Voidable Agreements | Explained

Voidable Agreements are the midway between valid and void. The bridge between total legality and total nullity is voidability. The law prescribes certain situations and conditions where an agreement becomes voidable. The very word itself suggests the meaning: Something which is able of being void.

Voidable Agreements

Generally, to define the word agreement, accord and satisfaction have been used. The parties accept something in the expectation of a right to the action.[1] The Indian Contract Act has defined agreement as-

2(e)– Every promise and every set of promises, forming the consideration for each other, is an agreement[2]

But the application of the force of law changes with the kind of agreement that has been entered into. One such agreement that would be dealt with in the article is the Voidable agreement.

Meaning

The Indian Contract Act defines “Voidable contract” as-

2(i)- 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.

The voidable act is one which is a good act unless avoided[3]. Hon’ble Supreme Court[4] gives the example of an allegation of fabrication of document. The voidable state of affairs, in such a situation, would be the real state of affairs. A party who alleges otherwise is obliged to prove it.

The oft-quoted passage of Salmond on Jurisprudence is pertinent to understand the concept-

“A valid agreement is one which is fully operative in accordance with the intent of the parties. A void agreement is one which entirely fails to receive legal recognition or sanction, the declared will of the parties being wholly destitute of legal efficacy. A voidable agreement stands midway between these two cases…

…It is not a nullity, but its operation is conditional and not absolute. By reason of some defects in its origin, it is liable to be destroyed or cancelled at the option of one of the parties to it. On the exercise of this power the agreement not only ceases to have any efficacy but is seemed to have been void ab initio. The avoidance of it relates back to the making of it”.[5]

Salmond has used the words “hypothetical or conditional efficacy” for attributing the validity to such agreements. At the election of one of the parties, the contract can become VOID or VALID.

This definition is not only important from an academic point of view. It has found a highlight in the judicial circles through the Privy Council[6] authoritative ruling. In the case of Satgur Prasad v. Harnarain Das, the Court had noted this distinction.

The concept of the election has also been highlighted since the refusal results in an abdication of the legal basis to the contract. Hon’ble High Court had noted in the case of S.N.R. Sundara Rao and Sons v. CIT.[7]

The distinction with void contracts

The relevant part of the interpretation clause of the Indian Contract Act is produced herein below-

2 (g)- An agreement not enforceable by law is said to be void.

This definition is self-contained to explain the distinction that exists between void and voidable agreements. But to elaborate further, some of the judicial rulings can be perused.

In the case of the Director of Public Prosecutions v. Head[8], the court explained the fine line of difference. In case of the void, the contract since its inception is considered a nullity. So, all the connected dealings with the associated transactions also lose their meaning.

But, in the case of voidable, the order doesn’t become automatically void. Something would have to be done to avoid it. There would have to be an application to the High Court for certiorari to quash it.[9]

This fine line has been further reiterated and in detail explained by Lord Denning himself. He terms void and voidable as two kinds of invalidity. In the one kind, the invalidity is so grave that the list is a nullity altogether. In the other kind, the list is not made a nullity altogether. It stands, as per Lord Denning, unless and until it is set aside.[10]

For summarization of the concept, De Smith can be turned to. To explain the distinction, De Smith states that, “Behind the simple dichotomy of void and voidable acts (invalid and valid until declared to be invalid) lurk terminological and conceptual problems of excruciating complexity”.

An act ultra vires, outside jurisdiction, is null and void. An intra vires act but lacking in the area of authority is said to be voidable. It is valid till set aside or in the past quashed by a writ of certiorari for error in law on the face of the record.[11]

Undue Influence

The relevant portion of § 16 of the Indian Contract Act where the undue influence as a concept is explained, is reproduced herein below-

16.“Undue influence” defined.—(1) A contract is said to be induced by “undue influence” where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other.

The contracts entered into through undue influence are termed voidable and not void. [12]

A person who claims that a contract is voidable needs to establish that the contract is vitiated by fraud, undue influence, misrepresentation or any other circumstance, which would entitle a party to contract to avoid it. [13] A situation can also arise where the party has acted upon a voidable contract as being a valid one. Once this happens, that party is estopped from denying the validity later.[14]

In the landmark case of Oriental Insurance Co. Ltd. v. Ram Moorjani[15], this question of voidability was under consideration. It was alleged by the defendant that the plaintiff exercised undue influence in obtaining an indemnity bond. But, the plaintiff defended by asserting that it was a practice so followed.

