Section 24: Agreement void, if considerations and objects unlawful in part

1. Basics:

• An agreement is void if any part of the consideration or object is unlawful. This principle applies if:
• A portion of a single consideration for one or more objects is unlawful.
• Any part of multiple considerations for a single object is unlawful.

2. Entire vs. Divisible Agreements

• General Principle:

• • According to Section 24.1, an agreement with an unlawful consideration cannot be enforced if the consideration is entirely illegal. However, if an agreement contains multiple promises, some of which are lawful and some unlawful, the lawful parts can still be enforced if they have distinct lawful considerations.

• Severability of Agreements:
  • Severance Test:

• • • Agreements with both lawful and unlawful components can sometimes be severed. This means that while the unlawful parts can be ignored, the lawful parts can be enforced.
    • For instance, in BOI Finance Ltd v Custodian (1997), the arrangement involved a legal “ready” leg and an illegal “forward” leg. The case illustrates the principle of severability under Section 24, despite being decided under Section 57. This principle is also affirmed in Canbank Financial Services Ltd v Custodian (2004), where similar issues of severability were addressed.

• Case Laws:

• • • In Shin Satellite Public Co Ltd v Jain Studios Ltd (2006), the court addressed the severability of a clause violating Section 28, allowing the legal parts of the agreement to remain enforceable. Similarly, Elektron Lighting Systems Pvt Ltd v Shah Investments Financial Developments & Consultants Pvt Ltd (2015) involved a contract with both legal and illegal components, where the lawful part (street light refurbishment) was enforced while the illegal part (advertising) was disregarded.

• Legal Tests:

• • The rule of “substantial severability” applies, meaning if the illegal part cannot be effectively separated from the lawful part, the entire agreement is void. If the illegal aspect can be isolated, the legal part may still be enforced.

3. Case Laws:

• Pikering v Ilfracomb Ry. Co (1868):

• • Justice Wiles discussed the concept of severability where parts of an agreement may be unlawful while others are not. If the illegal part cannot be separated, the entire agreement may be void.

• BOI Finance Ltd v Custodian (1997):

• • This case involved a “buy-back” arrangement where the legal “ready” leg and illegal “forward” leg were examined. The case supports the principle of severability, showing that parts of an agreement can be considered separately.

• Kathu Jairam Gujar v Vishwanath Ganesh Javadekar (1925):

• • The case involved an agreement with both legal and illegal parts. It was determined that the agreement could not be severed, leading to the entire agreement being void.

• Srirangachariar v Ramasami Ayyanga (1894), Bindeshari Prasad v Lekhraj Sahu (1916), and Bani Ramachandra v Jayawanti (1918):

• • These cases involved agreements where the consideration was illegal, resulting in the entire agreement being declared void.

• Shin Satellite Public Co Ltd v Jain Studios Ltd (2006):

• • The court addressed the severance of a clause offending Section 28, allowing the legal parts of the agreement to remain effective while the illegal part was severed. Similar principles were upheld in Elektron Lighting Systems Pvt Ltd v Shah Investments Financial Developments & Consultants Pvt Ltd (2015), where only the lawful part of the contract was enforced.

• Alice Mary Hill v William Clarke (1905):

• • An agreement where payment was made for illegal considerations was declared void, illustrating that services rendered under such an agreement cannot be recovered.

• Gopalrav v Kallappa (1901):

• • The case involved an agreement with illegal components, resulting in the entire agreement being void.

 

Section 25: Agreement without consideration, void, unless it is in writing and registered, or is a promise to compensate for something done, or is a promise to pay a debt barred by limitation law.

