Void Valid and Voidable Contracts | Law Optional Notes for UPSC PDF Download

Introduction 

A voidable contract is a contract that can be canceled or altered under specific legal conditions. Not all contracts are voidable, and thus, a legal basis is required to discharge an obligation. An often-used method to terminate a contract is by identifying a flaw in it. The simplest way to void a contract is when both parties mutually agree to void it, which is typically the best course of action.
A voidable contract, sometimes called a formal agreement between two parties, can be declared void for various legal reasons, including:

• Failure by one or both parties to disclose a material fact.
• A mistake, misrepresentation, or fraud.
• Undue influence or duress.
• One party's legal incapacity to enter a contract (e.g., a minor).
• One or more terms that are unconscionable.
• A breach of contract.

What are voidable contracts

• The term "voidable" implies that a contract can be invalidated. A voidable contract is initially considered valid and enforceable, but it can be annulled by one party if defects or issues are identified. If a party with the authority to annul the contract chooses not to do so despite the flaws, the contract remains valid and enforceable. Typically, entering into a voidable contract negatively impacts only one of the parties because that party fails to recognize the deception or fraud perpetrated by the other party.
• In the case of Bawlf Grain Co. vs. Ross (1917), an intoxicated wheat producer entered into a contract but failed to fulfill his obligations as the price of wheat increased. This case established a significant precedent that contracts made while one party is intoxicated can be voided at the discretion of the aggrieved party.
• In general, a voidable contract arises when one of the contracting parties would not have agreed to the contract if not for the actions or omissions of the other party, such as fraud or misrepresentation. Initially, the parties believe the contract to be valid and enforceable. However, the aggrieved party discovers reasons to void the contract and considers themselves no longer bound by its terms due to the revelation of facts or information. In the case of a voidable contract, one of the contracting parties has grounds to void the contract due to the actions of the other party. It is rare for both parties in a contract to have valid reasons to declare the contract void. When dealing with a voidable contract, the aggrieved party can choose to either affirm or void the contract at their discretion.

Accepting a voidable contract

In the event that one of the parties involved in a contract discovers defects that could justify canceling the contract after it has been signed, that party may still decide to proceed with the contract's terms. For instance, let's consider a scenario in which you enter into a contract that you would not have agreed to if not for the other party's deception. Even after realizing the extent of the other party's misrepresentation, you make the choice to honor the contract's terms and remain bound by it. By doing so, you accept the contract and continue to abide by its provisions. At this point, a voidable contract is ratified and becomes legally enforceable.

Repudiating a voidable contract

A party who enters into a contract under voidable circumstances has the option to repudiate the contract. In simple terms, if they discover valid reasons for voiding the contract, they can reject it and argue that they are not bound by its terms. When one party asserts that they are not obligated to adhere to the contract's terms while the other party insists otherwise, repudiating the contract can lead to a contractual dispute between the parties involved. If the parties are unable to reach a mutual agreement to accept the contract, modify its terms, or void it amicably, they may end up in a legal battle. If one party believes that the contract is voidable or that the other party has legal grounds to void it, they may file a breach of contract lawsuit against the other party. This can be a complex situation, and if it reaches this stage, it's advisable to seek legal counsel or representation from an attorney.

Voidable contracts based on formation defects 

A contract can become voidable if it fails to meet the statutory requirements for its formation. In essence, for a contract to be legally enforceable, the following elements must be present:

• Offer.
• Acceptance.
• Consideration.
• Object.
• Legal capacity.

If any of these essential formation elements are deficient, the contract can be rendered voidable. For instance, if you enter into a contract with an individual who is mentally incapacitated, you would be violating the legal capacity requirement. A contract made with someone lacking legal capacity will not be considered valid and legally binding. Consequently, the contract becomes voidable due to deficiencies in its formation.

Voidable contracts based on vitiated consent

A contract may become voidable if a party's consent to it has been compromised. Vitiating consent means that one party induced another to enter into a contract despite that party's unwillingness to do so had they been provided with complete and truthful information before concluding the transaction.

