This Void Agreements – CA Foundation Law Study Material is designed strictly as per the latest syllabus and exam pattern.
Void Agreements – CA Foundation Business Law Study Material
Explain Agreements in restraint of trade. What are the exceptions to such agreements?
Agreements in restraint of trade (sec. 27)
Agreements in restraint of trade: “Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind,
to that extent void.” – [Sec. 27]
“Public policy requires that every man shall be at liberty to work for himself and shall not be at liberty to deprive himself of the fruit of his labor skill or talent, by any contract that he enters into”. The constitution of India guarantees Freedom of Trade.
“To that extent” – It means that only that portion of the agreement is void which is restrictive. Agreement in restraint of trade is valid in the following cases:
1. Sale of goodwill (Sec. 27) .’The seller of the goodwill of a business can be restrained from carrying on
- a similar business
- within specified local limits
- so long as the buyer or his successor in interest carries on a similar business provided
- the restraint is reasonable in point of time and place.
2. Partners’ Agreements (Exceptions given in the Partnership Act):
- Partner’s competing business. A partner of a firm may be restrained from carrying on a similar business, so long as he remains a partner – [sec. 11(2), Partnership Act.]
- Rights of outgoing partner: A partner may agree with his partners that on ceasing to be a partner he will not carry on a similar business within a specified period or within specified local limits – [sec. 36(2), Partnership Act],
- Partner’s similar business on dissolution: Partners may, in an¬ticipation of the dissolution of the firm, agree that all or some of them shall not carry on a similar business within a specified period or within specified local limits – [sec. 54, Partnership Act.]
- An agreement between any partner and the buyer of the firm’s goodwill: That such partner will not carry on any business similar to that of the firm within a specified period or within specified local limits provided the restrictions imposed are reasonable – [sec. 55(3), Partnership Act].
3. Trade Combinations:
An agreement, the primary object of which is to regulate business and not to restrain it, is valid. Thus, an agreement in the nature of a business combination between traders or manufacturers e.g., not to sell their goods below a certain price, to pool profits or output, and to divide the same in an agreed proportion does not amount to a restrain of trade and is perfectly valid. If an agreement attempts to create a monopoly, it would be void.
4. Negative stipulations in service agreements:
An agreement of service by which a person binds himself during the term of the agreement, not to take service with any else, is not in restrain of the lawful profession and is valid. But an agreement of service which seeks to restrict the freedom of occupation for some period, after the termination of service is void.
5. Sole Selling Agent’s Agreement:
An agreement between a manufacturer & sole selling agent in which the sole selling agent agrees not to deal with the goods of any other manufacturer, such restraint in trade is binding.
Define a wagering agreement. List its characteristics.
Agreements by way of the wager (sec. 30)
Definition. A wager is an agreement by which money is payable by one person to another on the happening or non-happening of a future uncertain event.
Characteristics of wagering agreements:
- The consideration for the promise under a wagering agreement is to pay or get money.
- The money is payable on the happening or the non-happening of an event.
- The agreement depends on a future and uncertain event.
- The essence of wagering is that one party wins and the other loses.
- In a wagering agreement, no party has control over the event.
- Parties have no interest in the contract other than winning or losing.
What is the exceptional case where agreements similar to wagering agreements are not treated as void?
It has been held that the following transactions are not wagers:
1. Shares: Share market transactions in which there is a clear intention to give and take delivery share.
2. Games of skill: Prizes and competitions which are games of skill, e.g. picture puzzles, athletic competitions, etc. An agreement to enter into a wrestling contest, in which the winner was to be rewarded by the whole of the sale proceeds of tickets and the party failing to appear on that day would have to forfeit ₹ 500 was held not to be a wagering agreement.
3. A statutory exception: An agreement to contribute to the payment of a prize of the value of ₹ 500 or upwards to the winners of a horse race, is valid. This is a statutory exception laid down in a sec. 30 of the Contract Act.
4. Contract of Insurance: A contract of insurance is not a wagering agree¬ment.
5. An agreement to purchase a lottery authorized by Government is valid: A lottery is an agreement for the distribution of chances of prizes in money among persons purchasing tickets. The dominant motive of the participants need not be gambling. Where a wagering transaction amounts to the lottery, it is illegal as per section 294A of the Indian Penal Code. However, section 294A itself states that this rule will not apply to lotteries run or authorized by a State.
6. Speculative transactions .’Though wagering transactions are void, speculative transactions are generally valid. It is, however, sometimes difficult to distinguish between a speculative transaction and a wagering trans¬action. A speculative transaction essentially must have two elements, namely,
- mutual intention of the contracting parties to acquire or deliver, as the case may be, the commodities; and
- the undertaking of risk arising from movement in prices. A wager, on the other hand, postulates only the incurring of risk.
Explain agreements in restraint of legal proceedings.
Agreements in restraint of legal proceedings (sec. 28).
Section 28 declares void 3 types of agreements that restraint the parties to the contract to take recourse to legal proceedings –
- Agreements that oust the jurisdiction of courts in trying the legal dispute & absolutely restrict a party from enforcing his legal rights.
