VOID AGREEMENTS Lecture 4

An agreement not enforceable by law is said to be a void agreement in terms of Section 2(g). It does not give rise to any legal consequences and is void ab initio.

Agreement Expressly Declared Void 1. Agreement by incompetent persons [Sec. 11] 2. Agreements made under a bilateral mistake of fact material to the agreement [Se. 20].

3. Agreements with unlawful objects or consideration [Sec.23].

4. Agreements of which consideration or object is unlawful in part [Sec.24].

5. Agreements made without consideration[Sec. 25].

6. Agreements in restraint of marriage [Sec. 26]. 7. Agreements in restraint of trade [Sec.27]. 8. Agreements in restraint of legal proceedings [Sec.28].

9. Agreements the meaning of which are uncertain [Sec.29].

10. Agreements by way of wager [Sec. 30]. 11. Agreements contingent on impossible event [Sec.56].

12. Agreements to do impossible acts [Sec.56 part 1].

Agreements of which consideration or object is unlawful in part [Sec.24].

1. Where the legal part can not be separated from the illegal part then

(a)If there are several objects but a single consideration, the agreement is void if any one of the objects is unlawful.

(b)If there is a single object but several consideration, the agreement is void if any one of the considerations in unlawful.

Eg.: A agrees to supervise on behalf of B a legal manufacture in indigo and an illegal traffic in other articles for a salary of Rs. 10,000/- a year. The Agreement is void, the object of A’s promise and the consideration of B’s promise being in part unlawful.

2. Where there is a reciprocal promise to things legal and also the things illegal, and the legal part can be separated from the illegal part, the legal part is a contract and the illegal part is a void agreement.

Eg.: A agrees to sell his house to B for Rs. 10,000/- , but that if B used it as a place of gambling, he shall pay Rs. 50,000/- to A. The first part of the agreement is valid and binding but the second part shall be void and unenforceable.

3. In the case of an alternative promise, one branch of which is legal and the other illegal, the legal branch alone can be enforced.

Eg.: A agrees to pay B Rs. 1000/- for which B is to deliver either rice or smuggled opium. There is a valid contract to deliver rice and a void agreement as to opium.

Agreement in Restraint of marriage:

Every agreement in restraint of marriage of any person, other than a minor is void.

Eg.: In Lower Vs. Peers, P promised to marry L only and none else and to pay a definite sum if he married someone else. P married X . Held L could not recover the sum as the agreement was in restraint of marriage and therefore unenforceable.

Agreement in restraint of Trade:

Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.

Eg: In Madhub Chander Vs. Raj Koomar, A and B were rival shopkeepers in a locality of Kolkata. B agreed to pay A, a sum of money if he would close his business in that locality. A did so but B refused to pay him. Held , the agreement was void.

A. Statutory Exception

1. Sale of goodwill (a) The seller should be restrained only from carrying

on a similar business.(b) The restriction shall apply so long as the buyer or

any person deriving title from him, is carrying on a similar business.

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

(d) The restraint must be reasonable in the eyes of the court.

Eg.: A is running a grocery shop in Connaught Place. He sells his business to B on the condition that A will not run a similar business within specified limits. This restriction is valid. But a restriction on A for not carrying on similar business anywhere in India, will be a restraint of trade and hence void.

2. Exceptions mentioned in the Partnership Act. a) Restriction on existing partner b) Restriction on outgoing partner c) Restriction in anticipation of dissolution d) Restriction in case of sale of goodwill of the firm

B. Judicial Exceptions: a. Trade combinations.

b. Service Contracts

c. Exclusive Dealing Agreements:

Eg.: In Narayan Shankar Golikar Vs Century Spg. & Mfg. Co.Ltd., an employee was restrained by the service contract from serving anywhere else during the five years even after he had left the employment. The restraint was imposed because he had access to technical information. The employee left the organization and took up employment in another Firm. The former employer could successfully prevent him by means of an injunction.

