New Jersey business law allows people and businesses to manage their relationships by entering contracts which define the terms of that relationship. Contracts are enforceable by the full force of the law. For instance, if one party owes another money under a contract but doesn’t pay, the wronged party can go to court; if it can prove its case the court will enter a judgment in its favor and it can then have the county sheriff go seize the breaching party’s property to pay the debt.
In some cases, all or part of a contract may not be enforceable. This area of New Jersey business law contains three distinct and important concepts: void contracts, voidable contracts, and severability.
Void Contracts or Contract Provisions
In essence, a “void” contract (or in legal terms, “void ab initio”), never really existed. The Appellate Division of New Jersey’s Superior Court explained in the case of Bunky, Inc. vs. Hamell that “The term ‘void ab initio’ means a contract is null from the beginning if it seriously offends law or public policy, in contrast to a contract which is merely voidable at the election of one of the parties to the contract.” Thus a contract which is for an illegal purpose is void because it violates the law or public policy. As an extreme example, a contract to commit murder is always void. However, this can occur every day in business transactions without any illicit intent. For example, a contract for a person or business to remove solid waste is illegal if that person or business does not have the required A-901 approval from the New Jersey Department of Environmental Protection (the NJ DEP).
“Voidable” contracts, on the other hand, actually “exist,” but one or more of the parties to it have the power to “avoid” the contract. Contracts which have a legal purpose, but which have problems in their creation, such as mistake, or misrepresentation or fraud by one of the parties, allow the mistaken or defrauded party to avoid the requirements of the contract. It is important to note they do not have to do so. They may find that despite the initial mistake or misrepresentation it is to their advantage to continue operating under the contract. In that case, they may “ratify” the contract, and “waive” the mistake or misrepresentation. When they engage in such a waiver, however, they are giving up their power to avoid the contract.
If the problem applies only to a portion of the contract, but not its main purpose, it may be possible to “sever” the offending portion – in other words, to cut out the bad part and keep the rest. In the case of Jacob v. Norris, McLaughlin & Marcus [no relation], New Jersey’s Supreme Court explained severability:
If striking the illegal portion defeats the primary purpose of the contract, we must deem the entire contract unenforceable. However, if the illegal portion does not defeat the central purpose of the contract, we can sever it and enforce the rest of the contract…. [T]he courts enforce the severable legal parts of an illegal divisible agreement where the unlawfulness does not permeate the whole and even in the case of indivisible contracts they strive to segregate and uphold if possible such portions as may be legal.
While the courts may do this, it is not always a given, and the outcome is fact sensitive. One way to avoid this is to make sure the contract includes a “severability clause,” which is a provision in the contract which says that if one portion of the contract is found to be void or voidable, the remainder of the contract will remain in effect and be fully enforceable. Severability clauses take some of the uncertainty out of contracts.
Our business lawyers draft contracts which attempt to head off disputes and anticipate problems so that our clients can enter into profitable ventures in which their interests are protected. Our litigators are aggressive in fighting for our clients rights in disputes over breaches of contract. Call (973) 890-0004 or email us to speak with on of our attorneys.