Subject Code – BBA 604

Subject – Business Law & Industrial Relations

Notes – 02
KINDS OF CONTRACTS
A. From the point of view of ENFORCEABILITY
From the point of view of enforceability a contract may be:

Contract
(On the basis of enforceability)

VALID VOIDABLE VOID UNENFORCEABLE ILLEGAL/UNLAWFUL

CONTRACT CONTRACT CONTRACT CONTRACT CONTRACT

1. VALID CONTRACT – A valid contract is an agreement enforceable by law. An agreement

becomes enforceable by law when all the essential elements of a valid contract are present.

2. VOIDABLE CONTRACT –

According to Section 2(i), “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.”

Thus, a voidable contract is one which is enforceable by law at the option of one of the parties.
Until it is avoided or rescinds by the party entitled to do so by exercising his option in that behalf,
it is a valid contract.
Usually a contract becomes voidable when the consent of one of the parties to the contract is
obtained by coercion, undue influence, misrepresentation or fraud. Such a contract is voidable at
the option of the aggrieved party i.e. the party whose consent was so caused (Secs. 19 & 19A).
But the aggrieved party must exercise his option of rejecting the contract:
i. Within a reasonable time
ii. Before the rights of third parties intervene,
Otherwise the contract cannot be rejected.
For example, A, threatens to shoot B if he does not sell his new Hero Bike to A for Rs. 2000. B
agrees. The contract has been brought by coercion and is voidable at the option of B.
Other circumstances under which a contract becomes voidable.
1. Section 53 of the Act states that “When a contract contains reciprocal promises, and one
party to the contract prevents the other from performing his promise, then the contract
becomes voidable at the option of the party so prevented.
For example, A, contracts with B that A shall whitewash B’s housed for Rs. 100. A, is ready
and willing to execute the work accordingly, but B prevents him from doing so. The contract
becomes voidable at the option of A.

2. Section 55 of the Act states that “When a party to the contract promises to do a certain
thing within a specified time, but fails to do it, then the contract becomes voidable at the
option of the promise, if the intention of the parties was that time should be of the essence
of the contract.
For example, X, agrees to sell and deliver 10 bags of wheat to Y for Rs. 2500 within one
week. But X does not supply the wheat within the specified time. The contract becomes
voidable at the option of Y.

Rights and Obligations of the parties to a voidable contract after its rescission.
Section 64 lays down the rights and obligations of the parties to a voidable contract after it is
rescinded. The section states that
1. When a person at whose option a contract is voidable rescinds it, the other party thereto
need not perform a promise therein contained in which he is a promisor.
2. If the party rescinding a voidable contract has received any benefit from another party to
such contract, from another party to such contract, he must restore such benefit, so far as
may be, to the person from whom it was received.
For Example, when a contract for the sale of a house is avoided on the ground of undue
influence, any money received on account of the price must be refunded.
3. But it must be remembered that the benefit which is to be restored must have been received
under the contract.
4. If an amount has been received as a security for the due performances of the contract, such
earnest money deposit is not to be returned if the contract becomes voidable under Section
55 on account of the promisor’s failure to complete the contract at the time agreed and has
been rescinded by the promise because it is not a benefit received under the contract.
3. VOID CONTRACT -

According to Section 2(j), “A contract which ceases to be enforceable by law becomes void,
when it ceases to be enforceable.”

The word ‘void’ means ‘not binding by law’. Accordingly the term ‘void contract’ implies a
useless contract which has no legal effect at all. It follows from the definition that a void contract
is not void from its beginning and that it is valid and binding on the parties when originally entered
but subsequent to its formation it becomes invalid and destitute of legal effect because of certain
reasons.
The reasons which transform a valid contract into a void contract, as given in the Contract Act,
are as follows:
a) A contract becomes void by impossibility of performance after the formation of the
contract. For example, A and B contract to marry each other. Before the time fixed for the
marriage, A goes mad. The contract to marry becomes void.
b) A contract also becomes void by subsequent illegality. For example, A agrees to sell B 100
bags of wheat at Rs. 1650 per bag. Before delivery, the Government bans private trading
in wheat. The contract becomes void.
c) A voidable contract becomes void, when the party, whose consent is not free, rejected the
contract. For example, M by threatening to murder B’s son, makes B agree to sell his car
worth Rs. 30,000 for a sum of Rs. 10,000 only. The contract, being the result of coercion,
is voidable at the option of B. B may either affirm or reject the contract. In case B decides
to reject the contract, it becomes void.
d) A contingent contract to do or not to do something on the happening of an uncertain future
event, becomes void, when the event becomes impossible. For example, A contracts to
give Rs. 1,000 as a loan to B, if B marries C. C dies without being getting married to B.
The contract becomes void.

