Analysis of voidable agreements

THIS ARTICLE WAS WRITTEN BY SHUBHANGI AGRAWAL, A STUDENT OF HIDAYATULLAH NATIONAL LAW UNIVERSITY, RAIPUR

Section 2(i) of the Indian contract act 1872 defines voidable agreements

Voidable contracts as defined under Indian Contract Act, 1872 is “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.”[1]

A voidable contract is a contract which was initially a valid contract but later due to some defects it was found to give the non-defaulting party an option to accept or reject the contract.

Voidable contract gives a benefit to the non-defaulting party as the party can choose to accept or reject the contract so that it would not suffer due to the changes in the terms by the defaulting party or due to the hiding of a fact by the defaulting party.

Also the objectivity is seen is whether the non-defaulting party e could have reasonably found about the situation and avoid it if so the voidability might not occur in such situation.

It can happen due to various reasons-

• Some material fact is hidden by one party from the other party.
• The contract has the elements of fraud or misrepresentation.
• Consent gained for the contract by undue influence.
• Due to incompetency of one or both parties.
• Contract has one or more illegal terms.
• Due to non-performance.

There are various types of voidable contract –

• Initially voidable
• Subsequent voidable
• Voidable by law

Initially voidable contract are those types of contracts which are voidable from the very beginning. Talking about initially voidable contracts section 19 and section 19 A can be referred.

Section 19 states Voidability of agreements without free consent –

When consent to an agreement is caused by coercion, 4A [***] fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused.

A party to a contract, whose consent was caused by fraud or misrepresentation, may, if he thinks fit, insist that the contract shall be performed, and that he shall be put on the position in which he would have been if the representations made had been true.

Exception: If such consent was caused by misrepresentation or by silence, fraudulent within the meaning of section 17, the contract, nevertheless, is not voidable, if the party whose consent was so caused had the means of discovering the truth with ordinary diligence.

Explanation: A fraud or misrepresentation which did not cause the consent to a contract of the party on whom such fraud was practiced, or to whom such misrepresentation was made, does not render a contract voidable.[2]

Two consider various scenarios having the application for this section we can see below mentioned illustrations:

In first case A the owner of a factory Misrepresents the fact to B that 500 kgs of wheat is produced in the factory. B believes a and advise the factory this is a voidable contract at the option of B.

In another case when a misrepresents be cross examine the fact and finds that 500 kg of wheat is not produced in the factory instead only 400 kg are produced. Even after knowing this B buys the factory in this case the contract will not be voidable on the basis of A’s misrepresentation.

As the section above talks about two options to make a contract valid or to make a contract voidable. If a contract is made voidable and it is rescinded by the other party then the contract becomes void. The contract terms are ratified by the party to who had the option of accepting the contract, contract will be valid.

Talking about subsequent voidable contract section 39 is to be referred

Section 39 Effect of refusal of party to perform promise wholly

When a party to a contract has refused to perform, or disabled himself from performing, his promise in its entirety, the promisee may put an end to the contract, unless he has signified, by words or conduct, his acquiescence in its continuance.[3]

The section says in a contract subsequent voidability can arise due to not performance of an act in entirety or some condition of the contract is not performed.

Contracts while in executory nature can be declared voidable.

Section 39 can be explained as the contract which was initially a valid contract letter due to the fault of one party who either refused to perform or disabled themselves from performing the contract in entirety.

This will be done by promise so promise have two options

• to put an end to the contract, or
• make give consent and ratify the act for the continuance of the contract.

In the case of Hochster v De La Tour (1853)[4] De La Tour proposed to hire Hochster as their courier traveller in Europe on 1 June 1852. Later before the performance of the contract on May 11 they contacted Hochster has said they no longer need them and told that he is not require to give them services. On 22 May 1852, Hochster filed a suit against the company for the breach of the contract.

Issue was there that

Can a party cancel the contract before its performance and still be not considered as breach?

Can this type of breach provide the damages to the aggrieved party?

It was held that, the main function of the contract is to lock the performance of certain future promise so refusing to perform on the agreed promise makes the party liable for the breach of contract. As when the contract is made it is the implied consent of the parties that they will perform the action of the future for which the contract is made. And once the performance is rejected by one party even before the date of performance the other party can file a suit for damages against the defaulting party without waiting for the commencement of the performance day.

Moving forward to Sec 53 of Indian Contract Act, 1872 it states about the voidable at the end of the promisee.

Liability of party preventing event on which contract is to take effect

When a contract contains reciprocal promises, and one party to the contract prevents the other from performing his promise, the contract becomes voidable at the option of the party so prevented; and he is entitled to compensation from the other party for any loss which he may sustain in consequence of the non-performance of the contract.[5]

In a contract there are reciprocal promises which main promise which form the consideration or part of consideration to each other.

For example: A has to give goods to B and B has to pay.

Here B will only pay when and as A gives the goods to be.

Another, When A and B contract to execute certain work an agrees to work for 1000 rupees. B is ready and willing to execute the work immediately, but A later prevents him from doing the work here the contract is voidable at the option of B and if he wants, he can rescind the contract and is entitled to recover the compensation from A which he has suffered due to the prevention by A.

Sec 55 of Indian Contract Act,1872

Section 55: Effect of failure to perform at fixed time, in contract in which time is essential

When a party to a contract promises to do a certain thing at or before a specified time, or certain things at or before a specified time and fails to do such thing at or before a specified time, and fails to do such thing at or before a specified time, the contract or so much of it as has not been performed, becomes voidable at the option of the promisee, if the intention of the parties was that time should be of essence of the contract.

