Void Agreements | Law of Contracts - CLAT PG PDF Download

Void Agreements

There are certain agreements that are explicitly declared void under specific provisions of the Contract Act or other laws. The following types of agreements are expressly declared void under various sections of the Indian Contract Act:

• Agreement with partly unlawful consideration or object (Section 24).
• Agreement made without consideration (Section 25).
• Agreement in restraint of marriage (Section 26).
• Agreements in restraint of trade (Section 27).
• Agreements in restraint of legal proceedings (Section 29).
• Wagering agreement (Section 30).
• Impossible agreement (Section 56).

 Agreement with Partly Unlawful Consideration or Object 

• According to Section 24 of the Indian Contract Act, if any part of the consideration for one or more objects is unlawful, the agreement is void.
• For example, if A agrees to supervise B's business involving both legal and illegal items, the agreement is void due to partial illegality.
• If multiple promises are made for a lawful consideration, the enforceability of one promise does not affect the others.
• The key is whether a distinct, wholly lawful consideration can be identified for the disputed promise.
• In the case of Gopalrao v Kallappa, a contract involving the sale of opium and ganja was deemed void because it was impossible to separate the capital contributed for each part of the business.

 Agreement Made Without Consideration 

• Section 25 of the Indian Contract Act states that an agreement made without consideration is generally void, but there are exceptions to this rule.

 Agreement in Restraint of Marriage 

• According to  Section 26  of the Indian Contract Act, any agreement that restricts the marriage of a person who is not a minor is considered void. The restriction can be either general or specific.
• For instance, a person can be prohibited from marrying at all, from marrying for a limited time, or from marrying a particular individual or a specific group of people.
• Example: If person A agrees to marry only person B and promises to pay Rs. 2,000 if they marry someone else, this agreement is void because it restrains marriage, as illustrated in the case of  Lowe v. Peers  .
• A penalty for remarriage is not necessarily considered a restraint of marriage.
• For example, in the case of two co-widows, an agreement stating that if one remarries, she forfeits her share of her deceased husband's property is valid, as seen in  Rao Rani v. Gulab Rani  .
• Similarly, a provision in a  Nikah Nama  (marriage contract) allowing a Muslim wife to divorce her husband if he marries a second wife is legal.
• If the wife exercises this right, the divorce is valid, and she is entitled to maintenance from her husband, as established in the case of  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, an individual cannot barter it away by agreement.
• Public policy requires that every person shall have the liberty to work for himself and cannot deprive himself or the state of his labour, skill, or talent through any contract.
• Courts do not allow restrictions on an individual's liberty to conduct any business, profession, or trade.
• Therefore, all agreements in restraint of trade, whether general or partial, qualified or unqualified, are considered void.

 Cases: 

• In a case from Patna city, 29 out of 30 comb manufacturers agreed to supply combs to R exclusively, allowing R to reject goods if there was no market. The court held this agreement constituted a restraint of trade and was thus void (Sheikh Kalu v. Ramasaran Bhugat).
• In another case in Calcutta, A, a brazier, agreed to stop his business in a locality if B paid him Rs. 900, which A had paid to his workmen as an advance. A ceased his business, but B did not pay. The court ruled the agreement was void, and nothing could be recovered on it (Madhab v. Raj Coomar).

 Exceptions 

There are two exceptions to the rule regarding restraints of trade: statutory exceptions and those arising from judicial interpretations of Section 27.

[Question: 1754373]

 Statutory Exceptions 

 Sale of Goodwill:  When a seller of a business's goodwill agrees not to engage in a similar business within specified local limits, this restraint is valid if the limits are reasonable as per Section 27. The reasonableness depends on factors like the area of goodwill, the price paid, and the nature of the business. For instance, a seller of imitation jewelry in England who sold his business and promised not to deal in imitation jewelry in England for two years had a lawful restriction for the first promise, while the second promise was void due to being unreasonable in space and nature.

