Voidable Contracts and Void Agreements
Section 10: What Agreements are Contracts?
Not every agreement is a contract.
An agreement becomes a contract only when certain conditions are met.
The agreement must be made with the free consent of the parties.
There should be no force, no pressure, no fraud, no mistake, and no misrepresentation toward either of the parties.
The people entering the agreement must also be competent to contract.
The parties to the contract must be legally capable and they should be of sound mind and not disqualified by any law.
The agreement must have lawful consideration and a lawful object.
The benefits exchanged by the parties, as well as the purpose of the agreement, must be lawful.
If the consideration or the object is illegal, immoral, or against public policy, the agreement cannot become a contract.
The agreement also should not be one of the types that the law says are void.
If the law clearly declares a particular kind of agreement as void, then even if all other conditions are met, it cannot be a contract.
Rule:
If any other laws in India that require certain contracts to be in writing, signed, witnessed, or registered then those contracts must be written, registered and witnessed.
Section 11: Who are competent to Contract?
A person is legally capable of entering into a contract if:
They have attained the age of majority under the law applicable to them.
They are of sound mind at the time of contracting.
They are not barred from entering into contracts by any law that applies to them.
Section 12: What is a sound mind for the purposes of contracting?
A person is considered to have a sound mind for making a contract if:
At the moment of entering into the agreement, they can understand what the contract means.
They can make a rational decision about how it will affect their interests.
Someone who is generally of unsound mind but has intervals of clarity can enter into a contract during those periods when their mind is sound.
Conversely, a person who is usually of sound mind cannot enter into a contract during the times when they experience unsoundness of mind.
Illustration:
(a) A patient in a lunatic asylum, who is at intervals of sound mind, may contract during those intervals.
(b) A sane man, who is delirious from fever or who is so drunk that he cannot understand the terms of a contract, or form a rational judgment cannot contract whilst such delirium or drunkenness lasts.
Section 13: Consent
Two or more persons are said to consent when they agree upon the same thing in the same sense.
Section 14: Free Consent
Consent is considered free when it is not affected by any of the following:
(a) Coercion (Section 15).
(b) Undue influence (Section 16).
(c) Fraud (Section 17).
(d) Misrepresentation (Section 18).
(e) Mistake (As covered in Sections 20, 21, and 22).
If a person agrees only because one of these factors were present and they would not have consented without it then:
Their consent is considered to have been caused by that coercion, undue influence, fraud, misrepresentation, or mistake.
Section 15: Coercion
Coercion means forcing someone to enter into an agreement by:
Doing or threatening to do something that is forbidden under the Indian Penal Code (IPC). (Threatening violence or committing a criminal act)
Unlawfully detaining or threatening to detain someone’s property. (Refusing to return someone’s goods until they agree.)
It does not matter whether the IPC is actually in force in the place where the coercion happens.
If the act would be a crime under the IPC, it counts as coercion.
Illustration:
(a).
A and B are on an English ship in the middle of the sea.
A forces B to make an agreement by doing something that amounts to criminal intimidation under the IPC.
Later, A sues B in Calcutta for breaking the contract.
Even though the IPC was not in force on the ship or at that time, A’s act is still considered coercion, because the act would be an IPC offence (criminal intimidation) if the IPC applied.
Section 16: Undue Influence
16(1).
A contract is said to be caused by undue influence when the relationship between the parties is such that one person is able to dominate the will of the other, and uses that position to gain an unfair advantage.
Essentially means , When one party is in a stronger position and misuses that power to get the weaker party to agree, it becomes undue influence.
16(2).
A person is considered to be in a position to dominate another’s will in the following situations:
(a).
When he has real or apparent authority over the other person (e.g., a parent, employer, teacher),
When he is in a fiduciary relationship (e.g., doctor–patient, lawyer–client).
These relationships naturally give one party influence over the other.
(b).
When the other party’s mental capacity is affected, either temporarily or permanently, due to age, illness, or mental or bodily distress.
If someone is mentally weak or distressed, they can be easily influenced.
16(3).
When a person who has the ability to dominate the will of another enters into a contract with that person, and the contract appears unfair or one-sided (unconscionable), then the burden of proof shifts.
So the dominant person must prove that the agreement was not made by undue influence.
This rule does not affect Section 111 of the Indian Evidence Act, which deals with fiduciary relationships.
Illustrations:
(a).
