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Analyzing Voidability of Agreements under The Indian Contract Act, 1872

Contracts and agreements are made to enter a relationship that requires fulfillment of certain duties and liabilities in the interests of both the parties. The Indian Contract Act, 1872 is responsible for governing the laws regarding forming such types of legal relationships in India. Legal relationships such as contracts and agreements require several formalities and general procedures to be followed. They also require transparency and trust between the parties to maintain clarity of the contract.

The process of forming a contract starts from an offer from one party to another. Proposal is followed by acceptance to form a promise. Every promise or set of promises that forms consideration for each party is called an agreement. Thus, an agreement, in essence, is an accepted proposal that provides each party with some kind of consideration. When the agreement is legally enforceable, it becomes a contract. Section 10 of Indian Contract Act states the conditions for an agreement to be enforceable by law and become a contract.

The conditions are:
  • The agreement should be made by free consent of the parties;
  • Parties to the agreement should be competent to contract;
  • The agreement should be made with a lawful consideration;
  • The agreement should have a lawful object;
  • The agreement should not be expressly declared void in the Indian Contract Act.

If any single one of the above conditions are not fulfilled, the agreement would not be enforceable by law. Section 2(g) defines such agreements as ˜void agreements'. It is to be noted that only agreements can be void. Contracts are already legally enforceable and hence cannot be void, instead they are ˜voidable' in applicable cases. However, contracts can be declared void ab initio by courts in case of mistakes and legal inaccuracies.

Void Agreements

The various conditions and cases under which agreements are declared void in the Indian contract Act are discussed in detail below:
  1. Agreements with unlawful considerations/unlawful object

    Section 24 states that if any part of a consideration made for an object or more than one objects in an agreement, or the object of the agreement in itself is unlawful, the agreement is void. The point worth noting here is that according to the Doctrine of Severability, if the concerned consideration/object is not crucial to the agreement or is separable to the contract, only that part of the agreement shall be regarded void, keeping intact the validity of the rest of the agreement.

    In the case of Alice Mary Hill v William Clarke[1], the plaintiff is offered money to commit adultery and also to look after the defendant's house. The court declared the whole agreement void as the distinction between the lawful and unlawful (adultery) object was not clear.

    Now the question arises that which kind of considerations and objects would be deemed unlawful. Section 23 governs the criteria of legality of considerations and object. If any consideration/object; is forbidden by law, would defeat the provisions of law, is fraudulent, involves inflicting injury to a person or property of others, is regarded as immoral by the court of law or opposes public policy, it would be regarded as unlawful.
     
  2. Agreement without consideration

    Section 25 states that Agreement without consideration, void, unless it is in writing and registered or is a promise to compensate for something done or is a promise to pay a debt barred by limitation law. This section is quite self-explanatory.

    This section opens space for various exceptions under which the agreement won't be rendered void.
    • The agreement is made out of natural love and affection between parties of near relation.
      For example, when a daughter takes care of her father, nurtures him and in return, if he presents her a gift, it would come under this exception[2].
      However, mere existence near relations does not guarantee the presence of love and affection. Agreements to fall into this exception need to be in writing and registered, out of natural love and affection of near relatives. The agreement would be declared void if the there is no natural love and affection found even between near relatives[3].
       
    • Agreement to compensate a person who has done something for the promisor voluntary, or was legally compelled to do.
      There is no need of consideration in these agreements as the previous act (voluntary or legally compelled to do) of the person stands as a testimony and works like a good consideration to base the current agreement[4] on. Thus, the current agreement does not need a substantial consideration.
      However, the promisor must be legally competent to contract while he was subjected to the service.

     
  3. Agreements in restraint of marriage

    According to Section 26, agreements that limit or completely ends the freedom of marriage are considered void. The restraint may be partial, meaning it could concern with nor marrying for a particular period of time or with a particular person, or a category of people or complete, denying any freedom of marriage whatsoever.

    However, if an agreement imposes a penalty or disadvantage to a person on the option of marriage, it is not considered restraint. For example, an agreement between a husband and wife, stating that the wife would divorce him if he marries a second wife, is completely valid under the law[5]. Here, the divorce is a consequence of a marriage at the choice of the husband, hence, not really hampering with his freedom of marriage.
     
  4. Agreements in restraint of trade

    Section 27 states that, Any agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. The essence of this section is that no individual shall be deprived of their freedom of trade of commerce, which is a fundamental right provided under Article 19 of the Indian Constitution. Thus, any agreement that deprives a person to ˜exercise a lawful profession, trade or business', is rendered void. Agreements under this section are also subject to the principle of severability, as specified by ˜to that extent'.

    The applied restraint may not be complete or absolute restraint. In the case of Madhub Chander v Raj Coomar[6], the plaintiff was promised a sum of money on the condition that he closed his business in the specified locality. The defendant refused to pay, and hence, sued by the plaintiff. However, the judgement held the agreement void, justifying that restraint mentioned is not only absolute, but also partial restriction, including restriction limited to a place.

    There is one exception in this section, related to the sale of goodwill. If a person sells the goodwill of his business to another person, the seller can be restricted from exercising similar business within specified local limits. The only catch is that the agreements and limits should appear reasonable to the Court in accordance with the nature of the business to be completely valid.
     
  5. Agreements in restraint of legal proceedings

    Section 28 renders the agreements that absolutely restrict a person from enforcing their rights of legal proceedings and remedies, void. If an agreement limits the time of enforcing his rights, they are also considered void. Also, agreements that extinguish the rights of any party or discharges any party from their liabilities under any contract after a limited time, so as to restrict any party from enforcing their rights, are void to that extent.

