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Mercantile Laws-I

Notes 4. Effect on collateral transaction. A voidable contract does not affect collateral transaction.
But if the agreement is void on account of the object or consideration being illegal or
unlawful, the collateral agreement will also become void.
Obligation of the parties under a void contract and a voidable contract. In the case of a void
contract, since the transaction is either unenforceable from the beginning or so becomes on the
transaction becoming impossible or illegal of execution, the parties thereto are exonerated of
their obligations. Thus, none of the parties can seek performance from the other. In the case of
a voidable contract, the party aggrieved may or may not opt to repudiate the transaction. Thus,
where it prefers, in spite of his consent being not free, to abide by the transaction the other party
shall also be subject to the obligations contemplated under the contract. The position shall be as
if the contract was a valid contract. But where it chooses to opt out of the transaction, then all the
parties shall be excused from the obligations under the contract.
Are all unenforceable contracts void? Section 2(j) does not declare every unenforceable contract
void. A contract may be unenforceable either by substantive law or by procedural law or
regulation. It is only that contract which in unenforceable by substantive law which becomes
void. In other words, ‘unenforceable by law’ means unenforceable by substantive law.

Examples:
(i) There is a contract with an alien enemy. It is illegal from its inception and therefore would
be void under s.2(g).
(ii) There is a contract with an alien friend but later on he becomes an alien enemy. Such a
contract would be void under s.2(j).
A contract may be unenforceable but not be void. Thus, a mere failure to sue within the time
specified by the Limitation Act or an inability to sue by reason of the provisions of one of the

orders under the Civil Procedure Code would not make the contract void.
Distinction between void agreement and void contract. A void agreement is unenforceable from
the very beginning; whereas a void contract is valid at the time of its formation but becomes void
later on.

Classification of contracts according to performance. Still another method of classifying contracts
is in terms of the extent to which they have been performed. Accordingly, contracts may be: (i)
Executed and executory, or (ii) Unilateral and bilateral. An executed contract is one which has
been wholly performed. Nothing remains to be done in terms of the contract.

Example: A buys a bicycle from a dealer. A pays cash. The dealer delivers the bicycle.
An executory contract is one which remains wholly unperformed, or in which there remains
something further to be done.

Example: On June 1, A enters into a contract with a dealer to buy a bicycle. The contract is
to be performed on June 15.
The executory contract becomes an executed one when it is completely performed. For instance,
in the above example, if both – A and the dealer 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 a dealer. The dealer has to deliver the
bicycle on June 15 and A has to pay price on July 1. The dealer delivers the bicycle on June 15. The
contract is executory as something remains to be done in terms of the contract.

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