This article has been written by Oishika Banerji of Amity Law School, Kolkata. It provides a detailed analysis of voidable contracts and everything a reader needs to know about the same.
It has been published by Rachit Garg.
A voidable contract is one that can be cancelled or changed under certain legal circumstances. Not all contracts are voidable and therefore, in order to discharge an obligation, a legal precedent must exist. A frequent technique to terminate a contract is to discover a flaw in it. The most straightforward approach to void a contract is when both parties agree to that voiding and are generally the best course of action that can be taken. A voidable contract can also be referred to as a formal agreement between two parties that can be declared void for a variety of legal grounds, 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’ signifies ‘capable of being voided’. A voidable contract is initially thought to be valid and enforceable, but it can be rejected by one party if faults are detected. The contract remains valid and enforceable if a party with the authority to reject it chooses not to reject it despite the flaw. Most of the time, committing to a voidable contract hurts only one of the parties because that party fails to identify the other party’s deception or fraud.
In the case of Bawlf Grain Co. vs. Ross (1917), an intoxicated wheat producer engaged into a contract but failed to fulfil his responsibilities as the price of wheat increased. It was a landmark decision that stated that any contract entered into while a party is intoxicated is voidable at the aggrieved party’s discretion.
In general, we have a voidable contract when one of the contracting parties would not have signed the contract if it was not for the other party’s (other party to the contract) activities or omissions, such as fraud or misrepresentation. The parties initially regard the contract as legitimate and enforceable. However, the aggrieved party discovers grounds to nullify the contract and considers themselves not to be bound by its provisions as a result of the discovery of facts or information. When we have grounds for a voidable contract, it is one of the contracting parties who have grounds to void the contract because of the other’s acts. Rarely may both parties to a contract have valid reasons to declare the contract void. When confronted with a voidable contract, at his or her option, the aggrieved party can either accept or reject the contract.
Accepting a voidable contract
Even if a contracting party discovers faults that provide him or her grounds to cancel the contract after signing it, he or she may choose to accept the contract’s terms anyhow. Consider the case where you get into a contract that you would not have signed otherwise due to a party’s deception. Despite the fact that you have discovered the depth of the other party’s misrepresentation, you opt to continue to be bound by the contract’s terms. In this situation, you become obligated to the contract by accepting it or continuing to comply with its terms. A voidable contract is ratified and legally enforceable at this point.
Repudiating a voidable contract
A party who signs a contract with voidable grounds has the right to repudiate it. In other words, if voidable reasons are noticed, the party might reject the contract and argue that it is not bound by the contract’s terms. If one party claims they are not obligated by the conditions mentioned in the contract and the other party claims otherwise, renouncing a contract may result in a contractual dispute between the contracting parties. If the parties are unable to agree to accept the contract, amend its conditions, or cancel it peacefully, they may find themselves in court. If a party believes the contract is voidable or that the other party has legal grounds to void the contract, the party might initiate a suit of breach of contract against the other. When this happens, it’s not a comfortable situation to be in. If it does, you should get legal advice or representation from an attorney.
Voidable contracts based on formation defects
A contract may be voidable if it does not follow the statutory standards for its creation. Essentially, for a contract to be legally binding you need:
- Legal capacity.
The contract will be voidable if any of these formation features are defective. If you engage in a contract with someone who is mentally ill, for example, you will be violating the legal capability criterion. A contract entered into with someone who lacked legal ability will not be considered valid and legally binding. As a result, the contract is voidable due to flaws in its creation.
Voidable contracts based on vitiated consent
A contract can also be voidable if a contractual party’s permission has been revoked. Consent to be vitiated indicates that a contractual party induced a party to sign a contract despite the fact that that party would not have signed if complete and truthful information had been communicated prior to the completion of the transaction.
Let us consider a scenario where the property seller is aware that his house’s foundation is not up to the mark and is potentially dangerous, but he fails to reveal this information to a possible buyer. The buyer agrees to purchase the property for a reasonable price but is unaware of the serious foundational flaw. The buyer would not have purchased the home if he had known about the existing flaw. This is a case where the buyer’s consent was void due to the seller’s deception.
Voidable contracts under the Indian Contract Act, 1872
Section 2(i) of the Indian Contract Act, 1872 defines voidable agreements as those which are valid as long as one of the parties or both parties can decide to void their agreement. Most cases involving a voidable contract involve a circumstance in which one of the parties did not give their consent. As a result, if the party accepts the contract’s terms, it stays valid; if they don’t, the contract between them is nullified. Coercion, deception, undue influence, and other elements play a vital role in determining whether a contract is voidable at the decision of either party.
