This article is written by Wardah Beg, student, Faculty of Law, Aligarh Muslim University.
One of the essential requirements to form a contract is that it should not be void. Section 10 of the Indian Contract Act says, “all agreements are contracts…that are not hereby expressly declared to be void”. A contract can be void due to several reasons, for example:
- It could be void ab initio- i.e., an agreement to do an illegal act is void ab initio, that is, it is void from the moment it was first made.
- It is against the principles of justice and fairness or against public policy.
- It becomes subsequently void because of a change in the law.
- It has already been fully performed.
Some agreements are just harmful to society. They are against public policy. Some such agreements are Agreements in restraint of marriage, trade or legal proceedings. These agreements are expressly declared to be void in the Indian Contract Act in Section 26, 27 and 28 respectively.
Agreements in Restraint of Marriage
According to Section 26 of the Indian Contract Act, all agreements in restraint of marriage except that of a minor are void. Romans were the first to delegitimize agreements that were in restraint of marriage. The basis of making agreements in restraint of marriage void is that marriage is a sacrament and nothing should interfere in the institution of marriage, not even contracts. The idea behind this provision is to not snatch away the personal right of every individual to marry someone of their own choice. It is important to note here that according to the section, agreements in restraint of marriage of a minor are not void.
- A person Susan agrees with John, in return for some consideration, that she will not marry a certain person Mark. This agreement is one in restraint of marriage and is thereby void.
- Tina’s father promises a person Rahul, that he won’t marry his daughter Tina to anyone else but he, if only he would pay a sum of Rs. 20,000 per month until their wedding date. This is a void agreement, as it is in restraint of marriage of a person of age.
The case of Lowe v. Peers set a precedent in the law relating to restraint of marriage. In this case, the defendant contended that if he marries any other person except the plaintiff, he would give her 1000 pounds within three months of his marriage. It was held that such an agreement is void.
In the recent case of Shrawan Kumar v. Nirmala, the petitioner filed a suit in the Allahabad High Court asking the court for an injunction on the defendant’s marriage to the other person. The plaintiff contended that the defendant had promised to marry him, and therefore her marriage with the other person should be injuncted against. Pankaj Mithal, J. cited Section 26 of the Indian Contract Act, 1872 while pronouncing his judgment, whereby he dismissed the petition.
Agreements in Restraint of Trade
Agreement in restraint of trade is void under Section 27 of the Act. That is, any agreement that debars one person from starting or continuing his trade or profession, in return for some consideration is void. Therefore, any agreement stopping a person from trading in the manner he likes or wherever he likes, on an agreement with other party, in which the other party benefits from him stopping his trade or profession, will be called an agreement in restraint of trade. Apart from two exceptions, which we will discuss below, all agreements in restraint of trade are void. The two exceptions lie in Sale of Goodwill and Partnership Act.
The background for delegitimizing an agreement in restraint of trade lies in the history of conflict between free markets and the freedom of contracts. Ensuring freedom to the contract would mean legitimizing agreements in restraint of trade, which would result in parties agreeing to curb competition. Under the common law, the current position is derived from the case of-
In this case, Thorsten Nordenfelt was a manufacturer of guns in Sweden and England. Thorsten sold his business to a company, which then transferred the business to Maxim Nordenfelt. At this time, Thorsten entered into an agreement with Maxim that he would not engage in the manufacture of guns for 25 years, other than what he manufactures on behalf of the company. Later, Thorsten broke his vow claiming that the agreement was not enforceable as it was in restraint of trade. The decision of the court was in Thorsten’s favour.
In common law, a test of reasonability is followed. An agreement in restraint of trade is valid, if:
- There is a valid interest that the party imposing the restraint is trying to protect.
- The restraint is no more than that which is necessary to protect this interest.
- Restraint is not contrary to public interest.
Position in India
Section 27 of the Indian Contract Act declares all agreements in restraint of trade, void pro tanto, with the only exception being Sale of Goodwill. Yet, it is important to understand that these agreements are void, not illegal. Which means, these agreements are not unlawful to make, they are just not enforceable in a court of law if either of the parties fails to perform his part of the agreement. Unlike the common law, even partial agreements in restraint of trade or reasonable restraint are not valid under the Contract Act.
Shalini has a business of office supplies and books in a locality in Bareilly. A person Zahida is planning to open her business of similar goods in the same locality. Fearing competition in the market, Shalini enters into an agreement with Zahida not to open her business in the area for 15 years, and as a consideration promises to pay a certain sum of money to her every month. Later, Shalini fails to pay the sum agreed upon. Zahida tries to take the matter in a court of law. The agreement being void, Zahida has no case.
