trictly for Internal Circulation - KCL UNIT - III Introduction: When a proposal is made by a person to another, it gets converted into an agreement when it is accepted by that person to whom it is made. An agreement may be void, voidable or a valid one. VOID AGREEMENT A void agreement is that agreement that does not fulfil all the legal requirements of a valid contract that are provided in ection 10 of Indian Contract Act, 1872. ection 2(g) of Indian Contract Act, 1872 defines "Void agreement" as- "An Agreement not enforceable by law is said to be void." A void agreement can not be enforced even when both the parties to a contract are agreed upon it because it has no existence in the eyes of law. Void agreements are also of two kinds- 1. Void-ab-initio 2. Void subsequent. Void-ab-initio agreements are those agreements which are void from the very beginning. This means such type of agreements never comes in existence. Void-subsequent agreements are those agreements which are lawful/legal at the time of entering the contract but later on due to some reasons beyond the control of the parties to a contract, their completion becomes impossible. This kind of agreements is also known as frustrated agreements which are covered under the topic "Doctrine of Frustration". Agreements declared to be void by I.C. Act, 1872: Indian Contract Act, 1872 declares the following agreements void- Unlawful agreements (ection 23) Agreements without consideration (ection 25) Agreements in restraint of marriage (ection 26) Agreements in restraint of Trade (ection 27) Agreements in restraint of legal proceedings (ection 28) Agreements void for uncertainty (ection 29) 21
trictly for Internal Circulation - KCL Agreement by way of wager (ection 30) Agreement to do impossible acts (ection 56) 1) UNLAWFUL AGREEMENT: According to ection 23 of Indian Contract Act, 1872- "The consideration or object of an agreement is lawful unless - it is forbidden by law; or is of such a nature that, if permitted, it would defeat the provisions of any law; or is fraudulent; or involves or implies injury to the person or property of another; or the court regards it as immoral or opposed to public policy. In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void. In a recent case of Central Inland Water Transport Co. Ltd. Vs Birjo Nath Ganguly and others AIR 1986 C 1571 The upreme Court observed that the term 'public policy' is not defined in the IC Act, 1872. From the very nature of things 'public policy' is incapable of precise definition. Public policy connotes some matter which concerns the public good and public interest. The concept of public good or public interest has varied from time to time and place to place. ome of the various agreements or. areas that are recognised by the courts against public policy are as follows- 1. Agreements prejudicial to the state for example Trading with the enemy, sale of public offices and appointment etc. 2. Agreements interfere with administration of justice, for example maintenance and champerty agreements, agreement to stifle prosecution etc. 3. Agreements against public decency for example marriage brokerage agreements, agreements against marital relations etc. Effect of Unlawful Agreements: 1. Contract, which is unlawful, is also void. 2. No recovery of money paid or goods delivered in pursuance of an illegal contract except: a. Where one of the parties is innocent. b. Where no more has been done than the payment of money and no part illegal purpose has been carried out. 2) Agreements without consideration: Consideration is an essential part of an agreement. An agreement is converted into a valid contract if it has lawful consideration as per the requirement of 22
trictly for Internal Circulation - KCL section 10 of I.C. Act, 1872. But ection 25 and ection 185 of I.C. Act, 1872 are exception to it : According to ection 25 of I.C. Act, 1872, an agreement made without consideration is void unless- i) it is expressed in writing and registered under the law for the time being in force for the registration of document and is made on account of natural love and affection between parties standing in a near relation to each other, or unless; ii) iii) it is a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promiser, or something which the promisor was legally compellable to do; or unless it is a promise made in writing and signed by the person to be charged therewith, or by his agent generally or by specifically authorised in that behalf, to pay wholly or in part a debt of which the creditor might have enforced payment but for the law for the limitation of suits. In any of these cases, such an agreement is a contract. For Example 1. A, for natural love and affection, promises to give his son,, Rs. 1000. A puts his promise to, into writing and registers it. This is a contract. 