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contract_laws:part-1:void-agreement

Void Agreements

There are certain agreements which have been expressly declared void under certain provisions of the contract Act or any other law. The following types of agreements have expressly been declared void under various Sections of the Indian Contract Act.

  1. Agreement, the consideration or object of which is partly unlawful 2).
  2. Agreement in restraint of marriage4).
  3. Agreements in restraint of trade 5).
  4. Agreements in restraint of legal proceedings6).
  5. Uncertain agreements7).
  6. Wagering agreement8).
  7. Impossible agreement9).

Agreement, the consideration or object of which is partly unlawful

Section 24 of the Indian contract Act provides that if any part of a single consideration for one or more objects, or any one or any part of any one of several considerations for a single object, is unlawful, the agreement is void. For example, A promises to supervise the business on behalf of B, a licensed manufacturer of some permissible chemicals and some contraband items. B promises to pay A a salary of Rs. 10,000 per month. The agreement is void, the object of A's promise and the consideration for B's promise being in part unlawful. It is well settled that if several distinct promises are made for one and the same lawful consideration, and one or more of them be such as the law will not enforce, that will not of itself prevent the rest from being enforceable. The test is whether a distinct consideration which is wholly lawful can be found for the promise called in question.

In Gopalrao v Kallappa, a license was granted to a person for the sale of opium and ganja with the restriction that he would not partner with anyone in the ganja business without the permission of the collector. He admitted a partner into the whole business by accepting some capital without such permission. The admitted partner filed a suit for dissolution of the firm and refund of his money. But the court held that it is impossible to separate the contract and say how much capital was advanced for the opium and how much for ganja. The whole transaction was held to be void.

Agreement made without consideration

Section 25 declares that an agreement without consideration is void subject to certain exceptions.

Agreement in restraint of marriage

According to Section 26 of the Indian Contract Act, every agreement in restraint of the marriage of any person, other than a minor, is void. The restraint may be general or partial. Thus the party may be restrained from marrying at all, or from marrying for a fixed period, or from marrying a particular person or a class of persons. For example, A promised to marry none else except B, and in default pay her a sum of Rs. 2,000. A married someone else and B sued A for recovery of Rs. 2,000. Held, the agreement was in restraint of marriage and as such void in Lowe v. Peers. A penalty upon remarriage may not be construed as a restraint of marriage. Thus, an agreement between two co-widows that if one of them remarried she should forfeit her right to her share in the deceased husband's property has been upheld in Rao Rani v. Gulab Rani.

Similarly, a provision in Nikah Nama (marriage agreement) by which a Muslim husband authorises his wife to divorce herself from him in the event of his remarrying a second wife is not void. Thus, if the wife divorces herself from the husband on his marrying a second wife, the divorce shall be valid, and she will be entitled to maintenance from him as held in Badu v. Badarannessa.

Agreement in restraint of trade

Freedom of trade and commerce is a fundamental right protected by Article 19(g) of the Constitution of India, Just as the Legislature cannot take away individual freedom of trade, so also the individual cannot barter it away by an agreement. Public policy requires that every man shall be at liberty to work for himself and shall not be at liberty to deprive himself or the state of his labour, skill or talent, by any contract that he enters into. Courts, therefore, do not allow any tendency to impose restrictions upon the liberty of an individual to carry on any business, profession or trade. Thus, all agreements in restraint of trade, whether general or partial, qualified or unqualified, are void.

Case Laws

  • In Patna city, 29 out of 30 manufacturers of combs agreed with R to supply him combs and not to anyone else. Under the agreement R was free to reject the goods if he found there was no market for them. Held, the agreement amounted to restraint of trade arid was thus void in Sheikh Kalu v. Ramasaran Bhugat.
  • A and B carried on business of braziers in a certain locality in Calcutta. A promised to stop business in that locality if B paid him Rs. 900 which he had paid to his workmen as advance. A stopped his business but B did not pay him the promised money. Held, the agreement was void and, therefore, nothing could be recovered on it. (Madhab v. Raj Coomar).

Exceptions

There are two exceptions to this rule- those created by statutes, and those arising from judicial interpretations of Section 27.

Statutory Exceptions

Sale of Goodwill

The seller of goodwill of a business may agree with the buyer thereof not to carry on a similar business within specified local limits. Such a restraint shall be valid, if limits are reasonable (Section 27). The reasonableness of restrictions will depend upon many factors, such as the area in which the goodwill is effectively enjoyed, the price paid for it and above all, the nature of the business. For example, a seller of imitation jewellery in England, sold his business to B and promised that for a period of two years he would not deal (a) in imitation jewellery in England (b) in real jewellery in certain foreign countries. The first promise alone was held lawful. The second promise is void and the restraint was unreasonable in point of space and nature of business.

