Monday, March 7, 2011

Legal defenses that make a contract voidable

In most jurisdictions there are seven situations where a contract may be voidable

  • Mistake (such as a mistake in their Bid upon which the Contract is based).

  • Misrepresentation by the other party.

  • Fraud in the inducement by the other party.

  • Illegality of purpose, or subsequently illegality of purpose where a new law makes certain performance illegal.

  • Lack of capacity such as the contract being signed by a minor, someone with mental problems, under the influence or not having the authority to make the commitment on behalf of the party.

  • Failure to comply with requirements of the statute of frauds, (see below)

  • Unconscionable (contains terms that would not be enforceable as a matter of public policy).

In most cases only the Supplier would seek to void the contract by mistake. To make sure that your Contract isn’t voidable you should make sure that there were no mistakes in the Supplier’s bidding. Requesting that they verify the correctness of their bid or quote may do this.

For a Buyer to claim misrepresentation, the representation needs to be made part of the contract since most contracts will have merger clause stating that the agreement represents the entire understanding of the parties.

To manage a lack of capacity from voiding the agreement you need to make sure that the party signing the contract for the Supplier is authorized. We’ll discuss this in more detail in the blog on authority but in most situations authority to bind a company may be positional. For example Officers of a Corporation are considered to have positional authority to bind the company. For others, authority
needs to be either expressly granted by the Corporation or delegated by someone authorized by the corporation that as part of their grant of authority has the right to delegate authority.  For example a Vice President of Procurement may have the authority to delegate authority based upon a Procurement Policy that identifies who may sign certain types of contracts and at what financial value.  When in doubt, one way to verify authority is to ask for a “Secretary’s Certificate” that is signed by the Corporate Secretary that expressly describes the individual’s authority that the Corporation has granted the individual.

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