The Indian Contract Act, 1872 (the Act) defines the term “contract” under Section 2(h) stating: “An agreement enforceable by law is a contract.” In other words, an agreement that the law will enforce is a contract[1]. Section 10 of the Act deals with enforceability. First part of Section 10 of the Act clearly states that “All agreements are contracts if they are made by the free consent of the parties competent to contract, for a lawful consideration and with a lawful object.” Offer and acceptance is not sufficient to constitute a contract. Thus, all agreements are contracts if they fulfil certain conditions of enforceability. These are the factors that must accompany an agreement to materialise into a contract. Whereas the second part of the section states that “and are not hereby expressly declared to be void”. The author discusses Sections 20, 26, 27, 28, 29, 30 and the first para of Section 56 in the light of this part of the provision.
Are void agreements said to be void ab initio?
The two terms void agreements and void ab initio should not be used interchangeably. Thus, the answer is in negative. The consequences of agreements that are void ab initio differ from void agreements. Void agreements are those agreements that are expressly declared to be void under Sections 24-30 of the Act under the heading “void agreements”.
The term “void” is given under Section 2(g) of the Act which states as follows: “An agreement not enforceable by law is said to be void.” A void agreement is not enforceable at the option of either party[2]. e.g., agreements which are only partly illegal/unlawful i.e., which is opposed to the law of the land, the court will enforce the part which is not illegal provided that it is severable from the rest of the agreement. In many cases of contracts relating to trade or legal proceedings, the court knock out the objectionable clause of the agreement and allow rest to be enforced. Another example of severance, Section 27 says that an agreement shall be void to that extent i.e., to the extent of unreasonable restraint[3]. Whereas agreements that are void ab initio may be avoided altogether and if any price is paid, it cannot be recovered.
Consequences of void agreements
Illegality of an agreement is also a void agreement[4], but it is not necessary that void agreement is always illegal. Sections 25 to 30 refer to cases in which agreement is only void, though the consideration is not necessarily unlawful. In respect to the main or the primary agreement nothing can be recovered under either kind of agreement and if something has been delivered or some payment made, it cannot be recovered back[5]. But we have seen above severance as an exception to the above rule under Sections 24-30 as it comes within the heading void agreements. Similarly, another exception to the above rule is in case of “collateral transactions”.
Collateral transactions as an exception
The only material difference between an illegal and void agreement relates to their effect upon collateral transactions. A collateral transaction means a transaction subsidiary to the main transaction. For example, where money is given to a person to enable him to pay a wagering debt, the wage is the main transaction and the loan subsidiary to it. If the main transaction is only void, its collateral transaction will remain enforceable. If the main transaction is illegal, for example, smuggling, a collateral transaction like money given to a person to smuggle, will also be tainted with the same illegality and the money will be irrevocable[6]. Thus, the first example points towards void agreements given under Sections 25-30 of the Act whereas the second example concerns those agreements that are void ab initio as given under Section 23 of the Act (unlawful consideration or object).
Whereas the first part of Section 10 dealing with void ab initio has been explained as follows:
Every contract is an agreement, but every agreement is not a contract. An agreement becomes a contract when following conditions are satisfied:
- There is some lawful consideration for it.
- The parties are competent to contract
- Their consent is free.
- The object is lawful.[7]
Why are those agreements whose consent is not freely obtained (except mistake) as given under Section 14 held to be voidable contracts? (This question has been answered under the heading voidable contracts). The author would like to point out Section 25 of the Act as well. Thus, agreement without consideration is held to be void agreement and not void ab initio. One of the ingredients of a valid contract is lawful consideration and not adequate consideration, the law recognises, with certain conditions, an agreement without consideration is a contract. But when an agreement the object and consideration of which is opposed to the law of the land, it is held to be void (although the word void ab initio is not expressly mentioned, the author expresses that these agreements are void ab initio). Parties are not, as a rule, so foolish as to commit themselves to an agreement to do anything obviously illegal, or at any rate to bring them into Court; so, the kind of question which arises in practice under this head is whether an act or some part of a series of acts, agreed upon between the parties does or does not contravene some legislative enactment or regulation made by lawful authority[8] (Thus, this is discussed under the heading “Agreements discovered to be void”).
Agreements discovered to be void
Section 65 of the Act deals with doctrine of restitution of any advantage received due to agreements discovered to be void and contracts that have become void. This type of validity is concerned with an agreement which never amounted to a contract. But the parties discovered this at a later stage. The effect of the principle laid down in the section is that when the parties have entered into an apparently valid contract and some benefits have been passed under it, and subsequently the contract is either discovered to be void or becomes void, the party who has received the benefits must restore them to the other. Thus, the section does not apply to a contract which the parties knew at the time of making it to be void.[9]
E.g., where parties discover their mistake as to a matter of fact essential to the agreement (under Section 20) or where a court of law holds it to be void under any of the Sections 23-30.
