The last essential of a valid contract as declared by Section 10 is that it must not be one which is ‘expressly declared’ to be void by the Act. Thus, there arises a question, as to what are ‘expressly declared’ void agreements? The following agreements have been ‘expressly declared’, to be void by the Indian Contract Act:
1. Agreements in restraint of marriage (Sec. 26).
2. Agreements in restraint of trade (Sec. 27).
ADVERTISEMENTS:
3. Agreements in restraint of legal proceedings (Sec. 28).
4. Agreements the meaning of which is uncertain (Sec. 29).
5. Agreements by way of wager (Sec. 30).
ADVERTISEMENTS:
6. Agreements contingent on impossible events (Sec. 36).
7. Agreements to do impossible acts (Sec. 56).
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At the very outset, it may be borne in mind that the law declares these agreements void ab-initio and not illegal, and therefore transactions collateral to such agreements are not made void. It may be recalled that in the case of illegal agreements, transactions collateral to them are also tainted with illegality and hence void.
1. Agreements in Restraint of Marriage:
ADVERTISEMENTS:
Every individual enjoys the freedom to marry and so according to Section 26 of the Contract Act “every agreement in restraint of the marriage of any person, other than a minor, is void.”
The restraint may be general or partial but the agreement is void, and therefore, an agreement agreeing not to marry at all, or a certain person, or a class of persons, or for a fixed period, is void. However, an agreement restraining the marriage of a minor is valid under the Section.
It is interesting to note that a promise to marry a particular person does not imply any restraint of marriage, and is, therefore, a valid contract.
Illustrations:
(a) A agrees with B for good consideration that she will not marry C. It is a void agreement.
(b) A agrees with B that she will marry him only. It is a valid contract of marriage.
2. Agreements in Restraint of Trade:
The Constitution of India guarantees the freedom of trade and commerce to every citizen and therefore Section 27 declares “every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.” Thus no person is at liberty to deprive himself of the fruit of his labour, skill or talent, by any contracts that he enters into.
It is to be noted that whether restraint is reasonable or not, if it is in the nature of restraint of trade, the agreement is void always, subject to certain exceptions provided for statutorily.
Illustration:
An agreement whereby one of the parties agrees to close his business in consideration of the promise by the other party to pay a certain sum of money is void, being an agreement is restraint of trade, and the amount is not recoverable, if the other party fails to pay the promised sum of money (Madhub Chander vs Raj Kumar).
But agreements merely restraining freedom of action necessary for the cartying on of business are not void, for the law does not intend to take away the right of a trader to regulate his business according to his own discretion and choice.
Illustration:
An agreement to sell all produce to a certain party, with a stipulation that the purchaser was bound to accept the whole quantity, was held valid because it aimed to promote business and did not restrain it (Mackenzie vs Striramiah).
But where in a similar agreement the purchaser was free to reject the goods (i. e., was not bound to accept the whole quantity tendered) it was held that the agreement was void as being in restraint of trade (Sheikh Kalu vs Ram Saran).
Exceptions:
An agreement in restraint of trade is valid in the following cases:
(i) Sale of goodwill:
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 any person deriving title to the goodwill from him, carries on a like business therein, provided the restraint is reasonable in point of time and space (Exception to Sec. 27).
Illustrations:
(a) A, after selling the goodwill of his business to B promises not to carry on similar business “anywhere in the world.” As the restraint is unreasonable the agreement is void.
(b) C, a seller of imitation jewellery in London sells his business to D and promises that for a period of two years he would not deal: (a) in imitation jewellery in England, (b) in real jewellery in England, and (c) in real or imitation jewellery in certain foreign countries. The first promise alone was held lawful.
The other two promises, namely (b) and (c), were held void as the restraint was unreasonable in point of space and the nature of business (Goldsoll vs Goldman).
(ii) Partners’ agreements:
An agreement in restraint of trade among the partners or between any partner and the buyer of firm’s goodwill is valid if the restraint comes within any of the following cases:
(a) An agreement among the partners that a partner shall not carry on any business other than that of the firm while he is a partner [Section 11(2) of the Partnership Act],
(b) An agreement by a partner with his other partners that on retiring from the partnership he 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 [Section 36(2) of the Partnership Act],
(c) An agreement among the partners, upon or in anticipation of the dissolution of the firm 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 provided the restrictions imposed are reasonable (Section 54 of the Partnership Act).
