The last requirement of a formation of a lawful contract is that the object of the contract must be lawful. S. 23 provide certain circumstances when the object and consideration of a contract are unlawful. If the object and consideration are unlawful, it becomes an unlawful agreement. Such unlawful agreements are void and not enforceable by law. Whereas S. 25 to 30 and S. 56 declare certain agreements as void, i.e. not enforceable by law. However, contracts entered into by a minor or by a person of unsound mind and contracts by mistake are contracts void-ab-initio, i.e. void since the beginning

II. Agreements declared void:-

Following are the agreements declared void by the Contract Act.

A) Unlawful Agreements[2] (S. 23):-

23 provides that, in the following circumstances, the consideration or object2 of an agreement is unlawful3 if it is-

1) Forbidden by Law[3]:-

When the object or consideration of an agreement is forbidden by the law, the agreement will not be valid agreement. An agreement to do what has been prohibited by the Indian Penal Code or by some other law cannot be enforced.

Illustration

(a) A promises to obtain B employment in the public service, and B promises to pay 1,00000/- rupees to A. The agreement is void, as the consideration for it is unlawful.

(b) A promises B to drop a prosecution which he has instituted against B for robbery, and B promises to restore the value of the things taken. The agreement is void, as its object is unlawful.

2) Defeat the Provisions of Law[4]:-

If the object or consideration of an agreement would defeat any legal provision, although it does not directly violate the law, the agreement is void.

Illustration

A’s estate is sold for arrears of revenue under the provisions of an Act of the Legislature, by which the defaulter is prohibited from purchasing the estate. Upon an understanding with A, B becomes the purchaser and agrees to convey the estate to A upon receiving from him the price B has paid. The agreement is void, as it renders the transaction ineffective as a purchase by the defaulter himself and would so defeat the object of the law.

3) Fraudulent[5]:-

If the consideration or object of an agreement is to commit fraud, the agreement is void. Illustration

(a) A, B and C entered into an agreement for the division among them of gains acquired, or to be acquired, by fraud; the agreement is void, as its object is unlawful.

(b) A, being an agent for a landed proprietor, agrees for money, without the knowledge of his principal, to obtain for B a lease of land belonging to his principal. The agreement between A and B is void, as it implies fraud by concealment by A on his principal.

4) Agreement Injurious to the Person or Property of Another:-

If the agreement’s consideration or object is to cause an injury to the person or property of another, the agreement is unlawful and, therefore, void.

5) Immoral:-

If an agreement’s consideration or object is immoral, it is void.

Illustration

(a) A, who is B’s mukhtar (power of attorney), promises to exercise his influence, as such, with B in favour of C, and C promises to pay 1,000/- rupees to A; the agreement is void because it is immoral.

(b) A agrees to let her daughter hire B for concubinage. The agreement is void because it is immoral, though the letting may not be punishable under the Indian Penal Code.

6) Opposed to Public Policy[6]:-

An agreement is unlawful if the court regards it as opposed to public policy. In an English case, Lord Halsbury held that a contract of marriage brokerage, the creation of perpetuity, a contract in restraint of trade, a gaming or wagering contract, or assisting the King’s enemies are all unlawful things on the grounds of public policy”. (For details, see note at the end).

In Oil and Natural Gas Corporation Ltd. V/s Dolphin Drilling Ltd Laws ((Bom) 2014-12-135[7]). On the ground of public policy under S. 23 of the Contract Act and in the light of Art. 14 of the Constitution of India, in the matter of employer and employee, the Bombay High Court referred to the Supreme courts observation that “any term of the agreement which is patently arbitrary and otherwise arrived at because of the unequal bargaining power (of employees) would not only be ultra vires of Art. 14 but also hit by S. 23 of the Contract Act”.

B) Agreement without Consideration (S. 25):-

An agreement without consideration is void (Discussed already in the topic of ‘Consideration’).

C) Agreement in Restraint of Marriage (S. 26):-

Every agreement in restraint of marriage of any person other than a minor is void. A person is not bound by law to marry, but any agreement that restricts him from marriage is against public policy and, hence, void. Restrictions on marriage may be general or particular. General restraint is that which prohibits a person from marrying at all, whereas particular restraint is partial restraint, e.g. not to marry for a fixed period or not to marry a particular person (or a class of persons). Both these types of restraints are void5*. The only exception is of minor’s marriage.

