Void Agreements

By | August 16, 2019
Void Agreements

The effect of terming any contracts as void contracts is that it would mean the contract never existed in the first place and either party doesn’t have to perform any obligations related to that contract.

Introduction

As we know, contractual agreements are entered into for the fulfilments of certain obligations are of interest to both the parties. And to give effect to the same, Indian Contract Act was drafted so that various forms of contract can be given legal recognition so that in the event of any breach the parties can seek a remedy in the court.

Now, with the passage of time, certain contracts are regarded as immoral and against public policy because of which they are regarded as a void contract. Contracts like agreement restraining someone from trading or restraining someone from getting into marriage. So contracts like this have the objective of restraining human rights which as been given the stature of fundamental rights in the constitution because of which they are regarded as void contracts.

The effect of terming any contracts as void contracts is that it would mean the contract never existed in the first place and either party doesn’t have to perform any obligations related to that contract. Now, Indian Contract Act has specified certain types of contracts as void contracts from section 24 to 30 & sec 56which this article shall be discussing in a detailed manner.

Following are the list of void agreements:-

  1. Agreements which have unlawful consideration and/or objectives in whole or in part [Sec 24]
  2. Agreement without consideration [Sec 25]
  3. Agreement which is in restraint of marriage [Sec 26]
  4. Agreement which is in restraint of trade [Sec 27]
  5. Agreement which in restraint of legal proceeding [Sec 28]
  6. The unmeaning agreement [Sec 29]
  7. Agreements which are wagering in nature [Sec 30]
  8. Agreement to do impossible act [Sec 56]

1. Section 24 of the Act

This section states that if the consideration or the objective of the contract in whole or in part is unlawful then the agreement shall be considered as void agreement. The working philosophy behind this section is that if the unlawful clause can be severed out from the contract, then the whole contract is not regarded as void but only the unlawful part shall be regarded as void and the rest of contract is deemed as valid, but if the unlawful clause cannot be separated from the legal part then the whole contract shall be deemed as illegal.[1]

Like if A promise to B to pay Rs 5000 in return of having an adulterous relationship with him and also working as a maid in his house. So in this case, the unlawful part-having adultery relationship with A shall be considered a void agreement and since it can be severed from the rest of the contract of working as a maid, so the rest of the contract shall be deemed as a valid one.

Moreover, if transaction which arises out of an unlawful act is such that if they are separated from the illegal part, then they would constitute a valid agreement, then those transactions remain valid and shall be enforceable notwithstanding the illegality of the agreement.[2]

2. Section 25 of the Act

This section states that an agreement shall be considered as a void agreement unless if it falls under the following exceptions:-

  • If the agreement has been made out of love and natural affections: –

The first exception which comes under section 25(1) is “contract based on love & affection”, where the contract which is in writing and registered is made out of love and affection by a party standing near relationship. For example, if a contract is made out between mother & son that mother shall provide money to buy son’s books, and then in this case contract shall be enforceable even if consideration is not mentioned.

So in one case where a person promised to pay his brother’s debt, even though not founded on valuable consideration, but it’s a good consideration due to love, affection, if, made by the registered document[3]. Similarly, when a daughter takes care of his father, nurtures him & in return when he gifts her something, it shall come under this section[4].

“Is made” are not to be regarded as equivalent to “is expressed to be made”. So if an agreement doesn’t contain any reference regarding love and affection, then the court will take account of the evidence produced in the court for the same to verify whether the disposition was made out of love & affection or not.

“Standing near relationship” shouldn’t be narrowed down to mean mere relatives.  The ingredients for a contract like this are:-

  1. The contract is made out of natural affection & love
  2. The contract is registered
  3. The contract is in writing
  4. Parties to are in close relation with one another
  • The person has already voluntarily done something for the promisor:

This exception under section 25(2) means that if a person promises to compensate/reimburse partly or wholly to a person who had already done something either voluntarily or legally compellable to do. It means that the person stands as a guarantee for any of the act done by the person who has done the act voluntarily or legally compellable to do. In contract like this, consideration is not compulsory. In such contracts, past consideration may be a good consideration, if the previous one was existing and valid one[5].

