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‘Lawful Object’
Prof. Santosh D. Bhosale
(..6...)
LAWFUL OBJECT
QUESTION BANK
Q.1. Enumerate the classes of the agreements, which the Indian Contract Act, expressly
declares void.
Q.2. An agreement in restraint of trade is void Discuss are there any exceptions to this
rule?
Q.3. Write a detail note on “void agreements”.
Q.4. Discuss an agreement in restraint of ‘Legal proceedings’ and ‘Marriage’.
Q.5. What is wagering agreement? Whether a contract of insurance is a wagering
contract?.
Q.6. “No action is allowed on an illegal agreement”. What are the exceptions to this rule?
SHORT NOTES
1. Wagering Contract
2. Discuss an agreement in restraint of ‘Legal proceedings’
3. Agreements opposed to public policy
4. Illegal agreements
SYNOPSIS
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I.
Introduction:-
The last requirement of a formation of a lawful contract is that the object of the
contract must be lawful. S. 23 provide certain circumstances when the object and
consideration of a contract are unlawful. If the object and consideration are unlawful, it
becomes an unlawful agreement. Such unlawful agreements are void and not enforceable
by law. Whereas S. 25 to 30 and S. 56 declare certain agreements as void, i.e. not enforceable
by law. However, contracts entered into by a minor or by a person of unsound mind and
contracts by mistake are contracts void-ab-initio, i.e. void since the beginning
II.
Agreements declared void:-
Following are the agreements declared void by the Contract Act.
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A) Unlawful Agreements (S. 23):-
1)
Forbidden by Law:-
When the object or consideration of an agreement is forbidden by the law, the
agreement will not be valid agreement. An agreement to do what has been prohibited by
the Indian Penal Code or by some other law cannot be enforced.
Illustration
(a)
A promises to obtain B employment in the public service, and B promises to pay
1,00000/- rupees to A. The agreement is void, as the consideration for it is unlawful.
(b)
A promises B to drop a prosecution which he has instituted against B for robbery,
and B promises to restore the value of the things taken. The agreement is void, as its object
is unlawful.
2)
Defeat the Provisions of Law:-
If the object or consideration of an agreement would defeat any legal provision,
although it does not directly violate the law, the agreement is void.
Illustration
2
Difference between ‘object’ and ‘consideration’.
The ‘consideration’ and ‘object’ is generally treated as same thing. However, S. 23 makes the
difference between ‘object’ and ‘consideration’ of contract. Consideration is Quid pro quo (something for
something) (for detail definition see topic consideration). According to S. 23, ‘object’ means ‘purpose’ or
‘design’. E.g. If A borrows money from B for marriage of his minor son, the object of it is illegal though
consideration is lawful. Here the promise of B to lend to A and A’s promise to pay it back with interest
thereon is valid consideration however; the object is the ‘performance of marriage of a minor son’. Child
Marriage Restraint Act forbids the marriage of minor.
3
Distinction between ‘void’ and ‘illegal agreement’.
There is difference between agreement which is simply ‘void’ and the one in which the
‘consideration or object’ is unlawful. According to S. 23 illegal agreement is that which is against provisions
of the law. This agreement is therefore void, not enforceable. Ss. 25 to 30 describe certain agreements
which are simply void, not enforceable by law. Illegal agreement is by nature ‘void’ but all void agreements
are not ‘illegal’. ‘Illegal agreement’ are forbidden by law but a void agreement may not be forbidden by
law. In short, every illegal agreement is void but every void agreement is not necessarily illegal.
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A’s estate is sold for arrears of revenue under the provisions of an Act of the Legislature,
by which the defaulter is prohibited from purchasing the estate. Upon an understanding
with A, B becomes the purchaser and agrees to convey the estate to A upon receiving from
him the price B has paid. The agreement is void, as it renders the transaction ineffective as
a purchase by the defaulter himself and would so defeat the object of the law.
3)
Fraudulent:-
If the consideration or object of an agreement is to commit fraud, the agreement is void.
Illustration
(a)
or to be acquired, by fraud; the agreement is void, as its object is unlawful.
(b) A, being an agent for a landed proprietor, agrees for money, without the knowledge
A, B and C entered into an agreement for the division among them of gains acquired,
of his principal, to obtain for B a lease of land belonging to his principal. The agreement
between A and B is void, as it implies fraud by concealment by A on his principal.