Certain restraints in partnership

There are four provisions under the Partnership Act which recognise agreements in restraint of trade as valid. Accordingly, partners may agree that:

  1. A partner shall not carry on any business other than that of the firm while he is a partner [Section 11(2) of the Indian Partnership Act, 1932.
  2. A partner on ceasing to be a partner will not carry on any business similar to that of the firm within a specified period or within specified local limits. The agreement shall be valid only if the restrictions are reasonable [Section 36(2) of the Indian Partnership Act, 1932].
  3. Partners may, upon or in anticipation of the dissolution of the firm, make an agreement that some or all of them will not carry on a business similar to that of the firm within a specified period or within specified local limits. Such an agreement shall be valid provided the restrictions imposed are reasonable (Section 54 of the Indian Parthership Act, 1932).
  4. A partner may, upon the sale of the goodwill of a firm, make an agreement that such partner will not carry on any business similar to that of the firm within a specified period or within specified local limits. Any such agreement shall be valid if the restrictions imposed are reasonable. [Section 55(3) of the Indian Partnership Act, 1932].

Exceptions under Judicial Interpretations

Following are the exceptions arising under judicial interpretation of Section 27 of Indian Contract Act.

Trade Combinations

Business combinations with the idea of regulating business and not restraining it have been held to be desirable in public interest. Restraints imposed by such associations are, therefore, not to be declared void on grounds of restraint of trade. In the case of Haribhai v. Sharef Ali, four ginning factories entered into an agreement fixing uniform rate for ginning cotton and pooling their earnings to be divided between them in certain proportions. The Bombay High Court held the agreement to be valid and enforceable. Bur the Courts would not allow a restraint to be imposed disguised as trade regulations. Thus, an agreement between certain persons to carry on business with the members of their caste would be held void.

Exclusive Dealing Agreements

Reasonable agreements to deal in the products of a single manufacturer or to sell the whole produce to a single dealer have been upheld to be valid and not in restraint of trade. Thus, the following agreements were upheld as enforceable.

An agreement by a manufacturer of dhotis to supply 1,36,000 pairs of certain description to the defendant and not to sell goods of that kind 10 any other person for a fixed period (Carliles Nephew & Co. v. Ricknauth Bucktemull).

Where a manufacturer or supplier, after meeting all the requirements of a buyer, has surplus to sell to others, he cannot be restrained from doing so (Shaikh Kalu v. Ram Saran Bhagat). Similarly, exclusive dealing agreements shall not be valid if their terms are unreasonable or they unreasonably check competition (Esso Petroleum Co. v. Harper's Garage Ltd.).

Service Agreements

An agreement of service by which a person binds himself during the term of the agreement not to take service with anyone else or, directly or indirectly, take part in or promote or aid any business in direct competition with that of his employer is valid. For example, A agreed to become assistant for three years to B who was a doctor practising at Zanzibar. It was agreed that during the term of the agreement A was not to practise on his own account in Zanzibar. After one year, A started his own practice. Held, the agreement was valid and A could be restrained by an injunction from doing so. These days it is a common practice to appoint trainees. A service bond is normally got signed whereby the trainee agrees to serve the organisation for a stipulated period. Such agreements, if reasonable, do not amount to restraint of trade and hence are enforceable. But an agreement to restrain an employee from competing with his employer after the termination of his employment may not be allowed by the courts.

Section 28 of the Indian Contract Act regards the following two restraints of legal proceedings as void.

An agreement by which a party is restricted absolutely from enforcing his legal rights under, or in respect of any contract by the usual legal proceedings in the ordinary tribunals is void. For example, a contract contains a stipulation that no action should be brought upon it in case of breach. Such a stipulation would be void because it would restrict both parties from enforcing their rights under the contract in the ordinary tribunals. But, a contract whereby it is provided that all disputes arising between the parties should be referred to the arbitration, whose decision shall be accepted as final and binding on both parties of the contract, is not invalid. The courts have power, in spite of such a stipulation, to set aside the decision of the arbitrator on grounds of misconduct on the part of the arbitrator.

A contract may contain a double stipulation that any dispute between the parties should be settled by arbitration, and neither party should enforce his rights under it in a court of law. Such stipulation would be valid as regards its first branch. (i.e., all disputes between the parties should be referred to arbitration, because that stipulation itself would not have the effect of ousting the jurisdiction of the courts. But the latter branch of the stipulation (i.e, neither party should enforce his rights under it in a court of law) would be void because by that the jurisdiction of the court would be necessarily excluded. Further, it should be noted that the restriction imposed upon the right to sue should be absolute in the sense that the parties are precluded from pursuing their legal remedies in the ordinary tribunals. Thus, where there are two courts, both of which have jurisdiction to try a suit, an agreement between the parties that the suit should be filed in one of those courts alone and not in the other, does not contravene the provisions of Section 28.

