LEGALITY

Animesh
 WHAT AGREEMENTS ARE CONTRACT?

• All agreements are contracts if they are made by the free consent of parties
competent to contract, for a lawful consideration and with a lawful object, and
are not hereby expressly declared to be void.
• ELEMENTS OF A VALID CONTRACT
• Free consent
• Parties competent
• Lawful consideration
• Lawful object
 SECTION 23: WHAT CONSIDERATION AND
OBJECTS ARE LAWFUL, AND WHAT NOT?

The consideration or object of an agreement is lawful, unless—

• it is forbidden by law; or
• is of such a nature that, if permitted, it would defeat the provisions of any law; or
• is fraudulent; or
• involves or implies, injury to the person or property of another; or
• the Court regards it as immoral, or opposed to public policy.
In each of these cases, the consideration or object of an agreement is said to be unlawful.
Every agreement of which the object or consideration is unlawful is void.
 MEANING OF OBJECT

• Object means the purpose .

• It is important to observe what is the object of the contract.
• For example if the object of a contract is to defeat a law force in India, then it
will be unlawful an thus void.
 FORBIDDEN BY LAW

• If the object of the agreement is to forbidden by law, then that agreement is

void.
• Law means laws which are in force in India at that point in time.
• Example- Sale of liquor without licence.
 DEFEAT ANY LAW

• The object or consideration of an agreement is of such nature that, if permitted,

it would defeat the provisions of any law.
• Such kind of agreement is void.
• Example- A married B and before the marriage they entered into the agreement
that B, the wife would live with her parents after the marriage. The wife went
to live with her parents and refused to return back to her husband’s house. A,
the husband filed a suit for the restitution of conjugal rights. She argued that
she was allowed to live away from her husband under the agreement which
they had entered into before marriage. The plaintiff was granted the decree for
restitution of conjugal rights.
 FRAUDULENT PURPOSE

• Is of such nature that, if permitted, it would defeat the provisions of any law.
• ‘Intention to deceive’ is necessary for invoking this section under this category.
• Example 1- A, B and C enter into an agreement for the division among
themselves of the gains acquired or to be acquired by them by fraud.
• Example 2- A tells B that he would pay him Rs 50,000 if he commits fraud on
C.
 INJURIOUS TO PERSON OR PROPERTY

• If the consideration or object of an agreement is to cause injury to a person or

property of another, then agreement is void.
For example- an agreement to assault someone or to destroy someone’s property
 IMMORAL

• If the object or consideration of an agreement is immoral then it is void.

• What is immoral depends on the standard of morality prevailing at that
particular time period in a particular society and approved by courts.
• There are certain acts which have always been regarded as immoral.
• For example- dealing with prostitutes
• A agrees to let her daughter for hire to B for concubinage.
PEARCE AND ANOTHER V BROOKS (1866) CE

• The plaintiffs sold a new miniature brougham to the defendant which was to be
paid for by instalments. The defendant was a prostitute and wanted the brougham
for use in attracting trade.
• The jury found that these facts were known to the plaintiffs at the time of the
contract.
• When the defendant did not pay the second instalment and returned the brougham
damaged, the plaintiffs sued for the remaining payment or the cost of the damage.
• Held the plaintiffs could not recover anything on a contract for an immoral
purpose.
 OPPOSED TO PUBLIC POLICY

• There is no precise definition of public policy.

• Opposed to public policy means which is against the public interest.
• If an agreement is opposed to public policy, then it is unlawful.
• Example- an agreement in restraint of trade
• The courts would interpret whether the agreement is in consonance with the recognized public
policy or not.
• The courts would rely on the standard notion of the interest of the society at that particular
time.
• The courts would see if the agreement is against public policy then the courts will not enforce
it.
 G H ER U L A L V M A H A D EO D A S , A I R 1 9 5 9 SC 7 8 1

The doctrine of public policy may be summarized thus: Public policy or the policy of the law is an
illusive concept; the primary duty of a Court of Law is to enforce a promise which the parties have
made and to uphold the sanctity of contracts which form the basis of society, but in certain cases,
the Court may relieve them of their duty on a rule founded on what is called the public policy; for
want of better words Lord Atkin describes that something done contrary to public policy is a
harmful thing, but the doctrine is extended not only to harmful cases but also to harmful tendencies;
this doctrine of public policy is only a branch of common law, just like any other branch of
common law, it is governed by precedents; the principles have been crystallized under different
heads and though it is permissible for Courts to expound and apply them to different situations, it
should only be invoked in clear and incontestable cases of harm to the public; though the heads are
not closed and though theoretically it may be permissible to evolve a new head under exceptional
circumstances of a changing world, it is advisable in the interest of stability of society not to make
any attempt to discover new heads in these days.
 EXAMPLES UNDER SECTION 23

1. A agrees to sell his house to B for 10,000 rupees. Here, B’s promise to pay the sum of 10,000
rupees is the consideration for A’s promise to sell the house and A’s promise to sell the house is
the consideration for B’s promise to pay the 10,000 rupees.
2. A buys alcohol from B who does not have a regulatory license to operate as a liquor vendor. Sale
of alcohol without a regulatory license in prohibited.
3. A agrees to get B a certain number of votes enabling him to win the election in exchange of B
promising to resign from office after 2 years. Section 8 of the Advocates Act prescribes a five-
year term of the office. After 2 years, B refuses to resign.