(d) 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 [Section 55(3) of the Partnership Act].
(iii) Trade combinations:
As pointed out earlier, 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 restraint of trade and is perfectly valid (Fraser & Co. vs Bombay Ice Company).
Similarly, an agreement amongst the traders of a particular locality with the object of keeping the trade in their own hands is not void merely because it hurts a rival in trade (Bhola Nath vs Lachmi Narain6). But if an agreement attempts to create a monopoly, it would be void (Kameshwar Singh vs Yasin Khan).
Agreements tending to create monopolies are now also governed by the provisions of the Monopolies and Restrictive Trade Practices Act, 1969, which forbids certain types of trade agreements.
(iv) 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 anyone else, is not in restraint 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 (Maganlal vs Ambica Mills Ltd).
But an agreement of service which seeks to restrict the freedom of occupation for some period, after the termination of service, is void. Thus, where S, who was an employee of Brahmputra Tea Co., Assam, agreed not to employ himself or to engage himself in any similar business within 40 miles from Assam, for a period of five years from the date of the termination of his service, it was held that the agreement is in restraint of lawful profession and hence void (Brahamputra Tea Co. vs Scarth).
3. Agreements in Restraint of Legal Proceedings:
Section 28, as amended by the Indian Contract (Amendment) Act, 1996, declares the following three kinds of agreements void:
(a) An agreement by which a party is restricted absolutely from taking usual legal proceedings, in respect of any rights arising from a contract.
(b) An agreement which limits the time within which one may enforce his contract rights, without regard to the time allowed by the Limitation Act.
(c) An agreement which provides for forfeiture of any rights arising from a contract, if suit is not brought within a specified period, without regard to the time allowed by the Limitation Act.
Restriction on Legal proceedings:
As stated above, Section 28 renders every agreement in restraint of legal proceedings void. In this connection the following points must also be borne in mind:
(a) The Section applies only to rights arising from a contract. It does not apply to cases of civil or criminal wrongs or torts.
(b) This Section does not affect the law relating to arbitration e.g., if the parties agree to refer to arbitration any dispute which may arise between them under the contract, such a contract is valid (Exceptions 1 and 2 to Section 28).
(c) The Section does not affect an agreement whereby parties agree “not to file an appeal” in a higher court. Thus where it was agreed that neither party shall appeal against the trial court’s decision, the agreement was held valid, for,
Section 28 applies only to absolute restriction on taking the legal proceedings, whereas here the restriction is only partial as the parties can go to a court of law alright and the only restriction is that the losing party cannot file an appeal (Kedar Nath vs Sit a Ram).
(d) Lastly, this Section does not prevent the parties to a contract from selecting one of the two courts which are equally competent to try the suit. Thus in A. Milton & Co. vs Ojha Automobile Engineering Company’s Case, there was an agreement which inter-alia provided-“Any litigation arising out of this agreement shall be settled in the High Court of Judicature at Calcutta, and in no other court whatsoever.”
The defendants filed a suit in Agra whereas the plaintiff brought a suit in Calcutta. It was held that the agreement was binding between the parties and it was not open to the defendants to proceed with their suit in Agra.
Curtailing the period of limitation:
Any agreement curtailing the period of limitation prescribed by the Limitation Act is also void under Section 28. Thus, if a clause in an agreement between A and B provides that either party can sue for breach within a year of breach only, the clause is void and despite the clause the parties have a right to sue in case of breach by either party within the time allowed by the Limitation Act i.e., within three years from the date of breach.
It is relevant to state that agreements extending the period of limitation prescribed by the Limitation Act are also void, not under this Section but under Section 23, as the object will be to defeat the provisions of the law (Rama Murthy vs Gopayya).
Forfeiture of contract rights:
Under Clause (c) of Section 28 (stated above) an agreement which provides for forfeiture of any rights arising from a contract, if suit is not brought within a specified time (say 3 months) is also void. This Clause was inserted by the Indian Contract (Amendment) Act, 1996.
The distinction between Clause (b) and Clause (c) of Section 28 (stated above) may be noted. Under Clause (b), the agreement limits the time within which one may enforce his contract rights thereby curtailing the period of limitation prescribed by the Limitation Act, whereas under Clause (c), the agreement limits the time within which one is to have any contract rights to enforce.
