Void Agreement and it's types

Authors

Harsh Gautam (VIPS, Delhi)

Harshraj Singh Rathore (School of Law, UPES, Dehradun)

Hanuman Singh Bishnoi (AIL, Mohali)

Introduction-

The first thing which should be kept in mind while drafting a contract is that it should be according to the law, so to ensure its legality. Only those agreements that are legally enforceable by law are considered valid contracts. Agreements should be made with the free consent of the parties and also it should be free from any wrongful means mentioned in the contract law. Parties should be competent in the contract is an important essential for a valid .

A void agreement is an agreement that is not enforceable by law. Such an agreement cannot be challenged in a court of law. The type of agreements which are declared void are-

1) Agreements in Restraint of Trade

Any agreement done by the parties in restraint of trade is void under Section 27 of the Indian Contract Act. Any agreement stopping a person from trading in the manner he likes on an agreement with other parties for the benefit of a party will be called an agreement in restraint of trade.

Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd.

The facts of the case are that Thorsten Nordenfelt was a manufacturer of guns in Sweden and England. Thorsten sold his business to Maxim Nordenfelt and entered into an agreement with Maxim that he would not manufacture guns for 25 years. Later, Thorsten claimed that the agreement was not enforceable as it was in restraint of trade and judgment was passed in favor of Thorsten.

So, here a test of reasonability is followed. An agreement in restraint of trade is valid, if:

1.There is a valid interest that the party imposing the restraint is trying to protect.

2.The restraint is no more than that which is necessary to protect this interest.

3.Restraint is not contrary to the public interest.

All agreements in restraint of trade are void is laid in Section 27 of the Indian Contract Act with only exception as Sale of Goodwill. Also, these agreements are void and not illegal which means these agreements are not unlawful but just not enforceable in a court of law if either of the parties fails to perform their part of the agreement.

Illustration

Neetu has a business of books in a locality in Delhi. Sonam is planning to open a similar business in the same locality. Fearing competition in the market, Neetu enters into an agreement with Sonam not to open her business for 15 years and promises to pay a certain sum of money. Later, Neetu fails to pay the sum agreed upon. Sonam tries to take the matter in the court of law. The agreement being void, Sonam has no case.

Madhub Chunder v. Rajcoomar

In this case, the defendant, Rajcoomar suffered a loss due to the plaintiff's competition and entered into an agreement with the plaintiff that he would pay him the advances if he closed his business. When the defendant failed to pay, the plaintiff filed a suit against the defendant to recover the amount but failed to do so because it was an agreement in restraint of trade.

Exceptions to Restraint of Trade

Conditions that make restraint of trade valid

1.The seller can be restrained only from carrying out a similar business.

2.The restraint can be applied only to certain local limits.

3.The limits/restraint should appear to be reasonable.

2) Agreement in Restraint of Legal Proceedings

Section 28 of the Indian Contract Act says that any agreement that restricts an aggrieved party to approach a court or tribunal in case of a breach of contract is a void agreement.

Exceptions

There are two exceptions to Section 28, as mentioned in the Act.

1. If there is an arbitration clause in the said agreement.

2. Agreements stating the limit of time. For instance, a suit for breach of contract may be brought within three years from the date of the breach.

3) Wagering Agreement

Wager means a bet. It is a game where the probability of winning or losing is not certain. The chance of winning or losing is wholly dependent on an uncertain event. Generally, wagering agreements are void.

Parties involved in a wagering contract mutually agree that either one will win. Each party stands equally to win or lose the bet.

Example

B and D agree with each other that if it rains on Sunday, B will pay Rs. 100 to D and if it does not rain then D will pay B Rs. 100. Such agreements are termed as wagering agreements and hence void.

Essentials of a Wager:

1. Dependence on Uncertain Event

2. Mutual Chance of Gain or Loss

3. No Other Interest in the Event

4. No Control Over the Event

Exceptions

1. Contract of Insurance is not wagering

Insurance contracts are contracts of indemnity. They are entered to safeguard the interest of a party to the contract.

2. Skill Competitions are not wagering

It includes crosswords competitions, pictures, puzzles, etc. Here, the prizes are awarded by brain competitions and they have control over the event. Such competitions are not wagering.

