How a Contract Can Be Invalidated
Are you in dispute with someone you signed a contract with? One of the first things you need to determine is whether or not the contract will be considered an enforceable agreement under the law. Contracts commonly involve promises to do something (or stop doing something), but not all promises are contracts. So, how does the law identify which promises are enforceable agreements and which are not?
Contracts may be invalidated without consideration
The courts may not enforce contracts that were not entered into without valid consideration. Under basic principles of contract law, consideration is the answer to the question, “What are parties exchanging for being bound to this contract?” For any agreement to be deemed legally binding, it must include consideration from each entity or individual entering the contract.
What is consideration?
According to the California Civil Code § 1605:
- Any benefit conferred, or agreed to be conferred, upon the promisor, by any other person, to which the promisor is not lawfully entitled, or any prejudice suffered, or agreed to be suffered, by such person, other than such as he is at the time of consent lawfully bound to suffer, as an inducement to the promisor, is a good consideration for a promise.
Consideration is what takes place in the formation of a contract. Each party must take a clear position that is known to the other party as “consideration” offered as the basis for a contract. Every contract has consideration as either a promise not to do something you have the right to do or a promise to do something you are not legally obliged to do. A change in position is also referred to as bargained-for exchange of a legal detriment.
Therefore, if you find yourself in an agreement where one party has taken a change in position without there being actual bargained-for exchange, your contract may not be enforceable on the basis that there was no consideration.
Contracts may be enforceable and valid without actual authority
If you have found yourself in disagreement about a contract that has already been signed, you may be wondering:
Is the validity of a contract dependent on whether or not the representative of the other party was authorized to sign? There are a few considerations.
What is apparent authority?
Even if the signer did not have actual authority to sign, the employee who signed the contract can bind the company to the agreement due to apparent authority.
Restatement Agency § 2.03: “Apparent authority is the power held by an agent or other actor to affect a principal’s legal relations with third parties when a third party reasonably believes the actor has authority to act on behalf of the principal and that belief is traceable to the principal’s manifestations.”
Apparent authority can be created if it was reasonably believable that the person signing was authorized to act with legal consequence.
Restatement Agency § 3.03: “Apparent authority, as defined in § 2.03, is created by a person’s manifestation that another has authority to act with legal consequences for the person who makes the manifestation, when a third party reasonably believes the actor to be authorized and the belief is traceable to the manifestation.”
Many companies operate using management structures where executive or senior level managers delegate responsibilities and thereby authorize their subordinates to act on their behalf, which reinforces the reasonable belief in the creation of apparent authority.
Restatement Agency § 3.03, comment b: A principal may “make a manifestation by placing an agent in a defined position in an organization or by placing an agent in charge of a transaction or situation. Third parties who interact with the principal through the agent will naturally and reasonably assume that the agent has authority to do acts consistent with the agent’s position or role unless they have notice of facts suggesting that this may not be so. A principal may make an additional manifestation by permitting or requiring the agent to serve as the third party’s exclusive channel of communication to the principal.”
Therefore, if one party wishes to invalidate a contract by arguing that the representative who signed the contract did not have signing authority, the contract may still be enforceable, if it can be proven that there was reasonably believable apparent authority. Alternatively, a contract may be invalidated if it was signed without actual or apparent authority.
If you are in dispute about a contract or have questions about dispute resolution and business litigation, call San Diego Business Lawyer Christopher Villasenor to help you with next steps.
Call Us Today: 619-375-2956
Email Us: chris@sdlawfirm.net
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