If you have entered into a contract, you or the other party have drafted without legal assistance, you should consider some of the unintended serious consequences that can arise, including where a contract or a term in a contract is void, voidable or unenforceable. There are differences between validity, voidability and unenforceability. This article explores some of those differences.
Validity
A term in a contract that is invalid is referred to as void. It has
no legal effect. Where a term is void, no rights or obligations
provided by the term are legally created between the parties to the
contract. The term will be treated as if it never existed, and it
will not bind the parties. One of the most common reasons a term in
a contract is void is where it is, in a legal sense, uncertain. A
court will endeavour to discover the intention of the parties from
words used in the contract and as long as a term is capable of a
meaning, it will ultimately be given that meaning. However, it is
not always possible for a court to discover any intention of the
parties. One example of an uncertain term is where there is an
agreement to agree on contractual terms: United Group
Rail Services Ltd v Rail Corporation NSW [2008] NSWSC 1364 at
[13].
An entire contract can be void where there is uncertainty in a term so essential to the nature of the contract that the non-performance of the promise in the term may fairly be considered a failure to perform the contract at all. Uncertainty in a non-essential term can result in the uncertain term being severed. However, if the term is essential and a Court finds it is uncertain, the contract itself is void for uncertainty. One example of this is where there is legal uncertainty as to price: Australian Securities and Investments Commission v Fortescue Metals Group Ltd (No 5) [2009] FCA 1586; 264 ALR 201 at [298] and [311].
On the other hand, a court will treat a severable, non-essential term in an otherwise valid and enforceable contract as severed.
Voidability
A voidable contract is one which is valid until a party whose right
it is to avoid the contract exercises that right. A party's
election to avoid or affirm a contract arises where there is a
'vitiating factor'. Vitiating factors often arise where the
contract is entered in circumstances of:
- duress
- undue influence
- unconscionable conduct and
- unilateral mistake as to a fundamental term of the contract where a court concludes it would be unconscionable to uphold the bargain.
Once a party exercises their right to avoid the contract, it is treated as void and the parties are no longer bound by it.
Unenforceability
Contractual provisions may be valid or voidable but nevertheless
unenforceable. Examples of when a term or contract is unenforceable
include where a statutory provision states a term or a contract is
unenforceable or the term or contract is contrary to public
policy.
Conclusion
Commercial litigation often involves disputes about contracts and
their terms. It is essential to ensure that a contract is drafted
correctly and in accordance with the law so that the parties can be
confident that its terms are valid and enforceable. If you have
doubts about a contract, or its terms, you should seek legal
advice.
For further information please contact:
Daniel Miller, Senior Associate
Phone:+61 2 9777 8330
Email: dgm@swaab.com.au
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
