The law relating to contracts in India is governed by The Indian Contract Act, 1872. However the Contract Act does not purport to codify the entire law relating to contracts. The Act specifically preserves any usage or custom of trade or any incident of any contract not inconsistent with the provisions of the Act. The law of contract confines itself to the enforcement of voluntarily created civil obligation. The law of contract is not able to take care of the whole range of agreements. Many agreements remain outside the purview because they do not fulfill the requirement of a contract.
A Contract is an agreement; an agreement is a promise and a promise is an accepted proposal. Thus, every agreement is the result of a proposal from one side and its acceptance by the other.
An agreement is regarded as a contract when it is enforceable by law. Section 10 of the Act deals with the conditions of enforceability. According to this section, an agreement is a contract if it is made for some consideration, between parties who are competent to contract, with free consent and for a lawful object.
Void Contract means that a contract does not exist at all. The law can not enforce any legal obligation to either party especially the disappointed party because they are not entitled to any protective laws as far as contracts are concerned. An agreement to carry out an illegal act is an example of a void contract or void agreement. For example, a contract between drug dealers and buyers is a void contract simply because the terms of the contract are illegal. In such a case, neither party can go to court to enforce the contract.
As per Section 2(g) of The Indian Contract Act, 1872 “An agreement not enforceable by law is said to be void”, and as per Section 2(j) of The Act “A Contract which ceases to be enforceable by law becomes void when it ceases to be enforceable”. Thus Void Contracts can be of following two types:-
| Void Ab Initio | Void due to the impossibility of its performance |
| Void Ab Initio i.e. unenforceable from the very beginning. | A contract can also be void due to the impossibility of its performance. E g: If a contract is formed between two parties A & B but during the performance of the contract the object of the contract becomes impossible to achieve (due to action by someone or something other than the contracting parties), then the contract cannot be enforced in the court of law and is thus void. |
Any agreement with a bilateral mistake is void.(Section 20):- Where both the parties to an agreement are under a mistake as to matter of fact essential to agreement, the agreement is void, e.g. A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of the bargain, though neither party was aware of the fact. The agreement is void.
But a contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact. (Section 22)
Agreements which have unlawful consideration and objects are void.(Section 23 & 24):- The consideration or object of an agreement is unlawful if it is 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 court regards it as immoral or opposed to public policy.
If any part of a single consideration for one or more objects, or any one or any part of any one of several consideration for a single object, is unlawful, the agreement is void. But where the legal part of an agreement is severable from the illegal, the former would be enforced.
Agreements made without consideration is void. (Section 25):-
An agreement without the consideration is void unless:-
Agreement in restraint of marriage of any major person is void (Section 26):- Every agreement in restraint of the marriage of any person, other than a minor is void. It is the policy of the law to discourage agreements which restrains freedom of marriage. The restraint may be general or partial, that is to say, 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 is void .
Agreement in restraint of trade is void. (Section 27):- Every agreement by which anyone is restrained from exercising a lawful profession, or trade or business of any kind, is to that extent void. There are two kinds of exception to the rule, those created by Statutes:-
Sale of Goodwill:- The only exception mentioned in the proviso to section 27 is that relating to sale of goodwill. It states that “One who sells the goodwill of the business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving the title to the goodwill from him, carries on a like business therein. Provided that such limits appear to the court reasonable, regard being had to the nature of the business.
Partnership Act:- There are four provisions in the Partnership Act which validate agreements in restraint of trade. Section 11 enables partners during the continuance of the firm to restrict their mutual liberty by agreeing that none of them shall carry on any business other than that of the firm. Section 36 enables them to restrain an outgoing partner from carrying on a similar business within a specified period or within a specific local limits.
Exclusive Dealing Agreements:- Business practice in vogue is that a producer or manufacturer likes to market his goods through a sole agent or distributor and the latter agrees in turn not to deal with the goods of any other manufacturer. In the case of Percept D. Mark (India) Pvt. Ltd. v Zaheer Khan, it was observed by the Court that Negative Covenant in a contract that the covenantee would not sell a similar product of a competitor does not necessarily in restraint of trade, it could also be in furtherance of the trade.
