Void and Voidable Contracts in Nepal
A void contract is an agreement which is not recognized by the law - Void and Voidable Contracts in Nepal introduction. Contract will be deemed void on the following circumstances as per the Contract Act, 2056 (2000), Clause No. 13: 1. A contract that restricts anyone from engaging in any occupation, trade, public facilities etc that is not prohibited by the law. However, contract shall not be considered void under certain exceptions. When a contract is among partners in a partnership firm then it may contain certain restriction in activities which may prevent any of the partners involved in the firm from engaging in any trade or business which is similar to the partnership firm. A contract can also prevent the seller from getting into a profession or trade of buying and/or selling of goodwill of any trade. If a concluded contract among the partners prevent engaging in trade or business under the partnership firm for certain specific time and place after separation from partnership then it is still a valid contract. 2. When a contract restricts a marriage, other than that prohibited by the established law.
3. A contract that prevents anyone from enjoying the facilities already being enjoyed by the general public.
4. A contract seeking to prevent a legal right of any person from being enforced by any government office or court.
5. A contract that has been concluded which is contrary to and/or restricted by existing law. 6. A contract that is concluded against public morality or
public interest serving immoral purpose.
7. A contract which cannot be performed as the contracting parties are not fully aware regarding the matters concluded in the contract.
8. A contract which is considered impossible to comply with at the allocated time. 9. Vague contracts providing no reasonable meaning.
10. A contract concluded by an incompetent, minor person.
11. A contract concluded with an unlawful consideration and/or objective. Voidable Contract
A voidable contract remains valid until and unless the court decides its invalidity. One of the contracting parties must request the court to invalidate the contract and must present the necessary proof to invalidate it. Contract will called voidable contract and may be void on the following circumstances as per the Contract Act, 2056 (2000), Clause No. 14: 1. Coercion: A contract is concluded through coercion when one party compels the other to accept the contract.
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2. Undue Influence: A contract is concluded under undue influence when one party accepts the contract after the other party exercises influence for personal benefit. A person will be deemed submissive to his/her personal interest if a person lives under his/her guardianship, protection and custody and also if that person cannot take care of himself/herself due to old age, sickness, or physical and/or mental weakness.
3. Fraud: A contract is concluded through fraud when one party concludes the contract after being intentionally lead on by the other party with false information. 4. Misrepresentation: If a contract is concluded by misrepresenting the information with misleads any parties to injustice then it is known as voidable contract. In other words, it is a
contract concluded through deceit.
LEGAL EFFECTS OF VOID AND VOIDABLE CONTRACT
A void contract is of no legal effect because it is not recognized by law and a void contract is not known as ‘contract’ legally. A void contract is treated as “void ab initio” by law meaning to be treated as invalid from the offset and it is merely only a promise/agreement producing without any legal bindings. Thus, neither party can sue each other on the basis of contract. A voidable contract is legally binding until it is invalidated by the court in the interest of one of the contracting parties. As a voidable contract means the contract has not been concluded under free consent, the burden of proof of innocence shall rest in the party who claims that such contract is not concluded under an undue influence. In Nepal, such voidable contract may not be avoidable if the right to avoid such a contract is not exercised within 35 days.
LEGAL REMEDIES TO VOID AND VOIDABLE CONTRACTS
Following are the legal remedies to void and voidable contract: 1. Arbitration: It is a formal private and binding process where disputes are resend by a final award made by one or more independent arbitrators. The process of arbitration is faster, simpler & less expensive alternative to litigation. The parties involved in a dispute must consent to arbitration and the arbitrators to be used must be agreed by the parties.
2. Restitution: The basic purpose of restitution is to achieve fairness and prevent the unjust enrichment of a party. Restitution is used in contractual situations where one party has conferred a benefit on another party but cannot collect payment because the contract is defective or no contract exists.
3. Rescission for judicial proceedings: Rescission is equitable remedy and is discretionary which can be termed as invalidating a contract between parties and is imposed mutually upon both sides to a contract. In Nepal, such voidable contract may not be avoidable if the right to avoid such a contract is not exercised within 35 days. 4. Damage recovery/ compensation: Damage recovery/compensation is process of recovery of loss. Here actual damage (such damages which can be measured in terms of financial unit according to market value) is considered. The damages cane be actual damage; prescribed damage; and anticipated damage and it should be measurable.
5. Injunction: A court order by which an individual is required to perform, or is restrained from performing, a particular act. A legal document framed according to the circumstances of the individual case. It is an order for negative stipulation to relieve the aggrieved party from further damage.
6. Specific Performance: Here, the compensation is not possible in the monetary unit. It is applicable only in the personal nature of the contract.
7. Quantum Meruits: This measure is used only in case of implied contract. This implies paying for reasonable value of services for settlement of disputes of contract.
Contract Act 2056 (2000). (2000, June 17).
Mann, R. A., & Roberts, B. S. (2012). Smith and Roberson’s Business Law (15th Edition).
South Western Cengage Learning.