AGREEMENT EXPRESSLY DECLARED TO BE VOID
There are certain agreements which the law regard as void, such as minor’s agreement, or agreement under mutual mistake of fact, or agreement without consideration, or whose object or consideration is unlawful.
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| Adhivakta Law Cafe |
Apart from those discussed earlier, there is a list of agreements, specifically enumerated in the Indian Contract Act, that are void. They are as follows –
(a) Where consideration is unlawful in part
If any part of a single consideration for one or more objects, or any one or any part of any one of several considerations for a single object, is unlawful, the agreement is void.
The above language of the law may appear technical. But it is corollary to previously discussed unlawful objects and considerations. Where object or consideration of an agreement is unlawful, but merely in part, the law examines whether the legal part can be separated from the illegal part. If yes, then the legal part is given effect while the illegal is rejected. But where no such separation is possible, the contract is altogether void.
For example, where A promises to manage B’s business, manufacturing of sugar, and also illegal smuggling of alcohol. B promises to pay to A a monthly salary of Rs. 10,000. The agreement is void.
But if B had agreed to pay Rs. 5000 for sugar business and another Rs. 5000 for alcohol smuggling. The agreement would be valid for management of sugar business for a monthly salary of Rs 5000.
(b) Agreement in restraint of marriage
Every agreement in restraint of the marriage of any person, other than a minor, is void. So if a major person agrees for good consideration not to marry, the promise is not binding.
(c) Agreement in restraint of trade
Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. The object of this law is to protect trade. The restraint, even if it is partial, will make the agreement void.
For example, A, a shop keeper, in a particular locality agrees to pay B his business rival certain compensation, if B closes his business in that locality the agreement is void.
However, there are certain exceptions to the general rule based on the principle of fairness. They are as follows –
(i) Sale of goodwill
An agreement by a person who sells the goodwill of a business, not to carry on a similar business within specified local limits so long as the buyer carries on a similar business, is valid provided that the restrictions are reasonable.
(ii) Partnership Act
Under the law of Partnership, partners may agree not to carry on any other business during continuance of partnership. This restriction may be absolute so that partners remain focused on partnership business
Also, an outgoing partner may be restrained by agreement from carrying on competing business for a reasonable time or within specific locality. It is worth noting that this restriction can only be partial and with respect to competing business only
Similarly, on dissolution of partnership firm, the partners may agree that one or more of them will not carry on business similar to that of the dissolved partnership for a reasonable time or within specific locality. This restriction, again, cannot be absolute.
(iii) Exclusive Dealing Agreements
Law even provides for exclusive dealing agreements. Such as, An agreement that during a term, entire production of a factory will be sold exclusively to one dealer, is not in restraint of trade.
Similarly, an agreement of service through which an employee commits not to compete with his employer is not in restraint of trade. Say, A, a Doctor, employs B as his assistant under the condition that B shall not practice as an independent Doctor during the period of his employment. The agreement is valid.
(iv) Trade Unions
Trade unions may adopt reasonable covenants for regulation of business. For example. Union of traders may agree that sellers shall not sell a particular product below a particular price.
(d) Agreement in restraint of legal proceedings
An agreement, which restricts a party absolutely from enforcing his rights in respect of any contract or which limits the time within which the right may be enforced, is void to that extent.
However, there is an important exception to the rule, that is, arbitration. Parties may agree that any dispute between them, whether present or future, shall be referred to arbitration. Such an agreement must be in writing and signed by the parties. Such an agreement bars civil litigation before a court or tribunal.
It is important to note that initiation of a criminal action for a non-compoundable offence cannot be restrained by way of agreement.
(e) Uncertain Agreements
Agreements, the meaning of which is not certain, or capable of being made certain, are void. But where the meaning is capable of being made certain, then the agreement is valid.
