By Asok Nadhani
6.1 Void Agreements
An agreement not
enforceable by law is said to be void Contract Act specifies following agreements as void : An agreement
not enforceable by law is said to be void (sec.2(g)). The Contract Act specifies following agreements as
void and unenforceable by law. Such an agreement does not give rise to any
legal obligation and is void ab initio.
a. Agreements by incompetent parties (Sec.
11). [refer to chapter. 4]
b. Agreements made under a mutual mistake of
fact (Sec. 20). [refer to chapter. 5]
c. Agreements the consideration or object of
which is unlawful (Sec. 23).
d. Agreements the consideration or object of
which is unlawful in part (Sec. 24).
e. Agreements made without consideration (Sec.
25). [refer to chapter. 3]
f. Agreements in restraint of marriage (Sec. 26).
g. Agreements in restraint of trade (Sec. 27).
h. Agreements in restraint of legal
proceedings (Sec. 28).
i. Agreements the meaning of which is
uncertain (Sec. 29). [refer to chapter 1]
j. Agreements by way of wager (Sec. 30).
k. Contingent agreements becoming impossible
(Sec. 36).
l. Agreements to do impossible acts (Sec. 56).
[refer to chapter 8]
m. Reciprocal promises involving part legal and
part illegal acts (Sec. 57).
Some of these have been discussed in
earlier chapters (ch 3, 4 & 5).The rest of them are discussed now.
6.2 Contracts becoming Void
The following types of contracts, initially
valid, but become void and not enforceable:
i. A voidable contract becomes void when the
party whose consent is not free, repudiates the contract.
Ex. A, by misrepresenting certain facts to B, enters into a
contract with B. B on becoming aware of the misrepresentation,
repudiates the contract. On such repudiation by B, the contract becomes void.
ii. A contract becomes void by supervening
impossibility or illegality (Sec. 56).
Ex. A contracts to take in cargo for B at a foreign port. A
war breaks out against the foreign country. The contract becomes void when war
is declared.
iii. A contingent contract turning impossible to
happen (Sec. 32).
Ex. A contracts to
pay B a sum of money when B marries C. C dies unmarried. The
contract becomes void.
6.2.1
Restitution (sec. 65)
When
a contract becomes void, the party who has received any benefit under it must
restore it to the other party or must compensate the other party by the value
of the benefit. This restoration of the benefit is called Restitution. It is based on the principle that a person
getting unjustly benefited at the expense of another should make it to the
other. It is thus not based on loss suffered by the plaintiff but on the unjust
benefit one has enjoyed at the cost of the other.
In
contracts with parties incompetent to contract (like minor, person of unsound
mind), the Court may, on
equitable grounds, order for the restoration of the benefit by the minor where
he has misrepresented his age.
Ex. A pays B Rs.1,000
in consideration of B’s promise to marry C, A's daughter. C is dead. The
agreement is void but B must repay A Rs.1,000.
Ex. A, a singer, contracts with B,
the manager of a theatre, to sing at his theatre for two nights in every
weekend during the next two months, and B agrees to pay her Rs.1,000 for
each night's performance. After singing for 5 nights, on the sixth night, A
wilfully absents herself from the theatre. So, B rescinds the contract.
He must pay A for the five nights on which she had sung.
Ex. A contracts to
sing for B at a concert for Rs.1,000 which are paid in advance. A is too
ill to sing. B asks A for refund of
money and the loss suffered. A is not
bound to make compensation to B for the loss of the profit but must
refund to B Rs.1,000 paid in advance.
6.2.2
Difference between Void Agreement
and Void Contract
Void Agreement
|
Void Contract
|
1.
An agreement not enforceable by law is void
agreement.
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1.
A contract when ceases to be enforceable by law
is said to be void contract.
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2.
At the time of formation of the valid agreement
all the essentials of the contract are not satisfied resulting in nullity
from the very beginning.
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2.
At the time of formation of a contract all the
essentials of the contract are satisfied which subsequently becomes void.
Thus at the time of formation it is a valid contract.
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3.
Restitution is allowed in case of expressly
declared void agreements.
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3.
Restitution is not allowed in case of a void
contract.
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4.
A void agreement does not create any legal
obligations between the parties from the very beginning.
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4.
When the legal obligation created under a
contract come to an end subsequent to formation of the contract, the contract
becomes void.
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6.3 Voidable Contract
i.
