Module 6 Legality of A Contract Final

Legality of a contract
Section 23 & 24 : Unlawful

agreements
• Section 23:
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.
Such agreements which have any one or more of these

above components is void under Section 24.
• Jaffer Meher Ali v. Budge budge Jute
Mills:
Object is different from consideration and

it means the purpose or the design behind
the agreement.
I. Forbidden by law:
• Any agreement which breaches any law which is
in force in India.
• Nandlal v. Thomas J. William

The act forbide the sale, transfer, sublease and
partnership in a business for sale of liquor.
• Jaswinder Singh v. Sanjogta Nanda:

Property sold by a non resident India without
permission of RBI was liable to be penalised under
FEMA. Would it make the sale void?
II. Defeat any law:
• When the object or the consideration is not

directly forbidden by the law, but it defeats
the provisions of the law.
Case: Fateh Singh v. Sanwal Singh

Recovery of the amount paid by the surety.
• Defeat of the law of a friendly country:

Case : Foster v. Driscoll
III. Fraudulent
• An agreement entered into by the parties
to impose fraud on a third party is void in
nature.
• Intention to deceive:
Case: Brown Jenkinson & Co. v. Percy Dalton
(London) Ltd.
• If only one part of the contract is
fraudulent in nature. What will happen?
• A being an agent of B, a landowner, agrees for money without the
knowledge of B, to obtain from him a lease of land for C. Agreement
between A and C is fraudulent in nature.
• A composition agreement with all the creditors to repay all of them
1/3 rd of the amout due to them, but secretly making an agreement
with one of the creditor paying off to him on full is fraudulent in
nature.
• Case: Sujan Singh v. Mohkam Chand:
An agreement not bid against each other in an auction sale is valid in
nature.
Case: Manni Ram v. Purshottam Lal:

A was not allowed to procure a contract with railways so he came into an
agreement that B would put forward an application in his name though
A shall serve as the real contractor.
IV. Agreement injurious to a person or
property
• An agreement between two persons to injure the person or property of
another is unlawful.
• Underlying Principle: Law does not help a person to recover anything
under his own crime.
•
Case : Ram Sarup v. Bansi Mandar
An agreement under which the borrower was made to engage in bonded
labour until repayment and if he failed he was to pay exorbitant rate of
interest.
• An agreement to jointly carry on the a business is not unlawful, does

not amount to conspiracy against the rival shipping company.
Case: Beresford v. Royal Insurance Co. Ltd.

V. Immoral
• When the object or the consideration of an

agreement is immoral in nature.
• Morality: depends on the social standards
prevailing at a particular period of time.
• Case: Baivijli v. Nansa Nagar
• Case: Fender v. St. John Mildmay
• Case: Upfill v. Wright: renting of house for
concubinage.
• Case D. Nagaratnamba v. Kunuku Ramayya
• Case: Gherulal v. M. Maiya: scope of
immorality
VI. Against public policy
• Gherulala v. Maiya:
“Any agreement which is against the policy of law.”
• Marriage of minor girls.
• Bribe
• Agreement against the laws of friendly nations.
• Alienation of lands.
• Trading with enemy.
• Trafficking in public offices.
• Interference with the administration of justice
• Interference with court of justice.
• Stifling prosecution
• Maintenance and champerty.
• Marriage brokerage agreements.
• Unfair dealing
Section 26: restraint of marriage
• Every contract in restraint of marriage other than that of a
minor, is void.
• Based on public policy.
• Any contract is void which unduly restricts or hampers the
freedom of persons to marry “at will”.
Eg. a contract not to marry any person other than the party to
it was void.
Case: Lowe v. Peers
Case: Rao Rani v Gulab Rani:
No direct prohibition to re-marry was imposed by the
compromise and the compromise was arrived at in order to
preserve the family properties and to ensure their proper
management
Principle as followed in England and
India:
• England: the restraint has to be “reasonable”
in nature.
Case: Esse Petroleum Co. Ltd. V. Harper’s Garage
Ltd.: the classification is never ending and it is
flexible in nature.
• India: the restraint will be valid if it has been
specifically provided under any statue or it has
been specifically created by the judiciary.
Section 27: Agreement in restraint of trade
• Any agreement which restricts a person from
exercising a lawful profession, trade or
business of any kind is void.
• Based on public policy.
• Constitution of India: Article 19 (g) and Article
301.
Case: Madhub Chander v. Rajcoomar Dass: no
distinction between partial or complete
restraint.
Case: Nordenfelt v. Maxim Nordenfelt
Guns and Ammunition Co. Ltd.
• Sale of goodwill by a manufacturer of guns
and ammunitions.
• The agreement said,
1. Not to practise the same trade for 25 years.
2. Not to engage in any business competing or
liable to compete in any way with the
business for the time being carried on by the
company.
Exceptions:
• Sale of goodwill:
Case: Vancouver Malt & Sake Brewing Co. v.
Vancouver Breweries Ltd.
Limits: the contract should provide a certain
time limit and the geographical or territorial
limits.
• Under Partnership Act:

