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:
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:
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.
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.
Wagering or gambling agreements.
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.
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.
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
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.
How to Prepare for a Test on Types of Contract in Commerce
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