Void Agreement-The Indian Contract Act 1872 Notes

Introduction

In contract law, the term void agreement refers to an agreement that is not enforceable by law. Such agreements do not create any legal obligations or rights between the parties involved, and they cannot be enforced in a court of law. Section 2(g) of the Indian Contract Act, 1872 defines a void agreement as “an agreement not enforceable by law.” Void agreements lack essential elements required for a valid contract or involve terms that make them legally invalid. Understanding the void agreement section under the Indian Contract Act is crucial for law students and professionals. This article will explain what a void agreement is, cover relevant sections such as Section 24, and provide examples like agreements in restraint of marriage and public policy violations.

What is a Void Agreement?

A void agreement is essentially a nullity from the beginning, meaning that even though it may have all the elements of an agreement, it does not hold legal force. Section 2(g) states that a void agreement has no legal effect and cannot be enforced in a court of law. Unlike voidable contracts, where the aggrieved party has the option to enforce the contract, a void agreement is entirely unenforceable from the start.

2(g)- Void agreement is an agreement which is not enforceable by Law – void – ab – inito.

1. Agreement by or with person’s incompetent to contract [10, 11]
2. Agreement entered into through a mutual mistake [20]
3. Object or consideration – unlawful [23]
4. Consideration or object partially, unlawful [24]
5. Without consideration [25]
6. Restraint of marriage [26]
7. Restraint of trade [27]
8. Legal proceeding [28]
9. Consideration identified [29]
10. Wagering agreement [30]
11. Impossible agreement [56]
12. An agreement to enter into an agreement in the future.
    
    

Agreements Made by Incompetent Parties (Section 11)

Section 11 of the Indian Contract Act, 1872 specifies that only certain individuals are competent to contract. It declares that any individual who is not of the age of majority, is of unsound mind, or is disqualified by any law cannot enter into a valid contract. If a contract is made by a person falling within these categories, it is considered void.

Key Points

1. Minors: A person below 18 years of age is considered a minor. Any contract entered into by a minor is void ab initio (void from the beginning).
2. Persons of Unsound Mind: Persons who cannot understand the nature of the contract and are incapable of making rational decisions cannot enter into valid contracts. This includes people suffering from mental illness, intoxication, or other conditions affecting their reasoning ability.
3. Disqualified Persons: Persons who are legally disqualified from entering contracts, such as insolvents or convicts, cannot form enforceable contracts.

Example

• Minor’s Contract: A, a 17-year-old, buys a bike from B. Since A is a minor, this contract is void, and A cannot be held liable for payment.

Case Law

Mohori Bibi v. Dharmodas Ghose (1903): This case is a landmark decision in Indian law regarding minors. The Privy Council held that any agreement entered into by a minor is void and cannot be enforced in a court of law. The court further clarified that even if a minor misrepresents their age, the contract remains void.

Agreement Entered into Through a Mutual Mistake (Section 20)

Under Section 20, when both parties to an agreement are under a mistake as to a fact essential to the agreement, the contract is considered void. The mistake must be about a fundamental fact relating to the subject matter of the contract.

Key Points

• Mutual Mistake: Both parties are mistaken about a critical fact that forms the foundation of the contract.
• Essential Fact: The mistake must relate to a fact that is vital to the agreement and not a minor or incidental fact.

Example

• Mutual Mistake of Fact: A agrees to sell his cargo to B, thinking it is still on its way, but the cargo had already been lost at sea unbeknownst to both A and B. This is a mutual mistake of fact, and the contract is void.

Case Law

Couturier v. Hastie (1856): In this English case, the contract was for the sale of goods that were believed to exist but were already destroyed. The court ruled that the contract was void due to the mutual mistake of fact regarding the existence of the subject matter.

Object or Consideration – Unlawful (Section 23)

Section 23 of the Indian Contract Act declares that the consideration or object of an agreement is unlawful if:

1. It is forbidden by law.
2. It would defeat the provisions of any law.
3. It is fraudulent.
4. It involves or implies injury to the person or property of another.
5. The court regards it as immoral or opposed to public policy.