4)
Agreement Injurious to the Person or Property of Another:-
If the agreement's consideration or object is to cause an injury to the person or
property of another, the agreement is unlawful and, therefore, void.
5)
Immoral:-
If an agreement's consideration or object is immoral, it is void.
Illustration
(a) A, who is B’s mukhtar (power of attorney), promises to exercise his influence, as such,
with B in favour of C, and C promises to pay 1,000/- rupees to A; the agreement is void
because it is immoral.
(b) A agrees to let her daughter hire B for concubinage. The agreement is void because it
is immoral, though the letting may not be punishable under the Indian Penal Code.
6)
Opposed to Public Policy:-
An agreement is unlawful if the court regards it as opposed to public policy. In an
English case, Lord Halsbury held that a contract of marriage brokerage, the creation of
perpetuity, a contract in restraint of trade, a gaming or wagering contract, or assisting the
King’s enemies are all unlawful things on the grounds of public policy”. (For details, see
note at the end).
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In Oil and Natural Gas Corporation Ltd. V/s Dolphin Drilling Ltd Laws ((Bom)
2014-12-135). On the ground of public policy under S. 23 of the Contract Act and in the
light of Art. 14 of the Constitution of India, in the matter of employer and employee, the
Bombay High Court referred to the Supreme courts observation that “any term of the
agreement which is patently arbitrary and otherwise arrived at because of the unequal
bargaining power (of employees) would not only be ultra vires of Art. 14 but also hit by S.
23 of the Contract Act”.
B)
Agreement without Consideration (S. 25):-
An agreement without consideration is void (Discussed already in the topic of
‘Consideration’).
C)
Agreement in Restraint of Marriage (S. 26):-
Every agreement in restraint of marriage of any person other than a minor is void.
A person is not bound by law to marry, but any agreement that restricts him from marriage
is against public policy and, hence, void. Restrictions on marriage may be general or
particular. General restraint is that which prohibits a person from marrying at all, whereas
particular restraint is partial restraint, e.g. not to marry for a fixed period or not to marry a
exception is of minor’s marriage.
However, some agreements are held not void by the courts. For example, an
agreement containing a condition in a will that a widow would lose her right of
maintenance on remarriage is not an agreement in restraint of marriage. Similarly, an
agreement between two co-widows that any one of them would lose her right to the
deceased husband’s estate on remarriage is not a restraint on the right of marriage.
Likewise, an agreement that the wife would get the right of divorce in a second marriage
by the husband is not void.
D)
Agreement in Restraint of Trade (S. 27):-
1)
General:-
5*
In Lowe V. Peers (1768) 4 Burr. 2225.
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The Constitution of India has recognised ‘freedom of trade and commerce’ as a
individual also cannot bargain to take this right out; this is what is ensured by S. 27 of the
Act. According to S. 27, “every agreement by which anyone is restrained from exercising
a lawful profession, trade or business of any kind, is to that extent void”. It ensures free
competition and declares those agreements against public policy. Free trade is in favour
of the public interest.
Facts:- A and B were rival shopkeepers in a locality in Calcutta. B agreed to pay A
a sum of money if he closed his business in that locality. A accordingly did so, but B refused
to pay.
Calcutta High Court Held:- that the agreement is void. The court further observed
that “S. 27 prohibits general as well as particular restraint on trade. Therefore, in this case,
though there seems a particular restraint, an agreement nevertheless is void.”
In English law also, all restraints, whether general or partial, on trade are void.
laid down some exceptions to S.27.
2)
Exceptions:-
6
Art. 19 (1) (g).
7 (1874) 14 B.L.R. 76.
8
Held in Nordenfelt V/s Maxim Nordenfelt Guns and Ammunition Co. Ltd (1894) AC 535.
Facts:- In this case the Nordenfelt, was the manufacturer of guns and ammunition. He sold his business
to the Maxim. Company for a consideration of £ 2,87,500. He agreed that for 25 years, he would not
engage, either directly or indirectly,
(1) in the trade or business of manufacture of guns, gun mounting or carriage, gunpowder, explosives or
ammunition, or
(2) in any business competing or liable to compete in any way with that for the time being carried on
by the company.
Held that. - the first part of the agreement provided a reasonable protection to the interest of the buyer
of the business, and it was valid, whereas the second part requiring him not to compete ‘in any business’,
was unreasonable and, therefore, void.