 Certain Restraints in Partnership 

•  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 prohibits a partner from engaging in any business other than that of the partnership during their tenure as a partner.
•  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:  Section 36(2) of the Indian Partnership Act, 1932 allows partners to agree that upon leaving the partnership, a partner will not engage in a similar business for a reasonable period or within specified local limits.
•  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:  Section 54 of the Indian Partnership Act, 1932 permits partners to agree that upon dissolution or in anticipation of it, some or all partners will not engage in a similar business for a reasonable period or within specified local limits.
•  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:  Section 55(3) of the Indian Partnership Act, 1932 allows a partner selling the goodwill of a partnership to agree not to engage in a similar business for a reasonable period or within specified local limits.

 Trade Combinations

• Business combinations aimed at regulating rather than restraining trade are considered desirable in the public interest.
• Restraints imposed by such associations are not deemed void on grounds of restraining trade.
• For example, in  Haribhai v. Sharef Ali  , four ginning factories entered into an agreement to fix uniform ginning rates and pool their earnings. The Bombay High Court held the agreement valid and enforceable.
• However, courts do not permit restraints disguised as trade regulations.
• For instance, an agreement among individuals to conduct business exclusively with members of their caste would be considered void.

 Exclusive Dealing Agreements

• Reasonable agreements to deal exclusively in products from a single manufacturer or to sell all produce to a single dealer are upheld as valid and not in restraint of trade.
• Examples of enforceable agreements include:
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  • An agreement where a dhoti manufacturer supplies specific pairs to a defendant and agrees not to sell similar goods to anyone else for a fixed period (  Carliles Nephew & Co. v. Ricknauth Bucktemull  ).
• If a manufacturer or supplier has surplus goods after meeting a buyer's requirements, they cannot be prohibited from selling to others (  Shaikh Kalu v. Ram Saran Bhagat  ).
• Exclusive dealing agreements are invalid if their terms are unreasonable or if they unreasonably restrict competition (  Esso Petroleum Co. v. Harper's Garage Ltd  ).

 Service Agreements

• Service agreements where a person commits not to work for anyone else or engage in competing business during the agreement's term are valid.
• For instance, if A agrees to assist B, a doctor in Zanzibar, for three years with the condition of not practicing independently in Zanzibar, the agreement is valid.
• If A violates this by starting their own practice, an injunction can be issued to enforce the agreement.
• Service bonds signed by trainees, committing them to serve the organization for a specified period, are enforceable if reasonable and do not constitute a restraint of trade.
• However, agreements preventing employees from competing with their employers after employment termination may not be upheld by courts.

 Agreements in Restraint of Legal Proceedings 

According to  Section 28 of the Indian Contract Act,  two types of restraints on legal proceedings are considered void:

•  Absolute Restriction on Legal Proceedings:  If a party is completely prohibited from enforcing their legal rights through ordinary legal channels, the agreement is void. For instance, a clause in a contract that prevents legal action in case of a breach is invalid. Both parties must have the ability to enforce their rights through legal means.
•  Validity of Arbitration Clauses:  An agreement that mandates disputes to be resolved through arbitration, with the arbitrator's decision being final and binding, is valid. However, courts retain the authority to set aside the arbitrator's decision in cases of misconduct.

 Example: 

• A contract stipulating that disputes be settled through arbitration while simultaneously preventing either party from taking legal action in court is partially valid. The arbitration requirement is enforceable, but the prohibition on court action is not, as it restricts the court's jurisdiction.
• Additionally, if parties agree to file a suit in one of two jurisdictional courts, this does not violate Section 28, as it does not impose an absolute restriction on legal remedies.

 Limitation of Time 

 Definition:  A clause in an agreement that attempts to limit the time within which legal action can be taken must not be shorter than the time period prescribed by law. For instance, under the Indian Limitation Act, legal action for breach of contract must be taken within three years from the date of the breach. If a contract includes a clause that says legal action must be taken within two years, that clause is considered invalid.

 Examples: 

• A life insurance policy that states, "No legal action to recover under this policy shall be taken after one year from the death of the insured," was deemed invalid because it set a shorter time limit than allowed by law.

 Distinction:  Clauses that impose a deadline for taking action, which could lead to the loss of rights, are viewed differently. For example, a life insurance policy that specifies, "If a claim is made and rejected, legal action must be initiated within three months after the rejection; otherwise, all benefits under the policy will be forfeited," is considered valid.