Unlawful object and doctrine of restitution
The concept of agreements whose object or consideration is unlawful in its entirety is based on the Latin term “in pari delicto“. The expression “discovered to be void” presents some difficulty as regards agreements which are void for unlawful consideration (Sections 23 and 24). It seems that the present section does not apply to agreements which are void under Section 24 by reason of an unlawful consideration or object. The reason being that if the illegal purpose or any material part of it has been carried out, the money paid cannot be recovered back, for the parties then are equally at fault, and in pari delicto melior est conditio possidentis[10]. But there is an exception to this rule:
Firstly, the contract is still executory and the rule of “in pari delicto”. Where the contract is still executory in the sense that no part of the illegal purpose has been carried into effect, the money paid or goods delivered under it may be recovered. “But if he fails till the illegal purpose is carried out, or if he seeks to enforce the illegal transaction, in neither case can he maintain an action”[11]. Secondly, the parties are not at equal fault. Where the parties are not at equal fault, the less guilty may recover anything that he has given to the other under contract[12].
Section 65 and mistake
Section 65 will cover cases of initial mistake[13]. Thus, the author at this point finds it appropriate to discuss the sections relating to “mistake” in the light of Section 13 dealing with the definition of “consent”. Thus, there may be an ambiguity or a fundamental error. Mistake may operate upon a contract in two ways. It may, firstly, defeat the consent altogether that the parties are supposed to have given, that is to say, the consent is unreal. Secondly, the mistake may mislead the parties as to the purpose which they contemplated. When a mistake does not defeat consent, but only misleads the parties, Section 20 of the Act shall apply[14].
Explaining the above points in the light of its validity:
- Under Section 20 an agreement is void by reason of mistake when both parties are mistaken as to a matter of fact essential to the agreement. A mistake as to an existing fact renders the contract void ab initio, but if the mistake is as to some future event, it is a binding contract which may be avoided at some future date if the expected event does or does not occur[15]. Thus, in the light of Section 65 of the Act where, for example, money is paid for the sale of goods, which unknown to the parties, have already perished at the time, the money is refundable. The principle will apply whether the agreement is void by reason of law or by reason of facts[16].
- Further Section 22 deals with agreements amounting to unilateral mistakes as to a matter of fact. These agreements are not held to be voidable contracts. Thus, the one party who was under mistake is not entitled to any relief. Also, no rectification is allowed and the person who was mistaken could not avoid the contract because it was his unilateral mistake[17].
Initial agreement to do an act impossible in itself
Consequences
Section 56 of the Act deals with initial impossibility and subsequent impossibility. The author will deal only with initial impossibility in this segment. The essence of agreements which come within the ambit of first para of Section 56 is found in and read with Section 10 of the Act. Section 37 is not applicable to the first para of section 56 of the Act. The reason being that performance of promises arises after the parties have entered into a valid contract and their performance is dispensed with or excused under the provision of the Act.
The proposal can be made for anything. Legal as well as physical impossibility too. Thus, if the parties purport to agree to do something which is obviously impossible it is deemed to be a case in which they are not interested in performing their respective obligations or they do not understand at all as to what they are agreeing for[18]. This pre-contractual pre-existing impossibility may be known or unknown to the parties at the time of making of contract. If the parties are aware of such impossibility these agreements do not come within the heading void agreements but are those agreements ‘expressly declared to be void’ as given under Section 10 of the Act. Example of an initial impossibility will be – A agrees with B to discover a treasure by magic, being impossible of performance, the agreement is void. In case of pre-existing legal impossibility rendering an agreement unlawful, such as if there is no possibility of performance of the contract because it would be unlawful to do that, the agreement is void, such cases would also fall within Section 23 of the Act which declares that every agreement of which the object or consideration is unlawful is void[19]. Also, there is a difference between impossibility and commercial hardships. Thus, where the performance is not practically cut-off but only rendered more difficult or costly such cases do not fall within the purview of Section 56 of the Act[20].
Contract becomes void
And when an agreement fulfilling all the requirements including enforceability came to be called a contract but subsequently on it becoming a contract ceases to be enforceable by law, then such contracts “becomes void” only “when it ceases to be enforceable”. This has been dealt in Section 2(j) of the Act read along with Section 65 of the Act. Thus Section 2(j) in comparison to Section 2(g) deals with “unenforceable contract” rather than “not enforceable contract”. In other words, contract subsequently becomes unlawful or impossible of performance. Thus, the author uses the term “becomes void” rather than “void contracts”. This segment is to be read with Section 65 of the Act.
This segment will deal with:
- Contract to do an act impossible/contracts becoming unlawful/illegal
- Contingent contract becoming void
- Voidable contracts which have been avoided.
- Contract to do an act impossible
The essence of second para of Section 56 of the Act is found in Section 37 of the Act. The performance of agreements to do an act impossible in itself have been dispensed with or excused under the provisions of this Act. The parties need not perform their obligations. The parties are discharged from performing their obligations. There is an exception to this rule: when one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non-performance of the promise.