9 योगय तया मयादा [उचित पचꢀबंध]
ा
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The following are the exceptions to the general rule that agreements restraining
trade are void. In other words, in the following circumstances, even if the agreement is
restraining trade, it is not void. These exceptions are provided by laws and evolved by the
Courts from time to time. Viz.
(i)
Sale of Goodwill:-
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
case law, see Nordenfelt V. Maxim Nordenfelt Guns and Ammunition Co. Ltd. ibid.)
(ii)
Exceptions under the Indian Partnership Act:-
S. 11 of the Partnership Act provides that the partners may restrict their freedom by
an agreement that none or any one of them shall not carry on any business other than that
of the firm. S. 36 of the same Act provides that an outgoing partner may be restrained from
carrying on a similar business within the specified local limits or within a specified period.
S. 54 of the same Act provides that in anticipation of the dissolution of a firm, the partners
may make a similar agreement to restrict themselves from carrying on the same trade.
However, it is necessary that such restrictions be reasonable and that the local limits or
periods of restraint be specified.
(iii) Combinations to Regulate Trade Relations:-
Sometimes, traders or manufacturers combine to eliminate competition and make
agreements fixing minimum prices, regulating the supply of goods, providing standard and
quality goods to customers, etc. Such agreements are not void because they oppose public
policy or restrain trade.
Facts:- the plaintiff was the associations of hop growers, who had combined with a view
to avoiding competition between themselves by marketing the produce of all the members
through regulated sales. The defendant was a member of this association, and he agreed to
deliver his entire crop for a particular year to the association to be sold by it.
Held that:- the restriction on the defendant’s power to dispose of his own crop himself
was not unreasonable.
11 This is the only exception provided by S. 27 of the Act.
14 (1928) 2 K.B. 174.
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(iv) Solus or Exclusive Dealership Agreement:-
The marketing of goods through a sole-selling or exclusive agent is not void. Thus,
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an agreement to sell all the salt produced during a certain period to a particular buyer only
or to sell a certain variety of dhotis manufactured by the defendant to the Plaintiff only and
no other person is not in restraint of trade.
(v)
Restraints upon Employees:-
An agreement of service under which an employee agrees that he will serve a
particular employer for a certain duration and that he will not serve anybody else during
that period is a valid agreement
E)
Agreement in Restraint of Legal Proceedings (S. 28):-
a)
General:-
Every person in civilised society has a right to knock on the doors of the court for
justice; no agreement contrary can take this right out from him. “An agreement purporting
to oust (restrict) the jurisdiction of the court is illegal and void on the grounds of public
policy” is an important principle of English law. In other words, agreement, which tends
to prevent the course of justice, is void because of the illegality of the object. S. 28 of the
Act has recognised the above principle. It declares two kinds of agreements in restraint of
legal proceedings as void-
(i) An agreement imposing absolute restrictions on the enforcement of legal rights
under the contract,
(ii) An agreement imposing time limitation for enforcing the rights under the
contract.
i)
Agreement absolutely restraining legal proceedings:-
If one party to an agreement restrains the other party absolutely from enforcing his
contractual rights by bringing the usual legal proceedings, the same is void. However, if
the restriction is partial, the restriction is not void. An agreement to oust the jurisdiction of
a court is opposed to public policy, and the same is void both in India and England.
ii)
Agreement Limiting time for a legal action:-
Indian Limitation Act. 1963, a specific time limit was prescribed for taking various
legal actions in a court. The Act lays down the following partial restraints as valid-
(1)
Contract to refer the future dispute to Arbitration:-
An agreement to refer the future dispute arising between the parties to arbitration
concerning any subject (or class of subjects) and the amount recoverable in such arbitration
is valid.
(2)
Contract to refer already arisen dispute to Arbitration:-
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The second exception provides that a question (dispute) which has already arisen
between the parties may be referred by them to arbitration by a contract in writing. Such
an agreement is valid.
F)
Ambiguous and Uncertain Agreements (S. 29):-
Agreements, the meaning of which is not certain or capable of being made certain,
are void.
Illustration
(a) A agrees to sell to B “a hundred tons of oil”. There is nothing whatever to show what
kind of oil was intended. The agreement is void of uncertainty.
(b) A agrees to sell to B “my white horse for rupees five hundred or rupees one thousand”.
There is nothing to show which of the two prices was to be given. The agreement is
void.
However, if the meaning of the agreement is certain or capable of being made
certain, the agreement is valid, not void.
Illustration
(a)
(b)
A agrees to sell to B one hundred tons of oil of a specified description, known as
an article of commerce. There is no uncertainty here to make the agreement void.
