What is a Voidable Contract?
A voidable contract is an agreement between two parties that can be legally canceled by one or both parties under certain conditions.
The rationale behind voidable contracts is to allow courts to weigh the fairness of a contract based on the circumstances under which it was made. This will enable them to determine whether a party had been unfairly manipulated or coerced into signing a contract they otherwise would not have agreed to under normal circumstances.
What Does Voidable Mean?
Voidable is a term used to describe a contract or other legal document that, although valid, may be voided by one of the parties, but only if that party chooses to do so.
The term voidable is often confused with "void" — and indeed, these two terms are very similar — but there is a crucial difference between them. A contract or other legal document that is void cannot be enforced in court. A void contract is unenforceable because it violates a statute or public policy.
On the other hand, a voidable document can be enforced if both parties agree to continue following its terms.
A voidable contract is an otherwise valid and enforceable agreement. It provides that one or more of its terms may be disregarded at the option of one party to the agreement (i.e., it may be voided).
In such a case, the party who does not want to comply with a contract term can choose not to do so but cannot compel performance from the other party under that term.
In some cases, however, the party whom a voidable contract has wronged will allow the contract to continue in force and effect. This could be because the contract terms offer some advantage to that party. It may also be because the party who breached the contract has promised restitution or additional compensation to make up for any losses suffered from the breach.
Examples of Voidable Contracts
An example of a voidable contract is a contract that involves a minor. Sometimes children enter into contracts that they don't fully understand.
For example, you may have gone to a summer camp during your youth and signed a waiver releasing the camp from liability for any injuries you received while at camp. However, you probably didn't understand the document you were signing as a child. Therefore the contract may be voidable.
A similar situation occurs when someone with mental disabilities enters into a contract. In some cases, people suffering from mental health problems are not considered capable of understanding what they are agreeing to. As a result, they may not realize that they are entering into a contract. This makes such contracts voidable by either party after the fact.
Another example of a voidable contract is if you buy life insurance from an agent who tells you that your new policy will automatically transfer to your children when you die. But your children are not listed as beneficiaries on your policy and are not even eligible for coverage under your policy based on its terms. Then you could sue to have your contract voided.
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What Causes a Contract to be Voidable?
Misrepresentation of a contract
Misrepresentation is a false statement that misleads another party into agreeing to a contract. The misrepresentation must be important enough to induce a reasonable person to sign the contract.
For example, if you are selling your house under disclosures and represent that you have maintained the furnace properly. If you know the furnace is on its last legs, this would probably be grounds for voiding the contract. However, an opinion such as saying your house is "beautiful" would not constitute misrepresentation because it's just an opinion.
A contract signed under duress
Duress occurs when one party forces another party into signing a contract through either physical force or psychological pressure.
A contract is considered to be signed under duress if, for instance, a person is forced to enter into a contract by means of an illegal threat.
For example, if one party threatens to burn down another party's house unless they sign a contract, that contract would likely be voided because it was entered into under duress.
However, this rule has some exceptions depending on state law and the type of threat involved.
Undue influence is similar but applies more to situations where someone uses their power over another person to force them into signing a contract against their will.
There was a mistake in the contract signing process
If both parties have misunderstood a fact during a contract negotiation (for example, if one party misunderstands that they will be traveling out of state as part of their new job when hired), that contract can be called off.
Also, suppose both parties make an innocent mistake about the same material fact of the agreement. In that case, it's possible to have the contract voided. However, the mistake must be one that would cause a reasonable person not to sign the contract.
There is a breach of the agreement
One party breached a duty owed to the other party in connection with the formation of the contract – called a breach of contract. If one party fails to uphold their end of the deal, the other party is excused from performing their duties under the terms of the agreement.
Incapacity to understand, sign, and uphold a contract
If one or both parties did not have the mental capacity to understand the terms and conditions of the agreement, perhaps due to intoxication or mental illness, the contract is considered voidable. The same case applies if one party becomes incapable of performing his obligations under the contract due to death, mental incapacity, or bankruptcy.
Voidable Contract in Real Estate
Contracts are everywhere in the real estate world, from purchase and sales agreements to lease agreements. Some of these agreements are voidable because they have not fulfilled conditions or contain terms that cannot be enforced under state law.
The most common example of a voidable contract in real estate is a contract for the sale of a home where the buyer has not met all conditions spelled out in the purchase and sale agreement. For example, suppose the buyer fails to secure financing despite a good faith effort. In that case, the purchase and sale agreement is no longer valid.
For example, if you agree to buy a house for $500,000 with no contingency for financing but later find out you can't obtain a loan, you may be able to back out of the deal and not lose your deposit. This is because most contracts contain language stating the buyer can cancel if he doesn't obtain financing within a certain time frame — usually 30 days from when the contract becomes binding.
You might want to back out of a real estate deal because of defects found during the inspection. Most contracts contain a clause that the seller must repair problems during the inspection period. If the seller refuses or the issues are extensive, you may decide it's not worth buying. As a result, you may find yourself retracting away from the contract, creating a voidable contract.
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