Once you sign a contract, you and the other party are legally bound to perform your obligations under it. However, some factors make a contract void even after it comes into effect. A void contract means the contract is not enforceable, so neither party can exercise their rights or perform their obligations under the contract. This article will set out six key factors that lead to a void contract.
What Are the Key Elements to a Contract?
|Offer and Acceptance||Firstly, one of the parties must offer goods or services to the other. This offer must have the details set out so that both parties are fully aware of the content of the contract. The other party then accepts that offer.|
|Consideration||There must be a valid reason for the two parties to enter into the contract and there must be an exchange of value between the parties. Generally, consideration is the price paid but it can also be one party accepting some liability or choosing not to act.|
|Intention to Create Legal Relations||The two parties must also clearly intend to create legal relations and are willing to bind themselves to those obligations.|
|Certainty and Completeness||The parties must also be competent to enter into a binding contract. In addition, the terms of the contract must not be too vague or uncertain as this will make the contract unenforceable.|
Factors That Make A Contract Void
These factors usually reflect that:
- there has been miscommunication around the agreement by either party; or
- the contract is against public policy.
|Uncertainty||If the contract uses language that creates uncertainty around contractual obligations, the contract will be void. For example, an agreement to agree within a contract can create uncertainty as there is no clear indication of what will be agreed to in a contract.|
The contract is incomplete if it is missing an essential term. An essential term means that the contract cannot be performed without the term included. Examples of essential terms include an agreed price or a starting date for a lease.
A common mistake is when both parties are mistaken about the subject matter of the contract. For example, if one party agrees to buy a painting from the other party, but the painting was already destroyed by fire, that would be a common mistake that would void the contract.
|Lack of Capacity||
All parties are presumed to have the mental capacity to understand the nature and effect of the contract. If they demonstrate a lack of capacity (such as through a mental disorder, or being under the age of 18 in Victoria), the contract could be made void.
A contract may be void because it deals with illegal activity. This could be contracts that are directly prohibited by law, such as cartel contracts. On the other hand, they can also be particular elements of contracts that are not allowed under the law, such as unfair contract terms in contracts covered by the Australian Consumer Law.
|Public Policy||Finally, a contract could be void if its subject matter or performance is against public policy. For example, you cannot create a contract that involves slavery.|
What is the Effect of a Void Contract?
A void contract means neither party can enforce the contract when it was formed, as the contract had never been created. Therefore, neither party can enforce any rights or perform any obligations set out in the contract.
A void contract is different from a voidable contract. A voidable contract means that there are factors which may allow one party to end the contract. A voidable contract remains enforceable.
A void contract is also different from a contract that is not validly executed. For example, only one director signed off on behalf of the company when entering a contract when the sign-off required two directors and a company secretary. The type of remedies available in this scenario may be different 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 contact, 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’re preparing or signing a contract, ensure the draft does not contain any of the six factors that could void the contract:
- common mistake;
- lack of capacity;
- illegality; and
- a breach of public policy;
If you have any questions, get in touch with LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.
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