For instance, consider a situation in which a property seller is aware of a serious foundation issue that makes the house potentially unsafe, yet they fail to disclose this information to a potential buyer. The buyer agrees to purchase the property at a reasonable price but is unaware of the significant foundation problem. If the buyer had been informed about this flaw, they would not have gone through with the purchase. In this case, the buyer's consent was rendered void due to the seller's deception.

Voidable contracts under the Indian Contract Act, 1872

According to Section 2(i) of the Indian Contract Act, 1872, voidable agreements are those that remain valid until one or both parties decide to void them. Voidable contracts often involve situations where one of the parties did not provide their consent freely. Therefore, if the party agrees to the terms of the contract, it remains in effect; if they choose not to, the contract is nullified. Coercion, fraud, undue influence, and other factors play a crucial role in determining whether a contract can be voided by either party.

For instance, in a scenario where A threatens B with a weapon and forces her to sell her house to him for a very low price, and B agrees out of fear for her life. B's consent in this case was obtained under duress, so she has the option to void the contract based on this ground.

• Lack of free consent (Sections 19 and 19-A): These provisions state that any contract in which a party's consent is not given freely can be voided at the discretion of that party. Consent obtained through coercion, fraud, or undue influence in such cases is considered illegal under the law.
• Prevention of performance by the other party (Section 53): When one party prevents the other from fulfilling their obligations under a contract based on a reciprocal promise, the contract can be voided at the choice of the party who was prevented from fulfilling their promise.
• Failure to perform within a specified time (Section 55): There are contracts in which time is of the essence, and they must be performed within the specified timeframe. If a contract is not completed on time, the aggrieved party has the option to void the contract.
• Consequences of rescission (Section 64): When a person, at whose discretion the contract is voidable, rescinds it, the other party is released from all contractual obligations. Simultaneously, the person who has rescinded the contract is liable for any benefits received.

What makes a contract voidable at the option of the other party

In the case of Mohd. Hussain vs. Fida Hussain And Anr (1951), the Punjab & Haryana High Court made an observation that, in simple terms, Sections 19 and 19A of the Indian Contract Act, 1872 establish that when a party's consent is procured through coercion, fraud, or undue influence, the agreement can be voided at the discretion of the party whose consent was acquired in such a manner. To put it differently, these sections stipulate that a contract formed under duress, fraud, or undue influence can be canceled at the option of the party who was subjected to these unfair practices. A party to a contract whose consent was secured through misrepresentation has the right to insist on the contract's enforcement, and to be placed in the position they would have been in if the representation had been truthful.

Coercion

Section 15 of the Indian Contract Act, 1872 defines coercion as the act of committing or threatening to commit an act prohibited by the Indian Penal Code, 1860, or unlawfully detaining or threatening to detain property, to the detriment of any person, with the intent to compel that person to enter into an agreement. Whether the Indian Penal Code, 1860, is in force or not in the location where the coercion takes place is irrelevant.

For example, if person A, while on an English ship in international waters, uses criminal intimidation as defined by the Indian Penal Code, 1860, to coerce person B into signing a contract, and later sues person B for breach of contract in Calcutta, the use of coercion is still relevant. Even if person A's actions were not illegal under English law, and Section 506 of the Indian Penal Code, 1860, was not applicable at the time or place of the incident, the contract would be voidable at the discretion of person B. The presence or absence of the Indian Penal Code, 1860, has no bearing on this determination.

Undue influence 

Undue influence, as defined in Section 16 of the Indian Contract Act, 1872, involves the following elements:

• The relationship between the parties is such that one party has the capacity to control the will of the other. This control can occur in two ways:
  • When one party possesses actual or apparent authority over the other.
  • When one party is in a fiduciary relationship with the other. Examples of fiduciary relationships include those between a solicitor and client, trustee and trust, spiritual advisor and devotee, and medical attendant and patient.
• The party in the dominant position takes advantage of their superior position to gain an unfair advantage over the other party.