If the consideration or object of an agreement is unlawful, the contract is void.

Key Points

• Forbidden by Law: An agreement to commit an illegal act, such as selling narcotics, is void.
• Opposed to Public Policy: Agreements that harm public welfare, such as a contract to bribe public officials, are void.

Example

• Unlawful Object: A agrees to sell a plot of land to B for ₹1,000,000, knowing that the land will be used to build an illegal gambling house. This agreement is void due to the unlawful object.

Case Law

Gherulal Parakh v. Mahadeodas Maiya (1959): The Supreme Court held that agreements aimed at unlawful or immoral objectives are void. In this case, a speculative agreement that could harm public interest was deemed void under Section 23.

Consideration or Object Partially Unlawful (Section 24)

Section 24 of the Indian Contract Act specifies that if the consideration or object of an agreement is partially unlawful, the agreement is entirely void, unless the unlawful part can be separated from the lawful part. If the unlawful part cannot be separated, the entire contract is rendered void.

Key Points

• Partial Unlawfulness: Even if part of the contract is legal, if another part is unlawful and cannot be separated, the whole contract is void.
• Separable: If the unlawful portion can be separated, the lawful portion may still be enforceable.

Example

• Partially Unlawful Contract: A agrees to sell B goods worth ₹500,000 and also agrees to smuggle contraband worth ₹50,000. Since part of the consideration is unlawful and inseparable from the legal part, the entire contract is void under Section 24.

Case Law

Pearce v. Brooks (1866): In this case, an agreement to hire out a carriage, knowing it would be used for immoral purposes, was considered void as the object was partially unlawful. The court ruled that even the lawful parts of the contract were unenforceable.

Agreement Without Consideration (Section 25)

Section 25 of the Indian Contract Act states that an agreement made without consideration is void unless it falls under specific exceptions:

1. Natural Love and Affection: Agreements made out of love and affection between close relatives, provided the agreement is in writing and registered.
2. Compensation for Voluntary Services: A promise to compensate someone for voluntary services rendered in the past is enforceable.
3. Promise to Pay a Time-Barred Debt: A written and signed promise to pay a debt, barred by the statute of limitations, is enforceable.

Key Points

• No Consideration, No Contract: Generally, an agreement without consideration is void unless it falls under the exceptions in Section 25.
• Exceptions: Certain agreements, such as those made out of love and affection or to pay time-barred debts, are valid without consideration.

Example

• Agreement Without Consideration: A promises to give his friend B ₹10,000 as a gift. This agreement, being without consideration, is void under Section 25, unless it is a gift between close relatives made out of love and affection.

Case Law

Chinnaya v. Ramayya (1882): The court upheld a promise made without consideration because the promise was made out of natural love and affection between family members. The agreement was enforced under the exceptions provided in Section 25.

Agreement in Restraint of marriage [26]

Agreement in Restrain of trade [27]

Every agreement by which anyone is restrained from exercised a Lawful profession, trade or business of any kind is void .

Burden for Proof

Party supporting the contract:- must show that the restraint is reasonably necessary to protect public interest. Party challenging the contract:- restraints is injurious to the public.

Ex. :  In Patna, 29 out of 30 manufacturers of combs  agreed with R to supply combs only to  him and not to anyone else. Under the agreements R was free to reject the goods if he found no market for them. Held, the agreement amounted to restraint of trade and void.

Exception to Sec. 27

• Sale of goodwill: – Seller of goodwill of a business may agree with the buyer to restrain from carrying on business.
  • Must relate to same business
  • Restriction shall apply within specified Local limits.
  • Restriction shall apply within a reasonable time period
  • The specified local limits – depends on nature of business.
• Restriction on existing partner [11(2)]
  Not carry on business other than business of the firm till he is partner.
• Restriction on outgoing partner [36]
  Not carry on a similar business after retirement
  Local limits + specified period – local limit – nature of business
• Sec. 54: Upon or in anticipation of dissolution of Firm. Partners may agree that some or all of them will not carry on business similar to that of the Firm within specified periods or local limits.
• Sec. 55(2) : Partner may agree with due buyers of Goodwill, not to use the Firm name or carry on Firm’s business or solicit clients of the Firm.
• Sec. 55(3): Upon sale of Firm’s Goodwill, a partner may agree that he will not carry on any business similar to Firm’s within specified periods or local limits.
  
