Harsh Gautam (VIPS, Delhi)
Harshraj Singh Rathore (School of Law, UPES, Dehradun)
Hanuman Singh Bishnoi (AIL, Mohali)
The first thing which should be kept in mind while drafting a contract is that it should be according to the law, so to ensure its legality. Only those agreements that are legally enforceable by law are considered valid contracts. Agreements should be made with the free consent of the parties and also it should be free from any wrongful means mentioned in the contract law. Parties should be competent in the contract is an important essential for a valid .
A void agreement is an agreement that is not enforceable by law. Such an agreement cannot be challenged in a court of law. The type of agreements which are declared void are-
1) Agreements in Restraint of Trade
Any agreement done by the parties in restraint of trade is void under Section 27 of the Indian Contract Act. Any agreement stopping a person from trading in the manner he likes on an agreement with other parties for the benefit of a party will be called an agreement in restraint of trade.
Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd.
The facts of the case are that Thorsten Nordenfelt was a manufacturer of guns in Sweden and England. Thorsten sold his business to Maxim Nordenfelt and entered into an agreement with Maxim that he would not manufacture guns for 25 years. Later, Thorsten claimed that the agreement was not enforceable as it was in restraint of trade and judgment was passed in favor of Thorsten.
So, here a test of reasonability is followed. An agreement in restraint of trade is valid, if:
1.There is a valid interest that the party imposing the restraint is trying to protect.
2.The restraint is no more than that which is necessary to protect this interest.
3.Restraint is not contrary to the public interest.
All agreements in restraint of trade are void is laid in Section 27 of the Indian Contract Act with only exception as Sale of Goodwill. Also, these agreements are void and not illegal which means these agreements are not unlawful but just not enforceable in a court of law if either of the parties fails to perform their part of the agreement.
Neetu has a business of books in a locality in Delhi. Sonam is planning to open a similar business in the same locality. Fearing competition in the market, Neetu enters into an agreement with Sonam not to open her business for 15 years and promises to pay a certain sum of money. Later, Neetu fails to pay the sum agreed upon. Sonam tries to take the matter in the court of law. The agreement being void, Sonam has no case.
Madhub Chunder v. Rajcoomar
In this case, the defendant, Rajcoomar suffered a loss due to the plaintiff's competition and entered into an agreement with the plaintiff that he would pay him the advances if he closed his business. When the defendant failed to pay, the plaintiff filed a suit against the defendant to recover the amount but failed to do so because it was an agreement in restraint of trade.
Exceptions to Restraint of Trade
Conditions that make restraint of trade valid
1.The seller can be restrained only from carrying out a similar business.
2.The restraint can be applied only to certain local limits.
3.The limits/restraint should appear to be reasonable.
2) Agreement in Restraint of Legal Proceedings
Section 28 of the Indian Contract Act says that any agreement that restricts an aggrieved party to approach a court or tribunal in case of a breach of contract is a void agreement.
There are two exceptions to Section 28, as mentioned in the Act.
1. If there is an arbitration clause in the said agreement.
2. Agreements stating the limit of time. For instance, a suit for breach of contract may be brought within three years from the date of the breach.
3) Wagering Agreement
Wager means a bet. It is a game where the probability of winning or losing is not certain. The chance of winning or losing is wholly dependent on an uncertain event. Generally, wagering agreements are void.
Parties involved in a wagering contract mutually agree that either one will win. Each party stands equally to win or lose the bet.
B and D agree with each other that if it rains on Sunday, B will pay Rs. 100 to D and if it does not rain then D will pay B Rs. 100. Such agreements are termed as wagering agreements and hence void.
Essentials of a Wager:
1. Dependence on Uncertain Event
2. Mutual Chance of Gain or Loss
3. No Other Interest in the Event
4. No Control Over the Event
1. Contract of Insurance is not wagering
Insurance contracts are contracts of indemnity. They are entered to safeguard the interest of a party to the contract.
2. Skill Competitions are not wagering
It includes crosswords competitions, pictures, puzzles, etc. Here, the prizes are awarded by brain competitions and they have control over the event. Such competitions are not wagering.
Effects of Wagering Agreements
Sec. 30 of the Indian Contract Act states that agreements by way of wager are void, and no suit shall be brought for recovering anything be won on any wager or other uncertain event on which any wager is made. Though a wagering agreement is void but it is not forbidden by law.
4) Agreement to do impossible act
An agreement to do an act impossible is void.
Where one person has promised to do something which he knew to be impossible or unlawful, such agreements are void provided the promisor must make compensation to promisee for any loss which such promisee sustains through the non-performance of the promise.
5) Agreement by persons who are not competent to contract-
Minor is not competent to contract as per section 11 of The Indian Contract Act, 1872. An agreement with the minor is deemed void ab initio.
Mohri Bibi v. Dharmodas Ghosh-
In this case, Privy Council stated the law that the contract entered into by the minor or any agreement by the minor is void. This law is strictly being followed in further cases.
Also, the person with an unsound mind is not competent to contract as per section 12 of The Indian Contract Act, 1872.
The unsound mind may include 2 categories-
Idiot- Means a person whose mental condition is not stable by birth. An idiot is never considered to be competent to contract in his life because of his unfit mind by birth.
Lunatic- Means a person who is fit sometimes as well as unfit sometimes and who suffers from fits. While suffering from fits such a person cannot enter into any agreement at that particular moment.
Insolvent- A person against whom a case of insolvency is under litigation is incompetent to enter into a contract because such a person is un-discharged insolvent. In case of insolvency of any individual, his official receiver will contract on his behalf.
Convicted- It means a person against whom the court has passed judgment in severe cases like robbery, murder, kidnapping, etc. A convicted person is incompetent to contract.
Married woman- A married woman can contract for her personal property but cannot contract on behalf of her husband's property.