4. A promises to maintain B’s child, and B promises to pay A 1,000 rupees yearly for the purpose.
Here, the promise of each party is the consideration for the promise of the other party.
 EXAMPLES UNDER SECTION 23

5) A promises to obtain for B an employment in the public service and B

promises to pay 1,000 rupees to A.
6) A agrees to let her daughter to hire to B for concubinage.
7) 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.
8) A promises to lend ornaments to a prostitute to attract male customers.
9) A advances B some money to go to the brothel.
10)A agrees to give false evidence in the court in exchange of certain sum of money.
 SECTION 24: AGREEMENTS VOID, IF
CONSIDERATIONS AND OBJECTS UNLAWFUL IN
PART

• If any part of a single consideration for one or more objects, or any one or any part of
any one of several considerations for a single object, is unlawful, the agreement is
void.
• Example-A promises to superintend, on behalf of B, a legal manufacture of indigo, and
an illegal traffic in another articles. B promises to pay to A salary of 10,000 rupees a
year. The agreement is void, the object of A's promise, and the consideration for B's
promise, being in part unlawful.
• Example- A agreed to live in adultery with B and also agreed to serve him as a
housekeeper for a sum of Rupees 10,000 and 1500 respectively. In this case the first
part of the contract is unlawful and it can easily be separated from the second part. The
court will set aside the first part and enforce the second part of the agreement.
 SECTION 26: AGREEMENT IN RESTRAINT OF
MARRIAGE IS VOID.

• Every agreement in restraint of the marriage of any person, other than a minor,
is void.
• Every individual should have freedom of marriage. So any agreement in
restraint of marriage is void.
• It could be general or partial. General- restrained from marrying at all.
Partial- restrained from getting married for a fixed period of time.
• Exception: minor
 SECTION 27: AGREEMENT IN RESTRAINT OF
TRADE, VOID

• Every agreement by which anyone 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.
 SECTION 27: AGREEMENT IN RESTRAINT OF
TRADE, VOID

• Does not matter if the restrain is general or partial. Both are void.
• Example- A and B are competitors selling apples in the market. A told B not to
sell apple but he was allowed to sell other fruits. This is void.
 NIRANJAN SHANKAR GOLIKARI V. CENTURY
SPINNING & MANUFACTURING CO. LTD., AIR
1967 SC 1098

Facts
• The appellant joined the service of the respondent company as Shift
Supervisor .
• He was given training in the manufacture of tyre cord yarn.
• The contract was for five years and it was stipulated that during the said period
the appellant would not work in similar capacity in any other concern and
would maintain secrecy as to the technical aspects of his work.
• However, shortly after completing his training the appellant joined a rival
concern at higher emoluments.
 NIRANJAN SHANKAR GOLIKARI V. CENTURY
SPINNING & MANUFACTURING CO. LTD., AIR
1967 SC 1098

• The respondent company filed a suit for an injunction against the appellant
restraining him from working elsewhere as a shift Supervisor in the manufacture
of tyre cord yarn or in similar capacity and from divulging the trade secrets of
the respondent company.
• The injunction was granted.
• His appeal failed before the High Court and he appealed at Supreme Court.
• It was contended on his behalf that the covenant was against public policy
within the meaning of s. 27 of the Indian Contract Act, that it was unreasonable,
and that it was unnecessary for safeguarding the trade interest of the company.
 NIRA NJA N S HAN KAR GOL IKA RI V. CE NTURY SP INNING
& MA NUFACT URIN G CO. LT D. , AIR 1 9 67 S C 1 0 9 8

Judgement
• Negative covenants operative during the period of employment when the
employee is bound to serve his employer exclusively are not to be regarded as
restraint of trade and therefore do not fall under s. 27 of the Contract Act.
• A negative covenant that the employee would not engage himself in trade or
business or would not get himself employed by any other master for whom
he would perform similar or substantially similar duties is not a
restraint of trade unless the contract is unconscionable or excessively harsh
or unreasonable or one-sided.
PERCEPT D’MARKR V. ZAHEER KHAN, (2006) 4 SCC 277