Definition
of voidable contract: An
agreement which is enforceable by law at the option of one or more of the
parties thereto, but not at the option of the other or others, is a voidable
contract.
ii. Reason behind voidable contract: A contract becomes a voidable contract if
the consent of a party was not free (i.e., the consent was obtained by
coercion, undue influence, fraud or misrepresentation).
iii. Right to rescind a voidable contract:
a. The party whose consent was not free (i.e.,
the aggrieved party) has the right to rescind the voidable contract, within
a reasonable time.
b. Alternatively, the aggrieved party may sue
the other for performance of the contract. Until a voidable contract is
rescinded, it remains valid and enforceable.
iv. Loss of right of recession: The right to rescind a voidable contract is
lost in the following cases:
a. Where the aggrieved party affirms the
contract.
b. Where the aggrieved party does not, within
reasonable time, exercises its right to avoid the contract.
c.
Where
a third party, acting in good faith, acquires rights in the subject matter of the
contract.
d.
If
the aggrieved party is not in a position to restore the benefits that he had
obtained under the voidable contract.
v.
Communication
of Rescission: The rescission of voidable contract can be communicated in same manner as
revocation. (s.66)
6.3.1
Difference between Void and Voidable Contract
Void
Contract
|
Voidable Contract
|
1.
A contract when ceases to be enforceable by law
is said to be void contract.
|
1.
It may be repudiated at the will of
one or more of the parties but not at the will of the other side.
|
2.
It is valid at the time of making but
subsequently it becomes unenforceable due to some defect.
|
2.
It is voidable at the option of the
aggrieved party and remains valid till rescinded by him.
|
3.
It does not provide any legal remedy
for the parties to the contract.
|
3.
Aggrieved party can rescind the
contract and the contract becomes void, otherwise the contract remains valid.
|
4.
A
void contract does not grant any right to any party.
|
4.
Under
a voidable contract, the party whose consent was not free has the right to
rescind the contract.
|
5.
A
void contract cannot be performed. No party can sue the other party for
performance of a void contract.
|
5.
If
the aggrieved party does not, within reasonable time, exercise its right to
avoid the contract, the voidable contract becomes enforceable. In such case,
any party can sue the other for performance of the contract.
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6.
A
contract becomes void due to change in law or change in circumstances.
|
6.
A
contract becomes a voidable if the consent of a party was not free (i.e., the
consent was obtained by coercion, undue influence, fraud or
misrepresentation).
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7.
All
the essentials of the contract are satisfied at the time of formation of a
contract, which subsequently becomes void.
|
7.
The
consent of a party is not free in case of a voidable contract. All essentials
of a contract are also not satisfied at the time of formation of a voidable
contract.
|
8.
No
damages are awarded to any party for non-performance of a void contract
(since it is impossible to perform it).
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8.
A
party whose consent was not free may rescind the voidable contract, and may
claim damages also (in cerain cases).
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6.4 Unlawful Object & Consideration
(sec. 23)
i) The Object and Consideration of a contract
must be lawful. The Object means the purpose of the contract. A contract with
unlawful object is void even if the consideration is lawful.
Ex. A let a maruti car to B a terrorist, knowing that it would
be used for immoral purposes. The agreement is void due to unlawful object even
the consideration is lawful.
ii)
The
following are some instances where the object or consideration of a contract is
considered unlawful:
a. Forbidden
by Law : An act forbidden by law is punishable under
criminal law or prohibited by special legislation or regulations.
Ex. A promises B to drop a prosecution against B for
robbery, B having promised to get back the articles robbed. The
agreement is void as its object is unlawful.
Ex. A promises B to
get B employment in Railways and B promises to pay Rs.1,000 to A.
The agreement is void, as the consideration for it is unlawful.
b. Defeats
any Law : The agreement is void if the object or the
consideration, though not directly forbidden by law, would defeat the
provisions of any law.
Ex. A, an employer, engaged B, an employee at monthly salary of
Rs.15,000. But to evade Income Tax, both A & B agreed that A would pay only
10,000 as salary and Rs.5,000 as office expenses The agreement is unlawful
because though everything is legal in the eye of law, it would defeat the
purpose of taxation.
Ex. A was running a
licensed liquor shop. The law forbids to sale, transfer, sub-lease the license,
or creation of a partnership to run the shop. A took B into partnership.
The agreement is void.
Ex. A leased B a flat
at a rent of Rs.1,200 a year. To avoid municipal taxes, agreement was drawn as
Rs.450 as Rent and Rs.750 as maintenance expenses. The agreement is void.
Ex. An agreement by a debtor not to raise
the plea of limitation is void.
c. Fraudulent
: An agreement made for a
fraudulent purpose is void.