Now, there was no legal or statutory right with the plaintiff to obtain such an indemnity bond. The court also did not accept the argument of practice. It was authoritatively held that such practise needs to have the sanction of law. The practice can also be flowed out of mutual agreement concluded and entered into between the parties. Unless such requirements are not fulfilled, the undue influence remains.

Thus, the contract was found vitiated. The indemnity bond so given under undue influence was found unenforceable.

Other Examples

1. A contract that falls under Section 236 of the Indian Contract Act, is a voidable contract. [16] The section is also about a person falsely contracting as an agent and one not entitled to performance.
2. If a natural guardian transfers the minor’s property in contravention of Section 8(2) and (3) of the Hindu Minority and Guardianship Act, 1956, it becomes a voidable transaction. The transaction can be avoided by the restoration of any benefits received under such transfer.[17]
3. A mortgage can be done by a junior member. In such a case, the transaction is not deemed void. It only becomes voidable.[18]
4. There can be a unilateral postponement of the right to claim the performance of the contract. The motive can be that of taking undue benefit of a favourable market. This makes the contract voidable.[19]

Privity of Contract

A contract is closest to the parties associated with it. The benefits and entitlements cannot be conferred upon someone who is a third party.[20]

Usually, in a contract, a lot of other parties are also indirectly involved. The best example is that of a tender, where multiple contending people are involved. But, avoidance can be practised only by the parties to the contract.

This basic principle was reiterated and expiated by the Hon’ble High Court of Madhya Pradesh. In the case of Bakatawar Singh v. the State of M.P.[21], such a peculiar state arose. The tender was awarded by the State Electricity Board to its sister concern. At the time of the contract, no tenderer raised an objection of the Board having a financial interest in its sister concern.

But the court held that the option of raising an objection is only available to the Board. Hence, the objection raised or not raised by a third party is of no concern.

Rescission

To rescind is to expressly or unequivocally cancel a contract. [22]

As explained in the flowchart being out above, affirmation and rescission are two options available to a party. It has been explained by Bowstead[23] with regards to the agency. He explains that if the agent has made full disclosure of a contract to him, the Principal can do two things. He can either rescind or affirm (and claim the profit if any).

With regards to rescission, it has been opined that the Principal has to take the proceedings within a reasonable time after discovering the truth. Otherwise, he will be taken to have acquiesced. In case of rescission, it will also not matter that the contract has been executed or the property has meanwhile decreased in value. [24]

U/§ 62 of the Indian Contract Act, the party to a contract can easily rescind, after which the party will not have to perform the contract.[25] Now, a voidable contract can also be rescinded.

It is because; voidability of an agreement gives the option of rescission to a party. A transaction in which a party has entered through inducement may be set aside. Inducement can be through duress or undue influence. Thereby, the person induced gets the right to rescind not only against the person exercising compulsion but also against the party having notice of the fact that compulsion or influence was used.[26]

After exercising such an option of rescission, money or property transferred can be recovered. They can be recovered from the person exercising undue influence. But, it can also be recovered from a person though ignorant about undue influence, has furnished no consideration.

The reasoning for the above-mentioned proposition is taken from the settled jurisprudence. It says, “Let the man receiving it be ever so chaste, yet if it comes through a polluted channel, the obligations of restitution will follow it”[27]

In the context of Indian law, § 64 of the Indian Contract Act governs the said position-

Consequences of rescission of voidable contract.—When a person at whose option a contract is voidable rescinds it, the other party thereto need not perform any promise therein contained in which he is 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.

Thus, performance is no more required. But, the right to receive the damages remains intact. There is no objection for such a position with regards to the section appended hereinabove.[28] Thus, the benefits received have to be refunded.

