Section 10 of the Indian Contract Act provides that an agreement in order to be a contract, must satisfy the following conditions:
(1) it must be made by the free consent of the parties;
(2) the parties must be competent to contract;
(3) it must be made for a lawful consideration and with a lawful object;
(4) it should not have been expressly declared as void by law.
Also, there must be consensus ad idem or identity of minds in the sense that parties have agreed about the subject matter of the contract at the same time and in the same sense, as evidenced by offer and acceptance (Section 13). It has also been observed that the agreement must import an intention to create legal relationship between the parties, and that agreements relating to social matters are not enforceable by law.
Capacity to contract
Meaning: Capacity refers to the competence of the parties to make a contract. It is one of the essential element to form a valid contract.
Who is competent to contract ?
Every person who (a) has attained the age of majority, (b) is of soundmind and (c) is not otherwise disqualified from contracting, is competent to contract. (Section 11)
(a) Age of majority: In India, the age of majority is regulated by the Indian Majority Act (Act IX of 1875). Every person domiciled in India attains majority on the completion of 18 years of age.
Law relating to Minor’s agreement/Position of Minor’s:Law relating to minor’s agreement are as follows-
- A contract made with or by a minor is void-ab-initio: A minor is not competent to contract and any agreement with or by a minor is void from the very beginning. In the leading case of Mohori Bibi v. Dharmodas Ghose held that in minor’s contracts are absolutely void.
- No ratification after attaining majority: A minor cannot ratify the agreement on attaining
majority as the original agreement is void ab initio.
Example: X, a minor makes a promissory note in the name of Y. On attaining majority, he makes a new promissory note in place of old one. Here the new promissory note which he executed after attaining majority is also void being without consideration.
- Minor can be a beneficiary or can take benefit out of a contract: Though a minor is not competent to contract, nothing in the Contract Act prevents him from making the other party bound to the minor. Thus, a promissory note duly executed in favour of a minor is not void and can be sued upon by him, because he though incompetent to contract, may yet accept a benefit. A minor cannot become partner in a partnership firm. However, he may with the consent of all the partners, be admitted to the benefits of partnership (Section 30 of the Indian Partnership Act, 1932).
Example: A mortgage was executed in favour of a minor. Held, he can get a decree for the enforcement of the mortgage.
- A minor can always plead minority: A minor can always plead minority and is not stopped to do so even where he has taken any loan or entered into any contract by falsely representing that he was major.
- Contract for supply of Necessaries: Minor is liable to pay out of his property for the necessaries supplied to him by the other.(Section 68).
- Contract by guardian – how far enforceable: Though a minor’s agreement is void, his guardian can, under certain circumstances enter into a valid contract on the minor’s behalf. Where the guardian makes a contract for the minor, which is within his competence and which is for the benefit of the minor, there will be valid contract which the minor can enforce.
For instance a guardian can make an enforceable contract of marriage for a minor. Similarly, when the father of the bridegroom contracts with the father of the bride to pay the bride an allowance, there bride can sue her father-in-law to recover arrears of the allowance. But all contracts made by guardian on behalf of a minor are not valid.
For instance, the guardian of a minor has no power to bind the minor by a contact for the purchase of immovable Property. But a contract entered into by a certified guardian (appointed by the Court) of a minor, with the sanction of the court for the sale of the minor’s property, may be enforced by either party to the contract.
(b) Person of Sound mind:
A person is said to be of sound mind for the purposes of making a contract if, at the time when he makes it, he is capable of understanding it and of forming a rational judgement as to its effect upon his interests. A person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind. A person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind.
Examples: (1) A patient in a lunatic asylum, who is at intervals, of sound mind, may contract during those intervals.
(2) A sane man, who is delirious from fever, or who is so drunk that he cannot understand the terms of a contract,or form a rational judgement as to its effect on his interests, cannot contract whilst such delirium or drunkness lasts. Position of unsound mind person making a contract: A contract by a person who is not of sound mind is void.