There is a conflict between Allahabad HC and Calcutta, Bombay HC regarding use of this exception with effect to the age of a person. As per Allahabad HC, it has held that if past consideration has been done by a person who was minor, then that consideration won’t be applicable for the contract when the person attains majority. But Calcutta & Bombay HC has held that past consideration made by minor shall be applicable when the person attains majority.

The conditions are necessary to give the effect of this exception:-

  1. The act must have been done voluntarily unto the promisor
  2. The promisor must be competent to contract when the service was rendered.

Voluntarily: – The act done by the promisor shouldn’t be done at the desire by the promisor. It means that the act should be done without the desire of the promisor, and then the act shall fall under this exception. Exceptions in this regard are those cases where the person does some service without the knowledge of the promisor and he undertakes to compensate him. A promise to pay a woman an allowance for past consideration cohabitation has been regarded as an undertaking by the promisor by compensating the promisee for past service voluntarily rendered by him[6].

  • It’s a promise to pay them in whole or in part the debt which the creditor might have enforced if not for the contracts falling under the limitation of the suits.

This exception comes under section 25(3), which states that a promise made in writing and it is signed by the debtor or by his agent to pay the time-barred debt is enforceable, even when the contract is to pay either the whole or the part of the amount. The intention of the parties should be clearly expressed. This exception doesn’t take into account if the time-barred debt is paid by other people than the debtor himself. So if a widow in her personal capacity pays the time-barred debt of her husband, then that transaction won’t be considered under this exception. But the scenario changes if the deceased take the loan from the bank. In that circumstance that loan won’t be considered a promise to pay creditor time-barred debt and thus this exception won’t apply. It’s of utmost importance that the promise should be in writing & signed by the person to be charged with, or else it won’t form good consideration

3. Section 26 of the Act

This section states that any agreement which interferes with the marital life any other person shall be considered as avoid agreement. This restraint can either be partial or general in sense, a party may be restraint from marrying for a particular period of time, or from marrying class of person or particular person or from marrying at all or he may be restraint from.

But it has to be differentiated from imposing of penalty upon remarriage. Penalty upon remarriage is not considered as a restraint on marriage. So when an agreement has been entered between two co-widows that if either of them marries then the other person has to forgo her share in the deceased husband’s property.

The court held that there was no restraint of marriage in the contract. All that was provided was if the widow chose to remarry she would have to forgo her rights into the property.[7]

4. Section 27 of the act

This section states that any agreement which obstructs any person from exercising his right to undertake any profession or trade, then that agreement shall be considered as a void agreement. The freedom of trade and commerce is a fundamental right given by the constitution under Art 19(1)[8].

So just like legislature can’t take away any individuals right to undertake any profession similarly no individual can take ay the right through the medium of any agreement. The basic principle of law is that every person shall have the freedom to work for his self-fulfilment and no contract shall deprive him of his right & liberty to work for himself.[9] In the case of Madhub Chander v Raj Commar[10], the plaintiff and the defendant were a rival business.

The defendant wanted to reduce the competition offered a certain amount of money to the plaintiff so that he would close the business in that locality. So the plaintiff agreed to do so and once he has closed his shop that the defendant declined to pay any sort of money. So plaintiff has filed suit against the defendant for the recovery of the amount stating this case won’t come under section 27 of the Act as the restraint was only partial as he was asked to stop business in one locality only where else the Act talks about complete restraint.

The court held that the agreement was void and said that the restraint as stated in the section doesn’t always mean absolute restraint but also implies partial restriction a restriction limited to a place.

There were two exceptions to this rule: –

  • Sale of goodwill

This principle states that the person when one person sells the goodwill of his business to another person, then that person can impose certain restrictions to the seller like restricting him from carrying the business of similar nature in the same locality. The only caveat regarding this is that the agreement should be reasonable according to the nature of the business. The whole point of making this exception is to protect the interest of a purchaser of goodwill. If this provision is not provided then it might happen that the seller after selling his goodwill pens another shop and that will in effect attract all the customers from the buyer of the goodwill.[11]

  • Partnership Act

There are 3 provisions in partnership Act which allows for the agreement which restrains the trade. Section 11 of the partnership Act, states that none of the partners shall carry on any business till the continuity of the partnership. Section 36 of the Partnership Act allows the remaining partners to restrict the outgoing partner from opening business of similar nature within specified locality provided that the restrictions are reasonable. Similarly, section 54 of the Partnership Act states that in the event of the dissolution of the partnership, a similar agreement may be entered into by all the partners by which they may restrict themselves from opening business of a similar nature to that of the dissolved partnership firm.

