Definition
A voidable contract refers to a legally enforceable agreement, but it becomes invalid if one of the involved parties opts to cancel or revoke it due to a legitimate reason. Possible reasons could be the person was under legal age, under duress or bound by a deceptive practice. Until it is voided, the agreement remains valid and can be enforced.
Key Takeaways
- A Voidable Contract refers to a legal agreement that can be legally rejected or canceled by one party involved in the transaction. Despite being a valid contract, due to some sort of defect, it can still be rendered void at will by the discretion of one party.
- The contract becomes voidable if a party involved in the agreement is at a disadvantage, such as lack of legal capacity, undue influence, misrepresentation or fraud, duress, or mutual mistake.
- If the disadvantaged party disaffirms the voidable contract, the contract is considered void by all parties. However, if the disadvantaged party ratifies the contract, it is no longer voidable and is legally enforceable.
Importance
A Voidable Contract is a critical concept in finance because it refers to an agreement that is legally enforceable but may be annulled or invalidated by one party involved.
This is important as it provides protection to individuals or parties who enter into contracts under misrepresented facts, coercion, undue influence, or misinterpretation.
To put simply, while the contract initially seems valid, it can later be voided keeping the best interest of the involved parties.
It also emphasizes the importance of transparency and fair dealing in finance.
Hence, understanding these contracts is crucial for smooth financial transactions and operations.
Explanation
A voidable contract, in the realm of finance, serves a significant purpose in preserving the individuals involved in a contract from being exploited or manipulated. It addresses the scenarios where an agreement was entered into under circumstances that were unfair, manipulative, or deceptive.
The principle behind a voidable contract is to maintain the legal and ethical standards of contractual agreements by giving a party, who was a victim of deception or pressure to accept unfairly disadvantageous terms, the right to rescind the contract. Moreover, a voidable contract is used to uphold the moral integrity of the business world by assuring that contracts are born out of genuine and informed consent of all parties involved and not by means of fraud, duress, undue influence, mistake, misrepresentation or incapacity.
It ensures that all parties have equal bargaining power or, if not, steps are taken to balance it. When a contract is declared voidable, the innocent party is restored to their position prior to the contract, which aims to eliminate any unjust enrichment.
This principle of voidable contracts is quite essential in maintaining fairness and justice in commercial transactions.
Examples of Voidable Contract
Underage Agreement: If a person under the age of eighteen enters into a contract with a bank for a loan, the contract can be considered voidable. Under most jurisdictions, contracts entered into by minors can be voided by the minor until they reach the age of maturity. So even if the underage person started paying the loan, they could still choose to cancel or void the contract until they reach the age of
Misrepresentation or Fraud: Let’s assume a real estate agent sells a property that they claim is free from any legal issues, but the buyer later discovers there are outstanding taxes or lawsuits associated with the property. In this case, the contract could be voided due to fraudulent misrepresentation.
Coercion or Undue Influence: If a elderly person is coerced or influenced by a family member or caregiver into signing a contract to change their will or give away their assets, the contract can be voided. It is considered voidable because it was not entered into voluntarily and was influenced by external pressure, be it physical or psychological.
FAQs about Voidable Contract
1. What is a Voidable Contract?
A voidable contract, unlike a void contract, is a valid contract which may become void later at the option of one of the parties.
2. What makes a contract voidable?
A contract may become voidable if the consent of one of the parties to the contract is obtained by misrepresentation, fraud, or undue influence. Another reason could be if the contract is detrimental or unfavorable to the party involved.
3. What are the consequences of a voidable contract?
When a party to a contract rightfully exercises the power to void that contract, the effect is the same as if the contract had never been created. Both parties are returned to their pre-contract positions.
4. How is a voidable contract treated legally?
Legally, a voidable contract can be enforced, i.e., it may be ratified or rejected, at the option of one of the parties but not by others.
5. Can a voidable contract be rectified?
Yes, a voidable contract can be rectified if the party who has the right to reject the contract, instead confirms the contract and chooses to continue with it.
Related Entrepreneurship Terms
- Rescission
- Unenforceable Contract
- Misrepresentation
- Lack of Capacity
- Mutual Mistake
Sources for More Information
- Investopedia – they have comprehensive financial glossaries that cover a wide range of topics including voidable contracts.
- Legal Information Institute (Cornell University Law School) – it offers a robust collection of legal definitions and explanations.
- Corporate Finance Institute (CFI) – it provides a vast array of financial resources and guides.
- LawDepot – they offer free online legal information and resources.