1. General Rule: Under Section 25 of the Indian Contract Act, an agreement made without consideration is void, except in certain specified cases. Consideration is defined as something of value given in return for a promise. Without consideration, an agreement is generally unenforceable.
2. Exceptions to the Rule: The section provides three exceptions where an agreement without consideration can still be considered a contract:

• Written and Registered Agreements: An agreement made without consideration is valid if it is expressed in writing, registered under the law in force for the registration of documents, and made on account of natural love and affection between parties standing in a near relation to each other. For instance, a registered document executed by a husband agreeing to transfer property to his wife as a gesture of natural love and affection would fall under this exception. (Tatia v. Babaji)
• Promise to Compensate for Voluntary Act: An agreement is valid if it is a promise to compensate, either wholly or partially, a person who has already voluntarily done something for the promisor, or performed something which the promisor was legally obligated to do. This covers voluntary services provided at the request of the promisor, even if not initially agreed upon.
• Promise to Pay a Time-Barred Debt: A promise made in writing and signed by the person to be charged therewith, or by his authorized agent, to pay wholly or partially a debt that is barred by limitation law is enforceable. The promise must be express and in writing to be valid. (Maniram v. Seth Rupchand)

3. Consideration in Detail

• General Principle: As established, consideration is a necessary element of a binding contract. The absence of consideration renders an agreement void unless it falls within the exceptions provided. For example, in Williams v. Roffey Brothers, the Court of Appeal recognized “practical benefit” as a form of consideration, although this has been criticized for allowing reliance on one’s own breach as consideration.
• Forbearance and Compromise: Forbearance to prosecute a claim or a compromise of a bona fide dispute is valid consideration. The relinquishment of a legal right, even if the claim is weak or flawed, constitutes valuable consideration. This principle is reflected in various Indian case laws, including agreements related to succession rights or family settlements. (Smt. Mania v. Dy. Director, Consolidation)
• Performance of Existing Duty: The performance of an existing duty, which one is already legally bound to perform, cannot serve as consideration for a new promise. For example, an agreement to pay an additional sum to a lawyer for an obligation already undertaken is void. However, if the duty is performed in a manner beyond the original obligation or in an advantageous manner, it can be considered valid consideration. (Williams v. Roffey Brothers)

4. Transfer of Immovable Property

• Incorrect Application: Section 25 has been misapplied in cases involving the sale or mortgage of immovable property, where the requirement for consideration has been wrongly interpreted. The Transfer of Property Act does not integrate the provisions of Section 25 directly, thus ensuring that agreements related to property transfers are governed by its specific provisions.

5. Negotiable Instruments

• Presumption of Consideration: For negotiable instruments, consideration is presumed and does not need to be proved. This presumption is established under Section 118 of the Negotiable Instruments Act, 1881, and is supported by Section 114 of the Indian Evidence Act, 1872.

6. Consideration Dispensed with in Specific Cases

• Registered Writing: A registered agreement made for natural love and affection can dispense with consideration. However, the relationship between parties must be near, and natural love and affection must be evident. Disputes arise when such agreements are challenged on the grounds of lack of consideration or personal conflict, as seen in (Bhiwa v. Shivaram) and (Allahabad High Court in Smt. Mania’s case).
• Compensation for Voluntary Service: Compensation for services rendered voluntarily at the promisor’s request is valid. However, services provided to third parties or without the promisor’s prior knowledge do not qualify. The service must be rendered to the promisor, and voluntary acts must be acknowledged as such.
• Promise to Pay a Time-Barred Debt: This exception applies only to debts for which the promisor would be liable if not barred by limitation, and not to debts of third persons. An express promise in writing is required to validate such agreements.

7. Adequacy of Consideration

• Principle of Adequacy: The law does not assess the adequacy of consideration but ensures that it has some legal value. Inadequacy may suggest imposition or lack of understanding but does not inherently invalidate a contract. This principle aligns with English law as noted in cases like Tennent v. Tennents.

 

Section 26: Agreement in restraint of marriage, void

1. General Rule: As per Section 26 of the Indian Contract Act, any agreement that restrains the marriage of a person (other than a minor) is considered void. This rule is broad and applies to all forms of restraint on marriage, irrespective of the nature or reason for the restraint.
2. Interpretation and Exceptions:

• Restraint on Remarriage: There is a distinction between absolute restraint on marriage and restraint on remarriage. For example, an agreement by a Hindu at the time of marriage with his first wife, which prohibits him from marrying a second wife while the first wife is alive, would be void according to the literal interpretation of Section 26. This interpretation, however, might not reflect the Legislature’s intention, as such agreements may have cultural or religious significance.
• Conditional Restraint: Agreements that impose conditions related to maintenance rather than directly restraining marriage are generally valid. For instance, a condition that the widow of a co-sharer will forfeit her right to maintenance if she remarries is deemed valid.