5. Section 28 of the Act

This section states that any contract which either absolutely restricts any party from enforcing his right to a legal proceeding or which restricts the person right to a legal proceeding after the expiry of a certain time period shall be considered as a void agreement. Right to appeal doesn’t come under the purview of this section. It’s also impertinent to note that any compromise which parties entered into outside the court regarding the withdrawal of suit was not hit by section 28 of the Act as no restraint was being placed upon the institution of the proceeding.[12]

Similarly, any agreement which restricts the time period within which claim can be filed in the court so as to shorten the period than what has been prescribed by the Limitation Act 1963 shall be deemed as a void agreement. As per the Limitation Act, any action for the breach of contract should be filed within 3 years from the date on which the breach has occurred.

So if the clause of any contract states that no suit can be filed after the expiry of 2 years then it shall be declared as void agreement. Now with the amendment to the section in 1997, it now states that any clause which reduces the normal period of limitation would be declared void to that extent.

This section will be applicable only when restriction imposed upon the party for the right to sue is an “absolute” one, which means if an agreement wholly preclude a party from pursuing their legal remedies then only it shall be hit by section 28, but if an agreement has partial restriction then it shall be considered as a valid agreement.[13] This section also has certain exceptions:-

  • Future disputes to arbitrations

This section won’t render any agreement as void if it has a clause by which both the parties come to the conclusion that any future disputes shall be resolved by referring the case to the arbitration and any amount awarded shall be recovered from the contesting party.

  • Existing questions to the arbitration

If an agreement has any clause which says that any existing question shall be decided by arbitration then such clauses have held valid under this sections.

6. Section 29 of the Act

This section states that any unclear or ambiguous agreement whose meaning can’t be made certain of then such agreements shall be deemed as void agreement. For example, if A enters into an agreement with B where he says that deliver a certain amount of wheat to his place of business. Now, contract shall be deemed as a void one in case B has multiple places of business then it creates confusion on the mind of B regarding the delivery place. Another case is where a car was brought from the seller for a Rs 1, 00,000 with provision to earn more if the car is found to be lucky. The agreement was deemed as void as “lucky” is a very subjective term and its impact can’t be assessed objectively[14].

7. Section 30 of the Act

The section stipulates that when two people enter into an agreement that if some future uncertain events happen then the first party will pay a pre-decided amount to the second person and if the future event doesn’t happen then the second person will pay a pre-decided amount to the first person. It’s basically a “bet” between two parties where the first party predict that situation A will happen and the other party denies that outcome.[15]

For example, if a cricket match is going on between India & Pakistan, A says that India will win and B says that Pakistan will win. So in this case, both are predicting the happening of some future uncertain events and if A wins B have to pay and vice versa. So contracts like these are termed as the wagering contracts which are deemed as void.

The essential characteristics of a wagering contract are as follows:-

  • Uncertain events

The first and foremost feature of a wagering contract is that it’s based on a future uncertain event. It may also be regarding any past event which has already happened but parties to the contract are unaware of it.

  • Mutual chances of loss or gain

In a wagering contract, each party shall have the chance to either win or lose the bet. If there is no such mutual chance of gain or loss then there is no wager.

  • Neither party to have control over the event

None of the parties shall have any control over the outcome of the event. If one of the parties can control the outcome, then the control no longer is deemed as a wagering contract.[16]

  • No other interest in the event

Neither party should have any other interest except for the stake to win or lose. This is what differentiates insurance contract from a wagering contract.

The section also provides for some exceptions which are as follows:-

  • Horse race

Any wagering contract relating to the horse race shall not be deemed as a void agreement as per the exception provided in the section.

  • Crossword & lottery competitions

If any game requires skill or if skill plays a substantial part in the results and prizes are awarded as per it then the competition is not a lottery, but otherwise it is. So a literary competition which requires skill shall not be considered as a wagering contract.[17] But competitions where the winner is decided upon a chance then that is a lottery and it shall be regarded as the wager.[18]

8. Section 56 of the Act

This section stipulates that any contract which has been entered to undertake any impossible activity shall be considered as a void contract. The act further states that if when the contract was entered objective of the agreement wasn’t impossible but with the due course of time the objective became impossible then also the fulfilment of the contract isn’t necessary.

