The consideration and objects of a contract
are lawful, unless it – is forbidden by
law – any act punishable under criminal law or any special legislation or
regulations.
(a)
A promises to obtain for B employment in public service – B promises to pay
Rs.1000 to A – unlawful consideration – void agreement.
(b) A promises to drop prosecution
instituted against B for robbery – B promises to restore the value of things
taken – unlawful object – void agreement.
Nandlal Vs.
Thomas - A
licensed under Excise Act to run liquor shop – Act forbade sale, transfer or
sub-lease of licence or creation of partnership in running of shop – A took B
into partnership - Held, agreement void
as it would defeat the policy of the law if unapproved persons could find their
way into working liquor shops.
1. It defeats the provision of any law – though
not directly forbidden by law.
Fateh Singh Vs. Sanwal Singh – accused required under Criminal Procedure Code to furnish surety
of Rs.5000 for his good behaviour – he deposits sum with defendant and
persuades him to become surety – after period of suretyship is over, accused
sued defendant for the amount – Held, the intention in requiring a surety is
that the surety shall at his own risk see to the appearance of the accused –
the purpose of agreement defeated by agreement of above sort – agreement void.
Napier Vs. National Business Agency Ltd. – company employed N - weekly wages of £13 and
weekly expense allowance of £6 – Held, the expense allowance a device to evade
tax – agreement unlawful.
Alexander Vs. Rayson – A
leased flat to R at rent of £1200 a
year – two separate agreements entered into, one for lease at £450 and other
for services connected with flat at £750 – A sued R for recovery of instalment
of £750 – Held, agreement void as object was to deceive the municipal
authorities – A could not recover - R entitled to remain in possession of flat
for remainder of term of lease.
2. It is fraudulent.
Example : A, B
and C enter into agreement – for division of profits to be acquired by them by
fraud – object is unlawful – void agreement.
Ram Nath Misra Vs. Rajendranath Sanyal - two decree-holders against
the debtor – one of them, the plaintiff, got debtor’s property attached and
brought to sale – agreed with defendant , a prospective buyer, that he would
not bid against the defendant and defendant would pay him off – property sold
to defendant at very low price – Held, the object of the arrangement was
fraudulent as it deprived the other decree-holder of his claim amount which he
could have got had the sale been competitive – plaintiff could not recover
anything from defendant.
3. It involves
or implies injury to person or property of another – property includes both movable
and immovable property.
Ram Swaroop Vs. Bansi Mandar – B borrowed Rs.100 from R – executed bond promising to work for L
without pay for two years – in case of default, B to pay principal plus
exorbitant interest at once – Held, contract void as it was indistinguishable
from slavery which involved injury to person of B.
Gherulal Parakh Vs. Mahadeo Dass – agreement between some persons to purchase shares in a company –
intended to deceit to induce other persons to believe that there was bona fide
market for the shares – Held, agreement void.
4. Involves
immorality
Baivijli Vs.
Nansa Nagar - money given to married woman to obtain
divorce from her husband – lender intended to marry the woman – Held, agreement
was immoral.
1.
Opposed to public policy –
harmful to public welfare.
2.
Agreement of trading with enemy
3.
Agreement to commit a crime.
W.H. Smith
& Sons Vs. Clinton - A promises to indemnify a firm of printers
and publishers of newspapers against consequences of any libel which it might
publish in the newspaper – Held, it was an agreement to commit a crime and
indemnity against it - A’s promise could not be enforced and the firm liable to
pay damages for published libel.
4.
Agreement which interferes with
administration of justice – it is opposed to public policy – Examples –
agreement to use improper influence of any kind with the judges and officers of
justice – agreement not to prosecute an offender is for stifling (oppressing)
prosecution.
5.
Agreement in restraint of legal
proceedings - Example - prohibiting any
party from enforcing his rights under a contract – curtailing (restricting) the
period of limitation prescribed by Law of Limitation – however agreement to
refer a dispute to arbitration is valid.
6.
Trafficking in public offices
and titles or for procurement of public recognition like Padma Vibhushan etc.
for monetary consideration.
