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The Indian Contract Act, 1872, and Agreements Declared Void Under It

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23
Jul

Introduction

Sir W. Erle (W. M. James after Erle’s retirement), Lord Sherbrooke, Sir Edward Rayan, Robert Lowe, J. M. Macleod and Justice Wills (John Henderson after Wills’s retirement) constituted the 3rd Indian Law Commission on 2nd December 1861, under the direction of Lord Romilly.[1] Over the next 18 years, the commission was tasked with codifying laws regarding succession, inheritance, negotiable instrumentation, evidence, property, insurance and criminal procedure, hence, the phase of the 3rd Indian Law Commission was aptly called as the ‘Golden Age of Code.’[2] The Royal Charter of 1726, signed by King George I, authorized the application of English laws and statutes (ones created till 1726) in the presidencies of Calcutta, Bombay and Madras.[3] In the post-1726 period, jurists and lawyers relied on case-laws and judicial decisions to ascertain the law.[4] In 1866, the initial draft of the Indian Contract Bill was introduced into the House of Lords. The bill was introduced in the Indian Legislative Council in 1867 and till 1868, the bill was tabled in front of multiple committees (ex: Select Committee) and Local Governments for their opinions.

The bill was stalled multiple times because the Indian representatives resented the English-way of the bill, which ignores the Indian norms and practices. The final draft of the bill was a product of six slow revisions.[5] Sir William Ewart Gladstone signed on the final draft of the bill while the parliament gave their approval to the provisions of the bill on 25th April 1872. The assent of Queen Victoria enforced the provisions of Indian Contract Act, 1872 on 1st September 1872 (Note: The commission resigned following the strained relation between the commission and the Government of India).[6] The Government of India Act, 1945 allowed for the 266 sections of the Indian Contract Act (ICA) to be enforced in all states of India except the state of Jammu and Kashmir.[7] The ICA, 1872 is divided into two parts: The first part (sections 1 through 75) deals with the general precepts of the law of contract, which applies to all contracts irrespective of its type, and the second part (sections 76 through 266, specifically sections 124 through 238) deals with special contracts (ex: indemnity, guarantee, bailment, agency).[8] Different authors have expounded the term ‘contract’ differently: Sir Frederick Pollock defines ‘contract’ as a promised agreement, which is enforceable by law while Anson explicates ‘contract’ as an actionable promise between a promisor and a promisee with a common intention.[9] Hence, a contract consists of two elements: an agreement and legal enforceability of the agreement. Section 2, Clauses G, H, I and J construe that when the contract quits being enforceable by law either presently, or in the future, the contract becomes void.[10]

Section 2, Clause J outlines a void agreement, which are agreements that are not enforceable to law or lacks the essential ingredients of an agreement. Section 2, Clause I outlines a distinct type of void agreements, i.e. voidable agreements, which are agreements that are valid for one contracting party but are void against the other contracting party (when at least one of the parties reserves its consent, either freely or forcefully).[11] A major difference between a void agreement and voidable agreement is that the latter is still valid against one contracting party (bound to the agreement) and voidable against the other contracting party (not bound to the agreement) unless the non-binding party decided to repudiate the agreement, making the once valid agreement as void. Section 2, Clause G outlines a void agreement, wherein the promise makes one or all parties break the law (Illegal Contract).

An illegal contract is void ab initio while void agreements become void at a different time. A consensus from the four clauses is that a void agreement is not enforceable by law and a breach of such agreement will not bring any legal liability on the contracting party.[12]

 

Analysis

Indian Contract Act, 1872 specifies void contracts from section 24 to 30 and section 36 and 56:[13]

  • Section 24: Unlawful Consideration with/ without an unlawful object

A contract, which has an unlawful provision or clause is not prima facie void because the unlawful provision or clause can be eliminated from the entire contract and the contract becomes valid again. However, if the unlawful clause cannot be removed from the contract or if the clause is one of the essential ingredients of an agreement, then there is no option but to deem the entire contract as void and legally non-enforceable.[14] Any performance that arises out of a contract, which contains an unlawful clause is valid, provided that the performance arises from an unlawful clause, which can be removed from the contract.[15]