 Uncertain Agreements 

• An uncertain agreement refers to a situation where the terms or meaning of the agreement are unclear or incapable of being made clear. Such agreements are considered void according to Section 29 of the Indian Contract Act.
•  Illustration: 
  • In the first example, if A agrees to sell B "one hundred tons of oil" without specifying the type of oil, the agreement is void due to lack of clarity.
  • In the second example, if A agrees to sell B "my white horse for Rs. 5,000 or Rs. 10,000" without indicating which price applies, the agreement is also void because of uncertainty.

Wagering Agreement

• A wagering agreement, also known as a wager, is a contract between parties where money is paid by one party to another based on the occurrence of a future uncertain event.
• In a wagering agreement, there is a mutual chance of profit and loss for both parties involved.
• Generally, wagering agreements are considered void and not enforceable by law.
• The term "wager" refers to a bet, which is a game of chance with uncertain outcomes.
• The outcome of winning or losing in a wager is entirely dependent on an uncertain event.
• In a wagering contract, both parties agree on the terms that determine the winner, with equal chances of winning or losing.
• The risk of loss or the possibility of gain is shared equally by both parties.
• If one party can only win or one party can only lose, it is not a wagering contract.
• The core idea of a wagering contract is that the parties are primarily interested in the monetary sum involved, not in any other aspect of the contract.
• For example, if two people agree that one will pay the other a certain amount of money based on whether it rains on a specific day, it is a wagering agreement and is therefore void.

 Essentials of a Wager 

 Dependence on Uncertain Event 

• A wagering agreement hinges on an uncertain event, which could be in the past, present, or future. The parties involved must be unaware of the event's outcome or timing. For example, if two individuals bet on the outcome of a football match between Team A and Team B scheduled for June 30, 2016, this agreement is considered a wager and is legally void.

 Mutual Chance of Gain or Loss 

• In a wagering agreement, both parties must have an equal chance of winning or losing based on the outcome of the uncertain event. If such mutual chances of gain or loss are absent, the agreement is not a wager.
• For instance, if two individuals bet on the outcome of a cricket match between India and South Africa, where one agrees to pay Rs. 500 if India wins and the other agrees to pay Rs. 500 if South Africa wins, this constitutes a wagering agreement.
• In this scenario, the gain of one party directly translates to the loss of the other, exemplifying mutual risk.
• In the case of  Babasaheb v Rajaram  , two wrestlers agreed to a match with the stipulation that the party failing to appear would forfeit Rs. 500 to the other, and the winner would receive Rs. 1125 from the gate money. When one party failed to appear, legal action was taken.
• The court ruled that the agreement did not constitute a wager because neither party stood to lose based on the match's outcome. The winning amount was derived from the gate money, not from the parties themselves.

 No Other Interest in the Event 

• When parties engage in a wager, their sole interest should revolve around the potential sum they stand to win or lose. If either party has an additional interest beyond this monetary aspect, the agreement ceases to be a wager.
• For instance, consider a scenario where A, the owner of a house, insures the property against fire with GIC. A is obligated to pay a monthly insurance premium of Rs. 50 as per the contract. In the event of a fire destroying the house, GIC compensates A for the actual loss incurred. Here, A has a vested interest in the house, but if the unfortunate event occurs, A does not stand to gain anything substantial. Thus, this situation does not constitute a wager.

 No Control Over the Event 

• In a wagering agreement, it is crucial that neither party has control over the occurrence of the event.
• If one party can influence the outcome of the event, the transaction cannot be classified as a wager.
• For example, if A and B enter into a contract where A agrees to pay B Rs. 500 if he resigns from his job, and vice versa, A has control over the event, making it not a wager.

 Promise to Pay Money or Money's Worth 

• A wagering agreement must include a commitment to pay money or something of equivalent value.
• Transactions lacking this element do not qualify as wagers.
• It is important to ensure that the agreement involves a promise to pay money or its equivalent to meet the criteria of a wagering contract.

 Contract of Insurance Are Not Wagers 

A contract of insurance is fundamentally distinct from a wagering agreement due to the presence of insurable interest, making it a valid and legitimate agreement.

