Voidable Contract

Article byJyotsna Suthar
Edited byprarthana Khot
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Voidable Contract?

A voidable contract is a formal agreement that either of the parties cannot practice or enforce due to some legal faults in it. This contract allows the parties to exercise or reject a deal. 

Voidable Contract

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Various reasons can make an agreement voidable. It includes misinterpretation, fraud, deceit, minor, and similar things. However, if a person still enters into such a contract, a high chance of indulging in fraud arises. 

Key Takeaways

  • Voidable contracts refer to agreements where parties have a right to revoke (cancel) it on discovering legal faults. 
  • The causes of these contracts include misinterpretation, undue influence, minor mental incompetency, and coercion.  
  • The three types of voidable contracts include agreements without capacity, mutual consent, and initially rescindable agreements. 
  • Certain remedies for the voidable contract include reading contract terms properly, competency of the parties, and similar things. 

Voidable Contract Explained

A voidable contract is valid unless certain legal reasons make it unenforceable. Simply put, every agreement has the possibility of being voidable or rescindable. Parties can execute every contract. However, if one of the parties finds some reasons that can breach the agreement, it turns voidable. They have the option to either change or reject the contract. 

A contract can turn rescindable depending on its nature. When two parties agree, the contract is enforceable and valid. These parties have certain rights and liabilities as per the voidable contract section. If either party notices flaws or missing facts, they have the right to reject this contract. In contrast, if they are ignorant of such facts, they can be a victim of fraud. However, parties can still execute the contract. 

At times, parties are unaware of these facts and, by default, enter into such contracts. In such a case, they can follow certain remedies to avoid breaching. Let us look at some steps in dealing with voidable contracts:

  • First, be sure that the document is legal.
  • Second, read all terms and conditions before agreeing to the contract. Likewise, read each word carefully. 
  • Third, ensure the other person is legally competent to enter the contract.
  • Next, interrogate the other party about suspicious facts and terms.
  • Finally, collect all evidence if there is any force for entering the contract. 

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Causes 

As per the voidable contract section, certain reasons contribute to negative consequences. Following are the causes of enforceable contracts:

Causes of Voidable Contract

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#1 – Misinterpretation

It is a false claim or statement made by either of the parties. Its prime purpose is to make the other person enter the contract through verbal terms. As a result, it misleads the other party. However, if any party gets misinterpreted, they must show evidence of how they relied on a false claim before entering the contract. In addition, they also get the right to rescind the contract. 

#2 – Duress or Undue Influence

Duress is a situation where one party forces physical or psychological to agree. Some means to perform duress include threats to life and property, violence, and similar things. In contrast, undue influence refers to a person using power to force another person into a contract. For example, a sibling might threaten another to sign the property papers or lose his life. 

#3 – Minors

Any individual below a certain age (mostly 18) can lead to an unenforceable contract. It is because a person’s maturity at this age can differ depending on their nature. Therefore, the other party can reject the offer if they learn about the minor age. However, in some voidable contract cases, the parties can ratify the agreement on reaching maturity. 

#4 – Mental Incompetence

It indicates the capability of an individual to enter into a contract. In other words, a person with mental or impaired mental capacity can turn contract as voidable. However, without proper evidence, a party cannot declare others mentally incompetent.   

Types

Let us look at the types of voidable contracts that can breach the terms of a contract:

#1 – Contracts Without Capacity

Contracts without capacity are when either of the parties is not competent to enter the contract. For example, a minor does not hold the capacity to enter an agreement, thus making it voidable. However, they have the right to enter the contract after reaching maturity. Even a mentally incompetent person signing a contract can turn it voidable without a legal guardian. Some other examples include drunkards and wagers. 

Contracts that attract no mutual consent of the parties are voidable. Without proper consent, a high chance of contracts turning voidable. Remedies for voidable contracts mentioned above can save them from fraud. As per the judiciary, parties entering without assent indicate no desire to participate. For example, voidable contract real estate often sees such incidents where the party’s consent is illegal. 

#3 – Initially Voidable 

A contract like this could only exist if one party got forced, threatened, or deceived into signing it. Such contracts automatically turn voidable, and so does the approval of the forced party. Although there was compulsion on the part of the party, they could choose to continue with the contract. However, there is an exception to it. The contract would be valid if the consent were not through coercion, fraud, or misinterpretation. Also, if the party has all means to know the facts, considering consent was silent, the contract would not be void in that case. 

Examples

Let us look at the examples of voidable contract cases to comprehend the concept better:

Example #1

Suppose Christel wants to take a property on the Southwest side of New Jersey. She approaches Harry as he wants to sell it. They make the deal and enter into a voidable contract for real estate. Before agreeing to the contract terms, she acquires details about the property. Once satisfied, the deal occurs. Through some sources, Christel discovers this property is under illegal proceeds. She approaches Harry to sort this out, but he denies the fact. Finally, through constant discussion with the lawyer, Harry accepts his fault. 

Although the contract had turned voidable, Christel had a choice to either ratify (change) or cancel it. She chose to cancel the agreement and switch to another land. 

Example #2

In April 2022, the president of the United States, Joe Biden, proposed the MeToo bill. Per this bill, employees victims of sexual harassment can approach the court. It was added as an important element of the voidable employment contracts. More than 60 million American workforce added this element. The contract will become void if the employees’ rights (approaching the court) are violated.   

Difference Between Void And Voidable Contract

Although voidable and void contracts seem to be similar, there is a major difference between them.

The former can still work if both parties agree to the current terms. However, parties cannot enforce the latter from the time of its existence. For a contract to become void, either party must engage in illegal activities. The parties must represent a strong reason to revoke the agreement in the voidable contract. While void contracts are illegal from the beginning, the former can arise anytime between the contract. 

Frequently Asked Questions (FAQs)

1. How do you cure the defects of a voidable contract?

The defects of unenforceable contracts can get cured through the process of ratification. However, it can only happen when the parties agree to follow the new terms of the contract. 

2. What are voidable contracts in insurance?

When the policyholder fails to make premiums, holds higher risk, or represents false facts, the contract turns voidable. Also, mistakes from the insurer’s side can lead to unenforceable contracts. 

3. Can voidable contracts be ratified?

Yes, parties can ratify the contract. Ratification is a legal procedure where parties shed down the old terms and agree to the new ones. Contracts under breach, fraud, threat, coercion, or undue influence can get ratified. 

4. How might a voidable contract become valid?

The only way to make a voidable contract valid is when the parties with the power agree not to reject the contract despite the faults.   

This article has been a guide to What is Voidable Contracts and its meaning. We explain its causes, types, examples, and comparison with the void contracts. You can learn more about it from the following articles –

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