Restraints Upon Employee:- An agreement of service often contain negative covenants preventing the employee from working elsewhere during the period covered by the agreement. Trade Secrets, name of customers etc. are also the property of master and servant is not supposed to disclose it to anyone else. An agreement of this class does not falls within Section 27.
Agreement in restraint of legal proceedings is void. (Section 28):- An agreement purporting to oust the jurisdiction of the courts is illegal and void on grounds of public policy. Section 28 of the Act renders void two kinds of agreement, namely:
This section shall not render illegal a contract, by which two or more persons agree that any dispute which may arise between them in respect of any subject or class of subjects shall be referred to arbitration, and that only the amount awarded in such arbitration shall be recoverable in respect of the dispute so referred.
Nor shall this section render illegal any contract in writing, by which two or more persons agree to arbitration any question between them which has already arisen, or affect any provision of any law in force for the time being as to references to arbitration.
But right to Appeal does not come within the purview of this section. A party to a suit may agree not to appeal against the decision.
An agreement the terms of which are uncertain is void. (Section 29):- Agreements, the meaning of which is not certain, or capable of being made certain, are void. It is a necessary requirement that an agreement in order to be binding must be sufficiently definite to enable the court to give it a practical meaning. An agreement to agree in the future is void, for there is no certainty whether the parties will be able to agree.
Where only a part or a clause of the contract is uncertain, but the rest is capable of bearing a reasonably certain meaning, the contract will be regarded as binding. Similarly , if the agreement is totally silent as to price, it will be valid, for, in that case, Section 9 of the Sale of Goods Act,1930 will apply and reasonable price shall be payable.
An agreement by way of wager (betting/gambling) is void. (Section 30):- Agreements by way of wager are void; and no suit shall be brought for recovering anything alleged to be won on any wager or entrusted to any person to abide by the result of any game or other uncertain event on which any wager is made. The section does not define “Wager”. But wager can be said as a promise to give money or money’s worth upon the determination or ascertainment of an uncertain event.
An agreement contingent upon the happening of an impossible event is void. (Section 36):- A contingent contract is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen. Contingent agreements to do or not to do anything, if an impossible event happens, are void, whether the impossibility of the event is known or not to the parties to the agreement at the time when it is made.
Agreement to do impossible acts is void. (Section 56):- An agreement to do an act impossible in itself is void. A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.
Voidable Contract:- An agreement which is enforceable by law at the option of the one or more of the parties thereto, but not at the option of others or others, is a voidable contract. Voidable Contract are valid unless one of the parties has set it aside. Voidable Contract generally happens when one side of the party is tricked into entering a contract by other party.
Voidability of agreements without free consent:- When consent to an agreement is caused by coercion, fraud or misrepresentation the agreement is voidable at the option of the party whose consent was so caused. However, a party to a contract, whose consent was obtained by fraud or misrepresentation, may, if he thinks fit, insist that the contract shall be performed.
Power to set aside contract induced by Undue Influence:- When consent to an agreement is caused by undue influence, the agreement is a contract voidable at the option of the party whose consent was so caused. A contract is said to be induced by undue influence where the relation subsisting between the contracting parties are such that one of the parties is in a position to dominate the will of the other.
In such a case the burden of proving that such a contract was not induced by undue influence shall lie upon the person who is in a position to dominate the will of other.
Liability of a Party preventing event on which contract is to take effect:- When a contract contains reciprocal promises and one party to contract prevents the other from performing his promise, the contract becomes voidable at the option of the party so prevented. Obvious principle is that a person cannot take advantage of his own wrong. For example A and B contract that B shall execute certain work for A for a certain sum of money. B is ready and willing to execute the work accordingly, but A prevents him from doing so, the contract is voidable at the option of B.
