Image Source: https://rb.gy/e2ajvk

This article is written by Sahaja, from NALSAR University of Law, Hyderabad. This article points out the difference between a void contract and a void agreement.

This article has been published by Sneha Mahawar.

Introduction

It is important to understand the difference between the terms agreement and contract, although they are used interchangeably in common parlance. In legal jargon, the phrases agreement and contract have different connotations. A proposal that is accepted is a promise in a legal sense. The promisor is the person or party who offers to do something or get something done, and the promisee is the person or party who accepts the offer. An agreement is a promise backed by consideration from both the promisor and the promisee. A contract is an enforceable agreement in which the parties seek legal backing and certain regulations are laid down that need to be followed.

Section 2(e) of the Indian Contract Act, 1872 (hereinafter “The Act”) defines agreement and Section 2(h) defines a contract. From the definitions given in the two subsections of Section 2, it is evident that a contract cannot be created until and unless there is a valid agreement in place and this particular agreement is backed by consideration. 

Void agreements

According to Section 2(g) of the Act, a void agreement is an agreement that cannot be enforced by the law. This means that it is void-ab-initio (void from the beginning) and cannot become a contract. An agreement that is void does not bind the parties to the agreement. It is intrinsically illegal and unenforceable, and the injured party has no legal recourse if it is violated. According to Section 10 of the Act, an agreement must fulfill all the elements of a legal contract in order to be enforceable. If these prerequisites are not met then the agreement is null and void.

Certain agreements that are made have been particularly classified as void agreements under the Act. Such agreements and cases will be dealt with in the following sections.

Capacity to contract

Section 11 (“Who are competent to contract”) of the Act defines the competence to contract. Under this Section, a minor, a person of unsound mind, and a person disqualified by a law to which they are subject to are incompetent to contract. Any agreement made by an incompetent person is void-ab-initio and does not have the capacity to become a contract at the first place as it does not cater to the essentials of a valid contract. An agreement made by a minor and a person of unsound mind is subject to certain circumstances under which the contract will not be completely void but can be voidable at the option of parties or in some situations, valid.

In Mohori Bibee v. Dharmodas Ghose, (1903)a minor, D executed a mortgage deed in favour of a money lender. Money lender was aware of the fact that D was a minor, he still lent the money. D later asked for termination of the contract since he was a minor. Lender said that the contract was only voidable and not void. The privy council held that the agreement was void ab initio and the lender was not entitled to repayment of the money.

Bilateral mistake as to the matter of fact

When the parties to an agreement are under different impressions about a matter of fact that is essential to the agreement, the agreement is void. This has been pointed out by Section 20 of the Indian Contract Act The explanation to the same Section also implies that an erroneous opinion as to the value of a material that is the core of a contract cannot be considered as a bilateral mistake that renders the agreement void.

In James Cundy v. Lindsay (1878), a person sent an order to a firm in writing asking to buy handkerchiefs, the purchaser had written the correct address, but the order was delivered to some other company with the same name as given in the address. Therefore, the company had sold the goods to another company. The delivery party traced the goods from this innocent party and sued the company that had sold them. Here it was held that there existed no contract between the first company and to which the delivery was made. Thus, no contract had arisen between them, identity was important in this case and the contract was held to be void.

Considerations rendering agreements void

When the consideration for an agreement is unlawful or the object of the agreement is unlawful, the agreement is considered to be void. Section 23 of the Act mentions the objects and considerations and Section 24 states that an agreement is void if the consideration and objects (as mentioned under Section 23) are unlawful.

Consideration is one of the most essential prerequisites to form a valid contract. An agreement without consideration is a void agreement according to Section 25 of the Act, although some exceptions to an agreement without consideration do apply which does not render the agreement void. These exceptions are also mentioned under Section 25. 

Agreements in restraint of marriage

According to Section 26 of the Act, any agreement which restricts the marriage of an adult is void.