A lent money to his minor son B.
After B becomes an adult, A uses parental pressure to make B sign a bond for more money than he actually owes.
This is undue influence.
(b).
A is old or sick.
B is A’s doctor.
B uses his position as a medical attendant to make A agree to pay an unreasonably high fee.
This is undue influence.
(c).
A owes money to B, a moneylender.
A takes a new loan on extremely unfair terms.
Since the terms look unconscionable, B must prove that there was no undue influence.
(d).
A needs a loan during a financial crunch.
A banker agrees but only at a very high rate of interest.
This is still ordinary business practice, not undue influence.
Section 17: Fraud
Fraud refers to certain acts done with the intention to deceive someone or to make them enter into a contract.
These acts may be done by a party, or done with their help, or done by their agent.
Fraud includes the following:
Saying something as a fact which is false, knowing that it is false and not believing it to be true.
Actively hiding a fact: When the person knows the fact and deliberately conceals it.
Making a promise without any intention of actually performing it.
Doing any other act that is designed to trick or deceive someone.
Doing any act or omitting to do something which the law specifically says is fraudulent.
Explanation
Simply staying silent about something that may affect the other person’s decision is not fraud.
However, silence becomes fraud in two situations:
When the person has a duty to speak because of the circumstances (e.g., a relationship of trust), or
When their silence is effectively the same as making a statement (for example, silence used to mislead).
Illustrations
(a).
A sells a horse to B at an auction.
A knows the horse is unsound but says nothing.
This is not fraud because A had no duty to tell B.
(b). In the same scenario:
B is A’s daughter who has just become an adult.
Because of their special relationship, A has a duty to inform her if the horse is unsound.
Not telling her would be fraud.
(c) In the same scenario:
B tells A: “If you do not deny it, I will assume the horse is sound.”
A stays silent.
Here, A’s silence is treated as a statement, so it becomes fraud.
(d).
A and B are traders.
A has private information about a price change that may affect the contract.
A does not have to disclose this information.
This is not fraud and it is ordinary business practice.
Section 18: Misrepresentation
Misrepresentation refers to situations where a person makes a false statement or causes a misunderstanding, but without the intention to deceive.
It includes the following:
1.
When a person states something as a fact, believing it to be true, but the statement is actually not true, and the person had no reasonable basis for making such an assertion.
While they genuinely believed it, they should not have been so sure, because their information did not support the claim.
2.
When a person, without intending to deceive, breaches a duty they owe to the other party, and this breach gives them some advantage, while misleading the other party and causing loss or harm to them.
The key element is that the person gains something because the other party was misled even though the misleading was not intentional.
3.
When a person, even innocently, causes the other party to make a mistake about something essential to the agreement.
The misunderstanding caused should relate to the substance or nature of the thing being contracted for.
Section 19: Voidability of Agreements without Free Consent
When a person gives consent to an agreement because of coercion, fraud, or misrepresentation, the agreement becomes voidable.
The affected party (the one whose consent was not free) can choose either to continue with the contract or to cancel it.
Right of the aggrieved party (fraud or misrepresentation)
If someone entered the contract because of fraud or misrepresentation, that person may choose to keep the contract alive.
If they do so, they can demand that the contract be carried out in such a way that they are placed in the same position they would have been in if the false statements had actually been true.
Exception:
If consent was caused by misrepresentation, or silence that amounts to fraud then:
The contract is not voidable if the affected person had the means to discover the truth with ordinary diligence.
Therefore, if they could have found out the real facts by reasonable effort, they cannot later cancel the contract.
Explanation:
If the fraud or misrepresentation did not actually influence the person’s decision, then the contract cannot be treated as voidable.
If the wrong statement did not cause you to agree, you cannot cancel the contract because of it.
Illustration:
(a).
A lies to B by saying that A’s factory produces 500 maunds of indigo every year, even though this is false.
B believes this and purchases the factory.
Since B’s consent was obtained by fraud, the contract is voidable at B’s option.
B can choose to either keep the contract or cancel it.
(b).
A makes a false statement (misrepresentation) that the factory produces 500 maunds of indigo yearly.
B checks the factory accounts, which clearly show only 400 maunds are produced.
Even after knowing the truth, B still buys the factory.
Here, B had the means to discover the truth and actually discovered it.
Since he still chose to buy the factory, the contract cannot be avoided on the basis of misrepresentation.
