This article is written by PRANIT BHAGAT pursuing B.A LL.B from ILS Law College, Pune. In this article, he has discussed the various types of contracts and agreements and also differentiated between them.
One enters into contractual engagements daily. Every business organization, be it large or small, binds itself in bonds of the contract with customers, suppliers, or employees in the conduct of its business operations. All these involve interactions of contractual nature. We all make contracts every day and many of us spend most of our lives performing contractual obligations. One may safely say that contracts are the most frequent juridical acts and the most useful among laws governing social relationships. However, not all contracts are valid. They raise the issue of defects or vices which may render the contract susceptible to invalidation or no effect at all. It is not possible to avoid the occurrence of vitiating factors but we can always reduce the undesired effects of a defective contract. Some defects make a contract void, while others make it voidable. Most legal systems expressly define defective contracts and enumerate effects that these categories of contracts produce. There is a common origin for the terms “void” and “voidable” and are also used to show the degree of defect in a contract. Void, voidable, and unenforceable contracts denote different degrees of the ineffectiveness of contractual engagement. The counterparts of these terms are in the continental system. The contract law in India is governed by The Indian Contract Act, 1872. However, the Contract Act does not claim to codify the entire law related to contracts. The Act specifically preserves any usage or custom of the trade or any incident of any contract not inconsistent with the provisions of the Act. The laws of contract confine itself for the enforcement of voluntarily created civil obligations. The law of contracts does not take care of the whole range of agreements and therefore, many agreements remain outside the purview as they do not fulfil the requirements of a contract. Every agreement is the result of a proposal from one side and its acceptance from the other. An agreement can be regarded as a contract when it is enforceable by law. Thus, A Contract can be defined as an agreement between two or more parties to perform a service, provide a product, or commit to an act and is enforceable by law. Section 10 of this Act talks about the conditions of enforceability, According to this section, an agreement is said to be a contract if it is made for some consideration, between parties which are competent to the said contract but with free consent and for a lawful object.
Types of contracts based on its validity
1. Valid Contracts
An agreement having all the essential elements of a contract is called a valid contract and thus, it can be enforced by law. Valid contracts are defined under The Indian Contract Act, 1872 and it also lists the Essentials of a Contract directly or through interpretations of various judgments of the judiciary. Section 10 of the act also enumerates certain points that are essential for a valid contract like free consent, Competency Of the parties, Lawful consideration, etc.
2. Void contract
Section 2(j) of this act talks about void contracts. An agreement that is not enforceable by law is said to be void. A void contract is a contract that terminates to be enforceable by law. A contract when originally entered into may be valid and binding on the parties but may subsequently become void.
3. Voidable contract
Section 2(i) of this act talks about a voidable contract. An agreement which is enforceable by law but at the option of one or more parties thereto, but not at the option of other or others, is a voidable contract. However, the contract is continued to be good and enforceable unless it is rejected by the aggrieved party.
4. Illegal contract
A contract is said to illegal if it is forbidden by law; or is of such nature that, if permitted, would defeat the provisions of any law or fraudulent; or has involved into injury to a person or property or regarded as immoral by the court or is opposing to public policy. These agreements are punishable by law. Also, these contracts are void-ab-initio which means that they are void from the start itself.
All illegal agreements are considered as void agreements but all void agreements are not illegal in nature.
5. Unenforceable contract
A contract that is good in substance but due to some technical defects cannot be enforced by law is called an unenforceable contract. These contracts are neither void nor voidable.
Void Contract is a contract that does not exist at all. It cannot be enforced by law through any legal obligation to either party especially the aggravated party because they are not entitled to any protective laws as far as contracts are concerned. An agreement which talks about carrying out an illegal act is an example of a void contract or void agreement.
For example, an agreement between a drug dealer and its buyer is a void agreement simply because the terms of the agreement are illegal. Therefore, neither party can go to court to enforce the contract.
Section 2(g) of The Indian Contract Act, 1872 talks about an agreement being not enforceable by law and is called void. A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable as per Section 2(j) of the Act.
Void Agreeements are of two types:-
(i) Void ab initio: void-ab-initio means “unenforceable from the very beginning.
(ii) Void due to the impossibility of its performance: A contract can also be void due to the impossibility of its performance.
Example: If a contract has been formed between two parties B & C but when the contract is being performed, the object of the contract becomes impossible to achieve because of action by someone or something other than the contracting parties, then the contract cannot be enforced in the court of law and is considered void.
(iii) Void agreements according to the Indian Contract Act, 1872
• Any agreement with a bilateral mistake is void: Section 20 of the act talks about this where both the parties to an agreement are under a mistake as to the matter of fact essential to an agreement and thus making it void
Example: B agrees to buy a certain horse from C but It turns out that the horse was dead at the time of the bargain, though neither party was aware of the fact. The agreement becomes void.
• Agreements having unlawful consideration or objects are void.
Section 23 & 24 of this act talk about this where either the consideration or object of an agreement is unlawful or forbidden by law or of such a nature that if permitted, it would defeat the provisions of any law or is fraudulent or involves injury to the person or property of another or it is immoral or opposed to public policy.
If any part of a single consideration for one or more objects, or anyone or any part of any one of several considerations for a single object is unlawful, the agreement becomes void. But if the legal part of an agreement is severable from the illegal one then, the former would be enforced.
• An agreements made without consideration is void:
An agreement without the consideration is void according to Sec 25 of the act unless:
(i) Made on an account of natural love and affection and it is expressed in writing and registered under the law for the time being in force.
(ii) A promise to compensate for a person who has already done something voluntarily for the promisor.
(iii) It has made a promise to pay a time-barred debt.
• Agreement for restraint of marriage of any major person is void:
Section 26 of the act talks about this where every agreement in restraint of the marriage of any person, other than a minor is void. The law has the policy to discourage agreements which restrains freedom of marriage. The restraint can be general or partial in nature but the party may be restrained from marrying at all or from marrying for a fixed time or from marrying a particular person or class of persons, the agreement becomes void.
Void and Illegal Agreement
The laws of contracts draw a distinction between an agreement which is void and unlawful or illegal. An illegal agreement is forbidden by law while a void agreement may not be forbidden by the law but merely say that if it is made and the courts will not enforce it. Thus, we can say that every illegal contract is void but a void contract is not necessarily illegal. The main difference between the two is that void contracts are not punishable and its collateral transactions are not affected but on the contrary illegal contracts are punishable and its collateral transactions are also void.
Difference between Void and Voidable Agreement
A void contract can be considered as a legal contract which is invalid even from the start of signing the contract. While a voidable contract is also a legal contract but declared invalid by one of the two parties for certain legal reasons. A void contract becomes invalid at the time of its creation and a voidable contract becomes invalid only if cancelled by one of the two parties who are engaged in the contract. No performance is possible in case of a void contract but performance is possible in a voidable contract. While a void contract cannot be considered valid at face value, a voidable contract is valid, but can be declared invalid at any time. A void contract is nonexistent and cannot be upheld by any law, a voidable contract is an existing contract, and is binding to at least one party involved in the contract.
The performance and enforceability of a contract can be secured if the contract is a valid contract as void contracts can’t be enforced in the court of law.