Effect of failure to perform at fixed time, in a contract in which time is essential:- When time is essence of contract and party fails to perform in time, it is voidable at the option of other party. A person who himself delayed the contract cannot avoid the contract on account of delay.
Consequences of rescission of Voidable Contract:– When a person at whose option a contract is voidable rescinds it, the other party thereto need not perform any promise therein contained in which he is promisor. The party rescinding a voidable contract shall, if he has received any benefit there under from another party to such contract, restore such benefit, so far as may be, to the person from whom it was received.
Mode of Communicating or revoking rescission of voidable contract:– The rescission of a voidable contract may be communicated or revoked in the same manner, and subject to the same rules, as apply to the communication or revocation of a proposal.
The Contract Act draws distinction between an agreement which is only void and the one which is unlawful or illegal. An illegal agreement is one which is forbidden by law; but a void agreement may not be forbidden, the law may merely say that if it is made, the courts will not enforce it. Thus every illegal contract is void but a void contract is not necessarily illegal.
The main difference between a void and illegal contract is that, a void contract is not punishable and its collateral transactions are not affected but on the contrary illegal contract is punishable and its collateral transactions are also void.
| Void | Voidable |
| A void contract is considered to be a legal contract that is invalid, even from the start of signing the contract. | On the other hand, a voidable contract is also a legal contract which is declared invalid by one of the two parties, for certain legal reasons. |
| While a void contract becomes invalid at the time of its creation | A voidable contract only becomes invalid if it is cancelled by one of the two parties who are engaged in the contract. |
| In the case of a void contract, no performance is possible. | Whereas it is possible in a voidable contract. While a void contract is not valid at face value, a voidable contract is valid, but can be declared invalid at any time. |
| While 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. |
To secure the performance and enforceability of contract, the contract should be a valid contract, as the void contracts can’t be enforced.
An absolute contract is a one where the promisor performs the contract without any condition. Contingent contracts, on the other hand, are the ones where the promisor performs his obligation only when certain conditions are met.
A contract is an agreement enforceable by law. [Section 2(h) of The Indian Contract Act, 1872]. For every contract, there should be an agreement that is made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object. The agreement should not be declared void hereby to form a contract. This definition of contracts as per Indian Contract Act, 1872 is based on Sir Pollock’s definition which states that every agreement and promise enforceable at law is a contract. Thus for the formation of a contract, there must be an agreement and something in addition to that, i.e., an agreement, and its enforceability at law.
Section 31 of the Indian Contract Act, 1872 defines the term ‘Contingent Contract’ as follows:
‘A contingent contract is a contract to do or not to do something, if some event collateral to such contract does or does not happen’.
In simple words, contingent contracts are the ones where the promisor performs his obligation only when certain conditions are met. The contracts of insurance, indemnity, and guarantee are some examples of contingent contracts.
Illustration:- A contracts to pay to B Rs. 20,000 if B’s house is burnt. This is a contingent.
Chandulal Harjivandas v. CIT – In this case, it was held that all contracts of insurance and indemnity are contingent.
After examining the definition of the contingent contract given under section 31 of the Act, the essentials of the term contingent contract are as follows:
Section 32 and 33 of the Act talks about enforcement of the contingent contract on the happening or not happening of the events respectively. The contract will be valid only if it is about performing or not performing an obligation.
The condition for which the contract has been entered into must be a future event, and it should be uncertain. If the performance of the contract is dependent on an event, which is although a future event, but certain and sure to happen, then it’ll not be considered as a contingent contract.
The event on whose happening or non-happening of the event on which the performance of the contract is dependent should not be a part of the consideration of the contract. The happening or non-happening of the event should be collateral to the contract and should exist independently.
Illustration: X enters into a contract with Y and promises to deliver 10 books to him. Y promises to pay Rs. 2000 upon delivery. This is not a contingent contract since Y’s obligation depends on the event which is a part of the contract (delivery of 10 Books) and not a collateral event.
The event so considered as for contingency should not at all to be dependent on the promisor. It should be totally a futuristic and uncertain event.
