Void vs Voidable Contract under the Indian Contract Act, 1872: Sections 2(g), 2(i) and 2(j), Grounds of Invalidity and the Consequences under Sections 64 to 66

A void agreement and a voidable contract are not two degrees of the same defect. They are different in kind. A void agreement never had legal existence, so nothing passed under it and no one acquired anything by it. A voidable contract is a real contract, fully effective and capable of transferring property, which one party is entitled to set aside. The consequences diverge accordingly: on the right of election, on the restoration of benefits, on the position of a third party who has meanwhile bought the subject matter, and on whether the passage of time makes any difference. This topic works through both categories and the third that sits between them, the contract that becomes void.

1. The Three Definitions

Three features of this drafting repay attention. Section 2(g) speaks of a void agreement, never a void contract, because on the Act's own logic an arrangement that was never enforceable was never a contract at all. Section 2(i) speaks of a voidable contract, confirming that such an arrangement is a contract in every sense until avoided. Section 2(j) introduces a third possibility, a contract that was valid at birth and ceases to be enforceable later, and its defining word is becomes.

2. Void Agreements: Grounds and Character

An agreement is void from inception where an essential of Section 10 was missing when it was made, or where the Act expressly declares that class of agreement void.

• Incapacity. Sections 11 and 12. An agreement by a minor or by a person of unsound mind is void from the beginning, as the Privy Council held in Mohori Bibee v. Dharmodas Ghose.
• Bilateral mistake of fact. Section 20. Where both parties are under a mistake as to a matter of fact essential to the agreement, the agreement is void. The Explanation provides that an erroneous opinion as to the value of the subject matter is not such a mistake.
• Mistake of foreign law. Section 21. A mistake as to a law in force in India does not make an agreement voidable, but a mistake as to a foreign law has the same effect as a mistake of fact.
• Unlawful object or consideration. Section 23, read with Section 24 where part is unlawful and the parts cannot be severed.
• Absence of consideration. Section 25, subject to the three exceptions of natural love and affection in a registered document, compensation for something voluntarily done, and a written promise to pay a time-barred debt.
• Expressly declared void classes. Restraint of marriage under Section 26, restraint of trade under Section 27, restraint of legal proceedings under Section 28, uncertainty under Section 29, and wagering under Section 30.
• Initial impossibility. Section 56, first paragraph. An agreement to do an act impossible in itself is void.

3. Voidable Contracts: Grounds and the Right of Election

A contract is voidable where consent was obtained by an improper means, or where one party has prevented or failed to perform in a way the Act treats as entitling the other to put an end to the contract.

1. Coercion. Section 15, read with Section 19. Committing or threatening to commit any act forbidden by the Indian Penal Code, or unlawfully detaining or threatening to detain any property, to the prejudice of any person, with the intention of causing him to enter into an agreement.
2. Undue influence. Section 16, read with Section 19A. Where one party is in a position to dominate the will of the other and uses that position to obtain an unfair advantage. Under Section 19A the court may set the contract aside absolutely or on such terms as it thinks just.
3. Fraud. Section 17, read with Section 19. Suggestion of an untrue fact, active concealment, a promise made without intention of performing it, or any other act fitted to deceive.
4. Misrepresentation. Section 18, read with Section 19. An innocent but untrue assertion, a breach of duty giving an advantage by misleading, or causing a party to make a mistake as to the substance of the subject matter.
5. Prevention of performance. Section 53. Where one party prevents the other from performing his promise, the contract becomes voidable at the option of the party so prevented.
6. Failure to perform at a time made essential. Section 55. Where time was of the essence and the promisor fails to perform within it, the contract becomes voidable at the option of the promisee.

3.1 Exercising the option

The right to avoid belongs only to the party whose consent was improperly obtained, and it must be exercised. Until it is, the contract stands and both sides remain bound. Three limits apply. The election must be made within a reasonable time. It must be unequivocal, and the party cannot approbate and reprobate by taking a benefit under the contract while denying it. And the right is lost by affirmation, express or implied, once the party has full knowledge of the facts entitling him to avoid. Section 19 further provides that a party who has been defrauded or misled may, instead of avoiding, insist that the contract be performed and that he be put in the position in which he would have been if the representations had been true.

The same facts, two different consequences for a third party

4. Contracts That Become Void

Section 2(j) covers the arrangement that was a valid contract when made and ceases to be enforceable afterwards. The principal instances are the second paragraph of Section 56, where performance becomes impossible or unlawful by an event the promisor could not prevent; Section 32, where a contingent contract depends on an event that becomes impossible; and the consequence of avoidance itself, since a voidable contract that is avoided ceases to be enforceable from that point.

The practical significance lies in the intervening period. Rights that accrued while the contract was alive are not disturbed by its later becoming void. Instalments that fell due before frustration remain payable, and property that passed before the supervening event remains passed. This is the sharpest contrast with a void agreement, under which nothing ever accrued to be preserved.

5. The Comparison Set Out

6. The Consequences: Sections 64, 65 and 66

• Section 64. When a person at whose option a contract is voidable rescinds it, the other party need not perform any promise in which he is promisor. The party rescinding must, if he has received any benefit from another party to the contract, restore that benefit so far as may be to the person from whom it was received.
• Section 65. When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under it is bound to restore it, or to make compensation for it, to the person from whom he received it. As Tarsem Singh confirms, 'discovered to be void' includes an agreement void from inception whose invalidity is established later.
• Section 66. The rescission of a voidable contract must be communicated or revoked in the same manner, and subject to the same rules, as apply to the communication or revocation of a proposal.

7. The Position Stated Shortly

1. A void agreement never had legal existence; a voidable contract is a valid contract until avoided; a contract that becomes void was valid when made and ceases to be enforceable later.
2. Voidness arises from incapacity, bilateral mistake of fact, unlawfulness, absence of consideration, the expressly declared void classes and initial impossibility.
3. Voidability arises from coercion, undue influence, fraud, misrepresentation, prevention of performance, and failure to perform within an essential time.
4. Tarsem Singh: mutual mistake as to the unit of measurement makes the agreement void under Section 20, and earnest money is refundable under Section 65.
5. Chikham Amiraju: a threat to commit suicide is coercion under Section 15, making the transaction voidable.
6. Only the aggrieved party may avoid, and the right is lost by affirmation or unreasonable delay.
7. Title passes under a voidable contract, so a bona fide transferee for value before avoidance is protected; no title passes under a void agreement.
8. Section 64 governs restoration on rescission of a voidable contract; Section 65 governs restitution where an agreement is discovered to be void or a contract becomes void; neither applies to a minor's agreement.

8. Related Topics and Provisions