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Void Agreements– CA Foundation Business Law Notes
According to sec. 23, the consideration or the object of an agreement is unlawful in following cases:
1. If it is forbidden by law:
A promises to drop a prosecution which he has instituted against B for robbery, and B promises to restore the value of the things taken. The agreement is void, as its object is unlawful.
If it is of such a nature that, if permitted, it would defeat the provisions of any law.
A’s estate is sold for arrears of revenue under the provisions of an Act of the Legislature, by which the defaulter is prohibited from purchasing the estate. B, upon an understanding with A, becomes the purchaser and agrees to convey the estate to A upon receiving from him the price which B has paid. The agreement is void, as it renders the transaction, in effect, a purchase by the defaulter, and would so defeat the object of the law.
2. If it is fraudulent:
(1) A, being an agent for a landed proprietor, agrees, for money, without the knowledge of his principal, to obtain for B a lease of land belonging to his principal. The agreement between A and B is void as it implies a fraud by concealment by A, on his principal.
(2) A scheme of fraud among partners in a firm to cheat income tax authorities or among directors of a company to cheat the investors is void.
(3) An agreement between some persons to purchase shares in a company with a view to induce other persons to believe, contrary to the fact, that there is a bona fide market for the shares is void.
3. If it involves or implies injury to the person or property of other:
A borrowed ₹ 100 from B. He (A) executed a bond promising to work for B without pay for 2 years and in case of default agreed to pay interest at a very exorbitant rate and the principal amount at once. Held: The contract was void.
4. If the court regards it as immoral:
A let a cab on hire to B, a prostitute, knowing that it would be used for immoral purposes. The agreement is void. [Pearce v. Brooks (1886) L.R. 1 Ex. 213]
5. If the court regards it as opposed to public policy:
A promises to obtain for B an employment in the public service and B promises to pay A ₹ 1,000. This is an unlawful agreement.
6. Every agreement of which the object or consideration is unlawful is void.
Agreements Opposed to Public Policy:
An agreement, which is injurious to the public or is against the interests of the society is said to be opposed to public policy. Public policy is not capable of exact definition. It varies from time to time. The Courts do not usually go beyond the decided cases on the subject.
It has been said in the House of Lords that, “public policy is always an unsafe and treacherous ground for legal decision”. Courts are generally disinclined to create a new item in the list of agreements against public policy.
The agreements which have been declared against public policy by Courts can be described under the following heads:
- Agreements for trading with the enemy.
- Agreements for stifling (suppressing) prosecution.
- When an offence has been committed, the guilty party must prosecuted and any agreement which seeks to prevent the prosecution of such a person is opposed to public policy and is void.
- Agreements interfering with the course of justice. Any agreement whose purpose or effect is to use improper influence of any kind with judges or officers of justice is void.
- Agreements for marriage brokerage.
- Agreements tending to create interest against obligation.
- Agreements for sale of public offices, titles and appointments.
- Agreements tending to create monopolies.
- Agreements not to bid.
- Agreements restraining personal liberty.
- Agreements in restraint of parental rights.
- Agreements interfering with marital duties.
- Agreements to influence public servants to act opposed to their duty.
- Agreements in restraint of marriage.
- Agreements in restraint of trade.
- Agreements in restraint of legal proceedings.
Agreements of champerty and maintenance:
Champerty and Maintenance are British terms and can be described as the promotion of litigation in which one has no self interest.
→ When a person helps (financial or otherwise) another in litigation in which he is not himself interested and does not share in the proceeds of the action, it is called Maintenance.
→ When a person helps another in litigation in exchange of a promise to hand over a portion of the fruits of the litigation, if any, it is called Champerty.
→ Example : P files a suit against Q for the recovery of a claim of ₹ 1 lakh. X promises to advance ₹ 20,000 to P for the costs of the litigation and P promises to give to X ₹ 40,000 if he is successful in his suit. This is an agreement by way of champerty. Had P been liable to return to X only the amount taken by him, then it would have been a mere maintenance agreement.
→ In India, an agreement to finance litigation in return of a portion of the results of the litigations is valid provided the litigation was instituted with a bona fide motive and the terms are not unfair or unjust to the helped person. If, however, the litigation was inspired by a malicious motive or to instigate litigation or is of a gambling character, or is against public policy, the agreement is bad.
The following agreements have been expressly declared as void under the Indian contract Act.