2. A find B's purse and gives it to him. B promises to give A Rs. 50. This is a contract. Besides the section, another exception is recognized under section 185. In the famous case of Raj Luckhy Vs Bhootnath (1900) 4 Call. W.N. 488 The husband and wife had strained relations. They entered into an agreement by which they started to live apart and the husband voluntarily agreed to give a monthly amount to the wife. The agreement also expressed their bitter relations. The court held that there was no consideration for that agreement from the wife's side and the agreement was not entered due to love and affection as shown by the agreement. Hence the court held that the present suit cannot be maintained. 3) Agreement in restraint of Marriage: According to ection 26 of IC Act, 1872- "Every agreement in restraint of marriage of any person, other than a minor, is void. A famous English case on this pont is Lawe Vs Peers (1768) 4 Burr. 2225. In this case Mr. Peers made a promise to Mrs. Catherine Lowe in the following words- "I do truly promise Mrs. Catherine Lowe that I will not marry with any person besides herself; I agree to pay the said Catherine Lowe 2000 within 3 months next after I shall many anybody else". The court held this contract is void because it unduly restricts or hampers the freedom to marry. This contract is opposed to public policy also. 23
trictly for Internal Circulation - KCL ection 26 of I.C. Act, 1872, does not state about the kind of restraint, it tells us about restraint of marriage but the court held that this section does not apply where the restriction is only against marriage with a particular person or a person of particular religion. The two widows of a person agreed that if either of them remarried, she would forfeit her share in the property. The court held that the said restraint on marriage was not a direct or total prohibition to remarry. Hence the restraint is valid. A person wrote a clause in his will that the person who is entitled to get some benefit under the will would forfeit his or her share if he or she married outside parsee community. The court held that the restraint is valid and it can not be said that the testator is doing something which is against morality or against law. Hence partial restraint on marriage is legal whereas absolute restraint on marriage is void. 4) Agreement is restraint of trade: According to section 27 of IC Act, 1872- "Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to the extent void. Exception: aving of agreement not to carryon business of which goodwill is sold- one who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business within specified local limits, so long as the buyer or any person deriving title to the goodwill from him, carries on a like business therein: Provided that such limits appear to the. court reasonable, regard being had to the nature of the business. Originally, all restraints of trade whether general or partial were regarded as totally void. But later on, a distinction was made between general and partial restraints and general restraints were declared invalid whereas partial restraints were held valid. But section 27 of I.C. Act, 1872 covers absolute as well as partial restraint. The only exception to this section is the sale of goodwill. The defendant agreed to pay a sum of money to the plaintiff if he stopped his business in that locality. The plaintiff stopped the business but the defendant refused to pay the amount agreed to the plaintiff. The court held that the agreement was void and therefore no part of it could be enforced. 5) Agreements in restraint of legal proceedings void: According to ection 28 of I.C. Act, 1872- "Every agreement, by which any party thereto is restricted absolutely from enforcing his: rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce his rights is void to that extent". Exception I : aving of contract to refer to arbitration dispute that may arise this section shall not render illegal a contract by which two or more persons agree that any dispute which may arise between them in respect of any subject or class of subjects shall be referred to arbitration, and that only the amount awarded in such arbitration shall be recoverable in respect of the dispute so referred. Exception II : aving of contract to refer questions that have already arisen- Nor shall this section render illegal any contract in writing, by which two or more, persons agree to refer to arbitration any 24