However, some agreements are held not void by the courts. For example, an agreement containing a condition in a will that a widow would lose her right of maintenance on remarriage is not an agreement in restraint of marriage. Similarly, an agreement between two co-widows that any one of them would lose her right to the deceased husband’s estate on remarriage is not a restraint on the right of marriage. Likewise, an agreement that the wife would get the right of divorce in a second marriage by the husband is not void.

D) Agreement in Restraint of Trade (S. 27):-

1) General:-

The Constitution of India has recognised ‘freedom of trade and commerce’ as a fundamental right6. This right is protected against the action of a State. Similarly, an individual also cannot bargain to take this right out; this is what is ensured by S. 27 of the Act. According to S. 27, “every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void”. It ensures free competition and declares those agreements against public policy. Free trade is in favour of the public interest.

In Madhub Chander V/s Raj Coomar Dass7

Facts:- A and B were rival shopkeepers in a locality in Calcutta. B agreed to pay A a sum of money if he closed his business in that locality. A accordingly did so, but B refused to pay.

Calcutta High Court Held:– that the agreement is void. The court further observed that “S. 27 prohibits general as well as particular restraint on trade. Therefore, in this case, though there seems a particular restraint, an agreement nevertheless is void.”

In English law also, all restraints, whether general or partial, on trade are void. However, in English law, if the restriction is found ‘reasonable’, the agreement is valid 8. In India, there is no concept of ‘reasonable restriction9’, but some Acts and Courts have laid down some exceptions to S.27.

2) Exceptions:-

The following are the exceptions to the general rule that agreements restraining trade are void. In other words, in the following circumstances, even if the agreement is restraining trade, it is not void. These exceptions are provided by laws and evolved by the Courts from time to time. Viz.

(i) Sale of Goodwill10:-

One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business within specified local limits so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein11. (For case law, see Nordenfelt V. Maxim Nordenfelt Guns and Ammunition Co. Ltd. ibid.)

(ii) Exceptions under the Indian Partnership Act12:-

11 of the Partnership Act provides that the partners may restrict their freedom by an agreement that none or any one of them shall not carry on any business other than that of the firm. S. 36 of the same Act provides that an outgoing partner may be restrained from carrying on a similar business within the specified local limits or within a specified period. S. 54 of the same Act provides that in anticipation of the dissolution of a firm, the partners may make a similar agreement to restrict themselves from carrying on the same trade. However, it is necessary that such restrictions be reasonable and that the local limits or periods of restraint be specified.

(iii) Combinations to Regulate Trade Relations13:-

Sometimes, traders or manufacturers combine to eliminate competition and make agreements fixing minimum prices, regulating the supply of goods, providing standard and quality goods to customers, etc. Such agreements are not void because they oppose public policy or restrain trade.

In English Hop Growers V/s Dering14

Facts:– the plaintiff was the associations of hop growers, who had combined with a view to avoiding competition between themselves by marketing the produce of all the members through regulated sales. The defendant was a member of this association, and he agreed to deliver his entire crop for a particular year to the association to be sold by it.

Held that:- the restriction on the defendant’s power to dispose of his own crop himself was not unreasonable.

(iv) Solus or Exclusive Dealership Agreement15:-

The marketing of goods through a sole-selling or exclusive agent is not void. Thus, an agreement to sell all the salt produced during a certain period to a particular buyer only or to sell a certain variety of dhotis manufactured by the defendant to the Plaintiff only and no other person is not in restraint of trade.