  • Section 25: An Agreement devoid of C

Section 2, Clause D of the ICA, 1872 states that a consideration, which can be furnished by either contracting party at the desire of the offeror. Consideration is at the desire of the offeror. Consideration is the price paid by one party for the promise of the other party (quid-pro-quo).[16] An inducement to an agreement or a consideration is the motive or price which induces the contracting party (offeree) to agree.[17] Section 25 explicates that any contract without a lawful consideration is void in the eyes of the law.

1. Section 25, Sub-Section 1: Agreement made out of love and affection

An agreement between family members is out of natural love and affection and is enforceable with or without a lawful consideration.[18] Such agreements must be in writing and the contracting parties must be in close relation to each other.[19] The contract in such cases must be associated with a registered document.[20]

2. Section 25, Sub-Section 2: Contracting party has voluntarily done something for the offeror/ promisor

If a person performs an act or series of acts voluntarily and not at the desire of the promisor, and if the other person promises to compensate or reimburse, either partly or wholly the former person, then such proposals or promises without consideration is valid.[21] If the current performance overlaps with an existing contract, then the consideration of the past contract (assuming the consideration is valid and lawful) can be used as the consideration for the current promise.[22] In such cases, the act or series of acts must be performed voluntarily and the promisor must be competent at the time of the act. A promise to pay for a past act is binding on the person who is not performing the act.[23]

3. Section 25, Sub-Section 3: Time-barred Debt

A time-barred debt is enforceable by law, provided that the agreement of the time-barred debt is duly signed by the promisor or any personnel authorized by the promisor; such agreements have legal standing with or without a complete consideration.[24] The validity of Section 25 is reinforced in Section 138 of the Negotiable Instruments Act, 1881.

  • Section 185: Contract of Agency

Section 185 of the Indian Contract Act, 1872 mentions that any Contract of Agency (Appointment of an agent) is not void even if there is no consideration because it is understood that an agent is paid remuneration via some commission.[25]

  • Section 26: An Agreement in restrain of marriage.

The 3rd Indian Law Commission believed that any agreement whose provisions interfere with the marriage of any contracting party, either partially, or fully is void.[26] Ex: An agreement that bars a contracting party from marrying someone for a particular period, from marrying someone from a different socio-economic standing, marrying anyone, etcetera. A penalty for remarrying (in case of a widow/ widower) is a not restraint for marriage, and such penalty cannot be held as void.[27] A restraint to marriage is a violation of the fundamental freedom of a person to choose their partner and live a dignified life.[28]

  • Section 27: An Agreement in restraint of trade or occupation.

Article 19, Sub-Section 1, Clause G of the Indian Constitution grants the citizen of India the freedom to practice any profession, trade, business and occupation of choice; this idea consecrates in Section 27 of the Indian Contract Act, wherein any agreement that prevents the citizen of India from pursuing his/ her trade of choice is void and not enforceable by law (no individual can take away the fundamental right of a citizen).[29] In Madhub Chander v. Rajcoomar Das (1874) Beng LR 76, Justice Sir Richard Couch observed that though the plaintiff was barred from operating his business from one particular locality (partial restriction) and not barred from working on his business altogether (complete restriction), the agreement was still void.[30] The consideration paid for closing the shop by the defendant was also void. However, if a person puts a restraint on his/ her trade or business, then the restraint shall not constitute void.[31]

There are four major exceptions to Section 27:

1. Goodwill:

If one person buys the goodwill in the business of another person, then any restrictions imposed by the former on the latter’s business is not unlawful and the agreement is not void (ex: the former can bar the latter from carrying similar trade in the same locality). In Chandra Kanta Das v. Parsullah Mullick (1922) 24 BOMLR 602, Justice V. Haldane of the Bombay High Court surmised that the restriction placed upon the defendant (to stop operating his bus service from Pune to Mahableshwar out of a ticketing shop in the same locality) by the plaintiff is valid on the grounds of goodwill (plaintiff purchased the business goodwill of the defendant). The agreement arising out of goodwill is valid only if the agreement is reasonable against the nature of trade or business; this is to prevent the situation where the seller (goodwill) opens another shop after selling his/ her business goodwill to the purchaser and begins competing with the purchaser.[32]