  

Exception under judicial interpretations

1. Trade combination.
   • Traders may from associations among them to regulate the business or to fix prices.
   • Such agreement like opening and closing of business venture, licensing of  traders, supervision and control of dealers, etc. are valid even if they are in restraint of trade.
   • But, a Combination that tends to create monopoly; or when two enter into an agreement to avoid competition, they are against public policy and hence void.
2. Sale dealing agreement: – Agreements to deal in the products of a single manufacturer or to sell the whole produce to a single dealer are valid if their terms are reasonable.
3. Service agreement.
   • Agreement: Employers may enter into agreements with employees – (i) not to engage in other work during the tenure of his employment; or (ii) not to engage in similar work after his termination.
   • During Employment: The first restraint is always valid, e.g. doctors may be paid non practicing allowances to avoid practicing when they are employed in a hospital.
   • After termination of service: The second restraint is valid only is it is to protect the trade interests or the employer. It may be imposed to prevent the outgoing employee from using trade secrets he had learnt during his tenure, to the detriment of his previous employer.
   • Valid Agreements : Requiring employees to serve the organization for a few years after training leaving; or execution of a bond requiring employees leaving the organization to pay compensation to the employer are valid.
   • Use of Personal Skills: The employer cannot prevent the employees from using his personal skills and knowledge to his benefit; e.g. an employer cannot restrain an employee to act in theatre plays or in perforating an art.

Agreement in Restraint of legal proceedings [28]

Agreement restricting enforcement of rights:

An agreement by which any party is restricted absolutely from enforcing his legal rights under any contract is void. Agreements Limiting period of limitation:- An agreement which limits the time within which an action way be brought is void. A partial restrain is not void, eg.

• Ex. 1: A clause in a contract that any dispute arising between the parties shall be subject to jurisdiction of a court at a particular place only, is valid.
• Ex. 2: An agreement is not void merely because if provides that any dispute arising between two or prove person shall be referred to arbitration.

• • That has arises.
  • Which may arise
  • Which has already arisen?

• Ex. 3: An agreement not to go in appeal to higher court against the judgment of a lower court not amount to restart of legal proceeding.

An agreement the meaning of which is not certain (Sec 29)

1. An agreement is called an uncertain agreement when the meaning of that agreement is not certain or capable of being certain. Such agreements are declared void u/s 29.
2. Areas of uncertainty: Uncertainty may relate to – (a) Subject Matter of Contract; or (b) Terms of contract.
   
   1. Subject Matter: There may be uncertainty as regards –
      1. (i) existence;
      2. (ii) quantity
      3. quality;
      4. (iv) price; or
      5. (v) title to the subject matter.
         
         
   2. Terms of Contract: There may be uncertainty as regards – (i) existence (ii) quality; (iv) price; or (v) title and other terms in the contract.

Example

1. A says to B “I shall sell my house; will you buy?” A says, “Yes, I shall buy”. Due to uncertainty of price, the agreement is void and unenforceable. There is binding contract.
2. A agreed to pay a certain sum, when he was able to pay. Held, the agreement was void for uncertainty.
3. D agrees to sell his white horse, for Rs.5,000 or Rs.10,000.
   
   

WAGERING AGREEMENT [30]

An agreement between two persons under which money or money’s worth is payable by one person to another on the happen or non happening of a future uncertain event is called a wagering agreement.

• X promise to pay Rs. 1000 to Y if it is rained on a particular day, and Y promise to pay Rs.1000 to X if it did not.
• Wagering agreement is promise to give money or money’s worth upon  the determination of uncertain event.- Sir Willian Anson.
  