A, who is a dealer in coconut oil only, agrees to sell to B “one hundred tons of oil.
The nature of A’s trade affords an indication of the meaning of the words, and
Agreement by Way of Wager (S. 30):- (Discussed in note 2)
Agreement to do Impossible Act (S. 56):-
G)
H)
NOTES
1]
Agreement’s Opposed to Public Policy.
SYNOPSIS
18
(c) A agrees to sell to B “all the grain in my granary at Ramnagar”. There is no uncertainty here to
make the agreement void.
(d)
A agrees to sell to B “one thousand maunds of rice at a price to be fixed by C”. As the price
is capable of being made certain, there is no uncertainty here to make the agreement void.
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The agreement’s Opposed to Public Policy:-
An agreement is unlawful if the court regards it as opposed to public policy. In other
words, the term ‘public policy’ means that sometimes, the courts will, on consideration of
public interest, refuse to enforce a contract. This clause confers wide discretionary power
on courts to refuse enforcement of contracts on the grounds of public policy. An act which
is injurious to the interest of society is against public policy. It is within the discretion of
the court to declare what acts are against the public interest and what are not.
Courts, from time to time, have declared various grounds against public policy. In
an English case, Lord Halsbury held that a contract of marriage brokerage, the creation of
perpetuity, a contract in restraint of trade, a gambling or wagering contract, or assisting the
However, there is one stream of thoughts according to which courts are not at liberty
to declare any act as against public policy unless that ground is specifically recognised as
The following agreements are held against public policy and the influx of time by courts.
(1)
Agreements to Trade with Enemy:-
At the time of war, it is against public policy to trade with the subjects of an enemy
country.
(2) Agreements to Stifle Prosecution:-
An agreement to stifle (suppress or release) prosecution is against public policy. It
is because the object of criminal law is to punish a guilty person, and a compromise with a
view to save a guilty person from liability would frustrate this object.
19
In Janson V. Driefontein Consolidated Mines Ltd, (1902).
20
According to Lord Halsbury in Egerton V. Brownlow, (1853).
Lord Atkinson in Fender V. John Mildmay, (1938) AC 1, Observed that ‘from time to time judges of the
highest reputation have uttered warning notes as to danger of permitting judicial tribunals to roam
unchecked in this field’.
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(3) Agreements to Interfere with the Course of Justice:-
Agreement to interfere with the course of justice is against public policy, e.g., a
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promise to give money for giving false evidence or a promise to give money to delay
execution proceedings etc.
(4)
Maintenance and Champerty:-
When a person intermeddles in the litigation between others by providing assistance
to one of the parties, and he has no interest of his own in the litigation, such intermeddling
is unlawful and is called ‘maintenance’. ‘Champerty’ is a kind of maintenance in which
the person assisting in the proceedings is to receive a share of the gain made in the
proceedings he maintains. In other words, an agreement of maintenance and champerty is
an agreement whereby one party is to assist (financially or otherwise) the other in
recovering property (through civil proceedings), and is to share in the proceeds of the action
(i.e. from the recovered property). The agreement of ‘maintenance and champerty’ is
declared against public policy in English as well as in Indian law.
(5)
(6)
Marriage Brokerage Agreements:-
Agreements Tending to Create Interest against Duty:-
An agreement with a person (public servant or any other person) under a duty, if
inconsistent with and creating an obligation against the performance of his duty, is against
public policy. For example, bribing police to allow a person to conduct Matka or theft is
against public policy.
(7)
Agreements of Traffic by Way of Sale of Public Offices:-
Traffic agreements (i.e. malpractices) involving the sale of public offices are against
the public interest because they discriminate against the best-qualified persons. Thus, the
sale of the office of Sebait, the transfer of the office of Mutwalli, and the sale of the land
of religious offices are against public policy.
(8)
(9)
Monopolistic agreements.
Suicide Insurance.
(10) Prejudicial service contracts or rules.
(11) Promise not to Claim statutory maintenance.
(12) Agreements violative of human rights
(13) Agreement of payment of less salary.
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Agreement by Way of Wager (S. 30):-
SYNOPSIS
Prof. Santosh D. Bhosale
2)
A)
Meaning:-
S. 30 declares agreements by way of wager are void, and no suit shall be brought
for recovering anything alleged to be won on any wager or entrusted to any person to abide
by the result of any game or other uncertain event on which any wager is made.
