What Is A Void Agreement?
A void agreement is an agreement that is not legally enforceable. Section 2(g) of the Indian Contract Act, 1872 defines a void agreement as "an agreement not enforceable by law." A void agreement is not an agreement at all. It is an agreement which lacks enforceability from its very inception. Such agreements are void from the very beginning. On the other hand, "voidable agreements" are those in which one or both parties have the option to void the contractual obligations. Section 2(i) defines a voidable agreement as "an agreement which is enforceable at the option of one or more parties but not at the option of the other or others." In simple words, it means that the party who is at liberty to enforce the agreement may enforce it or set it aside and while the other party can have no remedy except to bear the losses flowing from a non-performance of the contract. Do note that parties cannot enter into contracts which are expressly declared void under the Indian Contract Act , 1872 or any other law for the time being in force.
Characteristics of Void Agreements
- Void agreements are not enforceable by Law
- They don’t confer rights and impose liabilities upon the concerned parties
- These are of no legal effect
- They are treated as if they never existed
- They do not impact the business or commercial relations
- Such an agreement cannot be ratified
- The party at fault cannot be penalized
- There can be no subsequent approval or ratification of such void agreements
- Such agreements are void ab initio
- Suffering of Parties: No compensation is directed to be paid to parties as such agreements confer no rights on the parties
- An action can’t be maintained on such agreements in a court of law
- They affect the public at large
- Such contracts are void because of illegality
- In such cases, the loss of the party at fault is not compensated
- Void agreements are always present between the same parties
- They falsify the statements made prior to the making of agreements
Understanding Voidable Agreements
A contract is voidable if its enforceability can be rejected at the option of one of the parties, whereas a void contract is one which is incapable of being performed and is therefore invalid in law from its inception. From a strictly legal point of view, contracts may not be voidable in the sense of being capable of being avoided. It is rather the remedy which may result in avoidance of the contract rather than the contract itself being voidable. On this view, the expression ‘voidable’ describes a remedy whereby the obligations and liabilities of the parties may be set aside.
The circumstances in which an agreement may be classified as voidable:
a) Less than the age of majority;
b) A lunatic/minor who is validly represented in a contract with the approval of the court;
c) Foreign sovereigns (diplomats);
d) Persons who are unable to understand what they are doing due to mental infirmity;
e) Agreements in restraint of marriage;
f) Inadequate consideration;
g) Uncertain agreements;
h) Agreements which restrain trade or employments;
i) Agreements done under coercion/undue influence;
j) Mistake of fact;
k) Fraud:
A contract that is voidable links the parties in a limited way. The person or party affected by the occurrence of the factor which makes the contract voidable has the right to repudiate the contract, thereby restoring the original status quo. In other words, a voidable contract is one which remains valid and enforceable at the option of the aggrieved party, but the agreement has no binding force on the person to whom it is voidable and is simply "voidable at the instance of the aggrieved party."
The first step, therefore, is to determine whether the potentially voidable contract is unenforceable. If it is, then it will bind only the party who entered into it. If not, it will be binding on both parties and therefore, voidable at the instance of the parties who are disadvantaged. There is always a possibility that such a contract can be legally ratified retrospectively.
Distinction Between Void And Voidable Agreements
When it comes to contract law, the terms "void" and "voidable" are sometimes used interchangeably in the general populace, but in legal contexts they have significantly different meanings. Depending on whether an agreement is void or voidable can have major legal consequences for all parties involved. Read on for an overview of the key differences between these two types of agreements.
Validity
Perhaps the most obvious difference between void and voidable agreements is that while a void agreement is invalid from the outset and has no legal effect, a voidable agreement is technically valid until it is declared void. In many cases, however, the primary difference lies in the enforceability of the contract—while both types of agreements are never going to be legally enforceable in their current form, a voidable contract can technically still be enforced if the injured party so chooses.
Parties’ Rights
With regard to parties’ rights, because a voidable contract is legally valid until it’s rendered void—for example, if an injured party waits to rescind until the statute of limitations has run—parties’ rights are not waived as a result of entering into a voidable contract. In other words, even after the contract is void, the injured party’s rights are still preserved and can be enforced at a future date. With a void contract, the parties’ rights are immediately and permanently terminated.
No Right to Enforce
As mentioned above, in a voidable agreement, one or both parties have a choice of whether to enforce the contract to seek damages. In a void contract, the parties lack this right and cannot seek legal remedy.
Illustration Of A Void Agreement
Common examples of void agreements include contracts formed with a minor, contracts formed with a mental incompetent, and contracts formed through coercion or fraud in the formation process. Following is a brief explanation of each type of agreement.
A void contract with a minor is voidable at the option of the minor, but not at option of the adult. The adult must be prepared to answer for his conduct if he contracts with a minor.
A contract is void for any party if a party to the contract is mentally incompetent at the time the contract is formed. Mental incompetency includes a party being intoxicated or under the influence of drugs. Contracts made under vexation are void.
