Other Essential Elements of a Contract (Part-5) CA Foundation Notes | EduRev

Business Laws for CA Foundation

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CA Foundation : Other Essential Elements of a Contract (Part-5) CA Foundation Notes | EduRev

The document Other Essential Elements of a Contract (Part-5) CA Foundation Notes | EduRev is a part of the CA Foundation Course Business Laws for CA Foundation.
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VOID AGREEMENTS:

Expressly declared Void Agreements

1Made by incompetent parties (Section 11)
6Agreement in restraint of marriage (Section 26)
2Agreements made under Bilateral mistake of fact (Section 20)
7Agreements in restraint of trade (Section 27)
3Agreements the consideration or object of which is unlawful (Section 23)
8Agreement in restraint of legal proceedings (Section 28)
4Agreement the consideration or object of which is unlawful in parts (Section 24)
9Agreement the meaning of which is uncertain (Section 29)
5Agreements made without consideration (Section 25)
10Wagering Agreement (Section 30)

[Refer Unit 2]
11Agreements to do impossible Acts (Section 56)

(1) Agreement in restraint of marriage (Section 26): Every agreement in restraint of marriage of any person other than a minor, is void. So if a person, being a major, agrees for good consideration not to marry, the promise is not binding and considered as void agreement.
(2) Agreement in restraint of trade (Section 27): An agreement by which any person is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. But this rule is subject to the following exceptions, namely, where a person sells the goodwill of a business and agrees with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer or his successor in interest carries on a like business therein, such an agreement is valid (goodwill is the advantage enjoyed by a business on account of public patronage and encouragement from habitual customers). The local limits within which the seller of the goodwill agrees not to carry on similar business must be reasonable. Under Section 36 of the Indian Partnership Act, 1932 if an outgoing partner makes an agreement with the continuing partners that he will not carry on any business similar to that of the firm within a specified period or within specified local limits, such an agreement, thought in restraint of trade, will be valid, if the restrictions imposed are reasonable. Similarly, under Section 11 of that Act an agreement between partners not to carry on competing business during the continuance of partnership is valid.

But an agreement of service by which an employee binds himself, during the term of his agreement, not to compete with his employer is not in restraint of trade.
Example 1: B, a physician and surgeon, employs A as an assistant for a term of three years and A agrees not to practice as a surgeon and physician during these three years. The agreement is valid and A can be restrained by an injunction if he starts independent practice during this period.

Example 2: An agreement by a manufacturer to sell during a certain period his entire production to a wholesale merchant is not in restraint of trade.
Example 3: Agreement among the sellers of a particular commodity not to sell the commodity for less than a fixed price is not an agreement in restraint of trade.
Other Essential Elements of a Contract (Part-5) CA Foundation Notes | EduRev

(3) Agreement in restraint of legal proceedings (Section 28): An agreement in restraint of legal proceeding is the one by which any party thereto is restricted absolutely from enforcing his rights under a contract through a Court or which abridges the usual period for starting legal proceedings. A contract of this nature is void. However, there are certain exceptions to the above rule:
(i) A contract by which the parties agree that any dispute between them in respect of any subject shall be referred to arbitration and that only the amount awarded in such arbitration shall be recoverable is a valid contract.
(ii) Similarly, a contract by which the parties agree to refer to arbitration any question between them which has already arisen or which may arise in future, is valid; but such a contract must be in writing.
4. Agreement: the meaning of which is uncertain (Section 29): An agreement, the meaning of which is not certain, is void, but where the meaning thereof is capable of being made certain, the agreement is valid.

Example: A agrees to sell B “a hundred tons of oil”. There is nothing whatever to show what kind of oil was intended. The agreement is void for uncertainty. But the agreement would be valid if A was dealer only in coconut oil; because in such a case its meaning would be capable of being made certain.

5. Wagering agreement (Section 30): An agreement by way of a wager is void. It is an agreement involving payment of a sum of money upon the determination of an uncertain event. The essence of a wager is that each side should stand to win or lose, depending on the way an uncertain event takes place in reference to which the chance is taken and in the occurrence of which neither of the parties has legitimate interest.
Example: A agrees to pay Rs. 50,000 to B if it rains, and B promises to pay a like amount to A if it does not rain, the agreement will be by way of wager. But if one of the parties has control over the event, agreement is not a wager.