Restraint of Legal Proceedings

Every agreement which restricts any party absolutely from enforcing his rights under a contract, or which limits the time of their enforcement, or which extinguishes the rights of a party, or discharges a party from liability under a contract on the expiry or a specific period, is to that extent void.

a. Absolute restriction on legal proceeding

b. Agreements curtailing the limitation period

c. Extinguishment of rights after expiry of specific period

d. Agreement discharging a party from liability after expiry of specified period.

Eg.: A pays an advance of an advance of Rs. 2 lac out of total price of Rs. 20 lac to B for the purchase of a flat. The contract provides that if a fails to take possession within 3 months, his right to take possession will be lost. Since there is an extinguishment of right, it is void.

Exceptions to Sec. 28.

(a) Agreement to refer a present dispute to arbitration.

(b) Agreement to refer a future dispute to arbitration and to recover only the amount awarded in such arbitration in respect of the dispute so referred.

Agreement the meaning of which is uncertain.

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

In Guthina Vs. Lynn, a horse was brought for a certain price, coupled with a promise to give 5 pounds more if the horse proved lucky. The agreement was held to be void for want of certainty.

Wagering Agreements – Section 30.

Wager is “ an agreement between two parties in which one promises to pay money or moneys worth on the happening of some uncertain event in consideration of the other party’s promise to pay if the event does not happen.

Eg.: A and B may make an agreement that A shall pay to B Rs. 50/- if it rains on Monday, and that B shall pay to A the same amount if it does not rain.

Essentials of a Wager 1. Money or money’s worth 2. Event 3. Uncertainty of the event. 4. Mutual chances of gain or losses 5. No control over the event. 6. Stake as the only Interest

Effects of Wagering Agreements

According to Sec. 30 , no suit can be brought to recover 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.

Exceptions to Wager:

1.Horse race2. Cross word competitions3. Games of Skill4. Share market transactions5. Contracts of Insurance6. Chit fund

S. No.

Wagering Agreements Insurance contracts

1. There is no insurable interest except for the stake

The assured has an insurable interest in the subject matter

2. These are void as these are not contracts of indemnity

These are valid contracts being contracts of indemnity. Their object is to make good the actual loss of the insured.

Difference between Wagering Agreement and Insurance Contracts

3. These are conditional These are contracts of indemnity except life insurance contracts which are contingent contracts

4. It is just a gamble These are based on scientific and actuarial calculation of risks

5. It is of no benefit to the society

It is a form of social cooperation

Collateral Transactions:

Though wagering agreements are void, agreements collateral or incidental to them are valid. Eg.: A instructs his agent B to bet with C. B lost and had to pay out of his own pocket. Since payment by B is on behalf of his principal, it is a collateral transaction. B can recover from A.

Agreements to do Impossible Acts [Sec. 56]

An agreement to do an act impossible in itself is void. Eg.: A agrees to put life into the dead body of B’s father. It is void for want of possibility.

Contingent Contracts

Contracts may be either absolute or contingent.

Eg. : A contracts to pay B Rs. 10,000/- if B’s house is burnt. This is a contingent contract.

Essential elements of a Contingent Contract:

1. The performance of the contract depends on the happening or non happening of an event in future. 2. The event must be uncertain 3. The event must be collateral to the contract 4. The event should not be at the discretion of the promise

Rules regarding contingent contracts [Sec 32 to 36]

1. Contracts contingent on the happening of event. 2. Contracts dependent on the non happening of an event.

3. Contracts contingent upon the future conduct of a living person.

4. Contracts contingent upon the happening or non happening of a specified event within a fixed time.

5. Contracts contingent upon the happening of an impossible event.

1. Contracts contingent on the happening of event.

Eg.: i) A makes a contract with B to buy B’s horse if A survives C. The contract can not be enforced until C dies in A’s life time.

ii) A contracts to pay B a sum of money when B marries C. C dies without being married to B. The contract becomes void.

2. Contracts dependent on the non happening of an event.

Eg.: A agrees to pay B a sum of money if a certain ship does not return. The ship is sunk. The contract can be enforced when the ship sinks and not before.

