Summary
- A void contract has no legal effect and is treated as though it never existed, meaning neither party can enforce its terms or sue for breach, and any third party rights under the contract are also extinguished.
- Common grounds for a contract being void include uncertainty of terms, mistake as to subject matter, statutory prohibition, lack of authority, restraint of trade, or a party acting beyond their capacity.
- A voidable contract differs in that it remains valid until the aggrieved party elects to rescind it, and third party rights under the contract continue until rescission occurs.
- This article explains the difference between void and voidable contracts for business owners entering into commercial agreements in Australia.
- LegalVision, a commercial law firm specialising in advising clients on contract law, outlines what makes a contract void, when a contract is voidable, and how to protect your business from both.
Tips for Businesses
Before signing, verify all parties have authority to contract and that terms are sufficiently certain. Keep clear records of negotiations. If a contract was entered into under duress, misrepresentation, or mistake, seek legal advice promptly, as the right to rescind a voidable contract can be lost if not exercised in time.
A void contract has no legal effect and cannot be enforced by either party, whereas a voidable contract gives the wronged party the option to rescind or continue the agreement. Knowing the difference is essential for any business that regularly enters into contracts. This article explains what a void contract is and the circumstances in which a court may declare one void.
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What is a Void Contract?
A void contract is not a valid agreement in the eyes of law. In other words, it has no legal effect and the purported contract terms cannot create enforceable obligations. If a contract is declared to be void, it is treated as if it never existed in the first place.
How is a Void Contract Different from a Voidable Contract?
Importantly, void contracts are different from voidable contracts. If the court declares a contract void, it treats it as if it never existed in the first place.
However, if a contract is determined to be a voidable contract, either party to the contract has the right to rescind the agreement or to have it set aside by a court. This means that the rights within the contract are not automatically extinguished. Instead, the wronged party can choose whether to continue with the agreement or not.
An important difference between the two is in relation to third party rights. If a contract is void, then third parties under the contract will have no legal rights. In contrast, if you have a voidable contract that is not rescinded, the third party can continue to enjoy their rights as part of the agreement.
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What Makes a Contract Void?
Certain circumstances can give rise to a voidable contract. The most common reasons include if the contract:
- was not formed properly, for example, the contract terms are too uncertain to be enforceable;
- was entered into on the basis of a mistake, for example, a mistake as to the subject matter that you were negotiating about;
- is prohibited by statute, for example, a statute that prevents illegal activities or anti-competitive practice;
- was made by someone who did not have the authority to enter into a contract, for example, an agent acting on behalf of their employer who was mistaken as to their authority; or
- causes a restraint of trade; or
- the parties who entered into the contract did not have the capacity, for example, they were limited by their company’s constitution (this is sometimes called an ultra vires agreement).
The presence of any of these reasons will result in a void agreement. You can, however, enter into a new contract with the other party if you wish. This could be a valid contract if it is created properly. For example, if you entered into a contract on the basis of a mistake in subject matter, but you would like to continue the agreement nonetheless, it is a good idea to enter into a separate new legally binding contract.
What Makes a Voidable Contract?
A contract might be voidable in certain circumstances, such as if the contract was entered into:
- while one party was making illegitimate threats to the other party;
- on the basis of an important misrepresentation as to a fact;
- with one person taking advantage of their superior position;
- with an underage person – usually, this will make the contract voidable until the underage person becomes 18 years old;
- made with someone with mental or physical capacity, including if they were intoxicated; or
- if the contract is voidable by a statute, for example, the Auctions (Bidding Agreements) Act 1969.
As mentioned, a voidable contract will give the aggrieved party the right to rescind the contract if they wish. To exercise the right to rescind, the person must tell the other person that they have chosen to rescind the contract, or if the case ends up in court, the person can ask the court to set the contract aside.
Avoiding Void and Voidable Contracts
To protect your business from problematic contracts:
- do your homework on the other party and contract subject;
- ensure clear, honest communication throughout negotiations;
- get legal advice on important contracts before signing;
- keep thorough records of all agreements and discussions;
- stay up-to-date with relevant laws in your industry;
- avoid using or giving in to high-pressure tactics; and
- consider including safeguard clauses in your contracts.
Key Takeaways
As a business owner, it is important to know the difference between a legally binding and a void contract. A contract is void in certain circumstances. For example, a contract is void if the parties were mistaken as to the subject matter of the contract. This means the agreement has no legal content. In other words, the parties cannot rely on the contract in a court case.
A voidable contract, on the other hand, arises in different circumstances. This can give the wronged party the right to set the contract aside if they wish.
If you need help determining if your contract is void, LegalVision provides ongoing legal support for businesses through our fixed-fee legal membership. Our experienced contract lawyers help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 0808 196 8584 or visit our membership page.
Frequently Asked Questions
No, they cannot be enforced. By definition, a void contract is considered to have never existed in the eyes of the law. Neither party can sue for breach or seek to enforce any terms of a void contract, as it has no legal effect whatsoever.
If money or property has been exchanged under a contract that is later found to be void, the general principle is that the parties should be returned to their pre-contractual positions. This means that any money paid or property transferred should be returned. However, there may be exceptions depending on the specific circumstances and the nature of the void contract. It’s best to seek legal advice if you find yourself in this situation.
Yes. If a contract is declared void, you can enter into a new, properly formed contract with the same party if you wish to continue the arrangement. Ensuring the new contract is correctly drafted will help avoid the same issues arising again.
If a contract is void, third parties have no legal rights under it. This differs from a voidable contract that has not been rescinded, where third parties can continue to enjoy their rights under the agreement until the contract is formally set aside.
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