What is Voidable contract, Kinds and its Consequences?

Scope of Study

1. What is voidable contract?
2. Kinds of Voidable contract
3. Consequences of Voidable contract

What,

Contract that can be affirmed or rejected at the option of aggrieved party can be said as voidable contract.

Here in a contract aggrieved/innocent  party doesn’t have given the free consent. Aggrieved party is induce to give the consent to the contract, against his/her will, that results, the absence of free consent in contract and became voidable.

Example,

Mr. Ram gives threat to shoot Shyam if he does not let his house to Ram on hire. Shyam agrees to give his house to Shyam on hire.

Kinds of voidable contract

Since absence of free consent in a contract makes it voidable, we can say the situation where there is absence of free consent is the kind of voidable contract.

Thus voidable contract are,

1. Contract by coercion
2. Contract by Undue influence
3. Contract by Fraud
4. Contract by Misrepresentation

Consequences of voidable contract

1. Innocent party may appeal to void the contract.
2. Innocent party can affirmed or continue the contract, if the contract is in the favor him/her.
3. He/she can claim compensation
4. He/she may ask to brought them in pre contract stage.
5. Limitation
6. Innocent party has to go the court, within 1 year to declare the voidable contract void
7. If not then contract will become valid Ipso Facto.      

Free Consent

Free Consent

 Consent

It is an act of assenting to the offer.

Section 2(c) of NCA-2056 ‘Consent’ means the consent given by the person to whom a proposal has been presented in the same meaning of that offer.

Thus to be a valid consent there should be two elements

v  Consensus ad idem – consent on same thing

v  Meeting of mind – meeting of same mind

Free Consent

Consent is said to be free where there is absence of

1. Coercion
2. Undue influence
3. Fraud
4. Misrepresentation
5. Mistake

“It is an essential element to form a valid contract”

Consequences

What happens if there is no consent itself in the contract?

Ans. Contract is void

What happens if there is consent in contract but that is not free or there is no free consent in contract?

Ans. Contract became voidable.

Importance of free consent

1.      To respect the contractual independency of the parties to the contract.

2.      To promote the reasonable transaction

3.      To respect the intent of the parties.

Consideration

The basic idea of consideration inside contract is that before one party can acquire something, he must actually give something to the other party.

It is also one of the means by which the law courts decide if a particular contract is enforceable, or should be enforced.]

It is related with the Latin term quid pro quo that means “something for something”. Contract is valid only if there is a exchange of something between the parties to the contract. It assumes that one will obey the term of the contract if there is something benefit to him/her.

It adheres to the common sense idea of bargaining where one person trades something for another.

 Justice Patterson

“Consideration means something which is of some value in the eye of law; it may be some benefit to the plaintiff or some detriment to the defendant.”

Section 2(d) of NCA-2056 says 'Consideration' means the promise made to do or not to do any work in return of doing or not doing of any work mentioned in the proposal.

This section doesn’t give clear meaning about the consideration as it only focus on work, but in reality it could be object or any thing else that has value in the eye of law.

Types of Consideration

1. Past consideration
2. Present consideration
3. Future consideration
4. Positive consideration
5. Negative consideration
6. Direct consideration

Indirect consideration

Rules Regarding Consideration and Exception to the general rule

Rules Regarding Consideration

1. Consideration must move at the desire of promisor
2. It must be real
3. It must be Lawful
4. Consideration must move from promisee (i.e. parties to the contract)
5. Performance of existing obligation is not consideration
6. Consideration needn’t adequate.

Exception to the general rule “No consideration No contract”

1. Contract in natural love and affection
1. Written
2. Register
3. Must based on natural love and affection
4. They must be relative
2. Contract to pay time barred debt
3. Contract relating to gift
4. Contract to pay for voluntary service
5. Contract to pay for gratuitous bailment
6. Contract of voluntary agency

Other Disqualified person to make a contract

Those who can’t understand the content of the contract and can’t make the rational judgment for their interest.

Since contract is private law made by the parties to the contract by them for themselves, the clear understanding and rational judgment should be there.

Thus law of contract treat person of unsound mind as a disqualified person to make a contract or in other word they don’t have contractual capacity.