For example, A threatens B with a gun and demands that she must sell her house to him for a pittance, and B agrees, terrified for her life. B was pressured into agreeing by A in this case, hence her permission was not freely given. As a result, she has the option of terminating the contract on this ground.
These provisions state that any contract in which a party’s consent is not freely given is voidable at that party’s discretion. Consent gained through coercion, deceit, or undue influence in such situations, is illegal under the law.
- Prevention of performance by the other party (Section 53):
When one party prohibits the other from completing his or her responsibilities under a contract based on a reciprocal promise, the contract becomes voidable at the choice of the party who was prevented from performing on their promise.
- Failure to perform in fixed time (Section 55):
There are some contracts in which time is the essence, and they must be completed within that time frame. When a contract is not completed on time, the aggrieved party has the option to invalidate the contract.
- Consequences of rescission (Section 64):
When a person, at whose discretion the contract is voidable, rescinds it, the other party is relieved of all contractual obligations. At the same time, the individual who has cancelled the contract is responsible for any advantages obtained.
What makes a contract voidable at the option of the other party
In Mohd. Hussain vs. Fida Hussain And Anr (1951), the Punjab & Haryana High Court had observed that in plain English, Sections 19 and 19A of the Indian Contract Act, 1872 state that where a party’s consent is obtained through coercion, fraud, or undue influence, the agreement is voidable at the discretion of the party whose consent was obtained in such a manner. In other words, Sections 19 and 19A declare that a contract entered under duress, fraud, or undue influence is voidable at the aggrieved party’s discretion. A party to a contract whose consent was obtained through deception may, if he/she so desires, insist on the contract’s performance and that he/she be placed in the position he/she would have been in if the representation made had been accurate.
Section 15 of the Indian Contract Act, 1872 states that “coercion is the committing, or threatening to commit, any fact forbidden by the Indian Penal Code, 1860 or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatsoever, with the intention of causing any person to enter into an agreement”. It is immaterial whether the Indian Penal Code, 1860, is or is not in force in the place where the coercion is employed.
Take, for instance, A, while onboard an English ship on the high seas, coerces B into signing a contract by criminal intimidation as defined by the Indian Penal Code, 1860. A then sues B in Calcutta for breach of contract. A used coercion, despite the fact that his act was not illegal under English law and that Section 506 of the Indian Penal Code, 1860 was not in effect at the time or location of the act. Therefore, in this case, the contract will be voidable at the option of B, and the presence or absence of the Indian Penal Code, 1860 will render no effect.
Undue influence under Section 16 of the Indian Contract Act, 1872 necessitates the following ingredients:
- The parties’ relationships are such that one of them can exert control over the other’s will. Control can be exerted in the following two ways:
- Where the party holds a real or apparent authority over the other.
- Where one party is in a fiduciary relation to the other party. For example, solicitor and client, trustee and trust, spiritual adviser and devotee, medical attendant and patient.
- Such a person takes advantage of his/her dominant position to get an unfair edge over others.
Under Section 19A of the Indian Contract Act, 1872, an agreement induced by undue influence is voidable at the option of that party whose consent was taken by influencing him/her. Performance of such agreements may be avoided absolutely or on prescribing certain terms and conditions.
A false claim, active concealment, promise without the purpose to carry it out, any other deceptive act, or any act considered fraudulent are all included in Section 17 of the Indian Contract Act, 1872 as the list of activities that constitute fraud.
The Madras High Court while deciding on the case of Kopparthi Venkataratnam And Anr. vs. Palleti Sivaramudu And Anr (1939) has observed that when consent to an agreement is obtained through coercion, fraud, or misrepresentation, Section 19 states that the agreement is a voidable contract at the discretion of the person whose consent was obtained in such a manner. Even if such consent was obtained using fraudulent means, such as misrepresentation or silence, as defined under Section 17 of the Act of 1872, the contract is not voidable if the person whose consent was obtained had the ability to learn the facts with ordinary diligence.
Misrepresentation under Section 18 of the Indian Contract Act, 1872, occurs when one party (or their agent) provides misleading information to the other party before the contract is established in order to encourage the other party to enter into the contract. If a person enters into a contract based on deception and suffers a loss as a result, they have the option to annul the contract or sue for damages.
The Lordships of the Privy Council has observed in the case of Lewis Pugh vs. Ashutosh Sen (1929) that if “fraudulent within the meaning of Section 17” qualifies “misrepresentation,” due diligence would be required in cases where misrepresentation became fraudulent, but not in cases where misrepresentation fell within Section 18 and was just short of fraud because the exception would be limited to the former kind only. Therefore, the case helped in understanding the overlapping relationship between fraud and misrepresentation under the Indian Contract Act, 1872, both of which contribute to rendering a contract voidable at the option of one of the parties to the same.
