Void Agreements in Business Law

At the very outset, it may be borne in mind that the law declares these agreements void ab-initio and  not illegal, and  therefore transactions collateral to such agreements are not made void. In fact it is for this reason that  these agreements

have not been discussed in the preceding chapter. Illegal agreements are also ‘unlawful agreements’ as they are expressly declared void by the Contract Act. It may be recalled that in the case of illegal agreements, transactions collateral to them are also tainted with illegality and hence void.

1.     Agreements in Restraint of Marriage

Every individual enjoys the freedom to marry and so according to Section 26 of the Contract Act “every agreement in restraint of the marriage of any person, other than a minor, is void.” The restraint may be general or partial but the agreement is void, and therefore, an agreement agreeing not to marry at all, or a certain person, or a class of persons, or for a fixed period, is void. However, an agreement restraining the marriage of a minor is valid under the Section.

It is interesting to note that a promise to marry a particular person does not imply any restraint of marriage, and is, therefore, a valid contract.

Illustrations

(a)            Agrees with B for good consideration that he will not marry C. It is a void agreement.

(b)     A agrees with B that she will marry him only. It is a valid contract of marriage.

2.     Agreements in Restraint of Trade

The Constitution of India guarantees the freedom of trade and commerce to every citizen and therefore Section27 declares “every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void,” Thus no person is at liberty to deprive himself of the fruit of his labour, skill or talent, by any contracts that he enters into.

It is to be noted that whether restraint is reasonable or not, if it is in the nature of restraint of trade, the agreement is void always, subject to certain exceptions provided for statutorily.

Illustration.

An agreement whereby one of the parties agrees to close his business in consideration of the promise by the other party to pay a certain sum of money, is void, being an agreement in restraint of trade, and the amount is not recoverable, if the other party fails to pay the promised sum of money ( Madhub Chander vs Raj Kumar)

But agreements merely restraining freedom of action necessary for the carrying on of business are not void, for the law does not intend to take away the right of a trader to regulate his business according to his own discretion and choice.

Illustration

An agreement to sell all produce to a certain party, with a stipulation that the purchaser was bound to accept the whole quantity, was held valid because it aimed to promote business and did not restrain it (Mackenzie vs Striramiah). But where in a similar agreement the purchaser was free to reject the goods (i.e., was not bound to accept the whole quantity tendered) it was held that the agreement was void as being in restraint of trade (Sheikh Kalu vs Ram Saran).

Exceptions

An agreement in restraint of trade is valid in the following cases

(i)    Sale of goodwill. The seller of the ‘goodwill’ of a business can be restrained from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein, provided the restraint is reasonable in point of time and space (Exception to Sec. 27).

Illustrations

(a)       A after selling the goodwill of his business to B promises not to carry on similar business “anywhere in the world.” As the restraint is unreasonable the agreement is void.

(b)     C a seller of imitation jewellery in London sells his business to D and promises that for a period of two years he would not deal: (a) in imitation jewellery in England, (b) in real jewellery in England, and (c) in real or imitation jewellery in certain foreign countries. The first promise alone was held lawful. The other two promises, namely (b) and (c), were held void as the restraint was unreasonable in point of space and the nature of business (Goldsoll vs Goldma).

(ii)   Partners’ agreements. An agreement in restraint of trade among the partners or between any partner and the buyer of firm’s goodwill is valid if the restraint comes within any of the following cases:

(a)       An agreement among the partners that a partner shall not carry on any business other than that of the firm while he is a partner .

(b)     An agreement by a partner with his other partners that. on retiring from the partnership he will not carry on any business similar to that of the firm within a specified period or within specified local limits, provided the restrictions imposed are reasonable [Section 36(2) of the Partnership Act}.

(c)                 An agreement among the partners, upon or in anticipation of the dissolution of the term, that some or all of them will not carry on a business similar to that of the firm within a specified period or within specified local limits, provided the restrictions imposed are reasonable (Section 54 of the Partnership Act).

(d)     An agreement between any partner and the buyer of the firms that such partner will not carry on any business similar to that of the firm within a specified period or within specified local limits, provided the restrictions imposed are reasonable [Section 55(3) of the Partnership , Act.]

(iii) Trade combinations. As pointed out earlier, an agreement, the Ii primary object of which is to regulate business and not to restrain it, is valid. Thus, an agreement in the nature of a business combination between traders or

manufacturers e.g., not to sell their goods below a certain price, to pool profits or output and to divide the same in an agreed proportion, does not amount to a restart of trade and IS perfectly valid (Fraser & Co. v Bombay Ice Company5). Similarly, an agreement amongst the traders of a, particular locality with the object of keeping the trade in their own hands is not void merely because it hurts a rival in trade (Bhola Nath vs Lachmi Narain). But if an agreement attempts to create a monopoly, it would be void (Kameshwar Singh vs Yasin Khan). Agreements tending to create monopolies are now also governed by the provisions of the Monopolies and Restrictive Trade Practices Act, 1969, which forbids certain types of trade agreements.

(iv) Negative stipulations in service agreements. An agreement of service by which a person binds himself during the term of the agreement, not to take service with anyone else, is not in restraint of lawful profession and is valid. Thus a chartered accountant employed in a company may be debarred from private practice or from serving elsewhere during the con-tinuance of service (Maganlal vs Ambica Mills Ltd. 8) But an agreement of service which seeks to restrict the freedom of occupation for some period, after the termination of service, is void. Thus, where S, who was an employ-ee of Brahmputra Tea Co. Assam, agreed not to employ himself or to” change himself in any similar business within 40 miles from Assam, for a period of five years from the date of the termination of his service, it was held that the agreement is in restraint of lawful profession and hence void (Brahamputra Tea Co. vs Scarth).