1. Judicial Interpretations:

• Case Law on Maintenance: In Jamila Khatoon v Abdul Rashid (AIR 1939 Lah 165), an agreement executed contemporaneously with marriage, providing that in the event of strained relations, the wife would be entitled to a customary maintenance allowance, was not considered an agreement in restraint of marriage. The court held that such provisions are not void under Section 26.
• Divorce and Maintenance in the Context of Multiple Marriages: In Badu v Badarannessa ((1919) 29 Cal LJ 230), a provision in a Kabinnamah (a marriage contract) allowing a Mahomedan wife to divorce herself if her husband marries a second wife was held valid. The divorce, in this case, was valid, and the wife was entitled to maintenance for the period of iddat (waiting period after divorce).

1. Legal Significance:

• Impact on Marriage Contracts: The distinction between an absolute restraint and conditions relating to maintenance impacts how marriage contracts are interpreted. Agreements that are found to be in restraint of marriage are void, but those addressing maintenance or other related conditions may still be enforceable.
• Cultural and Religious Considerations: While Section 26 provides a general rule, the application of this rule must consider cultural and religious contexts. The cases of Latafatunnissa v Shaharbanu (AIR 1932 Oudh 108) and Jamila Khatoon v Abdul Rashid highlight that the court’s interpretation may accommodate traditional practices and agreements linked to maintenance or remarriage.

Section 27: Agreement in restraint of trade, void

1. General Rule:

• Every agreement that restrains an individual from exercising a lawful profession, trade, or business is void to that extent.

2. Exception to the Rule:

• An agreement related to the sale of the goodwill of a business is exempted. The seller may agree to refrain from carrying on a similar business within specified local limits, provided these limits are deemed reasonable by the Court, considering the nature of the business.

3. Broad Definition:

• Agreements that restrict a party’s freedom to work or carry on their profession or business are categorized under restraint of trade. The doctrine balances the freedom of contract against the public interest in not depriving the State of individuals’ skills and talents.

4. Codification and Exceptions:

• In India, the doctrine is codified in Section 27, which generally declares agreements in restraint of trade void, except for those specified in exceptions. The intention is to protect trade, especially given the nascent stage of trade in India. The scope of the restraint must fall within one of the exceptions to avoid being deemed void.

5. Case Law on Partial Restraint:

• Madhub Chunder v Rajcoomar Doss: The restriction in this case, although confined to a particular quarter in Calcutta, was held void. This case established that partial restraint must be justified within the scope of exceptions.
• Zaheer Khan Case: In this case, a post-termination restriction on a cricketer’s ability to contract with third parties was deemed a restraint of trade and thus void.

6. Restraint During Term of Service:

• Agreements preventing employees from competing with their employers during the term of employment are generally enforceable if they are not excessively harsh or unreasonable.
• Charlesworth v MacDonald: An injunction was granted to restrain the defendant from practicing medicine in Zanzibar during the term of the agreement. Wrongful dismissal, however, invalidates such restraints for the remainder of the contract.

7. Restraint Operating Beyond Term of Service:

• Clauses extending restraint beyond the term of service are considered void.
• Superintendence Co of India v Krishan Murgai: A clause preventing an employee from joining a competitor or starting a similar business for two years post-employment was held void as it operated beyond the term of the contract.

8. Public Policy:

• The section is comprehensive, and courts cannot invalidate agreements on unspecified grounds of public policy beyond what is stipulated in Section 27.

9. Agreements Not in Restraint of Trade:

• The section targets contracts that wholly preclude a person from exercising their profession, trade, or business. It does not affect agreements essential for business operations, such as exclusivity agreements.
• Medical Superspeciality Aspirants: Compulsory bonds requiring medical students to serve the government post-study were upheld as they did not constitute a restraint on professional activity.