2. Partnership:

Section 11 (no contracting party can engage himself/ herself in any business while the current business is running), Section 36 (any contracting party, who leaves the trade or business is prevented from establishing any new business, which is similar in function to their ex-business venture, in the same locality as their previous business) and Section 54 (after the insolvency of a business, the contracting parties cannot open a new business of similar nature) of the Indian Partnership Act, 1932 is a legal exception to Section 27 of the Indian Contract Act, 1872.[33]

3. Trade in Unity:

Consider a mandi, wherein the individual shops sell vegetables and fruits of almost the same kind. To avoid any competition and animosity between the shops, the shopkeepers agree upon singular pricing for all vegetables and fruits that are followed by all the individual shops. Such restrictions to trade and business are not enforceable by law, even if the shopkeepers’ consent to the trade restriction.[34]

4. Employment:

This exception to Section 27 of the Indian Contract Act, 1872 arises from judicial decisions and case-laws. In recent times, it is a norm to prevent the employee of an institution from working with another institution, which is a direct competitor to the former institution. Such restrictions are not void.[35] However, the restrictions on the employee by the employer are valid during the course of the employment and any restriction that extends beyond the period of employment is not enforceable by law.[36]

  • Section 28: Agreements in restraint of legal proceedings.

Any agreement, which does not allow a contracting party to enforce his/ her legal rights via legal proceedings, either during a particular period or after the expiration of the period is void. However, if the contracting parties enter into any promise outside the court, then such promises do not restraint the legal right to legal proceedings.[37] The Limitation Act, 1963 allows for the aggrieved party to file a legal suit against the injuror within three years of the breach in the agreement. An agreement, which alters the period within which the contracting party can seek a legal remedy for a breach in a contract (modification or elimination) is void and not enforceable by law, but this alteration must be absolute (total). Any partial alteration or restriction of the legal right to legal proceedings can still be enforceable by law (valid).[38] If the contracting parties to an agreement decide that any dispute, regarding a provision or a group of provisions, will be resolved by the process of arbitration in the present and future, then the agreement will not be void and shall be enforceable by law.[39]

  • Section 29: Ambiguous Agreement

An agreement with ambiguous provisions is void and not enforceable by law. The provisions of the agreement need to be comprehensible with reasonable effort and an agreement does not become void simply because its provisions were difficult to understand. A promise, which calls for an agreement in the future is void (uncertainty among the contracting parties about meeting each other in the future).[40] Additionally, if one of the provisions is ambiguous while the rest of the provisions of the agreement are clear, then the agreement is valid and binding on the contracting parties.[41]

  • Section 30: An agreement by wagering/ betting.

Consider a hypothetical situation, where two contracting parties: A and B have decided that if the vaccine for COVID-19 becomes available before 31st December 2020, then A must pay ₹1,00,000 to B; and if the vaccine for COVID-19 becomes available after 31st December 2020, then B must pay ₹1,00,000 to A. Such contracts are based on a wager or bet (of an uncertain event in the past or future, wherein the contracting parties lack the awareness of the event), and rely heavily on the uncertainty of the future, hence, such agreements are void and not enforceable by law. A wagering contract is a two-person, zero-sum game, wherein neither of the party has any control over the outcome of the event (interference in the event can change the outcome owing to the skill of the party).[42] If the event is a luck-based (ex: lottery), then the event forms a wagering contract, which is not enforceable by law.[43]

  • Section 36: Impossible Condition.

If the performance of a contract or the acceptance of a proposal is contingent to the occurrence of an impossible event, which does not happen under normal circumstances, then the agreement is void, irrespective of the fact whether the contracting party was aware or not about the impossibility of the said event.

