Types of Contracts

1. Types of Contracts Basis Validity/Enforceability...........................................................................2

2. Distinction Between a Void Contract and Voidable Contract.........................................................3
3. Void Agreement...............................................................................................................................3
4. Unenforceable Contract...................................................................................................................4
5. Illegal or Unlawful Contracts:.........................................................................................................4
6. Types of Contracts: Basis Formation...............................................................................................5
7. Types of Contracts: Basis Performance...........................................................................................6
8. Restitution in Case of Void Agreements or Contracts.....................................................................6

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1. Types of Contracts Basis Validity/Enforceability

1.1 Valid Contract:

(a) A valid contract is an agreement that can be enforced by law.

(b) It possesses all the essential elements of a valid contract as summarized earlier.

1.2 Voidable Contract:

(a) As per Section 2(i), a voidable contract is one that can be enforced by law at the
option of one or more parties involved but not at the option of others.

(b) Initially, it is considered valid, but it can be voided or rescinded at the discretion of
the party granted that right by exercising their option.

(c) Voidable contracts result from obtaining consent through coercion, undue influence,
misrepresentation, or fraud.

(d) The aggrieved party, whose consent was obtained through these means, can void the
contract but must do so within a reasonable time and before third parties acquire
rights in connection with the contract.

(e) Illustrations:

(i) A threatens to shoot B unless B sells his new Bajaj bike to A for Rs. 2,000. B
agrees. This contract is voidable because it was brought about by coercion
and can be voided by B.

(ii) A, with the intention to deceive B, falsely represents that A's factory
produces five hundred quintals of indigo annually and induces B to buy the
factory. This contract is voidable because it was caused by fraud and can be
voided by B.

1.3 Void Contract:

(a) A void contract is one that, from its inception, has no legal effect and is considered
useless and null.

(b) It is not valid and binding on the parties involved from the beginning.

(c) As per Section 2(j), a contract that ceases to be enforceable by law becomes void
when it loses its enforceability.

(d) A void contract is initially valid but later becomes invalid due to specific reasons.

(e) Illustrations of situations where a valid contract transforms into a void contract:

(i) Supervening Impossibility:

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 When a contract becomes impossible to perform after its formation, it
becomes void.

A and B agree to marry each other, but before the set marriage date, A
becomes mentally incapacitated. The contract to marry becomes void.

(ii) Supervening Illegality:

A contract becomes void due to subsequent illegality.

A agrees to sell B 100 bags of wheat at Rs 1,650 per bag, but before delivery,
the government prohibits private trading in wheat. The contract becomes
void.

2. Distinction Between a Void Contract and Voidable Contract

2.1 Enforceability:

(a) A void contract cannot be enforced at all.

(b) A voidable contract is enforceable at the option of one party but not the other, making
enforceability a key distinction.

2.2 Nature:

(a) A void contract starts as valid but becomes unenforceable due to subsequent
developments, such as impossibility, illegality, or repudiation.

(b) A voidable contract remains valid until the party with the option to void it decides to
do so. It does not become void until the option is exercised. Contracts involving
coercion, undue influence, fraud, and misrepresentation are voidable. Contracts
caused by a mistake are void.

2.3 Rights:

(a) In a void contract, there is no legal remedy, as the contract cannot be performed in
any way.

(b) In a voidable contract, the aggrieved party has the right to void it within a reasonable
time. If voided, it becomes void. If not, it remains valid.

2.4 Reason:

(a) A contract becomes void due to changes in the law or unforeseen circumstances.

(b) A contract becomes voidable if a party's consent was not freely given.

3. Void Agreement

3.1 A void agreement is an agreement that cannot be enforced by law and is considered null and
void from the very beginning.

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3.2 This type of agreement lacks one or more essential elements of a valid contract, except for
"free consent."

3.3 Illustrations of void agreements:

(a) An agreement with a minor is void from the start because minors lack the capacity to
contract.

(b) An agreement without consideration is void ab-initio, although there are certain
exceptions mentioned in Section 25.

(c) The Act expressly declares some agreements as void, such as those in restraint of
trade, marriage, legal proceedings, or by way of wager.

(d) A void agreement does not qualify as a contract as it is void ab-initio, whereas a void
contract is initially valid but becomes unenforceable due to subsequent events.

4. Unenforceable Contract

4.1 An unenforceable contract is a valid contract that cannot be upheld in a court of law due to
technical defects like lack of written documentation, registration, required stamp, or
expiration under the law of limitation.

4.2 Illustrations of unenforceable contracts:

(a) An oral arbitration agreement is unenforceable because it must be in writing as per

the legal requirement.

(b) A bill of exchange or promissory note, while initially valid, becomes unenforceable
after three years from the due date due to being time-barred under the Limitation Act.

5. Illegal or Unlawful Contracts:

5.1 Illegal contracts are those prohibited by the law and are considered void.

5.2 Illegal contracts cannot be enforced in courts and even associated contracts related to these
contracts cannot be upheld.