Section 19A of the Indian Contract Act, 1872, states that an agreement induced by undue influence is voidable at the discretion of the party whose consent was influenced or coerced. The performance of such agreements may be entirely avoided or subject to specific terms and conditions.

Fraud

Section 17 of the Indian Contract Act, 1872, outlines various activities that constitute fraud in the context of contract law. These activities include making a false claim, actively concealing information, making a promise without the intention to fulfill it, engaging in any other deceptive act, or any act that can be classified as fraudulent.

In the case of Kopparthi Venkataratnam And Anr. vs. Palleti Sivaramudu And Anr (1939), the Madras High Court ruled that when consent to an agreement is obtained through coercion, fraud, or misrepresentation, as defined in Section 17, the agreement becomes voidable at the discretion of the party whose consent was influenced by such means. However, it's important to note that the contract is not voidable if the party whose consent was influenced by fraudulent means could have discovered the true facts with ordinary diligence. This means that if the deceived party had the opportunity to uncover the deception with reasonable effort, the contract may not be voidable.

Misrepresentation 

In accordance with Section 18 of the Indian Contract Act, 1872, misrepresentation occurs when one party (or their representative) provides false or misleading information to the other party with the intention of inducing them to enter into a contract. If an individual enters into a contract based on such misrepresentation and suffers a loss as a result, they have the choice to either void the contract or seek damages.

In the case of Lewis Pugh vs. Ashutosh Sen (1929), the Privy Council pointed out that "fraudulent within the meaning of Section 17" qualifies as "misrepresentation." This observation clarified that due diligence would be necessary in cases where misrepresentation was fraudulent, as defined in Section 17. However, in cases where the misrepresentation falls within Section 18 and falls just short of fraud, the exception would be limited to the former category. This case helps to illustrate the relationship between fraud and misrepresentation under the Indian Contract Act, 1872, both of which can render a contract voidable at the option of one of the parties involved.

The doctrine of mutuality

The term ‘mutuality of contract’ is described in the Concise Law Dictionary as “the doctrine of mutuality indicates that the contract must be jointly enforceable by each party against the other.” A voidable contract is an exemption to the mutuality requirement. A voidable contract is defined in Section 2(i) as an agreement that is enforceable by law at the discretion of one or more of the parties, but not at the option of the other or others.
Contracts voidable at the outset under: 

• Sections 19 (voidability of agreements without free consent) and 19-A (power to set aside contract induced by undue influence),
• Voidable by subsequent default of one party under Sections 39 (refusal of a party to perform promise wholly), 
• Section 53 (impossibility created by an act of the party), and 
• Section 55 (failure to perform at time fixed, time being of essence).

Types of voidable contracts 

There are basically three types of voidable contracts:

• Initially voidable.
• Subsequently voidable.
• Voidable by law (contracts become voidable due to other laws in subsisting in the country e.g. Section 8 of the Hindu Minority Act, 1956).

Initially voidable contracts 

Section 19 of the Indian Contract Act, 1872 deals with agreements reached by pressure, fraud, or deceit. This provision specifically states that a contract entered into by the parties without the free permission/consent of any of the parties, and the assent obtained through coercion, fraud, or deception is voidable at the discretion of the party whose consent was obtained through these means. If the person whose permission was obtained through fraud or deception wants the contract to continue, they must be placed in the position they would have been in if the misrepresentation made to them had been accurate.
The aforementioned provision has two exceptions, namely:

• The contract is not stated to be voidable if the party whose assent was produced by silence to a fact or by misrepresentation, which is claimed to be under the ambit of fraudulent as per Section 17 of the Indian Contract Act, 1872, and the party has proper methods of knowing the truth in the regular scheme of things.
• If the consent supplied by the relevant party was not obtained through deception or fraud, the contract is not voidable. Coercion, fraud, and misrepresentation are the three elements mentioned under Section 19 that render a contract voidable, as have been discussed previously.