(c) Contract by disqualified persons: Besides minors and persons of unsound mind, there are also other persons who are disqualified from contracting, partially or wholly, so that the contracts by such person are void. Incompetency to contract may arise from political status, corporate status, legal status, etc. The following persons fall in this category: Foreign Soverigns and Ambassadors, Alien enemy, Corporations, Convicts, Insolvent etc.
According to Section 13, “two or more persons are said to have consented when they agree upon the samething in the same sense (Consensus-ad-idem). Consequently, when parties to a contract make some fundamental error as to the nature of the transaction, or as to the person dealt with or as to the subject-matter of the agreement, it cannot be said that they have agreed upon the same thing in the same sense. And if they do not agree in the same sense, there cannot be consent. A contract cannot arise in the absence of consent.
If two persons enter into an apparent contract concerning a particular person or ship, and it turns out that each of them, misled by similarity of name, had a different person or ship in his mind, no contract would exist between them as they were not ad idem, i.e., of the same mind. Again, ambiguity in the terms of an agreement, or an error as to the nature of any transaction or as to the subject-matter of any agreement may prevent the formation of any contract on the ground of absence of consent. In the case of fundamental error, there is really no consent whereas, in the case of mistake, there is no real consent.
As has been said already, one of the essential elements of a contract is consent and there cannot be a contract without consent. Consent may be free or not free. Only free consent is necessary for the validity of a contract. Consent is free when it is not caused by coercion, undue influence, fraud, misrepresentation or mistake (Section 14). When consent is not caused by any of these factors, it is said to have been freely given. When consent is not free due to mistake, the agreement is void but in all other cases, the contract is voidable at the option of the party whose consent was obtained by coercion, etc.
Elements vitiating Free Consent
We shall now explain these elements one by one.
(a) Coercion (Section 15): “Coercion” is the committing, or threatening to commit, any act forbidden by the Indian Penal Code (45 of 1860), or the unlawful detaining, or threatening to detain any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement.
For example, X says to Y: “I shall kill your son, or I shall not return the documents of title relating to your wife’s property, unless you agree to sell your house to me for ` 5,000”. Y says, “All right, I shall sell my house to you for ` 5,000, do not kill my son or do not detain my wife’s documents of title”. X has employed coercion; he cannot therefore enforce the contract. But Y can enforce the contract if he finds the contract to his benefit. An agreement induced by coercion is voidable and not void. That means it can be enforced by the party coerced, but not by the party using coercion.
Where husband obtained a release deed from his wife and son under a threat of committing suicide, the transaction was set aside on the ground of coercion, suicide being forbidden by the Indian Penal Code.
A person to whom money has been paid or anything delivered under coercion, must repay or return it. (Section 71). The threat of suicide amounts to coercion within Section 15.
(b) Undue influence (Section 16): A contract is said to be induced by “undue influence” where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage of the other. A person is deemed to be in a position to dominate the will of the other, when he holds authority real or apparent over the other, or when he stands in a fiduciary relation to the other.
(1) A father, by reason of his authority over the son can dominate the will of the son.
- Again by reason of fiduciary relationship, a solicitor can dominate the will of his client and
- A trustee can dominate the will of the beneficiary.
- Similarly, a person whose mental capacity is affected by age, illness or distress may be a prey to undue influence.
(2) For instance, a doctor is deemed to be in a position to dominate the will of his patient
enfeebled by protracted illness.
The essential ingredients under this provision are:
(1) Relation between the parties: A person can be influenced by the other when a near relation
between the two exists.
(2) Position to dominate the will: Relation between the parties exist in such a manner that one
of them is in a position to dominate the will of the other.
A person is deemed to be in such position in the following circumstances:
(a) Real and apparent authority: Where a person holds a real authority over the other as in the case of master and servant, doctor and patient and etc.
(b) Fiduciary relationship: where relation of trust and confidence exist between the parties to a contract. Such type of relationship exists between father and son, solicitor and client, husband and wife, creditor and debtor, etc.
(c) Mental distress: An undue influence can be used against a person to get his consent on a contract where the mental capacity of the person is temporaily or permanently affected by the reason of mental or bodily distress, illness or of old age.
(3) The object must be to take undue advantage: Where the person is in a position to influence the will of the other in getting consent, must have the object to take advantage of the other.