This is also fortified in the case where an agreement to finance the litigation happened. Later, when the other party refused to pay the full amount, the court awarded damage under this section.[29] Hence, the obligation of paying back arises in case an agreement is voidable. Because it is not applicable for the cases where the agreement is void ab initio.[30]

Hence, restoring benefits is a duty cast upon the party rescinding the voidable contract.[31] A party is fully within its power and scope to rescind a contract and put an end to all the ensuing transactions. But, on the same hand, that party is duty-bound under the law to restore to the wrongdoer all the benefits received under the contract.[32]

In the case of personal services, this restoration of benefit can be done through money. The reason would be that in such a case, it would be sufficient.[33] In case of an unauthorised sale, a bona fide purchaser would be entitled to any expenditure incurred by him in the improvement of the permanent value of the property being reimbursed to him.[34]

Conclusion

The voidable agreement is interesting but risky. Since it gives a right to rescind the performance but also imposes a duty to restore the benefit received. The act of the party is very much necessary if a voidable contract has to be nullified. Such an act would amount to impeachment.[35] Only then can the party lay off its duty to perform and can avoid it.

To avoid any such complications, the parties should ensure that the contract is a valid one only under the law.

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[1] Cumber v. Wane, 1 strange 426: 93 ER 613; Foakes v. Beer, (1884) 9 AC 605.

[2] §2 (e), Indian Contract Act, 1872.

[3] Dhurandhar Prasad Singh v. Jai Prakash University; (2001) 6 SCC 534.

[4] Id.

[5] Salmond on Jurisprudence, 12^th edn, p. 341. Relied upon in G. Annamalai Pillai v. District Revenue Officer and Ors., (1993) 2 SCC 402; Murugan and Ors. v. Keshavan Gounder (Dead) through L.R., 2019 SCC Online SC 270.

[6] Satgur Prasad v. Harnarain Das, AIR 1932 PC 89.

[7] S.N.R. Sundara Rao and Sons v. CIT, AIR 1957 Mad 451.

[8] Director of Public Prosecutions v. Head, 1959 AC 83.

[9] Id.

[10] B.R. v. Paddington Valuation Officer, ex parte Peachy Property Corporation Ltd., (1965) 2 All ER 836.

[11] De Smith, Woolf and Jowell, Judicial Review of Administrative Action, 5^th edn. ¶ 5-044.

[12] Bainbregge v. Browne, (1881) 18 Ch.D. 188.

[13] In the matter of Amirthalinga Theva, AIR 1928 Mad 986.

[14] Ramdas Topandas & Son v. Kodanmal Phagunmal, AIR 1933 Sind 207.

[15] Oriental Insurance Co. Ltd. v. Ram Moorjani, 1999 (2) Bom LR 242.

[16] Ramdas Topandas & Son v. Kodanmal Phagunmal, AIR 1933 Sind 207.

[17] Surta Singh v. Pritam Singh, AIR 1983 P&H 114.

[18] Gopala Pillai v. State Bank of Travancore, AIR 1979 Ker 224.

[19] N. Sundareswaran v. Srikrishna Refineries, AIR 1977 Mad 109.

[20] http://lawcommission.justice.gov.uk/docs/lc242_privity_of_contract_for_the_benefit_of_third_parties.pdf.

[21] Bakatawar Singh v. the State of M.P., AIR 1992 MP 318.

[22] P.C. Markanda, Indian Contract Act, 10^th edition, p. 918.

[23] Bowstead on Agency, 14^th edn, p. 134- 135.

[24] Id.

[25] §62, Indian Contract Act, 1872.

[26] Lancashire Loans Ltd. v. Black, (1934) 1 KB 380; Kesarmel v. Valliappa Chettiar (N.K.V.), (1954) 1 W.L.R. 380.

[27] Bridgeman v. Green, (1757) Wilmot 58.

[28] Muralidhar Chatterjee v. International Film Co. Ltd., AIR 1943 PC 34; Mohammed Mumtaz Ali Khan v. Atlaf-ul-Rahman Sheikh, AIR 1922 Oudh 259.

[29] Pasupati Venkatapathiraju Garu v. Vatsavaya Venkata Sudhadrayyamma, AIR 1919 Mad 718.

[30] Ledu v. Hira Lal Bose, AIR 1916 Cal 266.

[31] G.N. Behere v. Nanagram Bhikamchand Rice Mills, AIR 1966 A&N 95 (DB).

[32] Union of India v. Bungo Steel Furniture (P) Ltd., AIR 1963 Cal 70 (DB).

[33] Dwarka Prasad v. Kandhai, AIR 1934 Oudh 170.

[34] Moneklal Manilal Gujar v. Keshav Kisan Bari, AIR 1938 Bom 71.

[35] Chesterfield v. Janssan, 1 White and Tudor’s L.C.; Oakes v. Turquand, L.R., 2 H.L., 375.

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