NVP Pandian Vs. MM Roy - R paid Rs.15,000 to N who
agreed to obtain a medical seat for R’s son – N failed to get the seat – R
filed a suit for refund – Held, agreement against public policy – void
agreement.
7.
Agreement tending to create
interest opposed to duty – anything against public or professional duty.
Example – A directs his agent B to buy particular house for him – B
tells A that it cannot be bought for specific reason - buys the house for himself – against
professional duty – A can compel B to sell it to him at the price B paid for
it.
8.
Agreement in restraint of
parental rights –
9.
Agreement restricting personal
liberty.
Horwood Vs. Millar’s Timber
& Trading Co. – A debtor agreed with money-lender not to
leave his job or borrow money or dispose of his property or change his residence
without lender’s written consent – held, void agreement as restricting personal
freedom.
10. Agreement in restraint of
marriage, other than a minor, is void.
Lowe Vs. Peers – P promised to marry
L only and none else –to pay £.2,000 to L if he married someone else – P
married X - Held, L could not recover the agreed sum as agreement in restraint
of marriage
11. Marriage brokerage agreement.
12. Agreements interfering with marital status.
(i)
Agreement to defraud creditors
or revenue authorities.
(ii)
Agreement in restraint of trade
– which interferes with liberty to engage in any lawful trade, profession or
vocation – Sec.27.
Shaikh Kalu Vs
Ram Saran Bhagat - out of 30 comb-makers in Patna city, 29
agreed to sell their output to R only and none else – R free to reject the goods
if no market found for them – Held, the agreement restrained from exercising
profession – void.
Madhav Chander
Vs. Raj Coomar - M and R rival shopkeepers in a locality in
Calcutta – R agreed to pay a sum of money to M if he would close his business
in consideration – M closed down his business – R refused to pay and M filed a
suit for recovery – Held, the agreement was void even though the restriction
was a partial restriction, a restriction limited to some place.
Exceptions to
the rule that “an agreement in restraint of trade is void” :
(a)
Sale
(b)
Partnership – four provisions
which validate agreements in restraint of trade –
- partner not to carry on any business other than that of the firm.
- outgoing partner not to carry on similar business within a specified period or within specified local limits.
- in anticipation of dissolution, partners may restrain each other from carrying on similar business within specified period or within specified local limits.
(c)
Trade combinations – regulations
as to opening and closing of business in a market, licensing of traders,
supervisions and control of dealers and mode of dealing are valid, even though
in restraint of trade.
S.B. Fraser
& Co. Vs. Bombay Ice Mfg. Co. – agreement between ice manufacturers – fixed
the minimum price for sale of ice, proportion of manufacture which each was to
bear and of profits each was to receive – some of them restrained from selling
at Poona
Bhola Nath
Shankar Das Vs. Lachmi Narain – rules of an association of traders
and weighmen restrained members from dealing with outsiders – penalty for
breach being fine and expulsion – Held, such restriction not disadvantageous to
public nor opposed to public policy – valid.
However, where a
combination tends to create monopoly and is against public interest is void.
Kores Mfg. Co. Ltd. V. Kulok Mfg. Co. Ltd. – both
companies engaged in manufacturing similar products involving processes in
which employees likely to acquire knowledge of trade secrets and confidential
information – agreed that neither would employer any person who had been the
employee of the other anytime during previous five years, without the written
consent of the other – Held, ban was applicable as much to an unskilled manual
labourers who might have been employed even for a single day as to a highly
skilled and long-term employee who might have acquired confidential knowledge.
(d)
Exclusive dealing agreements – reasonable
restriction valid - negative stipulation nothing but an ordinary incident of or
ancillary to the positive covenant.
Mackenzie Vs. Striramiah - contract to sell all the salt manufactured
to a firm for five years – Held valid as seller encouraged to exercise his
business because he is assured of a certain market for the products of his
labour.
(e)
Service contracts – restriction
from accepting any other engagement during his employment is valid.
Charlesworth Vs. MacDonald - A was a physician and
surgeon practising in Zanzibar - B agreed to become A’s assistant for three
years – appointment subject to clause against practising – B left service
within a year and began to practise there on his own account – Held, agreement
to service preventing persons to serve anyone other during the term of
employment is valid.