(4) Burden of proof: The burden of proving the absence of the use of the dominant position to obtain the unfair advantage will lie on the party who is in a position to dominate the will of the other.
Example: 1. A advanced money to his son, B, during his minority, upon B’s coming of age obtains, by misuse of parental influence, a bond from B for a greater amount then the sum due in respect of the advance. A employs undue influence.
(2) An illiterate old man who is physically ill and mentally distress executed a gift deed in favour of his relative who was taking care of him. Here relative is in position to dominate the will of an old man.
(c) Fraud (Section 17): As per the Act “Fraud” means and includes any of the following acts committed by a party to a contract, or with his connivance or by his agent with intent to deceive another party thereto or his agent, or to induce him to enter into the contract:
(i) the suggestion, as to a fact, of that which is not true by one who does not believe it be true;
(ii) the active concealment of a fact by one having knowledge or belief of the fact;
(iii) a promise made without any intention of performing it;
(iv) any other act fitted to deceive;
(v) any such act or omission as to law specially declared to be fraudulent.
The fraud, which results into a contract, is only covered by this section. Any fraud committed by a party which does not lead the other party to enter into a contract is not covered by this section.
Example: A sells by auction his horse to B which A knows to be Unsound. A says to B that the horse is absolutely sound,but later came to know by B that the horse is unsound. This is a fraud. Mere silence amounting to fraud: Mere silence as to facts likely to affect the willingness of a person to enter into a contract is no fraud; but where it is the duty of a person to speak, or his silence is equivalent to speech, silence amounts to fraud. [Read the examples under the Explanation to Section 17 of the Indian Contract Act]
Exceptions to this rule:
(i) Where the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak. Duty to speak arises when one contracting party reposes trust and confidence in the other or where one party has to depend upon the good sense of the other (e.g. Insurance Contract).
(ii) Where the silence is in itself, equivalent to speech.
Example: A says to B, “If you do not deny it, I shall assume that the horse you are selling to me is sound.” A says nothing. Here A’s silence is equivalent to speech.
(d) Misrepresentation (Section 18): Where a person asserts something which is not true, though he believes it to be true, his assertion amounts to misrepresentation. Mis – representation may be either innocent or without reasonable ground. Misrepresentation is misstatement of facts by one, which misleads the other who, consequently, can avoid the contract.
According to Section 18, there is misrepresentation:
(1) When a person positively states that a fact is true when his information does not warrant it to be so;
(2) When there is a breach of duty by a person without intention to deceive which brings an advantage to him, and loss to the other;
(3) When a party causes the other party to the agreement to make a mistake as to the subject
matter. For example, A makes a positive statement to B that C will be made the director of a company. A makes the statement on information derived, not directly from C but from M. B applies for shares on the faith of the statement which turns out to be false. The statement amounts to misrepresentation, because the information received second-hand did not warrant A to make the positive statement to B [Section 18(1)].
Consequences of coercion, fraud, misrepresentation etc. (Section 19): It has already been considered that when consent to an agreement is caused by coercion, undue influence, fraud or misrepresentation, though the agreement amounts to a contract, such a contract is voidable at the option of the party those consent was so obtained. The party, however, may insist that the contract should be performed and that he should be put in the same position in which he would have been, if the representation made had been true.
For instance, A fraudulently informs B that A’s estate is free from encumbrance. B thereupon agrees to buy the estate. The estate is, however, subject to mortgage. B may either avoid the contract, or may insist on its being carried out and the mortgage-debt redeemed. But a person who had the means of discovering the truth with ordinary diligence cannot avoid a contract on the ground that his consent was caused by misrepresentation or silence amounting to fraud.
For example, A by a misrepresentation leads B to believe erroneously that 750 tons of sugar is produced per annum at the factory of A. B examines the accounts of the factory, which should have disclosed, if ordinary diligence had been exercised by B, that only 500 tons had been produced. Thereafter B purchases the factory. In the circumstance, B cannot repudiate the contract on the ground of A’s misrepresentation.
