Classification of Contracts

Law of Contracts

Introduction

Contracts may be classified in terms of their

(1) validity or enforceability,

(2) mode of formation, or

(3) performance.

1. Classification of Contracts according to validity or enforceability

Contracts may be classified according to their validity as

(i) valid,

(ii) voidable,

(iii) void contracts or agreements,

(iv) illegal, or

(v) unenforceable.

A contract to constitute a valid contract must have all the essential elements discussed earlier. If one or more of these elements is/are missing, the contract is voidable, void, illegal or unenforceable.

As per Section 2 (i) a voidable contract is one which may be repudiated at the will of one of the parties, but until it is so repudiated it remains valid and binding. It is affected by a flaw (e.g., simple misrepresentation, fraud, coercion, undue influence), and the presence of anyone of these defects enables the party aggrieved to take steps to repudiate the contract.

It shows that the consent of the party who has the discretion to repudiate it was not free.

Example

A, a man enfeebled by disease or age, is induced by B’s influence over him as his medical attendant to agree to pay B an unreasonable sum for his professional services. B employs undue influence. A’s consent is not free; he can take steps to set the contract aside.

An agreement which is not enforceable by either of the parties to it is void [Section 2(i)].

Such an agreement is without any legal effect ab initio (from the very beginning). Under the law, an agreement with a minor is void (Section 11).*

A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable [Section 2(i)].

Examples

  • A and B contract to marry each other. Before the lime fixed for the marriage, A goes mad. The contract becomes void.
  • A contracts to take indigo for B to a foreign port. A’s government afterwards declares war against the country in which the port is situated. The contract becomes void when war is declared.

In the above two examples, the contracts were valid at the time of formation. They became void afterwards. In example (1) the contract became void by subsequent impossibility.

In example (2) the contract became void by subsequent illegality.*

It is misnomer to use ‘a void contract’ as originally entered into. In fact, in that case there is no contract at all. It may be called a void agreement. However, a contract originally valid may become void later.

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An illegal agreement is one the consideration or object of which (1) is forbidden by law; or (2) defeats the provisions of any law; or (3) is fraudulent; or (4) involves or implies injury to the person or property of another; or (5) the court regards it as immoral, or opposed to public policy.

Examples

  • A, B and C enter into an agreement for the division among them of gains acquired or to be acquired, by them by fraud. The agreement is illegal.
  • A promises to obtain for B an employment in the public service, and B promises to pay Rs. 1,000 to A. The agreement is illegal.

Every agreement of which the object or consideration is unlawful is not only void as between immediate parties but also taints the collateral transactions with illegality. In Bombay, the wagering agreements have been declared unlawful by statute.

Example

A bets with B in Bombay and loses; makes a request to C for a loan, who pays B in settlement of A’s losses. C cannot recover from A because this is money paid “under” or “in respect of a wagering transaction which is illegal in Bombay.

An unenforceable contract is neither void nor voidable, but it cannot be enforced in the court because it lacks some item of evidence such as writing, registration or stamping. For instance, an agreement which is required to be stamped will be unenforceable if the same is not stamped at all or is under-stamped. In such a case, if the stamp is required merely for revenue purposes, as in the case of a receipt for payment of cash, the required stamp may be affixed on payment of penalty and the defect is then cured and the contract becomes enforceable. If, however, the technical defect cannot be cured the contract remains unenforceable, e.g., in the case of an unstamped bill of exchange or promissory note.

Contracts which must be in writing. The following must be in writing, a requirement laid down by statute in each case:

  • A negotiable instrument, such as a bill of exchange, cheque, promissory note (The Negotiable Instruments Act, 1881).
  • A Memorandum and Articles of Association of a company, an application for shares in a company; an application for transfer of shares in a company (The Companies Act, 1956).
  • A promise to pay a time-barred debt (Section 25 of the Indian Contract Act, 1872).
  • A lease, gift, sale or mortgage of immovable property (The Transfer of Property Act, 1882).
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Some of the contracts and documents evidencing contracts are, in addition to be in writing, required to be registered also. These are:

  1. Documents coming within the purview of Section 17 of the Registration Act, 1908.
    1. Transfer of immovable property under the Transfer of Property Act, 1882.
    1. Contracts without consideration but made on account of natural love and affection between parties standing in a near relation to each other (Section 25, The Indian Contract Act, 1872).
    1. Memorandum of Association, and Articles of Association of a Company, Mortgages and Charges (The Companies Act, 1956).

2. Classification of Contracts according to mode of formation

There are different modes of formation of a contract. The terms of a contract may be stated in words (written or spoken). This is an express contract. Also the terms of a contract may be inferred from the conduct of the parties or from the circumstances of the case. This is an implied contract (Section 9).

Example

If A enters into a bus for going to his destination and takes a seat, the law will imply a contract from the very nature of the circumstances, and the commuter will be obliged to pay for the journey.

We have seen that the essence of a valid contract is that it is based on agreement of the parties. Sometimes, however, obligations are created by law (regardless of agreement) whereby an obligation is imposed on a party and an action is allowed to be brought by another party. These obligations are known as quasi-contracts

Examples

  • A supplies B, a minor, with necessaries suitable to his condition in life. A is entitled to be reimbursed from B’s property.
  • A supplies the wife and children of B, a minor, with necessaries suitable to their condition in life. A is entitled to be reimbursed from B’s property.
  • A, a tradesman, leaves goods at B’s house by mistake. B treats the goods as his own. B is bound to pay A for them.

In all the above cases, the law implies a contract and a person who has got benefit is under an obligation to reimburse the other.

3. Classification of Contracts according to performance

Another method of classifying contracts is in terms of the extent to which they have been performed. Accordingly, contracts are: (1) executed, and (2) executory or (1) unilateral, and (2) bilateral.

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An executed contract is one wholly performed. Nothing remains to be done in terms of the contract.

Example

A contracts to buy a bicycle from B for cash. A pays cash. B delivers the bicycle.

An executory contract is one which is wholly unperformed, or in which there remains something further to be done.

Example

On June 1, A agrees to buy a bicycle from B. The contract is to be performed on June 15.

The executory contract becomes an executed one when completely performed. For instance, in the above example, if both A and B perform their obligations on June 15, the contract becomes executed. However, if in terms of the contract performance of promise by one party is to precede performance by another party then the contract is still executory, though it has been performed by one party.

Example

On June 1, A agrees to buy a bicycle from B. B has to deliver the bicycle on June 15 and A has to pay price on July 1. B delivers the bicycle on June 15. The contract is executory as something remains to be done in terms of the contract.

A Unilateral Contract is one wherein at the time the contract is concluded there is an obligation to perform on the part of one party only.

Example

A makes payment for bus fare for his journey from Bombay to Pune. He has performed his promise. It is now for the transport company to perform the promise.

A Bilateral Contract is one wherein there is an obligation on the part of both to do or

to refrain from doing a particular thing. In this sense, Bilateral contracts are similar to

executory contracts.

An important corollary can be deduced from the distinction between Executed and

Executory Contracts and between Unilateral and Bilateral contracts. It is that a contract is a contract from the time it is made and not from the time its performance is due. The performance of the contract can be made at the time when the contract is made or it can be postponed also. See examples above under Executory Contract.

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