Madhub Chunder v. Rajcoomar
In this case, the parties were businessmen in Calcutta. The defendant, Rajcoomar suffered loss due to the plaintiff’s competition and entered into an agreement with the plaintiff that if he closed his business there, he would pay him all the advances he had made to his workmen. When the defendant failed to pay, the plaintiff filed a suit to recover the amount but failed to do so because it was an agreement in restraint of trade, therefore not enforceable in a court of law.
In this case, the Supreme Court came to the conclusion that Section 27 expressly declares all agreements (apart from one exception) to be void and the section cannot be attributed two meanings. The test of reasonability as applicable in England cannot be applied in India.
Exceptions to Restraint of Trade
Section 27 of the Act mentions only one exception validating restraint of trade, i.e., Sale of Goodwill. Another exception is found in the Partnership Act.
What is a Sale of Goodwill
Goodwill is an intangible asset of a firm, that is, it exists, yet it is not material or physical. It essentially means the reputation or status of the firm in society. Goodwill has its origin in brand value, employee morale, reputation, customer advantage etc. It is an important asset because a customer is expected to engage with the same favorable firm, that he was engaged with earlier, because of its name and reputation. This why Goodwill of a firm holds a value.
Like other assets of the firm, the goodwill of the firm can also be sold. Once the goodwill of a firm is sold, the buyer acquires some rights:
- He/she can use the firm’s name.
- He/she can represent the firm.
- He/she can restrain the seller of the goodwill from being in contact with the previous customers of the firm.
After a sale of goodwill, the seller continues to enjoy the right to carry out a competing business. But, in case,it is agreed upon through a contract that the seller will not enter into any such agreement, such rights extinguish.
Conditions that make restraint of trade valid
There are certain conditions that make a restraint on trade during a sale of goodwill valid, these are:
- The seller can be restrained only from carrying out a similar business.
- The restraint can be applied only to certain local limits.
- The limits/restraint should appear to be reasonable.
Here, the plaintiff was the owner of a fleet of buses that used to ply between Pune and Mahabaleshwar. The defendant also had a similar business in the same area. To avoid competition, the plaintiff bought the defendant’s business along with the goodwill, and by contract made him agree not to open a similar business in the area for 3 years. The defendant did not comply and started his business. It was held by the court that the agreement was valid, as it fell within the exception to S.27.
Another exception to the rule of limitation on agreements in restraint of trade is provided under the Partnership Act, 1932. The Act lays down three exceptions. These are:
- An agreement with a partner of the firm to not carry out his own business so long as he/she is a partner in the said firm will be valid under Section 11 (2) of the Partnership Act.
- An agreement between partners to not engage in a similar business as that of the said firm within specified territorial and time limits (period of restraint). (Section 36 (2))
- In anticipation of dissolving the firm, the partners may come to an agreement in restraint of carrying out a similar business within specified territorial and time limits so long as this restraint is reasonable.
In this case, two similar business owners, in a partnership, came to an agreement that only one of their factories would work at a time and the profit will be shared between them. This restraint was held to be valid.
Agreement in Restraint of Legal Proceedings
Any agreement between the two parties that debars either or both of them from going to a court of law in case of non-compliance of the contract, is a void agreement. Section 28 of the Indian Contract Act says that any agreement that restricts an aggrieved party from enforcing his rights to approach a relevant court or tribunal in case of a breach of contract, or limits the time within which he may do so, is a void agreement. It further says, any agreement that extinguishes the rights of any party or discharges either of the parties from liability is a void agreement.
In simple terms, all agreements are void, if:
- They render it invalid, by agreement, for a party to approach a relevant court or tribunal if the parties rights have been violated.
- Limit the time within which the aggrieved party can approach such a court or tribunal.
- Make a party immune from liability by agreement.
There are two exceptions to Section 28, as mentioned in the Act. Agreements in restraint of legal proceedings are valid, if:
- A future dispute or a past dispute is referred to arbitration. That is if there is an arbitration clause in the said agreement.
- Agreements stating the limit of time as per the Limitation Act, 1963. For instance, as per the Limitation Act, 1963, a suit for breach of contract may be brought within the period of three years from the date of the breach.
In this case, the Supreme Court held that the terms of an agreement should not be so construed as to bar the other party from seeking the remedy of the suit.
Some agreements are unenforceable in a court of law because they are against public policy and interest. Such agreements are not illegal, they can still be made, but they are not enforceable in a court of law. That is, in case any of the party in the agreement fails to perform his duties in such an agreement, the aggrieved party cannot take the matter to a relevant court or tribunal to have his rights enforced. Agreements in restraint of trade, marriage, and legal proceedings are examples of such agreements.