Effect of such failure when time is not essential: If it was not the intention of the parties that time should be of the essence of the contract, the contract does not become voidable by the failure to do such thing at or before the specified time; but the promisee is entitled to compensation from the promisor for any loss occasioned to him by such failure.

Effect of acceptance of performance at lime other than that agreed upon:

If, in case of a contract voidable on account of the promisor’s failure to perform his promise at the time agreed, the promisee accepts performance of such promise at any time other than that agreed, the promisee cannot claim compensation of any loss occasioned by the non-performance of the promise at the time agreed, unless, at the time of acceptance, he gives notice to the promisor of his intention to do so.[6]

The words “so much of date as has not been performed” mentioned in the section 55 talks about the severability concept.

Severability allows an agreement to remain as it is even one or more than one terms of that agreement are enforceable or illegal. However, some important terms of the agreement that are the foundation for the agreement are not covered in the severability clause.

The severability clause consists of the terms in which the agreement will remain up to date even if some of the terms are deleted or return in them.

It is an important clause in an agreement because if the agreement no longer holds the validity due to the presence of one unacceptable term the severability clause protects the agreements over all foundation and hence the invalid term can be e removed and the other terms of the agreement as a whole will have no effect of it.

Term mentioned in the contract that are “specified time” shows that time is made an essence to the contract.

In the case of Orissa Textile Mills Ltd. v/s Ganesh Das Ramkishun, 1960[7]

In this case it was held that nature of the contract must be collected. If the parties have not expressly or impliedly really made time as an essence of contract or not

Parties have complete right to set time as essence of contract.

It is presumed that in immovable property time is not essence but the presumption can be rebutted in the court it is not mandatory to be followed in every case it can depend upon the agreement formed by the parties

Generally, in a commercial contract construction contract for shipment contracts time is essence as the presumption in which court works but again the presumption is not a straitjacket rule it can be challenged upon the terms of the agreement.

If the time is made essence then the parties that do not perform the contract on time give rise to the voidability of the contract.

The contract is then voidable at the option of the promisee that the person who had to perform only when the other party first performs.

The promisee can either accept the contract or reject the contract.

If the promisee accepts the contract, the notice is to be provided to the other party.

If the party rejects the contract then the contract moves to the stage of breach of contract since the time is made the essence and the party who is unable to perform the task in the given time is refusing or disabling the contract this gives rise to breach of contract

Methods of residing a contract

Section 66 – Mode of communicating or revoking rescission of voidable contract[8]

The rescission of a voidable contract may be communicated or revoked in the same manner, and subject to the same rules, as apply to the communication or revocation of the proposal. But where the other party cannot be contacted a public notice or a authority will do the same

In the case of Car & Universal Finance v Caldwell [1965][9] car was possessed against a negligible and valuable cheque and the owner later informed the police about it and the company that was held to be sufficient recession and a subsequent sale was not binding upon the owner.

Recission is based on the party that re science and must be taken into benefit while deciding the Restoration of position of the parties to the contract.

Sec 64. Consequence of rescission of a voidable contract

When a person at whose option a contract is voidable rescinds it, the other party thereto need to perform any promise therein contained in which he is the promisor. The party rescinding a voidable contract shall, if he has received any benefit thereunder from another party to such contract restore such benefit, so far as may be, to the person from whom it was received.

so person avoiding loan giving the ground of due influence to give it back the court only reduces the rate of interest which may seem reasonable depending upon the in toxification of the person.

In the case of Bawlf Grain Co. v. Ross[10]

Man, who was in the state of intoxication entered into a contract. The state of Drunkenness do not make the contract as void but only makes the contract voidable

As the man is capable of ratifying his act later when he becomes sober, in such a contract it is considered valid if it is ratified within a reasonable time and the situations which the contract forms are the just and right circumstances in the side of the parties. Party ratifying the act must ratify the act as right it and take the exercise very promptly and express their ratification.

For understanding the concept of voidability we can also take the famous case of Dhurmo Dass Ghose vs Brahmo Dutt[11]

The plaintiff executed in favour of the defendant a mortgage over a premise in Calcutta to secure rupees 20000 and the present suit was bought on behalf of cancelled. on the ground that the time of its execution the plaintive was minor.

This provided a voidable contract from the side of the party being the minor.

[1] Indian Contract Act, 1872, Act No. 9 of 1872 (India)

[2] Indian Contract Act, 1872, Act No. 9 of 1872 (India)

[3] Indian Contract Act, 1872, Act No. 9 of 1872 (India)

[4] Hochster v De La Tour (1853) 2 E&B 678

[5] Indian Contract Act, 1872, Act No. 9 of 1872 (India)

[6] Indian Contract Act, 1872, Act No. 9 of 1872 (India)

[7] Orissa Textile Mills Ltd. v/s Ganesh Das Ramkishun, 1960, AIR 1961 Pat 107(India)

[8] Indian Contract Act, 1872, Act No. 9 of 1872 (India)

[9] Car and Universal Finance Co Ltd v Caldwell [1965] 1 QB 525

[10] Bawlf Grain Co. v. Ross, (1917) 55 S.C.R. 232

[11] Dhurmo Dass Ghose vs Brahmo Dutt (1898) ILR 25 Cal 616 (India)