An agreement must not restrain trade

According to Section 27, any agreement prohibiting anybody from engaging in a lawful profession, trade, or business of any type is null and void to that extent. Every man shall be free to work for himself, and shall not be free to deprive himself or the state of his labour, skill, or ability by any contract he enters into, according to public policy. This section also has an exception to it conforming to which, a seller of a business’s goodwill may agree with the buyer to refrain from carrying on a similar business within specified local limits. This can be done only as long as the buyer, or any person deriving title to the goodwill from him, carries on a similar business. But such limits must appear reasonable to the court, taking into account the nature of the business.

Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co. (1894)The case involved a sale of goodwill by an inventor and a manufacturer of guns and ammunition to a buyer who agreed with the following conditions: 

  • not to practice the same trade for 25 years, and 
  • not to engage in any business competing or liable to compete in any way with the business for the time being carried on by the company. 

He afterward entered into an agreement with another manufacturer of guns and ammunition and the company brought an action to restrain him. It was held that the first part of the agreement was valid, being reasonably necessary for the protection of the purchaser’s interest. But the rest of the covenant by which he was prohibited from competing with the company in any business that the company might carry on was held as unreasonable and, therefore, void.

Agreements that restrain legal proceedings

A contract that restricts a party’s right to a legal remedy or limits the amount of time a right can be enforced in a court of law is void. The only exception is that the parties may include an arbitration clause to send existing or future conflicts to arbitration. (Section 28)

Esso Petroleum Co Ltd v. Harper’s Garage (Stourport) Ltd, (1976)- In this case, the Lordships struck down an exclusive dealing agreement because it extended to a period of 21 years, which was unreasonable. A five-year period would have been held to be reasonable. In holding that the doctrine applied to exclusive dealing agreements they opened up the possibility that it might be extended to every sort of contract because all contracts must involve a restraint of some sort.

Uncertain and ambiguous agreement

A contract whose aim and meaning are vague and unknown, and which cannot be judged properly, is void according to Section 29 of the Act.

In Gunthing v. Lynn (1831), for example, the parties agreed to pay $5 more than the horse’s purchase price if it proved lucky. The court ruled that the contract was vague because there was no process in place to determine how the horse would bring luck to the party.

Wagering agreements

Wagering agreements are contracts between two parties in which the first party pays the second party money if in future an uncertain event occurs, the second party pays the first party money if the event does not happen. According to Section 30, such agreements are void.

According to the Section, wagering agreements are void, and no action may be brought to recover anything allegedly gained by a wager, or entrusted to any person to abide by the outcome of any game or other uncertain event on which a wager is made.

Agreement to do an impossible act

According to Section 56, an agreement to do an act that is impossible in itself is void. 

Void contract

As specified in Section 2(j) of the Indian Contract Act, 1872, void contracts are contracts that are legally enforceable at the time of their creation but are annulled afterwards. When entered into, void contracts are legitimate because they meet all of the conditions of enforceability set forth in Section 10 of the Act and are binding on the parties, but they become void later due to the inability to execute. 

Void contracts are not to be mistaken with voidable contracts. Unlike a void contract, a voidable contract is one that can be confirmed or rejected at the discretion of one of the parties. Only one of the contracting parties is obligated. The contract may be repudiated (rejected) by the freed party, in which case the contract becomes void. A contract is regarded as voidable when it is entered into without the parties’ free consent. A voidable contract is enforceable by law at the option of one or more parties but not at the option of the other parties, according to the Act’s description. If the aggrieved party does not rescind the contract within a reasonable time, it may be declared valid.

When one of the parties to a contract is unable to fully appreciate the agreement’s implications, the contract becomes void. A mentally ill or inebriated person, for example, may not be able to comprehend the terms of the agreement, rendering it void. Such contracts become void in the following circumstances:

Supervening impossibility/ frustration

Frustration is an idea that applies only at the stage of the performance of a contract. It is concerned with the idea of a supervening impossibility which is beyond the control of the parties. The doctrine of frustration is applied when the contract is created validly but the parties cannot perform their obligations. Frustration has a very high threshold. This is dealt with under Section 56. In case of an initial impossibility, the agreement will be void. However, in case of a subsequent impossibility, the contract becomes void when it becomes impossible for one of the parties to perform their duty under the contract.