trictly for Internal Circulation - KCL question between them which has already arisen, or affect any provision of any law in force for the time being as to references to arbitration. 6) Agreements Void for Uncertainty: According to section 29 of IC Act, 1872- "Agreements, the meaning of which is not certain, or capable of being made certain, are void." For Example- A agrees to sell B "a hundred tons of oil". The agreement is void due to uncertainty because there is nothing to show what kind of oil was intended. ection 29 of IC Act, 1872 lays down two main things- i) The agreements are void of which the meaning is uncertain. ii) Agreements which are incapable of being made certain are void. This means if any agreement is apparently uncertain but is capable of being made certain, it is valid, not void. For example - A, a dealer in Kerosene Oil only, agrees to sell to B, 'one hundred tons of oil'. In this case, although the agreement is uncertain on the face of it but it is clear that the intention of A is to deal with kerosene oil. Hence the agreement is valid and enforceable. 7) Wager Agreements: ection 30 of IC Act, 1872 provides that- "An agreement by way of wager are void", Now question arises- What is wager? Generally "Wagering" is staking something of value upon the result of some future uncertain event. In the case oc Carlill Vs Carbolic moke Ball Co. (1892) 2 Q.B. 484 Hawkins J. defined Wagering contract as one which two persons proforming to hold opposite views touching the issue of a future uncertain event ". Essential elements of a wagering contract: The essential elements of a wagering contract are as follows- i) Gain or loss. ii) iii) iv) Uncertain event No other interest Neither party should have a proprietary interest in the event. Lotteries are also wagering in nature. Lotteries are prohibited under the Indian Penal Code 1860 unless authorised by the government. Thus a Lottery which is authorised by the government is not illegal. The only exception recognised is in case of horse-racing. In the case of Lily White Vs. Munnuswami (1965) II MLJ In a case the Privy Council made it clear that in a wagering contract, there has to be mutuality in the 25
trictly for Internal Circulation - KCL sense that gain of one party would be the loss of the other on the happening of the uncertain event which is the subject matter of a wager. The court remarked- "A term which is prima facie opposed both to public policy and to the fundamental principle of the law of contract can not be enforced by a court merely because it is printed on the reverse of a bill and there is a tacit acceptance of the term when the bill was received by the customer." Insurance policies bear a certain superficial resemblance to wagering contracts, but they are really transactions of different character. They are not wagering agreements. But an insurance policy is a wagering agreement if there is no insurable interest. 8) Agreements to do impossible act: According to ection 56 of IC Act, 1872- "A contract to do an act which, after the contract is made, becomes impossible, or by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful. VOIDABLE CONTRACT According to ection 2(i) of I.C. Act, 1872, "An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the others, is a voidable contract." In Indian contract Act, 1872, there are certain provisions that declare voidability of agreements without free consent. According to ection 19 of IC Act, 1872- "When consent to an agreement is caused by coercion, fraud or misrepresentation, agreement is a contract voidable at the option of the party whose consent was so caused. A party to a contract, whose consent was caused by fraud or misrepresentation, may, if he thinks fit, insist that the contract shall be performed, and that he shall be put in the position in which he would have been if the representation made had been true. Exception: If such consent was caused by misrepresentation or by silence, fraudulent within the meaning of ection 17, the contract nevertheless is not voidable, if the party whose consent was so caused had the means of discovering the truth by ordinary diligence. Explanation: A fraud or misrepresentation which did not cause the consent to a contract of the party on whom such fraud was practised, or to whom such misrepresentation was made does not render a contract voidable. According to ection 19-A of IC Act, 1872- "When consent to an agreement is caused by undue influence, the agreement is a contract voidable at the option of the party whose consent was so caused. Any such contract may be set aside either absolutely, or if the party who was entitled to avoid it has received any benefit thereunder, upon such terms and conditions as to the court may seem just. Unlawful Agreements: ection 23 of I.e. Act, 1872 provide that - "the consideration or Object of an 26