(v) Restraints upon Employees:-

An agreement of service under which an employee agrees that he will serve a particular employer for a certain duration and that he will not serve anybody else during that period is a valid agreement

E) Agreement in Restraint of Legal Proceedings16 (S. 28):-

a) General:-

Every person in civilised society has a right to knock on the doors of the court for justice; no agreement contrary can take this right out from him. “An agreement purporting to oust (restrict) the jurisdiction of the court is illegal and void on the grounds of public policy” is an important principle of English law. In other words, agreement, which tends to prevent the course of justice, is void because of the illegality of the object. S. 28 of the Act has recognised the above principle. It declares two kinds of agreements in restraint of legal proceedings as void-

(i) An agreement imposing absolute restrictions on the enforcement of legal rights under the contract,

(ii) An agreement imposing time limitation for enforcing the rights under the contract.

i) Agreement absolutely restraining legal proceedings:-

If one party to an agreement restrains the other party absolutely from enforcing his contractual rights by bringing the usual legal proceedings, the same is void. However, if the restriction is partial, the restriction is not void. An agreement to oust the jurisdiction of a court is opposed to public policy, and the same is void both in India and England.

ii) Agreement Limiting time for a legal action:-

Indian Limitation Act. 1963, a specific time limit was prescribed for taking various legal actions in a court. The Act lays down the following partial restraints as valid-

(1) Contract to refer the future dispute to Arbitration:-

An agreement to refer the future dispute arising between the parties to arbitration concerning any subject (or class of subjects) and the amount recoverable in such arbitration is valid.

(2) Contract to refer already arisen dispute to Arbitration:-

The second exception provides that a question (dispute) which has already arisen between the parties may be referred by them to arbitration by a contract in writing. Such an agreement is valid.

F) Ambiguous and Uncertain Agreements17 (S. 29):-

Agreements, the meaning of which is not certain or capable of being made certain, are void.

Illustration

(a) A agrees to sell to B “a hundred tons of oil”. There is nothing whatever to show what kind of oil was intended. The agreement is void of uncertainty.

(b) A agrees to sell to B “my white horse for rupees five hundred or rupees one thousand”. There is nothing to show which of the two prices was to be given. The agreement is void.

However, if the meaning of the agreement is certain or capable of being made certain, the agreement is valid, not void.

Illustration

(a) A agrees to sell to B one hundred tons of oil of a specified description, known as

an article of commerce. There is no uncertainty here to make the agreement void.

(b) A, who is a dealer in coconut oil only, agrees to sell to B “one hundred tons of oil. The nature of A’s trade affords an indication of the meaning of the words, and

A has entered into a contract for the sale of one hundred tons of coconut oil18.

G) Agreement by Way of Wager (S. 30):- (Discussed in note 2)

H) Agreement to do Impossible Act (S. 56):-

NOTES

1] Agreement’s Opposed to Public Policy.

SYNOPSIS

(1) Agreements to trade with the enemy.

(2) Agreements to stifle prosecution.

(3) Agreements to interfere with the course of justice.

(4) Maintenance and champerty.

(5) Marriage Brokerage agreements.

(6) Agreements tending to create interest against duty.

(7) Agreements of Traffic by Way of Sale of Public Offices25:-

(8) Monopolistic agreements.

(9) Suicide Insurance.

(10) Prejudicial service contracts or rules.

(11) Promise not to Claim statutory maintenance.

(12) Agreements violative of human rights.

(13) Agreement of payment of less salary.

The agreement’s Opposed to Public Policy:-

An agreement is unlawful if the court regards it as opposed to public policy. In other words, the term ‘public policy’ means that sometimes, the courts will, on consideration of public interest, refuse to enforce a contract. This clause confers wide discretionary power on courts to refuse enforcement of contracts on the grounds of public policy. An act which is injurious to the interest of society is against public policy. It is within the discretion of the court to declare what acts are against the public interest and what are not.

Courts, from time to time, have declared various grounds against public policy. In an English case, Lord Halsbury held that a contract of marriage brokerage, the creation of perpetuity, a contract in restraint of trade, a gambling or wagering contract, or assisting the King’s enemies are all unlawful things on the grounds of public policy.”19.

However, there is one stream of thoughts according to which courts are not at liberty to declare any act as against public policy unless that ground is specifically recognised as such20. This view is adopted in English law as well as in Indian law.

The following agreements are held against public policy and the influx of time by courts.

(1) Agreements to Trade with Enemy:-

At the time of war, it is against public policy to trade with the subjects of an enemy country.

(2) Agreements to Stifle Prosecution21:-

An agreement to stifle (suppress or release) prosecution is against public policy. It is because the object of criminal law is to punish a guilty person, and a compromise with a view to save a guilty person from liability would frustrate this object.

