Q.
Differentiate valid contract, voidable contracts and void contracts. Give your answers according to Contracts Act 1950.
When is a contract become VOID? Give an example.
A.
Similar question was posted in What constitute a voidable contract?
A good revision is What constitute a Valid Contract?
Section 2 - Interpretation of Contracts Act, 1950 provides the definitions.
S.2 (g) An agreement NOT enforceable by law is said to be VOID.
S.2 (h) An agreement ENFORCEABLE by law is a contract. Furthermore,
Section 10 What agreements are contracts
(1) All agreements are contracts if they are made by the free consent of parties COMPETENT TO CONTRACT, for a lawful consideration* and with a lawful object**, and are not hereby expressly declared to be void.
(2) Nothing herein contained shall affect any law by which any contract is required to be made in writing or in the presence of witnesses, or any law relating to the registration of documents.
What it means COMPETENT TO CONTRACT is explained in
Section 11 - Who are competent to contract.
Every person is competent to contract who is of age of majority according to the law to which he is subject, and who is of SOUND MIND, and is not disqualified from contracting by any law to which he is subject.
Another element for a valid contract is 'SOUND MIND'.
Section 12 What is a sound mind for the purposes of contracting.
(1) A person is said to be of sound mind for the purpose of making a contract if, at the time when he makes it, he is capable of understanding it and of forming a rational judgment as to its effect upon his interests.
(2) A person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind.
(3) A person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind.
S.2 (i) An agreement which is enforceable by law at the OPTION of one or more of the parties thereto, BUT NOT at the options of the other or others, is a VOIDABLE contract.
S.2 (j) A contract which ceases to be enforceable by law becomes VOID when it CEASES to be enforceable.
(Capital letters and Bold - emphasis mine)
Example when a contract becomes VOID.
DIBS - Developer Interest Bearing Scheme, is now prohibited in Malaysia (after 2014).
'In the recently announced Budget 2014, it is stated that developers are no longer allowed to roll out property projects with features of DIBS, while financial institutions are also prohibited from providing final funding for projects involved in the scheme. Home buyers are advised to take note of this new stance by the Malaysian government.'
The Basics Of Developer Interest Bearing Scheme (DIBS)
*&**
What are lawful objects and lawful considerations?
Lawful objects means the act or promise to be carried out is of lawful nature, example selling a car, selling a house. Unlawful objects can be selling drug of abuse like cocaine, or prostitution.
Unlawful consideration can be illegal acts like crime or involvement in illegal money laundering.
Example - To sell cocaine for a consideration of killing someone. The object is selling cocaine - an illegal dangerous drug in Malaysia, and the consideration is killing someone - which is murder. Both are illegal.
Example - To sell endangered species of wild life in black market, for a price which is paid in illegal drugs.
Both the above two examples cannot form a valid contract because the objects and considerations are illegal. It is VOID ab initio - void from the beginning.