10. Trade Combinations:

• Agreements among manufacturers to fix prices or share profits are not void under this section as long as they do not restrain the parties from exercising their business activities.

11. Severability of Agreements:

• Agreements can be partially enforced if they are divisible and if the invalid parts can be separated from the valid ones using the “blue pencil” test.
• The principle of “substantial severability” is applied to determine if the remaining terms would still be agreed upon by the parties if they had known of the invalidity of other terms.

12. Reasonableness of Limits:

• Restraints must be reasonable in terms of time, area, and the nature of the business. They should balance the interests of the parties involved with public interest considerations.
• Medical Superspeciality Aspirants: An agreement to serve post-study for a reasonable period is not considered a restraint on trade if it serves the legitimate interests of the parties.

Section 28: Agreements in restraint of legal proceeding void

 

 1. General Rule

• Prohibition of Restriction: Agreements that absolutely restrict any party from enforcing their rights under a contract through legal proceedings are void. This includes agreements that:

• • Prevent enforcement through ordinary legal tribunals.
  • Limit the time within which rights may be enforced.

For instance, a stipulation in a contract that no action should be brought upon it is void under this provision, as it restricts the enforcement of rights in ordinary legal tribunals.

• Effect on Compromises: The section does not affect the validity of compromises where parties agree to a settlement, as recognized under the Civil Procedure Code. The validity of such compromises is upheld since they do not oust the jurisdiction of the courts but rather facilitate settlement.

2. Arbitration Agreements

• Arbitration Clauses: Clauses that mandate arbitration for dispute resolution but also restrict access to courts for enforcing rights are partly valid. While the arbitration clause itself is valid, any stipulation excluding court jurisdiction for dispute resolution is void.
• Case Law:

• • Madras High Court Case: The court invalidated a stipulation that barred parties from challenging the arbitrator’s award in court, holding that the agreement to exclude court jurisdiction was void.

• Severability: If an arbitration clause contains an invalid provision, the valid part (i.e., the arbitration agreement) may still stand if the invalid part is severable.

3. Agreements to Refer to Arbitrators

• Foreign Arbitration: Agreements that stipulate disputes be resolved by foreign arbitrators or institutions, such as the London brokers or Bengal Chamber of Commerce, are valid and not covered by this section.
• Court Authority: Agreements allowing courts to decide the matter without appeal are valid, provided they do not restrict the court’s jurisdiction.
• Case Law:

• • Scott v. Avery: Validates agreements requiring disputes to be resolved by a preliminary determination before any legal action is taken.

• Restrictive Stipulations: Clauses barring objections to awards or limiting recourse to courts are void.

4. Agreements on Jurisdiction

• Choice of Court: Agreements specifying the court where disputes will be filed do not contravene Section 28 as long as the chosen court has jurisdiction.
• Case Law:

• • Swastik Gases Case: The Supreme Court held that a clause specifying jurisdiction in a particular place implies exclusion of other jurisdictions if the chosen court has the authority to adjudicate the matter.
  • InterGlobe Case: The Supreme Court invalidated a clause that restricted jurisdiction exclusively to Delhi courts, ruling it invalid where the courts of the chosen place did have jurisdiction.

• Implied Exclusion: Clear and unambiguous intent to exclude other jurisdictions must be demonstrated. Simply stating “exclusive” or similar terms is not required if the intent is clear.

5. Application to Rights Under a Contract

• Scope of Section: Section 28 applies only to restrictions on enforcing rights under contracts, not to torts or decrees.
• Case Law:

• • Baroda Spg & Wvg Co. Case: Validated a clause in a fire insurance policy that stipulated forfeiture of benefits if a claim was not pursued within a specified period after rejection.

• Distinction Post-Amendment: The 1997 amendment removed the previous distinction between clauses limiting time and those extinguishing rights, making both types of clauses void.

6. Limitation of Time to Enforce Rights

• Void Agreements: Agreements that shorten the limitation period for enforcing rights, even if within the legal limitation period, are void.
• Case Law:

• • Judicial Committee Case: Held that agreements extending the period of limitation do not fall under Section 28, although they may be void under Section 23 if they defeat the Limitation Act.

