Types of Contracts
A contract is a legal agreement binding two parties that defines what can and what cannot be done by either party. This agreement is enforceable by law and provides legal protection to both parties in case of a potential business deal. The purpose of a contract is:
Establish the agreement made by the parties
Fix the rights and duties of both entities in accordance with the agreement in the contract
There are many kinds of contracts that are classified on the basis of mode of creation, its enforcement, and the extent of its execution. In this article, we will consider the types of contracts that are based on their enforcement or validity.
Classification of Contracts
Contracts are broadly classified into three different categories, as follows:
Contracts Based on the Validity or Legal Effects – Contracts that are based on legal implications fall in this category of contracts.
Contracts Based on Performance or Execution – The signing parties perform their duties based on the contractual agreement, and contract execution is the process that defines it.
Contracts Based on Formation or Mode of Creation – When a contract is created, various aspects are taken into consideration, like whether it is a written contract or not, etc.
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Contracts Based on Validity
Contracts are divided into five types based on their enforcement/validity:
Valid Contract
Void Contract
Voidable Contract
Illegal Contract
Unenforceable Contract
Valid Contract
The valid contract definition says it is a contract that is enforceable by the law. For a contract to be enforceable, it has to meet the requirements of section 10 of the Indian contracts Act 1872, which are:
A lawful offer and acceptance must exist to form a valid contract. In section 2(a), the definition of an offer is specified. Section 2(b) states that after an offer is accepted, it becomes a promise.
There is a lawful consideration to it, which is defined in section 2(d). Consideration is something to be given in return to the promisor and is the foundation of every contract. Without consideration, the contract does not exist. The consideration should not be immoral, unlawful, or against public policy.
The Signing Parties Must be Competent, which is Defined as:
They must be a major, i.e. 18 years or above.
They must possess a sound mind.
They are not disqualified by the law.
Parties have free consent, as defined in section 14 of the act.
Let Us Clarify this With a Valid Contract Example Given Below:
X says to Y that he will sell his car to him for Rs.1,00,000. This is a valid contract if:
X wants to sell it, not under any influence.
Consideration of X to sell the car is free.
If Y accepts the offer, then there is acceptance.
Void Contract
The void contract has been defined under section 2(j) of the Indian contracts act, 1872. A void contract was once a valid contract, but it has become void now due to changes in some of the original conditions. There is no obligation or rights concept in a void contract and is not enforceable by either the parties. These contracts are not covered by the law and cannot be made valid even if both parties consent.
Section 24 to 30 Defines the Following Types of Void Contracts:
Any agreement in which one party is restricted to enforce their legal rights is a void contract. These legal rights arise under the contract as per the usual legal proceedings in the ordinary tribunals.
Any agreement where there is a limit on the time of enforcing the contract rights
Agreements that are unlawful in parts
Agreements in Restraint of Marriage– Any agreement (apart from involving a minor), where there is restraint in marriage, is a void agreement.
Agreements in Restraint of Trade– Any agreement which restricts a lawful trade or profession is considered a void contract.
Unmeaning agreements
Wagering or gambling agreements.
Voidable Contract
A voidable contract has all the elements of a valid and enforceable contract but has some flaws that could enable either party to void it. In such a contract, either of the parties has a choice of avoiding their duties. Some of the examples where a void contract becomes voidable are:
Either of the parties is a minor.
There is an injured party involved.
The consent of one party was not free.
One party was suffering from a legal disability.
Any of the parties was a victim of fraud at the time of execution of the contract.
The difference between valid and voidable contracts is that a void contract is not enforceable by law at any cost, but a voidable contract is treated as void only if a party chooses to treat it as voidable by opposing the enforcement of the contract.
Illegal Contract
An agreement may be unlawful or illegal, as outlined in section 23 of the act. A contract that breaks some rule that is criminal or is against public policy is deemed as illegal.
One must distinguish between a void and an illegal contract. An illegal contract is one whose consideration is forbidden by the law, while in the case of a void contract, the law only says that the court will not enforce it in the event it is made. By this definition, all illegal contracts are void, but not all void contracts are illegal.
Unenforceable Contract
These contracts are good in substance, but due to some technical flaws, they are not enforceable by the law. The flaws could be:
Absence of writing
No registration
Absence of proper stamp
Time-barred due to the law of limitation
Ambiguous terms of the contract
One of the parties has a voidable contract.