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.
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 those types of contracts that turn about to be voidable following certain events that have taken place. These contracts are known by such a name since they begin as valid but include the option for one of the parties to cancel it or continue with it at a later time. Sections 39, 53, and 55 of the Indian Contract Act, 1872 apply to these contracts.
- Section 39 (Effect of refusal of a party to perform promise wholly): The effect of a party’s refusal to fully perform a commitment is dealt with in Section 39 of the Indian Contract Act, 1872. If a party to a contract refuses to perform or is unable to perform, their promise, the promisee may terminate the contract unless they have shown their assent in its continuation by words or conduct.
- Section 53 (Liability of party preventing event on which the contract is to take effect): As per Section 53 of the Indian Contract Act, 1872, when one party to a contract prevents the other from performing their promise, the contract becomes voidable at the option of the party who was prevented, and the party who was prevented is entitled to compensation from the other party for any loss they may suffer as a result of the non-performance of the promise.
Let’s take for instance, A and B agree to pay a thousand rupees for B to complete a specific task for A. B is ready and willing to complete the task, but A is preventing him from doing so. The contract is voidable at B’s discretion and if he chooses to do so, he is entitled to reimbursement from A for any losses he has suffered as a result of its non-performance.
- Section 55 (Effect of failure to perform at a fixed time, in a contract in which time is essential): If a party to a contract promises to do something at or before a certain time, or to do certain things at or before certain times, and fails to do any of those things at or before the specified time, the contract, or the portion of it that has not been performed, becomes voidable at the option of the promisee if the parties intended for time to be of the essence of the contract.
- Effect of such failure when time is not essential: If the parties did not intend for time to be of the essence of the contract, the failure to do so at or before the stipulated period does not render the contract voidable. However, the promisee is entitled to recompense from the promisor for any loss caused by such failure.
- Effect of acceptance of performance at a time other than that agreed upon: If the promisee accepts performance of the promise at any time other than that agreed, the promisee cannot claim compensation for any loss caused by the promisor’s failure to perform the promise at the time agreed, unless he/she gives notice to the promisor of his/her intention to do so at the time of such acceptance.
Contracts voidable by law
When a person whose option makes a contract voidable, rescinds it, the other party to the contract is relieved of any obligation to perform any promise contained therein to which the former is a promisor. If a party rescinds a voidable contract and receives any benefit from another party to the contract, he must return that benefit to the person from whom it was received to the maximum extent possible. A voidable contract’s rescission can be communicated or revoked in the same way, and under the same conditions as a proposal’s communication or revocation.
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 cannot be enforced in a court of law. The contract is valid at the time of creation since it meets all of the necessary conditions for a valid contract, such as free consent, capacity, consideration, a lawful object, and so on. However, the contract cannot be completed due to a subsequent change in any law or the impossibility of an act that is beyond the imagination and control of the contracting parties and so it becomes void. Furthermore, neither party has the right to sue the other for breach of contract. Section 2(g) of the Indian Contract Act, 1872 defines void contracts.
A voidable contract is one that can only be enforced at the request of one of the two contracting parties. One party is legally permitted to decide whether or not to perform their part in this type of contract. The offended party has complete control over the course of action. Coercion, undue influence, fraud or misrepresentation and other factors may impact the consent of the concerned party, giving birth to the right.
The provisions under the Indian Contract Act, 1872, that deal with void and voidable contracts are not only straightforward but also quite clear. The fact that this law is still in effect today, with no need for modifications, is a testament to its importance. Furthermore, it takes a protective approach to the contract law in that it protects persons from agreeing to absurd, illegal, or immoral duties that may result in severe financial loss. It is very easy for some people to influence others who may be at a disadvantage in their bargaining position and thus be exploited. These kinds of clauses make it impossible for such agreements to have any legal or official authority.
To summarise, the laws on contracts concerning void and voidable contracts can render an agreement unenforceable by law, thereby declaring it to be invalid. When an agreement cannot be enforced by either party because it fails to meet the standards of a legitimate contract, it may be declared void. Voidable contracts, on the other hand, are lawful contracts that can be cancelled at the request of the suffering party. The provisions that concern these contracts outline the conditions that can lead to the dissolution of an agreement between two individuals. As a result, these rules are instrumental to contract law around the world.
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:
- 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.
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.
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