Kinds of contracts

Kinds of contracts from the point of view of Enforceability

·      Valid contract

·      Voidable contract.

·      Void contract

·      Unenforceable contract

·      Illegal or unlawful contract

From the point of view of enforceability a contract may be valid, voidable, void, unenforceable or illegal.

1.     Valid contract. According to section 2(i), it is”an agreement enforceable by law”, an agreement becomes enforceable by law when all the essential elements of a valid contract as were enumerated in the last lesson are present.

If one or more of these elements is/are missing the contract is either void, voidable, illegal or unenforceable.

2.     Voidable contract. According to section 2(i), “an agreement which” is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract.” Thus, a voidable contract is one which is enforceable by law at the option of one of the parties only. Until it is avoided or rescinded by the party entitled to do so by exercising his option in that behalf, it is a valid contract.

Usually a contract becomes voidable when the consent of one of the parties to the contract is obtained by coercion, undue influence, misrepresentation or fraud. Such a contract is voidable at the option of the aggrieved party i.e., the party whose consent was so caused (secs. 19 and 19A). but the aggrieved party must exercise his option of rejecting the contract (i) within a reasonable time, and (ii) before the rights of third parties intervene, otherwise the contract cannot be repudiated.

Illustration.

(a)         A : threatens to shoot B if he does not sell his new Bajaj scooter to A for Rs. 2,000. B agrees. The contract has been brought about by coercion and is voidable at the option of B.

(b)   A. intending to deceive B. falsely represents that five hundred quintals of indigo are made annually at A’s factory, and thereby induces B to buy the factory. The contract has been caused by fraud and is voidable at the option of B.

Other circumstances under which a contract becomes voidable. The Indian contract act has laid down certain other situations also under which a contract becomes voidable. For example.

(i)    When a contract contains reciprocal promises, and one party to the contract prevents the other from performing his promises, then the contract becomes voidable at the option at the party so prevented (sec. 53).

Illustration. A. Contracts with B that A shall whitewash B’s house for Rs. 100. A. is ready and willing to execute the work accordingly, but B prevents him from doing so. The contract becomes voidable at the option of A.

(ii)   When a party to the contract promises to do a certain thing within a specified time, but fails to do it, then the contract becomes voidable at the option of the promisee. If the intention of the parties was that time should be of the essence of the contract. (sec.55)

Illustration. X Agrees to sell and deliver 10 bags of wheat to Y for Rs. 2,5000 within one week. But X does not supply the wheat within the specified time. The contract becomes voidable at the option of Y.

Consequences of rescission of voidable contract. Section 64 lays down the rights and obligations of the parties to a voidable contract after it is rescinded. The section states that when a person at whose option a contract has become has received any benefit from another party to such contract, he must restore such benefit. If an amount has been received as a security for the due performance of the contract, such earnest money deposit is not to be returned if the contract becomes voidable under section 55 on account of the promisor’s failure to complete the contract at the time agreed and has been rescinded by the promisee because it is not a benefit received under the contract.

3.    Void contract. Literally the word ‘void’ means ‘not binding in law’. Accordingly the term. ‘void contract’ implies a useless contract which has no legal effect at all. Such a contract is a nullity, as for there has been no contract at all. Section 2(j) defines: A contract which ceases to be enforceable by law becomes void, when it ceases to be enforceable.” It follows form the definition that a void contract is not void from its inception and that it is valid and binding on the parties when originally entered but subsequent to its formation it becomes invalid and destitute of legal effect because of certain reasons.

The reasons which transform a valid contract into a void contract, as given in the contract Act. Are as follows. (a)   Supervening impossibility (sec. 56) A contract becomes void by impossibility of performance after the formation of the of contract for example, A and B contract to marry each other. Before the time fixed for the marriage, A goes mad. The contract to marry becomes void.

(b)     Subsequent illegality (sec, 56) A contract also becomes void by subsequent illegality. For example, A agrees to sell B 100 hags of wheat at Rs. 650 per bag. Before delivery the government bans private trading in wheat. The contract becomes void.

(c)                 Repudiation of a voidable contract. A voidable contract becomes void, when the party, whose consent is not free, repudiates the contract. For example, M by threatening to murder B’s son, makes B agree to sell his car worth Rs. 30,000 for a sum of Rs. 10,000 only. The contract, being the result or coercion, is voidable at the option of B. B may either affirm or reject the contract. In case B decides to rescind the contract, it becomes void.

