This article is written by Muskan Kunwar, Trinity college of Law, pune ,B.A. LL.B., SY, during her internship at LeDroit India
Scope of Article: This article focuses on the main types of contracts and agreements, including their effect, enforceability, statute, examples and case laws. This article also explains the difference between void and illegal agreements and discusses the common misconception about unenforceable contracts.
Abstract
Contracts are part of our daily lives, from buying a product or taking up a job to renting a house, paying rent or taking a loan. Not all agreements, however, are created equal. Some are completely enforceable, while others are void, voidable, or unenforceable due to lack of specific elements. Agreements with unlawful objects or consideration, on the other hand, are treated far more seriously as the law ignores such promises altogether. This article focuses on the different types of contracts and agreements in terms of their validity, enforceability, statutory basis, examples and case laws. It discusses the crucial differences between a void and an illegal agreement as well as the often misunderstood topic of unenforceable contracts.
Keywords: Contract Law; Valid Contract; Void Agreement; Voidable Contract; Unenforceable Contract; Illegal Agreement .
Introduction
The term contract often conjures images of complex commercial transactions or long legal documents, but it also forms part of our everyday lives. When we buy a product, take up employment or even rent a house, we enter into agreements. However, not all promises are enforced by the law simply because they are made by two or more persons. According to The Indian Contract Act, 1872 – India Code, it becomes crucial to distinguish between various types of contracts and agreements.
Two agreements may appear identical at first but have drastically different legal consequences. For instance, a contract freely entered into by competent persons with lawful consideration or object may be valid, while another contract, obtained through coercion may be voidable. A contract containing an illegal object may be deemed void altogether. It is therefore essential to distinguish between the two not only on the basis of the agreement itself but also its enforceability by law.
Valid Contract
A valid contract refers to a contract that meets the requirements of validity as stipulated by law. As per Section 10 of The Indian Contract Act, 1872 – India Code, the contract must be entered into by parties who are competent to contract, contain free consent of all the parties, consideration and object that are lawful, among other factors.
Some of the usual elements of a valid contract include offer and acceptance, intention to create legal relations, lawful consideration, lawful object, competency of the parties entering into the agreement, free consent and certainty of terms, as well as possibility of performance. Other formalities may also be required depending on the statute applicable to the contract. For instance, a contract may require writing, registration or stamping in order for it to be enforced by law.
A contract between A and B for the sale of a laptop for ₹40,000, with both competent to contract, free consent of B, lawful consideration and object and no misrepresentation or fraud, is a valid contract, subject to other requirements of a valid contract being met.
As the name suggests, a valid contract enables a person to seek remedies in law for enforcing the contract. In other words, if one party to a valid contract fails to perform his obligations under the contract without a lawful reason, the other party can seek remedies against him in law.
Void Agreement
A void agreement is an agreement that is not enforceable by law. The Indian Contract Act expressly declares certain agreements as void in nature. Some of the common examples include agreements with mistakes, unlawful consideration or objects, void agreements without consideration subject to exceptions, agreements restraining marriage, trade or legal proceedings, agreements with uncertain or vague terms, and wagering agreements, among others.
According to Section 11 of The Indian Contract Act, 1872 – India Code, agreements that are made between persons who are not competent to contract are also void. One of the most prominent cases that illustrate this principle is Mohori Bibee v. Dharmodas Ghose, (1903) 30 I.A. 114 (P.C.). This case established the principle that an agreement made by a minor is void as a minor is not competent to enter into a contract. This principle has since been followed in many Indian judicial decisions as well.
It is therefore essential to understand the concept of competency to contract, which refers to the ability of a person to contract. According to Section 11 of The Indian Contract Act, 1872 – India Code, a person is competent to contract if he is of the age of majority, is of sound mind, and is not disqualified from contracting by any law to which he is subject.
It is not enough for person to simply sign a contract – he must also be competent to do so for the contract to be valid. In the case of Ammiraju v. Seshamma , ILR (1917) 39 Mad 235, for instance, an agreement to lend a considerable sum of money by a person who had not attained the age of majority was held to be invalid because the defendant was not competent to contract.
Avoid agreement should not be confused with a voidable contract. A contract that is void is not enforceable by law, while a voidable contract is initially valid but can be cancelled by the affected party at his option.
Voidable Contract
A voidable contract is different from a void agreement. A voidable contract is a contract that can be cancelled or avoided at the option of one of the parties to it. According to Sections 15 to 18 of The Indian Contract Act, 1872 – India Code, coercion, undue influence, fraud and misrepresentation can render a contract voidable at the option of the affected party. Section 19 of The Indian Contract Act, 1872 – India Code provides the general law on contracts, the performance of which is vitiated by coercion, undue influence, fraud or misrepresentation, while Section 19A of The Indian Contract Act, 1872 – India Code deals specifically with contracts vitiated by undue influence.
The reason why a contract can be voidable at the option of the affected party is because consent of a party to a contract must be free. According to Section 14 of The Indian Contract Act, 1872 – India Code, consent is not free if it is caused by coercion, undue influence, fraud or misrepresentation. A contract in which A threatens to kill B unless he agrees to sell his house to A may be voidable at the option of B because A’s threats may not constitute free consent. Similarly, a contract that is induced by fraud is also voidable at the option of the innocent party.