Thus, Clause (c) refers to an agreement which does not affect the remedy for breach but which extinguishes the right itself after the specified time and such a stipulation has also been declared void.
The background behind the passing of the Indian Contract (Amendment) Act, 1996 may be briefly stated as follows. Prior to this Amendment Act, the insurance policy documents issued by general insurance companies invariably provided that if a claim is rejected and a suit is not filed within three months after such rejection, all benefits under the policy shall be forfeited.
Such a provision was held valid and binding on the ground that it is outside the scope of Section 28 (Baroda Spinning Co. Ltd. vs Satyanarayan Marine & Fire Insurance Co. Ltd.).
The learned judge observed: “… what the plaintiff was forbidden to do was to limit the time within which he was to enforce his rights; what he has done is to limit the time within which he is to have any rights to enforce; and that appears to me to be a very different thing.”
However, the Supreme Court in the Food Corporation of India vs New India Assurance Co. Ltd. (1994) Case held that insurance contracts restraining the time period within which one is to have any contract rights to enforce were violative of the Limitation Act.
The Parliament has therefore amended Section 28 by inserting a new clause. Accordingly, henceforth general insurance companies cannot insist that suits for claims be brought within a period of time shorter than the period provided under the Limitation Act, otherwise all benefits under the policy shall be forfeited.
4. Uncertain Agreements :
“Agreements, the meaning of which is not certain, or capable of being made certain, are void” (Sec. 29). Through Section 29 the law aims to ensure that the parties to a contract should be aware of the precise nature and scope of their mutual rights and obligations under the contract. Thus, if the words used by the parties are vague or indefinite, the law cannot enforce the agreement.
Illustrations (To Sec. 29):
(a) A agrees to sell to B “a hundred tons of oil”. There is nothing whatever to show what kind of oil was intended. The agreement is void for uncertainty.
A, who is a dealer in coconut oil only, agrees to sell to B “one hundred tons of oil.” The nature of A’s trade affords an indication of the meaning of the words, and A has entered into a contract for the sale of one hundred tons of coconut oil.
A agrees to sell to B “one thousand mounds of rice at a price to be fixed by C”. As the price is capable of being made certain, there is no uncertainty here to make the agreement void.
A agrees to sell to B “his white horse for rupees five hundred or rupees one thousand”. There is nothing to show which of the two prices was to be given. The agreement is void.
Further, an agreement “to enter into an agreement in future” is void for uncertainty unless all the terms of the proposed agreement are agreed expressly or implicitly. Thus, an agreement to engage a servant sometime next year, at a salary to be mutually agreed upon is a void agreement.
5. Wagering Agreements :
What is a wager? Literally the word ‘wager’ means an ‘a bet’: something stated to be lost or won on the result of a doubtful issue, and, therefore, wagering agreements are nothing but ordinary betting agreements.
Thus where A and B mutually agree that if it rains today A will pay B Rs 100 and if it does not rain B will pay A Rs 100 or where C and D enter into an agreement that on tossing up a coin, if it falls head upwards C will pay D Rs 50 and if it falls tail upwards D will pay C Rs 50, there is a wagering agreement.
In Thacker vs Hardy Cotton, L.J., described a ‘wager’ as follows: “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.”
Possibly the most expressive and all-encompassing definition of a “wagering agreement” was given by Hawkins, J., in Carlill vs 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 upon the determination of that event, one shall win from the other, and the other shall pay or hand over to him, a sum of money or other stake; neither of the contracting parties having any other interest in that contract than the sum of stake he will so win or lose, there being no other real consideration for the making of such contract by either of the parties.
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, or may lose but cannot win, it is not a wagering contract.”
Certain aspects of the above definition require to be emphasised. In the first place, wager is a game of chance in which the contingency of either gain or loss is wholly dependent on an ‘uncertain event’.
An event may be uncertain, not only because it is a future event, but because it is not yet known to the parties. Thus a wager may be made upon the result of the cricket match which is to take place next month in Calcutta, or upon the result of an election which is over, if the parties do not know the result.
Secondly, the parties to a wager must have no interest in the event’s happening or non-happening except the winning or losing of the bet laid between them.
