Non BindingClauses of Contracts that Can Save Your From Liability

Contract : Non Binding Clauses

Under the Indian Contract Act, 1872, a contract is a legally enforceable agreement between two or more parties. However, certain situations can render the terms of a contract non-binding, meaning they are not legally enforceable. These situations are primarily addressed under various sections of the Act. If a contract becomes void ab-initio Or Voidable then the terms of such contract loose its enforceability in due Course. Those contracts which are unenforceable by law are called as Void Agreement. These agreements are generally those which are concerned with immoral elements or go against the public policies of the state.

Section 2(g) of the Indian Contract Act, 1872 defines void agreements. Further, Sections 24 to 30 and 56 of the Act specify the particular kinds of  agreements/contracts which are void. Since a void agreement is meaningless in the eyes of law, it does not cause any change in the position or relationship of the contracts.

Void Agreements (Section 24 – 30)

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.

Illustration :
A promises to superintend, on behalf of B, a legal manufacturer of Indigo, and an illegal traffic in other articles. B promises to pay A 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.

The basic essence of this statement is that if the consideration, as a whole or in part is unlawful or if the end product of the agreement is illegal then the agreement is declared void. The contract would, however, be considered valid after deleting the unlawful clauses. For example, if there is an agreement between A and B for the exchange of drugs and medicinal herbs for *5000, then the agreement stands void even though the consideration of the agreement is legal. This is because the object of the agreement is illegal. But in this case, if we remove the drugs from the object then the agreement would be termed valid.

Moreover, if transaction which arises out of an unlawful act is such that if they are separated from the illegal part, then they would count as a valid agreement, then those transactions hold value in the eyes of law irrespective of the illegality of the agreement .

Section 25 : 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—

Section 2(d) of the Indian Contract Act, 1872, states, consideration may be furnished by ‘the promisee or any other person’ as long as it is ‘at the desire of the promisor’. In the case of Currie v. Misa, the court defined valuable consideration as “in the sense of the law may consist either in some right, interest, forbearance, detriment, loss or responsibility given, suffered or undertaken by the other”. Section 25 of the Act mentions that all agreements devoid of consideration would be declared void unless they fall into the following categories:

If the agreement is made out of natural love and affection

This is the first exception mentioned under Section 25(1). In Rajlukhy Dabee v Bhootnath Mookerjee , the Hon’ble court had held that “A written and registered agreement which is based on natural love and affection between kins is enforceable without consideration”. Examples of this involve a daughter taking care of her father, a brother giving away property to his siblings, etc. Essentials of an agreement like this involve :

1. The agreement made out of natural love and affection;
2. The agreement is registered;
3. The agreement is in writing;
4. Parties are in close relation to one another.

The person has already done something voluntarily for the promisor

This is mentioned in Section 25(2) of the Act. Under this, the promisor performs the act in order to compensate the promisee either wholly or partially for some previously performed voluntary act of the promisee. For example, if there’s a contract between A and B where A’s expenses are taken care of by B for taking care of his son, then, it must be noted that the service provided wasn’t voluntary as B was legally bound to support his infant son. As per this exception, the promise must be to compensate a person who has himself done something for the promisor and not to a person who has done nothing for the promisor.

Section 26 : Agreement in restraint of marriage void—
Every agreement in restraint of the marriage of any person, other than a minor, is void.

Section 26 of the Act mentions that all agreements in restraint, either partial or full, of a marriage except that with a minor, would be void. For example, if Ria’s father provides Amit with some incentives only to prevent him from marrying his daughter, then such an agreement would stand void in the eyes of the law, provided the parties involved are not minors. In the case of Shrawan Kumar v. Nirmala, the plaintiff held that the defendant had promised to marry him and therefore her present marriage should be injuncted by the court. This petition was dismissed by the Allahabad High Court on the grounds of restraint of marriage. The philosophy behind this law is the fact that marriage is a sacred social institution and nothing should be allowed to interfere with it or restrict it, until and unless it involves minors. Therefore, an agreement in restraint of marriage of adults is void whereas the same in the case of the minor would not be held void. But this clause doesn’t apply in case of remarriage. In the case of remarriage, any penalty imposed upon the widow wouldn’t be counted as a restraint. This was held in the case of Rao Rani v. Gulab Rani, where it was held that the widow will have to forego her property rights.

Section 27 : Agreement in restraint of trade void—
Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.

This is dealt with under Section 27 of the Act. The freedom to practice any form of trade and occupation is a fundamental right guaranteed by the Constitution of India under Article 19(1). Hence, any agreement in restraint of trade and occupation would be deemed as void. The restraint can be both partial and complete. This was brought out in the case of Madhub Chander v. Raj Coomar, where the defendant had proposed to pay the plaintiff a certain amount of money if the latter agreed to shut down his shop in a particular locality. However, upon shutting down his shop, the plaintiff was denied payment by the defendant. The court here, ruled that the defendant did not own any money to the plaintiff since the agreement was void (as it was in restraint of trade), even though it imposed partial restraint i.e. extended to only a particular locality.

However, there are two exceptions to this rule:

The foundation for delegitimizing an agreement in restraint of trade lies the historical backdrop of contention between free markets and the opportunity of agreements. Guaranteeing freedom to the agreement would mean legitimizing agreements in limitation of trade, which would bring about parties consenting to check competition. Under the common law, the present position is taken from the case of Nordernfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd.

