Void Agreements: Limitations on Freedom of Contract (S. 24 – 30, Indian Contract Act) | Civil Law for Judiciary Exams PDF Download

Legal Agreements and Void Contracts

• A void agreement, as per the Indian Contract Act, 1872, is fundamentally unenforceable from its inception, rendering it null and void without legal effect.
• Under Section 2(g) of the Indian Contract Act, a void agreement is one that lacks legal enforceability, making it non-binding on any party involved.
• Reasons for an agreement to be void include illegality, immorality, opposition to public policy, fraud, misrepresentation, or impossibility of performance.
• Examples of void agreements encompass agreements to commit a crime or those expressly prohibited by law.

Lawful Consideration and Object Legality

• A contract arises when a proposal is made and accepted, establishing consideration that is legally enforceable.
• The object or proposal must adhere to legality, failing which the contract may be deemed invalid.
• Instances where consideration or object is prohibited by law lead to the invalidity of the proposal.
• If the consideration undermines any legal provisions, it is considered unlawful.
• Fraudulent considerations or objects, such as smuggling, render agreements void.
• Considerations deemed immoral or contrary to public policy are also classified as unlawful.
• For instance, if Party A promises to pay Party C for engaging in illegal activities, the agreement is void due to the unlawful nature of the consideration.

Agreements without Consideration (Section 25)

An agreement without consideration, as per Section 25 of the Indian Contract Act, is considered void unless it falls under certain exceptions:

• If the agreement is expressed in writing and registered, such as a contract based on natural love and affection.
• If there is a promise to compensate, either fully or partially, by the promisor to a person who has already performed something voluntarily for the promisor.

Let's delve deeper into each point:

Expressed in Writing and Registered

An agreement without consideration is generally void, but an exception exists when it is put in writing and registered. This could include contracts arising from natural love and affection, such as a parent leaving property for their child out of love.

Promise to Compensate

Another exception is when there is a promise to compensate fully or partially by the promisor to someone who has already performed something voluntarily. For instance, if a friend helps you move without expecting anything in return, and later you promise to buy them dinner as a token of gratitude, this promise is enforceable despite the lack of initial consideration.

Agreements in Restraint of Marriage

• Agreements that aim to prevent individuals from marrying, other than minors, are considered invalid under section 26 of the Indian Contract Act. The rationale behind this section is to uphold the fundamental right of individuals to choose their life partners, ensuring that this right is not infringed upon.
• Any agreement that restricts someone from marrying a person of their choice falls under the category of restraint of marriage.
• An illustrative example of this concept is a scenario where two widows, both married to the same individual, engage in a dispute regarding the inheritance of land after the husband's death.
• This particular case was deliberated in the division bench of the Allahabad High Court.

Agreements in Restraint of Trade

According to section 27 of the Indian Contract Act, any agreement that prevents a person from engaging in their trade or profession in exchange for some benefit is considered an agreement in restraint of trade.
For a restraint on trade during the sale of goodwill to be valid, certain conditions must be met:

• The seller can only be restricted from engaging in a similar business.
• The restriction can only apply within specific local limits.
• The limitations imposed should be considered reasonable.

Agreements in Restraint of Legal Proceedings (section 28)

• According to section 28 of the Indian Contract Act, agreements that restrict one or both parties from accessing courts are considered invalid. This includes contracts that prevent a party from approaching courts or tribunals, or impose time limitations on seeking legal recourse.
• A recent Supreme Court ruling highlighted that an insurance agreement clause, which states that the insurer is not liable if a claim is made after 12 months of the loss, is not necessarily invalid. This is because it involves forfeiting a right under the contract rather than obstructing legal proceedings.
• Similarly, another case emphasized that an insurance policy clause absolving the insurer from liability unless a claim is filed within a specified period from the occurrence of loss or damage is acceptable, even if the timeframe is shorter than legally prescribed.

Amended Section 28 is not retrospective

• Non-Retrospectivity of Amended Section 28: The amended Section 28 does not apply retrospectively. This means that certain conditions set in a contract, such as forfeiting arbitration rights if not claimed within a specified time, are not affected by the amendment.
• Time Constraints in Contracts: Contracts often include time-bound requirements, like making an insurance claim within a specified period. Failure to adhere to these timelines can lead to losing benefits outlined in the contract.
• Impact of Amended Section 28: With the introduction of the amended Section 28, extending certain rights beyond the agreed timeframe is no longer permissible under the Contract Act.
• Validity of Pre-Amendment Contracts: Contracts that were established before the enactment of the amendment are typically governed by the terms of Section 28 as it stood prior to 1996. An example of this is seen in cases like Oriental Insurance Co. Ltd v. Bank of Karur Vysya Ltd.

Ambiguous and Uncertain Agreements

• Agreements can be ambiguous due to unclear or undefined terms, or when they are incomplete, leading to uncertainty.
• If the terms of an agreement are ambiguous or vague, and the parties' intentions cannot be reasonably determined, the contract may not be legally enforceable.
• Section 29 deals with the interpretation of agreements. In the case of Kovuru Kalappa Devara vs. Kumar Krishna Mitter, it was highlighted that a settlement must be clear on its face to have a binding effect on the contract.
• A contract may not be enforceable if it lacks clarity. Ambiguity does not mean difficulty in understanding but rather a lack of clarity in defining the terms.
• When seeking a remedy for a breached contract, the party must be able to accurately describe the obligations to justify the remedy sought.
• Legislation recognizes varying degrees of certainty required for different types of remedies.

Understanding Wagering Agreements under the Indian Contract Act

• Definition of Wagering Agreement: When two parties agree that one will receive money based on the happening or non-happening of a future uncertain event, it constitutes a wagering agreement. Such agreements involve shared chances of profit and loss.
• Nature of Wagering Agreements: Wagering agreements are considered void because they involve betting or gambling. They are based on uncertain events where the outcome depends solely on chance.
• Illustrative Example: For instance, if individuals B and C agree to bet on whether it will rain on Saturday, with B paying C Rs 200 if it rains and vice versa, this agreement falls under a wagering agreement and is deemed void.

Exceptions of a Wagering Agreement

• Contracts for insurance serve as reimbursement agreements, designed to protect one party's interests without involving gambling. The insured party is covered against loss of property or life, making it a non-gambling contract.
• Skill-based competitions, such as crossword puzzles, picture contests, and puzzles, are not considered as wagering agreements. Prizes in these events are awarded based on merit, distinguishing them from mere gambling. However, if prizes are dependent on chance, it transforms into a lottery and falls under gambling.
• For instance, a newspaper crossword competition that promises a prize for the correct solution is considered a game of chance, making it a lottery and therefore a form of betting.
• State governments may legally conduct horse race competitions where subscriptions or contributions towards rewards exceeding Rs. 500 are not considered illegal. Agreements to subscribe or contribute to specific prizes are legally binding.
• Transactions involving the purchase and sale of shares and securities are not considered wagers if the primary intention is to acquire or sell stocks. However, if the focus shifts to speculating on price differentials, it could be categorized as a wager.
• Sports events like athletics, wrestling, indoor games, football, boxing, cricket, and hockey are skill-based contests rather than games of chance. These events are determined by competencies rather than luck, making them non-wagering activities.