•  Contract of Indemnity:  Insurance contracts are designed to protect the interests of one party, with the insured having a vested interest in the property or life being insured. This essential element of insurable interest differentiates insurance from a wager.
•  Insurable Interest:  A key distinction between a wagering agreement and a contract of insurance is the presence of insurable interest. In insurance, the insured must have a legitimate interest in the subject matter, whereas, in a wager, there is no such interest.
•  Validity:  Wagering agreements are considered void, while contracts of insurance are valid and legally binding. This is because insurance serves a legitimate purpose of risk management and protection.
•  Interest in Events:  In a wagering agreement, neither party has a genuine interest in the occurrence or non-occurrence of an event. In contrast, both parties in an insurance agreement have a vested interest in the subject matter being insured.
•  Conditional vs. Indemnity Contracts:  Wagering agreements are conditional contracts, whereas insurance agreements are primarily contracts of indemnity. However, life insurance contracts may be considered contingent contracts.
•  Purpose:  The objective of a wagering contract is to speculate for money or its equivalent, while an insurance contract aims to protect an interest. Insurance is not about speculation but about safeguarding against potential losses.
•  Scientific Basis:  A wagering agreement is essentially a gamble, whereas a contract of insurance is grounded in scientific and actuarial calculations of risks. Insurance relies on statistical data and risk assessment to determine premiums and coverage.

 Skill Competitions Are Not Wagers 

• Skill is a significant factor in determining the winners of certain competitions, such as crosswords, picture puzzles, and similar challenges. In these cases, prizes are awarded based on the merits of the solution, making them not wagers.
• However, if the outcome of a competition relies on chance, it becomes a lottery and, therefore, a wager. For instance, if a newspaper publishes a crossword puzzle and states that the first prize will go to the person whose solution matches the one kept by the editor, this scenario involves an element of chance and is considered a lottery, thus a wager.
• According to legal definitions, prize competitions based on skill are not wagers. However, if the prize amount exceeds a certain threshold, it may be regarded as gambling and rendered void.

 Horse Race Competition Is Not a Wager 

• Horse race competitions may be authorized by state governments if permitted by local laws. In such instances, contributions or subscriptions of Rs. 500 or more towards a prize or sum of money for the winner of a horse race are considered lawful.
• For example, if a person agrees to contribute Rs. 600 towards the prize money for a horse race organized by a legally permitted race course authority, this agreement is not classified as a wager.

 Share Market Transactions Are Not Wagers 

• Transactions involving the purchase and sale of shares and stocks with the intent to take and give delivery of the shares are not considered wagers.
• However, if the intention is solely to settle price differences without the actual transfer of shares, the transaction is deemed a wager and is therefore void.

 Sports Competitions Are Not Wagers 

• Various sports competitions, including athletics, wrestling, indoor games, boxing, football, cricket, and hockey, are determined by skill rather than chance.
• Consequently, these competitions are not classified as wagers.

 Effects of Wagering Agreements 

• In India, wagering agreements are explicitly declared void and cannot be enforced in a court of law.
• According to Section 30 of the Act, agreements made by way of wager are void, and no legal action can be taken to recover anything claimed to be won on a wager or entrusted to someone based on the outcome of a game or uncertain event involving a wager.
• Although wagering agreements are void and unenforceable, they are not prohibited by law. This means that while such agreements are null and void, they are not illegal. However, in the states of Gujarat and Maharashtra, wagering agreements have been declared unlawful.
• Regarding collateral transactions, since wagering agreements are void but not unlawful, they are enforceable. For example, if someone lends money to another person to settle a gambling debt, the lender can legally recover the money paid.

 Agreement to Do Impossible Acts 

According to Section 56 of the Indian Contract Act, an agreement to perform an act that is impossible in itself is considered void. For instance, if A agrees with B to find treasure through magic, the agreement is not legally binding.

• When parties attempt to agree on something clearly impossible, it suggests they are either not serious or do not fully understand the implications of their agreement.
• The law does not recognize a promise to do something obviously impossible as valid, and such a promise holds no value as consideration.
• It's important to distinguish between an agreement to do an act that is impossible in itself and a contract that becomes impossible to perform later on.
• Subsequent impossibility, where a contract becomes impossible to fulfill after it has been agreed upon, renders the contract void. Further details on subsequent impossibility and its implications are discussed in Unit 3.