Ex. A, B and C enter into an agreement for the division
among them of profits gained from a fraudulent act. The agreement is void.
d. Injury
: Any contract resulting
into personal injury or of property is void. Here, 'Injury' means ‘wrong',
'harm', or 'damage', 'Person' means
one's body, Property means movable or immovable property.
Ex. B borrowed Rs.100 from L and executed a bond
promising to work for L without pay for a period of two years. In case of
default, B was to pay Interest (at a very exorbitant rate) and the
principal sum at once. Held, the contract was void as it involved Injury
to the person of B.
Ex. An agreement between proprietor & printers of a
newspaper to indemnify them against any charge arising from libels printed in
the newspaper was held to be void.
e. Immoral
: An agreement, the
consideration or object of which is immoral, is void.
Ex. A married woman was given money to
enable her to obtain divorce from her husband and then to marry the lender.
Held, the agreement was immoral and the lender could not recover the money.
Ex. A agrees
with B to let her daughter to live with B as B’s wife without marrying
B. The agreement is unlawful, being immoral.
Ex. Agreements for
immediate separation between a husband and wife, in view to preserve peace and
reputation of families, are enforceable. Similarly agreements in respect of
past separation are also valid.
Ex. A lends money to B to help prostitution. After some period,
A asks for return of money. Held the contract is illegal and A cannot recover
the money.
Ex. A firm hired out
a carriage to a prostitute, knowing that it was to be used for immoral
practice. Held, A could not recover the hire charges as the agreement
was unlawful.
f. Opposed
to Public Policy : Agreements
which tend to be mischievous and injurious to the interest of public, or which
are against public goods or welfare are considered to be opposed to public
policy and are void.
Ex. The consideration under a sale deed was for marriage
expenses of a minor girl aged 12. Held, that the sale was a void transaction
opposed to public policy.
6.4.1 Agreements opposed to Public Policy
a. Agreements which tend to be mischievous and
injurious to the interest of Public, or which are against public good or
welfare are considered to be opposed to public policy.
b. Following are some examples of agreements,
considered to be opposed to public policy :
i. Trading with enemy.
Ex. A had a contract to supply 10 tons of iron ore to B of another
country, during the war between the country. Such contract is void and opposed
to public policy.
ii. Commit a crime.
Ex. D promises to indemnify E in consideration of his beating C. The
agreement is opposed to public policy.
iii. Interference in administration of Justice
like interference in course of justice, stifling prosecution, Maintenance &
Champerty etc.
iii.Maintenance & Champerty : Maintenance
or Champerty are agreements to instigate or stir up litigation with malafide
intention :
a. Maintenance : To assist another to defend
legal proceedings when he has no interest of his own in the subject matter.
Ex. Y owes some amount to X, X said to Y
that he(X) will discharge Y’s liability if Y sues Z. Here the intension of X is
to harass Z. This agreement between X and Y (called Maintenance Agreement) is considered to be opposed to public policy
and so is void.
b. Champerty : To assist to recover money or
property and share into its proceeds.
Ex. A filed a suit against B to recover his
house which he mortgaged earlier. C helped A in the case, as both C and A made
an agreement that C will be allowed a share in the recovered house. This
agreement between A and C (called a Champerty
Agreement) is considered to be opposed to public policy and so is void.
iv. Trafficking in public offices and titles,
like agreements for the sale or transfer of public offices and titles,
procurement of a public recognition like Padma Vibhushan or Param Veer Chakra
for monetary consideration etc.
Ex. A promised to obtain an employment to B in a public
office and B promised to pay A Rs.1,000.
Held, the agreement was against public policy and illegal.
Ex. R paid a sum of Rs.15,000 to A who agreed to
obtain a seat for R’s son in a Medical College
v. Agreements to influence elections in public
offices: An agreement with voters to procure their votes for monetary
consideration is void being opposed to public policy.
vi. Agreements to create interest opposed to duty.
Ex. P directs A, his
agent, to buy a certain house for him. A tells P that it cannot be bought and
buys the house for himself. P may, on discovering that A has bought the house,
compel A to sell it to him (P) at the price A gave for it.
Ex. An agreement by a newspaper proprietor not to comment on
the conduct of a particular person is unlawful being opposed to public policy.
vii. Agreements in restraint of parental rights:
Agreement by guardian of a minor, inconsistent with his parental
responsibilities.
viii. Agreements restricting personal liberty: Agreements
which unduly restrict the personal freedom of the parties.
Ex. A borrower agreed with his money-lender that, without the
lender's written consent, he would not leave his job, or borrow money, or
dispose of his property, or change his residence. Held, the agreement
was void.
ix. Marriage Brokerage Agreements: An agreement
to procure the marriage of another for monetary consideration is void. Also, an
agreement to pay money to the parent or guardian of a minor in consideration of
his/her consenting to give the minor in marriage is void.
