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Exceptions That Can Void A Contract

Imagine for a moment that your business has entered into a bad contract. (You have no excuse with our flat rate contract review, but just imagine). This is actually quite common. Many small business owners find themselves overwhelmed and don’t properly look over contracts. Other find themselves pressured or pushed into a contract by an incessant salesperson. Either way, the business owner finds him or herself wanting to void a contract.

Can your business leave this contract and survive?

Sadly there is a lot of misinformation when it comes to voiding a contract. Yes, exceptions exist that can void a contract. No, they are not what you think. Recall our prior article on the ‘parol evidence rule‘. A contract is a legally binding agreement, and should express both parties intents fully. You cannot void a contract because you do not like it anymore.

The point of this article is to discuss the exceptions that can void a contract and (hopefully) correct some of the misinformation out there. This is particularly useful for anyone who is about to enter a contract, has an existing contract or is thinking of entering a contract. It really does not matter what side of the contract you are on, you should familiarize yourself with these exceptions. So without further ado:

  • Subsequent modification of the contract. This is obvious. Any written and approved changes to the original contract can void existing terms.
  • A related agreement, if it does not contradict or change the main contract.
  • A condition that had to occur before contract performance was due. For example, if a contract stipulates that a remodel to a commercial space must occur before the lease starts but no remodel occurs, the contract could be voided.
  • Defects in the formation of the contract (such as fraud, duress, mistake or illegality). This is a very complicated caveat that could probably fill hundreds of blog articles. We will try to simplify it. Basically an illegal contract is not enforceable. A minor or person ruled mentally unfit cannot enter into a contract. The list goes on and on.
  • The parties’ intent regarding ambiguous terms in the contract. Basically, make sure everything in the contract is spelled out. If a contract specifies building parking, spell out how many spaces. If there is wi-fi included, ask the bandwidth limits.
  • Problems with the consideration. For example, a contract can be reliant on a payment. If that payment does not occur, the contract could be voided.
  • A prior valid agreement that is incorrectly reflected in the written instrument in question. A contract that references another contract incorrectly (ex: the new contract says the old contract called for 15 units, when it only called for 12) can be voided.

Final Thoughts

I want you to take note of how many times the word ‘can’ is used here. Each contract is different and requires special consideration. Just because there are exceptions does not mean they will apply to your business. Far too often we see small businesses operating under confirmation bias, only looking for information that will support their point of view. In a delicate situation, it pays to understand all factors involved. If you have any questions, I highly encourage you to contact us or comment below.

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6 comments

  • I recently entered into a contract will a bank for a business loan of $16,995 for a piece of equipment. On the contract, the monthly payments read
    Term (mos.) – 60
    Amount Each Payment $432.72
    The amount financed is $16,995
    (these are the exact words used on the contract)

    When I went to make my first payment online, I noticed the total amount I owed to the bank was $28,000. I was confused and questioned my account with the bank. The agent who had made my contract said I have to times the months and payment to get the total amount owed back to the bank. I asked the agent to highlight the words on the contract that I signed that stat that information and send it to me through the mail. When the contract came in the mail, the Term (mos.) – 60 and Amount Each Payment $432.72 were highlighted. There was an additional piece of paper that was recently handwritten (black ink pen) that read “months times monthly payment equals the total amount owed to the bank. The additional piece of paper was not signed by me or by the agent. It was like direction to the contract, I guess.

    So, my questions to you are,
    1. Is this contract voidable or am I obligated to pay the full $28,000?
    2. If the contract is voidable, can I only pay the $16,995 and be done with this contract (meaning stop all payments to the bank for this loan?

    Thank you for your time

    • Hi, Devin.

      It’s really hard to give you a very specific accurate answer, without seeing the entire financing and loan documents you signed and agreed to.

      By my calculations 60 months times $432.72 is $25,963.20, not $28,000. I suspect that difference of $2,036.80 could reflect other closing costs.

      Typically, what you’re telling me about this loan sounds about right. Businesses generally don’t have the same degree of legal protections as consumers and individuals, and you can expect less disclosures and (much) higher rates (especially for unsecured loans). I would suspect the $16,995 (i.e. “Amount Financed”) represents the “principal” on the loan (i.e. what you originally borrowed), and the interest and other fees to be incorporated into the monthly payment amount.

      Given this would be a secured loan (i.e. for a piece of equipment that I would assume will be the security on the loan), it does seem like a very high-interest loan.

      This comes back to my original comment, that it’s hard to give you a specific accurate answer without seeing the entire financing and loan documents. Each state has its own laws and rules around rates, terms, financing documents and more. If you really suspect you have a bad loan document, you should seek a “banking attorney” or “finance attorney” in your local jurisdiction. Have him or her look at the document, and see if there are any flaws that could render the document voidable or otherwise in violation of state law. This could give you some leverage.

      Larry.

  • Scott Buley /

    I am a landscape contractor going to arbitration on a contract my unlicensed wife wrote and signed with her name and the words “for Scott” meaning me. She did 75% of the contract and was medically disabled. I tried to finish but didn’t meet deadline due to my medical incapacity and extreme heat and record air pollution. Both the owners and I have sleep apnea and discussed that problem. They terminated contract. They are suing me. .. how can I best arbitrate? resolution

    • I’m very sorry for the delay in responding to you. Our system doesn’t always let me know when someone has sent in a comment, and my delay means you’ve already had to go through arbitration.

      I’m answering for others, and I hate to punt, but this is really where you need to consult with a local business attorney or construction lawyer. They will know the ins and outs of contract law (and construction law), and be able to help navigate through this.

      For example, in some states, it’s possible for unlicensed contractors to do contracting work, provided they are either supervised or affiliated with a properly licensed contractor. I have no idea what it is in your state, but if this applies to you, then you’re looking at a simple breach associated with the uncompleted work, versus something more serious — providing contracting services without a license. How your state comes out on this issue could have a big impact on what damages the other party is entitled to.

      Larry.

  • Hello Paul, great piece and thanks for the article. My partner and I entered into an oral agreement to own and operate a business. Few months down the line I was verbally threatened of my life. I have witnesses so my question is, can the fear for my safety for a threat void any binding agreements I had to perform with my partner and our landlord we leased space from?

    • Hi, Allan.

      Apologies for the delay in responding. The answer is “maybe.” You didn’t say whether it was the landlord or your partner that threatened you. Assuming the landlord, the answer is “maybe.” You really need to have a professional look at your lease, and determine what the avenues may be. For example, if your lease has some sort of dispute resolution clause, then I would expect you need to follow that.

      Of course, if the landlord is completely frustrating your quiet enjoyment of the property, then it’s possible you have a situation of “constructive termination” on your hands. You really need to talk with a professional to help you understand the issues and options here.

      Good luck. Larry.

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