It is here that wagering agreements differ from insurance contracts which are valid because parties have an interest to protect the life or property, and have, for that very reason, entered into the contract of insurance.
Essential features of a wager:
The essentials of a wagering agreement may thus be summarised as follows:
(a) There must be a promise to pay money or money’s worth.
The promise must be conditional on an event happening or not happening.
The event must be an uncertain one. If one of the parties has the event in his own hands, the transaction is not a wager.
Each party must stand to win or lose under the terms of agreement. An agreement is not a wager if one party may only win and cannot lose or if he may lose but cannot win, or if he cans neither win nor lose.
(b) No party should have a proprietary interest in the event. The stake must be the only interest which the parties have in the agreement.
Agreements by way of wager void:
Section 30 lays down that “agreements by way of wager are void; and no suit shall be brought for recovering anything alleged to be won on any wager, or entrusted to any person to abide the result of any game or other uncertain event on which any wager is made.”
Thus, where A and B enter into an agreement which provides that if England’s cricket team wins the test match, A will pay B Rs 100, and if it loses B will pay Rs 100 to A, nothing can be recovered by the winning party under the agreement, it being a wager.
Similarly, where C and D enter into a wagering agreement and each deposit Rs 100 with Z instructing him to pay or give the total sum to the winner, no suit can be brought by the winner for recovering the bet amount from Z, the stake-holder.
Further, if Z had paid the sum to the winner, the loser cannot bring a suit, for recovering his Rs 100, either against the winner or against Z, the stakeholder, even if Z had paid after the loser’s definite instructions not to pay.
Of course the loser can recover back his deposit if he makes the demand before the stake-holder had paid it over to the winner (Ratnakalli vs Vochalapu). But even such a deposit cannot be recovered by a loser in the States of Maharashtra and Gujarat where such an agreement is void and illegal.
The Section makes an exception in favour of certain prizes for horse racing by providing further that “This Section shall not be deemed to render unlawful a subscription, or contribution, or agreement to subscribe or contribute, made or entered into for or toward any plate, prize or sum of money, of the value or amount of five hundred rupees or upwards, to be awarded to the winner or winners of any horse race.”
Thus, a bet on a horse race carrying a prize of Rs 500 or more to the winners has been made valid under the exception. But with a view to protecting the poor persons from gambling, a bet on a horse race carrying a prize of less than Rs 500 remains a wager.
It is important to note that in the States of Maharashtra and Gujarat wagering agreements are, by a local statute, not only void but also illegal. As a result in these states the collateral transactions to wagering agreements become tainted with illegality and hence are void.
Insurance contracts:
Insurance contracts are valid contracts even though they provide for payment of money by the insurer on the happening of a future uncertain event. Such contracts differ from wagering agreements mainly in three respects:
(a) The holder of an insurance policy must have an ‘insurable interest’ in the event upon which the insurance money becomes payable. Thus contracts of insurance are entered into to protect an interest. In a wagering agreement there is no interest to protect and the parties bet exclusively because they can thereby make some easy money.
(b) Contracts of insurance are based on scientific and actuarial calculation of risks, whereas wagering agreements are a gamble without any scientific calculation of risks.
(c) Contracts of insurance are regarded as beneficial to the public, whereas wagering agreements do not serve any useful purpose.
6. Agreements Contingent on Impossible Events:
“Contingent agreements to do or not to do anything, if an impossible event happens, are void, whether the impossibility of the event is known or not to the parties to the agreement at the time when it is made.” (Sec. 36)
Illustrations (To Sec. 36):
(a) A agrees to pay B Rs 1,000 (as a loan) if two straight lines should enclose a space. The agreement is void. (b) A agrees to pay B Rs 1,000 (as a loan) if B will marry A’s daughter, C. C was dead at the time of the agreement. The agreement is void.
7. Agreements to do Impossible Acts:
“An agreement to do an act impossible in itself is void.” (Sec. 56 Para 1)
Illustrations:
(a) A agrees with B to discover treasure by magic. The agreement is void [Illustration (a) to Section 56],
(b) A agrees with B to run with a speed of 100 kilometres per hour. The agreement is void.
No Restitution:
The term ‘restitution’ means ‘return’ or ‘restoration’ of the benefit received from the plaintiff under the agreement. As per Section 65 no restitution of the benefit received is allowed in the case of expressly declared void agreements.