Ex. K agreed to pay S a sum of Rs.1,00,000 in consideration of
his (S’s) giving daughter in marriage. Held, such a promise amounted to a
marriage brokerage contract and was void.
x. Agreements interfering with marital duties:
Any agreement interfering with marital duties is void.
Ex. A, a married person, promised to marry B during the
lifetime or after the death of his spouse. This is void.
Ex. An agreement that husband and wife will always stay at the
wife's parents' house is void.
xi. Agreements to defraud creditors or revenue
authorities, like giving allowance in excess of expense to reduce basic salary
to lower income tax liability is void.
xii. Agreements in restraint of trade (Sec.27):
An agreement which interferes with the liberty of a person to engage himself in
any lawful trade, profession or vocation is void.
Ex. A, carrying on business of cookware, promised B, another person in similar trade in the same
locality, to stop his business in consideration of B giving him a
certain amount. B, subsequent to A’s closing the business, refused to
pay. A filed a suit for the recovery of the amount. Held, the agreement
was void.
xiii. Agreements in restraint of legal
proceedings: If a party to an agreement is restricted absolutely from enforcing
his rights or in respect of any contract, by legal proceeding in ordinary
tribunals, or it limits the time within which he may thus enforce his rights,
is void.
xiv. Agreements to deprive the jurisdiction of
Courts: An agreement to deprive the courts of their jurisdiction is opposed to
public policy.
xv. Agreements changing periods of limitation:
Agreements curtailing or extending the periods of limitation prescribed by the
Law subjected to defeat the provisions of the law are void.
6.5 Agreements in restraint of Marriage
(Sec. 26)
As per sec. 26, every agreement in
restraint of the marriage of any person, other than a minor, is void.
Marriage is the fundamental right of every
person. Therefore, an agreement in restraint of this fundamental right of a
person is opposed to public policy and void. It is immaterial as to whether the
restrain is for life or for a specified period.
Ex. P promised to
marry L only and none else and to pay Rs.2,000 if he married someone
else, P married X. Held, L could not recover the sum agreed.
Ex. X, agreed to marry Y and none else. He
further agreed to pay Rs.1,000 to Y, if he married someone else. But X married
Z. Y brought an action against X for the recovery of the agreed sum. The
agreement is void as it was in restraint of marriage and Y could not recover
the amount.
6.6
Trade or Service Agreements (Sec. 27)
Though normally agreements or services in
restraint of Trade are void, following types of agreements, though restraint of
trade or service are not considered void:
i.
Sale
ii.
Partners' Agreements: Certain types of agreement by an existing
or outgoing partner, as allowed under Indian Partnership Act, are held to be
valid.
Ex. A outgoing partner’s agreement not to
carry on a business similar to that of the firm within specified local limits,
solicit customers or persons who were dealing with the firm before his exit,
within a specified period, etc. are valid.
Ex. A Partner’s agreement not to carry on any business other
than that of the firm while he is partner is valid.
iii.
Trade Body Regulations:
a. Trade bodies normally form associations to
regulate business or to fix prices are not unlawful even if they are in
restraint of trade, provided that they are not opposed to public policy.
Ex. Members of a consumer society decided to regulate supply
and maintain price, of the goods consumed by the society. It is not necessarily
opposed to public policy and hence valid.
Ex. An agreement among the members of an agricultural society
to deliver all produce grown by the society members to the society and divide
the profit among the members was held to be valid.
Ex. An agreement between manufacture not to sell certain
products below a stated price and to divide the profits in a certain proportion
is not void.
b. However, an agreement with an intention to
create monopoly is held to be opposed to public policy and not valid.
iv.
Service Contracts: Certain Agreements with restrictions on
employment or service (like taking up employment with competitor) are valid.
Ex. An agreement with an employee not to take up any other
engagement during his employment is valid.
Ex. Agreements restraining Doctors in hospital cannot to do
private practice is valid.
Ex. Agreement not to take up similar engagement by the leaving
employee, after termination of his services is void.
Ex. Agreement restraining an employee
applying or making use of trade secrets acquired by him in the course of his
employment, is valid provided it is not for any other purpose.
6.7 Agreements in restraint of Legal Proceedings
(Section 28)
i.
Agreement
restricting enforcement of rights is void in following cases:
§ Restricts absolutely, any party, from enforcing his rights in
respect of any contract, by usual legal proceedings in the Ordinary Tribunals.
§ Limits the time within which he may enforce his rights by
way of legal proceedings in the Ordinary Tribunals.