(d)   In the case of a contract contingent on the happening of an uncertain future event, if that event becomes impossible. A contingent contract to do or not to do something on the happening of an uncertain future event, becomes void, when the event becomes impossible (sec.32).” for example, A contracts to give Rs. 1,000 as loan to B marries C. C dies without being married to B. the contract becomes void.

Void agreement- “An agreement not enforceable by law is said to be void” [sec.2 (g)]. Thus, a void agreement does not give rise to any legal consequences and is void agreement does not give rise to any legal consequences and is void ab-initio. In the eye of law such an agreement is no agreement at all from its very inception. There is absence of one or more essential elements of a valid contract, except that of ‘free consent,’ in the case of a void agreement. Thus, an agreement with a minor is void ab-initio as against him, because a minor lacks the capacity to contract. Similarly, an agreement without consideration is void ab-initio, of course with certain exceptions as laid down in section 25. Certain agreements have been expressly declared void in the contract act e.g., agreements which are in restraint of trade or of marriage or of legal proceedings or which are by way or wager.

A ‘void’ agreement should be distinguished from a ‘void contract’. A ‘void agreement ‘ never amounts to a contract as it is void ab-initio. A ‘void contract’ is valid when it is entered into, but subsequent to its formation something happens which makes it unenforceable by law, notice that a contract cannot be void ab-initio and only an agreement can be void ab-initio.

Obligation of person who has received advantage under void agreement or contract that becomes void. In this connection section 65 lays down that when an agreement is discovered to be void or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it. Thus, this section provides for restitution of the benefit received. Thus both parties may stand un-effected by the transaction in the following two cases. (a)   When an agreement is discovered to be void. In other words, when an agreement is void being discovered at a later stage. For example, A pays B Rs. 1,000 for B’s agreeing

to sell his horse to him. It turns out that the horse was dead at the time of the bargain, through neither party was aware of the fact. In this case the agreement is discovered to be void and B must repay to A Rs. 1,000. it should, however, be noted that agreements which are known to be void or illegal, when they are entered into, are excluded from the purview of this section. Thus, if L pays Rs. 10,000 to M to murder Z, the money cannot be recovered. Similarly, nothing can be recovered in the case of expressly declared void agreements, of course, subject to the following exceptions.

(i)    In the case of an agreement caused by bilateral mistake of essential fact (although it is expressly declared void under section 20) restitution is allowed as it comes under the category of ‘an agreement discovered to be void.’

(ii)   In the case of an agreement with a minor who commits fraud by misrepresenting his age (although agreement with a minor is known to be void.) restoration is allowed in specie on equitable grounds because a minor cannot be allowed to cheat people, and also because the other party has not lost his title to the thing in question.

(b)  When a contract becomes void, restitution is also allowed in the case of a void contract. For example, A agrees to sell B after one month 10 quintals of wheat at Rs. 625 per quintal and receives Rs. 500 as advance. Soon after the contract, private sales of wheat becomes void but A must return the sum of Rs. 500 to B. Similarly, where after accepting Rs. 1,000 as advance for singing at a convert for B, A is too ill to sing. A is not bound to make compensation to B for the loss of the profits which B would have made if A would have been able to sing, but A must refund to B the 1,000 rupees paid in advance.

4.                Unenforceable contract. An unenforceable contract is one which is valid in itself, but is not capable of being enforced in a court of law because of some technical defect such as absence of writing, registration, requisite stamp, etc., or time barred by the law of limitation. For example, an oral arbitration agreement is unenforceable because the law requires an arbitration agreement to be in writing. Similarly, a bill of exchange or promissory note, though valid in itself, becomes unenforceable after three years from the date the bill or note falls due, being time barred under the limitation act.

5.                Illegal or unlawful contract. The word ‘illegal’ means ‘contrary to law’ and the term ‘contract’ means ‘an agreement enforceable by law’. As such to speak of an ‘illegal contract’ involves a contradiction in terms, because it means something like this an agreement enforceable by law and contrary to law. There is apparent contradiction in terms. Moreover, being of unlawful nature, such an agreement can never attain the status of a contract. Thus, it will be proper if we use the term ‘illegal agreement’ in place of ‘illegal contract’ an illegal agreement is void ab-initio.

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