3. Contracts contingent upon the future conduct of a living person.

Eg.: A agrees to pay B a sum of money if B marries C. C marries D. The marriage of B to C must be considered impossible although it is possible that D may die and C may afterwards marry B.

4. Contracts contingent upon the happening or non happening of a specified event within a fixed time.

Eg.: i) A promises to pay B a sum of money if a certain ship returns within a year. The contract may be enforced if the ship returns within a year and becomes void if the ship is sunk within a year.

ii) A promises to pay B a sum of money if a certain ship does not return within a year or is burnt within a year. The contract may be enforced if the ship does not return within a year or is burnt within a year.

5. Contracts contingent upon the happening of an impossible event.

Eg.: A agrees to pay B Rs. 1000/- if two straight lines should a enclose a space. The agreement is void.

Difference between Wagering Agreement and Contingent ContractS. No.

Basis of difference

Wagering agreement Contingent contract

1. Interest in the subject matter

The parties do not have insurable interest in the happening or the non-happening of the event as such. Their main interest is in winning or losing

The parties have insurable interest in the happening or non-happening of the event

2. Future event The future uncertain even is the sole determining factor of the agreement.

The future event is only collateral or incidental to the contract

3. Nature These are contingent in nature

All contingent contracts, such as insurance, indemnity and guarantee are not wagers.

4. Reciprocal promises

It consists of reciprocal promises.

There need not be reciprocal promises.

5. Validity It is void. It is a valid contract.

Quasi Contract

Under the Law of Contracts, the contractual obligations are voluntarily undertaken by the contraction parties. However in certain circumstances, the obligations of a contract may be imposed by law.. These are called Qausi contractual obligations.

Provisions relating to Quasi Contracts

1. Claim for necessaries supplied (Sec. 68) 2. Reimbursement of person paying money due by another in payment of which payer is interested (Sec. 69)

3. Obligation of a person enjoying the benefit of non-gratuitous act (Sec. 70)

4. Responsibility of finder of goods (Sec. 71) 5. Liability of the person to whom money has been paid or anything delivered by mistake or under coercion (Sec. 72)

1. Claim for necessaries supplied (Sec. 68)

(a) There must be a supply of necessaries to a person who is incompetent to contract such as a minor or a person of unsound mind or dependents of such incompetent persons.

(b) The term ‘necessaries’ shall be construed in accordance with the situation in life of the incompetent person, the nature of goods, the extent of supplies, etc.

(c) The supplies can claim only reasonable value for the supplies made.

(d) The reimbursement of the price of goods supplied can be obtained from the property of the incompetent person who cannot be held personally liable.

Example: A supplies B, a lunatic with necessaries suitable to the condition in life. A is entitled to be reimbursed from B’s property.

2. Reimbursement of person paying money due by another in payment of which payer is interested (Sec. 69)

(a) The plaintiff must be interested in making the payment.

(b) The plaintiff should not be bound to make the payment.

(c) The dependent should have a statutory or contractual liability to pay.

(d) The plaintiff should have made the payment to another person and not to himself.

Examples A is bound by law to make a certain payment. B is interested in such a payment, and he makes it, there will be a quasi contractual obligation of A to reimburse B.

In Govindram Gordhandas Sekdaria vs. State of Gondal, a Maharaja sold certain mills without paying overdue muncipal taxes. The buyer paid the taxes to save the property from being sold and then sued the Maharaja. The Privy Council held that the Maharaja was bound to pay within the meaning of Sec. 69.

In Secretary of State vs. Femandes, the government was the permanent tenant of the landlord. Arrears of revenue were due from the landlord to the government. The government paid the arrears to itself. Held, the government cannot recover from the landlord as it made the payment to itself than another person.

3. Obligation of a person enjoying the benefit of non-gratuitous act (Sec. 70)

(a) A person should lawfully do something for another person or deliver something to him

(b) In doing the said thing or delivering the said thing, he must not intend to act gratuitously, and

(c) The other person for whom something is done or to whom something is delivered must enjoy the benefit thereof.

