Draw the Law: Contracts Part III, Void vs. Voidable and Contracts with Legal Persons

Last week recall that I talked about the need for persons to have the capacity to enter into a contract. Therefore, kids and intoxicated people may have grounds to avoid the contract. Recall even further back that I discussed that some contracts are illegal. Today, I will discuss the difference between void and voidable. In addition, I will go into contracting with legal persons better known as business entities.

Void vs. Voidable

If you noticed I used the term “voidable” as opposed to void. We make a distinction in the law between the two. Void contracts are ones that the court will not recognize. They are either illegal or very improper. Recall that a contract is a promise or series of promises that a court will enforce. Therefore, a void contract is an oxymoron in a way as a court will nullify it.

A court will not enforce the terms of a void contract. Therefore, it is not a valid contract, meaning it's as if the parties never contracted.

A voidable contract is a type of improper contract, but the victim has the choice whether to avoid the contract or honor it. Therefore, using the kid example again, the child has till age 18 to avoid the contract, but may choose not to if they do nothing and continue to comply with the contract’s terms by age 19.

One way to remember the difference is that void, is like a black hole, a completely empty space. Therefore, a void contract is not even there, it is nothing (because a court of law will not enforce it). On the other hand for voidable, just put an “a” in front of it and you will get the concept. The contract can be avoided.

A voidable contract allows the "victim" party to avoid having the terms of the contract enforced upon them for whatever reason like minority or incapacity.

What about Legal Persons?

So far I have talked about living, breathing people, but if you follow my blog and have come to my law talks, then you know that corporations, limited liability companies, and the like are separate entities; they are legal persons that can contract. However, we understand that this is a legal fiction. The brick-and-mortar store is not going to sprout arms and grab a pen and sign a document. A person does it, and normally this is fine.

While, business entities are legal persons that can "sign" contracts we understand it is the people (representatives) that carry out the action of agreeing to the contract.

However, consider pre-formation and post-windup of the business. For start-ups, the issue is sometimes you are getting things prepared for your company, but have not filed your paperwork with the state, and thus YOU are contracting with vendors, suppliers, etc . . . On the other end, if you have entered the winding up process a fellow co-owner still has authority to the bind the company with third parties.

It is crucial when contracting with business entities that you determine you are signing with the company through its representative (i.e. the president) OR if you are signing with them in their personal, individual, capacity.

Therefore, you want to make sure after your articles are filed that you get contracts changed over to reflect they are with the business (as the legal person) and not you the (individual person). When winding up the business you want to make sure you send out notices to everyone who deals with the business so that your co-owner is not continuing to enter agreements with your business as it winds up (because you will owe them if that co-owner skips out).

As a side note, remember if you are contracting with someone check if you are contracting with them or their entity, sometimes it does matter and that is when limited liability comes into play.

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*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.