VOID AGREEMENTS in NUTSHELL. LEGAL PROVISIONS ICA, S. 2(g), 24, 25, 26, 27, 28, 29, 30, SRA, S.27

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1 VOID AGREEMENTS Dr. MD. SALIM Associate professor of Law Symbiosis Law School, NOIDA LECTURE DELIVERED LAST UPDATE: A 28/29/ B 23/29/ C 28/

2 VOID AGREEMENTS in NUTSHELL LEGAL PROVISIONS ICA, S. 2(g), 24, 25, 26, 27, 28, 29, 30, SRA, S.27

3 S. 2 (g): VOID AGREEMENTS The following types of agreements are declared to be void: 1. Agreements unlawful in part S Agreements without consideration S Agreements in restraint of marriage S Agreements in restraint of trade S Agreements in restraint of legal proceedings S Unmeaning agreements S Wagering agreements S. 30 If a contract is, on the face of it, capable of legal performance, the fact that one party was entertaining an undisclosed intention of performing it unlawfully or of using it as a part of unlawful scheme, would not disentitle the other party from enforcing it. In case of doubt interpretation which preferred lawful performance may be preferred.

4 1. AGREEMENTS UNLAWFUL IN PART S. 24 Where the object or consideration is illegal in part and is not severable from the rest, the whole agreement goes down. Poona bibi v. Fyaz Baksh (1874): Agreement of handing over full earning and liberty to divorce. The later part is unlawful.

5 2. AGREEMENTS WITHOUT CONSIDERATION S.25 It has already been considered earlier.

6 3. AGREEMENTS IN RESTRAINT OF MARRIAGE S. 26 Agreement in restraints of marriage in general, partial, marrying at all, remarriage, persons or class all are void. Rao Rani v. Gulab Rani (1942): agreement among the two widows is permitted which is not directly restraining the remarriage.

7 AGREEMENTS IN RESTRAINT OF TRADE Section 27 APPLICABLE LAWS: ICA, S. 2(g), 27, 23, 65 IPA, S.11, 36, 53, 54, 55 SRA, 27 IMPORTANT CASES Madhub Chander v Raj Coomar Das (1874) Nordenfelt v. Maxim [1894] A.C. 535 N. S. Golikari v Century Spinning Ltd. (1967) Precept D Mark Ltd. v. Zaheer Khan, 2006

8 4. AGREEMENTS IN RESTRAINT OF TRADE S. 27 Constitutional rights of freedom of trade, commerce etc.: Article: 19(g), 21, Part XIII Madhub Chander v Raj Coomar Das (1874): defendant a shopkeeper agrees to the plaintiff another shopkeeper of similar business to close down his shop on the payment of money which defendant denied paying later, the contract is void and the money claimed is irrecoverable. Whether the restraint is general, partial or total, unqualified or qualified, if the agreement is in the nature of a restraint of trade, it is void. English Law: The restriction will be valid if it is reasonable. In India it will be valid if falls within any of the statutory, or judicially created exceptions. Nordenfelt v. Maxim [1894] A.C. 535: Sale of goodwill by an inventor and manufacturer of guns and ammunition agreed with the buyer: Not to practice the same trade for 25 years, and Not to engage in any business competing or liable to compete in anyway with the business for the time being carried on by the company. He was sued for breach of contract when working with another company. The second part of the agreement is void.

9 COLLUSION BETWEEN BIDDERS AND TENDRERS Md. Ishaq v Daddapaneni (1946): Bidding for tender is different from pure trade agreements, so is not void if agreed on payment to abstain from bidding, so claim of payment is maintainable. Pattipati Ramligaiah v N. Subbarami (1993): The agreement among the villagers bidding by one on behalf of all held valid, even if the authorities were misguided about the price. The law of restraining from bidding and auction etc. need to be confirmed with the Competition Act, 2003 of India, which makes it void unless it is necessary in public interest as was spelled in S. 38 of MRTP Act. FREEDOM OF PRESS: An agreement in restraint of publishing anything of public interest is void. RESTRICTIONS IN LEASE: Lease of land / business premises granted for holding particular kind of business is not a restraint rather an opening of certain avenues.