Limitation of Time

Another type of agreement rendered void by Section 28 is where an attempt is made by the parties to restrict the time within which an action may be brought so as to make it shorter than that prescribed by the law of limitation. For example, according to the Indian Limitation Act, an action for breach of contract may be brought within three years from the date of breach. If a clause in an agreement provides that no action should be brought after two years, the clause is void. A clause in a policy of life insurance declaring that “no suit to recover under this policy shall be brought after one year from the death of the assured” was held void. However, cases of the above sort are distinguished from those which provide for surrender or forfeiture of rights if no action is brought within the stipulated time. A clause in a policy of life insurance provided “if a claim be made and rejected and an action or suit be not commenced within three months after such rejection …, all benefits under the policy shall be forfeited.” This clause was held valid.

Uncertain Agreements

An agreement is called an uncertain agreement when the meaning of that agreement is not certain or capable of being made certain. Such agreements are declared void under Section 29.

Illustration

  • A agrees to sell to B “one hundred tons of oil”. The agreement is void for uncertainty since there is no clarity in the agreement what kind of oil was intended.
  • A agrees to sell B “my white horse for Rs. 5,000 or Rs. 10,000”. There being nothing to show which of the two prices was to be given, the agreement is void.

Wagering Agreement

Agreements entered into between parties under the condition that money is payable by the first party to the second party on the happening of a future uncertain event, and the second party to the first party when the event does not happen, are called Wagering Agreements or Wager. There should be mutual chance of profit and loss in a wagering agreement. Generally wagering agreements are void.

Wager means a bet. It is a game of chance where the probability of winning or losing is uncertain. The chance of either winning or losing is wholly dependent on an uncertain event. Parties involved in a wagering contract mutually agree upon the nature of the agreement that either one will win. Each party stands equally to win or lose the bet. The chance of gain or the risk of loss is not one sided. If either of the parties may win but not lose, or may lose but cannot win, it is a wagering contract. The essence of a wagering contract is that neither of the parties should have any interest in the contract other than the sum, which he will win or lose. Parties to a wagering contract focus mainly on the profit or loss they earn.

Illustrations: A and B agree with each other that if it rains on Tuesday, A will pay Rs. 100 to B and if it does not rain on Tuesday, B will pay A Rs. 100. Such an agreement is a wagering agreement and hence is void.

Essentials of a Wager

Dependence on Uncertain Event

One of the important essentials of a wagering agreement is that it must depend upon an uncertain event. Event may be past, present or future, but the parties must be unaware of its future or the time of its results or the time of its happening.

Example: A football match between team A and team B is to start at Mumbai on 30th June 2016. C and D enter into an agreement that C will pay Rs. 500 to D if team A wins, and if team B wins, D will pay Rs. 500 to C. This is a wagering agreement and is void.

Mutual Chance of Gain or Loss

Another element of wagering agreement is that each party to the agreement should stand to win or lose as per the result of the uncertain event. If there are no such mutual chances of gain or loss, there is no wager.

Example: A cricket match is to start at Hyderabad between India and South Africa. If India wins the match, A agrees to pay B Rs. 500, whereas if South Africa wins the match, B agrees to pay Rs. 500 to A. This is a wagering agreement. In this case. each party has the chances to win or lose. Here the gain of one party will be the loss of the other and vice versa.

In the case of Babasaheb v Rajaram, two wrestlers agreed to play a wrestling match on condition that the party failing to appear on the day fixed was to forfeit Rs.500 to the opposite party and the winner was to receive Rs.1125 out of the gate money. The defendant failed to appear in the ring and the plaintiff sued him for Rs.500. It was held that the agreement could not be of wager because neither party to the said contract stood to lose according to the result of the wrestling match. The winning amount was to be given from the gate money and not by the parties.

No Other Interest in the Event

Neither party should have any interest in happening or non-happening of the event other than the sum he will win or lose. If either party has some other interest other than the sum he will win or lose, it will not be a wager. Example: A, a owner of a house, insures his house against fire with GIC. A has to pay an Insurance premium of Rs. 50 per month as per the terms of contract. If the house is destroyed by fire, GIC will pay the actual amount of loss suffered by him. Here A has interest in his house. Further on the happening of the event i.e. fire, A will not gain anything. Hence, it is not a wager.

No Control Over the Event

The parties to the contract should not have any control over the happening of the event one way or the other. If one party has the events in his hands, the transaction will not be a wager.

Illustration: A and B enter into an agreement that if A resigns his job, B will pay Rs. 500 to A and A will pay Rs. 500 to B if he does not resign his job. Here A has the event under his control. Hence the contract is not a wager.

Promise to Pay Money or Money’s Worth

The wagering agreement must contain a promise to pay money or money’s worth.

The following transactions are not wagers

Contract of Insurance are not wagers

Insurance contracts are contracts of indemnity. They are entered into, to safeguard the interest of one party to the contract. In this contract, the insured has insurable interest in the property or life Hence it is not a wager.