§ Extinguishes the rights of any party thereto.
§ Discharges any party thereto from liability, in respect of any
contract on the expiry of a specified period so as to restrict any party from
enforcing his rights.
ii.
However,
an agreement is not void merely because it provides that any dispute that has
arisen or may arise shall be referred to arbitration.
Ex. An agreement purporting to oust the jurisdiction of
Courts is contrary to public policy. But an agreement between two or more
parties to refer to arbitration any disputes which have arisen or which may
arise between them is perfectly valid.
Ex. The rules of a crossword competition of a weekly published
by X Ltd. that (1) in matters arising in the competition, the editor's decision
shall be final and legally binding on the competitors (2) that at the
expiration of three months from the publication of the prize list, X
Ltd. shall not be liable to pay any claim unless a suit for it is then pending.
Held, Rule
No. 1 restricts persons from enforcing their rights through Court of law. Rule
No. 2 limits the time to a period shorter than the period prescribed by the Law
of Limitation. Hence, the rules are not enforceable.
6.8 Wagering Agreements (Sec. 30)
A wager is an agreement between two parties by which
one promises to pay money or money's worth on the happening of some uncertain
event in consideration of the other party's promise to pay if the event does
not happen.
Ex. A and B enter
into an agreement that A shall pay B Rs.100 if it rains on next Monday,
otherwise B shall pay A the same amount, is a wagering agreement. So, it
is void.
Ex. In a wrestling
bout, A and B bet with
each other over the result of the bout. This is a wagering agreement.
Ex. An agreement
for transaction only to share gain / loss, for the difference between the
contract and market price of certain goods on a specified day, without any
intention to take delivery is a wagering transaction. Hence it is void.
Ex. In a
commercial transaction, where the intention is not to deliver the goods but only
to pay the difference in price, is wager.
6.8.1 Essential elements of a Wagering
Agreement
i.
Promise to pay money or money's worth. The wagering agreement must contain a
promise to pay money or money's worth.
ii.
Uncertainty. The promise must be conditional on happening or not
happening of an uncertain event. The event normally is yet to happen, but it
may also relate to a past event provided the parties are not aware of its
result or the time of its happening.
iii.
Each party must stand to win or lose. On determination of the happening of the
event, each party should stand to win or lose. An agreement is not a wager if
either of the parties may win but cannot lose or may lose but cannot win.
iv.
No control over the event. Neither party should have any control over
the happening of the event in any way. If one of the parties has the event in
his own hands, the contract is not in nature of wager.
v.
No other interest in the event. Neither party should have any interest in
the happening or non-happening of the event except the stake to win or lose. If
the party to whom money is promised on the occurrence of an event has an
'interest’ in its non-occurrence, it is not in nature of a wager. That is why
insurance contract is not a wagering agreement.
6.8.2 Transactions not amounting to Wager
The following type of transactions, though
depending on uncertain events are not wager:
i.
Competition
involving skill: A competition or game involving skill and not merely dependent
on chance, is not wager.
Ex. A crossword
competition involving a good measure of skill for its successful solution is
not wager. But if prizes of a crossword competition depend upon matching with a
previously prepared solution is a lottery and hence a wagering transaction.
Ex. Prize competitions in games of skill are not wagers
(provided the amount of prize does not exceed Rs.1,000).
ii.
Games
of skill, e.g., picture puzzles or athletics competitions where prize money
does not exceed Rs.1000.
Ex. Two wrestlers agreed to enter into a wrestling contest on
the condition that the party failing to appear on the day fixed was to forfeit
Rs.500 and the winner was to be rewarded Rs.1,125 out of the sale proceeds of
tickets. Held, it was not wagering agreement.
iii.
A
subscription or contribution or agreement to subscribe or contribute toward any
prize (a cup or other prize for a race or other contest), or sum of money of
the value of Rs.500 or above to be awarded to the winner or winners of a horse race
(Exception to Sec. 30).
iv.
Share
market transactions in which delivery of stocks and shares is intended to be
given and taken.
v.
A
contract of Insurance.
6.8.3 Effects of Wagering Agreements
i.
Wagering
agreements have been expressly declared to be void in India Maharashtra Gujarat they are declared illegal. No suit
can be brought for recovering anything on any wager, or entrusted to any person
to abide by the result of any event on which any wager is made (Sec. 30).
ii.