- Contingent contract
The section emphasises that the contingency contemplated by the contract must be collateral to the contract. Distinguishing between proposal, acceptance and performance; a conditional offer differs from a contract wherein the condition is of uncertain nature. Firstly, a contract has already risen or a subsisting contract is there, but its performance cannot be demanded unless the contemplated event happens or does not happen[21]. Further Sections 32 and 33 of the Act deals with where enforcement depends upon happening or non-happening of an event. Thus, in case of enforcement of a contract depending on happening of an event, once the event has happened, the contingent contract becomes enforceable and where the performance of a contract depends upon the non-happening of an event, the parties have to wait till the happening of the event becomes impossible[22].
Similar to the explanation given above, where enforcement of a contract under Section 32 depends on happening of a future uncertain condition and the event becomes impossible, such contract become void whereas Section 36 deals with contingent agreements is dependent on the occurrence of an impossible event such agreements are void from its very inception.
Thus, the applicability of the Sections 31-32 and 56 has been explained recently in National Agricultural Coop. Marketing Federation of India v. Alimenta SA[23]:
“47. Section 32 of the Contract Act applies in case the agreement itself provides for contingencies upon happening of which contract cannot be carried out and provide the consequences. To this case, provisions of Section 32 of the Contract Act is attracted and not Section 56. In case an act becomes impossible at a future date, and that exigency is not provided in the agreement on the happening of which exigency, impossible or unlawful, the promisor had no control which he could not have prevented, the contract becomes void as provided in Section 56.”
- Voidable contract which has been avoided
The expression “becomes void” is sufficient to cover the case of voidable contracts which has been avoided[24]. Thus Section 65 of the Act is applicable to voidable contracts that have been avoided as they become void under Section 2(j) of the Act.
Voidable Contracts
Mutuality of contract
In the Concise Law Dictionary, the term mutuality of contract has been defined as: the doctrine of mutuality means that the contract must be mutually enforceable by each party against the other. An exception to the mutuality rule is voidable contract. Section 2(i) defines voidable contract: 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. Voidable contract under the Act can be divided into two groups, contracts voidable in their inception under Sections 19 (voidability of agreements without free consent) and 19-A (power to set aside contract induced by undue influence) and voidable by subsequent default of one party under Section 39 (refusal of party to perform promise wholly), Section 53 (impossibility created by act of the party) and Section 55 (failure to perform at time fixed, time being of essence)[25].
Unilateral promises and initial voidability
A unilateral promise is a promise from one side only and is intended to induce some action by the other party. The promisee is not bound to act, for he gives no promise from his side. But if he carries out the act desired by the promisor, he can hold the promisor of his promise[26]. Whereas voidable contracts are cases where lack of mutuality and obligation is due to some fact outside of the content of the bargain. These two classes of cases seem to be entirely distinguishable in principle. In the first, we have an entirely one-sided proposition. In the second, we have all of the affirmative elements of a valid contract, but the obligation of one of the parties is affected or taken away owing to the presence of some defence or negative element which does not affect the obligation of the other. Unilateral promises demand some mutuality or reciprocity of engagement as the basis of a contract in which one of the parties’ promises nothing definite in return [27].
Conclusion:
The consequence of agreements that are void ab initio and void agreements differ. Void implies those agreements which are not enforceable whereas contracts that become void are unenforceable contracts. Similarly contracts that become void are basically valid contract but have become unenforceable due to reasons such as subsequent impossibility or there is Section 32 of the Act dealing with contingent contracts becoming void if the event becomes impossible. Whereas agreements that are discovered to be void is basically pre-existence of something which is subsequently found out. Voidable contracts lack mutuality but the reason for doing so was the presence of negative element while bargaining terms.
† Advocate, BSL LLB, DES Law College and LLM, ILS Law College, Pune.
[1] Avtar Singh, Law of Contract, Eastern Book Company, 7th edn., p. 2.
[2] Id., 148.
[3] Id., 287.
[4] See S. 24 of the Indian Contract Act.
[5] Avtar Singh, Law of Contract, 281.
[6] Id., 286.
[7] Id., 3.
[8] Mulla, The Indian Contract Act, LexisNexis, 15th edn., p. 100.
[9] Avtar Singh, Law of Contracts, 342-343.
[10] Supra note 3 at 202.
[11] Avtar Singh, Law of Contracts, 282.
[12] Id., 345.
[13] Id., 343.
[14] Id., 190.
[15] Supra note 3 at 96.
[16] Avtar Singh, Law of Contracts, 343.
[17] Id., 213.
[18] Sankhyan, Amar Singh, “Study of Dimensions of Principle of Frustation in Indian Contract Law System”, Journal of the Indian Law Institute, Vol. 37, No. 4, 1995, pp. 442-456, Jstor <www.jstor.org/stable/43953245>. Accessed 25-11-2020.
[19] Ibid.
[20] Avtar Singh, Law of Contracts, 321.
[21] Id., 290.
[22] Id., 292-293.
[24] Supra note 3 at 203.
[25] Supra note 3 at 21.
[26] Avtar Singh, Law of Contracts, 84.
[27] “Mutuality and Consideration”, Harvard Law Review, December 1914, <https://www.jstor.org/stable/pdf/1325997.pdf>.