• Exceptions to Voidness: Agreements that extend the limitation period beyond legal limits are valid, while agreements that bar suits after a specific period are void.

7. Severability

• Doctrine of Severability: Provisions within agreements that fall under this section can be severed from the valid parts of the agreement, ensuring that the remainder of the contract remains enforceable.

8. Exceptions

• Exception 1: Applies to agreements like those in Scott v. Avery, where parties agree that no action should be taken until a specific issue (e.g., amount) is resolved by reference.
• Exception 2: Covers cases where the contract’s terms involve arbitration and are conditional or contingent.

Section 29: Agreements void for uncertainty

1. General Principle: Agreements whose meaning is not certain or cannot be made certain are deemed void. The Court is required to enforce the plain meaning of the words used in the agreement, regardless of personal preferences or perceived fairness. The intention of the parties is primarily discerned from the written words of the contract.
2. Contract Construction:

• The Court must adhere to the plain meaning of words used in a written contract, even if the outcome seems unfavorable. This is because the intention of the parties is found in the language they employed.
• The Court cannot restrict a right to terminate at will to a right to terminate for a reasonable cause. This principle highlights that a contract’s terms should be understood as per their plain meaning rather than any subjective interpretation of fairness.
• When interpreting business contracts, understanding the commercial context and the perspective of businessmen can aid in construing their words but does not replace the need for clear terms. The Court does not assume what reasonable parties might have agreed upon; it interprets the actual terms of the contract.
• If the meaning of terms is doubtful, the Court may consider surrounding circumstances to ascertain the parties’ intention. However, the Court will not supply missing terms or resolve ambiguities based on what it deems reasonable. Doing so would effectively result in creating a new contract rather than enforcing the existing one.
• Scammell v Ouston: Lord Wright emphasized that the Court’s role is to achieve justice between parties if an ascertainable and determinate intention to contract is present. The Court will strive to give effect to that intention, focusing on substance rather than form. Difficulty in interpretation does not equate to ambiguity if a definite meaning can be derived from the words used. The contract must be sufficiently definite to be enforceable, meaning its terms should be clear enough for practical implementation.

3. Extrinsic Evidence:

• Indian Evidence Act, 1872:
  • Section 93: Prohibits the introduction of extrinsic evidence to clarify or fill gaps in an ambiguous document. This applies to situations where the language is ambiguous on its face.
  • Section 94: Precludes the use of evidence to alter the meaning of a document that is clear and unambiguous in relation to existing facts.
  • Sections 95 to 97: Allow evidence to resolve latent ambiguities—where the document’s language is clear but its application to facts is uncertain.

• Examples:

• • Patent Ambiguity: For example, an agreement stating a price as ‘Rs.1000 or Rs.1500’ is patently ambiguous, and evidence cannot be introduced to resolve the ambiguity.
  • Latent Ambiguity: An agreement for the sale of ‘my house in Calcutta’ is a latent ambiguity if the vendor has no house in Calcutta but a house in Howrah. Evidence can be used to determine that the agreement pertains to the Howrah property.

4. Capable of Being Made Certain:

• A contract is not void for uncertainty if its terms can be made certain. The presence of a working rule or implied term that clarifies the agreement’s meaning prevents the contract from being void under this section. It must be shown that the contract is incapable of being made certain, not merely that its meaning is initially unclear.

5. Ambiguous Contracts:

• Agra Savings Bank Case: An instrument promising a sum of money monthly without specifying the period was held to be ambiguous and not a valid promissory note.
• Tilak Raj Bakshi Case: The Punjab & Haryana High Court initially deemed a clause in a settlement deed void for uncertainty due to an unspecified price. However, the Supreme Court overturned this, suggesting that the price could be understood as the market price, adhering to the principle in Section 93 of the Evidence Act.