10 EXCEPTIONS: There are two kinds of exceptions, STATUTORY EXCEPTIONS: 1. Sale of Goodwill: The agreement has to specify the reasonable local limits of the restraint. 2. Partnership Act: There are four provisions in the partnership Act which validate agreements in restraint of trade. Section 11, 36, 53, 54, 55.

11 EXCEPTIONS IN JUDICIAL INTERPRETATIONS: 1. Trade Combinations: Kores Mfg Co. v Kulok Mfg Co Ltd. (1959): Agreement of companies that neither would employ, without the written consent of the other. Profit sharing agreements on similar sale price is valid. 2. Solus or Exclusive Dealing Agreements: When producer or manufacturer likes or agreed to market his goods through a sole agent and the latter agrees in turn not to deal with the goods of any other manufacturer. E.g. EMR s, Authorized outlet / exclusive shop. Carliles Co. v Bucktermull: Exclusive supply/marketing agreement of particular brand of dhotis to one party only. Unreasonable term or long time are not valid / enforceable.

12 3. Restraint Upon Employees: During Employment: A servant / employee may be restrained from taking part in any business in direct competition with that of his employer. Charlesworth v McDonald (1898): A physician having three years contract with the term of not practicing started own practice after leaving the service. Person himself, agents, relatives and family members may also be barred upon agreement upto currency of engagement in the employment. Restrictions permitted on the basis of trade secrets or techniques.

13 After termination of Employment: An agreement to restrain a servant or employee from competing with the employer after the termination of employment may not be allowed by the courts. N. S. Golikari v Century Spinning Ltd. (1967): Except when service period bond or restrain on similar service during the bond period is valid. A master is not entitled to restrain his servant after the termination of employment from offering competition, but is entitled to reasonable protection against exploitation of trade secrets on the basis of technical know how. No restriction was allowed to be imposed upon an employee when his term of employment was not for a specified period and he had left the job. Precept D Mark Ltd. v. Zaheer Khan, 2006: An agreement was entered into with a sports management agency for marketing and managing the cricketer s endorsements, the contract provided that even after its termination, if the cricketer received an offer from a third party then he would have to first submit that offer to the agency, which could then choose to that offer. Held to constitute restraint and void.

14 Agreements in restraint of legal proceedings S.28

15 5. Agreements in restraint of legal proceedings S.28 The rule of law is that an agreement purporting to oust the jurisdiction of the courts is illegal and void on grounds of public policy. Any clause in an agreement providing that neither party shall have the right to enforce the agreement by legal proceedings is void. S. 28 renders two kinds of agreements void, namely: 1. an agreement by which a party is restricted absolutely from enforcing his legal rights arising under a contract by the usual legal proceedings in the ordinary tribunals, 2. an agreement which limits the time within which the contract rights may be enforced.

16 Absolutely S. 28 will come into play when the restriction imposed upon the right to sue is absolute, that is, the parties are wholly precluded from pursuing their legal remedies in the ordinary tribunals. The partial restraint will be valid. Generally three jurisdictions are available, The place of making the contract, The place of performance of contract, and The defendant s place of business or residence. If out of these three, atleast one is left open, it will not offend S. 28, provided the jurisdiction left open is available under CPC and is a convenient one i.e. available at reasonable expense and not inaccessible. A bilateral agreement under which an option is provided for choosing the jurisdiction of a particular country was held to be not opposed to public policy.

17 Exceptions: 1. Reference of future disputes to arbitration: The section does not render void a contract by which two or more persons agree that any dispute which may arise between them shall be referred to arbitration and that only the amount awarded in the arbitration shall be recoverable. 2. Reference of existing disputes to arbitration: This exception saves contracts to refer to arbitration questions that have already arisen. Where the parties agreed to refer their disputes to arbitration, they were held to be bound to do so.

18 6. Uncertain Agreements - S. 29 Guthing v Lynn: Horse bought for a certain price coupled with a promise to give $ 5 more if the horse proved lucky. The agreement was held to be void for uncertainty. If the price of the goods are not fixed, agreement is not uncertain, reasonable price may be paid under S. 9-Sale of goods Act. Agreement to agree or negotiate: an agreement to agree in future is uncertain and void, Preliminary negotiations taking definite shape: the parties can be compelled to contract on the terms based on preliminary negotiations crystalized into a definite shape.