  1. Section 56: Impossible Act or Series of Acts.

If the provisions of a contract entail the offeree to perform or omit an act or series of acts, which either are impossible presently, or become impossible in the course of the contract, then the contract becomes void.

  1. In the course of the contract, if the promisee realizes that the act to be performed or omitted is impossible in nature, then the fulfilment of the provisions of the contract by the promisee is no longer binding.
  2. Before entering an agreement, if the promisor realizes that the object of the contract is impossible in nature and still goes ahead with the agreement, then the promisor is liable to compensate the promisee (oblivious about the nature of object) when the promisee sustains injury or harm while performing or omitting the act or series of acts.[44]
  3. Additionally, if the performance or the omission of the contract becomes impossible due to the failure of the objective of the contract, i.e. the objective of the agreement becomes frustrated and in the absence of a valid objective, the agreement becomes void and non-enforceable by law.[45] If the performance of the provisions of a contract becomes impossible or impractical from the point of view of the object, then the performance becomes frustrated and the agreement becomes void.[46]

 

Conclusion

The existence of void agreements in the Indian Contract Act, 1872 proves that the statute was not drafted with precision; the ambiguities and differential interpretations of the loosely written ICA, 1872 gives rise to different forms of contract, which may or may not be valid from the point of view of social cohesion. However, the lucidity of the act proves to be quite flexible when it comes to creating contracts with changing times and methods. Hence, the ICA, 1872 is a double-edged sword, which is appropriately rigid and flexible. Void Agreements bar the offeror and offeree from harming not only themselves but also the society at large (immorality, illegality) while fostering healthy relationships between contracting parties. Void Agreements champion the protection of the Law of Tort and the enforcement of higher contractual obligations (Societies Registration Act, 1860). It is imperative to study void and voidable contracts to avoid any violation of social coherence.

 