The
following examples explain the effect of various types of wagering contracts:
a. Promissory
Note: A promissory note
was executed for payment of indebtedness arising out of wagering transactions
in shares. Held, that the promissory note was not enforceable.
b. Recovery
Suit: Money deposited with a person (called
stakeholder) to be paid to the party winning upon a wager cannot be recovered
by the winner. On the other hand, the loser can recover his deposit from the
stakeholder. But where the stakeholder pays the money to the winner, the loser
cannot recover it from him.
c. Principal
and Agent: Principal
cannot enforce in a wagering contract:
i.
An
agent cannot recover from the principal any money paid on a wagering agreement
entered into on behalf of his principal.
ii.
Where
the agent fails to carry out his instructions in respect of a wagering
transaction, the principal cannot sue him for breach of the contract of agency.
iii.
He
cannot resist the principal's claim on the ground that he received money in
respect of a void transaction.
d. Collateral
Transactions: As the
wagering agreements are void, transactions collateral to them are not affected.
However, in the States of Maharashtra and Gujarat ,
the wagering agreements have been declared to be Illegal. So, the collateral
transactions to such wagering agreements in the States of Maharashtra and Gujarat become tainted with Illegality. In the rest of India
6.8.4 Lotteries
i.
A
Lottery, being a game of chance, is a Wagering Agreement. An agreement to buy a
ticket for a lottery is also a Wagering Agreement. Since lottery is illegal, collateral
transactions are also tainted with illegality. Any place or office maintained
for the purpose of drawing a lottery (other than a Government authorised) shall
be unauthorized and illegal and will be liable for imprisonment upto 6 months
or fine.
Ex. A lottery, which is a game of chance, is a wagering
agreement. An agreement to buy a ticket for a lottery is also a wagering
agreement. If the lottery is authorised by the Government, the persons
conducting the lottery will not be punished, but the lottery remains a wager
all the same.
ii.
The
rights confer on a purchaser of a lottery ticket:
-
A
right to participate in a draw.
-
A
right to claim a prize contingent upon his being successful in the draw.
6.8.5 Distinction between Insurance and
Wagering Agreements
The contracts of insurance also rely on
uncertain event on which either of the party has no control, and so appear to
be wagering agreements, but they are really transactions of a different nature:
a. In insurance, the assured has an insurable
interest in the subject-matter. In a wagering agreement there is no such
interest.
b.
In
insurance, both the parties are interested in the protection of the
subject-matter whereas in a wagering agreement it is only one of the parties
who is interested in its protection.
c.
A
contract of insurance, except life insurance, is a contract of indemnity. In a
wagering agreement, the amount is fixed.
d.
Contracts
of insurance are beneficial to the public whereas wagering agreements do not
serve such useful purpose.
e.
A
contract of insurance is based on scientific and actuarial calculation of
risks. A wagering agreement is just a gamble.
6.9 Contingent
Contracts (Sec. 31)
A
contingent contract is a contract to do or abstain from doing
something, if some event, collateral to such contract, does or
does not happen (e.g. goods are sent on approval, the contract is a
contingent contract depending on the act of the buyer to accept or reject the
goods on inspection of sample).
Ex. A agrees to sell
a certain piece of land to B, in case he succeeds in his litigation
concerning that land. This is a contingent contract.
Ex. X contracts to cover Y against the
consequences of any proceedings which Z may take against Y in respect of a
certain sum of 2000 rupees. This is a contingent
contract.
6.9.1 Elements
of a Contingent Contract
The following
are the essential elements of a contingent contract:
i.
Its performance depends upon the happening
or non-happening of some event in future.
ii.
The event must be uncertain. If
the event is bound to happen and so the contract is certain to be performed, it
is not a contingent contract.
iii.
The event must be collateral to & incidental to the
contract. Contracts of insurance, indemnity and guarantee are instances of a
contingent contract.
Ex. A
in Bombay, made contract for sale of some items to be imported from Taiwan to B,
on condition that the goods would be delivered only on arrival. The goods did
not arrive and A failed to give delivery. B sued for damages for
breach. Held, the contract was
absolute and the obligation of A was not contingent upon the arrival of
the goods, so A was liable to pay damages.
6.9.2
Rules regarding Contingent Contracts
i.
Contingent contracts dependent on the
happening of an uncertain future event cannot be enforced until the event has
happened. If the event becomes impossible, such contracts become void
(Sec. 32).
Ex. A contracts to pay B a sum of money when B marries
C. C dies unmarried. The contract becomes void.
Ex. A makes a
contract with B to sell a horse to B at a specified price, if C,
to whom the horse has been offered earlier, refuses to buy it. The contract
cannot be enforced by law unless and until C refuses to buy the horse.
ii.
Where a contingent contract is to be
performed if a particular event does not happen, its performance can be
enforced when the happening of that event becomes impossible (Sec. 33).