Where a party to a contract committs fraud or misrepresentation, but the other party is not, in fact, misled by such fraud or misrepresentation, the contract cannot be avoided by the latter. (Explanation to Section 19). Thus when a seller of specific goods deliberately conceals a fault in
order that the buyer may not discover it even if he inspects the goods but the buyer does not in fact, make any inspection, the buyer cannot avoid the contract, as he is not in fact deceived by the conduct of the seller. A student was induced by his teacher to sell his brand new car to the latter at less than the purchase price to secure more marks in the examination. Accordingly the car was sold. However, the father of the student persuaded him to sue his teacher. State on what ground the student can sue the teacher?
Yes, A can sue his teacher on the ground of undue influence under the provisions of Indian Contract Act, 1872. A contract brought as a result of coercion, undue influence, fraud or misrepresentation would be voidable at the option of the person whose consent was caused.
(e) Mistake as per Section 20: When both the parties to an agreement are under a mistake to a matter of fact essential to the agreement, there such an agreement is altogether void. The Court will enforce a voidable contract if not avoided, but will not recognise an agreement that is void.
For instance, A agrees to sell to B a specific cargo of goods supposed to be on its way from England to Bombay. It turns out that before the day of the bargain, the ship conveying the cargo had been cast away and the goods lost. Neither of the parties was aware of these facts. The agreement was void. Both the parties must be under mistake.
Effect of mistakes as to law (Section 21): A contract is not a voidable because it was caused by a mistake as to any law in force in India but a mistake as to a law not in force in India has the same effect as a mistake of fact.
Example: A and B make a contract grounded on the erroneous belief that a particular debt is barred by the Indian Law of Limitation, the contract is not voidable. A unilateral mistake, that is to say, mistake of one party, does not render the agreement void (Section 22).
Example: A agrees to purchase from B, 18 carat gold thinking to be pure gold; B has not been instrumental to the creation of such an impression. It is a valid contract between A and B. Notice that the mistake must be as to a fact, not law. A and B wrongly believe that a particular debt is not barred by the Law of Limitation and on the basis of such belief enter into a contract. The contract is valid, mistake being not of fact but of law. A question of foreign law is, however, a question of fact. Again, the existence of a particular private right is a matter of fact, though depending on rules of law. Thus, a man’s promise to buy property which, unknown to him already belongs to him is not binding on him.
Further, the mistake must be as to an essential fact. Whether the fact is essential or not depends on whether a reasonable man would regard the fact as an essential in the circumstances. A mere wrong opinion as to the value is not an essential fact. For instance, A and B both believe that a particular kind of rice is being sold in the market at ` 1,780 per quintal and A sells rice of that kind to B at `1780 per quintal. But, in fact, the market price was ` 1,900. The contract is valid. Mistake renders the agreement void; neither party can enforce the contract against the other.
Lawful object and the consideration
We shall now discuss the next two ingredients of a valid contract, viz., lawful object and lawful consideration. There are certain provisions of law which are general in character and are applicable to the community as a whole. Subject thereto, an individual generally has the right to adjust his rights and obligations as he may wish. But this contractual freedom or the right of individuals to make by an agreement what in effect is law between themselves, is not absolute. In other words there is a limitation on the contractual freedom of an individual. The necessity for it will be clear from the following example: Suppose, A agrees to pay ` 100 to B on B’s stealing C’s purse. In this case, the Court obviously cannot compel A to pay B, if B has stolen the purse because it will be encouraging theft which is hit by the Indian Penal Code.
Object means purpose or design. The term ‘consideration’ is defined in Section 2(d) and the various forms it may take have been considered earlier in this Study Module where A agrees to sell goods to B, and B, who is insolvent assigns the benefit of the contract for ` 100 with a view to defrauding his creditors, the consideration for the assignment; viz., the sum of ` 100 is lawful but the object viz., defrauding the creditors, is unlawful as it is intended to defeat the provisions of the insolvency law.
The limits to contractual freedom are set out in Section 23 of the Act. An agreement, the object or consideration of which is unlawful is void. “Consideration or object in unlawful if it is forbidden by law; or it would; if permitted defeat the provisions of any or law or is fraudulent; or involves injury to the person or property of another, or is immoral; or opposed to public policy.
