void contracts
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This article is written by Disha Mohanty of National Law University and Judicial Academy, Assam. The article goes on to provide a detailed study of the kinds of void agreements and a brief idea of English law and its connection with Indian principles.

Introduction

Contracts and agreements are by far the most widely used legal devices and to some extent also govern most of our social relationships. However, those agreements which are legally enforceable can be termed as contracts whilst those which are unenforceable by law are called void agreements. These agreements are generally those which are concerned with immoral elements or go against the public policies of the state. Section 2(g) of the Indian Contract Act, 1872 defines void agreements. Further, Sections 24 to 30 and 56 of the Act specify the particular kinds of agreements/contracts which are void. Since a void agreement is meaningless in the eyes of law, it does not cause any change in the position or relationship of the contracts.

Agreements in which a part of consideration or object is unlawful

This is mentioned in Section 24 of the Act. The basic essence of this statement is that if the consideration, as a whole or in part is unlawful or if the end product of the agreement is illegal then the agreement is declared void. The contract would, however, be considered valid after deleting the unlawful clauses. For example, if there is an agreement between A and B for the exchange of drugs and medicinal herbs for ₹5000, then the agreement stands void even though the consideration of the agreement is legal. This is because the object of the agreement is illegal. But in this case, if we remove the drugs from the object then the agreement would be termed valid.

Moreover, if transaction which arises out of an unlawful act is such that if they are separated from the illegal part, then they would count as a valid agreement, then those transactions hold value in the eyes of law irrespective of the illegality of the agreement [1].    

Agreements without consideration

Section 2(d) of the Indian Contract Act, 1872, states, consideration may be furnished by ‘the promisee or any other person’ as long as it is ‘at the desire of the promisor’. In the case of Currie v. Misa, the court defined valuable consideration as “in the sense of the law may consist either in some right, interest, forbearance, detriment, loss or responsibility given, suffered or undertaken by the other”. Section 25 of the Act mentions that all agreements devoid of consideration would be declared void unless they fall into the following categories: 

  • If the agreement is made out of natural love and affection

This is the first exception mentioned under Section 25(1). In Rajlukhy Dabee v Bhootnath Mookerjee [2], the Hon’ble court had held that “A written and registered agreement which is based on natural love and affection between kins is enforceable without consideration”.  Examples of this involve a daughter taking care of her father [3], a brother giving away property to his siblings, etc. Essentials of an agreement like this involve [4]:  

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

This is mentioned in Section 25(2) of the Act. Under this, the promisor performs the act in order to compensate the promisee either wholly or partially for some previously performed voluntary act of the promisee. For example, if there’s a contract between A and B where A’s expenses are taken care of by B for taking care of his son, then, it must be noted that the service provided wasn’t voluntary as B was legally bound to support his infant son. As per this exception, the promise must be to compensate a person who has himself done something for the promisor and not to a person who has done nothing for the promisor [5]. 

Restraint of marriage

Section 26 of the Act mentions that all agreements in restraint, either partial or full, of a marriage except that with a minor, would be void. For example, if Ria’s father provides Amit with some incentives only to prevent him from marrying his daughter, then such an agreement would stand void in the eyes of the law, provided the parties involved are not minors. In the case of Shrawan Kumar v. Nirmala, the plaintiff held that the defendant had promised to marry him and therefore her present marriage should be injuncted by the court. This petition was dismissed by the Allahabad High Court on the grounds of restraint of marriage. The philosophy behind this law is the fact that marriage is a sacred social institution and nothing should be allowed to interfere with it or restrict it, until and unless it involves minors. Therefore, an agreement in restraint of marriage of adults is void whereas the same in the case of the minor would not be held void. But this clause doesn’t apply in case of remarriage. In the case of remarriage, any penalty imposed upon the widow wouldn’t be counted as a restraint. This was held in the case of Rao Rani v. Gulab Rani, where it was held that the widow will have to forego her property rights.

