BRF Lesson 4

 

BRF Lesson 4

 

LEGALITY OF CONSIDERATION AND OBJECT

 

For a valid contract it is essential that the object or consideration of the agreement must be lawful. According to Sec. 23 of the Indian Contract Act, the objects and the consideration of an agreement shall be unlawful in the following cases:

1. Where it is forbidden by law: As a matter of fact, an act is forbidden by law, when it is punishable by criminal law of the country, or when it is prohibited by special legislation or by the regulations made by a competent authority under power derived from the legislature.

2. Where it defeats the provision of any law: It is of such nature that, if permitted, it would defeat the provisions of law, e.g., purchase of land being sold for arrears of land revenue by the defaulter, or an agreement by a debtor not to raise the plea of limitation in a suit by the creditor.

3. Where it is fraudulent: If the two parties agree to practice a fraud on third party, then the agreement between the parties is unlawful and void.

4. Where it is injurious either to the person or his property: It involves or implies injury to the person or property of another, e.g., an agreement to indemnify a person against the consequences of publication of a libel.

5. Where it is regarded as immoral: The term ‘immoral’ depends upon the standard of ‘morality’ prevailing at a particular place and time. If the consideration for the agreement is an act of sexual immorality, for example, illicit co-habitation and prostitution, the agreement is illegal.

6. Where it is opposed to public policy: The agreements that are injurious to the public or which are against the public good or public welfare are void.

AGREEMENTS OPPOSED TO PUBLIC POLICY

Public policy is that principle of law which holds that no citizen can lawfully do that which has a tendency to be injurious to the public. An agreement is said to be opposed to public policy when it is injurious to the welfare of the society or it tends to prejudice the welfare of the society. Following agreements have been declared by the Courts as opposed to public policy and they are as follows:

1. Trading with an alien enemy: All agreements made with an alien enemy are illegal on the ground of public policy.

2. Agreement for stifling prosecution: An agreement which seeks to absolve an offender of criminal liability or excuse him from prosecution or to withdraw a criminal case pending against him is known as an agreement stifling prosecution.

3. Maintenance and Champerty: Any agreement which improperly promotes litigation is opposed to public policy. Such agreements may be either maintenance or Champerty.

4. Agreement for sale of public offices and titles: The agreements for the sale or trafficking in public offices or to obtain public title like Padma Shree etc., are illegal on the ground of being opposed to public policy.

5. Marriage brokerage agreements: Agreements to procure marriages for reward, or agreement to pay money to the parent or guardian of a minor in consideration of his consenting to give the child in marriage, are void.

6. Agreement in restraint of personal liberty: An agreement which unduly restricts the personal liberty of any person is void on the ground of being opposed to public policy.

7. Agreement in restraint of parental rights: An agreement which is inconsistent with the duties arising out of such guardianship is void as being opposed to public policy.

8. Agreements tending to create interest opposed to duty: An agreement with a public servant which obliges him to do something which is inconsistent with his official duty, shall be void as being opposed to public policy.

9. Agreements interfering with marital duties: Any agreement which interferes with the performance of marital duties, it is void. For example, an agreement that the husband shall always live at the wife’s house was held to be void.

10. Agreements to vary the period of limitation: Agreements, the object of which is to curtail or extend the period of limitation prescribed by the law of limitation, are void.

11. Agreements to defraud creditors or revenue authorities: The agreements, the object of which is to defraud the creditors or revenue authorities are void as being opposed to public policy.

12. Agreement tending to create monopoly: An agreement, the object of which is to create  monopoly is illegal and void as being opposed to public policy.

13. Agreement to commit a crime: An agreement to indemnify a person against consequences of his criminal act is void as opposed to public policy. These act may be grouped under the following heads:

a) Agreements in restraint of marriage [Section 26].

b) Agreements in restraint of trade [Section 27].

c) Agreements in restraint of legal proceedings [Section 28].

All these agreements will be discussed in detail in the next chapter on “Void Agreement”.

VOID AGREEMENTS

According to Section 2 (g) of the Indian Contract Act, 1872, a void agreement is an agreement which is not enforceable by law. A void agreement does not create any legal rights and obligations. It is void-ab-initio (i.e., void from the very beginning) and without any legal effect. Agreements, which possess all the essential elements of a valid contract laid down in Section 10, must not have

been expressly declares as void by any law in force in any country.

