January 23, 2022

Limitations on Freedom of Contract under Indian Contract Act

contract act

Legality of Object and Agreements with Unlawful Consideration

When a person or an organisation makes a proposal to another person or organisation and the other person or organisation accepts it forming consideration, which is enforced by law, is called a contract.

The object or the proposal must be lawful i.e.,

  1. When it is prohibited by law: when the consideration or the object is prohibited by law, the proposal is deemed to be invalid.
  2. If the consideration is of such nature that it would defeat the provisions of any law: if any of the parties defies any provision of law, the consideration will be not lawful.
  3. Fraudulent Consideration or Object: if the nature of transaction contains fraudulent consideration or object, i.e., smuggling, the agreement will be void.
  4. If the Court regards it as immoral, or opposed to public policy: if the court regards any part of the consideration as immoral, or opposed to public policies, the consideration will be termed as unlawful.

For Example: – C promises to superintend, on behalf of A, a legal manufacture of indigo, and an illegal traffic in another articles A promises to pay to C salary of 10,000 rupees a year. The agreement is void, the object of C’s promise, and the consideration for A’s promise, being in part unlawful.

Types of contracts: –

Valid contract:

When two parties agrees to enter into a agreement which can be enforced by law, it is known as valid contract.

Case: – Rajat Kumar Rath v. Government of India (2000)

In this case, an agreement which, although invalid, is not prohibited by law, can be applied as a valid agreement, if it is merely a collateral agreement to anyone other than the one which provides an assist in the enforcement of this object of the other agreement.

Void Agreements

Void agreements: When agreements are not valid from the beginning, the agreement is considered to be void, i.e., not valid. Void contracts are agreements which are illegal, made with incompetent parties, consist of any unlawful object, or impossibility of performance, etc. The maxim VOID-AB-INITIO is used for these agreements which means that these agreements are void from the beginning.

For example: Contracts entered by minors are considered as void. A, is a fourteen-year-old boy, who enters into a contract with b, an adult. A takes a loan from B and fails to pay it back. B cannot sue A since he is a minor and the contract between them is void.

Voidable Contracts [section 2(i)]:

When a contract is entered by a party with a lack of free consent, it is called as voidable contract. The aggrieved party is forced by the other party to enter into a contract. These contracts are enforced at the option of one party and not at the option of another. This can be explained through below example:

Example: A and B enters into a contract where B forces A to sell his car to B for Rs 100 or else he will kidnap A’s family. In this, A is forced by B to enter into a contract. This contract is only at the option of one party and not at the option of another party. This contract is termed as voidable contract.

Quasi contract:

Case: – Sinclair v Brougham [1914] AC 398[i]

The House of Lords held that the conduct of the bank were ultra-vires and invalid and that depositors could not recover under virtual contracts. The control of the construction company had to be confined to the proper artifacts in Viscount Haldane LC so the banking industry was ultra vires. Depositors thus were not entitled to reclaim the money they paid for an ultra-vires credit deal.

Public Policy and Law of Contracts

In the case of Gherulal Parekh v. Mahadevdas Maiya[v], the apex court observed:

” ‘Public policy’ is a vague and unsatisfactory term, and calculated to lead to uncertainty and error, when applied to the decision of legal rights; it is capable of being understood in different senses; it may, and does, in its ordinary sense, mean ‘political expedience’, or that which is best for the common good of the community; and in that sense there may be every variety of opinion, according to education, habits, talents, and dispositions of each person, who is to decide whether an act is against public policy or not. To allow this to be a ground of judicial decision, would lead to the greatest uncertainty and confusion. It is the province of the statesman, and not the lawyer, to discuss, and of the Legislature to determine, what is best for the public good, and to provide for it by proper enactments. It is the province of the judge to expound the law only; the written from the statutes; the unwritten or common law from the decisions of our predecessors and of our existing Courts, from text writers of acknowledged authority, and upon the principles to be clearly deduced from them by sound reason and just inference; not to speculate upon what is the best, in his opinion, for the advantage of the community. Some of these decisions may have no doubt been founded upon the prevailing and just opinions of the public good; for instance, the illegality of covenants in restraint of marriage or trade. They have become a part of the recognized law, and we are therefore bound by them, but we are not thereby authorised to establish as law everything which we may think for the public good, and prohibit everything which we think otherwise.” 