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Restraint of trade

This is dealt with under Section 27 of the Act. The freedom to practice any form of trade and occupation is a fundamental right guaranteed by the Constitution of India under Article 19(1). Hence, any agreement in restraint of trade and occupation would be deemed as void. The restraint can be both partial and complete. This was brought out in the case of Madhub Chander v. Raj Coomar, where the defendant had proposed to pay the plaintiff a certain amount of money if the latter agreed to shut down his shop in a particular locality. However, upon shutting down his shop, the plaintiff was denied payment by the defendant. The court here, ruled that the defendant did not own any money to the plaintiff since the agreement was void (as it was in restraint of trade), even though it imposed partial restraint i.e. extended to only a particular locality.

However, there are two exceptions to this rule:

The foundation for delegitimizing an agreement in restraint of trade lies the historical backdrop of contention between free markets and the opportunity of agreements. Guaranteeing freedom to the agreement would mean legitimizing agreements in limitation of trade, which would bring about parties consenting to check competition. Under the common law, the present position is taken from the case of Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd.
In the said case, Thorsten Nordenfelt was a producer of firearms in Sweden and England. Thorsten sold his business to an organization, which at that point moved the business to Maxim Nordenfelt. Then, Thorsten went into a concurrence with Maxim that he would not take part in the assembling of weapons for a period of 25 years, other than what he produces for the benefit of the organization. Afterward, Thorsten broke his promise asserting that the understanding was not enforceable as it was in restriction of trade. The decision of the court was in support of Thorsten. In common law, a reasonability test is pursued. An agreement in restriction of trade is legitimate, if: 

  • There is a substantial interest that the party forcing the restriction is attempting to secure.
  • The restriction is no more than what is important to secure this interest.
  • Restriction isn’t in opposition to public interest.

General principle in India and England similar?

The general principles in India and England regarding void agreements is more or less the same which is basically that all restraints on trade, whether partial or whole, are void. The only point of difference arises in the fact that in England, the decision on validity of restriction is taken on the basis of reasonableness while in India restrictions would be valid only if they fall within the category of the already stated statutory or judicial exceptions. Therefore, there aren’t any wide dissimilarities between the two laws. The English law tends to be more flexible as the clause of “reasonableness” helps to constantly change its ambit. As LORD WILBERFORCE remarked in Esso Petroleum Co Ltd v. Harper’s Garage (Stourport) Ltd “the classification (of agreements in restraint of trade) must remain fluid and the categories can never be closed”.

Exceptions to Section 27

Section 27 is basically based on public policy and applies to various cases in varying degrees. In the case of Brahmaputra tea co ltd v. Scarth, it was held by the court that any restraint through which a person binds himself or herself won’t be void and would be covered under the exceptions to Section 27.  These statutory and judicial exceptions are discussed below.

Statutory exceptions

  • Sale of Goodwill

According to this, a person who buys the business goodwill of another person is thereby privileged to impose certain restrictions on the business activities of the latter. The restrictions include preventing the seller from carrying out similar business within local limits only. This is done to protect the rights of the purchaser [6]. However, the restraint should be reasonable according to the nature of the business under consideration. In the case of Chandra v. Parsullah [7], the plaintiff and defendant both had the business of running buses between Pune and Mahabaleswar. To avoid competition, the plaintiff bought the defendant’s business along with its goodwill and made a contract whereby the defendant would not be allowed to carry on business in the same locality. However, there was a breach of contract on the part of the defendant. When brought to the court, the court ruled in favor of the plaintiff since the agreement was valid under Section 27.

There are three provisions of the partnership act that provide for restriction of business. They are [8]:

  1. Section 11, which states that none of the partners would carry on any business till the continuity of the business.
  2. Section 36, which provides the remaining partners to prevent the outgoing partner from opening any business similar to theirs’ in the same locality subject to certain restrictions.
  3. Section 54, which prevents all the partners from engaging in any business of similar kind after dissolution of the firm/business.

Firm Daulat Ram vs. Firm Dharm Chand, where two ice factory owners constituting a partnership agreed that only one factory will be worked at a time and its profits distributed among them. The restraint was held to be justified [9].

Under judicial interpretation

Trade combinations

Trade Combination basically refers to the agreements that a set of homogenous traders come up with to keep a check on the market. For example, if there is a group of sugar sellers in a locality, then they might come up with specific agreements regarding fixed prices, quality of goods, controlling dealers, etc. in the name of market regulation of the locality and to avoid unhealthy competition. Such agreements have been declared void by the courts since there is a deprivation of trade liberty. 