Distinction between Wagering Agreement and Contract of Insurance
  1. In a wagering agreement, there is no insurable interest, whereas contract of insurance has insurable interest.
  2. Wagering agreement is a void agreement, whereas contract of insurance is a valid one.
  3. In a wagering agreement, neither party has any interest in the happening or non￾happening of an event. But in an insurance agreement, both the parties are interested in the subject-matter.
  4. Wagering agreements are conditional contracts, whereas insurance agreements are contracts of indemnity except life insurance contracts which are contingent contracts.
  5. The object of a wagering contract is to speculate for money or money’s worth, whereas an insurance contract is to protect an interest.
  6. A wagering agreement is just a gamble, whereas a contract of insurance is based on scientific and actuarial calculation of risks.

Skill Competitions are not wagers

Skill plays a substantial part for the successful solution of certain competitions. For example, crosswords competitions, picture, puzzles etc. Here, the prizes are awarded as per the merits of the solution. Such competitions are not wagers. However, if prizes depend upon a chance, that is a lottery and therefore a wager.

Example: A crossword puzzle was given in a newspaper and it was stated in the newspaper that whose solution of the crossword puzzle would correspond with the solution kept with the editor, he would be given the first prize. This is a game of chance and therefore a lottery. And thus, is a wager. Further, as per law, the prize competitions involving games of skill are not wagers. But if the amount of prize exceeds certain amount, they will be regarded as gambling and void.

Horse Race Competition is not wager

State Governments may authorize the horse race competition, if it is permitted by the local laws. In such cases, any subscription or contribution of the value of Rs.500 or upwards made towards any prize or sum of money which is to be awarded to the winner of any horse race, shall not be unlawful. In other words, agreement to subscribe or contribute towards such prize or sum of money is valid and enforceable.

Example: A entered into an agreement with the Race Course Authority who was permitted to conduct the race course competition, to contribute Rs. 600 towards the money which was to be paid to the winner of the horse race to be held on a particular day. This is not a wager.

Share Market Transactions are not wagers

Transactions for the purchase and sale of shares and stocks, with an intention to take and give delivery of shares, is not a wager. However, if the intention is only to settle the price difference, the transaction is a wager and hence void.

Sports Competitions are not wagers

Sports competitions such as Athletics, Wrestling, Indoor games, Boxing, Football, Cricket, Hockey etc. are not games of chance. It is decided by skill. Hence, they are not wagers.

Effects of Wagering Agreements

In India, wagering agreements have been expressly declared to be void. So it cannot be enforced in any Court of law. Sec. 30 of the Act states that agreements by way of wager are void; and no suit shall be brought for recovering anything alleged to be won on any wager or entrusted to any person to abide by the results of any game or other uncertain event on which any wager is made. As a matter of fact, though a wagering agreement is void and unenforceable, but it is not forbidden by law. That is, the wagering agreements are void but not unlawful. However, in the States of Gujarat and Maharashtra, the wagering agreements have been declared to be unlawful. As far as collateral transactions are concerned, as the wagering agreements are void but not unlawful, they are not void. Therefore, they are enforceable. For e.g., where a person lends money to another person to enable him to pay a gambling debt, the lender can recover the money so paid.

Agreement to do impossible acts

Agreements to do impossible acts Section 56 of the Indian Contract Act declares that an agreement to do an act impossible in itself is void. Thus, where A agrees with B to discover treasure by magic, the agreement is void. We may say that parties who purport to agree to the doing of something obviously impossible must be deemed not to be serious or not to understand that they are doing. Moreover, law cannot regard a promise to do something obviously impossible as of any value and such a promise is, therefore, no consideration. An agreement to do an act impossible in itself should be contrasted from a contract which becomes impossible of performance. Subsequent impossibility renders a contract void when the act becomes impossible.

Write a short note on void agreement and void contract

Judiciary Mains Answer Writing

Void agreement: According to section 2(g) of the Indian contract Act, 1872 A void agreement is one which is not enforceable by law. A void agreement does not create any legal right (or) obligation. It is void-ab-initio (i.e., void right from the beginning).

Example:

  • An agreement with a minor
  • an agreement without consideration, etc.,

Void contract: According to section 2(f) of the Indian contract Act, 1872. A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable. A contract, when originally entered into, may be valid and binding on the parties and it may subsequently become void. We may talk of such a contract as void contract.

Example: - A contract to import goods from a foreign country when a war breaks out between the importing country and the exporting country.

1)
Section 23
2)
Section 24
3)
Section 25
4)
Section 26
5)
Section 27
6)
Section 28
7)
Section 29
8)
Section 30
9)
Section 56


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Created on 2020/12/24 21:44 by Japhin Raj • Last modified on 2020/12/24 21:47 by LawPage