3.    Agreements in Restraint of Legal Proceedings

Section 28, as amended by the Indian Contract (Amendment) Act, 1996, declares the following three kinds of agreements void:

(a)       An agreement by which a party is restricted absolutely nom taking usual legal proceedings, in respect of any rights arising Item a contract.

(b)     An agreement which limits the time within which one may enforce his contract rights, without regard to the time allowed by the Limitation Act.

(c)                 An agreement ‘which provides for forfeiture of any rights arising from a contract, if suit is not brought within a specified period, without regard to the time allowed by the Limitation Act.

Restriction on Legal proceedings. As stated above Section 28 renders every agreement in restraint of legal proceedings void. This is in furtherance of what we studied under the definition of a ‘contract’, namely, agreement plus ‘enforceability at law is a contract. Thus if an agreement inter-alia provides that no party shall ‘-go to a court of law, in case of breach, there is no contract and the agreement is void ab-initio. In this connection the following points must also be borne in mind:

(a)   The Section applies only to rights arising from a contract. It does not apply to cases1o of civil or criminal wrongs or torts.

(b)     This Section does not affect the law relating to arbitration e.g., if the parties agree to refer to arbitration any dispute which may arise between them under the contract, such a contract is valid (Exceptions 1 and 2 to Section 28).

(c)                 The Section does not affect an agreement whereby parties agree “not to file an appeal” in a higher court. Thus where it was agreed that neither party shall appeal against the trial court’s decision, the agreement was held valid, for, Section 28 applies only to absolute restriction on taking the legal proceedings, whereas here the restriction is only partial as the parties can go to a court of law alright and the only restriction is that the losing party cannot file an appeal (Kedar Nath vs Ramlal).

(d)     Lastly, this Section does not prevent the parties to a contract from selecting one of the two courts which are equally competent to try the suit. Thus in A. Milton & Co. vs qjha Automobile Engineering Company’s Casel2, there was an agreement which inter-alia provided “Any litigation arising out of this agreement shall be settled in. the High Court of Judicature at Calcutta, and in no other court whatsoever.” The defendants filed a suit in Agra whereas the plaintiff brought a suit in Calcutta. It was held that the agreement was binding between the parties and it was not open to the defendants to proceed with their suit in Agra.

Curtailing the period of limitation. Any agreement curtailing the period of limitation prescribed by the Limitation Act is also void under .section 28. Thus, if a clause in an agreement between A and B provides that either party can sue for breach within a year of breach only, the clause is void and despite the clause the parties have a right to sue in case of breach Such cases come under “Agreements Stifling Prosecutions” which have been discussed in the preceding chapter.by either party within the time allowed by the Limitation Act i. e.. within three’ years from the date of breach. It is relevant to state that agreements extend tile period of limitation prescribed by the Limitation Act are also void, not under this Section but under Section 23, as the object will be to defeat the provisions of the law (Rama Murthy vs Gopayya).

Forfeiture of contract rights. Under Clause (c) of Section 28 (stated above) an agreement which provides for forfeiture of any rights arising from a contract, if suit is not brought within a specified time (say 3 months) is also void. This Clause was’ inserted by the Indian Contract (Amendment) Act, 1996.

The distinction between Clause (b) and Clause (c) of Section 28 (stated above) may be noted. Under Clause (b), the agreement limits the time within

which one may enforce his contract rights thereby curtailing the. period of limitation prescribed by the Limitation Act, whereas under Clause (c), the agreement limits the time within which one is to have any contract tights to enforce. Thus, Clause (c) refers to an agreement which does not affect the remedy for breach but which extinguishes the right itself after the specified time and such a stipulation has also been declared void.

The background behind the passing of the Indian Contract (Amend-ment) Act, 1996 may be briefly stated as follows. Prior to this Amendment Act, the insurance policy documents issued

by general insurance companies invariably provided that if a claim is rejected and a suit is not tiled within three months after such rejection, all benefits under the policy shall be forfeited. Such a provision was held valid and binding on the ground that it is outside the scope of Section 28 (Baroda Spinning Co. Ltd. vs Satya-narayan Marine & Fire Insurance Co. Ltd. 14). The learned judge observed: “what the plaintiff was forbidden to do was to limit the time within which he was to enforce his rights; what he has done is to limit the time within which he is to have any rights to enforce; and that appears to me to be a very different thing”. However, the Supreme Court in the Food Corporation of India vs New India insurance Co. Ltd. (1994) .Case held that insurance contracts restraining the time period within which one is to have any con-tract rights to enforce were violative of the Limitation Act. The Parliament

has therefore amended Section 28 by inserting a new clause. Accordingly henceforth general insurance companies cannot insist that suits for claims be brought within a period of time smal1er than the period provided under the Limitation Act, otherwise all benefits under the policy shall be forfeited.

 Essentials of a Contract

 Methods of discharging a contract by mutual agreement.

 Distinguish between Contingent Contracts and Wagering Contracts

 What is void agreement?

 Void Agreements in Business Law

 Exceptions to Void Agreements

 What is Contract?

 What is Quasi Contract? What are the different types of Quasi Contracts.

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