Unilateral promises

A unilateral promise is a commitment made solely by one party in order to compel the other party to take some action. As the party makes no guarantee, the promisee is not obligated to act. However, if the promisee fulfils the promisor’s desire to act, the former can keep the promisor’s promise. Whereas voidable contracts are those in which there is a lack of mutuality and duty due to a factor outside of the bargain’s content. In concept, these two types of scenarios appear to be completely distinct. 

• At first, we’re dealing with a completely one-sided situation.
• In the second, we have all of the affirmative elements of a legal contract, but one of the parties’ obligations is harmed or removed due to the inclusion of defence or negative aspect that has no bearing on the other’s responsibility.

Unilateral commitments necessitate some form of mutuality or reciprocity of engagement as the foundation of a contract in which one of the parties makes no specific promises in return.

Subsequently voidable contracts

Subsequently voidable contracts are contracts that start as valid but can later become voidable due to specific events or circumstances. The Indian Contract Act, 1872, includes provisions related to subsequently voidable contracts in Sections 39, 53, and 55.

• Section 39 (Effect of refusal to perform promise wholly): This section deals with the consequences of a party's refusal to fulfill their promise. If a party to a contract refuses or is unable to perform their promise, the other party (promisee) can terminate the contract, unless they have indicated their agreement to continue the contract through their words or actions.
• Section 53 (Liability of party preventing event on which the contract is to take effect): Section 53 addresses situations where one party prevents the other from fulfilling their promise. In such cases, the contract becomes voidable at the option of the party who was prevented from performing. The party that was prevented from performing is also entitled to compensation for any losses they may have incurred due to the non-performance of the promise.

For example, if A and B enter into a contract where B is supposed to complete a task for A in exchange for a thousand rupees, but A prevents B from doing so, the contract becomes voidable at B's discretion. If B chooses to void the contract, he can claim compensation from A for any losses he has suffered as a result of the non-performance.

• Section 55 (Effect of failure to perform at a fixed time, in a contract in which time is essential): This section deals with cases where a contract specifies a particular time frame for performance. If a party promises to do something at or before a certain time and fails to do so, the contract or the unperformed portion of it becomes voidable at the option of the promisee. This is especially applicable when the parties intended for time to be crucial in the contract.
• If the failure to perform within the stipulated time is not due to the essence of the contract, the contract is not voidable, but the promisee can seek compensation for any losses incurred. Additionally, if the promisee accepts performance at a different time than originally agreed, they cannot claim compensation for losses arising from the delay unless they give prior notice to the promisor at the time of acceptance.

Contracts voidable by law 

When an individual, whose choice renders a contract voidable, decides to rescind it, the other party to the contract is released from any obligation to fulfill the promises contained in the contract to which the rescinding party is a promisor. If a party rescinds a voidable contract and has obtained any benefits from the other party involved, they are obligated to return those benefits to the maximum extent possible to the party from whom they were received. The act of rescinding a voidable contract can be communicated or revoked in the same manner and under the same conditions as the communication or revocation of a proposal in accordance with contract law.

Can a voidable contract be legally binding

• If the offended party does not reject or repudiate the contract within a reasonable time after learning of the voidability reasons, the contract can become legally enforceable. So, if you uncover facts and information after a contract’s execution that you believe justifies the contract’s unenforceability, you should bring it up as soon as feasible. The freed party can formally accept or ratify a voidable contract. It is possible that the acceptance is unspoken. 
• If the aggrieved party to a contract in spite of discovering the other’s actions of deception or fraudulent behaviour continues to follow the contract’s terms, the contract may become legally enforceable once a reasonable period of time has passed. 
• It all depends on the facts and circumstances of each case, but you should be aware that a voidable contract can become legally binding. A void contract, on the other hand, can never become legally binding.