Rules regarding person of unsound mind’s agreement

1. Generally Contract with person of unsound mind is void ab initio in Nepal. But in UK it is voidable contract. The person of unsound mind may accept the contract or declare void by the court of law.
2. A person who is usually of sound mind but occasaionally of unsound mind may make a contract when he is of sound mind.
3. A person who is of usually of unsound mind but occasionally of sound mind may make a contract when he is of sound mind
4. The contract did for the benefit of person of unsound mind by the parent or guardian it s valid.
5. Necessaries supplied to the person of unsound mind create the implied contract and it is also a valid contract.

Other Disqualified person to make a contract

1. Foreign Diplomats
2. Alien enemy
3. Corporation
4. Married Women
5. Insolvent
6. Professional person

Rules Regarding Minors agreement

1. An agreement with or by minor is void ab initio

Test case: Mohari Biwi V. Dharam Das Ghose, AIR (1903), 30 Calcutta, 539

In this case, a minor mortgaged house in favor of a mortgagee to secure a loan of Rs 2000 out of which a mortgagee paid the minor sum 8000.

Subsequently, the minor sued for setting aside the mortgage, stating that he has underage when he executed the mortgage.

The court held that “the mortgage was void and, therefore, it was cancelled.

2. The ratification after attaining the age of majority is not valid.

Ratification means the subsequent adoption and acceptance of an act or agreement. A minor agreement being a nullity and void ab initio has no existence in the eye of law. So far as Nepalese law is concern it is not clear but references can be drawn that contract done in situation when he is not able to know the benefit and loss and result of act is void itself and can’t be ratified by the person.

3. Principle of estoppels doesn’t apply to the minor

Estoppels means when you put forward any fact you are prevented to deny that fact or precluded to put different fact on same matter.

A minor is not estopped from pleading his minority in order to avoid the contract, even if he has entered into an agreement by falsely representing that he was full of age.

4. Minor can be beneficiary or promisee

Unlike Minor’s agreement that gives obligation to the minor, contract made for the benefit of minor is valid one and there is nothing, which debars him from becoming beneficiary. The nature of law that is law always protects weaker section also signifies here.

Test Case: The General American Insurance Co. Ltd v. Madan Lal Sonu Lal AIR (1935) 59 BOM 656

Contract made by minor where minor is beneficiary is valid and Minor can get the compensation for the loss of his property through insurance contract.

5.                 5. A minor cannot be a partner but can admitted to the benefits of partnerships

Partnership is a mutual agency and continuous relationship between the partners. Generally minor cannot be a partner because it has a chance of loss and benefits equally. But minor can admitted to the benefits of partnership. i.e he can be benefited out of partnership

6. A minor can be a agent

Since the agent work on behalf of the principle and agent is only bridge and doesn’t have any obligation rather work a minor can be an agent.

7. Minor can be liable for necessaries

The word necessaries are a vague one. It may include from basics things to suitable for his life. If any person provide necessaries for the minor then minor is liable for that. There is an implied contract between supplier and minor. But necessaries provided should be economical to the status of minor and socially acceptable.

8. A lawful guardian may make a contract for the benefit of minor

Minor Through his/her guardian can become the shareholder of the company

Competent Parties for Valid Contract

To be valid contract, the parties to the contract should have contractual capacity according to law. Here the term contractual capacity denote the “capacity recognize by the law to do the contract.”

Every person is presumed to be competent to enter into the contract, and if any one claims exemptions from liability on the ground of incapacity to contract he must strictly prove such capacity.

 

In context of Nepal

The Nepalese Contract Act 2056 Section 3 mention “Any person other than those mentioned below may conclude contract.

1. One who has not attained 16 years of age
2. One who is of unsound mind

“But the guardian of minors and insane may, in their interest, conclude contracts on behalf of minor and insane”

3. One who is disqualified by law – Like Foreign Enemy, Married Women, and criminal who is taking punishment, insolvent.

Minor

Generally, in Nepal person who less than 16 years is treated as the minor and According to NCA 2056 Section 3 they are not competent to enter into the contract.

But if we look into the provision of India and UK person under 18 years of old is minor. Here the nature of law i.e. law varies place to place plays a role.

Generally minor could not enter into a valid contract and contract with minor is void ab initio as per section 13 of NCA 2056. The principle behind this is

1. They don’t know the result of their act
2. They can’t analyze the benefit and loss.

But there are certain circumstance where contract with and by minor is valid. Those are governing by the rules regarding minor agreement/contract. The rules governing minor agreement/contract are based on two fundamental principles i.e.

1. The law must protect the minor against his inexperience

2. The law should not cause unnecessary hardship to an adult who deals fairly with minors.