Contract Loopholes: Everything You Need to Know
Contract loopholes are omissions or ambiguities found in contracts that are included to create ways for parties to avoid following requirements in the contract. 4 min read
Updated July 10, 2020:
Contract loopholes are omissions or ambiguities found in contracts that are included to create ways for parties to avoid following requirements in the contract. They may not be noticeable until the damage has been done, so it's essential that no loopholes exist in contracts.
What Is a Contract?
A contract is an agreement between two or more parties that is enforceable by law. Although a contract can also be oral, it's usually in the form of a legal document signed by two or more parties. There are many different types of contracts such as employment contracts, real estate contracts, purchase contracts, and insurance contracts.
When Can You Void a Contract?
There are certain situations when a contract needs to be broken; for example, when a contract does not meet the legal requirements. In such scenarios, courts can void a contract. Following are some of the major reasons for voiding a contract:
Impossible to Perform
When the contracting parties have done whatever is required by the contract, it is called performance. Let's say for instance, an artist enters into a contract to perform live in a concert. When he performs at the concert and gets paid for it, the contract is complete.
However, there are some cases where it is impossible to perform what is required by the contract. This is called impossibility of performance. In such cases, any party can break the contract. Suppose you have a contract with a painter to paint your portrait. The painter dies without the portrait being made. In such a case, contract is terminated due to impossibility of performance.
Fraud and Misrepresentation
You can break a contract if the other party does something improper or if the contract is based on fraud or misrepresentation. For example, you enter into a contract to buy a painting of Picasso owned by your friend. Before the sale is complete, you find out that the paining is not authentic. This contract is based on fraud, so you need not proceed with the sale. Breaking such contracts is known as rescission. Fraud or any kind of misrepresentation can be a good ground to rescind a contract.
The contract law also requires the parties to be of appropriate age. A person can escape a contract as he or she is not of certain age and cannot decide on some of the legal aspects. For example, a 13-year old boy signs a contract to sell a used car. This contract can be voided since the boy is a minor and not old enough to legally enter into a contract.
Breach of Contract
A breach happens in any of the following cases:
- If a party refuses to perform its part under the contract
- If a party does something it is not supposed to do
- If a party prevents you from fulfilling your obligations under the contract
If the other party breaches the contract, you too need not fulfill your part. However, the breach must be serious and material.
An immaterial breach does not matter much and is relatively unimportant for the agreement. For example, you hire a person to inspect a heating system every month. According to the contract, this person is supposed to attend the call on first Monday of every month. However, instead of first Monday, he comes on the first day of the month. This cannot be considered a breach of the contract.
A contract may contain a provision wherein either party can end the contract on certain conditions. Such contracts also detail out the information on how to end the contract.
Grossly Unfair Agreements
Often, an agreement may be unfair to one party and highly favorable to the other. For example, if your cell phone service provider starts charging a new fee in the middle of your contract, you can break the contract without having to pay the cancellation fees.
When a person is incapacitated, the contract gets negated. Making contract with a person who is drunk or suffering from Alzheimer's can negate the contract.
You need to be vigilant when entering into a contract. Watch out for the language of the contract. Insist on neatly slated rules and conditions before signing a contract.
Avoid payment loopholes, such as:
- No payment breakdown: Avoid going for a lump sum payment to the extent possible. Divide the payment into sub-payments for clearly identifiable parts of goods and services.
- No specific dates: There should be a clear indication of dates. The contract should have a timeline to prevent delays and changes.
- No repercussions: Clearly lay out the consequences for failure to perform. It will ensure better compliance.
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