Learn 100% online from anywhere in the world. Enroll today!

Void Contract

A contract that isn’t legally enforceable, starting from the time it was created

What is a Void Contract?

A void contract is a contract that isn’t legally enforceable, starting from the time it was created. While both a void and voidable contract are null, a void contract cannot be ratified. In a legal sense, a void contract is treated as if it was never created and becomes unenforceable in court.

 

Void Contract

 

Summary

  • A void contract is legally unenforceable, starting from the time it was created.
  • Void contracts arise for many reasons, including unlawful consideration.
  • Voidable contracts differ from void contracts in that they can be carried out legally if both parties wish to do so.

 

Void Contracts – Causes

 

1. incompetence

There are many ways in which a contract can become void. If one party is incompetent, they legally become unable to agree to a contract. This can include one of the people entering into the contract while being incapacitated or unable to make a proper judgment.

 

2. Inclusion of an unlawful object or consideration

The contract can also be considered void if an unlawful object or consideration is involved in the agreement. This can include the promise of sex, an illicit substance, or anything else causing one or both parties to break the law.

 

3. Impossibility of performance

Another common reason for a void contract is the impossibility of performance. This occurs when any aspect of the contract becomes impossible to carry out by one of the parties.

There are many reasons a void contract can arise, and looking at the legal elements that cause them will help you to understand them better.

 

Void Contract – Elements

Looking at some of the elements of a contract can help to determine what can cause a contract to be void.

  • Acceptance of Offer: Both parties must be fully aware of all elements of the contract. They must accept all aspects of the contract and what it entails.
  • Intention to Create Legal Relations: A contract does not always exist because of a promise between parties. The nature of the relationship between the individuals engaging in the contract must be evaluated, as well as the contract itself.
  • Consideration: There must be an exchange of value between parties. If one party is knowingly benefiting from a contract at the expense of the other party, the contract is void.
  • Complete: The contract must be complete and specific in nature, or it will be considered void.

 

Voidable Contracts

The terms “void” and “voidable” contracts are often used interchangeably but are completely different in nature. While a void contract is completely unenforceable by law, a voidable contract is a valid agreement. However, the terms within a voidable contract provide one or both parties entering into the contract the ability to void the contract at any time.

 

Voiding a Contract – Steps

1. Determine which elements of the contract may render it void.

2. Pinpoint exactly which laws and reasons relate to the contract being void.

3. Ensure all available information relating to the contract is collected (e.g., communication between parties, signed documents, etc.).

4. Determine whether a new contract can be drafted or whether the agreement should be completely abandoned altogether.

5. Legal proceedings may ensue to assess the situation and determine whether the contract is void or not.

 

Void Contract – Example

Bob enters into an agreement with a music label to split royalties from his new album 50/50. However, at the time of this agreement, Bob’s been drinking at the bar for several hours and is heavily inebriated. Due to the fact that Bob was incompetent at the time the contract was agreed to, it is a void contract.

 

Voidable Contract – Example

Assume a situation similar to the previous example. This time, Bob is a minor and hasn’t had anything to drink. Since Bob is a minor, the contract is instantly voidable. However, because he wasn’t incompetent, the contract is valid. Bob will have the option of keeping or dropping out of the contract at any time.

 

Other Considerations

While a contract may not be void when it is created, it is possible for other factors to render it void. New laws may come into effect that cause a contract to become void immediately. Also, information that was previously unknown to parties engaging in the contract can also make the contract void. As all contracts are unique, it is often difficult to judge their validity.

 

Related Readings

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

  • Completed Contract Method
  • Definitive Purchase Agreement
  • Letter of Intent (LOI)
  • Due Diligence

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes and training program!