In the following examples, the agreement is void because the object is unlawful:
(1) A, B and 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, viz., acquisition of gains by fraud is unlawful.
(2) A promises to B to abandon a prosecution which he had instituted against B for robbery and B promises in lieu thereof to restore the value of the property robbed. The agreement is void as its object, namely, the stifling of prosecution, is unlawful.
The following is an example of the agreement which is void because of unlawful consideration. A promises to obtain for B and employment in the public service and B promises, is return, to pay 1,000 to A. The agreement is void, as the consideration thereof is unlawful. Here A’s promise to procure for B an employment in the public services is the consideration for B’s promise to pay 1,000. The consideration, being opposed to public policy, is unlawful. The seven circumstances which would make consideration as well as an object unlawful are discussed below:
(i) Forbidden by law: Acts forbidden by law are those which are punishable under any statute as well as those prohibited by regulations or orders made in exercise of the authority conferred by the legislature. Let us consider an example: A licence to cut grass is given to X by the Forest Department under the Forest Act. One of the terms of licence is that the licencee should not assign his interest under the licence without the permission of the Forest Officer, and a fine is prescribed for a breach of this condition. But the observance of the conditions of the licence is not obligatory under the Forest Act. If A in breach of the condition, agrees to assign his interest under the licence to B, that agreement will be valid. Here, the assignment is not prohibited by law, the condition against assignment has been imposed only for administrative purpose or solely for the protection of revenue.
(ii) Defeat of the provision of law: The term ‘law’ includes any legislative enactment or rule of the Hindu and Muslim Laws or any other rule for the time being in force in India. Legislative enactment would be defeated by an agreement by a debtor not to plead limitation, as the object is to defeat the provisions of the Limitation Act. The Hindu Law is defeated by an agreement to give as son in adoption in consideration of annual allowance to the natural parents.
(iii) Defeat of any rule for the time being in force in India:
Example–A Receiver being an officer of the Court, the Court has also the jurisdiction to determine his remuneration, and the parties cannot by any of theirs add to or derogate from the functions of the Court without its authority. A promise, therefore, to pay the salary of a receiver without the leave of the Court, even if unconditional, being in contravention of law, is not binding on the promisor. The object of consideration in all the agreements aforementioned being unlawful these are void.
(iv) Fraudulent: The following are examples of agreement the object or consideration whereof is unlawful on the ground of fraud (1) A, an agent for a zamindar 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 the consideration is fraudulent. (2) An agreement between A and B to defraud a department of Government by submitting a tender in the name of one of them only, though they were both partners in the transaction is void, as the object is fraudulent.
(v) Injury to the person or property of another: The general term “injury” means criminal or wrongful harm. In the following examples, the object or consideration is unlawful as it involves injury to the person or property of another.
(1) An agreement to print a book in violation of another’s copyright is void, as the object is to cause injury to the property of another. It is also void as the object of the agreement is forbidden by the law relating to copyright.
(2) A promises to repay his debt by doing manual labour daily for a special period and agrees to pay interest at an exorbitant rate in case of default. Here A’s promise to repay by manual labour is the consideration for the loan, and this consideration is illegal as it imposes what, in substance, amounts to slavery on the part of A. In other words, as the consideration involves injury to the person of A, the consideration is illegal. Here the object too is illegal, as it seeks to impose slavery which is opposed to public policy. Hence the agreement is void.
(vi) Immoral: The following are the examples of agreements where the object or consideration
is unlawful, being immoral.
(1) A landlord cannot recover the rent of a house knowingly let to prostitute who carries on her vocation there. Here, the object being immoral, the agreement to pay rent is void.
(2) Where P had advanced money to D, a married woman to enable her to obtain a divorce from her husband and D had agreed to marry him as soon as she could obtain the divorce, it was held that P was not entitled to recover the amount, since the agreement had for its object the divorce of D from her husband and the promise of marriage given under these circumstances was against good morals.
