We enter into contracts all the time – from purchase and rental agreements to the paperwork surrounding mortgages and tenancies.

But contracts aren't automatically valid. If they don't meet certain criteria, they can be declared by the courts to be "void", meaning that they can't be enforced. What's more, they're treated as though they never existed.

This means that you can't litigate in the case of a breach of agreement. It's void – you might as well chase a ghost or sue the wind.

Knowing what makes a contract a contract is essential for businesses of all shapes and sizes. From one point of view, your business is a house of cards built out of contracts – agreements with employees, clients, shareholders and partners. If one is declared void, it can create a lot of headaches.

Disputes can happen when contracts aren't legally binding. In these situations, you can find yourself enmeshed in a web of complex, stressful, time-consuming and expensive litigation.

It's really not worth it. That's why many businesses choose to work with an experienced contract lawyer to help them write their contracts or simply to be a second pair of eyes.

It's much better to know in advance that your contracts are up to scratch than to find out down the line and have to deal with the consequences.

When is a contract "void"?

There are lots of different reasons why a contract could be unenforceable and therefore void. Here are some of the most common ones:

• The terms of the contract are uncertain or vague.
• The contract is an agreement about illegal activities.
• It was written by someone who didn't have the authority to.
• One party was coerced or manipulated into signing it,
• One or both parties were under 18 when the contract was signed.
• The contract is incomplete – for instance, it omits to mention starting dates or deadlines.

If a contract is declared void, that doesn't mean that your working relationship with the other party is dead in the water. It's entirely possible to enter into another agreement.

What's the difference between a void contract and a voidable one?

If a contract is void, it's treated as though it never existed. If it's "voidable", either party can rescind it. If the dispute ends up in court, the court can "set it aside".

There's also a distinction to be drawn with regard to third parties. If a contract is declared void, then any third parties mentioned in it lose their legal rights.

In the case of a contract that's voidable but not rescinded, third parties can continue to have their legal rights.

Why are contracts important?

Red tape can be frustrating – and you may wonder why you can't run a business on handshakes and verbal agreements. The main reason is that contracts provide clarity – and clarity helps to scotch legal disputes.

First, a contract helps build commitments within a business. All parties understand their roles, duties and processes. Everyone is entering into the agreement with their eyes wide open.