5.3 Contracts opposing public policy or involving immorality are illegal contracts.

5.4 Contracts intended for criminal activities, such as "supari" contracts, are categorized as
illegal.

5.5 Although illegal contracts and void contracts may seem similar, they differ in the following
ways:

(a) Scope:

All illegal contracts are void, while void contracts may not be illegal from initiation
but become void due to other factors (e.g., uncertainty in terms).

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 (b) Nature and Character:

Illegal agreements are void from the inception, described as void ab-initio. Void
contracts can change from being valid to void over time.

(c) Effect on Collateral Transactions:

In illegal contracts, collateral transactions (related transactions to the main contract)

also become unenforceable. In the case of void contracts, collateral transactions can
be enforced if they can be performed independently, even if the main contract
becomes voidable.

(d) Penalty or Punishment:

Illegal agreements are punishable under various laws, such as the Indian Penal Code,
whereas parties to void agreements do not face such penalties or punishments.

(e) Illustrations:

(i) A hires B to murder C and takes a loan of Rs. 5,000 from D to pay B.B
knows the purpose of the loan, making the agreement between A and B
illegal. The agreement between A and D is related to an illegal act, so it is
illegal and void. D cannot recover the money. However, if D is unaware of
the purpose of the loan, the loan is not linked to the illegal act, it will be a
valid contract.

(ii) If A borrows from B to pay wagering debts (wagering agreements are void
under Section 30).Even if B knows the purpose of the loan, the contract
between A and B remains unaffected. This is because an agreement that is
collateral (related) to a void agreement is valid.

6. Types of Contracts: Basis Formation

6.1 Express Contracts:

These are clearly defined contracts with terms explicitly stated, either verbally or in writing.
Illustration

Agreeing to sell a car at a specific price over the phone forms an express contract.

6.2 Implied Contracts:

(a) Implied contracts are not based on explicit words but are instead inferred from
circumstances, often due to legal obligations or actions.

(b) Agreements made without using explicit words are implied contracts.

(c) If person 'A' accidentally delivers goods to person 'B' instead of 'C,' even without a
formal agreement, 'B' is obligated to return the goods to 'A' because of the implied
contract.

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6.3 Tacit Contracts:

Tacit contracts are implied agreements that arise from the actions or conduct of the parties
involved.

When a bank customer withdraws cash from an ATM, there is an implicit agreement.

When a contract is assumed to exist during an auction sale when the hammer falls.

6.4 E-Contracts:

E-Contracts, also known as e-commerce contracts, are agreements formed using electronic
means, such as emails. In the realm of electronic commerce, various parties create
interconnected networks through Electronic Data Interchange (EDI), facilitating business
transactions electronically. These are referred to as EDI contracts, Cyber contracts, or mouse-
click contracts.

7. Types of Contracts: Basis Performance

7.1 Executed Contract:

An executed contract is one in which the actions specified in the contract have been
completed. It is a contract where both parties have fulfilled their obligations entirely.

7.2 Executory Contract:

An executory contract involves reciprocal promises or obligations where the consideration is

to be fulfilled in the future. In such contracts, the actions or obligations are yet to be
performed.

7.3 Unilateral Contract:

In a unilateral contract, only one party is obligated to perform their duty or obligation. It is a
one-sided contract where one party makes a promise, and the other party is not legally
obligated to do anything until the promise is fulfilled.

7.4 Bilateral Contract:

A bilateral contract involves obligations or promises on the part of both parties. Both parties
have outstanding obligations, and they are legally bound to perform their respective promises.

8. Restitution in Case of Void Agreements or Contracts

8.1 Section 65 outlines the obligation of a person who has received benefits under a void
agreement or a contract that later becomes void.

8.2 The person who has benefited must either restore what they received or provide compensation
to the person from whom they received it. This provision ensures that both parties are treated
fairly in the following situations:

8.3 When an Agreement is Void:

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(a) Illustration:

(i) A pays B Rs.1,000 for B's promise to sell his horse. Later it is discovered that
the horse was dead at the time of the agreement, though neither party was
aware of this fact. In this case, the agreement is void, and B is obligated to
repay A Rs.1,000.

(ii) Agreements that are knowingly void or illegal when entered are not covered
by this section.

If L pays Rs.10,000 to M to commit a murder, the money cannot be

recovered. The same applies to agreements expressly declared as void.

(b) When a Contract Becomes Void:

(i) Illustration:

A agrees to sell B 10 quintals of wheat at Rs.1,625 per quintal after one

month and receives an advance of Rs.500. Subsequently, a statutory Act
prohibits private wheat sales. The contract becomes void, but A must return
Rs.500 to B.

(ii) The plaintiff rented a godown from the defendant for 12 months and paid the
full advance. After about seven months, the godown was destroyed by fire,
without plaintiff's fault. When the plaintiff requested a refund of the advance,
the court ruled in favour of the plaintiff, affirming their entitlement to recover
the rent for the unexpired term.