Effects of Wagering Agreements

Sec. 30 of the Indian Contract Act states that agreements by way of wager are void, and no suit shall be brought for recovering anything be won on any wager or other uncertain event on which any wager is made. Though a wagering agreement is void but it is not forbidden by law.

4) Agreement to do impossible act

An agreement to do an act impossible is void.

Where one person has promised to do something which he knew to be impossible or unlawful, such agreements are void provided the promisor must make compensation to promisee for any loss which such promisee sustains through the non-performance of the promise.

5) Agreement by persons who are not competent to contract-

Minor is not competent to contract as per section 11 of The Indian Contract Act, 1872. An agreement with the minor is deemed void ab initio.

Mohri Bibi v. Dharmodas Ghosh-

In this case, Privy Council stated the law that the contract entered into by the minor or any agreement by the minor is void. This law is strictly being followed in further cases.

Also, the person with an unsound mind is not competent to contract as per section 12 of The Indian Contract Act, 1872.

The unsound mind may include 2 categories-

 Idiot- Means a person whose mental condition is not stable by birth. An idiot is never considered to be competent to contract in his life because of his unfit mind by birth.

 Lunatic- Means a person who is fit sometimes as well as unfit sometimes and who suffers from fits. While suffering from fits such a person cannot enter into any agreement at that particular moment.

Insolvent- A person against whom a case of insolvency is under litigation is incompetent to enter into a contract because such a person is un-discharged insolvent. In case of insolvency of any individual, his official receiver will contract on his behalf.

Convicted- It means a person against whom the court has passed judgment in severe cases like robbery, murder, kidnapping, etc. A convicted person is incompetent to contract.

Married woman- A married woman can contract for her personal property but cannot contract on behalf of her husband's property.

Alien enemy- Contract cannot be done with an alien enemy. An alien enemy is the citizen of a country with which our country's war is going on. For example- If during the war between country x and country y, country x imports good from country y and pays to country y for these imported goods, in such case revenue generated by country y from the sale of its goods to country x may be used against the country x. During a war between the two countries, no new contract can be established. A new contract can be established only when the situation gets normal.

Foreign representative- These are representatives of different countries who represent the interests of their respective countries in our country. Such representatives cannot contract with the citizens of our country because such representatives receive a lot of immunities and therefore citizens of our country cannot file a case against them if anything goes wrong after entering into a contract with such representatives.

Company or corporation- A company cannot enter into any contract if it goes beyond its Memorandum of Association as it includes the company's rights and powers. So, if the company enters into a contract by going beyond its Memorandum of Association or authority, it will be considered incompetent to enter into such a contract right from its inception.

6). Agreement with unlawful object or consideration

Suppose 'A' contracts with 'B' for the purchase of arms and ammunition without a license, the object here is illegal, therefore the contract cannot take place and the agreement will be termed as illegal. In another example, we would consider a situation of illegal consideration, suppose 'A' contracts with a jeweler for the purchase of jewelry worth rupees 5 lakh but the mode of payment adopted by 'A' for this purchase is giving drugs worth rupees 5 lakh to the jeweler in consideration. In this case, the object of an agreement is legal but the consideration of an agreement is illegal, therefore, such agreement is an illegal agreement.

7). Agreement without consideration

Consideration is an essential element of a contract. Without consideration, a contract cannot take place. Section 25 of The Indian Contract Act states- "No consideration, no contract". An agreement without consideration is void. Consideration doesn't need to be adequate but consideration should be real and lawful.

Natural love and affection- In the case of natural love and affection, parties should have a close relation. The contract should be in written form, registered and the contract should be voluntary without any pressure. For instance, if the father transfers a share from his property to his son due to natural love and affection voluntarily with a registered and returns contract, such contract is valid even without any consideration by his son.

Time-barred debt- In the case of time-barred debt; the contract is valid without any consideration. For example- X lends a loan to y, in January 2021, and y promises to return the amount of loan within a year. The amount of loan was rupees 30 lakh. In January 2022, y refuses to repay the amount of loan. According to the Indian Constitution Act, in cases of contract, suit may be filed within 3 years from the time when the course of action arose. So, x can file a case against y till 2025 and if x does not file a case against y within 3 years, such debt will become time-barred debt and x will not be entitled to file a case against y.

