Void Agreements

  • Post last modified:19 December 2021
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What is Void Agreements?

It is the essential element of a void contract that it must not have been expressly declared void by law. Any void agreement is not enforceable. Thus all agreements may not be enforceable. Only those agreements can be enforced which fulfil the essentials laid down in Section 10 of the Indian Contract Act.

This Act expressly declares certain agreements to be void. Section 2(g) of the Act says that an agreement not enforceable by law is void. Such agreements are void ab initio.

It means that void agreements are void ab initio. Therefore, they are not enforceable by law. A void agreement does not create any legal relationship between the parties. Hence it is useful to differentiate between illegal and void agreements.


Difference between Illegal and Void Agreements

These are some differences between illegal and void agreements which are given below:

S. No.Basis of DifferenceIllegal AgreementVoid Agreement
1.Forbidden by lawAn illegal or unlawful agreement is one which is actually forbidden by law.A void agreement is not forbidden by law as in the case of mirror.
2.Enforceability and forbidden by lawAn illegal agreement is both unenforceable and forbidden.A void agreement is only unenforceable but not illegal.
Difference between Illegal and Void Agreements

The difference between an illegal and void agreement is also related to its effect upon the collateral transactions. If the main transaction is forbidden by law, for example, smuggling, a collateral transaction like financial assistance given to enable a person to smuggle the diamond, will also be illegal and money provided in financial assistance will be irrecoverable.

However, if the main transaction is void, only (as in the case of a wagering agreement) its collateral transaction will remain enforceable.

Following agreements have been expressly declared as void by the Indian Contract Act:

  1. Agreement made by or with incompetent parties [Sec. 11]
  2. Agreement made under a mutual mistake of fact between the parties [Sec. 20].
  3. Agreement, the consideration or object of which is unlawful in full [Sec. 23].
  4. Agreements the consideration or object of which is unlawful in part [Sec. 24].
  5. Agreements made without consideration [Sec. 25].

All the above points have already been discussed in earlier lessons. Therefore, only the following agreements shall be discussed:

  1. Agreement in restrint of marriage {Sec. 26].
  2. Agreements in restraint of trade [Sec. 27].
  3. Agreements in restraint of legal proceedings [Sec. 28].
  4. Agreements the meaning of which is uncertain [Sec. 29].
  5. Agreements by way of wager [Sec. 30].
  6. Agreements, of impossible events [Sec. 56].

Agreements in Restraint of Marriage

According to Section 26 of the Indian Contract Act, “Every agreement in restraint of the marriage of any person, other than a minor, is void.” An agreement in restraint of the marriage of a minor cannot be void, as it is considered to be in the interest of the minor. Every person is free to marry. Anybody cannot be bound by law to marry; but an agreement restraining a person not to marry is illegal.

Any agreement restraining a person from marrying anybody or from marrying anybody except a particular person is void agreement. In the case of Lawe Vs. Peem (1768) Burr 225 X promised to marry none else except Miss Y and in default to pay her a sum of £ 2,000. X married some one else and Miss y sued for the recovery of that sum on the ground.

Court held that the agreement was in restraint of marriage and as such void. You should understand that in India any restraint of marriage whether total or partial is opposed to public policy, hence not permitted and void. In English law, however, only an absolute restraint is void.


Agreements in Restraint of Trade

According to Section 27 of the Indian Contract Act, “Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.” All agreements in restraint of trade, whether general or partial, qualified or unqualified, are void.

It is, therefore, not open to the Courts to enter into any question of reasonableness or otherwise of the restraint of trade. Courts do not allow any tendency to impose restrictions upon the freedom of a person to carry on any trade. An agreement seeking to restraint a person from exercising a lawful profession, trade or business is void to that extent.

Public policy requires that every person should have the freedom to work for himself.’ In England, all agreements were declared as void which placed any restrictions upon a man’s right to his trade or profession. But now partial restraint or a restraint confined to limited space and time is valid. Slowly new trends crept in with the rapid expansion of trade.

The test of partial restraint was given up and the test of reasonableness was substituted, In Nordenfelt Vs. Maxim Nordenfelt, etc., Co. (1893). A.C. 535, the House of Lords held that “the real test for determining the validity of agreements in restraint of trade was, whether the restraint imposed was reasonable, for good consideration, not prejudicial to the interests of the public, and no more onerous than necessary for the protection of the party imposing the restraint.”

The Indian contract Act as stated in Section 27 prevents a partial as well as a total restraint of trade. All agreements in restraint of trade whether general or partial, qualified or unqualified are void.

For example, the restraint in trade is taboo even if it is partial unless it comes within the exceptions laid down in Section 27 of the Act. An agreement to close a factory for 4 months in a year, and an agreement that one person would sell ice for 28 days in a month and the other for the rest of the month are void.

In the case of Fraser Co. Vs. Bombay Ice Co. (1905) 299 Bam. 107, it was held that every man shall be at liberty to work for himself. And shall not be at liberty to deprive himself or the State of his skill, labour or talent by any contract that enters into.

Exceptions or Case in which restraint of trade is valid: The rule that an agreement in restraint of trade is void is not true in all cases. There are following two types of exceptions:

  1. Statutory Exceptions
  2. Other Exceptions

Statutory Exceptions

  1. Sale of Goodwill
  2. Partner’ Competing Business
  3. Rights of Outgoing Partner
  4. Partners Similar Business on Dissolution
  5. Agreement in Restraint of Trade

Sale of Goodwill

The exception contained in Section 27 is related to the sale of goodwill. On the sale of the goodwill, it is certain the seller of goodwill may agree not to carry on a similar business within certain local limits. The exception says that one who sells the goodwill of a business may agree with the buyer to refrain 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 that such limits appear to the Court reasoned, regard being made to the nature of the business.