Essentials of a Wager
1. There must be a promise to pay money or money’s worth.
2. Promise must be conditional on an event happiening or not happening.
3. There must be uncertainty of event.
4. There must be two parties, each party must stand to win or lose.
5. There must be common intention to bet at the timing of making such agreement.
6. Parties should have no interest in the event except for stake.

Transactions similar to Wager (Gambling)
(i) Lottery transactions: A lottery is a game of chance and not of skill or knowledge. Where the prime motive of participant is gambling, the transaction amounts to a wager. Even if the lottery is sanctioned by the Government of India it is a wagering transaction. The only effect of such sanction is that the person responsible for running the lottery will not be punished under the Indian Penal Code. Lotteries are illegal and even collateral transactions to it are tainted with illegality (Section 294A of Indian Penal Code).
(ii) Crossword Puzzles and Competitions: Crossword puzzles in which prizes depend upon the correspondence of the competitor’s solution with a previously prepared solution kept with the editor of a newspaper is a lottery and therefore, a wagering transaction.

Case Law: State of Bombay vs. R.M.D. Chamarbangwala AIR (1957) Facts: A crossword puzzle was given in magazine. Above mentioned clause was stated in the magazine. A solved his crossword puzzle and his solution corresponded with previously prepared solution kept with the editor. Held, this was a game of chance and therefore a lottery (wagering transaction).

Crossword puzzles, picture competitions and athletic competitions where prizes are awarded on the basis of skill and intelligence are the games of skill and hence such competitions are valid. According to the Prize Competition Act, 1955 prize competitions in games of skill are not wagers provided the prize money does not exceed Rs. 1,000.
(iii) Speculative transactions: an agreement or a share market transaction where the parties intend to settle the difference between the contract price and the market price of certain goods or shares on a specified day, is a gambling and hence void.
(iv) Horse Race Transactions: A horse race competition where prize payable to the bet winner is less than Rs. 500, is a wager.

Example: A and B enter into an agreement in which A promises to pay Rs. 2,00,000 provided ‘Chetak’ wins the horse race competition. This is a wagering transaction.

However, Secion 30 is not applicable in an agreement to contribute toward plate, prize or sum of money of the value of Rs. 5,00,000 or above to be awarded to the winner of a horse race.

Transactions resembling with wagering transaction but are not void
(i) Chit fund: Chit fund does not come within the scope of wager (Section 30). In case of a chit fund, a certain number of persons decide to contribute a fixed sum for a specified period and at the end of a month, the amount so contributed is paid to the lucky winner of the lucky draw.
(ii) Commercial transactions or share market transactions: In these transactions in which delivery of goods or shares is intended to be given or taken, do not amount to wagers.
(iii) Games of skill and Athletic Competition: Crossword puzzles, picture competitions and athletic competitions where prizes are awarded on the basis of skill and intelligence are the games of skill and hence such competition are valid. According to the Prize Competition Act, 1955 prize competition in games of skill are not wagers provided the prize money does not exceed Rs. 1,000.
(iv) A contract of insurance: A contract of insurance is a type of contingent contract and is valid under law and these contracts are different from wagering agreements.

Distinction between Contract of Insurance and Wagering Agreement


Basis
Contracts of Insurance
Wagering Agreement
1Meaning
It is a contract to indemnify the loss.
It is a promise to pay money or money’s worth on the happening or non happening of an uncertain event.
2Consideration
The crux of insurance contract is the mutual consideration (premium and compensation amount).
There is no consideration between the two parties. There is just gambling for money.
3Insurable Interest
Insured party has insurable interest in the life or property sought to be insured.

There is no property in case of wagering agreement. There is betting on other’s life and properties.

4Contract of Indemnity
Except life insurance, the contract of insurance indemnifies the insured person against loss.Loser has to pay the fixed amount on the happening of uncertain event.
5Enforceability
It is valid and enforceable.
It is void and unenforceable agreement.
6Premium
Calculation of premium is based on scientific and actuarial calculation of risks.
No such logical calculations are required in case of wagering agreement.
7Public Welfare
They are beneficial to the society.
They have been regarded as against the public welfare.


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