What Is a Voidable Contract?
A voidable contract is a formal agreement between two parties that may be rendered unenforceable for a number of legal reasons. Reasons that can make a contract voidable include the following:
- Failure by one or both parties to disclose a material fact
- A mistake, misrepresentation or fraud
- Undue influence or duress
- One party's legal incapacity to enter a contract
- One or more terms that are unconscionable
- A breach of contract
How Voidable Contracts Work
A voidable contract is originally considered to be legal and enforceable but can be rejected by one party if the contract is discovered to have defects. If a party with the power to reject the contract chooses not to reject the contract despite the defect, the contract remains valid and enforceable. Most often, only one of the parties is adversely affected by agreeing to a voidable contract in which that party fails to recognize the misrepresentation or fraud made by the other party.
Voidable Versus Void Contracts
A voidable contract occurs when one of the involved parties would not have agreed to the contract originally if he had known the true nature of all of the elements of the contract prior to original acceptance. With the presentation of new knowledge, the aforementioned party has the opportunity to reject the contract after the fact.
A contract may be deemed void should the terms require one or both parties to participate in an illegal act, or if a party becomes incapable of meeting the terms.
Alternatively, a contract is voidable when one or both parties were not legally capable of entering into the agreement, such as when one party is a minor. In contrast, a void contract is inherently unenforceable. A contract may be deemed void should the terms require one or both parties to participate in an illegal act, or if a party becomes incapable of meeting the terms as set forth, such as in the event of one party’s death.
A contract that is deemed voidable can be corrected through the process of ratification. Contract ratification requires all involved parties to agree to new terms that effectively remove the initial point of contention present in the original contract.
For example, if it was later discovered that one of the parties was not capable of entering into a legally enforceable contract when the original was approved, that party can choose to ratify the contract when they are deemed legally capable.
Example of a Potentially Voidable Contract
Certain smartphone apps, categorized as freemium apps, begin as free downloads that allow for in-app purchases costing real currency. Those freemium apps that are geared toward children may result in a minor accepting the terms and conditions associated with gameplay, although those terms may allow for the later solicitation of in-app purchases.
This type of activity led to a lawsuit against Apple (AAPL) in 2012, which suggested the transactions were part of a voidable contract.
- Not all contracts are voidable, and there must be legal precedent to absolve responsibility.
- Finding a defect in the original contract is a common way to void that contract.
- The simplest way to void a contract is for both parties to agree that voiding it is the best option.