In the case of Kores Mfg Co Ltd v. Kulok Mfg Ltd, the two sugar mill employees had come to an agreement wherein either of them wouldn’t employ a person who had been working in the other person’s factory in the past 5 years, to protect trade secrets and other confidential information. The court had held this agreement to be void since the ban was applicable to all employees irrespective of their skills and positions held.

The Allahabad High Court, in the case of SB Fraser & Co. v. Bombay Ice Manufacturing Co. Ltd., observed the following, “The rules of an association of traders and weigh men provided that members shall not deal with outsiders, the penalty for breach being fine and expulsion. The legality of the association was attacked on the ground that its object and methods were unlawful as it aimed at the creation of a monopoly by shutting out all competition and was a defiance of the spirit of Section 23 and 27”. [10]

Thus, any agreement placing restrictions upon a trader regarding his choice of mode of business shall be held void.

Solus or exclusively dealing agreements

This refers to trading agreements whereby the manufacturer strikes a deal with the consumer that he/she would purchase items only from him for a fixed period of time. However, if the manufacturer produces any surplus quantity, he/she is allowed to sell it to anybody. “As long as the negative stipulation is nothing but an ordinary incident of or ancillary to the positive covenant, there is hardly anything obnoxious to Section 27. But the court may not countenance the agreement particularly where the buyers intend to corner or monopolise the commodity so that he may resell at his own price or where he binds the seller for an unreasonable period of time.”[11] This was brought out in Sheikh Kallu vs Ramsaran Bhagat.

The doctrine does not apply to ordinary commercial contracts for the regulation and promotion of trade during the existence of the contract provided that any prevention of work outside the contract viewed as a whole is directed towards absorption of the party’s services and not their sterilisation. Sole agencies are a normal and necessary incident of commerce, and those who desire the benefit of sole agency must themselves the opportunity of other agencies. 

Where a contract is reasonable and fair at the beginning, but circumstances have arisen which show that it is being enforced by one party in a manner which is prejudicial to the interest of others, the courts will hold the agreement to be unenforceable. Though not void or invalid. This opinion has been expressed by the court of appeal in Shell UK Ltd v Lostock Garages Ltd.

Restraint on employees

  • Restraint during employment: While an employee is engaged in a business, he/she is not allowed to work for any other business which is in direct competition with his employer. This is done for the protection of trade secrets, customer details, plans, etc. This was established in Charlesworth v. Macdonald.
  • Restraint after termination of employment: An agreement to restrain a servant from competing with his employer after the termination of employment may not be allowed by the courts. This was pronounced in Brahmaputra Tea Co v E. Scarth, where an attempt was made to restrain a servant from competing for five years after the period of service.

Conclusion

After thoroughly analysing the major sections related to void agreements, it can easily be deduced that the agreements which have been declared void and the exceptions to them, are done only to protect the rights and interests of the public at large. The restrictions assume paramount importance as agreements and contracts are the most commonly used legal tools and directly or indirectly, affect most of our social relations.

References

  1. BOI Finance Ltd. v Custodian (1997) 10 SCC 488
  2. Rajkukhy Dabee v Bhootnath Mookerjee (1900) 4 Cal WN 488.
  3. R Saraj v. Gyanada, 36 CWN 555.
  4.  https://www.legalbites.in/void-agreements/#_ftnref4
  5. https://lawtimesjournal.in/agreements-without-consideration/#_ftn1
  6. http://www.legalservicesindia.com/article/1753/Exceptions-of-agreement-in-restraints-of-trade-with-reference-to-Indian-and-English-case-laws.htm
  7.  Ann Trego v. Geroge Stratford Hunt 1896 AC 7
  8. https://blog.ipleaders.in/agreements-in-restraint-of-trade-marriage-and-legal-proceedings/
  9. https://www.legalbites.in/void-agreements/#_ftnref11
  10. https://taxguru.in/corporate-law/restraint-trade-exceptions-2.html
  11. http://www.legalservicesindia.com/article/1753/Exceptions-of-agreement-in-restraints-of-trade-with-reference-to-Indian-and-English-case-laws.html

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