19 Partial Uncertainty capable of being made certain : An uncertainty about a part of the contract may not have the avoiding effect. Lockout agreement: An agreement by which one party for good consideration agrees for a specified period of time, not to negotiate with anyone except the other party in relation to the sale of his property, can constitute an enforceable agreement. An agreement to negotiate in good faith for an unspecified period is not enforceable and nor can a term to that effect be implied in a lock-out agreement for an unspecified period. Option for renewal of tenancy: An option for renewal of tenancy is an enforceable option. But an option clause which provides for renewal of a lease on such terms as may be agreed upon by the parties at the time of renewal would make it invalid and unenforceable for uncertainty.

20 WAGERING CONTRACTS Section 30 APPLICABLE LAWS: ICA, S. 2(g), 30, 23, 65 SRA, 27 IMPORTANT CASES Babasaheb v Rajaram AIR 1931 Bom 264 W. Banvard v. MM Moolla, AIR 1929 Rang 241 Gherulal Parekh v Mahadeodas Maiya, AIR 1959 SC 781 Rajshree Sugars & Chemicals Limited v Axis Bank Limited, MANU/TN/0893/2008

21 A contract by A to pay money to B on the happening of a given event, in consideration of B paying to him money on the event not happening. If A insures cargo which is loaded on a vessel, this contract is not a wager because A s property is at risk during the voyage; but if A has no cargo on board, the contract is a wager; because if the vessel safe, A loses the amount of premium. Anson says: A promise to give money or money s worth upon the determination or ascertainment of an uncertain event. It is essential to a wagering contract, that each party may under it either win or lose, whether he will win or lose being dependent on the issue of the event, and, therefore, remaining uncertain until that issue is known. If either of the parties may win but cannot lose, it is not a wagering contract.

22 Dr. Salim defines wager as When two or more persons professing to hold an opposite opinion agree to receive or to pay something on the happening or non-happening of an uncertain future or unknown past event in which non of them have any control or interest other than that just created, is wager.

23 The expression wager has not been defined in the Indian Contract Act. A classic definition is however available in the case of Carlill v. Carbolic Smoke Ball Co, A wagering contract is one by which two persons, professing to hold opposite views touching the issue of a future uncertain event, mutually agree that, dependent on the determination of that event, one shall win from the other, and that other shall pay or hand over to him, a sum of money or other stake; neither of the parties having any other interest in that contract than the sum or stake he will so win or lose, there being no other consideration for making of such contract by either of the parties. If either of the parties may win but cannot lose, or may lose but cannot win, it is not a wagering contract.

24 1. Uncertain Event: The performance of the bargain must depend upon the determination of an uncertain event. A wager generally contemplates a future event; but may even relate to an event which has already happened in the past, but the parties are not aware of its result or the time of its happening. 2. Mutual chances of gain or loss: Upon the determination of the contemplated event each party should stand to win or lose. If there are no such mutual chances of gain or loss, there is no wager. A chit fund is not wager. Babasaheb v Rajaram AIR 1931 Bom 264: Wrestlers Case 3. Neither party to have control over the event: Neither party should have control over the happening of the event one way or the other. 4. No other interest in the event: Neither party should have any interest/risk in the happening of the event other than the sum or stake he will win or lose. This is the distinguishing point between a wager and an insurance.

25 Speculative Transactions: An agreement to settle the difference between the contract price and the market price of certain goods on a specified day has been held to be wager. Kong Yee Lone & Co. v. Lowjee Nanjee, 1901, Sukdevdoss v. Govindoss, 1918 and Doshi Talakshi v. Shah Ujamsi Velsi, Effect of wagering transactions: Void in forms. Collateral transactions: A wager is void, though not forbidden by law, hence, a wagering agreement is not unlawful under section 23 of ICA, and transactions collateral to it are enforceable. Agent / partner paid losses on wagering transactions could recover appropriate / proportionate indemnity from his principle / partners. W. Banvard v. MM Moolla, AIR 1929 Rang 241: K Owed money to N on a betting transaction. K refused to pay the said amount. N threatened to post K as defaulter before the Turf Club. So, K gave a post dated cheques to N and requested N not to do so and moreover K promised to make payment on certain day but he defaulted. It was held that plaintiff could recover on the cheques because the consideration for the passing of a cheque was the plaintiff s act in refraining from posting defendant before the Turf Club (as plaintiff could have done so) and the defendant s promise on such consideration is binding on defendant.