(c).
A tells B that his property is free from any encumbrances (such as mortgages), but this is false.
B buys the property believing it is clear.
Later, B discovers that the property is mortgaged.
Since A committed fraud, B has two choices to either cancel the contract, or keep the contract and demand that A clear the mortgage.
(d).
B discovers valuable ore on A’s land.
Instead of informing A, B hides the information so that A remains unaware.
Because of this concealment, B buys the property at a very low price.
Since B’s fraud affected A’s decision, the contract is voidable at A’s option.
(e).
A is supposed to inherit an estate after B dies. B dies, and C receives this news.
C intentionally prevents the information from reaching A.
Because A does not know he has inherited the estate, C convinces A to sell his interest in the estate at a cheap price.
C used fraudulent concealment to take advantage of A’s ignorance.
So, the sale is voidable at A’s option.
Section 19A: Power to set aside contract induced by undue influence
When a person agrees to a contract because of undue influence, the contract becomes voidable. This means the person whose will was dominated can choose to cancel the contract.
The court has the authority to set such a contract aside in two ways:
Absolutely: The whole contract is cancelled, with no further conditions.
With conditions: If the influenced party has already received some benefit under the contract, the court may require them to return or repay that benefit
on fair terms.
Illustrations:
(a).
A’s son forged B’s signature on a promissory note.
B threatens to prosecute the son unless A signs a bond promising to pay the forged amount.
A signs the bond because of this pressure.
This is undue influence because B is using his position of power over A (a parent trying to protect his child).
If B sues A on the bond, the court can cancel the bond completely.
(b).
A who is a money-lender lends Rs. 100 to B, an agriculturist.
Using undue influence, A forces B to sign a bond for Rs. 200 with extremely high interest (6% per month).
Here, the terms are unfair and oppressive, showing undue influence.
The court can cancel the bond, but since B actually received Rs. 100, the court may order B to repay the Rs. 100 with reasonable interest.
Section 20: Agreement void where both parties are under mistake as to matter of fact
When both parties to an agreement make a mistake about a fact that is essential to the agreement, the agreement becomes void.
The contract would then have no legal effect, because both sides were mistaken about something fundamental.
The mistake must be about an existing fact, and it must be so important that the agreement cannot stand without that fact being true.
Explanation
If the mistake is only about the value of the thing that is not considered a mistake of fact.
A wrong opinion about value does not make the agreement void.
Illustrations:
(a).
A agrees to sell B a specific cargo that both believe is on a ship coming from England.
But actually, the ship had already sunk and the goods were lost before they made the agreement.
Neither A nor B knew this.
So, the subject-matter itself no longer exists, so the agreement is void.
(b).
A agrees to buy a particular horse from B.
Unknown to both of them, the horse had already died before the agreement.
The subject-matter is dead, so the agreement is void.
(c).
A has rights in an estate for as long as B is alive.
A agrees to sell this interest to C.
But B had already died at the time of the agreement, and neither A nor C knew.
Since the interest ended with B’s death, the agreement is void.
Section 21: Effect of mistakes as to law
A contract does not become voidable merely because it was made under a mistake regarding a law that is in force in India.
However, if the mistake relates to a law that is not in force in India, it is treated in the same manner as a mistake of fact.
Illustration:
(a).
A and B enter into a contract believing that a particular tax rule has been repealed, when in fact it is still in force.
Since the mistake relates to the law of the land, the contract is not voidable.
(b).
A and B settle an old loan believing it is time-barred under the Limitation Act.
In reality, the limitation period has not expired.
Since this is a mistake of Indian law, the agreement is not voidable.
Section 22: Contract caused by mistake of one party as to matter of fact.
A contract does not become voidable simply because one party was under a mistake regarding a matter of fact.
Section 23: What considerations and objects are lawful, and what are not.
Consideration or object of an agreement is lawful unless:
It is forbidden by law.
Allowing it would defeat the provisions of any law.
It is fraudulent.
It involves or implies injury to a person or property.
The Court considers it immoral or opposed to public policy.
If any of these apply, the consideration or object becomes unlawful, and the agreement is void.
Illustrations:
(a).
A agrees to sell his house to B for ₹10,000.
Both promises are lawful considerations.
(b).
A promises to pay B ₹1,000 if C (who owes B ₹1,000) does not pay.
