As a business owner, your goal is to create a valid contract that is legally enforceable to support your commercial interests. Once you sign a contract, you and the other party must fulfil your obligations. However, some factors make a contract void even after its effect. A void contract means it is not enforceable, so neither party can exercise their rights or perform their obligations. This article will set out seven key factors that lead to a void contract.
What are the Key Elements of a Contract?
| Contract Element | Explanation |
| Offer and Acceptance | One party must offer the other goods or services. This offer must have the details set out so that both parties are fully aware of the contract’s content. The other party then accepts that offer. |
| Consideration | For the two parties to enter into the contract, a valid reason and an exchange of value must exist. Typically, consideration refers to the price paid. However, it can also involve one party accepting liability or choosing not to act. |
| Intention to Create Legal Relations | To create legal relations, both parties must clearly express their intention and be ready to accept those obligations. |
| Certainty and Completeness | The parties need to be competent to enter into a binding contract. Additionally, the terms of the contract must be clear. The contract becomes unenforceable if the terms are too vague or unclear. |
Factors That Make a Contract Void
| Factor | Explanation |
| Uncertainty | If the contract contains language that creates uncertainty about contractual obligations, the contract will be void. For instance, an agreement to agree within a contract can lead to uncertainty because it lacks a clear indication of what will be agreed upon in the contract. |
| Incomplete Contract | If a contract is missing an essential term, it becomes incomplete. An essential term means that the contract cannot be carried out without it. Examples of essential terms include an agreed price or a starting date for a lease. |
| Common Mistake | If both parties misunderstand the subject matter of the contract, this is a common mistake. For instance, if one party agrees to purchase a painting from the other party, but it has already been destroyed by fire, this misunderstanding will void the contract. |
| Lack of Capacity | All parties must have the mental capacity to understand the nature and effect of the contract. If a party demonstrates a lack of capacity (for instance, due to a mental disorder or being under the age of 18 in Victoria), the contract might be declared void. For companies, it is essential to act within the scope of their corporate powers. If a company enters into a contract beyond its permitted purposes, that contract might be considered void due to the company’s lack of capacity. |
| Illegality | A contract may become void if it involves illegal activities. For instance, the law directly prohibits some contracts, such as cartel agreements. Additionally, certain elements of contracts can also be illegal, such as unfair terms in contracts covered by the Australian Consumer Law. In particular, a contract will be void if it has an illegal purpose, even if the contract’s performance itself is not illegal. For example, a contract for selling land to operate an illegal cannabis cultivation business would be void. |
| Misrepresentation | A contract can become void if one party misrepresents important facts, causing the other party to agree to terms they would not have otherwise accepted. Misrepresentation occurs when one party makes false statements of fact, leading the other party to enter into the contract. For example, you cannot inform a buyer that a used car has never been in an accident if it has previously been involved in a major collision. |
| Public Policy | A contract may become void if its subject matter or performance contradicts public policy. Public policy consists of principles and values upheld for the collective good of society. Therefore, contracts that breach these principles will not be enforceable. For instance, you cannot create a contract involving slavery or forced labour, as such contracts violate fundamental public policy against exploitative and inhumane working conditions. Courts will not enforce agreements that breach these essential public interest standards. |
What is the Effect of a Void Contract?
A void contract means neither party can enforce it when they form it, as they have never created it. Therefore, neither party can enforce any rights or perform any obligations in the contract. A void contract is different from a voidable contract.
A voidable contract entitles a contracting party to withdraw from it. Several factors allow this. For example, contracts with minors (under 18) are generally voidable.
Therefore, while a void contract is completely unenforceable, a voidable contract can still be enforceable. It also is different from a contract that has not been executed properly.
The type of remedies available in this scenario may differ in a contractual dispute.
Questions to Ask When Reviewing a Contract
If you want to avoid a void contract, you should ask yourself the following five questions:
- are the terms of the contract illegal or against public policy;
- have you agreed on the essential terms of the contract, such as the price;
- does the contract restrict the rights of the other party;
- are the terms of the contract impossible to perform; and
- does the person understand the details of the contract?
If you are a company director, complying with directors’ duties are core to adhering to corporate governance laws.
This guide will help you understand the directors’ duties that apply to you within the Australian corporate law framework.
Key Takeaways
When preparing a contract, you intend for your agreement to have legal effect. A void contract undermines this intention. Thus, if you are preparing or signing a contract, ensure the draft does not contain the following elements that could void the contract. These factors include uncertainty, incompleteness, mistakes, lack of capacity, illegality, and whether the contract breaches public policy. By avoiding these six mistakes, you can avoid having a void contract.
If you need help ensuring you have a valid contract, our experienced contract lawyers can assist you as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A number of factors can cause a contract to be void. These include the use of uncertain language, incomplete information where an essential term is missing, a mutual mistake or misunderstanding between both parties, a lack of mental capacity to understand the contract, illegal matters contained within the contract, or if the contract constitutes a breach of public policy.
The essential elements of a contract include offer and acceptance, consideration, intention to create legal relations, certainty and completeness.
The effect of a void contract is that both parties must resolve the circumstances as if the contract had never existed. This means that neither party can enforce the agreement, nor do they have any obligations or rights under the contract.
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