Section 30: Agreements by way of wager, void

1. Definition and Validity of Wagering Contracts:

• A wagering contract is an agreement involving mutual promises that are conditional on the occurrence of an uncertain event. Each party’s promise is contingent on the outcome of the event.
• There is no technical objection to the validity of a wagering contract. The mutual promises, conditional upon the happening or not happening of an unknown event, can support each other as effectively as any other reciprocal promises.

2. What Constitutes a Wager:

• A wager is defined as a contract where one party (A) agrees to pay money to another party (B) if a specific event occurs, in consideration of B agreeing to pay money to A if the event does not occur.
• Sir William Anson’s definition describes a wager as “a promise to give money or money’s worth upon the determination or ascertainment of an uncertain event,” which is considered neater and more precise.
• The essence of a wager is that the parties must contemplate the determination of an uncertain event as the sole condition of their contract. A genuine wager is distinct from a conditional promise or a guarantee.
• If one party controls the event, it lacks the essential characteristic of a wager. Each side must stand to win or lose based on the uncertain event. A wager may involve past events (e.g., election results) as long as the event was uncertain at the time of the contract.
• A wager requires that the stake money come from the parties involved. If outsiders contribute, the agreement is not considered a wager (e.g., wrestling match with gate money provided by the public).

3. Case Law:

• Alamai v Positive Govt Security Life Assurance Co: Distinguished between wagers and legitimate insurance agreements.
• Thacker v Hardy: Emphasized that for an agreement to be classified as a wager, it must involve a loss to one party and a gain to the other based on an uncertain future event.
• Kong Yee Lone & Co v Lowjee Nanjee and Sukdevdoss v Govindoss: Established that if the intention is only to pay or receive money based on market variations, it is considered a wager.
• Doshi Talakshi v Shah Ujamshi Velsi: Held that contracts for the sale of cotton, with no actual delivery and only payment of differences, were wagering contracts.

4. Distinction Between Gaming and Wagering:

• The expression “by way of wager” used in Indian law is equivalent to “gaming and wagering” under English law.
• The key difference lies in the intention of the parties rather than the form of the contract. Indian courts may follow English decisions on this matter.

5. Court’s Role in Determining Wagering Nature:

• Courts assess the real nature of agreements, especially in stock exchange transactions, to determine if they are wagering contracts.
• Agreements where parties intend to pay differences without actual delivery of goods are considered wagers.
• The intention to wager must be mutual, and evidence of such intention can be inferred from the circumstances, even if brokers mediate the transactions.

6. Teji Mandi Transactions:

• A teji mandi transaction involves buying a double option for future trading dates, with options to declare as buyer or seller based on market rates.
• The mere presence of a teji mandi transaction does not classify it as a wager; it must be proven that the intention was to pay differences only.

7. Agreements with Pukka Adatia:

• Historically, transactions involving a pukka adatia (agent) were not considered wagers. However, modern rulings affirm that transactions between a pukka adatia and their constituent can be wagering agreements if they exhibit the characteristics of a wager.

8. Collateral Agreements to Wagering Contracts:

• While wagering contracts themselves are void, collateral agreements (e.g., broker’s commission) are not automatically void unless specific statutes like the Bombay Act III of 1865 apply.
• The Bombay Act prohibits suits for recovery of money or commission related to wagering agreements.

9. Insurance Policies:

• Life insurance policies where the insurer has no interest in the insured’s life are considered wagering contracts and are void.
• Third-party liability insurance under the Motor Vehicles Act is not classified as a wager, even if the registered owner is a benamidar.

10. Promissory Notes and Arbitration:

• Promissory notes based on wagering contracts are void as they lack consideration.
• Arbitration awards arising from wagering contracts are also void, and suits to set aside such awards are permissible.

11. Suit to Recover Deposit:

• The winner of a wager cannot recover deposits made by the loser. However, the loser can reclaim the deposit before it is paid to the winner.
• Under the Bombay Act III of 1865, even losers cannot recover deposits.

12. Lottery:

• A cross-word puzzle awarding prizes based on a predetermined solution is considered a lottery due to the chance element.
• A prize awarded for the best solution, which depends on skill, does not qualify as a lottery.
• Chit funds and sweepstakes are classified as lotteries and are considered wagering contracts.