Section 11, 36 of the Partnership Act
• Trade combinations
1. In order to regulate business and not retrain
it.
2. To standardise goods, fixed prices and
eliminate unreasonable competition.
Case: Kores Mfg. Co. Ltd v. Kulok Mfg. Co Ltd.
Appointment of employees
Case: Haribhai v. Sharaf Ali: pricing and output
Solus Agreement: exclusive dealing
agreements
• Not declared to be void.
• If the producer after selling off to the party
with whom he has a solus still has certain
surplus then the same can be sold to the rest
of the market.: Abdul Karim v. SK Dubar.
• Agreement for 21 years is unreasonably long:
Esso Petroleum Co. v. Harper’s Garage Ltd.
Restraint by a contract of service.
• Clause in the employment contract.
Case: Charlesworth v. Mac Donald.
An agreement for assistantship for three years
under a physician and surgeon.
• Important for the purpose of concealing trade
secrets, customer information and other
confidential information.
• Niranjan Shanker Golikari v. Century Spinning
& Manufacturing Co. Ltd.
Section 28: agreements in restraint of
legal proceedings.
• When an agreement absolutely restricts a
person from bring a law suit, it is void.
• As it is opposed to public policy.
• If it partially restricts the right then it is
enforceable in nature.
Case: Hakam Singh v. Gammon (India) Ltd.:
partial restriction not void. (with regard to
jurisdiction)
Agreement limiting the time period for
bringing an action: void.
• In case of insurance agreements
Case: Baroda Spinning and weaving Co. Ltd. V.
Satyanarayen Marine & Fire Ins. Co. Ltd.
• Amendment Act, 1997

• Exceptions:
1. Arbitration
2. Referring any existing question to arbitration
Section 29: agreement void due to
uncertainty.
• When the language and the meaning of the
agreement is not certain then it is void in
nature.
Case: May & Butcher v. R
Wagering and contingent contracts
• Section 30: wagering contract are void.
• Carlill V. Carbolic Smoke Ball:
“A wagering contract is one by which two
persons, professing to hold opposite views
touching the issue of a future uncertain event,
mutually agree that, dependent upon the
determination of that event, one shall win from
the other and that the other pay to him for the
win….”
Essentials:
1. Opposite views of both the parties.
2. The win or lose depends on a future event.
3. One party loses and the other wins.
Section 31: Contingent Contract
• Future performance, conditional in nature
which is uncertain as well.
• when the performance of the contract
depends on happening or non happening of a
future event.
Eg. Insurance contracts.
Case: Secretary of State for India v. A. J.
Arathoon: supply of timber contingent on
approval by the superintendent of the factory.
• Essentials:
1. Collateral contingent event.
2. Contingency can depend on the will of one of
the parties
3. It is a condition precedent: effect is such that
the contract may (not) be formed or
performance from one party may (not) take
place
Eg. On the date of the redemption of the
mortgage, the house shall be sold off to the
plaintiff.
• Section 32: enforcement dependent on the
happening of future event, otherwise not
enforceable.
If event becomes impossible, then contract become
void.
• Section 33: enforcement of contracts contingent
on an event not happening: opposite of Section
32.
• Section 34: when event on which contract is
contingent to be deemed impossible, if it is the
future conduct of a living person.
Case:Frost v. Knight
• Section 35: when a contract becomes a void,
which are contingent on specified event not
happening within a fixed time.
• Section 36: agreements contingent on
impossible events, void.

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Legality of a contract

Section 23 & 24 : Unlawful

Such agreements which have any one or more of these

Object is different from consideration and

• Nandlal v. Thomas J. William

• Jaswinder Singh v. Sanjogta Nanda:

• When the object or the consideration is not

Case: Fateh Singh v. Sanwal Singh

• Defeat of the law of a friendly country:

Case: Manni Ram v. Purshottam Lal:

• An agreement to jointly carry on the a business is not unlawful, does

Case: Beresford v. Royal Insurance Co. Ltd.

• When the object or the consideration of an

• Under Partnership Act:

• Amendment Act, 1997

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