Ex. 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.
Ex. A agrees to sell his car to B after C dies. The contract cannot be enforced so long as C
is alive.
iii.
If a contract is contingent upon how a
person will act at an unspecified time, the event shall be considered to become
impossible when such person does anything which renders it impossible to act
within definite time, or otherwise than under further contingencies (Sec. 34).
Ex. A agreed to take shares in a company if
the company would appoint him its sole agent at a certain place. The company
went into liquidation before appointing him agent and A was entered on
the list of contributories. Held, A was not liable as the contract to
take shares was contingent on his appointment as agent which event never took
place.
Ex. A agrees to pay B
a sum of money if B marries C. C marries D. The marriage of B
to C must now be considered impossible, although it is possible that
D may die and that C may afterwards marry B, and so the contract becomes void.
iv.
Contingent contracts to do (or not to
do) something on happening of an uncertain event within a fixed time, become void
if the event does not happen or its happening becomes impossible before the
expiry of that time.
Contingent
contracts to do or not to do something
on non –happening of an uncertain event within a fixed time, may be
enforced if the event does not happen or its user happening
becomes impossible before the expiry of that time (Sec. 35).
Ex. A promises to pay B a sum of money if a certain ship
does not return within a year. The contract may be enforced if the ship does
not return within the year or the ship sinks within a year.
v. Contingent
agreements to do or not do something, on happening an impossible event, are
void, whether or not the fact is known to the parties (Sec. 36).
Ex. A agrees
to pay B Rs.1,000 if B will marry A's daughter, C. C was
dead at the time of the agreement. The agreement is void.
Ex. A agrees
to pay B Rs.1,000 if two straight lines should enclose a space. The
agreement is void.
6.9.3
Difference between Wager and Contingent Contract
i.
A wagering agreement consists of
reciprocal promises whereas a contingent contract may not contain reciprocal
promises.
ii.
A wagering agreement is essentially of
a contingent nature whereas a contingent contract may not be of a wagering
nature.
iii.
A wagering agreement is void whereas a
contingent contract is valid.
iv.
In a wagering agreement, the parties
have no other interest in the subject matter of the agreement except the
winning or losing of the amount of the wager. Thus, a wagering agreement is a
game of chance, but a contingent contract is not so.
v.
In a wagering agreement, the future
event is the sole determining factor while in a contingent contract the future
event is only collateral.
vi.
A wagering agreement is a promise to pay money or money's worth on
the happening of some uncertain event in consideration of the other party's
promise to pay if the event does not happen.
Whereas, a
contingent contract is a contract to do
(or abstain from doing
something), if some event, collateral
to such contract, does or does not happen.
6.10 Partially Unlawful Contract
i. Partially Unlawful Object or Consideration
(Sec. 24): An Agreement is
void if-
a. any part of a single consideration (of one
or more objects) is unlawful, or
b. any one part of (having any one of several
considerations) a single object is unlawful.
ii.
Lawful
Consideration enforceable: When
there are several distinct promises made for one and the same consideration,
and one or more of them are of such nature that law will not enforce it, only
such of the promises as are unlawful cannot be enforceable. Others which are
lawful, can be enforced. (s.58)
iii.
Test
of Severability:
a. If illegal part cannot be severed from part
of a covenant, contract is altogether void.
b. If it is possible to severe them, whether
the illegality be due to Statute or Common Law, bad part alone may be rejected
and good retained.
6.10.1
Effects of Illegality
i.
The general rule of law is that no
action is allowed on an illegal agreement. This is based on the following two
maxims:
-
Ex turpi causa non oritur actio. No
action arises from a base cause. The effect of this is that the law discourages
people from entering into illegal agreements which arise from base causes.
-
In pari delicto, potior est conditio
defendentis. In cases of equal guilt, the defendant is in a better
position.
ii.
The following are the effects of the above
rules of illegality:
a. The
collateral transactions to an illegal agreement become tainted with illegality
and are treated as illegal even though they would have been lawful by
themselves.
b. No
action can be taken (a) for the recovery of money paid or property transferred
under an illegal agreement, and (b) for the breach of an illegal agreement.