References

  1. Jeanie Mohanty, All you need to know about The Law Commission of India, iPLEADERS (Jun. 28, 2018), https://blog.ipleaders.in/law-commission-of-india.
  2. UNIVERSITY OF KASHMIR, UNIT-4 5 (2017), http://law.uok.edu.in/Files/5ce6c765-c013-446c-b6ac-b9de496f8751/ Custom/UNIT%20-%204.pdf.
  3. Atul C. Patra, Historical Background Of The Indian Contract Act, 1872, 4 J. IND. L. INSTT. 373, 375-76 (1962).
  4. M. P. Jain, The Law of Contract Before its Codification, Special Issue J. IND. L. INSTT. 178, 199-200 (1972).
  5. Id.
  6. Hardik Jain & Sajjan Chaudhari, History of Indian Contract Act, SLIDESHARE (Oct. 17, 2016), https://www.slideshare.net/ patelmitul772/sajan-67292162.
  7. Indian Contract Act, 1872: Part I, TOPPR. (Aug. 8, 2018), https://www.toppr.com/guides /business-laws /indian-contract-act-1872-part-I.
  8. RAM MEGHE INSTITUTE OF TECHNOLOGY AND RESEARCH, BADNERA, UNIT-1: INDIAN CONTRACT ACT, 1872 1-2 (n.d.), http://mitra.ac.in/staff/download.php?f=1_CONTRACT_.pdf&u= UHJvZi4gUHJh dGlrc2hhIEEuIEthbG1lZ2g= (last visited Jul. 21, 2020).
  9. Abhay Pandey, Conditions When an Agreement becomes a Contract, iPLEADERS (Mar. 12, 2019), https://blog.ipleaders.in/conditions-when-an-agreements-becomes-a-contract.
  10. Andrew Bloomenthal, Void Contract, INVESTOPEDIA (Feb. 22, 2021), https://www.investopedia.com/terms/v/void-contract.asp.
  11. Types of Contracts-Based on Validity, TOPPR. (Oct. 13, 2019), https://www.toppr.com /guides/business-laws/indian-contract-act-1872-part-i/types-of-contracts -based-on-validity.
  12. Id.
  13. Sagnik Sarkar, Void Agreements: Concept and Important Case Laws, LEGAL BITES (Oct. 18, 2020), https://www.legalbites.in/void-agreements-concept.
  14. Pickering v. Illfracombe Rly Co, LR 3 CP 235 (1868) (England).
  15. BOI Finance Ltd v. Custodian, 10 SCC 488 (1997) (India).
  16. Vinayak C. Charu, All contracts are agreements but all agreements are not contracts, LAWYERS CLUB INDIA (n.d.), https://www.lawyersclubindia.com/articles/all-contracts-are-agreements- but-all-agreements-are-not- contracts-10307 (last visited Jul. 22, 2021).
  17. Mehta Alloy & Steel Works v. Mehta Finance & Leasing Company Ltd., 89 CompCas 227 (1997) (India).
  18. Rajlukhy Dabee v. Bhootnath Mookerjee, 4 Cal WN 488 (1900) (India).
  19. Sarkar, supra note 13.
  20. Lala v. Jangh, AIR Oudh 254 (1937) (India).
  21. Sarkar, supra note 13.
  22. Suraj Narain Dube vs Sukhu Aheer, ILR 51 All 164 (1928) (India).
  23. Sakshi Agarwal, Agreeents without Consideration, ITJ (Oct. 18, 2018), https://lawtimesjournal.in/ agreements-without-consideration/#_ftn1
  24. A.V. Murthy v. B. S. Nagabasavanna, C.A. No.: 206/ 2002 (2002) (India).
  25. Agarwal, supra note 23.
  26. Shrawan Kumar Pappu v. Nirmala, CWP No. 62174/ 2012 (2012) (India).
  27. Rao Rani v. Gulab Rani, ILR All 810 (1942) (India).
  28. INDIA CONST. art. 21, cl. 1(a).
  29. Leather Cloth Co. v. Lorsont, LR 9 Eq 345 (1869) (Court of Chancery).
  30. LexLife India, Law of contract: Void and voidable contracts, LEXLIFE INDIA (May. 31, 2020), https://lexlife.in/2020/05/ 31/law-of-contract-void-and-voidable-contracts.
  31. Brahmaputra Tea Co. Ltd. v. E. Scarth, ILR 11 Cal 545 (1885) (India).
  32. Ann Trego v. George Stratford Hunt, AC 7 (1896).
  33. Daulat Ram v. Dharam Chand, CR. No. 3495 (2013) (India).
  34. Kores Manufacturing Co. Ltd. v. Kolok Manufacturing Ltd., Ch 109 (1959) (Wales).
  35. Charlesworth v. Macdonald, ILR 23 BOM 103 (1858) (Zanzibar).
  36. Brahmaputra Tea Co. Ltd. v. E. Scarth, ILR 11 Cal 545 (1885) (India).
  37. Sakshi Agarwal v. Debts Recovery Appellate, 24 AIR (2010) (India).
  38. Continental Drug Co. Ltd., Bombay v. Chemoids And Industries Ltd., 58 CWN 916 (1954) (India).
  39. Rashmi Jajoria, Void & Voidable Agreements, LEGAL SERVICE INDIA (n.d.), http://www.legalservicesindia.com/article/ 315/Void-&-Voidable-Agreements.html (last visited Jul. 22, 2021).
  40. Punit Beriwala v. Suva Sanyal, 44 AIR (1998) (India).
  41. Nicolene Ltd. v. Simmonds, 1 QB 543 (1953) (England).
  42. Coles v. Odhams Press Ltd., 1 KB 416 (1936).
  43. Subhash Kumar v. State of Madhya Pradesh, AIR 2000 MP 109 (1999) (India).
  44. Sarkar, supra note 13.
  45. Krell v. Henry, 2 KB 740 (1903) (England).
  46. Satyabrata Ghosh v. Mugneeram Bangur, 54 AIR SC (1954) (India).
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