B agrees to give C more time. Both considerations are lawful.
(c).
A takes money from B and promises to compensate B if his ship is wrecked.
Both considerations are lawful.
(d).
A agrees to maintain B’s child, and B agrees to pay A ₹1,000 yearly.
Both considerations are lawful.
(e).
A, B, and C agree to divide gains obtained through fraud.
The agreement is void because the object is unlawful.
(f).
A promises to get B a job in public service, and B promises to pay ₹1,000.
The agreement is void because the consideration is unlawful.
(g).
A, an agent, secretly takes money from B to get him a lease from his principal.
The agreement is void because it implies fraud by A.
(h).
A agrees to withdraw a prosecution for robbery if B returns the stolen items.
The agreement is void as its object is unlawful.
(i).
A defaults on revenue payment and is barred from buying his estate.
B buys it on understanding he will transfer it to A.
The agreement is void as it defeats the law.
(j).
A, being B’s mukhtar, promises to influence B in favour of C, and C promises to pay ₹1,000.
The agreement is void because it is immoral.
(k).
A agrees to let her daughter out for concubinage. The agreement is void because it is immoral.
Section 24: Agreements void, if considerations and objects unlawful in part.
If any part of the consideration or object is unlawful, the entire agreement becomes void.
If one consideration supports several objects then whole agreement becomes void.
It also applies when multiple considerations support a single object if any consideration is unlawful, the agreement is void.
Illustration:
A promises to manage two things for B:
1. A legal indigo manufacturing business.
2. An illegal trade in other items.
B agrees to pay A a salary of ₹10,000 per year
Since part of the object (the illegal trade) is unlawful, the whole agreement is void.
Section 25: Agreement without consideration, void, unless it is in writing and registered, or is a promise to compensate for something done or is a promise to pay a debt barred by limitation law
As a general rule, an agreement without consideration is void.
However, three exceptions make an agreement without consideration a valid contract.
Exception 1 - Written, Registered, and Based on Natural Love & Affection
An agreement without consideration is valid if:
It is in writing.
It is registered.
It is made because of natural love and affection.
Between parties who have a close relationship (e.g., family members).
Exception 2 - Promise to Compensate for a Voluntary Act
A promise is valid even without fresh consideration when:
Someone voluntarily did something for the promisor in the Past.
Did something the promisor was legally bound to do, and the promisor later promises to compensate them.
Exception 3 - Promise to Pay a Time-Barred Debt
A promise is valid if:
It is in writing.
It is signed by the debtor (or authorized agent).
It promises to pay a debt that is otherwise barred by limitation (i.e., cannot be legally enforced anymore).
Explanation
A gift actually made is valid, even without consideration.
Explanation
If consideration is very small or inadequate, the agreement is not void for that reason alone.
However, the court may consider this inadequacy to check whether consent was freely given.
Illustration:
(a).
A promises to give B ₹1,000 without any consideration.
Since there is no consideration the agreement is void.
(b).
A promises to give his son B ₹1,000 out of love and affection.
He writes and registers it.
Since the agreement was written and registered and there is a close relationship between the parties there is a valid contract.
(c).
A finds B’s purse and returns it.
B promises to give A ₹50.
Since , it is a promise to compensate for a voluntary act , there exists a valid contract between A and B.
(d).
A supports and maintains B’s infant son.
B promises to reimburse A’s expenses for the child.
Since B was legally bound to maintain his child, the promise is valid consideration and the contract is valid.
(e).
A owes B ₹1,000, but the debt has become time-barred.
A signs a written promise agreeing to pay ₹500.
A written promise to pay a time-barred debt is considered valid consideration, so the contract is valid.
(f).
A sells a horse worth ₹1,000 for ₹10, and A gives free consent.
The consideration is inadequate, but the consent is freely given.
The contract is valid despite the inadequacy of consideration.
(g).
A sells a horse worth ₹1,000 for ₹10 but denies having given free consent.
The consideration is grossly inadequate in comparison to the value of the horse.
The court will examine this inadequacy of consideration to determine whether the consent was truly free.
Section 26: Agreement in restraint of marriage, void
Any agreement that restricts the marriage of a person (who is not a minor) is void.
No one can make a valid contract saying “You must not marry,” or “You can marry only if you do XYZ.”
The law protects the right to freely marry.
Section 27: Agreement in restraint of trade, void.