26 Bombay Act III of 1865 Section 1 and 2. The English Gaming Act, 1845 Marine Insurance Act, 1963 Section 6 Northern India General Insurance Co Ltd v. Kanwarjit Singh Sobti, AIR 1973 All 357: A truck owned by A was transferred benami to B who got it insured in his own name. The truck was involved in an accident and it seriously injured a young army officer who claimed heavy damages from the owner, driver, the benamidar and the insurance company. It raised the plea that an ostensible owner (a benamidar) had no insurable interest and that it was a wager for that reason. But these pleas were negatived by the high court. Alamai v. Positive Government Security Life Assurance Co. Ltd, 1898: The defendant co. issued a policy for term of 10 yrs. For Rs. 25,000/- on the life of Mehbub Bi, the wife of a clerk in the employment of the plaintiff s husband. After about a week, Mehbub Bi assigned the policy to the plaintiff. Mehbub Bi died a month later, and the plaintiff, as assignee of the policy, sued to recover Rs. 25,000/- from the defendants. Evidence showed that the policy was not effected by Mehbub Bi for her own use and benefit, and that it was void as a wagering transaction. Vappakandu Marakayar v. Annamali Chetti, 1901: The plaintiff lent a sum of money to the defendant on the risk of ship belonging to them. On 3 rd August 1896, the defendant passed a writing to the plaintiff which, after reciting the loan on the risk of the ship now under sail to Nicobars from Negapatam provided for the payment by the defendants to the plaintiff on 20 th March 1897 of the loan with if the ship returned safely to Negapatnam after the completion of her voyage, but that if ship did not return, the plaintiff lost his money. The ship had left Negapatnam on 23 rd July 1896, and was lost at sea three days later. In a suit by the plaintiff to recover the amount of the loan on the ground that the ship was lost before the date of the agreement, it is void by wager.

27 The position of derivatives under the common law and India: Two English decisions have caused concern among market participants that certain derivatives transactions may fall foul of the gaming and wagering laws. In Universal Stock Exchange v. Strachan [1904] 2 KB 658, the court held that wagering contracts included contracts for differences. Halsbury defines contracts for derivatives / differences as; Agreements between those who are only ostensible buyers and sellers of stock and shares where the common interest of the parties is to pay or receive the differences between their prices on one day and their prices on another day. In the second decision, City Index Limited v. Leslie [1927] 3 KB 234, the court declared that contracts akin to cash-settled derivatives were contracts for differences. The combined effect of both decisions is that cash-settled derivatives are wagering contracts and therefore unenforceable, unless exempted by legislation.

28 Gherulal Parekh v Mahadeodas Maiya, AIR 1959 SC 781 The appellant, Gherulal Parakh, and the first respondent, Mahadeodas Maiya, managers of two joint families entered into a partnership to carry on wagering contracts with two firms of Hapur, namely, Messrs. Mulchand Gulzarimull and Baldeosahay Surajmull. It was agreed between the partners that the said contracts would be made in the name of the respondents on behalf of the firm and that the profit and loss resulting from the transactions would be borne by them in equal shares. In implementation of the said agreement, the first respondent entered into 32 contracts with Mulchand and 49 contracts with Baldeosahay and the net result of all these transactions was a loss, with the result that the first respondent had to pay to the Hapur merchants the entire amount due to them. As the appellant denied his liability to bear his share of the loss, 'the first respondent along 'With his sons filed O. S. No. 18 of 1937 in the Court of the Subordinate Judge, Darjeeling, for the recovery of half of the loss incurred in the transactions with Mulchand. In the plaint he reserved his right to claim any further amount in respect of transactions with Mulchand that might be found due to him after the accounts were finally settled with him. That suit was referred to arbitration and on the basis of the award, the Subordinate Judge made a decree in favour of the first respondent and his sons for a sum of Rs. 3,375. After the final accounts were settled between the first respondent and the two merchants of Hapur and after the amounts due to them were paid, the first respondent instituted a suit, out of which the present appeal arises, in the Court of the Subordinate Judge, Darjeeling, for the recovery of a sum of Rs. 5,300 with interest thereon.