(3) Agreements to Interfere with the Course of Justice22:-

Agreement to interfere with the course of justice is against public policy, e.g., a promise to give money for giving false evidence or a promise to give money to delay execution proceedings etc.

(4) Maintenance and Champerty23:-

When a person intermeddles in the litigation between others by providing assistance to one of the parties, and he has no interest of his own in the litigation, such intermeddling is unlawful and is called ‘maintenance’. ‘Champerty’ is a kind of maintenance in which the person assisting in the proceedings is to receive a share of the gain made in the proceedings he maintains. In other words, an agreement of maintenance and champerty is an agreement whereby one party is to assist (financially or otherwise) the other in recovering property (through civil proceedings), and is to share in the proceeds of the action (i.e. from the recovered property). The agreement of ‘maintenance and champerty’ is declared against public policy in English as well as in Indian law.

(5) Marriage Brokerage Agreements:-

(6) Agreements Tending to Create Interest against Duty24:-

An agreement with a person (public servant or any other person) under a duty, if inconsistent with and creating an obligation against the performance of his duty, is against public policy. For example, bribing police to allow a person to conduct Matka or theft is against public policy.

(7) Agreements of Traffic by Way of Sale of Public Offices25:-

Traffic agreements (i.e. malpractices) involving the sale of public offices are against the public interest because they discriminate against the best-qualified persons. Thus, the sale of the office of Sebait, the transfer of the office of Mutwalli, and the sale of the land of religious offices are against public policy.

(8) Monopolistic agreements26.

(9) Suicide Insurance.

(10) Prejudicial service contracts or rules27.

(11) Promise not to Claim statutory maintenance28.

(12) Agreements violative of human rights

(13) Agreement of payment of less salary29.

2) Agreement by Way of Wager30 (S. 30):-

SYNOPSIS

A) Meaning
B) Elements

(1) Uncertain event

(2) Mutual chance of gain or loss

(3) Neither party has control on such an uncertain event

(4) No other interest in the event except the amount of bet

(i) Insurance Contract

(ii) Lottery

C) Exceptions to Wagering Agreements

(i) Horse race

(ii) Skill

A) Meaning:-

30 declares agreements by way of wager are void, and no suit shall be brought for recovering anything alleged to be won on any wager or entrusted to any person to abide by the result of any game or other uncertain event on which any wager is made.
30 thus declares an agreement by way of wager is void, but nowhere defines the term ‘wager’. Ordinarily, a wager means a ‘bet’. It is staking something of value upon the result of some uncertain event of the future, past or present. According to Anson, a ‘wagering agreement’ is the promise to give money or money’s worth upon the happening or non-happening of a future uncertain event. For example, A promises to pay Rs.-100/- to B if it rains today; otherwise, B will pay the same amount to A. Similarly, X promises to pay Y Rs.-500/- if the Indian Cricket team wins against Australia. Likewise, A’s promise to pay Rs.- 200/- if the particular party wins in the election and B’s promise to pay a similar amount if that party loses the election are all wagering agreements, hence void.

B) Elements:-

The wagering agreement has the following elements.

1) Uncertain Event31:-

The bet is always regarding an uncertain event.

2) Mutual Chances of Gain or Loss:-

Both parties must have an equal chance of winning or losing. In other words, one party in all circumstances should not be in a position to win only, e.g. if A bets that he will pay Rs.-100/- if the sun does not raise from east tomorrow; if B agrees to pay the same amount if it raises from east tomorrow; it does not wager, because here, A is in position to win and win only because raising of the sun from the east is a universal truth.

3) Neither Party has Control over that Uncertain Event32:-

Neither party should have any control over the happening of an event in any way. If one of the parties has the event in his own hands, the transaction lacks an essential ingredient of the wager.

4) No other interest in the event except the amount of Bet:-

Neither party should have any interest in the happening of the event other than the sum or stake he will win or lose. This makes the difference between a wagering agreement and an agreement of insurance. In an insurance contract, the party has ‘insurable interest33’ apart from merely gaining or losing.