- Agreements by a minor or a person of unsound mind. (Sec. 11)
- Agreements made under a bilateral mistake of fact material to the agreement. (Sec. 20)
- Agreements whose objects or considerations are unlawful. (Sec. 23)
- Agreements whose objects or considerations are unlawful in part and the illegal part cannot be separated from the legal part. (Sec. 24)
- Agreements made without consideration. (Sec. 25)
- Agreements in restraint of marriage. (Sec. 26)
- Agreements is restraint of trade. (Sec. 27)
- Agreements in restraint of legal proceedings. (Sec. 28)
- Agreements the meaning of which is uncertain. (Sec. 29)
- Agreements by way of wager. (Sec. 30)
- Agreements contingent on impossible events. (Sec. 36)
- Agreements to do impossible acts. (Sec. 56)
Serial numbers 1 to 5 have already been discussed in preceding chapters.
Agreements in restraint of marriage [Sec. 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.
Agreements in restraint of trade [Sec. 27]:
Agreements in restraint of trade: “Every agreement by which any one 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 labour 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 agreement is void which is restrictive.
Twenty-nine out of thirty manufacturers of combs in the city of Patna agreed with R to supply him with combs and not to any one 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 and was thus void.
An Agreement in restraint of Trade is void. State the Exceptions to the Rule:
Agreement in restraint of trade is valid in the following cases:
A. Statutory Exceptions:
(a) Sale of goodwill (Sec. 21)
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.
(b) Partners’ Agreements (Exceptions given in the LLP and 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 anticipation of the dissolution of the firm, agree that all or some of them shall not carry on 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]
It should be noted that such agreements can also be entered into by the partners of Limited Liability Partnership incorporated under LLP Act, 2008.
B. Legal decisions:
(a) 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 example – 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 (Kameshwar Singh v. Yasin Khan). An agreement between Ice manufacturer not to sell ice below a stated price and to divide profits in a certain proportion is not void under.
(b) Negative stipulations in service agreements – An agreements 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 lawful profession and is valid. Thus, a chartered accountant employed in a company may be debarred from private practice or from serving elsewhere during the continuance of service. But an agreement of service which seeks to restrict the freedom of occupation for some period, after the termination of service is void.
(c) 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 a restraint in trade is binding.
Agreements in restraint of legal proceedings. [Sec. 28]:
Section 28 declares void 3 types of agreements which restraint the parties to the contract to take recourse to legal proceedings –
- Agreements which oust jurisdiction of courts in trying the legal dispute.
- Agreements which curtail the period of limitation and prescribe a shorter period than that prescribed by law.
- Agreements which provide for forfeiture/waiver/extinguishment of the legal right itself, if no action is commenced within the period stipulated by the agreement. (Amended by Indian Contract (Amendment) Act, 1996 effective from 8-1-1997).
As a result of this amendment personal legal rights by way of agreement can neither be restricted or curtailed by way of limitation of time nor those rights be extinguished. These kinds of clauses were usually found in insurance policy contracts which provide that if a claim is made and rejected and no action is commenced within the time stipulated in the policy, the benefits flowing from policy shall stand extinguished and any subsequent action would be time barred.
Therefore, the right which has been extinguished for failure to commence action within the stipulated time could not be enforced, But, consequent to the amendment to this section in 1996 “every agreement which extinguishes the rights of any party thereto, or discharges any party thereto from any liability, under or in respect of any contract on the expiry of a specified period so as to restrict any party from enforcing his rights would also be void to that extent”.
Certain exceptions to the above rule may be noted:
(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, (agreement to refer present disputes to arbitration)
(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, (agreement to refer past & future disputes to arbitration)
Agreements with uncertain meanings [Sec. 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.
Agreements by way of wager [Sec. 30]:
What is a wagering agreement?
A wager is an agreement by which money is payable by one person to another on the happening or non-happening of future uncertain event. “The essence of gaming and wagering is that one party is to win and the other to lose upon a future event, which at the time of the contract is of an uncertain nature-that is to say, if the event turns out one way A will lose but if it turns out the other way he will win”. Thacker v. Hardy.
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 gaming and wagering is that one party is to win & the other lose.
- In wagering agreement no party has control over the event.
- Commercial transactions are valid, but to pay price differences in a wagering agreement is void.