- Agreements that curtail the period of limitation and prescribe a shorter period than that prescribed by law.
- Agreements that provide for forfeiture/waiver/extinguishment of the legal right itself, if no action is commenced within the period stipulated by the agreement.
Certain exceptions to the above rule may be noted:
- 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 (agreement to refer present disputes to arbitration)
- A clause in a contract or an agreement imposing partial restriction on the right to legal proceedings would be valid & enforceable.
Differentiate between wagering and insurance contracts.
|Basis||Contracts of Insurance||Wagering Agreement|
|Meaning||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.|
|Consideration||The crux of an insurance contract is a mutual consideration (premium and compensation amount).||There is no consideration between the two parties. There is just gambling for money.|
|Insurable interest||The insured party has an insurable interest in the life or property sought to be insured.||There is no property in case of a wagering agreement. There is betting on other’s life and properties.|
|Contract of Indemnity||Except for life insurance, the contract of insurance indemnifies the insured person against loss.||The loser has to pay the fixed amount on the happening of an uncertain event.|
|Enforceability||is valid and enforceable||It is a void and unenforceable agreement.|
|Premium||Calculation of premium is based on the scientific and actuarial calculations of risks.||No such logical calculations are required in the case of a wagering agreement.|
|Public Welfare||They are beneficial to society.||They have been regarded as against the public welfare.|
X agreed to become an assistant for 2 years to Y who was a practicing chartered accountant at Jodhpur. It was also agreed that during the term of agreement X will not practice as a chartered accountant on his own account within 20 kms of the office of Y at Jodhpur. At the end of one year, X left the 1 assistantship of Y and started practice on his own account within the said area of 20 kms.
Hint: The restriction contained in service agreements, whereby the employee agrees not to carry on the similar service on his own or for anyone : else during the period of his employment is valid and not treated as in restraint of trade (an exception to agreements in restraint of trade); the restriction on X not to carry on his own practice during the period of his employment with Y is valid and enforceable.
Sarah sells the goodwill of his shop to Vikas for ₹ 10,00,000 and promises not to carry on such business forever and anywhere in India.
Hint: The buyer can impose restriction of the seller of goodwill, not to carry on similar business, provided the restrictions are reasonable as regards to the duration and place of such business; (an exception to restraint on trade); the restraint on carrying on similar trade placed on Sarvesh, is not valid and hence is void to that extent.
An employed B and during the course of employment, B came to know of all the secrets of A’s business. B agrees with A not to do similar business in the particular area for 5 years after leaving A’s employment. Comment on the validity of the agreement
Hint: Generally any restriction imposed by service agreements on the employee is valid and not in restraint so far as relates to the period of employment. Any restriction on the employee whereby, after the termination of his service, he is prohibited from carrying on similar work on his own or for another employer, is treated as in restraint of trade and therefore void to that extent. However where such a restraint pertaining to the period after termination of services is essential to protect the trade secrets and interest of the employer, since the employee has knowledge of the same, then such restriction shall also be treated as valid and enforceable provided it is for a reasonable period of time. The agreement between A & B is valid and enforceable since B has knowledge of A’s business secrets.
Mr. Seth an industrialist has been fighting long-drawn litigation with Mr. Raman another industrialist. To support his legal campaign Mr. Seth enlists the services of Mr. X a legal expert stating that an amount of ₹ 5 lakhs would be paid if Mr. X does not take up the brief of Mr. Raman. Mr. X agrees, but at the end of the litigation, Mr. Seth refuses to pay. Decide whether Mr. X can recover the amount promised by Mr. Seth under the provisions of the Indian Contract Act, 1872.
Hint: Restraints imposed under service Agreements are valid and enforceable provided they are reasonable. A clause in a service agreement whereby an employee is prohibited from accepting any other engagement during his employment is valid and is not regarded as in restraint of trade. In the given case Mrs. Seth has enlisted (hired) the services of Mr. X a legal expert who agrees not to take up the brief of Mr. Raman during the course of litigation. Thus the agreement is valid & enforceable since the restriction imposed on Mr. X does not amount to restraint of trade. Mr. X can recover the amount from Mr. Seth.
Mr. X lends ₹ 10,000 to Mr. Y, in order to enable him to bet with Mr. C as to the results of a horse race. Can Mr. X recover the amount lent by him?
Hint: Wagering agreements are generally void and their collateral agreements are treated as valid and enforceable. However, in the case where the wagering agreement is regarded as illegal, agreements collateral to such agreements shall also be regarded as illegal and void ab initio; Mr. X can recover his loan from Mr. Y since the loan given by him is in the form of agreement collateral to the wagering agreement (betting on a horse race is void) and is therefore valid and enforceable.
A and B agree to share the proceeds of a robbery committed by them. A lends ₹ 500 to B to buy implements required for the robbery. Can A recover from B the money lent by him (A). Give reasons.
Hint: No the agreement is illegal and hence collateral transactions will also be void.