What is a voidable contract?
A voidable contract is a formal agreement between two parties that can become unenforceable for a number of legal reasons. Reasons that can make a contract voidable include:
- Failure by one or both parties to disclose a material fact
- An error, misrepresentation or fraud
- Undue influence or coercion
- Legal inability of one of the parties to enter into a contract
- One or more terms that are inconceivable
- A breach of contract
How voidable contracts work
A voidable contract is originally considered legal and enforceable, but can be rejected by one of the parties if the contract is found to be defective. If a party with power to reject the contract chooses not to reject the contract despite the defect, the contract remains valid and enforceable. Most of the time, only one party is adversely affected by agreeing to a voidable contract in which that party does not acknowledge the misrepresentation or fraud performed by the other party.
Voidable contracts vs. voided contracts
A voidable contract occurs when one of the parties involved would not have accepted the contract originally had it known the true nature of all elements of the contract prior to the original acceptance. With the presentation of new insights, the named party has the opportunity to reject the contract after the fact.
A contract can be considered void if the terms require one or both parties to engage in an illegal act, or if one of the parties becomes unable to perform on the terms.
Alternatively, a contract is voidable when one or both parties were not legally able to enter into the agreement, such as when one of the parties is a minor. In contrast, a void contract is inherently unenforceable. A contract can be considered void if the terms require one or both parties to engage in an illegal act, or if one of the parties becomes unable to perform on the stated terms, as in the case of the death of one of the parties.
A contract that is deemed voidable can be corrected through the ratification process. Ratification of the contract requires all parties involved to agree to new terms that effectively eliminate the initial talking point 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 may choose to uphold the contract when deemed legally capable.
Example of a potentially voidable contract
Certain smartphone apps, categorized as freemium apps, start out as free downloads but then allow in-app purchases that cost real money. Freemium applications directed at children may cause a minor to agree to the terms and conditions associated with the game, although these terms may allow subsequent request for in-app purchases.
This type of activity led to a lawsuit against Apple (AAPL) in 2012, which suggested that the transactions were part of a voidable contract.
- Not all contracts are voidable; there must be a legal precedent to absolve liability.
- Finding a defect in the original contract is a common way to void that contract.
- The easiest way to void a contract is for both parties to agree that voiding is the best option.