What a contract is and what it does is something that is likely to be understood by the individuals who subscribe to our thought leadership articles. But a void contract is not always obvious.
A contract is defined as ‘a legally enforceable agreement that creates, defines, and governs mutual rights and obligations among its parties’. The ‘creation’ this refers to is the creation of a legal bond between the parties that they must execute the agreement as per its terms. The terms are ‘defined’ in the contract to inform parties of what’s expected of them and how the relationship should be ‘governed’ to achieve its stated outcome.
Therefore, the validity of the contract you have with your suppliers is fundamental to your ability to: Firstly, steer your relationship with them and drive good behaviours between you to assure the achievement of your mutual goals. Secondly, if those goals are not achieved, for you to rely on your agreement’s legal protection.
What makes a contract valid?
A contract is simply a legally enforceable agreement between two or more parties to do something in exchange for something else. To be valid this agreement must involve five elements:
|The 5 Elements of a Contract||Description of Each Element of the Contract|
|1. Offer||One or more parties make an offer to one or more other parties to the contract.|
|2. Acceptance||All parties accept the offers, and agree to be bound by the terms, contained within the agreement.|
|3. Consideration||The parties provide consideration to one another:
• a promise to pay money
• a promise to do something
• a promise not to do something, or
• promise to provide something else of value
|4. Intention||Each party has an intention to be legally bound by the agreement (offer and acceptance).|
|5. Capacity||Parties may be individuals or organisations, but in all cases they must have the legal capacity to enter into the contract.|
This all seems clear enough. However, there are many ways in which your contract can be delegitimised, resulting in it being void or voidable. If your contract suffers from one of these issues then you could find yourself unknowingly relying on a document that has no (or diminished) validity in a court of law.
As this would be a worrying place to be, our article looks to clarify how an agreement can lose its legitimacy (or never have it in the first place) and the difference between the states of ‘void’ and ‘voidable’.
What makes a contract void?
A contract is void if it is found to be illegitimate, illegal and unenforceable. This can be something that occurs at its creation or later as a result of a change in the law or the actions or inactions of parties to the agreement which make its execution impossible.
What can create a void contract and, therefore, makes the contract unenforceable?
- A contract made by parties who are deemed to be not legally competent. That is, where the law would consider one or both of the parties to a contract incapable of entering into an agreement. Most commonly this would be for parties who are under the age of consent or incapacitated/intoxicated.
- A contract where a material bilateral mistake has occurred. Where both parties are under a mistaken impression of material importance to the contract, it can become void.
- A contract which has unlawful consideration. If you enter into a contract where the action required of the parties is illegal, such a contract would be void. You can also be prosecuted for participating in the arrangement.
- A contract which concerns an unlawful object. Where the item being transferred/sold is illegal, the contract is void from creation. You can also be prosecuted for participating in the arrangement.
What makes a contract voidable?
Voidable is a contractual state of flux, where at least one party to the contract is not legally bound to it and, therefore, has the choice to affirm or reject it. If they decide to reject the contract it moves from a voidable state to a void state.
The slightly more complex area is around how a contract which should be legally enforceable by all of its parties can become detached from one of them.
The answer is that there is a wide range of reasons why a contract may either be unstable in this way from its creation or become so, some way down the line.
Most common of these are:
- Coercion or undue influence
- Intoxication or mental incompetence
- Fraud or misrepresentation
- Breach of contract by one or more of the parties.
The first few of these are related to legal competence from the list in the void section above, but in the case of a voidable contract the agreement is not automatically voided. It requires the legally detached party to decide to go down that path. They have a choice to end the contract, but can also choose to proceed with it.
More specific examples can include :
- A contract which has no consideration on one side. Consideration is the value exchange, but if one side does not trade anything at all – money, intellectual property, product or service – the agreement can be invalid.
- A contract which restricts trade. A contract designed to prevent a party from carrying out their work or trade will be void, though some limited restrictions are enforceable where a legitimate reason is provided.
- A contract which restricts legal proceedings. An agreement cannot prevent a party from initiating legal proceedings against another as this runs contrary to common law which places the jurisdiction of the courts above all contracts.
- A contract which contains material uncertain terms. It is possible for a contract to be void if contractual terms are too uncertain to be enforceable.
- A contract that relies on the happening of an impossible event. Contracts should be fundamentally fair documents so, therefore. if one is created which can only be executed in combination with an event which simply will not occur then the contract cannot be valid.
- Requires the performance of impossible act. Similar to the one above, except the requirement here is that one of the parties is expected to complete a task which is deemed impossible.
How to avoid these contractual complexities
Finding yourself reliant on a contract that is not legally enforceable is an extremely unfortunate position to be in and is wholly avoidable.
The creation of a fit-for-purpose agreement is a delicate task, requiring consideration for the needs of all parties, awareness of the motivations that trigger action, reaction and innovation from your strategic partner, a clear and quantifiable outcome and the use of language which will minimise the possibility of ambiguity, misunderstanding and manipulation.
While lawyers are, for the most part, exceptionally good at the technical side of the creation of valid contract terms, there are times when specific service and/or project knowledge in a defined technical domain is needed. Should your organisation require guidance or support in the creation, assessment or early termination of your contractual agreements and see value in a confidential (no obligation) chat, call 0845 345 0130 or you can book a call directly with Allan Watton (BPG’s CEO) using the calendar feature here.