Case: – Central Inland Water Transport Corporation Limited V Brojo Nath Ganguly AIR 1986 SC 1571

 The court held that the central water transportation company, the Central Inland water transportation corporation, is not only defined by the government under section 617 of the Company Act of 1956 but also owned wholly by the three central governments, West Bangladesh, and Assam. The deal was conducted on conditions that were unjust because it defied what would be right or rational and it seemed to have been made to the unfair benefit of others. And the State in compliance with Article 39 should respect its policies on the security and fair pay of people for equal work for men and women which will also reduce the level of wealth and development to the detriment of everyone

Limitations on Freedom of Contract under Indian Contract Act

Agreements without Consideration (section 25)

According to sec 25 of the Indian contract act, Agreement without consideration is void, unless it is a promise to compensate for something done or is a promise to pay a debt barred by limitation law or is it is in writing and registered.

An agreement without the consideration is void unless: –

  1. It is expressed in writing and is registered. It is a contract arising out of natural love and affection.
  2. It is promised to compensate fully or in part by the promisor to a person who is already done something voluntarily for the promisor.

Agreements in Restraint of Marriage

Under section 26 of the Indian contract act, agreements which are made in order to restrain someone from marrying other than a minor is not valid, i.e., void. The main idea which made this section was that marrying someone of their own choice is a basic right of every individual and it should not be snatched away. Therefore, any agreement which prohibits someone from marrying another person pf his own choice will come under restraint of marriage.

Case: – Rao Rani v. Gulab Rani:

In this case, the two parties were the widows of the same man. After the death of their husband, a dispute aroused between them as to who will inherit the land. This case took place in the division bench of the Allahabad High Court.

Agreements in Restraint of Trade

Under section 27 of the Indian contract act, a contract between two persons shall not bound a person from not practicing or starting his own trade or profession for some consideration. Therefore, a person restraining someone to practice a trade or profession for his own benefit, or restraining him to trade in a particular way for his own benefit will come under restraint of trade.

Conditions that make restraint of trade valid

There are certain conditions that make a restraint on trade during a sale of goodwill valid, these are:

  1. The seller can be restrained only from carrying out a similar business.
  2. The restraint can be applied only to certain local limits.
  3. The limits/restraint should appear to be reasonable.

Agreements in Restraint of Legal Proceedings (section 28)

Under section 28 of the Indian contract act, agreements that restrains either one or both of the parties from going to the courts are not valid or void. When a contract debars a party to the contract from going to the appropriate courts or tribunals or which limits the time to approach a court is void and it comes under agreements in restraint of legal proceedings.

  • Case: –   Vulcan Insurance Co. Ltd v. Maharaj Singh

The Supreme Court held that an insurance agreement provision stating that the insurer will not be liable for any damage if the claim is made 12 months after the loss is 

not invalid, as it merely allows for the right accrued to a party under the contract to be forfeited and does not attract the inconvenience of Article 28 of the Contract Act. This new clause, which does not allow for any retrospective effect, would from the date of entry into force of this amendment, make this decision not a good rule. 

Another Supreme Court case can be reviewed in this regard.

  • Case: –National Insurance Corporation Ltd. v. Sujir Ganesh Nayak and CO.

It was held that the clause in the insurance policy relieving the insurer from responsibility for loss and damage was such a condition, unless the claim was made before the expiry of the stated period from the beginning of the loss or damage, even if the period specified therein was less than that prescribed by the law for damage.

Amended section 28 is not retrospective

It is not retrospective to section 28. A contract states that the party would forfeit the right to seek relief under arbitration if the arbitration is not claimed within the prescribed time. In an insurance plan, the agreement stipulates that the insurance claim must be made within the time stated therein. Otherwise, the advantages resulting from the strategy would have been removed. The time defined is less than the limitation period for a suit under the contract provided for in the Limitation Act. However, under the amended Section 28 of the Contract Act, such an extension of the right is impermissible. However, having regard to the fact that the amendment was prospective in nature and that the contract was entered into prior to the amendment, it was found that the condition of the policy was valid in the light of the provisions of Section 28 prior to its 1996 amendment, as was the case with Oriental Insurance Co. Ltd v. Bank of Karur Vysya Ltd[4]..