Void vis à vis voidable contracts

• A void contract is one that lacks enforceability in a court of law. Initially, it meets all the prerequisites of a valid contract, such as free consent, capacity, lawful object, and consideration, but becomes unenforceable later due to changes in the law or an unforeseen impossibility. Neither party can sue the other for a breach of the contract. Section 2(g) of the Indian Contract Act, 1872 defines void contracts.
• In contrast, a voidable contract can be enforced at the discretion of one of the parties involved. This type of contract allows one party to decide whether or not they want to proceed with their obligations. Factors like coercion, undue influence, fraud, or misrepresentation can impact the consent of one party, giving them the right to choose the course of action.
• The provisions in the Indian Contract Act, 1872, regarding void and voidable contracts are straightforward and clear. They serve the purpose without needing any modifications and provide protection against unreasonable, unlawful, or immoral obligations that could lead to significant financial losses. These provisions prevent agreements that exploit individuals in a weaker bargaining position.
• To summarize, the laws pertaining to void and voidable contracts can render an agreement legally unenforceable, making it invalid. Void contracts lack enforceability from the outset, while voidable contracts are initially valid but can be canceled by the aggrieved party. These legal provisions establish the conditions under which agreements between parties can be terminated, making them crucial in contract law worldwide.

Similarities between void and voidable contracts

The similarities between void and voidable contracts have been listed hereunder:

• Both clauses of the Indian Contract Act, 1872, deal with the non-performance of a contract between parties who may or may not want it.
• If a party to a voidable contract decides to repudiate it, it has the same impact as a void agreement, in which the agreement is deemed to have never occurred.
• Both provisions are concerned with the establishment of a contract using unethical and illegal means that are contrary to public policy.
• The major goal of including these restrictions was to ensure that people were not exploited as a result of a hastily constructed agreement.

Dissimilarities between void and voidable contracts

The differences between void and voidable contracts are provided hereunder:

• A void contract becomes void the minute the parties agree to it, whereas a voidable contract remains enforceable until one of the parties decides to invalidate it.
• An agreement that is voidable can be invalidated at the discretion of any party, but an agreement that already gives neither party a choice about the agreement’s enforceability is void.
• Any of the parties are not bound by a void contract. A voidable contract, on the other hand, binds at least one of the parties.

Other laws, such as the Sales of Goods Act of 1930 or any other statute dealing with transactions between parties, are supplemented by the provisions on void and voidable contracts. They are a crucial component of comprehending how a contract is formed, as well as emphasising the dos and don’ts of the process. Finally, the law governing void and voidable contracts achieves a balance between flexibility and rigidity in its application allowing it to adjust to the realities of the case while retaining the contract’s terms and conditions.

Key takeaways about voidable contracts

• A voidable contract is one that is initially valid but becomes voidable due to the discovery of grounds for voidability.
• A contract can be void from the beginning or voidable after it has been signed.
• A void contract is one that breaks the law and was never intended to be enforced in the first place.
• A voidable contract is one that was initially deemed lawful by the parties but is later deemed unenforceable against one of the parties due to valid legal grounds.
• A contract can be voided in the following circumstances:
  • Coercion,
  • Undue influence,
  • Misrepresentation, and
  • Lack of legal capacity.  
• A key feature of a voidable contract is that the party who believes it is not obligated by the contract, the unbound party, has the option to reject or accept it.
• If the contract is accepted by the freed party, the contract becomes legally binding on both parties.
• If the contract is rejected by the unbound party, the person will claim that the contract is unenforceable against him or her.
• This frequently results in a lawsuit or legal conflict.
• Finally, a court of law will have to decide whether or not the contract was voidable.
• Consult a litigation lawyer if you signed a contract but do not believe it was legally constituted or should legally bind you.

Conclusion

As we come to the end of this article, it is evident to state that the concept of a voidable contract respects the freedom of the parties to the contract by means of giving significance to the willingness of the parties to the contract. Interestingly, Section 75 of the Indian Contract Act, 1872 upholds this belief as it talks about the parties who are rightfully rescinding a contract, are entitled to compensation for the loss suffered due to non-fulfilment of the contract. This underlying principle of voidable contract also throws light on the importance of ‘free consent’ in contract law jurisprudence. Thus, it will be appropriate to state that the concept of a voidable contract is one of the pillars of contract law.