It has been held that the following transactions are not wagers:
(i) Shares: Share market transactions in which there is clear intention to give and take delivery share.
(ii) 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.
However, crossword puzzles in which prize depends on the correspondence of the competitor’s solution with a previously prepared solution kept with the editor of the newspaper is a lottery and hence a wagering transaction. According to the Prize competition Act, 1955 prize competitions ; in games of skill are not wagers provided the prize money does not exceed ₹ 1,000. [State of j Bombay vs. R.M.D. Chamarbangwala, AIR (1957)].
(iii) 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 statutory exception laid down in sec. 30 of the Contract Act.
(iv) Contract of Insurance: A contract of insurance is not a wagering agreement.
(v) Chit Fund: Chit fund does not come within the scope of wager.
Difference between insurance contracts and wagering agreements:
|Basis||Contracts of Insurance||Wagering Agreement|
|1. 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.|
|2. Consideration||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.|
|3. Insurable||Insured party has insurable interest in the life or property sought to be insured.||There is no property in case of wagering agreement.|
|4. Interest||Except life insurance, the contract of insurance indemnifies the insured person against loss.||There is betting on other’s life and properties.|
|5. Contract of Indemnity||It is valid and enforceable||Loser has to pay the fixed amount on the happening of uncertain event.|
|6. Enforceability||Calculation of premium is based on scientific and actuarial calculation of risks.||It is void and unenforceable agreement.|
|7. Premium||They are beneficial to the society.||No such logical calculations are required in case of wagering agreement.|
The effects of a wagering agreement:
An agreement by way of wager is void. It will not be enforced by the courts of law. In the State of j Maharashtra and of Gujarat wagering agreement are, by a local stature, not only void but also illegal. Though wagering agreements and void, collateral transactions to it would be valid.
Thus a broker in a wagering transaction can recover his brokerage. Similarly a principal can recover from his agent, the prize money received by him on account of wagering transaction. Thus wagering agreements are void but not illegal.
“An agreement to purchase a Lottery authorised by Govt, is valid” Comment:
Lottery is an agreement for the distribution of chance of prizes in money among persons purchasing tickets. The dominant motive of the participants need not be gambling. Where a wagering transaction amounts to lottery, it is illegal as per section 294A of the Indian Penal Code.
However, section 294A itself state that this rule will not apply on lotteries run or author ized by a State. The Supreme Court in H Anroj v. Government of Tamil Nadu upheld lotteries with a prior permission of the Government as legal thereby conferring upon the winner of the lottery a right to receive the 1 prize subject to payment of sales tax.
Though wagering transactions are void, speculative transactions are generally valid. It is, however, sometimes difficult to distinguish between a speculative transaction and a wagering transaction. 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.
- The undertaking of risk arising from movement in prices. A wager, on the other hand, postulates only the incurring of risk.
Is a party receiving benefit under a void agreement, voidable contract, a void contract bound to return it?
Secs. 64 & 65 which deal with ‘restitution’ are reproduced below.
Consequences of rescission of voidable contract:
When a person at whose option a contract is voidable rescinds it, the other party thereto need not perform any promise therein contained in which he is promisor. The party rescinding a voidable contract shall, if he has received any benefit thereunder from another party to such contract, restore such benefit, so for as may be, to the person from whom it was received. (Sec. 64).
Advantage received under void agreement or void contract:
When an agreement is discovered to be void or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it. (Sec. 65).
(a) A contracts to sing for B at a concert for ₹ 1,000 which are paid in advance. A is too ill to sing. A is not bound to make compensation to B for the loss of the profit which B would have made if A had been able to sing, but must refund to B ₹ 1,000 paid in advance.
(b) A contractor entered into an agreement with Government to construct a godown and received advance payments for the same. He did not complete the work and the Government terminated the contract. Held, the Government under Sec. 65 could recover the amount advanced to the contractor under (State of Orissa v. Rajballav, A.I.R. 1976 Ori.10).
Sec. 65 applies to contracts “discovered to be void” and “Contracts which becomes void”. It does not apply to –
- Contracts which are known to be void when they are entered into. Thus, if P pays ₹ 500 to D to beat T, the money should not be recovered (Inderjit Singh v. Sunder Sing).
- Contracts of parties who are incompetent to contract example – contracts of a minor or of a person of unsound mind. But the Court may, on equitable grounds, order for the restoration of the benefit by the minor where he has misrepresented his age.