The provision of Sec. 70 is attracted in the following circumstances

(a) There must be something lawfully done or delivered to another person.

(b) The person doing the act should not have intended to do it gratuitously.

(c) The act must not have done against the will of their party.

4. Responsibility of finder of goods (Sec. 71)

(a) To take reasonable care of the goods as a man of ordinary prudence would take of his own goods.

(b) To take steps to trace the true owner.

(c) Not to make unauthorized use of the goods. (d) To return the goods to the true owner

The finder has the following rights in respect of the goods found:

(a) To receive compensation for the expenses incurred by him in preserving the goods or finding the true owner.

(b) To retain possession until the payment of his rightful expenses.

(c) To sell the goods if the true owner cannot be found after reasonable search, or the true owner refuses to pay the lawful charges of the finder and when goods are in danger of perishing, or the charges of finder exceed two-thirds the value of the goods found.

5. Liability of the person to whom money has been paid or anything delivered by mistake or under coercion (Sec. 72)

A and B jointly owe Rs. 100 to C. A alone pays the amount to C. B, not knowing this fact, pays Rs 100 over again to C. C is bound to refund the amount to B.

Contracts of Indemnity and Guarantee

According to Section 124, a ‘contract of indemnity’ means “a contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself or by the conduct of any other person.”

A contracts to indemnify B against the consequences of any proceeding which C may take against B in respect of a certain sum of Rs. 200. This is a contract of indemnity.

Section 124 has restricted the scope of indemnity only to cases where loss is caused by a human agency namely:

(a) by the conduct of the promisor (b) by the conduct of a third party

In Secretary of State vs. Bank of India Ltd., A was the holder of a government promisory note. B, a broker forged the signatures of A and endorsed the note in favour of a bank. The bank got the note renewed from the government. A recovered compensation from the government and the government got damages from the bank. The bank was held liable on the basis of implied promise by the bank to indemnify the government.

Rights of the indemnity holder

(a) All damages which he may be compelled to pay in a suit in respect of any matter to which the promise to indemnify applies.

(b) All costs which he may be compelled to pay in bringing or defending such suits provided he acts in such a way as a prudent man would under similar circumstances in his own case, or with the authority of the promisor.

(c) All sums which he may have paid under the terms of any compromise of any such suit. But it should not be contrary to the orders of the promisor and should be prudent or authorised by the promisor.

Commencement of Indemnifier’s liability

There is no provision in the Contract Act relating to the commencement of indemnifier’s liability.

If the indemnifier has incurred a liability and that liability is absolute, he is entitled to call upon the indemnifier to save him from that liability and pay it off.

Contracts of Guarantee (Sec. 126) “a contract to perform the promise or to discharge the liability of a third person in case of his default”

Objectives: (a) to secure the performance of a mercantile promise (b) to secure the honesty and fidelity of someone (c) to secure a person from injury arising out of some wrong committed by another

Eg. A advances a loan of Rs. 5000 to B in consideration whereof C promises with A that if B does not repay, C will.

Requisites of a Valid Guarantee 1. Principal debt 2. Consideration 3. Competent parties 4. No misrepresentation 5. Surety’s liabilities must be conditional 6. Concurrence of all the three parties 7. Writing not compulsory

Difference between Indemnity and Guarantee

1. Number of Parties Contract of indemnity has two parties, namely, indemnifier and indemnified. Contract of guarantee has three parties, viz., creditor, principal debtor and surety.

2. Nature of LiabilityLiability of indemnifier is primary in nature.Liability of surety is secondary. It arises only if the principal debtor does not pay

3. Number of Contracts There is only one contract between the indemnifier and the indemnified. It has three contracts as follows:a) Between principal debtor and the creditorb) Between the creditor and suretyc) Between the surety and principal debtor

4. RequestIt is not necessary for the indemnifier to act at the request of the indemnified.It is necessary that surety should give the guarantee at the request of the debtor.