The following agreements have been expressly declared as void by the Indian Contract Act:

1. Agreements by incompetent persons [Section 11].

2. Agreements made under a mutual mistake [Section 20].

3. Agreements, the object or consideration of which is unlawful [Section 23].

4. Agreements, the object or consideration is partly unlawful [Section 24].

5. Agreements made without consideration [Section 25].

6. Agreements in restraint of marriage [Section 26].

7. Agreements in restraint of trade [Section 27].

8. Agreements in restraint of legal proceedings [Section 28].

9. Agreements the meaning of which is uncertain [Section 29].

10. Agreements by way of wager [Section 30].

11. Agreements to do impossible acts [Section 56].

Agreements from 1 to 5 have already been discussed in earlier chapters. The other agreements are discussed below:

AGREEMENTS IN RESTRAINT OF MARRIAGE [SECTION 26]

According to Sec. 26 of the Act, “every agreement in restraint of the marriage of any person, other than a minor, is void”. The law regards the marriage as the right of every person. Restriction on the freedom of people shall be against public policy and, therefore, void.

Example: A promised to marry B only and none else, and to pay Rs. 2000 in default. A married C and B sued A for recovery of Rs. 2000. It was held that B could not recover anything because the agreement was in restraint of marriage. [Lowe vs. Peers] It may be noted that an agreement which provides for a penalty upon remarriage may not be considered as a restraint of marriage.

AGREEMENTS IN RESTRAINT OF TRADE [SECTION 27]

According to Sec. 27 of Indian Contract Act, 1872, “every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void”. This is  because Article 19 (g) of the Constitution of India regards the freedom of trade and commerce as a right of every individual. Therefore, no agreement can deprive or restrain a person from exercising

such a right. Example: In the case, Madhub Chander vs Raj Coomar, A and B were rival shopkeepers in a locality of Calcutta. A agreed to pay a sum of money to B if he would close his business in that locality. B closes his shop. On A’s refusal to pay the amount, the court held that the agreement was

void under Sec. 27 of the Act.

EXCEPTIONS

The following are the exceptions to the rule that ‘an agreement in restraint of trade is void’.

1. Statutory Exceptions

a) Sale of Goodwill: An agreement which restrains the seller of a goodwill from carrying on a business is valid if all the following conditions are fulfilled:

(i) The seller should be restrained only from carrying on a similar business;

(ii) The restriction shall apply so long as the buyer or any person deriving title from him is carrying on a similar business;

(iii) The restraint should apply only within specified local limits.

(iv) The restraint must be reasonable having regard to the nature of the business.

b) Restrictions under Partnership Act: The following restrictions are provided in the Partnership Act, 1932:

(i) Restriction on existing partner [Section 11(2)]: A partner shall not carry on any business other than that of the firm while he is a partner.

(ii) Restriction on outgoing partner [Section 36(2)]: An agreement by an outgoing partner with the continuing partners not to carry on a business similar to that of the firm within a specified period or within specified local limits shall not be void.

(iii) Restriction in anticipation of dissolution [Section 54]: Agreement amongst partners that upon dissolution of the firm some or all of them shall not carry on similar business within a specified period or within specified local limits shall not be void.

(iv) Restriction in case of sale of goodwill of the firm [Section 55 (3)]: Agreement by a partner upon sale of goodwill of the firm, with the buyer thereof not to carry on any similar business within a specified period or within specified local limits shall not be void.

2. Under Judicial Interpretations

a) Trade Combinations: Trade combinations which have been formed to regulate the business or to fix prices are not void, but the trade combinations which tend to create monopoly and which are against the public interest are void.

b) Service Agreements: Agreements of service often contain a clause by which the employee is prohibited from working anywhere else during the term of the agreement, such agreements are valid.

c) Sole Dealing Agreements: An agreement to deal in the products of a single manufacturer or to sell the whole produce to a single dealer is valid if their terms are reasonable.

AGREEMENTS IN RESTRAINT OF LEGAL PROCEEDINGS [SECTION 28]

An agreement by which any party is restricted absolutely from enforcing his legal rights under or in respect of any contract is void to that extent. An agreement which interferes with the course of justice is void on account of its being opposed to public policy.

The following are the four kinds of agreements which are in restraint of legal proceedings, and are therefore, void:

a) Absolute restrictions from enforcing legal rights: Any agreement that absolutely restricts a party to a contract from enforcing his contractual rights in ordinary tribunals is void.

b) Agreements curtailing the limitation period: An agreement which limits the time within

which an action may be brought so as to make it shorter than that prescribed by the Law of Limitation, is void because its object is to defeat the provisions of law.

c) An agreement which extinguishes the rights of a party.

d) An agreement which discharges a party from liability.