Gratuitous bailment- If your friend gives you his car for a test drive and after the test drive, you return his car to him without consideration. This is a gratuitous bailment as your friend did not charge anything from you for the test drive of his car.

Contract of agency- In case of a contract of agency there are 3 parties-

1. Principal

2. Agent

3. Third-Party

On behalf of the principal, his agent deals with the third party. So, the relation between Principal and agent is termed as the contract of agency. If the agent works for the principal without consideration such a contract is valid because there is no such mandate of consideration between agent and principal.

Completed gifts- If the donor offers a gift to done and done accepts such gift it is termed as a completed gift.

Post voluntary services- If someone agrees to pay for past voluntary service without any consideration, then also such contract will be valid.

8). An agreement under a mutual mistake of fact material (bilateral mistakes)

To understand this, let's take an example. Varun agreed to buy a bike from Abhijeet and the price specified in the letter was Rs8000 instead of Rs80,000 due to the error in typing. This is one of the good examples of the mistakes of facts between the parties. Therefore, the bike of Rs80,000 cannot be sold at just Rs8000. Therefore, such an agreement would be a void agreement.

9). Agreements in restraint of marriage

Section 26 of the Indian Contract act declares agreement in restraint of marriage as void. No one should be compelled for the marriage. Everyone has the right to decide their life partners and if the person is forced to choose a person of someone else's choice to whom the bride or groom doesn't give their consent then such agreements are declared void under the law.

Taking the famous case of Lowe vs Peers

In this case, a person promised that he will not be marrying any other person than the plaintiff and also if he does so, then he will pay an amount of 2000Euros to the Plaintiff. This agreement was declared void as the agreement was not something that the person should marry that woman but a restricted promise that the person can not marry any other person of his choice.

That is restricting someone from marrying a person of his or her choice by an agreement is void. It doesn’t matter whether the restriction is a complete restriction or a partial one on the person, it is void if it restricts the person to marry someone of his/her own choice.

10). An agreement, the meaning of which is uncertain

This type of agreement is covered under section 29 of The Indian Contract Act 1872. According to this section, if an agreement is uncertain then it is declared void.

Uncertain means that the contract only mentions the work to be done but it does not specify what or how the things in the contract should be carried forward to complete the contract. For example, a person asks a florist to supply flowers for his garden. This is a void agreement since that person has not specified exactly which type of flowers, he wanted the florist to supply.

Now for further understanding, let take the famous case of Keshavlal Lallubhai Patel vs Lalbhai Trikumlal Mills Ltd.

In this case, there was a strike in the defendant's mill as support to the Quit India Movement in 1942. Due to this, the defendant mill wrote a letter to the plaintiff in which they asked them that they would be needing some extra time to complete its orders as there is a strike going on. The agreement for an extension of the contract was declared void as the defendant did not mention the proper time or defined a proper period it would be needing to complete the contract.

But if the agreement's meaning can be made certain then it is a valid contract.

Conclusion

Some agreements are not enforceable 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 if any party in the agreement fails to perform his duties, the aggrieved party cannot take the matter to a relevant court or tribunal to have his rights enforced. Agreements in restraint of trade, legal proceedings, wagering agreements are examples of such agreements.

Reference

1. Bare Act, The Indian Contract Act, 1872.

2. R K Bangia’s “Contract-I”, ‘Agreement in Restraint of marriage’, pg.238, Lowe vs White.

3. R K Bangia’s “Contract-I”, ‘Ambiguous and uncertain agreements’, pg.257, Keshavlal Lallubhai Patel vs Lalbhai Trikumlal Mills Ltd.

WEBSITES

1. www.legalserviceindia.com

2. www.casemine.com/search/in/madhub%20chunder%20rajcoomar%20doss

3. indiankanoon.org/doc/1679668

4. blog.ipleaders.in/agreements-in-restraint-of-trade-marriage-and-legal-proceedings

5. accountlearning.com/wagering-agreement-meaning-essentials-exceptions-effects

6. www.legistify.com/indiankanoon/indian-contract-act-1872/section-56-agreement-to-do-impossible-act