NOTE – A ‘Void agreement’ should be distinguished from ‘Void Contract’. A void

agreement never amounts to a contract as it is void ab-initio. A ‘void contract’ is valid
when it is entered into, but subsequent to its formation something happened=s which
makes it unenforceable by law.
A contract cannot be void ab-initio and only an agreement can be void ab-initio.

4. UNENFORCEABLE CONTRACT -
An unenforceable contract is one which is valid in itself, but is not capable of being enforced in
a court of law because of some technical defect such as absence of writing, registration requisite
stamp, etc. or time barred by the law of limitation.
For example, a bill of exchange or promissory note, though valid in itself, becomes unenforceable
after three years from the date the bill or note falls due, being time barred under the Limitation
Act.
5. ILLEGAL OR UNLAWFUL CONTRACT -
An illegal contract is an agreement that violates the law because its fulfillment requires the
parties to engage in illegal activity. Such a contract is void and unenforceable from the
beginning i.e. void ab-initio. Thus, if the contract is breached, neither party will be entitled to
any compensation or held liable.
It is important to note that a contract can be illegal without violating the law. For example, this
can occur when a contract deals with certain activities, like gambling or prostitution that are
not explicitly prohibited by law but are discouraged due to violation of public policy.
B. From the point of view of CREATION

Contract
(On the basis of creation)

EXPRESS IMPLIED QUASI

CONTRACT CONTRACT CONTRACT

1. EXPRESS CONTRACT – Where both the offer and acceptance constituting an agreement
enforceable at law are made in words spoken or written, it is an express contract.
For example, A tells B on telephone that he offers to sell his car for Rs. 80,000 and B in reply
informs A that he accepts the offer, there is an express contract.

2. IMPLIED CONTRACT – Where both the offer and acceptance constituting an agreement
enforceable by law are made otherwise than in words i.e., by acts and conduct of the parties, it is
an implied contract.
For example, M, a professional shoe shiner starts polishing the shoes of N without being
requested to do so, and N allows to polish his shoes knowing that M excepts to be paid for the
service, there comes into existence an implied contract and N is under obligation to pay to M.

3. QUASI OR CONSTRUCTIVE CONTRACT – Certain obligations which are not contracts

in fact but are so in the contemplation of law. Such a contract does not arise by virtue of any
agreement, express or implied between the parties but the law infers or recognizes a contract
under special circumstances.
For example, obligation of finder of lost goods to return them to the true owner or liability of
person to whom money is paid under mistake to repay it back cannot be said to arise out of a
contract as there is neither offer and acceptance nor consent, but these are very much covered
under quasi-contracts as per Section 71 and 72 respectively.
A quasi-contract is based upon the equitable principle that a person shall not be allowed to retain
unjust benefit at the expense of another. Section 68-72 of the ICA, 1872 describe the cases which
are to be deemed ‘quasi-contracts’.
C. From the point of view of the EXTENT OF EXECUTION
From the point of view of the extent of execution a contract may be:

Contract
(On the basis of extent of execution)

EXECUTED CONTRACT EXECUTORY CONTRACT

1. EXECUTED CONTRACT – A contract is said to be executed when both the parties to a

contract have, completely performed their share of obligation and nothing remains to be done
by either party under the contract.
For example, when a bookseller sells a book on cash payment it is an executed contract
because both the parties have done what they were to do under the contract.

When only one of the parties to a contract has performed his share of obligation and the other
party is still to perform his share of obligation, then also the contract is called ‘executed’. This
type of executed contracts are also called Unilateral Contracts because in such contracts only
one obligation remains outstanding, the other obligation having being performed at the time of
or before the formation of the contract.
For example, M advertises a reward of Rs. 1,000 to anyone who finds his missing son. B
knowing the offer finds the missing boy and brings him. As soon as B traces the boy, there
comes into existence an executed contract because B has performed his share of obligation and
it remains for M to pay the amount of reward to B.

2. EXECUTORY CONTRACT – A contract, is said to be executory when either both the

parties to a contract have still to perform their share of obligation in whole or there remains
something to be done under the contract on both sides. Executory contracts are also known as
Bilateral Contracts.
For example, Where T agrees to coach R, a pre-medical student, from first day the next month
and R in consideration promises to pay T Rs. 3,000 per month, the contract is executory
because it is yet to be carried out.
Similarly, Where M promises to sell his car to N for Rs. 1,00,000 cash down, but N pays only
Rs. 10,000 and promises to pay the balance on next Sunday. On the other hand, M gives the
possession of car to N and promises to execute a sale deed on receipt of the full amount. The
contract between M and is executory because there