Example: X agrees to sell to Y the goodwill of a business. X then sets up a similar business close-by Y’s showroom and solicits his customers. This is contrary to the agreement and Y may obtain an injuction to restrain X.

Case of Golds oll Vs. Gold mand (1915) 1. Ch. D. 292 is important in this case D a seller of jewellery, sells his business to P and promises not to carry on similar business, it was held that the restraint with regard to jewellery was valid.

Partner’ Competing Business

Section 11 (2) of the Partnership. Act, 1932 says that a partner of a firm may be restrained ‘from carrying on a similar business independently, so long as he remains a partner. It shall not be void as being in restraint of trade.

Rights of Outgoing Partner

An outgoing partner may agree with other partners that on ceasing to be a partner, he will not carry on a similar business within a specified period or within specified local limits. This agreement shall not be void if the restrictions are reasonable. [Sec. 36 (2) of the Partnership Act.]

Partners Similar Business on Dissolution

In this case partners may, agree that ill or any of them shall not carry on similar business within a specified period or within specified local limits [Sec. 54 of the Partnership Act., 1932]

Agreement in Restraint of Trade

Any partner upon the sale of the goodwill of a firm, with the buyer of goodwill that such partner will not carry on any business similar to that of the firm within a specified period or within specified local limits. Such agreement shall be void if the restrictions imposed are not reasonable. [Sec 55 (3) of the Partnership Act.]

Other Exceptions

Other Exceptions or Exceptions under the common Law: These are some other exceptions recognized by the courts:

  1. Service Agreements
  2. Sole Selling Agreement
  3. Trade Combinations

Service Agreements

During the Term of Employment: Any agreement of service restraining an employee, during employment, not to compete with his employer is valid. Service agreements often contain a clause by which the employee is restricted from working anywhere else during the agreement.

An agreement by which person binds himself during the term of the agreement not to compete with his employer by carrying on similar business, or accepting any other employment during the term of his agreement is not in restraint of trade. The employer can prohibit the employees from working elsewhere during the term of service.

Now-a-days it is in practice to appoint management and other technical trainees. A lot of time and money is spent in training the candidates. So, it will be a waste for the organization if these persons left for other organizations immediately after training.

Therefore, a service bond is normally got signed whereby the trainees (employees) agree to serve the organization for an agreed period. Such agreements, if reasonable, do not amount to restraint of trade and hence are not void.

Example: Y an engineer agrees to employ a fresh engineering graduate as his assistant on the condition that he will not carry on his practice during his employment with X. It is not a void agreement.

Sole Selling Agreement

Where restraint is to protect the employer against an employee making use of secrets of business, the restraint is valid. A producer may agree to sell the whole of his production to a particular seller. This is enforceable. In the case of Niranjan Shankar Golikari Century Vs. Spinning and Manufacturing Co. LTD. Air 1967 SC 1098. the agreement was held to be valid and the employee was restrained from serving anywhere else during the currency of the agreement. In this case CMSC Co. Ltd.

Manufacturing special yarn was offered collaboration by a foreign producer. It was the condition that the company shall maintain the secrecy of all the technical information and that it should receive corresponding secrecy arrangements from its workers and employees.

One employee named N was appointed for 5 years on the condition that during this period he would not take employment anywhere even if he left this employment. This agreement was held enforceable.

Although a master is not entitled to prohibit his servant after the termination of employment he is entitled to reasonable protection against exploitation of trade secrets by the previous employee.

Trade Combinations

An agreement entered into between different business firms in the nature of a trade combination in .order to maintain a price level and avoid underselling is legal. An agreement between firms not to sell their products below a certain price, acquire profits and divide the business and profits in a certain proportion is not illegal.

Where mutual benefit is not the purpose of trade combination but an out and out monopoly is sought to be created, then the agreement is void. Thus, if combinations are not in the nature of monopoly, they are not void.

Trade combinations in the nature of trade regulations are perfectly valid. In the case of Fraser & Co. Vs. Bombay Ice Mfg. Co. (1905) Bom. 107, agreement to regulate trade was held not void. In this case, an agreement between certain ice manufactures fixed the minimum price for sale.

It was also agreed in what proportion ice manufactures will manufacture the ice and receive the profits. Some of the ice manufactures were also prohibited from selling at Poona and some others at Steamers. In this case the Court held that the agreement was not hit by Section 27 of the Indian Contract Act as the whole object being to regulate business and not to restrain it.


Agreements in Restraint of Legal Proceeding

This section provides that an agreement which tends to prevent the process of justice is void. Every agreement by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce Ms rights, is void to that extent.

If a servant agrees not to sue for wrongful dismissal is void. Section 28 of the Act says that every agreement:

  1. By which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce Ms rights.
  2. Which abolishes the rights of any party thereto, or discharges any party thereto from any liability, under or in respect of any contract on the expiry of a specified period so as to restrict any party from enforcing his rights, is void to that extent.

Following are the exceptions to this rule:

  1. Saving of Contract to Refer to Arbitration Dispute They May Arise
  2. Saving of Contract to Refer Questions That Have Already Arisen

Saving of Contract to Refer to Arbitration Dispute They May Arise

Section 28 shall not render illegal a contract, by which two or more persons agree that any dispute which may arise between them in respect of any subject or class of subjects shall be referred to arbitration and that only the amount awarded in such arbitration shall be recoverable in respect of the dispute so referred.

Thus, an agreement to refer future disputes in relation to a contract for arbitration is valid.

Saving of Contract to Refer Questions That Have Already Arisen

Section 28 shall not render illegal any contract in writing, by which two or more persons agree to refer to arbitration any question between them which has already arisen or affect any provision of any law in force for the time being as to references to arbitration.


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