An agreement is void if one of the parties is forced to enter into the contract through coercion.
It is important to note that in many cases where one party commits fraud, the contract is still a legally binding contract. If a party is frauded or coerced into entering a contract, the contract is voidable at the option of the defrauded or coerced party, not void.
Illustration Of A Voidable Agreement
An example of a voidable agreement is when a minor has signed a contract. As previously discussed, minors do not have the legal capacity to enter into a contract without the consent of their parents or guardians. If a minor signs a contract to sell their car, for instance, that contract can be voidable at the election of the minor once they reach the age of majority. If the minor elects to affirm the contract upon reaching the age of majority, the contract would no longer be voidable by the minor.
Another example of a voidable agreement can be found in contracts entered into under duress or undue influence. By way of hypothetical example , assume an individual has a sizable gambling debt. If someone with knowledge of the gambling debt threatens to cause physical harm to the individual if they do not sign a written contract, then the contract can be voidable at the election of the individual. Contracts can also be considered voidable in several other circumstances. For example, a contract can be voidable if one of the parties is mentally incompetent, if one party was defrauded, or a party was intoxicated.
Remedies Pertaining to Void and Voidable Agreements
A party to a void agreement is not entitled to any remedy. In fact any party who has sign pursuant to the contract, can take the legal stance that no agreement has ever been concluded between the parties. Furthermore a void agreement is of no force and effect in law and would not be possible to enforce in any court of law. Conversely, a party to a voidable agreement is entitled to a remedy aside from cancellation. This is because a voidable agreement is valid until set aside by a court of law. Thus, with a voidable contract, the innocent party will have a choice. He or she may elect to (i) seek appropriate legal remedies or (ii) confirm the contract. If the innocent party chooses to confirm the voidable contract, it will become valid and binding on both parties and as such enforceable in a court of law. By confirming the contract, this will in turn prejudicially affect the party who was being legally bound as a result of the voidable contract to the innocent party because the innocent party can no longer raise fraud in a court of law as a defence against the party who committed the acts of fraud and/or duress.
Outcomes of Selecting The Void or Voidable Options
The decision to treat a contract as void or voidable carries consequences for each party. The void option may have the effect of altering the parties’ rights and obligations such that neither can successfully enforce the contract or pursue the other for damages resulting from a breach. This option is invoked by the party that may have the basis for enforcing the agreement if the other party also has some basis for cancelling it. A statutory right of rescission may have this effect when the party who stands to benefit from the recission cannot receive the remedy it seeks. For example, if both parties had the right to rescind (or enforce) the contract but the commercial terms are such that each party would only be able to enforce against the other the other party has no incentive to seek even a partial recission. No matter how much time passes and how deeply entrenched each party is in its position of non-performance, the contract remains void and cannot effect the rights and obligations of the parties. A void contract is really no contract at all and can have serious implications for any deals that are based on the understanding that there is a legally enforceable contract between the parties.
Conclusion and Tips
As can be surmised from the aforementioned discussion, the distinction between void and voidable agreements is of critical importance in determining the legal enforceability of a contractual provision or entire agreement. If a contract is void ab initio, the parties have never been under any binding obligation to each other, making any litigation over the terms of that contract ineffectual as both parties will have suffered exactly the same legal consequences whether the contract ever existed or not. A voidable contract, on the other hand, is an existing, effective contract that one party can request a court to invalidate but which legally binds both parties in the absence of such a request.
A party faced with a suit for breach of contract needs to be extremely mindful of the circumstances under which the contract at issue was formed. If the contract suffered from a fatal flaw as previously discussed, the aggrieved party must bring this to the attention of the court as soon as possible and seek an order invalidating the contract rather than awarding any other type of relief. This is true even where the contract was executed by the party bringing the suit. For example, if the party seeking an order for rescission lacked the mental capacity required to enter into a contract, the court will still have the power to obliterate the agreement no matter how forcefully the other party argues for its enforcement. The threshold inquiry for the court is whether the contract in question receives legal protection – not whether it was entered into freely , or whether one of the parties id legally bound by its terms. Thus, even if both parties agree that a given contract should be enforced, the court will grant no relief if it determines that the essential elements of the contract are legally unenforceable.
If instead a contract is voidable as opposed to void, the court will allow an aggrieved party to sue for a legal remedy. As discussed above, this is because the other party has a vested interest in the fulfillment of the contract and would incur substantial damages, given the substantial remedies available for breach of a valid and binding contract, were the aggrieved party allowed to passively request rescission of the agreement. In short, the issue before the court is not whether the aggrieved party wishes to be bound by the contract but whether the other party wants the aggrieved party to be bound.
In contracting, it is apparent that there is often far more at stake than simply striking a bargain. The consequences of a contractual relationship are not always anticipated or foreseeable by either party but an experienced contract attorney can help clients identify red flags or potentially fatal flaws when negotiating the terms of any agreement. Whether a contract is void or voidable does not just affect the consequences of a breach but instead cuts to the heart of the original bargain itself.