(vii) Agreement opposed to public policy: The expression ‘public policy’ can be interpreted either in a wide or in a narrow sense. The freedom to contract may become illusory, unless the scope of ‘public policy’ is restricted. In the name of public policy, freedom of contract is restricted by law only for the good for the community. In law, public policy covers certain specified topics, e.g., trading with an enemy, stifling of prosecutions, champerty, maintenance, interference with the course of justice, marriage brokerage, sales of public offices, etc. Agreements tending to create interest against duty, agreements tending to create monopolies and agreements not to bid at an auction are also opposed to public policy. An attempt to enlarge the scope of the doctrine is bound to result in the curtailment of individual freedom of contract. Public policy, on this account, has been described as an unruly horse which, if not properly bridled, may carry its rider he knows not where. It being an untrustworthy guide for regulating the relations between parties it should not be invoked except within the prescribed limits described below.
(a) Trading with enemy: Any trade with person owing allegiance to a Government at war with India without the licence of the Government of India is void, as the object is opposed to public policy. Here the agreement to trade offends against the public policy by tending to prejudice the interest of the State in times of war.
(b) Stifling prosecution: An agreement to stifle prosecution tends to be a perversion or an abuse of justice; therefore, such an agreement is void. The principle is that one should not make a trade of felony. The compromise of any public offence is generally illegal.
Under the Indian Criminal Procedure Code, there is, however, a statutory list of compoundable offences and an agreement to drop proceeding relating to such offences with or without the permission of the Court, as the case may be, in consideration the accused promising to do something for the complainant, is not opposed to public policy.
Thus, where A agrees to sell certain land to B in consideration of B abstaining from taking criminal proceeding against A with respect to an offence which is compoundable, the agreement is not opposed to public policy. But, it is otherwise, if the offence is uncompoundable.
(c) Champerty and maintenance: Maintenance is the promotion of litigation in which one had no interest and champerty is bargain whereby one party agrees to assist the other in recovering property, with a view to sharing the profits of litigation. Agreements tending to champerty and maintenance are void in England but in India they are not necessarily void. Thus, in India, an agreement to share the subject of litigation, if recovered in consideration of the party’s supplying the funds in good faith to carry it on, is not itself, opposed to public policy. But where such advances are made by way of gambling in litigation, the agreement to share the subject of litigation is certainly opposed to public policy and therefore void.
(d) Interference with the course of justice: An agreement whose object is to induce any judicial officer of the State to act partially or corruptly is void, as it is opposed to public policy; so also is an agreement by A to reward B, who is an intended witness in a suit against A in consideration of B’s absenting himself from the trial. For the same reasons, an agreement which contemplates the use of under-hand means to influence legislation is void. Similarly, as agreement to induce any executive officer of the State to act partially or corruptly is void.
(e) Marriage brokerage contracts: An agreement to negotiate marriage for reward, which is known as a marriage brokerage contract, is void, as it is opposed to public policy. For instance, an agreement to pay money to a person hired to procure a wife is opposed to public policy and therefore void.
(f) Interest against obligation: The following are examples of agreement that are void as they tend to create an interest against obligation. The object of such agreements is opposed to public policy.
(1) An agreement by an agent to receive without his principal’s consent compensation from another for the performance of his agency is invalid.
(2) A, who is the manager of a firm, agrees to pass a contract to X if X pays to A 2,000 privately; the agreement is void.
(g) Sale of public offices: An agreement to traffic in public office is opposed to public policy, as it interferes with the appointment of a person best qualified for the service of the public. Public policy requires that there should be no money consideration for the appointment to an office in which the public is interested. The following are the examples of agreements that are void; since they are tantamount to sale of public offices.
(1) An agreement to pay money to a public servant in order to induce him to retire from his office so that another person may secure the appointment is void.
(2) An agreement to procure a public recognition like Padma Vibhushan for reward is void.
(h) Agreement for the creation of monopolies: Agreements having for their object the establishment of monopolies are opposed to public policy and therefore void. It is also hit by the MRTP Act.
(i) Agreement in restraint of marriage (Section 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.
