What is the invalidation of contract?

Invalidity refers to the legal concept which renders a contract or part of a contract ineffective in law. This is the simplest of definitions but it is a useful one for our purposes and we will explore it in more detail below. Contract invalidity might affect the whole contract or it may be that only one individual clause is affected by the invalidity. For example, and as will be described further below, a contract might be voidable due to a misrepresentation by one party. The main contract, however, may not necessarily be void, assuming that the other terms are valid.
It is important to understand if a contract or part of a contract is invalid. Despite what some words in Latin may suggest, the principles of invalidity are not particularly complicated. Invalidity is not the same as unenforceability. An unenforceable contract is in law not able to be enforced in the courts. This may be because of a failure to satisfy pre-conditions to the enforcement or because of some legal impediment to the enforcement. A contract that is unenforceable may be valid but impossible to enforce. In the right circumstances, an unenforceable contract may be valid and enforceable. Note, for example, that an employee may have a contract of employment preventing him from working for a competitor following the termination of the employee’s employment but unless the relevant contract term can be enforced, the employee may be permitted to do so. The parties may, however, still be bound by that contract, for example , if it is not properly pleaded or the facts give rise to a different claim. Invalidity means that the contract simply does not exist.
A contract may be void from its inception. It is common law that a contact is void if one of the parties was underage (i.e. not old enough to give legal consent). In this situation, the contract does not exist. In the same vein, and notwithstanding some limited exceptions, a contract made by someone who has been declared to be mentally unfit to make a contract is void.
In some situations, a contract is voidable. A voidable contract is one which is valid until it is challenged by one of the parties with the right to do so. Until that time, however, it remains valid. A mistake or misrepresentation can render a contract voidable. A mistake will be a mistake in factual terms of the contract or in terms of the nature of the contract. A misrepresentation will be a false statement of fact (not opinion) made by one party to the other, which induces that party to enter into the contract. Notably, the effects of misrepresentation can be both civil and criminal. For example, knowingly making a false statement of fact leading someone to believe that a contract is valid (when it is not) can lead to charges of fraud or forgery being brought against the wrongdoer.
Note however that where a contract is made with a public body that contract may be void even where an employee has misrepresented the powers of that public body. Care should therefore be taken in dealing with public bodies. The other area to be aware of contractual claims being made against a public body relates to the provision of goods and services under the GLA 1979.

Causes of contract invalidation

There are several reasons why a contract may be declared invalid by the court. Among the most frequent of these include fraud, misrepresentation, lack of capacity, illegality, and duress.
Fraud occurs when one party knowingly makes a false statement in order to induce the other party to act in a certain way. In such cases, the party who acted may be able to seek damages from the other. For instance, imagine that the owner of A Painting Company knows that the painter it is about to hire has been using low-quality paint. The company orders 100 gallons, under the fraud that the company will provide only the highest quality paint. The company agrees, but when the painter delivers the paint, the company does not hire them for the job.
Misrepresentation is a little bit different from fraud, though it is very similar, and it can be either innocent or intentional. With innocent misrepresentation, someone makes a statement it believes to be true, but is actually false. The other party relies on the incorrect statement to its detriment. For example, a home inspector might say a newly painted deck on a home is in good shape. The home buyer uses this information to negotiate a lower price, believing that they will have a good deal. A week later, the buyer discovers that the deck with the new paint job is in need of millions of dollars of repairs. The buyer can state that the transaction should not be valid because they relied on the misrepresentation of the home inspector.
Contractual arrangements must also have capacity—not only with regard to those who are represented in the contract, but also those who prepare the contract. If there is any question about the level of competency in an individual or organization with regard to construction contracts, an experienced construction attorney may be able to address some of your concerns.
Illegal contracts are those that cannot be enforced because they are prohibited by law. This can include agreements to commit a crime, such as a conspiracy to commit murder, or may be a tortuous agreement, such as a contract to stab a random stranger. As you might guess, contracts that are considered illegal may contain conditions of duress — such as the example above.
Duress occurs when one party to a contract forces another to enter into it. These situations can be intimidating to the weakest partner in the negotiations. For example, if your contract includes conditions that require you to return the $500 deposit you placed on a new car in order to break the agreement, you may have signed the contract under duress.

