Each time there is an exchange of value between two persons where a payment is made there exists a commercial contract. So embedded is the mercantile agreement in our daily dealings, that we now conclude contracts numerous times a day without even realising it. From purchasing airtime credit on your banks online platform to filling up your tank at the fuel station, have you ever stopped to ask yourself “how many contracts have I entered into today?”
As the cost of living in Zimbabwe continues on an escalating trajectory, more people are opting to draw up their own contracts excluding the services of a lawyer as a cost containment measure. In some instances, they choose to use templates from previously used contracts [as a way of mitigating risks]. While this may appear harmless on the face of it, the down side is that it poses significant risk when terms of the contract, or the contact itself are in question.
Even as Artificial Intelligence moves us towards block-chain and “smart” contracts, there is always need for sound legal advice in any commercial transaction, more so, where large amounts of money are exchanging hands. It is necessary to move away from the existing mind-sets in some quarters that only when a disputes arises are lawyers needed.
In times when you find a contract you entered into is under threat of rejection by the other party, or perhaps you would like to reject it, you will need to approach the matter with background knowledge of this instances in which this can be allowable.
This article seeks to encourage reflections on commercial contracts that may be voidable. In order to reduce the characteristic high expenses and time consuming nature of dispute resolution, the parties must be empowered on key aspects relating to voidable contracts. When more informed decisions on how, when and why to launch contractual disputes are made, this re-affirms the integrity of our justice delivery system and becomes reflective of a society where the rule of law exists to support economic development.
So, here’s what you need to know:
Firstly, establish contract validity
In Zimbabwe, for a contract to be valid: it should be lawful; possible of performance; within contractual capacity; there must be serious intention to contract (animus contrahendi); meeting of the minds (consensus ad idem); it must be clear and unequivocal; the intention of both parties should be communicated. A contract may be verbal, meaning it need not be in writing unless the law relating to that type of contract specifies so, for example, when entering into a contract for the purchase of a house.
Where any one of the essential elements of a contract is missing, it becomes void. Depending on the situation, the contract may have all the essential requirements as spelt out above, but one of the parties disputing it, or disputes certain terms, it then become voidable (i.e. possible to be annulled).
This is only possible where the following grounds exist:
When a party to a contract has made a material statement concerning a state of affairs, which is not true, there is misrepresentation. This may be innocent, fraudulent or even negligent and may be made by the party themselves by an agent, but it must essentially entice the other party to enter into the contract.
In practice, high value transactions and deals such as mergers or acquisitions may end up falling through due to misrepresentations. Legal counsel will often seek to provide a safety net for their client by adding representation and warranty clauses. In a recent report, AIG found that payments on insurance claims for merger/acquisition transactions had grown significantly in the 2017/18 period . This new trend implies the complexity of commercial transactions and shows how simply unforeseeable future legal disputes may be.
2. Duress or Undue Influence
In instances where a person has been forced into a contract as a result of fear that has been induced by actual or threats of violence on his/her person or property, the concluded contract is voidable. An innocent party may for whatever reason thereafter intend to maintain a contract that was initially concluded under duress. In that instance the contract may be upheld as valid, hence at law, the initial contract is said to be voidable at the instance of the innocent party.
In commercial contracts, duress and undue influence are rather difficult to prove, and historically appear uncommon. Where mutual termination agreements are concluded in labour relations/industrial matters however, this defence is a potential trap for employers. The import of this is that an organisation must exercise caution and ensure that no amount of duress or undue influence has been used where mutual agreements are made.
Some contracts may become voidable where a mistake is cited by either of the parties. Where there’s mistake a contract may be vitiated provided the mistake is one of fact, and not law (this is where the old adage “ignorance is not a defence in the law pops up”) and that is of a material fact or term of the contract.
The materiality of a mistake has been classified into two further categories of errors regarding the reason why parties enter into contracts, and errors regarding the terms of the contract or its existence. The doctrine of mistake has a wide berth within which it may be used. At the core of it, being the realisation that a party may enter into a contract not on the basis of any misrepresentation but rather, at the time of conclusion of the contract either one or both of the parties were under some misapprehension about a certain fact.
In practice, various factors need to be considered when a party has come to the realisation that a contract is voidable.
In some instances it’s more commercially sensible to undertake a ‘wait and see approach’, while in others, its makes more sense to adopt a formal, approach in dealing with contracts that have been rendered voidable.
In all instances, actions taken must be in good faith.
When you are not sure of the status of a contract, legal audits and assessments may be undertaken by a competent lawyer to assist you in reaching clearer decisions on actions to take regarding a contract.