  

Essential elements of wagering agreements

• The must be a promise to pay money or money’s worth
• Performance of a promise must depend upon determination of uncertain event. It might have already happened but the parties are not aware about it.
• Mutual chancels of Gains or Loss.
• Neither party to have control over the events
• Neither party should have any other interest in event.
• One party is to win and one party is to lose.

Ex. 1:- Agreement to settle the difference between the contract price and market price of certain goods or shares on a particular day.

Ex. 2: A lottery is wagering agreement. Therefore, an agreement to buy and sell lottery tickets  is a wagering agreement. Section 294 – A of the Indian Penal Code declares that drawing of lottery is an offence. However, the government may authorize lotteries. The persons authorized to conduct lotteries are exempt from the punishment. But, the lotteries still remain a wagering transaction.

Ex. 3: However, if the crossword puzzle prizes depend upon sameness of the competitor’s solution with a previously prepared solution kept with the organizer or newspaper editor, is a lottery and, therefore, a wagering transaction.

Ex. 4: However, when any transaction in any commodity or in shares with an intention of paying or getting difference in price, the agreement is a wager.

Agreement not held as wagers

• Prize in terms of Prize competition Act, 1955 not exceeding Rs.1000 is not wagering agreement.
• Horse race [500] – An agreement to contribute a plate or prize.
• Contract of insurance utmost in good faith eg. Favour in public policy.
• Share market transaction A commercial transaction should always be distinguished from a pure speculative transaction. A commercial transaction is done with an intention of delivery of goods (commodity or security) and payment of price. Therefore, it is not wagering agreement.
• Crossword competition involving skill for its solution. If skill plays an important role in the result of a competition and prize depend upon the result, the competition is not Involve applications of skill and prizes are awarded to the participants on the basis of merit of their solutions and not on chance. Therefore, such competitions are valid and are not wagers.
• Athletic Competitions also fall in the category of games of skill. Therefore, these are also not wagers.
  Example: A and B, two wrestlers, agreed to enter into a wrestling contest in Ahmedabad on a certain day. They further agreed that a party failing to appear on the fixed day was to forfeit Rs.500 and the winning party will receive a sum of Rs.1,000. Held, it was not a wagering agreement.
• Contribution to chit fund is not wager – contributions made by the members are refunded by draw of lots.

Effects of wagering agreements:-

• Agreement is void.
• No suit can be filled for any recovery of the amount won on any wager.
• It is not illegal. Any agreement collateral to wagering agreement is valid.
• However, it is illegal in state of Maharashtra and Gujarat.

Difference Between Void and Voidable Contracts

It is important to distinguish between void agreements and voidable contracts:

• Void Agreement: An agreement that is invalid from the start and has no legal force. The parties cannot seek legal enforcement.
• Voidable Contract: A contract that remains valid until one party chooses to void it. The aggrieved party can enforce the contract or declare it void.

Latest Case Law on Void Agreements

Bharat Sanchar Nigam Ltd. v. Motorola India Ltd. (2009)
In this case, the Supreme Court held that agreements made for an unlawful object or consideration, such as an agreement for the sale of goods that are legally prohibited, are void under Section 23 and Section 24 of the Indian Contract Act. The case reaffirmed that unlawful agreements cannot be enforced in a court of law.

Shreepat Rai v. Bombay Cotton Co. (2020)
In this case, the court examined an agreement in restraint of marriage and held that any contract restricting the free will of a party to marry would be void under Section 26.

Conclusion

A void agreement under the Indian Contract Act, 1872, is an agreement that is not enforceable by law. Section 2(g) defines such agreements, and several other sections like Section 24, Section 26, and Section 29 further elaborate on situations where an agreement can be rendered void. Whether it’s due to unlawful consideration, uncertain terms, or restraint of marriage, these agreements are null and hold no legal standing. Understanding the scope of void agreements helps in ensuring that contracts adhere to the legal requirements of lawful object and consideration. Legal professionals must be vigilant in identifying the elements that can make an agreement void to avoid unenforceable contracts.