For an example where A enters into an agreement to supply 100 tons of oil, the agreement is not valid as the meaning of it is uncertain since the type of oil is not known. But if A is a dealer of coconut oil only, then the meaning of the agreement is capable of being ascertained from the circumstances surrounding the promise. Such an agreement shall be valid.
(f) Wagering agreement
Agreements by way of wager are void. Wager is a promise to give money or money’s worth upon determination or ascertainment of an uncertain event. It is an agreement by which two or more parties agree that a certain sum of money, or thing, shall be paid or delivered to any of them, on the happening or not happening of an uncertain event. The essence of wagering agreement is where there are two parties, one wins, the other loses upon an uncertain event taking place in which neither of them has legitimate interest. That is
- Two parties
- Mutual chances of gain and loss
- Uncertain Event
- No interest other than stake
- Neither party to have control over the event
For example A agrees to pay Rs. 500/- to B if it rains and similarly B agrees to pay A if it does not. This is a wagering agreement as neither has control over the event. But where one of the parties has control over the event, the agreement is valid.
The law provides for two exceptions of the rule. Firstly, Horse racing tickets, where Rs 500 or more is to be awarded to the winner, are valid.
Secondly, Speculative transactions. Speculation means the act or practice of buying land, goods, shares, etc., in expectation of selling at a higher price, or of selling with the expectation of repurchasing at a lower price. It is trading on anticipated fluctuations in price, as distinguished from trading in which the profit expected is the difference between the retail and wholesale prices, or prices in different markets.
There are two elements of a speculative transaction –
(a) Mutual intention of parties to acquire or deliver goods and not mere exchange of difference in price.
(b) Undertaking of risk arising from change of prices.
In wager, risk is the only element without ever intention to deliver goods. Wagering agreement is void, speculative transactions are valid.
It is often difficult to distinguish between the two. For example, A enters into a agreement with B to buy 100 bags of cement at Rs. 400/- per bag for delivery after 6 months. After 6 months, the prices are Rs. 500/-. A may –
i. Take delivery of 100 bags on payment at the rate of Rs. 400/- and sell it to some other buyer at prevailing rates in the market and make profit, or
ii. Simply collect the difference of Rs. 10,000/- at rate of Rs. 100/- per bag.
Similarly, if the price falls to Rs. 350/-, A may –
i. Take delivery of 100 bags on payment at the rate of Rs. 400/- and sell it to some other buyer at prevailing rates in the market and incur loss, or
ii. Pay the difference of Rs. 5000/- at rate of Rs. 50/- per bag.
In the above example, if the original intention of the parties was to settle the difference in price only, then the agreement is by way of wager, and thus void. But if the original intention was delivery of the goods, the transaction is one of speculation and a valid one.
Further, Insurance contract are in their nature speculative. To avoid them from becoming a wager, law provides that the person seeking insurance must have insurable interest in the subject matter. Insurable interest means interest in the survival or preservation of the person or the thing. That is, if death of a person or destruction of the object is detrimental to a person, he has an insurable interest in the person or thing. Thus, one can insure one’s own life, life of a family member, one’s own car. But not one’ neighbour’s car. Unless for some reason, an insurable interest may be established, an insurance policy so taken will be void.
It is also worth noting that at times when a bet is placed, parties may agree that the amount of bet be placed with a neutral third party (stakeholder). But even such an arrangement does not make wager a valid contract. A winner cannot compel the stakeholder to deliver him the award.
Collateral transactions
Transactions collateral to, though independent of, wagers are valid. Wagering agreements are void and unenforceable in nature, but not forbidden by law. The test of validly of a collateral transaction is whether the main transaction is illegal or legal but void. If the main transaction is illegal, the collateral transactions are also invalid.
For example, A lends money to B, to pay off the debts arising out of a wagering agreement or bet. Though, B makes payment over a void agreement, and A has knowledge of the same, but since the agreement between A and B is collateral to wager and not to an illegal agreement or wager in itself, A can recover the loan from B.
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