Legal implications of invalid contract

The legal consequences of a declaration of contract invalidity depend on the type of invalidity involved.
Absolute invalidity leads to a statutory sanction consisting in the automatic nullity of the unlawful clause or of the entire contract, if necessary. Such clause loses its effect as from the moment of the initial illegality. The null clause is automatically replaced by the equivalent clause dictated by law or custom, in particular in relation to sales, leases and employment contracts. In the absence of any such equivalent clause, the parties must be restored to their respective positions at the time of signing.
Relative invalidity is more complex. It does not lead to the automatic sanction of nullity. The contract remains in principle valid, but only until such time as the person entitled to the remedy decides to seek the sanction of nullity. The prescription period for the action of nullity is 30 years from the date of the contract or event giving rise to the nullity. If prescription has not run out, the remedies available in the face of a declaration of relative nullity are: Depending on the circumstances, the court has discretion to grant the declaratory judgment of nullity (or claim for nullity) only with effect for the future, and not with effect from the day of the judgement. The court may decide, for example, that the obligation to pay interest shall remain in force, or that damages may be claimed for losses actually incurred. Furthermore, the court may implement anti-abuse measures designed to counteract any attempt by the party who committed the illegal acts to retain the benefit of the unlawful clause or unjustified revenues obtained because of its illegal nature.
Apart from situations involving special law, the consequences of a declaration of contract invalidity are to be determined in the light of the general provisions relating to obligations. Depending on the circumstances, the contract may be rendered vulnerable to one of the legal remedies aimed at ensuring the protection of the parties to an unlawful contract or of a third party. These remedies consist of: That said, the fact that the remedy of restoration of the status quo is a possibility does not mean that the parties to a contract may breach or contravene its provisions without consequence. By virtue of the (rebuttable) presumption of good faith and the prohibition of bringing the unlawful nature of a contract to the attention of the courts (nemo auditur claiming ex turpi causa), work must be carried out under the unlawful contract and the parties must continue to act as if the contract were valid.

Preventing contract invalidation

To stave off the invalidity of a contract, parties may exercise caution in various capacities of a transaction. First, parties should review stipulations and provisions of a contract and ensure that they comply with the laws of the jurisdiction governing the agreement, as well as the laws of the particular state the agreement is taking place in. Parties should also conduct thorough due diligence to confirm the legitimacy of an opposing party and their credentials, which may include a criminal background check, a check on prior contracts, or a financial background check.
Aside from conducting thorough due diligence on the opposing parties entering into the contract, parties should ensure a mutually beneficial and voluntary agreement has been made , as opposed to situations involving coercion or duress. It is also helpful to clearly define all terms and conditions, including but not limited to, payment terms, performance timelines, deliverables required and the means available to procure specific remedies in the event some aspect of the agreement is breached by either party.
Finally, it is always a good idea to have a legal review of the proposed contract prior to the execution of the agreement. A legal professional knowledgeable in the field of contract law may be helpful in preemptively identifying issues with a proposed contract prior to execution. An attorney may also edit and revise an agreement to ensure clarity and compliance with all legally required elements.

Practical examples of contract invalidation

The lexicon of invalidity is one that has evolved within the case law for centuries, and it comprises a number of different and overlapping concepts, frequently applied to resolve real life disputes.
Consequently, contract law is rife with examples of invalidity for any number of reasons – the ones typically discussed above and more.
The following are some famous examples of where contracts fall foul of a lack of agreement:

1. Mutual Mistake

Plett v Penge [1899] 2 QB 45 – A contract by which an artist sold a portrait of the plaintiff (which had been destroyed) to her was held to be void as the parties were operating under a fundamental impossibility (the painting no longer existed).

2. Mutual Mistake as to the Identity of the Parties (also known as a mistake as to identity)

In Phillips v Brooks Ltd [1919] 2 KB 243, the claimant sold a diamond ring to a person he believed was Mr de Beers. The person was a fraudster and for all intents and purposes seemed Mr de Beers, apart from not being the right person. The defendant was refusing to return the ring. The Court of Appeal held that the claimant had made a mistake as to the identity of the defendant, and the contract was void.

3. Minors

The rules relating to minors and the capacity to contract have been mentioned above. The general rule is that a contract made with a minor is voidable at the option of the minor. However certain contracts are enforceable. For example education or training contracts, can be enforced against a minor.

4. Mental Incompetence

A contract made with a person who is mentally incompetent (for example due to mental illness) will be valid if the other party was unaware that the person was mentally incompetent. In such situations, the contract may not be void but in any event, the minor has the right to avoid the contract at the option of the minor.

5. Bank Items

The Bills of Exchange Act deals with bank items (cheques and promissory notes). It makes certain presumptions about the capacity of the parties. For example, it assumes in certain circumstances that minors are able to enter into contracts.

6. Conflict of Laws

Courts have discretion to refer to the laws of another country which touch on the same subject-matter; this choice of law must best serve the interests of justice.

7. Rebus SIC STANTIBUS

In the case of a reallocation of risks, the parties may allocate the risk differently to their relationships with third parties which may affect the allocation of risks. This is a complex area of law, and it is recommended that legal advice is sought.

Conclusions: The significance of valid contract

Contracts form the backbone of legal agreements between businesses, and only when they are enforceable are the disputes that arise between the parties truly resolved. If a contract is held to be void or voidable, it will be as if the contract never existed, and the expected reciprocity will not be upheld. This means that even if the consideration has been provided by one party, the other will not be required to honour their side of the bargain .
This is why it is far better to use a contract that would be legally binding rather than to rely on informal written or oral agreements. As we’ve discussed in this post, there are many reasons for contract invalidity, but even where the invalidity is not clear, it is a good idea to consult a lawyer to ensure that you are protected from liability later down the line.