S. 30 thus declares an agreement by way of wager is void, but nowhere defines the
term ‘wager’. Ordinarily, a wager means a ‘bet'. It is staking something of value upon the
result of some uncertain event of the future, past or present. According to Anson, a
‘wagering agreement’ is the promise to give money or money’s worth upon the happening
or non-happening of a future uncertain event. For example, A promises to pay Rs.-100/- to
B if it rains today; otherwise, B will pay the same amount to A. Similarly, X promises to
pay Y Rs.-500/- if the Indian Cricket team wins against Australia. Likewise, A’s promise
to pay Rs.- 200/- if the particular party wins in the election and B’s promise to pay a similar
amount if that party loses the election are all wagering agreements, hence void.
B)
1)
2)
Elements:-
The wagering agreement has the following elements.
Uncertain Event:-
The bet is always regarding an uncertain event.
Mutual Chances of Gain or Loss:-
Both parties must have an equal chance of winning or losing. In other words, one
party in all circumstances should not be in a position to win only, e.g. if A bets that he will
pay Rs.-100/- if the sun does not raise from east tomorrow; if B agrees to pay the same
amount if it raises from east tomorrow; it does not wager, because here, A is in position to
win and win only because raising of the sun from the east is a universal truth.
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3) Neither Party has Control over that Uncertain Event:-
Neither party should have any control over the happening of an event in any way. If
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Prof. Santosh D. Bhosale
one of the parties has the event in his own hands, the transaction lacks an essential
ingredient of the wager.
4)
No other interest in the event except the amount of Bet:-
Neither party should have any interest in the happening of the event other than the
sum or stake he will win or lose. This makes the difference between a wagering agreement
and an agreement of insurance. In an insurance contract, the party has ‘insurable interest’
apart from merely gaining or losing.
We will discuss whether the following agreements are wagers or not.
i)
Insurance Contract:-
The contract of insurance has little resemblance to the wagering agreement, but it is
not a wagering agreement. The distinction between these two is well maintained by
legislatures. One of the essential requirements of a wagering agreement is that there should
not be any other interest in the event except the amount of the bet. In an Insurance contract,
it is necessary that the person insuring must have ‘insurable interest’ in the subject matter
insured.
The Insurance policy without ‘insurable interest’ is a wager. ‘Insurable interest’
means an interest in the ‘existence and preservation of the thing insured’. E.g. the husband
has an ‘insurable interest’ in his wife’s life; hence he can take an insurance policy on his
wife’s life by paying some regular premium. However, it is wager to take insurance in the
name of the other’s wife because it lacks ‘insurable interest’. Similarly, he can insure his
car, house or any other property because he has an interest in its existence and preservation
(i.e. Insurable interest’). But if he takes insurance on ‘The Great Wall of China’ or ‘The
Taj Mahal’ or on ‘Best Bakery’ or any property of another, the agreement is a wager due
to the absence of insurable interest in the subject matter.
Facts: The plaintiff (Brahm Dun Sharma) financed an insurance policy taken by
Mukhtar Singh on his life for Rs. 35,000. Mukhtar Singh did not have sufficient means to
afford an insurance policy. Mukhtar Singh made the nomination in favour of the plaintiff
and not in favour of his own wife and children. On Mukhtar Singh's death, the question
arose whether the plaintiff could recover the sum insured.
The Court held:- that the plaintiff had affected and financed this insurance policy
on the life of the deceased without having an ‘insurable interest’ in his life, and as such,
the contract of insurance was in the nature of a wagering contract and, therefore, void.
34
AIR 1966 All. 474.
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ii)
Lottery:-
A lottery is a scheme for distributing prizes by drawing lots or by any other procedure
which depends on chance only. The agreement to pay prizes on the lottery is an agreement
by way of wager and, therefore, is void. A person declared as a winner of the prize money
C)
Exceptions to Wagering Agreements:-
Following are the exceptions to the wagering agreement provided in S. 30 itself.
i)
Horse Race:-
S. 30 does not render a subscription or contribution, or an agreement to subscribe
or contribute, towards any gain, prize or sum of money the value or amount of five hundred
rupees or upwards to the winner or winners of any horse races.
ii)
Skill:-
In competitions in which skill and merit are the basis of the result and the prizes are
awarded to the best skilful person, the transactions are valid. Thus, crossword competition
is not a wager.
*****
35 Shekharchand Jain V. Ramnarayan (1977) 2 M.P.W.N. 118.