Ex. A promises to pay
B Rs.500 if he beats T. If B beats T, he cannot recover the amount from A. If
A has already paid the amount and B does not beat T, A cannot recover
the amount.
c. In
cases of equal guilt in an illegal agreement, the position of the defendant is
better than that of the plaintiff. The plaintiff (e.g the Innocent party) may,
however, sue to recover money paid or property transferred:
i. Where
he is not in pari delicto (equally guilty) with the defendant, e.g., where
he was induced to enter into an agreement by fraud, undue influence or
coercion.
ii. Where
he does not have to rely on the illegal transaction.
iii. Where
a substantial part of the illegal transaction has not been carried out, and he
is truly and genuinely repentant (this way, the law encourages repentance even
in bad men).
d. Severance
of illegal contracts: Sometimes, a contract may contain several distinct
promises or promise to do several distinct acts of which some are legal and
others illegal, or a part of which is legal and a part of which is illegal. If
the illegal promise or act is severable from the legal one, the legal promise
may be enforced. If the Illegal promise or act cannot be separated from the
legal one, the whole contract is declared illegal.
e. Reciprocal
Promises (sec.57): Where persons reciprocally promise, firstly, to do
certain things which are legal, and secondly, under specified circumstances, to
do certain other things which are illegal, the first set of promises is a
contract, but the second is a void agreement.
Ex. A and B agree that A shall sell B a house for
Rs.10,000 but if B uses it as a gambling house, B shall pay A Rs.50,000
for it. The first set of reciprocal promises, namely to sell the house and pay
Rs.10,000 for it, is a contract. The second set is for an unlawful object,
namely that B may use the house as a gambling house, and is a void
agreement.
f. Alternative promise: In the case of an alternative promise, one
part of which is legal and the other illegal, the legal part alone can be
enforced.
Ex. A and B agree
that A shall pay B Rs.1,000, for which B shall afterwards deliver
to A either rice or smuggled opium. This is a valid contract to deliver rice
and a void agreement as to the opium.
g. Unlawful
Object or Consideration: If there are several objects but there is a single
consideration, the agreement is void if any one of the objects is
unlawful. Similarly, if there is a
single object but there are several considerations, the agreement is void if
any one of the considerations is unlawful.
Ex. A employs B to
supervise his business of a legal manufacture of indigo and an illegal
traffic in other articles. The agreement is void. The object and the
consideration being in part unlawful.
6.10.2
Distinction between Unlawful and Illegal Agreements
Both
Unlawful & illegal agreements are not enforceable by law. But there is a subtle
distinction between them:
i.
An unlawful Illegal agreement
is void ab initio and it affects only the immediate parties and has
no further consequences.
ii.
An illegal agreement, on the
other hand, is not only void as between immediate parties but the collateral
transactions also become tainted with illegality.
An agreement to
assault somebody is illegal. Similarly, an agreement to publish a libel is
illegal.
Ex. L lends B to purchase some
prohibited goods from T, an alien enemy. The agreement between B &
T, is illegal. Consequently, the agreement between B and L shall
also become illegal, being collateral to the main transaction which is illegal.
L cannot, therefore, recover the amount (he can recover the amount if he did
not know of the purpose of the loan).
iii.
Every illegal agreement is unlawful,
but every unlawful agreement is not necessarily illegal. An Illegal act,
involve crime of moral turpitude or contrary to public policy (e.g., an
agreement for illicit cohabitation, or an agreement to defraud the revenue or
commit a crime, or an agreement which tends to endanger the public safety).
Unlawful acts, on the other hand, involve a "non-criminal breach of
law". These are normally disapproved by law on some ground of public
policy (like agreements in restraint of trade, marriage, legal proceedings,
etc).
6.10.3 Difference between Void and Illegal Agreement
Void Agreement
|
Illegal
Agreement
|
1. It
is not forbidden under law.
|
1.
It is forbidden under law.
|
2. All
void agreements are not illegal.
|
2.
All Illegal agreements are void
ab-initio.
|
3. A
valid contract may subsequently become void.
|
3.
An illegal agreement is void from the
very beginning.
|
4. Such
agreements are not punishable.
|
4.
Illegal agreement may be punishable
with fine or imprisonment or both.
|
5. Collateral
transactions are not affected.
|
5.
Collateral transactions are
void.
|
6. An agreement not enforceable by law is a
void agreement.
|
6.
An
agreement which is forbidden by any law in force, is an illegal agreement.
|
7. An agreement may be void when it does not
satisfy one or more requirements of section 10, 29 or 56.
|
7.
An
agreement becomes an illegal agreement only if it is made against the
provisions of any law in force.
|
8. When an agreement is discovered to be
void, any person who has received any advantage under such agreement is bound
to restore it, or to make compensation for it, to the person from whom he
received it (Sec. 65).
|
8.
Any
money or property transferred under an illegal agreement cannot be recovered
by going to a Court of law.
|
For more details, refer to
Mercantile law, by Asok Nadhani, BPB Publications, www.bpbonline.com, bpbpublications@gmail.com