Where
restriction imposed to protect employer against employee making use of trade
secrets learned in course of employment - such restriction is valid.
Hivac Ltd. Vs. Park Royal - H employed A on a highly skilled work – with
access to manufacturing data – in his spare time, A worked for P on similar
work in competition with H – Held, A in breach of duty – could be restrained
from working for R.
However,
restriction on similar engagement after termination of service is void.
Brahamaputra Tea Company Vs. Scarth – employees restrained from taking service or engaging in any
similar business for period of 5 years after termination of service - Held to be void.
Unlawful
and illegal agreements :
Unlawful agreement – a void ab initio – not enforceable by law –
affects only the immediate parties but does not affect the collateral
agreements.
Illegal
agreement – void ab initio – taints
the collateral agreements with illegality - void not only as between immediate
parties but also makes collateral agreements void.
Example : A
enters into an agreement with B to manufacture prohibited goods – A takes loan
for the purpose from C who knows about the purpose of the loan – agreement
between A and C is collateral to the main agreement between A and B, which is
illegal – collateral agreement is also illegal.
An illegal
agreement is actually forbidden by law – but every void agreement may not be
forbidden – Thus, every illegal agreement is void, but every void agreement is
not necessarily illegal.
Illegal
agreements include acts opposed to public morals – e.g. agreement for illicit
cohabitation, agreement to defraud the revenue, agreement to commit a crime or
agreement to do something which endangers public safety – No action allowed on
illegal agreement – depends on two maxims :
(i)
Ex turpi causa non oritur action – means
‘no action arises from a base cause’ – law does not approve of any action
arising from base action which is illegal.
(ii) In part delicto, potior est condition
defendentis – means ‘in cases of equal guilt, the defendant is in a better
position’.
Example : A
promises to pay B Rs.1000 if he kills T - If B actually kills T, he cannot
recover the amount from A – if A has already paid the amount and B does not
kill T, A cannot recover the amount.
The effects of
illegality are –
(i)
collateral agreements also
becomes tainted with illegality – treated as illegal even though they might be
lawful by themselves.
(ii) No action can be taken for
(a)
recovery of money paid or
property transferred under an illegal agreement.
(b)
Breach of illegal contract.
·
In case of equal guilt, defendant is in
better position than plaintiff.
However, the
plaintiff can sue for recovery of money paid or property transferred in
following cases –
(a)
where he is not in part delicto (equal guilt) with the
defendant – e.g. where he is induced to enter into agreement by fraud, undue
influence or coercion.
Fakir Chand Seth Vs. Dambarudhar Bania - payment made in advance for
purchasing a paddy crop not knowing that a control order was being violated –
consideration paid allowed to be recovered.
Mistry Amar Singh Vs. Kulubya - land given to an non-African
under a lease in violation of a law for the protection of Africans in Uganda –
action brought about by African party for recovery of rent and possession – the
other party pleaded illegality – Held, the parties are not in pari delicto, the person injured may
bring his action and defeat the contract.
(b)
Where he does not have to rely
on the illegal transaction.
(c)
Where the agreement is still
executory - and he is truly and genuinely repentant.
(d)
where the non-illegal part is
severable from the rest of the agreement – the Court will enforce the legal
part and reject the illegal one – if inseparable, the whole contract is
declared illegal.
Aition Vs. Spickermann –
house leased on rent - subject to
condition that lessee would also purchase certain chattels at premium – lessee
occupied the premises but offered to pay only the natural price – lessor sought
eviction on ground that the whole agreement unlawful - Held, the two agreements
had two aspects namely, the agreement of lease and the promise to pay a premium
– the latter part was unlawful and being severable from the rest, the lease was
valid.
Unlawful
agreement involves non-criminal breach of law – do not affect public morals –
disproved on grounds of public policy – e.g. agreements in restraint of trade,
marriage or legal proceedings.
Gherulal Parekh Vs. Mahadeo Das - partner entered into agreement
to indemnify his co-partner for proportionate of the losses suffered by him in
entering into wagering transactions on behalf of firm – Held, wagering being
only void, the collateral agreement of indemnity is fully enforceable.
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