Business law

Introduction
• Consideration is an essential element for the formation
 of a contract. It may consist of a promise to perform a 
desired act or a promise to refrain from doing an act
that one is legally entitled to do.
• Consideration must have a value that can be objectivey
 determined. A promise, for example, to make a gift or 
a promise of love or affectionis not enforceable becaus
e of the subjective nature of the promise.
 Lawful and unlawful object
• The consideration or object of an agreement is
lawful, unless:
• It is forbidden by law (see Sees. 26, 27, 28 and 30) or
is of such a nature that, if permitted, it would defeat
any law.
• 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.
 Seven circumstances which would make an object as
well as consideration unlawful are discussed
1. Forbidden by law: Object or consideration becomes
unlawful when it is forbidden by law. An agreement
the consideration or object of which is unlawful is void.
'Law' in this connection means the law for the time
being in force in India and, therefore, includes Hindu
and Mohammad Laws and also principles of unwritten
law.
• An act is forbidden by law when it is punishable by the
criminal law of the country. An act is forbidden by law
when it is prohibited by special legislation or
regulations made by a competent authority under
powers derived from the legislature.
 Cont...
2. Defeat of the provision of law: If the object or
consideration of an agreement is such that, though
not directly forbidden by law, it would defeat the
provisions of any law and hence the agreement is
void.
(a) An agreement by a debtor not to raise the plea of
limitation is void,
(b) The Hindu Law is defeated by an agreement to give a
son as adoption consideration of annual allowance to
the natural parents.
 Cont..
• Fraudulent: An agreement made for a fraudulent purpose is void.
Where the parties agree to impose a fraud on a third party, their
agreement is unlawful. An agreement defraud creditors, or to give
fraudulent preference to a creditor or to defraud revenues
authorities, or investors in a company are illegal.
• Example: Amar promises to pay Rs. 20,000/- to Bimal, if Bimal could
commit fraud on Kamal. Bimal agrees to do so. Bimal’s agreeing to
defraud is unlawful consideration for Amar’s promise to pay.
Therefore, the agreement is illegal and void.
 Cont...
 4. Injurious to person or property: Injury means wrong,
harm or damage. Person; means one's body. Property
includes movable and immovable property.
• If the object or consideration is injurious to the
person or property of another, it is void as it is
unlawful. If the object of an agreement is such that it
involves or implies injury to the person or property of
another, the agreement is void.
• Example: Agreements relating to bonded labour have
also been held to be injurious to person and hence are
void. .
5. Immoral: An agreement the object or consideration of
which is immoral, e.g. an agreement between a
husband and wife for future separation, is unlawful.
• Example: A married women was given money to
enable her to obtain divorce from her husband and
then marry the lender. Held, the agreement was
immoral and the lender could not recover the money.
 Cont…
6. Public policy: An agreement is unlawful if the court regards it as
opposed to public policy. The term public policy is not clearly
defined anywhere and in the words of justice Burrogh, "Public
Policy is a very unruly horse and when once you get astride it, you
never know where it will carry you."
• Public policy is that principle of law which holds that no citizen can
lawfully do that what has a tendency to be injurious to the public.
Any agreement which tends to promote corruption or injustice or is
against the interests of the public is considered to be opposed to
public policy [Ratan Chand Hira Chand v. Askar Hawaz Jmg (1991) 3
SCC 67].
 Cont…
• An agreement is unlawful if the court regards it as
opposed to public policy. A contract which is opposed
to public policy cannot be enforced by either of the
parties to it.
• In law, public policy covers certain specified topics and
they are described as under.
• Trading with enemy: It is a well settled principle of law
that an agreement between citizens of two nation at
war with each other is void and inoperative. In India
such agreements are allowed where specially permitted
by the Government.
• Agreement to commit a crime: Where the consideration
is an agreement to commit crime, the agreement is
opposed to public policy. The court will not enforce such
an agreement. Similarly, an agreement to indemnify a
person against consequences of his criminal act is
opposed to public policy and hence unenforceable.
• Agreements which interfere with administration of
justice: An agreement the aim of which is to
interfere with the administrator of justice is unlawful
being opposed to public policy. It may take any of the
following forms:
a. Interference with the course of justice: An
agreement which obstructs the ordinary process of
justice is unlawful. Thus, an agreement for using
improper influence of any kind with the judges
officers of justice is unlawful. But an agreement refer
present or future dispute to arbitration is valid.
 Cont...
b. Stiffing prosecution: It is in public interest that if a
person has committed a crime, he must be prosecuted
and punished. Here an agreement not to prosecute an
offender is an agreement for stifling prosecution and is
lawful. But a compromise in case of compoundable
offences is valid.
c. Maintenance and champerty: Maintenance is an
agreement whereby a person promises to maintain a suit
in which he has no interest. When a person agrees to help
another by money or otherwise in litigation in which he
is not himself interested, it is called maintenance. In
English law, these agreements are void.
• When a person helps another in litigation in exchange of
a promise to handover a portion of the fruits of the
litigation, if any, it is called champerty. Under English
law, these agreements are void. In Indian law, however, it
does not make them absolutely void. The party helping
in litigation shares in the gains in addition to interest on
money advanced or fees for professional services.
 d. Agreements in restraint of legal
proceedings of litigation:
• Agreements restricting enforcement of rights:
An agreement which wholly or partly prohibits
any party from enforcing his rights under or in
respect of any contract is void to that extent.
• Agreements curtailing period of limitation:
Agreements which curtail the period of
limitation prescribed by the law of limitation
are void because their object is to defeat the
provisions of law.
 e. Trafficking public offices:
• Agreements for the sale or transfer of public offices
and titles or for the procurement of a public
recognition like Padma Vibhushan or.Param Veer
Chakra for monetary consideration are unlawful
being opposed to public policy.
 f. Agreements tending to create interest
opposed to duty:
• If a person enters into an agreement whereby
he is bound to do something which is against
his public or professional duty, the agreement
is void on the ground of public policy.
g. Agreements in restraint of parental rights:

• A father, and in his absence the mother, is the legal

guardian of his/her minor child. The right of
guardianship cannot be bartered away by any
agreements. A father is entitled by law to the custody
of his legitimate child. He cannot enter into an
agreement which is inconsistent with his duties arising
out of such custody.
 h. Agreements in restraint of personal liberty:

• Agreements which unduly restrict the personal

freedom of the parties to it are void, being
against public policy.
• (i) Agreements in restraint of marriage: Every
agreement in restraint of the marriage of any
person other than a minor is void (Section 26).
This is because the law regards marriage and
married status as the right of every individual.
 I . Marriage brokerage or brokerage
agreements:
• An agreements by which a person, for a monetary consideration, promises in
return to procure the marriage of another is void, being opposed to public
policy.

j. Agreements interfering with marital duties:

An agreement which interferes with the performance of marital duties is void.

Such agreements have been held to include the following:

(i) A promise by a married person to marry during the lifetime or after the dealth
of spouse.

(ii) An agreement in contemplation of divorce. For example, an agreement to lend

money to a woman in consideration of her getting a divorce and marrying the
lender.
 k. Agreements to defraud creditors:

• An agreement the object of which is to

defraud creditors or the revenue authorities is
not enforceable, being opposed to public
policy. An agreement by which an employee
gets an expense allowance grossly in excess of
the expenses actually incurred by him is
illegal.
l. Agreements in restraint of trade (Section 27):
• An agreement which interferes with the
liberty of a person to engage himself in any
lawful trade, profession or vocation and then
it becomes void.
• The exceptions are: (a) sale of goodwill and (b)
partner's agreements and trade
OBJECTS OR CONSIDERATION UNLAWFUL IN PART

• If the object or consideration is partially unlawful, the following rules

will apply:

1. If there are several objects but a single consideration, the agreement is

void if anyone of the objects is unlawful (Section 24).

2.If there is a single object but several considerations, the agreement is

void if any one of the considerations is unlawful (Section 24).

• The two above rules apply to the case where the agreement cannot be
divided into two parts - a part which is legal and a part which is illegal.
• A promises to superintendent, on behalf of B,
a legal manufacturer of indigo, and an illegal
traffic in other articles. B promises to pay A a
salary of Rs. 4,00,000 a year. The agreement is
void. Here a part of the object is legal and a
part is illegal, but there is a single
consideration.
3. Where there is a reciprocal promise to do things
legal and also other illegal things, the
legal part can be separated from the illegal part.
The legal part is a contract whereasthe illegal
part is a void agreement (Section 57).
A and B agree that A shall sell a house for Rs.
90,000, but if B uses it as a gambling house, he
shall pay A Rs. 2,50,000 for it. The first part of
the agreement is valid, the second part is invalid.
4.In the case of an alternative promise, one branch
of which is legal and the other isillegal, the legal
branch alone can be enforced (Section 58).
• A and B agreed that A shall pay Rs. 6,000 for
which B shall, afterwards, deliver to A either
rice or smuggled opium. This is a void contract
to deliver rice and a void agreement as to
opium.4
 Unlawful and illegal agreements
• An unlawful agreement is one which , like a void
agreement , is not enforceable by law. It is void ad into and
lacks legal effects altogether. It affect only the immediate
parties and has no further consequences.