trictly for Internal Circulation - KCL agreement is lawful unless - 1. It is forbidden by law, or 2. Is of such nature that, if permitted it would defeat the provision of any law; or 3. Is fraudulent; or 4. Involves injury to the person or property of another; or 5. The court regards it as immoral or opposed to public policy. Hence this section deals with consideration or object of an agreement only. In the case of Pyare Mohan vs. Narayani Devi AIR 1982 Raj 43 : It was held that Under ection 23 only an object of the agreement and not the motives of the parties have to be considered. Agreements declared to be unlawful Under ection 23 may be considered under the following different heads - 1) Forbidden by Law: Any agreement, the object or consideration of which is forbidden by law is unlawful and therefore void. In the case of Pearce vs. Broaks (1866) L. R.1. Ex. 213 the plaintiff agreed to supply the defendant a horse carriage (brougham) on hire knowing the fact that the defendant was a prostitute and the horse carriage was to be used for immoral vocation. The court held that the plaintiff could not recover the price of the thing so supplied because he contributed to the performance of an illegal act by supplying horse carriage with the knowledge that it is going to be used for that immoral purpose. imilarly, if A promises to obtain for B an employment in the public service, and B promises t2 pay R.1 000 to A. the agreement is void, as the consideration for it is unlawful. 2) Agreement which defeats the provision of any law: If an agreement is of such a nature that if permitted, it would defeat the provisions of any law, the consideration or object of such agreement is said to be unlawful, hence the agreement is void. In the case of Fateh ingh vs. anwal ingh, ILR (1878) 1 All. 751 The accused was ordered to file a surety of R.5000. Under ection 107 Cr.P.C. The accused deposited R.5000 with the defendant and agreed with him to become his surety. Later on, after the period of surety-ship the accused filed this suit to recover the amount. The court held that the plaintiff could not recover the amount because the agreement was void. 3) Fraudulent Agreement: If consideration or object of an agreement is fraudulent, the agreement will be unlawful and void. For example, A, Band C enter into an agreement for the division among them of gains acquired or to be acquired by fraud. The agreement is void as its object is unlawful. Injury to person or Property of another: As given in ection 23 of I.C. Act, 1872, the agreement containing consideration or object which involves or implies injury to the person or property of another is unlawful. 27
trictly for Internal Circulation - KCL 4) For example - If two persons agree to purchase shares in a company with a view to mislead and give an impression to others that these is a good market for shares, the agreement will be unlawful and can not be enforced. 5) Immoral or Opposed to Public Policy: Immorality is a word that is not defined in Indian Contract Act, 1872. What is immoral at a material time depends on the facts and circumstances of the case and the prevailing standards of morality in the society. Hence what is moral and what immoral, changes from time to time and place to place. According to ection 23(v) of I.e. Act. 1872, the court has power to decide what is immoral or opposed to public policy. Tenancy created in favour of a prostitute to carryon her profession, money advanced to a dancing girl to continue cohabitation are examples of immorality. A marriage brokerage contract where a third person intervenes and wants to make money out of the marital relationship between the two partners is against public policy and not enforceable by a court of law. The term "opposed to public policy" is also undefined and it is very vague, uncertain and covers a wide range of topics. In the case of Richardson vs. Mellish (1831) Bing 229, Burrough J. tated that - "Public policy is a very unruly horse and once you get astride it. you never know where it will carry you." In the case of Fender vs. t. John Mildmay (1983) AC 1. The defendant told the plaintiff that he was unhappy with his wife and asked him to marry her if his wife divorced him. he consented and entered into sexual relation. The wife filed petition for divorce on ground of adultery and a decree was passed accordingly. Later on he retracted from his promise; the court held that the promise was to do something contrary to public policy. In India the upreme Court followed this principle in the case of Gherulal Parikh vs. Mahadev Das Maiyya AI R 1959 C 781. Effect of Void, Voidable and Unlawful agreements: ec 23 of I.C. Act. 1872 deals with unlawful agreements and ection 25 - ection 30 and ection 56 declares some agreements void. All the unlawful agreements are void but all the void agreements are not unlawful agreements or illegal ones. 28
trictly for Internal Circulation - KCL IMPORTANT QUETION 1. Under what circumstances the object and consideration of a contract is deemed unlawful? Explain. 2. Agreements in restraint of trade are void. Explain. Can a trade combination be treated as restraint of trade? Explain. 3. What is an agreement by way of wager? What test would you apply to determine if or not an agreement is by way of wager? Distinguish a wagering agreement from a good contract. 4. What agreements are void if consideration and objects are unlawful in part? Give examples. 5. 'Agreements, the meaning of which is not certain, are void'. Explain. 6. What agreements have been expressly declared to be void by Indian Contract Act? 7. Write a short note on 'Agreements to do Impossible Acts.' 29