Exceptions

There are the following two exceptions to the rule laid down in Section 28:

1. Restraints for referring the future disputes to arbitration.

2. Restraints for referring the existing or present disputes to arbitration.

AGREEMENTS THE MEANING OF WHICH IS UNCERTAIN [SECTION 29]

An uncertain agreement is one, the terms of which are uncertain or not capable of being made certain without further agreement between the parties are void. An agreement with uncertain, ambiguous or vague terms is void because in such cases, courts may not give a practical meaning to the contract Example: A agreed to sell to B, 100 tons of oil. There is nothing whatever to show what kind of oil

was intended. Therefore, the agreement is void for uncertainty.

AGREEMENTS BY WAY OF WAGER [SECTION 30]

The term ‘wagering agreement’ or ‘wager’ may be defined as an agreement in which one person agrees to pay certain amount of money to the other person on the happening or non-happening of a specified uncertain event.

i) X agrees with Y that if there is rain on a certain day X will pay Y Rs. 1000. If there is no rain Y will pay X Rs. 1000. The agreement is of a wagering nature.

ii) A test match between India and Australia has ended in Kolkata today. Both A and B are ignorant of the result. A agrees with B to pay 1000 in case India wins and B agrees to pay A Rs. 1000 in case India does not win. The agreement is of a wagering nature.

Essential Features of a Wager Agreement

1. Promise to pay money or money's worth: There must be a promise to pay money or money's worth by one party to the other.

2. Event: The promise must be conditional on the happening or not happening of an event.

3. Uncertainty of the event: The agreement must be conditional upon the determination of an uncertain event. An event may be uncertain not only because it relates to future but because it is not yet ascertained to the knowledge of the parties.

4. Mutual chances of gain or loss: Each party must stand an equal chance to win or lose on the determination of the contemplated events.

5. No control over the event: Neither party should have control over the happening or non happening of the event.

6. Stake as the only interest: Neither party should have any interest other than the sum or stake that he stands to win or lose.

Effects of Wagering Agreement

a) Agreements by way of wager are void in India.

b) Agreements by way of wager have been declared illegal in the states of Maharashtra and Gujarat.

c) No suit can be filed to recover the amount won on any wager.

d) Transactions which are collateral to wagering agreements are not void in India except the states of Maharashtra and Gujarat (Wagering agreements which are illegal).

Exceptions to Wager

The following transactions are not wagers:

1. Horse race: An agreement to contribute or subscribe towards any plate, prize or sum of money, the amount of rupees five hundred or more to be awarded to the winners of any horse race is a valid agreement and not a wager. In 1996, the Supreme Court has held horse races to be "games of skill" and not gambling.

2. Crossword competitions: According to the Prize Competition Act, 1955, prize competitions in games of skills are not wagers provided the amount of prize does not exceed Rs. 1000.

3. Games of skill: Picture puzzles, literary and athletic competitions, being based on skill and intelligence, are games of skill.

4. Share market transactions: In the share market if the intention is to take and give delivery of stocks and shares, it is a valid transaction.

5. Contracts of insurance: It is a contract in which an insurer, in consideration of a certain sum of money, undertakes to make good the loss of the insured arising on the happening of an uncertain specified event.

 

CONTINGENT CONTRACT

According to Section 31 of the Contract Act, a contingent contract “is a contract to do or not to do something, if some event, collateral to such contract does or does not happen”.

The performance of a contingent contract becomes due only upon the happening or nonhappening of some future uncertain event. In simple words, it is a conditional contract. Contracts of insurance, indemnity and guarantee etc. are some of the important examples of contingent contracts.

Example: A contracts to pay Rs. 10,000 to B if his (B’s) house is burnt. This is a contingent contract as its performance is dependent upon an uncertain event (i.e., burning of B’s house).

Essentials of a Contingent Contract

A valid contingent contract must satisfy these essential requirements:

1. There must be a valid contract: It must fulfill the basic requirements of a valid contract between the parties.

2. The performance of the contract must be conditional: The performance of a contingent contract must depend upon the happening or non-happening of some future event.

3. The event must be uncertain: The future event, upon which the performance of a contract depends, must be an uncertain event.

4. The event must be collateral to the contract: The event must be independent or ancillary to the contract.

5. The event should not be the discretion of the promisor: The ‘mere will’ or ‘discretion’ of the promisor is not an event for the purpose of a contingent contract.