• An illegal agreement is not only void between immediate

parties but has this further effect that the collateral
transaction to it also become infected with illegality.
 Effect of illegality
• The general rule is that no action is allowed on an illegal
agreement.

• two maxim ( proverb)

• Ex turpi cause non ouitur action ( i.e no action arise from a base
cause). The law discourages people from entering into illegal
agreement which arise from base cause.

• In pari delicto portior est condition defendants: in case of equal

guilt, the defendant is in a batter position than of a plaintiff.
 Void Agreement
• An agreement not enforceable by law is said to be void” (section
2g). All agreement may not be enforceable at law; only those
agreement which fulfil the essential laid down in section 10 of
the contract act can be enforced.

• The contract act specially declares certain agreement to be void.

• a void agreement is one “ which is not enforceable by law. Such

as agreement dose not give rise to any legal consequences and
void ab initio.
 contract become void.

1.A contract becomes void by supervening impossibility or

illegality.

2. A voidable contract become void when the party whose

consent is not freely repudiates the contract.

3. A contingent contract to do or not to do something on the

happening of an event become void when the event becomes
impossible.
 We have already dealt with the following
five types
1. Agreement by a minor or a person of unsound mind.
2. Agreement made under a bilateral mistake of fact
material to the agreement. ( sec...20)
3. Agreement of which the consideration or object is
unlawful. Section 23
4. Agreement of which the consideration or object is
unlawful in part and the illegal can not be separated
from the legal part.
5. Agreements made without consideration. Exercises
alphabets assent
expressly declared to be void agreement

• Agreements in restraint of marriage:

• According to Section 26 of the Contract Act, "every agreement in restraint

of the marriage of any person, other than a minor, is void." Every individual

enjoys the freedom to marry. He or she should not be restrained to do so.

• The restraint may be either general or partial but the agreement is void. So,

an agreement agreeing not to marry at all a certain person is void. It is

interesting to note that a promise to marry a specific person does not imply

any restraint of marriage and hence, it is a valid contract.

• Agreements in restraint of trade:

The Constitution of India guarantees the freedom of trade and commerce to every

citizen. Section 27 of the Contract Act states, "Every agreement by which anyone

is restrained from exercising a lawful profession, trade or business of any kind, is

to that extent void."

• Agreement in restraint of legal proceedings (Section 28):

An agreement which prohibits a person from taking judicial proceedings in respect

of any right arising from a contract is void. Thus, where a servant agrees not to sue

for wrongful dismissal is void under this section. At the same time, any limitation

of the time within which he may enforce his rights is void.

• Agreements the meaning of which is uncertain (Section 29):

Agreements the meaning of which is not certain or capable of being made certain

are void.
• Agreements by way of wager:
A wager is an agreement between two or more parties by
which one promises to pay money or money's worth on the
happening of some uncertain event in consideration of the
other party's promise to pay if the event does not happen.
Agreements by way of wager are void. No suit shall be
brought for recovering anything alleged to be won on any
wager or entrusted to any person to abide by the results of
any game or other uncertain event on which any wager is
made (Section 30).
• Agreements contingent on impossible events (Section 36):
Contingent agreements to do or not to do anything, if an
impossible event happens, are void, whether the impossibility
of the event is known or not to the parties to the agreement at
the time when it is made.
• Agreements to do impossible acts:

• An agreement to do an act impossible in itself is void (Section 56, Para 1)

• Example: X agrees with Y to discover treasure by magic. The agreement is

void. 8.

• Reciprocal promise to do things legal, and also other things illegal:

Where persons reciprocally promise, first, to do certain things which are

legal and secondly, under specified circumstances, to do certain other,

things which are illegal, the first of promises is a contract, but the second is

a void agreement.