(j) Agreement in restraint of trade (Section 27): An agreement by which any person is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. But this rule is subject to the following exceptions, namely, where a person sells the goodwill of a business and agrees with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer or his successor in interest carries on a like business therein, such an agreement is valid (goodwill is the advantage enjoyed by a business on account of public patronage and encouragement from habitual customers). The local limits within which the seller of the goodwill agrees not to carry on similar business must be reasonable. Under Section 36 of the Indian Partnership Act, 1932 if an outgoing partner makes an agreement with the continuing partners that he will not carry on any business similar to that of the firm within a specified period or within specified local limits, such an agreement, thought in restraint of trade, will be valid, if the restrictions imposed are reasonable.
Similarly, under Section 11 of that Act an agreement between partners not to carry on competing business during the continuance of partnership is valid. But an agreement of service by which an employee binds himself, during the term of his agreement, not to compete with his employer is not in restraint of trade. For example, B, a physician and surgeon, employs A as an assistant for a term of three years and A agrees not to practice as a surgeon and physician during these three years. The agreement is valid and A can be restrained by an injunction if he starts independent practice during this period.
Similarly, an agreement by a manufacturer to sell during a certain period his entire production to a wholesale merchant is not in restraint of trade. Likewise an agreement among the sellers of a particular commodity not to sell the commodity for less than a fixed price is not an agreement in restraint of trade.
(k) Agreement in restraint of legal proceedings (Section 28): An agreement in restraint of legal
proceeding is the one by which any party thereto is restricted absolutely from enforcing his rights under a contract through a Court or which abridges the usual period for starting legal proceedings. A contract of this nature is void. Such an agreement also is void under Section 23 of the Court Act, because its object is to defeat the provision of the Indian Limitation Act.
However, there are certain exceptions to the above rule:
(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.
(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.
Agreements expressly declared void
Certain agreements have been expressly declared void by the Contract Act. These are void ab initio and do not give rise to any legal consequences. We have already discussed some of these contracts such as agreements by incompetent parties (Section 11); agreements with an unlawful object or consideration (Section 23); agreement made under a mutual mistake of fact (Section 20); agreements without consideration (Section 25); agreements in restraint of marriage, trade, or legal proceedings etc. We shall now discuss some other case of agreements expressly declared to be void.
(a) Consideration Unlawful in Part: By virtue of Section 24, “if any part of a single consideration for one or more objects, or any one or any part of any one of several considerations for a single object, is unlawful, the agreement is void.”
This section is an obvious consequence of the general principle of Section 23. There is no promise for a lawful consideration if there is anything illegal in a consideration which must be taken as a whole. The general rule is that where the legal part of a contract can be severed from the illegal part, the bad part may be rejected and the good one can be retained. But where the illegal part cannot be severed, the contract is altogether void.
Example: A promises to superintend, on behalf of Y, a legal manufacturer of indigo and an illegal traffic in other articles. B promises to pay A a salary of 2,000 rupees per month. The agreement is void, the object of A’s promise and the consideration for B’s promise being in part unlawful.
(b) Agreement-the meaning of which is uncertain (Section 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. For example, A agrees to sell B “a hundred tons of oil”. There is nothing whatever to show what kind of oil was intended. The agreement is void for uncertainty. But the agreement would be valid if A was dealer only in coconut oil; because in such a case its meaning would be capable of being made certain.
(c) Wagering agreement: An agreement by way of a wager is void. It is an agreement involving payment of a sum of money upon the determination of an uncertain event. The essence of a wager is that each side should stand to win or lose, depending on the way an uncertain event takes place in reference to which the chance is taken and in the occurrence of which neither of the parties has legitimate interest.
For example, A agrees to pay ` 500 to B if it rains, and B promises to pay a like amount to A if it does not rain, the agreement will be by way of wager. But if one of the parties has control over the event, agreement is not a wager. Now, what is your view about a lottery authorised by the government? Is your agreement to buy a Haryana State Lottery ticket valid? It has been held that such an agreement is one by way of wager and hence void under Section 30.
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 transaction. A speculate transaction essentially, must have two elements, namely, (1) mutual intention of the contracting parties to acquire or deliver, as the case may be, the commodities; and (2) the undertaking or risk arising from movement in prices. A wager, on the other hand, postulates only the incurring of risk.
