Grasping Void Agreements
A void agreement is one which cannot be enforced in a court of law. It is as though it never existed, hence the term "void." The Indian Contract Act defines void and voidable agreements. According to Section 2 (g) of the Indian Contract Act, 1872, "An agreement not enforceable by law is said to be void."
Several events can render an agreement void. Firstly, if an agreement is entered with someone who is not competent to contract, it may be considered void. If the agreement excludes something that is illegal or against public policy, it can also be considered void. An agreement made for an impossibility of purpose will be considered void.
May be that is why the Lord Alverstone observed in the case of Fisher v. Bell (1889) 23 Q.B.D. 424 at 426 that "an unlawful object, not the mere intention to do something unlawful, is an essential element in every criminal attempt to commit what would be the complete offense of, in the case of a complete, much lesser offense, to work some legal injury to another…" Perhaps, the intention was unstated or not articulated but we can assume where intention is true, the contract shall be void.
In the case of a breach of an agreement, a suit cannot be filed for damages arising from the same. The plaintiff cannot recover anything for injured rights. Even if one party is willing to perform the agreement, the other party is not concerned and an action of damages cannot be claimed by one who is in default to another who is in default.
An agreement that does not comply with the requirements of Section 25 and Section 56 of the Indian Contract Act, 1872 also falls within the category of void. For example, an agreement to commit a crime, or an agreement to perform an impossible act would render the agreement as void ab initio .
An agreement can also be considered void if it is contrary to public policy. If the agreement is regarding wagering, a gaming and betting contract, buying the goodwill of a business with the intent to shut down, hindering a police investigation, or an agreement to commit a crime, a contract is void ab initio (from the beginning).
Occasional use of the phrases "void ab initio" and "ab initio" is commonly seen in the context of agreements. An agreement is said to be "void ab initio" when it is void from its very inception. Although the Longman Dictionary defines "ab initio" as "from the beginning," recent rulings by higher courts have led to the usage of "ab initio" in preference to the phrase "void ab initio."
Indian jurisprudence has evolved significantly as described in the case of T.P. Meenakshisundaram Pillai v. Haji Gaffoor Koya Koya. As mentioned above, such a change in language usage is evidence of the flexibility of word usage of English or Latin words in the Indian legal system. In this case, the Court held that the phrase "ab initio" should be preferred in the context of void agreements because "an agreement which is not valid from the beginning cannot be said to be "void" in the legal sense of the word…therefore, the ordinary or natural meaning of ‘void’ would not be appropriate. In a legal or technical sense, an agreement is void when it is of no effective value, and hence, is void ab initio."
Thus void agreements can be considered a form of nullification, void agreements have no effect, while voidable agreements are agreements which are actionable unless avoided by a party.
Examining Voidable Contracts
While some contracts are void and cannot be enforced at all, there are other contracts that are "voidable." If a contract is voidable, it means that one or more of the parties to the contract can choose to cancel the contract if they wish. A voidable agreement is therefore valid and enforceable until it is voided by the party who has the right to void it.
While a voidable agreement is valid, it is important to understand that this does not mean that the contract is completely free from defects. There must be some quality about the agreement that causes it to be voidable.
One circumstance where a contract can be voidable is if the contract was entered into as a result of a material misrepresentation (or a deceit) by one party (L’Estrange v. F Graucob Ltd [1934] 2 KB 394). Material misrepresentations concern the subject of the contract and cause the innocent party to enter into the contract despite there being no real intention to do so between the parties. A material misrepresentation can either be verbal or written.
Another circumstance where a contract can be voidable is if the contract was entered into by a party in duress. If a party enters into a contract with a gun to their head, that contract will almost certainly be voidable at their election.
Analyzing Void and Voidable Contracts
Put simply, a void agreement is unenforceable in law right from the start and is considered a nullity from its inception. By contrast, a voidable contract is one that, while it is valid and has all the required elements of a contract, may be either enforced or cancelled at the option of one of the parties. If the party with the option elects to do nothing, the contract stands and is fully enforceable. If, however, the party with the option elects to cancel the contract, then it becomes void from the moment of cancellation and has no effect.
As an example, in the event a minor enters into a contract for the purchase of a motor vehicle for a set price, while knowing he was actually paying an excessive amount, the minor can avoid his obligations under that contract if he chooses to elect to do so. The other party cannot force the minor to complete the purchase and/or maintain the agreement. On the other hand, if the minor did not enter the contract knowing that the other party was charging an excessive price, that is, there was no misrepresentation involved, then the minor would be bound by the real property.
In summary: Void agreement = Unenforceable contract right from the start. No effect. Voidable contract = Enforceable contract, unless elected to cancel, in which case it has no effect.
Legal Implications and Remedies
Legal Consequences and Remedies for Void and Voidable Contracts
The distinction between a void agreement and a voidable contract bears substantial significance, as void agreements will carry with them the legal consequences, including remedies for the parties. The distinction must begin with the understanding that a court does not have to enforce a void agreement. Because the agreement is already void, no remedy will occur at the initiation of a lawsuit or subsequent court adjudication. In other words, parties to a void agreement do not need to go through the courts to declare a void agreement invalid, as there is no agreement to declare invalid .
