Invalidity of contract is a hot-button issue for small and medium-sized enterprises (SMEs), especially when international assemblage promises higher profit margins but also entails greater risk. As directors and managers of SMEs ensure their commercial relationships can scale with their operations, one of the most crucial questions they need to ask themselves is how to ensure the validity of their commercial contracts, including under the laws of whichever country they may be operating in.

Keep on reading to learn more about contract invalidity, how to enforce a valid contract, how to tackle contract challenges, and how the invalidity of contract could affect your company.

“Invalidity of contract” occurs when a contract lacks the legal elements necessary to be considered binding, particularly when necessary elements are inexistent or when they are circumstantially incompatible with the content of the contract.

While the specifics of contract law differ widely from country to country, contract for SMEs must generally contain sufficient elements for courts to establish congruence with contracts that are similar or comparable to their content.

Contract invalidity may arise as a result of an error (viziation), misrepresentation (dolo), coaction or duress, excessive advantage, immorality (illegality), lack of authorization or incapacity to consent, undue influence, contravention to conditions proposed by the Law and public policy, prohibitions on contracts, mistakes in the identity of the parties, and other factors.

In the context of international commercial activities, companies may also have to deal with the possibility of their contract being deemed as “trafficking in persons”.

There are two main causes of contract invalidity that commonly affect international commercial activities:

The invalidity of contract or its inadmissibility means that the contract is then treated as if it had never been closed (res inter alios acta). Consequently, the contract cannot be enforced against either party, except where a party has made a payment under the contract which is to be considered as an undue (repetitive) payment, or where one of the parties has received an advantage from the contract (without which, contract execution would not have occurred).

In these cases and depending on the situation, only one or the other party may be entitled to claim damages.

Companies using contracts with unknown legal validity, including all those who are involved with partnerships, services agreements, joint ventures, and other situations, should ensure that their contracts are duly vetted by legal professionals to ensure their validity.

To avoid contract invalidity, the first strategy is to simply comply with the law and ensure that the contract’s content meets the conditions for valid contracts.

This means ensuring that:

It’s also important to ensure that the contract contains representative elements that can be recognized by courts to be congruent with the requested contract content.

Generally speaking, the most common causes of contract invalidity in the context of international commercialization are those caused by an existing erroneous representation, especially in light of the “real name requirement”. In this case, contracts entered into under a d/b/a or trade name system may be challenged as “invalid due to lack of authorization”.

But even where there isn’t any potential for contract invalidity in a jurisdiction directly, companies must always keep in mind that contract provisions can be unenforceable even in jurisdictions where validity is presumed, particularly if the contract in question was entered into under the impression of future illegality.

Contract invalidity is often used as a pretext to attempt a negotiation that is subsequently followed by a settlement to minimize damage. In the event a negotiation falls through, it is important to ensure that adequate notice and requisite formalities are complied with to recover any damages incurred.

Companies are recommended to take a proactive approach which includes, among other measures, legal due diligence and stringent contract drafting.

Other strategies that can help mitigate the risk of contract invalidity include:

While doing business across borders provides a great opportunity for growth and a chance to reach a larger market, companies should always ensure that their international contracts can be enforced without complications. Accordingly, directors and managers of SMEs should invest in legal counsel that can help them navigate this complex landscape.

For more information on contract law, you can visit Wikipedia.