We will discuss whether the following agreements are wagers or not.

i) Insurance Contract:-

The contract of insurance has little resemblance to the wagering agreement, but it is not a wagering agreement. The distinction between these two is well maintained by legislatures. One of the essential requirements of a wagering agreement is that there should not be any other interest in the event except the amount of the bet. In an Insurance contract, it is necessary that the person insuring must have ‘insurable interest’ in the subject matter insured.

The Insurance policy without ‘insurable interest’ is a wager. ‘Insurable interest’ means an interest in the ‘existence and preservation of the thing insured’. E.g. the husband has an ‘insurable interest’ in his wife’s life; hence he can take an insurance policy on his wife’s life by paying some regular premium. However, it is wager to take insurance in the name of the other’s wife because it lacks ‘insurable interest’. Similarly, he can insure his car, house or any other property because he has an interest in its existence and preservation (i.e. Insurable interest’). But if he takes insurance on ‘The Great Wall of China’ or ‘The Taj Mahal’ or on ‘Best Bakery’ or any property of another, the agreement is a wager due to the absence of insurable interest in the subject matter.

In Brahm Dutt Sharma V/s Life Insurance Corporation of India34

Facts: The plaintiff (Brahm Dun Sharma) financed an insurance policy taken by Mukhtar Singh on his life for Rs. 35,000. Mukhtar Singh did not have sufficient means to afford an insurance policy. Mukhtar Singh made the nomination in favour of the plaintiff and not in favour of his own wife and children. On Mukhtar Singh’s death, the question arose whether the plaintiff could recover the sum insured.

The Court held:- that the plaintiff had affected and financed this insurance policy on the life of the deceased without having an ‘insurable interest’ in his life, and as such, the contract of insurance was in the nature of a wagering contract and, therefore, void.

ii) Lottery:-

A lottery is a scheme for distributing prizes by drawing lots or by any other procedure which depends on chance only. The agreement to pay prizes on the lottery is an agreement by way of wager and, therefore, is void. A person declared as a winner of the prize money on a lottery ticket cannot sue for its recovery because it is a wagering agreement35.

C) Exceptions to Wagering Agreements:-

Following are the exceptions to the wagering agreement provided in S. 30 itself.

i) Horse Race:-

30 does not render a subscription or contribution, or an agreement to subscribe or contribute, towards any gain, prize or sum of money the value or amount of five hundred rupees or upwards to the winner or winners of any horse races.
ii) Skill:-

In competitions in which skill and merit are the basis of the result and the prizes are awarded to the best skilful person, the transactions are valid. Thus, crossword competition is not a wager.

*****

[1] वैध उद्देश्य

[2] गैरकानूनी समझौते

2 Difference between ‘object’ and ‘consideration’.

The ‘consideration’ and ‘object’ is generally treated as same thing. However, S. 23 makes the difference between ‘object’ and ‘consideration’ of contract. Consideration is Quid pro quo (something for something) (for detail definition see topic consideration). According to S. 23, ‘object’ means ‘purpose’ or ‘design’. E.g. If A borrows money from B for marriage of his minor son, the object of it is illegal though consideration is lawful. Here the promise of B to lend to A and A’s promise to pay it back with interest thereon is valid consideration however; the object is the ‘performance of marriage of a minor son’. Child Marriage Restraint Act forbids the marriage of minor.

3 Distinction between ‘void’ and ‘illegal agreement’.

There is difference between agreement which is simply ‘void’ and the one in which the ‘consideration or object’ is unlawful. According to S. 23 illegal agreement is that which is against provisions of the law. This agreement is therefore void, not enforceable. Ss. 25 to 30 describe certain agreements which are simply void, not enforceable by law. Illegal agreement is by nature ‘void’ but all void agreements are not ‘illegal’. ‘Illegal agreement’ are forbidden by law but a void agreement may not be forbidden by law. In short, every illegal agreement is void but every void agreement is not necessarily illegal.

[3] कायद्याने प्रतिबंधित केलाला [कानून द्वारा निषिद्ध।]

[4] कायदयाचे तत्वांना बाधा येते [कानून के प्रावधानों को बाधक[]

[5] फसवणुकीचा [धोखाधड़ी]

[6] जनकल्याण विरुद्ध [सार्वजनिक नीति का विरोध]

[7] decided on 20^th Dec 2014

5* In Lowe V. Peers (1768) 4 Burr. 2225.