Alternatively, and perhaps more significant, is the fact that when a court adjudicates on a voidable contract, it will carry with it legal consequences and remedies to correct or amend the agreement. As discussed above, a voidable contract, in contrast, is one which continues to be present and enforceable in the eyes of the law until one of the parties takes action to void the contract. The legal ramifications of a court declaring an agreement voidable depend upon the type of voidable contract. For example, if a contract becomes voidable due to a statutory provision giving the party the opportunity to back out of the agreement, the party may void it upon their pleasure. However, in all situations, the contract will be valid until the injured party exercises their right to void the contract.
Case Law and Examples
When a contract is void, it generally is void ab initio, which means from the beginning. A contract that is voidable may be enforced unless the party with the right to rescind disaffirms it. These principles are illustrated by the following analyses.
A. Case Law Examples
In order for a contract to be considered void it must be missing one of the fundamental elements. First, a recent case out of Minnesota was decided denying contract status because the contract was illegal due to lack of consideration. In Jack v. Progressive Development Group, Inc., the plaintiffs had a signed contract to purchase a condominium but during a study to determine the suitability of the land for development, the geology firm that was hired made everyone aware of the sinkholes in the area of the construction. As a result of the sinkholes, the city required geotechnical assessments and final reports on the construction site before commencing with building the condominiums. The plaintiffs and the developers signed an addendum reducing the number of units to be built from 74 to 63 until the final reports were received. After the final reports, the buildings were initially approved and the plaintiffs gave the developers $50,000.00 to reserve three of the units. The defendants did not formally send the plaintiffs copies of the final reports until two years after those reports were due after they started spending the money put down as deposits. When the plaintiffs demanded copies of the reports and full statistical data on the land to determine if the land was stable enough for construction of a four story structure, the defendants could not provide the information and ultimately began failing to communicate with plaintiffs. A few weeks later, the developers unilaterally increased the price of the three condominium units and the plaintiffs refused to pay the increased amount. The plaintiffs brought suit claiming the contract was breached when the developers decided to increase the prices and the defense claimed the contract was void as illegal.
The district court held the contract was void because it was against public policy. The court also stated that while parties to an illegal contract are in pari delicto (equal fault), it is a discretionary decision whether to award damages to an illegal contract. In addition, the court stated that even if the contract were not void, the defendants would have had the right to terminate the contract because the plaintiffs failed to give timely notification of the rescission. Tennessee courts also provide similar holdings suggesting that a contract is void if it is against public interest. Smith v. Stowers, 109 Tenn. 318, 80 S.W. 196 (Tenn. Ct. App. 1899).
Another example of a void contract is one that is made during a lapse of power. For example, in Oklahoma v. Purcell, the Oklahoma Department of Corrections ("DOC") awarded a contract to a company before the DOC had the authority to do so under Oklahoma law. The company did not perform a full audit of the state’s surcharge funds that was required by law. Subsequently, the governor signed legislation that corrected the problems with the DOC and made the DOC legal in its award of the contracts. However, the court found that the legislation correcting the problem was "void and ineffectual."
In addition to being void from its inception, a void contract does not have the effect of rescission, i.e. no party has to do anything. In other words, it is no longer a legal contract after the judiciary declines to enforce it. Davidson Chapin PLLC v. GNL Ventures, 357 Or. 641, 655 (2015). In Davidson Chapin, the defendant entered into a contract with the plaintiffs to act as the real estate attorney. The defendant argued that the contract was void because it was between an LLC and a law firm that was not a registered entity within the required statutory period. The court agreed with the defendant and refused to enforce the contract. The court determined that the limited liability company was not a person, which is required by statute to enter into a contract.
B. Statutory Examples
Given that a contract must fulfill all five elements in order to be deemed enforceable, the absence of an element will deem the contract void. A contract cannot lose its legality or be rescinded by only one party; it is either valid and enforceable or not. If the parties did not have capacity, the contract is voided, and cannot be validated even it is within the statute of limitations. By way of example, if a minor enters into a contract with an adult for the adult to cook for the minor for a month, the contract is void as the minor does not have capacity. Likewise, if an adult enters into a contract with another adult for the adult to buy the minor the contract is void as the minor lacks capacity.
In Tennessee, the statute of frauds requires certain types of contracts to be in writing and signed by the parties. See T.C.A. ยง 29-2-101. For example, a contract for the sale of an interest in real property must be in writing. Another example is a contract to pay another person’s debts, e.g. a loan that is 18 years old. To clarify, if a party does not sign the contract and the party prevails, the contract is void and unenforceable per the statute of frauds unless the contract falls within an exception to the statute of frauds.
How to Avoid Void and Voidable Contracts
There are a number of ways that a business can help ensure that it does not enter into a void or voidable contract.
First, as is true in many legal contexts, doing your homework and undertaking some due diligence prior to entering into an agreement can help ensure that there are not any defects to the contract. Due diligence should start with a review of any relevant public records and should include a review of other documentation that would typically be part of the contract negotiation process. The more thorough of a review you undertake, the more likely you can spot problems prior to signing the agreement.
Second, when reviewing a written agreement , it is important to take the time to carefully read all of the terms and conditions. A contract is only binding if the terms of that contract can be fully performed by the parties. Thus, it is always important to make sure that all of the terms are valid and are capable of being fulfilled.
Finally, when in doubt, always seek legal counsel when you feel that there is any ambiguity as to the enforceability or interpretation of an agreement. Even if you cannot afford to hire a lawyer to draft the agreement, it may be worth your while to at least consult with a family member or friend who has some knowledge of contract law or other types of trained professionals.