29 Rajshree Sugars & Chemicals Limited v Axis Bank Limited, MANU/TN/0893/2008 In a foreign exchange derivatives contract, sold by the Bank to the company, thereby resulting in huge losses for the company estimated to be around Rs crores. The company had refused to make any loan repayment to the bank contending that the contract was a wagering deal, and hence untenable on such grounds. The court answered this issue in the negative. Based on the elucidations of various landmark judgments on wagers, the court evolved a threefold test to determine whether the contract is a wager - First, there must be two persons Holding opposite views touching a future uncertain event; second, one of those parties is to win and the other is to lose upon the determination of the event; third, both the parties have no actual interest in the occurrence or non-occurrence of the event, but have an interest only on the stake. The case in question fulfilled the first criteria, but the second was not satisfied because in the light of the facts of the case, the plaintiff did not always stand to lose. Citing Indian case law the judges make an interesting observation, that though every wagering contract is speculative in nature, every speculation need not necessarily be a wager. Further, a common intention to wager is essential, and an element of mutuality has to be present in the sense that the gain of one party would be the loss of the other on the happening of the uncertain event which is the subject matter of wager. In the light of abovementioned points and also adhering to the Supreme Court judgment in Gherulal Parakh v. Mahadeodas Maiya the Judges in this case concluded that the sequence of events in the present case reflected that the nature of the transaction was not in the form of a wager. Even though the plaintiff was susceptible to incurring huge losses yet that by itself could not deem the contract to be a wager.

30 EXCEPTIONS: 1. Horse Race: The section does not render void a subscription or contribution, an agreement to subscribe or contribute, towards any plate, prize or sum of money, of the value or amount of Rs. 500/- or upwards to the winner of any horse races. 2. Crossword Competitions: If skill plays substantial part in the result and prizes are awarded according to the result of the solution, the competition is not a lottery, otherwise it is.

31 Illegal & Void Agreements Unenforceable: An illegal agreement is one which is actually forbidden by the law S. 23 A void agreement may not be forbidden, the law may merely say that if it is made, the courts will not enforce it - S Nothing can be recovered if paid under either kind of agreements.

32 Exceptions 1. Where contract still executory: Where the contract is still executory and no part of the illegal purpose has been carried into effect, the money paid or goods delivered under it may be recovered. 2. Parties not in Pari-delicto (at equal fault): Where the parties are not in pari-delicto the less guilty may be able to recover money paid, or property transferred, under the contract. The possibility may arise in three situations: A. The contract may be of a kind made illegal by a statute in the interest of a particular class of persons of whom the plaintiff is one. B. The plaintiff must have been induced to enter into the contract by fraud or strong pressure. C. A person who is under a fiduciary duty to the plaintiff will not be allowed to retain property, or to refuse to account for money received, on the grounds of an illegal transaction.

33 3. Where recovery possible without relying on illegal agreement: Transactions arising out of an agreement to do an illegal act, if taken separately from the illegal act, they would be valid and enforceable notwithstanding the illegality of the agreement. A person allowed to recover which he made over to his brother in-laws for evasion of taxes. When a contract is repudiated on account of its illegality, the innocent party may recover compensation proportionate to the amount of work done.

34 4. Collateral Transactions: It is a transaction subsidiary to the main transaction. If the main transaction is unlawful, the collateral is also of the same effect, but if the money advanced to perform a void agreement, the money is recoverable, and the collateral transaction is valid. 5. Severance: Where the agreement is partly illegal, the court will enforce the part which is not illegal provided that it is severable from the rest of the agreement. Where a contract is severable, it would make no difference that the parties had knowledge of the fact that their contract contained an illegal element.

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