Any agreement that prevents a person from carrying on a lawful profession, trade, or business is void to that extent.
The law ensures freedom of trade and occupation.
A clause that completely stops someone from doing a business/profession is invalid.
Exception: (Sale of Goodwill)
If a person sells the goodwill of a business (reputation, customer base), he may agree:
Not to run a similar business.
Within certain local limits.
For as long as the buyer or his successors operate that business.
And only if the limits are reasonable.
This is allowed because:
It protects the buyer who pays for goodwill.
The restriction is partial and justified.
Section 28: Agreements in restraint of legal proceedings, void
The law does not allow agreements that take away or restrict a person’s right to go to court for enforcing a contract.
(a). Absolute restriction on enforcing rights
If a contract states that a party cannot approach a court to enforce their rights, that restriction is void.
If the contract reduces the time limit for filing a case to less than what the law provides, that clause is also void.
Such terms cannot take away or limit the legal right to seek remedies through the courts.
(b).
If a contract says someone will lose their rights after a certain time and cannot enforce them, that part is not valid.
If the contract lets a person avoid responsibility after a short time in a way that stops others from claiming their rights, that part is also not valid.
These rules are not allowed because they unfairly stop someone from going to court to protect their rights.
Exception 1: Arbitration for Future Disputes
If two parties agree that any future disputes will be solved through arbitration and only the arbitration award can be enforced, this is legal.
Arbitration does not take away anyone’s legal rights.
It only changes the way disputes are resolved from going to court to arbitration.
Exception 2: Arbitration for Existing Disputes
If a dispute has already arisen, the parties can agree in writing to refer that specific dispute to arbitration.
This agreement is valid under the law.
The law encourages arbitration as an alternative to going to court.
Exception 3: Guarantee Agreements of Banks/Financial Institutions
A bank can put a clause in a guarantee that ends someone’s rights or frees them from responsibility after a set time.
The time must be at least one year from the event.
This is allowed because bank guarantees need to be clear and cannot stay open forever.
Clarification:
A bank guarantee is a promise by a bank to pay a certain amount to a person or company if the party for whom the guarantee is given fails to meet their obligations.
Section 29: Agreements void for uncertainty.
A contract must be clear about what exactly the parties are agreeing to.
If the meaning of an agreement is not certain, or cannot be made certain, then the agreement is void.
If either of the parties can tell what exactly was promised, the agreement cannot be enforced.
Illustrations Explained
(a).
A agrees to sell B “100 tons of oil” without specifying the type, quality, or characteristics.
Because any oil could be meant, the description is too vague.
The agreement is void for uncertainty.
(b).
A agrees to sell B 100 tons of oil of a specified description (e.g., groundnut oil, coconut oil, etc.).
The type of oil is clearly defined, so there is no vagueness.
(c).
A agrees to sell “all the grain in my granary at Ramnagar.”
This refers to a specific and identifiable stock of grain.
The quantity can be determined, so the agreement is certain and valid.
(d).
A agrees to sell B 1000 kgs of rice, with the price to be fixed by C.
Even though the price is not set initially, it can be made certain by C’s decision.
Therefore, the agreement is certain and valid.
(e).
A agrees to sell his horse for “Rs. 500 or Rs. 1,000” with no indication of which price applies.
The price is uncertain and cannot be made certain.
Therefore, the agreement is void for uncertainty.
Section 30: Agreements by way of wager void
A wagering agreement is basically a bet.
An agreement where two parties promise that money or something of value will be paid depending on the outcome of an uncertain event.
(For example, betting on a cricket match, coin toss, game result, etc.).
All wagering agreements are void.
They cannot be enforced in court.
No lawsuit can be filed to recover money won from a wager.
Even if money or valuables were given to someone to “hold” until the bet’s result, they also cannot be recovered through court.
Exception:
If people contribute or subscribe money for a prize of ₹500 or more to be awarded to the winner of a horse race, then:
This is not considered a wager.
Such agreements remain valid.
Because they are treated more like a competitive prize than a bet between two individuals.
Section 294A IPC continues to apply and Section 30 of the Indian Contract Act , 1872 does not override it.
Section 294A prohibits:
Keeping a lottery office.
Conducting, publishing, or promoting specified gambling activities.
Allowing certain horse-race prizes does not make all betting legal.
Anything specifically prohibited under IPC 294A remains illegal.