The last part of the contract states that, if the promisor knows that objective of the contract has become impossible but the still he enters into a contract with the promisee then, in that case, the promisor shall be liable to pay certain compensation which the promisee sustains because of non-performance of the contract.

This section, in essence, talks about the “Frustration” of contract. It stipulates that the performance of the contracts becomes impossible because of the disappearances of the subject matter.[19] In the case of Krell v. Henry,[20] the defendant hired a room from plaintiff for 2 days as the coronation possession of the king would pass along that road. And in that effect certain part of the rent was pre-paid. But the possession was cancelled as the king fell sick.  So the defendant refused to pay the full amount of the contract.

It was held that the main object of entering into the contract was to have the view of the coronation possession. So happening of the possession was the foundation of the contract. The objective of the contract was frustrated as the possession was cancelled so the defendant wasn’t liable to pay the rest of the rent.

So the contract can be frustrated in two types of situations:-

  1. First, where the performances are physically impossible
  2. Second, where the objective of the contract has failed.

The Supreme Court of India has stated that this doctrine shall be applicable in both types of frustration. In the case of Satyabrata Ghosh v Mugneeram Bangur[21] the court held that “…the performance of an act may not be literally impossible but it may be impracticable and useless from the point of view of the object and the purpose which the parties had in view & if the untoward event of circumstances totally upsets the very foundation upon which the parties rested their bargain then it can be very well said that the promisor finds it impossible to the da the act which he promised to do.”

Conclusion

After thoroughly analysing all the sections pertaining to the void agreements it can be deduced that Indian Contract Act has tried to prohibit contracts which are either against the public policy or are immoral or which are in direct violation to the fundamental rights as prescribed in the Indian constitution.

Though the work of the act is to promote and maintain contractual relationships between the parties but at the same time, it’s important to restrict such contracts which if implemented then the general public have to suffer which is not the objective of any legislations.


[1] Pickering v Illfracombe Rly Co (1868) LR 3 CP 235

[2] BOI Finance Ltd v Custodian (1997) 10 SCC 488

[3] Lala v Jangh, AIR 1937 Oudh 254

[4] R Saraj v Gyanada, 36 CWN 555

[5] Suraj v. Suku, ILR 51 All 164.

[6] Laxminarayana v. Subhadri Anmal, 13 MLJ 7.

[7] Rao Rani v Gulab Rani ILR 1942 All 810

[8] Constitution of India 1950, art 19(1)

[9] Leather Cloth Co v Lorsont (1869) LR 9 Eq 345

[10] Madhub Chander v Raj Commar (1874) 14 Beng LR 76

[11] Ann Trego v George Stratford Hunt 1896 AC 7

[12] Sashi Agarwal v Det Recovery Appellate Tribunal AIR 2010 All 24

[13] Continental Drug  & Co v Chemoids & Industries Ltd AIR 1955 Cal 161

[14] Guthing v Lynn (1831) 2 B & Ad 232

[15] Avtar Singh, ‘Contract & Specific Relief’ (12th Edn, EBC Publication 2017)

[16] Dayabhai Tribhovandas v Lakshmichand ILR (1885) 9 Bom358

[17] Coles v Odhams Press Ltd (1936) 1 KB 416

[18] Subhash Kuamr v State of MP AIR 2000 MP 109

[19] Taylor v Caldwell (1863) 3 B&S 826

[20] Krell v Henry (1903) 2 KB 740 (CA)

[21] Satyabrata Ghosh v Mugneeram Bangur AIR 1954 SC 44; Dhruv Dev Chand v Harmohinder Singh AIR 1968 SC 1024

Suggested Readings

  1. Contracts which need not be Performed(Opens in a new browser tab)
  2. Need for indemnity to facilitate commercial transaction(Opens in a new browser tab)
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Author: Sagnik Sarkar

Sagnik Sarkar is currently studying BBA LLB in National law University, Odisha and is in his 3rd year. He is interested in mooting, writing a research paper and has publications in his name. Writing a research paper and mooting has helped him in his editing and formatting ability.

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