Facts
• Percept D’Mark was a company engaged in the business of celebrity endorsement, sports
management and marketing.
• They entered into a promotion agreement (“Agreement”) with Zaheer Khan, an Indian cricketer in
November 2000.
• The object of the agreement was to manage the brand development and media affairs of Zaheer by
Percept.
• In the Agreement, a condition was laid down, which stated that upon termination of the Agreement,
Zaheer had to compulsorily give Percept an opportunity to match any offer made to him by a third
party if he chose to not renew the agreement and enlist another service provider.
• This clause – more popularly referred to as the ‘Right of First Refusal’ (“ROFR”) was available to
Percept before Zaheer entered into an agreement with an interested third party.
 PERCEPT D’MARKR V. ZAHEER KHAN,
(2006) 4 SCC 277

• Percept sent a draft proposal to extend the Agreement with Zaheer.

• Zaheer replied to the proposal stating he did not wish to renew the contract or extend the
agreement.
• A day before the expiry of the Agreement, Zaheer sent a letter to Percept arguing that the ROFR
clause in the Agreement, constituted a restraint of trade and therefore the Agreement was void
under Section 27 of the Act.
• Zaheer argued that the Agreement was one sided and unfair.
• After the expiry of the Agreement, Zaheer entered into an agreement with a third party without
entertaining Percept’s ROFR.
• This was challenged by Percept in the Bombay High Court and on appeal, was put forth the
Supreme Court for deliberation.
 P E R C E P T D ’ M A R K R V. Z A H E E R K H A N , ( 2 0 0 6 ) 4 S C C 2 7 7

Judgement
• The covenant contains restraint in trade.
• It clearly restricts Zaheer Khan’s ability to choose with whom he wants to deal
with.
• It curtails the liberty of the respondent.
• It is a void contract under section 27 of the Act.
 EXCEPTION: 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 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.
 NORDENFELT V MAXIM NORDENFELT
GUNS & AMMUNITION CO, 1894AC 535

Facts
• The defendant was an inventor and manufacturer of guns and ammunition.
• In 1886, the defendant sold his business to a new company, the Nordenfelt Guns and
Ammunition Company, of which he became managing director.
• In 1888, the company merged with the Maxim Gun Company, to form the plaintiff company.
• As part of the merger agreement, the defendant agreed with the buyer company on 1) not to
practice same trade for 25 years. 2) not to engage in any business competing or liable to
compete in any way with the business competing or liable to compete in any way with the
business for the time being carried on by the company.
• When the defendant made an agreement to work with a competing company, the plaintiff
company brought this action for an injunction to enforce the agreement not to compete.
 NORDENFELT V MAXIM NORDENFELT
GUNS & AMMUNITION CO, 1894AC 535

Judgement
• The first part of the agreement was valid as it protects the purchaser’s interest.
It is a reasonable restriction.
• The next covenant was not valid as it was unreasonable.
 SECTION 28: AGREEMENTS IN RESTRAINT OF
LEGAL PROCEEDING, VOID

[Every agreement,—
(a) 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 his
rights; or
(b) which extinguishes 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.]
Exception 1.— Saving of contract to refer to arbitration dispute that may arise. —This section 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.
Exception 2.— Saving of contract to refer questions that have already arisen. —Nor shall this section 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.
 SECTION 28: AGREEMENTS IN RESTRAINT OF
LEGAL PROCEEDING, VOID

Exception 3- Saving of a guarantee agreement of a bank or a financial institution.

This section shall not render illegal a contract in writing by which any bank or
financial institution stipulate a term in a guarantee or any agreement making a
provision for guarantee for extinguishment of the rights or discharge of any party
thereto from any liability under or in respect of such guarantee or agreement on
the expiry of a specified period which is not less than one year from the date of
occurring or non-occurring of a specified event for extinguishment or discharge
of such party from the said liability.
 SECTION 29: AGREEMENT VOID FOR
UNCERTAINTY

• Agreements, the meaning of which is not certain, or capable of being made certain, are void.
Examples
• 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 for uncertainty.
• A, who is a dealer in cocoanut-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 A has entered into a contract for the
sale of one hundred tons of cocoanut-oil.
• A agrees to sell to B "all the grain in my granary at Ramnagar". There is no uncertainty here to make
the agreement void.
• 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.
 SECTION 30: AGREEMENT BY WAY OF
WAGER, VOID

• 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 result of any game or other uncertain
event on which any wager is made.

• Exception in favour of certain prizes for horse-racing.-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 awarded to the winner or winners of any horse-race1.

• Section 294A of the Indian Penal Code not affected.-Nothing in this section shall be deemed to
legalize any transaction connected with horse-racing, to which the provisions of section 294A of the
Indian Penal Code (45 of 1860) apply.
 EXAMPLE

• A and B enter into an agreement according to which A would give B Rs. 5000
if candidate S wins the local election and B would pay A Rs. 5000 if candidate
R wins.