The essential character of a speculative transaction is stated below.
A buys from B 100 bales of jute at ` 150 per bale for forward delivery after six months.
At the time to delivery, the price of jute is ` 200. In these circumstances, at the end of six months A can either demand delivery of 100 bales or collect the difference in price at 50 bale. On the other hand, if the price has gone down to say, ` 125 per bale, A will be able to settle the transaction by paying B at ` 25 per bale. In the case, it will be observed, that the original intention of the parties was to purchase and sell the bales of jute. Merely because subsequently they transact by payment or receipt of the difference in price, the original character of the transaction is not thereby altered. If, however, the mutual intention was only to settle the transaction by payment or receipt of the difference in price, the transaction would be wagering contract which would be void. Thus, gambling is prohibited by law, whereas speculation is generally not. Under Section 30 of the Act, a wagering contract is void, the reason being that such a contract is opposed to public policy.
Wager and collateral transactions: Though a wagering contract is void, transactions incidental to wagering transactions are not void. 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 a wagering transaction.
When a transaction is simply void but not illegal, the collateral transaction would be valid. For example, a contract by way of wager is void by statute and no action can be brought to recover any money alleged to have been won upon a wager but it is not illegal. Therefore, a promise made by the loser of a wager to pay the amount lost in consideration of the winner’s forbearance to post him as defaulter, can be enforced as a fresh contract since it is separate and distinct from the original wagering contract, though collateral to it. But the position is different in respect of transactions collateral to illegal contracts. They are so invalid, e.g., security given for the regular payment of the rent of a house let out for purposes for gambling cannot be recovered; the recovery of security being tainted with illegality of the original transaction, cannot be enforced.
The following persons are incompetent to contract:
(b) persons of unsound mind,
(c) other disqualified persons.
(a) Minor: Agreement with a minor is altogether void but his property is liable for necessaries supplied to him. He cannot be a partner but can be admitted to benefits of partnership with the consent of all partners. He can always plead minority and cannot be asked to compensate for any benefit received under a void agreement. Under certain circumstances, a guardian can enter into valid contract on behalf of minor. Minor cannot ratify a contract on attaining majority.
(b) Persons of unsound mind: Persons of unsound mind such as idiots, lunatics and drunkers cannot enter into a contract, but a lunatic can enter into a valid contract when he is in a sound state of mind. The liability for necessities of life supplied to persons of unsound mind is the same as increase of minors. (Section 68)
(c) Certain other persons are disqualified due to their status.
Two or more persons are said to consent when they agree upon the same thing in the same sense
(Section 13). Consent is free when it is not caused by mistake, misrepresentation, undue influence, fraud or coercion. When consent is caused by any of above said elements, the contract is voidable at the option of the party whose consent was so caused (Sections 19 and 19A)
(a) Coercion: Coercion is the committing or threatening to commit any act, forbidden by the Indian Penal Code or the unlawful detaining or threatening to detain, any property, to the prejudice of any person with the intention of causing any person to enter into an agreement (Section 15). A contract induced by coercion is voidable at the option of the aggrieved party.
(b) Undue influence: When one party to a contract is able to dominate the will of the other and uses the position to obtain an unfair advantage, the contract is said to be induced by undue influence. (Section 16). Such contract is voidable, not void.
(c) Fraud: Fraud exists when a false representation has been made knowingly with an intention to deceive the other party, or to induce him to enter a contract (Section 17). Contract in the case is voidable.
(d) Misrepresentation: Means a misstatement of a material fact made believing it to be true, without an intent to deceive the other party (Section 18). Contract will be voidable in the case.
(e) Mistake: When both the parties are at a mistake to a matter of fact to the agreement, the agreement is altogether void.
Lawful Object and consideration
An agreement where the object or the consideration is unlawful, is void. Object or consideration is unlawful if it is forbidden by law, it would defeat the provisions of law; or is fraudulent, or involves injury to the person or property of another; or is immoral; or is opposed to public policy.
Besides the above said agreements, certain agreements have been expressly declared to be void by the Contract Act such as – wagering agreements, agreement with uncertain meaning, agreements where consideration is unlawful in part etc.