Illustration: X promises to pay Y, Rs. 10,000 if Y leaves Delhi for London on 31st March 2019. This is a contingent contract. Going to London can be within Y’s will but is not merely his will.
Provisions related to the enforcement of the contingent contract are given under section 32 to 36 as follows:
Condition #1- enforcement of contract contingent on the happening of an event
The contingent contracts to do or abstain from doing something if an uncertain future event happens. However, the contract cannot be enforced by law unless the event takes place. If the event becomes impossible, such contracts become void.[Section 32]
Illustration: X promises to pay Y, Rs. 100,000 if he marries Z, the prettiest girl in the neighborhood. This is a contingent contract. Unfortunately, Z dies in a car accident. Since the happening of the event no longer possible, the contract is void.
Condition #2 – enforcement of contract contingent on an event not happening
The contingent contracts to do or abstain from doing something if an uncertain future event does not happen can be enforced when the happening of that event becomes impossible. If the event takes place, then the contingent contract is void.[Section 33]
Illustration: X promises to pay Y a sum of money if a certain ship does not return. The ship is sunk. The contract can be enforced when the ship sinks. On the other hand, if the ship returns, then the contract is void.
Condition #3 – when an event on which contract is contingent to be deemed impossible if it is the future conduct of a living person
If a contract contingent upon how a person will act at a future time, the event shall be considered impossible when such person does anything which makes it impossible for the event to happen. (Section 34)
Illustration: X agrees to pay Y, Rs. 100,000 if Y marries Z. However, Z marries A. The marriage of Y to Z must now be considered impossible, although it is possible that A may die and that Z afterward marry Y.
Condition #4 – contracts contingent on an event happening within the fixed time
Contingent contracts to do or not to do anything if a future uncertain event happens within a fixed time. Such a contract is void if the event does not happen and the time lapses. It is also void if before the time fixed, the happening of the event becomes impossible. (Section 35)
Illustration: X promises to pay Y a sum of money if a certain ship returns before 1st April 2019. The contracts may be enforced if the ship returns within the fixed time. On the other hand, becomes void if the ship sinks.
Condition #5 – contracts contingent on an event not happening within the fixed time
Contingent contract to do or not to do anything if an uncertain event does not happen within a fixed time may be enforced by law when the fixed time has expired, and such event has not happened, or before the time fixed has expired, if it becomes certain that such event will not happen.[Section 35]
Illustration: X promises to pay Y a sum of money if a certain ship does not return before 31st March 2019. The contract may be enforced if the ship does not return before 31st March 2019. Also, if the ship burnt before the given time, the contract is enforced by law since the return is impossible.
Condition #6- contract contingent of impossible event void
If an agreement to do or not to do is based on the impossible event, then such agreement is void, whether the impossibility of the event is known or not to the parties to the agreement at the time when it is made.[Section 36]
Illustration: X promises to pay Y, Rs 500 if two straight lines should enclose a space. The agreement is void.
Illustration: Mohan contracts to pay Ram a sum of Money when Ram marries Geeta. Geeta dies without being married to Ram. The contract becomes void.
Illustration: Saurbh promises to pay Servesh if a certain ship returns within the year. The contract becomes void if the ship is burnt within the year.
Illustration: X agrees to pay Y, Rs. 10,000 if Y will marry X’s daughter P. P was dead at the time of the agreement. The agreement is void.
For a contract to be a contingent contract, certain essential elements have to be there. These elements form a contingent contract and without them, a contract will not be contingent. There must be a valid contract to do or not to do something. The performance of the contract must be conditional. The said event must be collateral to such contracts and the event should not be at the discretion of the promisor. These are some rules that have to be followed for a contingent contract to be enforceable. For instance, on the happening of an event, on the event not happening and on the event not happening within a specified time. There are some situations when a contingent contract becomes void. Some of them are: the event being impossible, not happening of event within fixed time, agreements contingent on impossible events and on the conduct of a living person.
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