6 Art. 19 (1) (g).

7 (1874) 14 B.L.R. 76.

8 Held in Nordenfelt V/s Maxim Nordenfelt Guns and Ammunition Co. Ltd (1894) AC 535.

Facts:- In this case the Nordenfelt, was the manufacturer of guns and ammunition. He sold his business to the Maxim. Company for a consideration of £ 2,87,500. He agreed that for 25 years, he would not engage, either directly or indirectly,

(1) in the trade or business of manufacture of guns, gun mounting or carriage, gunpowder, explosives or ammunition, or

(2) in any business competing or liable to compete in any way with that for the time being carried on by the company.

Held that. – the first part of the agreement provided a reasonable protection to the interest of the buyer of the business, and it was valid, whereas the second part requiring him not to compete ‘in any business’, was unreasonable and, therefore, void.

9 योग्य त्या मर्यादा [उचित प्रतिबंध]

10 नावलौकिक विक्री [ख़्याति कि बिक्री]

11 This is the only exception provided by S. 27 of the Act.

12 भारतीय भागीदारी कायद्या प्रमाणे अपवाद [भारतीय भागीदारी अधिनियम के तहत अपवाद]

13 व्यवसाय व्यवस्थित चालण्यासाठीच्या संघटना [व्यापार संबंधों को विनियमित करने के लिए संयोजन]

14 (1928) 2 K.B. 174.

15 एक विक्रेता करार

16 कायदेशीर प्रक्रिया थांबविण्यासाठी करार [कानूनी कार्यवाही के नियंत्रण के लिये समझौता]

17 संधीग्द व अनिअनिषित ठराव [अस्पष्ट और अनिश्चित समझौते|]

18 (c) A agrees to sell to B “all the grain in my granary at Ramnagar”. There is no uncertainty here to make the agreement void.

(d) A agrees to sell to B “one thousand maunds of rice at a price to be fixed by C”. As the price is capable of being made certain, there is no uncertainty here to make the agreement void.

19 In Janson V. Driefontein Consolidated Mines Ltd, (1902).

20 According to Lord Halsbury in Egerton V. Brownlow, (1853).

Lord Atkinson in Fender V. John Mildmay, (1938) AC 1, Observed that ‘from time to time judges of the highest reputation have uttered warning notes as to danger of permitting judicial tribunals to roam unchecked in this field’.

21 फौझादारी प्रक्रिया सोडून देण्यासाठी ठराव [अभियोजन पक्ष को दबाने के लिए समझौते]

22 न्यायदानाचे कामात हस्तक्षेप करण्यासाठीचा ठराव [न्याय के पाठ्यक्रम में हस्तक्षेप करने के लिए समझौते।]

23 दुसऱ्याच्या दाव्यात आर्थिक मदत करणे व त्यामधून फायदा घेणे [खुदको लाभ प्राप्त करने के लिए अन्य की कानूनी कार्यवाही मे मदत करना]

24 कर्तव्याच्या विरुद्ध करार [कर्तव्य के प्रति घ्रना पैदा करने वाले समझौते]

25 शासकीय नोनोकऱ्या विक्री संबंधी करार [सार्वजनिक कार्यालयों की बिक्री के बारेमे समझौते]

26 एकाधिकार समझौते

27 कामगारांचे हित विरुद्ध करार [पूर्वाग्रही सेवा करार या नियम]

28 कायदेशीर पोटगी न मागण्या संबंधित करार [वैधानिक रखरखाव का दावा न करने का वादा]

29 किमान वेतना पेक्षा कमी पगार देण्यासंबंधी करार [कम वेतन भुगतान का समझौता]

30 पैज स्वरूपाचा करार [दांव के माध्यम से समझौता]

31 अनिश्चित घटना

32 कोणत्याहि पक्षाचे घटनेवर नियंत्रण नसते. [उस अनिश्चित घटना पर किसी भी पक्ष का नियंत्रण नहीं है]

33 विमा उतरविण्यात हित [बीमाहित[

34 AIR 1966 All. 474.

35 Shekharchand Jain V. Ramnarayan (1977) 2 M.P.W.N. 118.