Ambiguous and Uncertain Agreements

Either because the words are unclear or undefined in an agreement or because the agreement is incomplete may be uncertain. The general rules are that, if the conditions of an arrangement are ambiguous or unlimited, and the intention of the parties cannot be determined with reasonable certainty, no contract shall be enforceable by law.

Section 29 Provides the interpretation, as in Kovuru Kalappa Devara vs. Kumar Krishna Mitter[ii], of a settlement which is to be apparent on the face of it, but the impact can be made on the contract if it is fair to be clear in its significance. The contract will not be enforceable if this is not so. It is not regarded as ambiguous merely difficult to read. As a party requesting a remedy of the Court in violation of the contract, the principle should be formulated. The duty must be able to describe with sufficient accuracy the obligation to warrant the remedy. The legislation therefore mentioned is more versatile and acknowledges that the solutions which require various degrees of certainty.

Wagering Agreements under Indian Contract Act

When two parties agree and enters into a condition that one party will receive money from the other party on the happening of future uncertain event, the other party will receive the money from the first party on non-happening of future uncertain event. This kind of agreement is a wagering agreement. In a wagering agreement, there should be shared chances of profit and loss. Wagering deals are usually void.

Wager means bet. It’s a chance game where the chance to win or lose is unknown. The probability of winning or losing depends solely on an unpredictable occurrence.

Example: – B and C agree with each other of it will rain on Saturday. B will pay C Rs 200 if it rains on Saturday and c will pay B if it does not rain on Saturday. This agreement between B and C is a wagering agreement and it is void.

Exceptions of wagering agreement

  1. Insurance policy is not an investment

Contracts for insurance are reimbursement contracts. They are signed in order to secure one party’s interest in the deal. The insured is insurable in the property or life in this contract; hence, it is not a settlement.

2. Competitions for skills are not competitive

Skill plays a significant role in overcoming these competitions successfully. For eg, competitions for crosswords, pictures, puzzles, etc. The awards are awarded here in conjunction with the merits of the solution. These are not wagering competitions. If prizes are contingent upon an opportunity, however, that’s a lottery and a gamble.

For example: – A crossword in a newspaper was provided that the crossword solution would correlate to the solution held with the publisher. It was also specified in the newspaper that the first prize would be awarded. It’s a luck game and therefore a lottery. And then, it’s a bet.[iii]

3. The market for horse races is not a wager

State governments can, if allowed by local law, award horse race competition. Any subscription or donation to any reward or amount of money to be awarded to a winner of a horse race of Rs. 500 or higher is, in these cases, not unlawful. In short, agreements which are also binding and enforceable to subscribe for or contribute to certain prizes or number.

  • The transaction of the share market is not a wager

The purchase and selling transactions of shares and securities are not wagered in order to receive and distribute stocks. Nevertheless, the contract will only be wagered if the goal is to overcome the price gap.

5. Sports competitions are not wager 

Sports events like athletics, wrestling, indoor games, football, boxing, cricketing, hockey and so on are not fortunate games. It is measured by competence. They’re not wagers, therefore.

Contingent contract under Indian Contract Act

Contingent contracts are those in which the promisor only fulfills his duty if certain provisions are fulfilled. Insurance, reimbursement and guarantee arrangements are some samples of contingent contracts.

Illustration: M is a private insurer who signs an M’s house insurance policy with N. Under the terms, M decides that N shall pay a sum of Rs 1 lakh if the annual premium of his home is burned by Rs 8,000. Often this is a contingent arrangement.[iv]

For more articles on Law of Contracts, Click Here.

For law notes, Click Here.

[i] https://www.cambridge.org/core/journals/cambridge-law-journal/article/abs/sinclair-v-brougham/8A340505054CAD89B3BDE30A2F82E293

[ii] https://indiankanoon.org/doc/183366/

[iii] https://accountlearning.com/wagering-agreement-meaning-essentials-exceptions-effects/

[iv] https://lexlife.in/

Author Details: Hitanshi Khandelwal [Student; Amity University, Kolkata]

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