    It has a few exceptions:
    • This section won't render any agreement as void if it has a clause by which both the parties come to the conclusion that any future disputes shall be resolved by referring the case to the arbitration and any amount awarded shall be recovered from the contesting party.
    • If an agreement has any clause which says that any existing question shall be decided by arbitration, then such clauses have been held valid under this section.
       
  6. Agreements void for uncertainty

    Section 29 states that those agreements that have uncertain meaning, or whose meaning is not capable of being made certain are declared void. For example, in the case of Guthing v Lynn[7], a horse brought for a certain price and a promise of paying 5 euros more if the horse was lucky was made. It was held that the agreement is void as the court cannot determine the luck of the horse was, hence the basis of the agreement was uncertain.
     
  7. Agreement by way of wager

    Section 30 renders wagering agreements void. The essential conditions, for any act to be classified as a ˜wager' are listed below:
    • The agreement should be based on the outcome of an uncertain event;
    • There should be mutual chances of gain and loss, i.e., each party has a chance at winning and losing;
    • Neither party should influence or have control over the outcome of the event;
    • Instead of winning or losing, parties should not be interested in the event for any other motive. (This differentiates insurance agreements from wagering agreements)

    This section gives an exception to horse races, stating the conditions that, This section shall not be deemed to render unlawful a subscription or contribution, or agreement to subscribe or contribute, made or entered into for or toward any plate, prize or sum of money, of the value or amount of five hundred rupees or upwards, to be rewarded to the winner or winners of any horse-race
     
  8. Agreement to do impossible act

    Section 56 declares that any agreement to do an impossible task is void. This section clarifies that an agreement whose objective becomes impossible to perform after the agreement has been formed, becomes void and need not be completed.[8]

    This section also states that if the promisor promises to perform an act that he knew or could have known with reasonable diligence, to be an impossible act, he must make due compensation to the loss sustained by the promisee due to its non-performance. The promisee, however, should be unaware of the impossibility of the act for this to be applicable.

Voidable Contracts

Section 19 and 19(A) specifies the conditions of voidability of contracts.

Under section 19, if the consent of a party to an agreement is caused by coercion, fraud or misrepresentation, then that party can declare the contract so formed, void. Thus, this makes the contract voidable at the option of the concerned party.

Section 15 defines coercion as obtaining the consent of a party to enter the agreement by pressurizing them with either committing or threatening to commit acts forbidden by the Indian IPC or by unlawfully detaining or threatening to detain property. In the case of Chikham Amiraju v. Chikham Seshamma[9], the wife and the son were induced to enter an agreement in favor of the husband's brother, threatening suicide. The agreement was held voidable under coercion.

Section 17 defines fraud to be acts done by one party of the contract to deceive another party and induce them to enter into a contract. These acts include making a promise without the intention of performing it, active concealment of facts, to state facts known to be false, any act or omission that the law expressly declares fraudulent and other acts that are fitted to deceive. Also, keeping silence about facts that will affect the willingness of a party to enter the agreement when it is the duty of the party to speak unless his silence is equivalent to speech also amounts to fraud.

Section 18 defines misrepresentation as committing the following acts:

  1. To present facts that are not true, however the party making them believes them to be true.
  2. However innocently, causing the other party to be mistaken about the subject of an agreement.
  3. Any breach of duty that is advantageous to the person committing it by misleading the other to his prejudice, without the intent to deceive.
Fraud and misrepresentation have a major difference, where fraud is an intentional act of deceive, misrepresentation is not intentional as such.

It is to be noted that section 19 clarifies that if the party whose consent was received through fraud or misrepresentation wants the contract to be performed, the contract would not be void and the deceived party would have to comply with the terms of the contract. Whereas, if a contract is declared void by the party concerned, section 64 relieves the promisor from his duties within the contract, and requires restitution of any advantage that he/she may have obtained within the contract.

If a person has received advantages under a rescinded voidable contract or void agreement, section 65, makes the person obligated to restore it or compensate the person from whom he received the said advantage.

The exception under section 19 states that the provisions of the section would not be applicable if the party, whose consent were caused by misrepresentation or silence to facts of the case, had the means of discovering the truth by ordinary diligence, hence, rendering the contract fully valid and not voidable.

Section 19(A) states that if a party's consent to an agreement is caused by undue influence, the contract is voidable at the option of that party. It also states that:
Any such contract may be set aside either absolutely or, if the party who was entitled to avoid it has received any benefit thereunder, upon such terms and conditions as to the Court may seem just.

Section 16 defines consent to a contract induced ˜undue influence' as when the relation between the parties is such that one of the parties' position would dominate the will of the other, and that party uses the position for an unfair advantage over the other. For example, in the case of Mannu Singh v. Umadat Pandey[10], a spiritual advisor induced the plaintiff, one of his devotees, to present him his entire property to secure benefits for his soul in the next world. The case was declared voidable as the consent was held to be caused by undue influence.

Aside from the provisions of Section 19 and 19(A), if the both the parties are mistaken as to the matter of fact of the contract, Section 20 renders the contract void ab initio as the consent was not given for the subject basis of the contract. However, Section 22 clarifies that a contract is not voidable merely because one of the parties was mistaken about the matter of fact. In this case, the contract would be voidable if the court deems it fit according to its facts.

End-Notes:
  1. ILR (1905) 27 All 266
  2. R. Saraj v. Gyanada, 36 CWN 555
  3. Rajlukhy Dabee v. Bhootnath Mookherjee, (1900) 4 CWN 488
  4. Suraj v. Suku ILR 51 All 164
  5. Badu v. Badarnessa, (1919) 29 CLJ 230
  6. (1847) 14 beng LR 76
  7. (1831) 2 B & Ad 232
  8. Krell v. Henry (1903) 2 KB 740(CA)
  9. ILR (1918) 41 Mad 33,36
  10. ILR (1888-90) 12 All 523

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