Common Loopholes in Contracts: One Party Bypassing a Contract

by

You’ve likely heard the phrase “there’s always a loophole” when people are discussing a contract, and many times it is true. If a party has a savvy attorney or understands the business of creating and signing contracts, they will often try to include a clause to excuse themselves from performing a term in the contract.

Most contracts will have some kind of excuses included because it is nearly impossible to remove them all. However, it is possible to work around the loopholes and draft an enforceable document, which this article aims to outline.

Contracts: Legal Documents with Obligations

A contract is an agreement that is legally enforceable between two or more parties. A party can be any legal person, meaning they can be humans or businesses. Most agreements will be in a written contract, but the parties may be able to enforce an oral contract in certain situations. The terms of the contract outline the agreement to complete the terms, which is called performance. The contracting parties must perform the terms and can face the consequences if they fail to do so.

Common Loopholes in Contracts

Contract loopholes are ways that a person tries to get out of performing their obligation under the agreement. Many times the party trying to use a loophole will claim that there is something that makes the contract void or allows them to legally break the contract. The common contract loopholes based on the law include:

  • Impossibility

This loophole arises when some circumstances or instances make the performance of the contract impossible. Usually, the circumstances are not present when the parties sign the contract, but it happens afterward. For example, suppose someone had a contract to buy the guitar used by a specific musician at the final show before he passed away, but the guitar was destroyed in a fire before the exchange happened. This would be an impossible contract.

Impracticability is similar to impossibility, but it occurs when the performance is possible, yet it is so impractical or costly that it would not make sense to complete it.

This is an excuse for the performance when the parties contracted for a specific purpose and something outside their control makes it so that purpose cannot be achieved. The example commonly given here is that one person contracted with another to stay at his house during a parade because it was along the parade route, and the city council cancels the parade two days before due to an outbreak of the flu. Here, the purpose of the contract–watching the parade from the home, is frustrated.

  • Incapacity

Another loophole is incapacity. This results in the contract being canceled because one or both of the parties could not consent to the agreement legally. The main reasons for incapacity are age and mental capacity. In many places, there is an age that someone must meet to sign a legal document. The other time incapacity is a contract loophole is when a person does not have their full ability to understand the specific terms and give their consent, such as a mental disorder or intoxication.

  • Fraud and Misrepresentation

If one party gets the other person to agree to the contract by deceiving them in some way or leaving out important information, the law will void the contract due to fraud or misrepresentation.

  • Breach

A contract can be avoided if one of the parties breaches or fails to perform, the contract first. In this instance, it is the best practice to consult with a lawyer or law firm because there are different versions of a breach and courts will view some as more material than others. An attorney review can determine if the termination of the contract is proper after the breach. But if it is a material breach and an important clause, it will be proper in most cases.

These loopholes may end up excusing a person from performing after signing a contract, and it is important for each person or business to review and understand the language contract to avoid drafting a contract that goes against their interest.

Use Legal Services to Avoid Loopholes from the Other Party

Failure to avoid clauses that allow the other party to get out of the contract can cause headaches and other issues in many cases. This is why it is important to consider hiring lawyers to prepare the related contracts and ensure that everything is the way it is supposed to be. Several benefits accompany the use of an attorney for contract review and other related services, particularly the use of important clauses. When an attorney is helping to draft a contract, they can include select clauses that will benefit the person who is paying them, including:

Force Majeure

Force majeure clauses are a clause that protects the parties to a contract against an “act of god” or natural disasters that could ruin the contract.

Legal Fees

Many lawyers will include a fee clause in the contract, which places the responsibility of any fees on the parties and ensures that the lawyers are paid in the event of a breach or loophole.

In addition to this clause, a lawyer can also provide expertise to the contract, such as intellectual property or business lawyers. This expertise helps ensure that loopholes specific to a practice area do not find their way into a contract they should not. This is particularly important in intellectual property and construction.

Conclusion

Contracts are difficult to master, but with the right legal counsel, common loopholes and breaches can be avoided.

Click here to learn more about contracts and all things relating to alternative dispute resolutions.

Must-read Articles:

Emily Holland
Latest posts by Emily Holland (see all)
error: ADR Times content is protected.