Void agreements and legality of object

1. Lawful consideration and object: sections 23 and 24

Section 23: the consideration or object of an agreement is lawful unless it

• is forbidden by law; or
• is of such a nature that, if permitted, it would defeat the provisions of any law; or
• is fraudulent; or
• involves or implies injury to the person or property of another; or
• the court regards it as immoral or opposed to public policy.

Every agreement of which the object or consideration is unlawful is void. Illustrations include an agreement to pay a public servant to obtain employment, and a promise to drop a prosecution for robbery in return for restoring the stolen goods.

Section 24: if any part of a single consideration for one or more objects, or any one or any part of several considerations for a single object, is unlawful, the whole agreement is void. If the lawful part can be severed, it may stand.

2. Agreements in restraint of marriage: section 26

Every agreement in restraint of the marriage of any person, other than a minor, is void. The restraint may be total or partial; a promise not to marry at all, or not to marry anyone other than a named person, is void. The section does not touch an agreement to marry a particular person, which is enforceable in damages.

3. Agreements in restraint of trade: section 27

Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind is, to that extent, void. The section adopts no reasonableness test of the English kind (Nordenfelt v. Maxim Nordenfelt, 1894). A partial restraint is void as much as a total one: Madhub Chunder v. Rajcoomar Doss (Calcutta High Court, 1874).

Exceptions.

• Sale of goodwill (Exception to section 27): the seller may agree with the buyer not to carry on a similar business within specified local limits, so long as the buyer or his successor carries on a like business there, provided the limits are reasonable.
• Partnership Act, 1932: section 11(2) (partner not to carry on competing business during the partnership), section 36(2) (outgoing partner), sections 54 and 55(3) (on dissolution and sale of goodwill), within reasonable limits.

Restraints in employment and trade agreements

The Supreme Court has drawn a line between restraints during the term of a contract and restraints after it ends.

• Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co., 1967 INSC 10, AIR 1967 SC 1098. An employee agreed to serve the company for five years and not to work for anyone else during that period. He left early to join a competitor. The Court held that a negative covenant operating during the period of employment, under which the employee binds himself to serve one employer exclusively, is not a restraint of trade within section 27. An injunction was granted to enforce it.
• Superintendence Company of India (P) Ltd. v. Krishan Murgai, 1980 INSC 124, (1981) 2 SCC 246. A clause barring an employee from serving a competitor in the same area for two years after leaving was held void under section 27. A post-employment restraint is void however reasonable; section 27 has no exception for it.
• Gujarat Bottling Co. Ltd. v. Coca Cola Co., 1995 INSC 441, (1995) 5 SCC 545. A franchise agreement barred the bottler from handling competing brands during its term. The Court held that a negative stipulation operating during the subsistence of the agreement, to promote the contract's purpose, is not a restraint of trade, and enforced it by injunction.

4. Agreements in restraint of legal proceedings: section 28

Every agreement is void to that extent (a) by which any party is restricted absolutely from enforcing his rights under or in respect of any contract by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may enforce his rights; or (b) which extinguishes the rights of any party, or discharges any party from liability, on the expiry of a specified period, so as to restrict him from enforcing his rights. Clause (b) was added by the 1997 amendment, so clauses that forfeit a right after a short period are now void as well.

• Exception 1: an agreement to refer disputes that may arise to arbitration is valid.
• Exception 2: an agreement to refer existing questions to arbitration is valid.
• Exception 3 (added in 2013 by the Banking Laws (Amendment) Act, 2012): a guarantee given by a bank or financial institution may provide for extinguishment of rights on expiry of a specified period of not less than one year from the occurrence or non-occurrence of a specified event.

An agreement choosing one of two courts that both have jurisdiction is not hit by section 28; it does not oust jurisdiction altogether.

5. Uncertainty: section 29

Agreements the meaning of which is not certain, or capable of being made certain, are void. Illustrations: (a) A agrees to sell B “a hundred tons of oil”. Nothing shows what kind of oil; void. (b) A, a dealer only in coconut oil, agrees to sell B a hundred tons of oil. The nature of his trade shows what is meant; valid. (e) A agrees to sell B “my white horse for rupees five hundred or rupees one thousand”. Nothing shows which price; void.

6. Wagering agreements: section 30

Agreements by way of wager are void, and no suit can be brought to recover anything alleged to be won on any wager, or entrusted to anyone to abide the result. Exception: a subscription or contribution, or an agreement to subscribe, towards a plate, prize or sum of five hundred rupees or upwards to the winner of a horse race is not void.

Essentials of a wager: (i) a promise to pay money or money's worth on the determination of an uncertain event; (ii) mutual chances of gain or loss, so that one side wins and the other loses; (iii) neither party has control over the event; (iv) no interest in the event other than the stake.

Gherulal Parakh v. Mahadeodas Maiya, 1959 INSC 24, AIR 1959 SC 781. Two parties entered into a partnership to carry on wagering transactions. One sued the other for his share of the loss. The Supreme Court held that a wager is void but not illegal under section 30, and is not opposed to public policy under section 23. A collateral agreement, such as the partnership, was therefore valid and the share of the loss recoverable. (In Maharashtra and Gujarat, statutes have made wagers unlawful, so collateral agreements there fall too.)

7. Agreements contingent on impossible events: section 36

Contingent agreements to do or not to do anything if an impossible event happens are void, whether or not the impossibility was known to the parties. Illustrations: (a) A agrees to pay B Rs 1,000 if two straight lines enclose a space; (b) A agrees to pay B Rs 1,000 if B marries A's daughter C, who was dead at the time. Both void. See the note on contingent contracts.

How this is examined

The common essay is “Agreements in restraint of trade are void. Discuss with exceptions”: section 27, Madhub Chunder, the goodwill exception, the Partnership Act exceptions, then the three Supreme Court cases. Others: “What are wagering agreements? Distinguish them from contingent contracts” (use Gherulal Parakh); “Which agreements are expressly declared void by the Act?” (list ss.24 to 30 and 36). Short notes on section 28 and on section 23 public policy are set often.