5. Existence of RiskThe liability of the indemnifier arises only on the happening of a contingencyThere is an existing liability the performance of which is guaranteed by the surety

6. Rights of PartiesIndemnifier cannot bring a suit against a third party in his own name unless there is assignment of claim in his favour.The surety can proceed against the principal debtor in his own right after he has discharged the liability of the principal debtor.

7. Parties interestsIndemnifier may have some other interest than indemnity.The surety should have no other interest in the transaction apart from guarantee.

8. PurposeThe object of indemnity is to provide security against loss.The object of guarantee is to provide security to the creditor against default by the principal debtor.

Kinds of Guarantee 1. Retrospective Guarantee 2. Prospective Guarantee 3. Specific Guarantee 4. Continuing Guarantee

A in consideration that B will employ C in collecting the rent of B’s Zamindari, promises B to be responsible, to the amount of Rs. 5000, for the due collection and payment by C of those rents. This is a continuing guarantee. When a guarantee is continuing, it is not exhausted by the first advance or credit upto the specified limit.

Revocation of Continuing guarantee

(i) By notice (Section 130)

(ii) By death of the surety (Section 131)

Nature and Extent of Surety’s Liability

1. Coextensive 2. Secondary Liability 3. Surety, a favoured debtor 4. No privity of contract 5. Liability for minor debts 6. Surety is liable despite contract principal debtor and creditor being void

Rights of Surety 1. Rights against the Principal debtor

2. Rights against the Creditor

3. Rights against Co-sureties

1. Rights against the Principal debtor (a) Right of indemnification (Sec. 145) Eg. B is indebted to C. A is a surety for the debt. C demands payment from A and on his refusal sues him. A defends the suit having reasonable ground for doing so. But he is compelled to pay the amount of debt with costs. He can recover from B the amount paid by him for costs as well as the principal debt.

(b) Right of subrogation (Sec. 140) (c) Right to seek relief from liabilities

2. Rights against the Creditor

(a) Before payment of the guaranteed debt (b) Right of set off (c) Right to securities (d) Right of subrogation (e) Right to equities

3. Rights against Co-sureties

(a) Co-sureties liable to contribute equally

Eg. A, B and C are sureties to D for the sum of Rs 3000 lent of E. E makes default in payment. A, B and C are liable as between proceed themselves to pay Rs 1000 each.

(b) Liability of co-sureties bound in different sums

Eg. A, B and C, as sureties for D, enter into three several bonds, each in different penalty, namely A in the penalty Rs. 10000, B in that of Rs. 20000, C in that of Rs 40000, for D’s duly accounting to E. D makes default to the extent of Rs 30000. A and B and C are each liable to pay Rs 10000

(c) Right to share benefit of security (d) Effect of release of a surety

Discharge of Surety 1. By revocation

2. By improper conduct of creditor

1. By revocation

(a) By notice of revocation in the case of continuing guarantee as regards future transactions

(b) The death of surety operates as termination of continuing guarantee as to future transactions

2. By improper conduct of creditor

(a) Variation in terms of the original contract between the principal debtor and the creditor without the consent of surety

Eg. X agrees to appoint Y as a clerk at a yearly salary. Z stands surety for Y’s duly accounting for money received by him. Afterwards without Z’s knowledge, X and Y agree whereby Y is to be paid by way of commission rather than by way of annual salary. Z is not liable fore subsequent financial misconduct of Y.

(b) Release or discharge of the principal debtor

(c) Compounding with or giving time to the principal debtor

Eg. B owes C a debt guaranteed by A. The debt becomes payable. C does not sue B for a year after the debt has become payable. A is not discharged from the suretyship

(d) Creditor’s act or omission impairing surety’s eventual remedy

Eg. A puts M as apprentice to B and gives a guarantee to B for M’s fidelity. B promises on his part that he will, at least once a month, see M to make up the cash. B omits to see M as promised and M embezzles. A is not liable to B on his guarantee.

(e) Loss of security

(f) Invalid guarantee

(g) Lack of essential elements of a valid contract

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