Such contracts cannot be enforced against any of the parties involved. Let us consider an unenforceable contract example to understand it better:
Let us say there is a contract where parties negotiate to sell paper clips for 10 Rs. But due to a printing mistake, the contract says 100 Rs. In this case, the contract would be declared unenforceable and would need to change to conform to the original intent of both parties.
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FAQs on Types of Contracts Based on Validity: Overview
1. What are the different types of contracts classified based on their validity or enforceability?
Based on their legal validity and enforceability under the Indian Contract Act, 1872, contracts are primarily classified into five types:
- Valid Contract: An agreement that is legally enforceable and meets all the essential requirements of a contract.
- Void Contract: A contract that ceases to be enforceable by law. It may have been valid when it was made, but subsequent events made it void.
- Voidable Contract: An agreement which is enforceable at the option of one or more of the parties, but not at the option of the other(s).
- Illegal Contract: An agreement where the consideration or object is forbidden by law, is fraudulent, or is against public policy.
- Unenforceable Contract: A contract that is valid in substance but cannot be enforced in a court of law due to some technical defect, such as the absence of a written document or a time-bar.
2. What are the essential elements that make a contract legally valid according to the Indian Contract Act, 1872?
For a contract to be considered legally valid and enforceable, it must satisfy the conditions laid down in Section 10 of the Indian Contract Act, 1872. The key elements are:
- Lawful Offer and Acceptance: There must be a clear offer from one party and an unqualified acceptance from the other.
- Lawful Consideration: Each party must give or promise to give something of value. The consideration must not be unlawful, immoral, or against public policy.
- Competency of Parties: The parties entering into the contract must be legally competent, meaning they are of the age of majority, of sound mind, and not disqualified by any law.
- Free Consent: The consent of the parties must be genuine and not obtained through coercion, undue influence, fraud, misrepresentation, or mistake.
3. What is the key difference between a void contract and a voidable contract?
The key difference lies in enforceability and the rights of the parties involved. A void contract is one that cannot be enforced by any party from the beginning (void ab initio) or becomes unenforceable due to a subsequent event. It has no legal effect. In contrast, a voidable contract is a valid contract that can be affirmed or rejected at the option of one of the parties. The aggrieved party has the right to choose whether to continue with the contract or to cancel it. Until it is cancelled, it remains a valid and enforceable contract.
4. How does an illegal contract differ from an unenforceable contract? Are all illegal contracts void?
An illegal contract is one whose formation or performance is forbidden by law because its object or consideration is against the law or public policy. For example, a contract to commit a crime. An unenforceable contract is one that is valid in essence but cannot be enforced in court due to a technical defect, like being time-barred or not being in writing as required by law. The core distinction is that an illegal contract is substantively flawed, while an unenforceable contract has a procedural or technical flaw. Yes, all illegal contracts are void, but not all void contracts are necessarily illegal (e.g., an agreement with a minor is void but not illegal).
5. What happens if a contract that was initially valid becomes impossible to perform later? What type of contract does it become?
If a contract was valid at the time of its formation but subsequently becomes impossible to perform due to unforeseen events beyond the control of the parties (like a change in law or destruction of the subject matter), it becomes a void contract. This is based on the principle of 'supervening impossibility'. The contract was enforceable when made, but it ceases to be enforceable by law, thus rendering it void. Neither party can sue the other for non-performance after it has become void.
6. What makes a contract 'voidable'? Provide an example of a situation leading to a voidable contract.
A contract becomes 'voidable' when the consent of one of the parties is not free. According to Section 14 of the Indian Contract Act, consent is not free if it is caused by coercion, undue influence, fraud, or misrepresentation. The aggrieved party whose consent was not free has the option to either rescind (cancel) the contract or uphold it.
For example, if A threatens to harm B's family unless B agrees to sell his house to A for a very low price, the contract is voidable at the option of B. B can go to court and have the contract set aside because his consent was obtained through coercion.
7. Can a simple mistake in a contract make it invalid? Explain with the impact of unilateral and mutual mistakes.
Yes, a mistake can make a contract invalid, but it depends on the nature of the mistake. The impact differs based on whether the mistake is unilateral or mutual:
- A unilateral mistake, where only one party is mistaken about a fact, generally does not make the contract voidable. The contract remains valid unless the other party was aware of the mistake and took unfair advantage of it.
- A mutual mistake, where both parties are mistaken about a fundamental matter of fact essential to the agreement (like the existence or identity of the subject matter), makes the agreement void. In this case, there is no real consent, as the parties did not agree on the same thing in the same sense.