For instance, if A commits fraud on B by falsely representing an important fact to secure a contract with him, the contract may be voidable at the option of B, subject to the requirements of law being fulfilled. Chikkam Ammiraju v. Chikkam Seshamma , ILR (1917) 39 Mad 235 is an illustration of coercion as per Section 15 of The Indian Contract Act, 1872 – India Code. The case held that the promise made by the plaintiff was vitiated by the threats of suicide of the defendant, which therefore rendered the promise voidable at the plaintiff’s option.
The key takeaway with regard to voidable contracts is that such contracts are not void from the beginning but become voidable at the option of the party whose consent was obtained through coercion, undue influence, fraud or misrepresentation. The affected party can choose to rescind or cancel the contract.
Unenforceable Contract
The expression “unenforceable contract” is not a statutory phrase because no contract is expressly declared unenforceable by The Indian Contract Act, 1872 – India Code. In legal writing, however, the term is used to refer to contracts that are otherwise valid but cannot be specifically enforced by law due to some technical irregularity. For instance, Section 49 of The Specific Relief Act, 1877 declares that certain transactions cannot be performed in court unless they are executed in writing. A contract that is not executed in writing would therefore be unenforceable by the court unless the statute governing it allows oral agreements.
It is essential to understand that “unenforceable” is not synonymous with “void.” A void contract is invalid, while an unenforceable contract is technically valid but cannot be specifically enforced because of some technical irregularity. The exact effect of “unenforceable” depends on the statute that applies to the contract. Consequently, a law student should always study the relevant statute when dealing with this term.
For instance, a contract that requires stamping in order to be enforced by the court cannot be enforced until this requirement is fulfilled. In other words, a contract may not be enforced if it lacks one of the formalities required by the applicable law, but such a contract cannot be treated as “void” simply because a technical irregularity, such as lack of stamping, exists.
Illegal Agreement
An illegal agreement refers to an agreement with an unlawful consideration or object. According to Section 23 of The Indian Contract Act, 1872 – India Code, consideration or object of an agreement is unlawful if it is forbidden by law, is of a nature that is opposed to public policy, involves injury to a person or property, or is fraudulent. An agreement with unlawful consideration or object is void.
An illegal agreement should not be confused with a void agreement. In Gherulal Parakh v. Mahadeodas Maiya , AIR 1959 SC 781, for instance, the Supreme Court differentiated between a void agreement and an illegal agreement. The case related to wagering transactions and discussed whether or not an agreement that is void under Section 30 of The Indian Contract Act, 1872 – India Code was illegal under Section 23 of The Indian Contract Act, 1872 – India Code. The Court ruled that a wagering agreement was indeed void and unenforceable under Section 30 but was not illegal under Section 23 of The Indian Contract Act, 1872 – India Code.
This ruling illustrates the difference between a void agreement and an illegal agreement. An illegal agreement has an object or consideration that is prohibited by law. An illegal agreement is also different from an unenforceable agreement. Although the latter cannot be specifically enforced by the court, it is not prohibited by law as well. A void agreement, on the other hand, may be either illegal or void for some other reason, such as the incompetency of one of the parties to contract.
The fact that an agreement is illegal often has adverse consequences on other transactions connected with it. The law generally does not assist a person who seeks to enforce an illegal agreement. It is therefore important to distinguish between a void agreement and an illegal agreement when examining the validity of a contract.
Void and Illegal Agreements: The Important Difference
Reasons. An illegal agreement is an agreement with unlawful consideration or object, while a void agreement is one that is not enforceable by law.
Every illegal agreement is void, but a void agreement is not necessarily illegal. In Gherulal Parakh v. Mahadeodas Maiya , AIR 1959 SC 781, for instance, an agreement was void under Section 30 of The Indian Contract Act, 1872 – India Code but not illegal under Section 23 of The Indian Contract Act, 1872 – India Code. In other words, although the agreement was unenforceable by law, it did not contain any unlawful consideration or object.
Thus, the two terms are not synonyms and should not be used interchangeably. A court must go through the relevant statutes before finding an agreement illegal or void.
Conclusion
Contract law governs the law of agreements, but not all agreements can be classified as valid, enforceable contracts. This article distinguishes between five different categories of contracts and agreements, including valid contracts, void agreements, voidable contracts, unenforceable agreements and illegal agreements. It discusses the basic elements of a valid contract, the circumstances under which a contract becomes voidable, the difference between a void and an illegal agreement and an unenforceable contract. The law must therefore always balance two important policies – contractual freedom and protection against legally defective or unlawful contracts.
The classification assists in determining whether a contract can be rescinded, specific performance can be claimed, or whether the courts would refuse to provide remedies in respect of such contracts. A contract can also become void due to a number of factors, including incompetence of a party, misrepresentation, fraud and coercion. The law must balance policy considerations when determining whether a contract should be void or illegal, including the importance of the public policy affected, whether the contracting parties acted bona fide, and other factors.
This article also demonstrates why the distinction between “unenforceable” and “illegal” is of crucial importance. In conclusion, understanding various categories of contracts enables a person to distinguish between the different legal effects that follow from signing an agreement.