Taylor v. Caldwell (1863)– in this case, the defendants let the plaintiffs use a particular music hall. The plaintiffs were to hold a concert there on certain dates. But before the first day of the concert, the hall was destroyed by fire without the fault of either of the parties. The plaintiffs sued the defendants for their loss. It was held that the contract was not absolute, as its performance depended upon the continued existence of the hall. Therefore, the contract was frustrated and thus void.

Change of laws

While a contract may not be void at the time of its creation, it may become void due to other circumstances. New laws may be enacted that render a contract null and void instantly. Furthermore, information that was previously unknown to the contracting parties can render the contract unenforceable. Because every contract is different, determining its validity can be difficult.

Metropolitan Water Board v Dick Kerr & Co Ltd (1918)– a firm was given the task of building a water tank within 6 months. While it was being built, an order was passed by the military that the work needed to be stopped. The firm claimed frustration. The Court said that, in the contract, the term “within 6 months” was important. It was impossible to finish the construction within 6 months after the intervention of the army. Thus, there was a frustration of the contract due to which it was rendered void.

Contingent contract

The fulfilment of a contract is sometimes perfectly achievable, but the value of the performance is destroyed due to the non-occurrence of an event anticipated by both parties as to the cause for the contract. When the anticipated event becomes impossible to be achieved, the contract becomes void.

Other grounds

Some other grounds of frustration that render a contract void are death or incapacity of a party, destruction of the subject matter of the contract, the intervention of war and government or administrative intervention.

Morgan v. Manser (1948)- In this case, a person had entered into a service contract for 10 years. Under this contract, he said that he shall not undertake any professional engagement during the currency of the contract. But before the expiry of 10 years, this person was called to serve in the army during the war. After he came back from war, he got engaged in some other work and refused to engage with the initial service. The initial employer sued him for breach. The court held that the contract was frustrated when the person was called to serve in the military forces. Therefore, the contract was deemed to be void.

V.L. Narasu v. P.S.V. lyer (1952) In this case, one of the walls of a cinema hall collapsed. It then became dangerous for customers to visit and avail the services. The license of the cinema hall was cancelled. The owner was informed that the license will remain cancelled until the wall is rebuilt. He was in a contract with a person to play his film. He couldn’t fulfill it because the wall had collapsed. He pleaded for frustration. The Court held that the owner could take any amount of time to rebuild his wall. The cinema hall was a subject matter that had been destroyed and when the subject matter was destroyed the contract was frustrated and thus had become void.

Key differences

Void AgreementVoid Contract
An agreement that is void ab initio i.e., at the time of its creation is a void agreement. A void contract is one that is valid at the time of its creation but becomes void due to supervening circumstances.
It is neither enforceable nor does it create any legal consequences for the parties.A void contract is enforceable until a superseding event or circumstance renders it to be void.
A void agreement is void due to the absence of one or more necessary elements that result in a contract.A void contract is one that becomes void due to the impossibility of performance.
In the case of void ‘agreement’, there is no remedy available in law. Restitution or restoration is not granted in the case of void agreement, although in certain circumstances, restitution is permitted on equitable grounds.A remedy is available in law only to the extent to restore any benefit received by the party, on the grounds of equity.
The main cause of the agreement being void is due to deficiencies with respect to the agreement during the time of its creation.The main cause of the annulment of a contract is the change in the country’s law, supervening impossibility, or inclusion of unlawful objects.

Conclusion

To summarise, a void agreement and a voidable contract have different meanings and legal implications. A void agreement is a dead agreement since it has no legal foundation, although a voidable contract may have legal standing. Some agreements are declared void by law because they are illegal and contrary to public policy, as well as to safeguard the lives and liberty of individuals. The consequences of void ab initio agreements and void contracts are different. Contracts that become void are unenforceable contracts, whereas void agreements are those that are not enforceable.

References


Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:

https://t.me/lawyerscommunity

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.

LEAVE A REPLY

Please enter your comment!
Please enter your name here