VOID AGREEMENTS-PART I

 

Section 2(g) reads as “An agreement not enforceable by law is said to be void”

Two parties enter into an agreement to fulfil certain interests that they have from each other. For the contract to be binding on both the parties it needs to have legal recognition which would make the contract valid. The purpose of the Indian Contract Act, 1872 is to define which contracts are legally enforceable. The act defines the essentials of a valid contract and if those are not fulfilled the contract may be void/voidable. These essentials and the effect of their non-fulfillment has been discussed in the previous articles. The act also expressly mentions certain kinds of agreements which are void i.e. have no legal force and cannot be legally enforced. These types of agreements are mentioned below-

1.     Agreement in restraint of marriage (Section 26)

Section 26- Every agreement in restraint of the marriage of any person, other than a minor, is void.

Any agreement between two persons restraining the marriage of a person is expressly declared void under this section. The restraint can be complete, partial, generic or specific i.e. a party may restrained from marrying at all or restrained only for a particular amount of time, restrained from marrying anyone or just from a specific person or class of persons. This section is pretty much absolute and the only recognised statutory exception is where the agreement is regarding restraint of marriage of a minor. The court has identified certain other exceptions as well relating to agreements regarding remarriage. For example, A and B, a divorced couple have an agreement that B would not exercise her right of maintenance as long as A does not remarry another woman. If A remarries then B will be entitled to exercise her right and the said agreement will be valid. (Latafatunnissa v. Shaharbanu Begam, AIR 1932 Oudh 108.) The principle that penalty upon remarriage is not a restraint is also upheld in the case of Rao Rani v. Gulab Rani, ILR 1942 All 810. In this case, two co-widows made an agreement that if any of them remarries she would lose the right to inheritance respectively. It was held by the court that there was no direct restraint on remarriage but rather just a proviso that she would lose her rights if she elects to remarry.

2.     Agreement regarding restraint of trade (Section 27)

Section 27- Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.

Exception 1.—Saving of agreement not to carry on business of which goodwill is sold. — 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 reasonable, regard being had to the nature of the business.

Halsbury defines an agreement regarding restraint of trade as “those in which one or both parties limit their freedom to work or carry on their profession or business in some way”.

For example, A and B are competitors in a local market. A promises B to pay him 1 lakh rupees if B closes up shop. B performs his part and A refuses to pay him afterwards. Such agreement is void. (Madhub Chander v. Raj Coomar, (1874) 14 Beng LR 76; GHurry Krishna Pillai v. M Authilachmy Ammal AIR 1916 LB 51 (FB); Parasullah v. Chandra Kant AIR 1918 Cal 546)

It is not necessary that the restraint be absolute. Any agreement with a partial restraint is also void. This principle comes from a comparison with section 28 which explicitly uses the word ‘absolutely’. Since it is not expressly mentioned in section 27 it is only reasonable that the intent of the legislature was to include both absolute and partial restraints of trade under the said section. Therefore, an agreement between parties wherein one parties sells products for 14 days where the other conducts business for the rest of the month is also void (Mohammad v Ona Mohd Ebrahim, AIR 1922 LB 9).

This section applies to only those agreements which are restricting the carrying of profession/trade/business in some way. The interpretation of the term profession/trade/business by the Indian Courts has been interesting. Where one court held that the performance of religious services is a profession (Revashanker Shamji v. VeljiJagjivan Kukama, AIR 1951 Kutch 56), another court observed that the activity of letting out land does not fall under the definition of profession, trade or business in the circumstances of the case (Pothi Ram v. Islam Fatima AIR 1915 All 94 (2)). In the former case, the court held that an agreement to monopolize the said profession is void. In the latter case, the court held that an agreement between two neighbouring landowners to not let land for a market of cattle on the same day in order to avoid competition is valid since the landowners are not the ones engaged in the business of trading cattle.  

Restrictions attached to a lease agreement regarding which business should be undertaken in what name and style have been held to be non-violative of the current section. (Vidya Wati v. Hans Raj, AIR 1993 Del 187.)

Restrictions on using a trademark are also held to be non-violative of this said section as the restraint in using trademark does not involve a restraint in carrying on trade or business. (Suresh Dhanuka v. Sunita Mohapatra, (2012) 1 SCC 578.)

This section has recognised statutory exceptions-

1.     Sale of goodwill

Section 27 provides an exception of sale of goodwill where one person buys goodwill of another, he/she may be restricted from carrying on the same trade elsewhere i.e. within certain geographical limits or within a particular time. But what exactly is goodwill? It is defined by Lord Macnaghten (Ann Trego v. George Stratford Hunt, 1896AC7,23-24) as “Often it happens that goodwill is the very sap and life of the business, without which the business would yield little or no profits. Itis the whole advantage, whatever it may be, of the reputation and connection of firm, which may have been built up by years of honest work or gained by lavish expenditure of money”.

This exception can be illustrated by the following case- A and B were involved in the business of carrying passengers by boats. A sold his business to B and promised that he would not carry out the said business for 3 years. A brought an action towards B to recover the promised sum. A’s action was allowed by the court and held that the agreement is valid since it definitely falls under the category of sale of goodwill.

This exception is framed to protect the rights of the purchaser of the goodwill. This exception however is limited in certain extents. The restrictions to trade imposed in a sale of goodwill should be definite and reasonable. It should be only limited to carrying a similar business and only till such time until the business is actually carried on. It should also be limited to a geographical area where the business enjoys goodwill.

2.     Partnership Act

Three provisions of partnership act provide exceptions to this section.

Section 11- allows contracts that restrict a partner from carrying out any business other than that of the firm while he is a partner

Section 36- allows agreements made between partners that provide that if a partner ceases to be a part of the business then he might be prohibited from carrying out business similar to that of the firm within a specified period of time or a specified locality provided these restrictions are reasonable.

Section 54- allows agreements between partners upon or anticipation of dissolution of the firm requiring that the partners may not carry the similar business within a specified period or specified locality provided such restrictions are reasonable.

Section 55- the same exception as provided under section 27 of the ICA.

Right to carry on trade is a fundamental right under section 19 of the Indian Constitution. The legislature is prohibited from taking away this right of the individuals. This section prohibits individuals from giving away this right themselves by way of contract.

BY

LAWVASTUTAH