In the said case, Thorsten Nordenfelt was a producer of firearms in Sweden and England. Thorsten sold his business to an organization, which at that point moved the business to Maxim Nordenfelt. Then, Thorsten went into a concurrence with Maxim that he would not take part in the assembling of weapons for a period of 25 years, other than what he produces for the benefit of the organization. Afterward, Thorsten broke his promise asserting that the understanding was not enforceable as it was in restriction of trade. The decision of the court was in support of Thorsten. In common law, a reasonability test is pursued. An agreement in restriction of trade is legitimate, if:

There is a substantial interest that the party forcing the restriction is attempting to secure.

The restriction is no more than what is important to secure this interest.

Restriction isn’t in opposition to public interest.

General principle in India and England similar?

The general principles in India and England regarding void agreements is more or less the same which is basically that all restraints on trade, whether partial or whole, are void. The only point of difference arises in the fact that in England, the decision on validity of restriction is taken on the basis of reasonableness while in India restrictions would be valid only If they fall within the category of the already stated statutory or judicial exceptions. Therefore, there aren’t any wide dissimilarities between the two laws. The English law tends to be more flexible as the clause of “reasonableness” helps to constantly change its ambit. As LORD WILBERFORCE remarked in Esso Petroleum Co Ltd v. Harper’s Garage (Stourport) Ltd “the classification (of agreements in restraint of trade) must remain fluid and the categories can never be closed”.

Exceptions to Section 27

Section 27 is basically based on public policy and applies to various cases in varying degrees. In the case of Brahmaputra tea co ltd v. Scarth, it was held by the court that any restraint through which a person binds himself or herself won’t be void and would be covered under the exceptions to Section 27. These statutory and judicial exceptions are discussed below.

Statutory exceptions :

Sale of Goodwill
According to this, a person who buys the business goodwill of another person is thereby privileged to impose certain restrictions on the business activities of the latter. The restrictions include preventing the seller from carrying out similar business within local limits only. This is done to protect the rights of the purchaser [6]. However, the restraint should be reasonable according to the nature of the business under consideration. In the case of Chandra v. Parsullah [7], the plaintiff and defendant both had the business of running buses between Pune and Mahabaleswar. To avoid competition, the plaintiff bought the defendant’s business along with its goodwill and made a contract whereby the defendant would not be allowed to carry on business in the same locality. However, there was a breach of contract on the part of the defendant. When brought to the court, the court ruled in favor of the plaintiff since the agreement was valid under Section 27.

Partnership Act

There are three provisions of the partnership act that provide for restriction of business. They are [8]:

1. Section 11, which states that none of the partners would carry on any business till the continuity of the business.
2. Section 36, which provides the remaining partners to prevent the outgoing partner from opening any business similar to theirs in the same locality subject to certain restrictions.
3. Section 54, which prevents all the partners from engaging in any business of similar kind after dissolution of the firm/business.

Firm Daulat Ram vs. Firm Dharm Chand, where two ice factory owners constituting a partnership agreed that only one factory will be worked at a time and its profits distributed among them. The restraint was held to be justified .

VOIDABLE CONTRACTS 

Section 2(i) of Indian Contract Act, 1872 defines voidable contract as an agreement which is enforceable by law and the option of one or more of the parties but not at the option of the other or others. It means that a voidable contract is a valid agreement that may become void at the option of one party. Such contracts remain legally binding and enforceable until the aggrieved party decides to rescind it. In Motio. Hussain vs. Fida Hussain And Anm (1951), the Punjab & Haryana High Court had observed that in plain English, Sections 19 and 19A of the Indian Contract Act, 1872 state that where a party’s consent is obtained through coercion, fraud, or undue influence, the agreement is voidable at the discretion of the party whose consent was obtained in such a manner. In other words, Sections 19 and 19A declare that a contract entered under duress, fraud, or undue influence is voidable at the aggrieved party’s discretion. A party to a contract whose consent was obtained through deception may, if he/she so desires, insist on the contract’s performance and that he/she be placed in the position he/she would have been in if the representation made had been accurate

1.Coercion: 
Section 15 of Indian Contract Act, 1872 defines Coercion as the use of physical or psychological pressure to compel a person to enter into a contract. As per section 15 coercion includes committing or threatening to commit any forbidden act provided by Indian Penal Code, 1860. If consent is obtained through coercion, the contract becomes void and the option of the coerced party.
Illustration: If A forces B to sell his property by threatening to harm B’s family, the contract is voidable at B’s option.

2.Undue influence
Section 16 of Indian Contract Act, 1872 says that undue influence arises when one party unfairly influences the other party because of having a position of dominance or trust to obtain an unfair advantage or to make a party enter into a contract. Such influence vitiates free consent under Section 14 and renders the contract voidable at the option of the aggrieved party.

Illustration: a spiritual guru persuades his devotee to transfer property in the name of that guru. Here, the guru is exploiting the devotee’s trust to make him enter into a contract and hence the contract becomes voidable at the option of devotee.

3.Fraud
Section 17 of Indian Contract Act, 1872 says that fraud entails deceptive intention to cause misrepresentation or concealment of material facts by one party to deceive the other. When consent is obtained through fraud, the contract becomes voidable at the option of the aggrieved party.

The Madras High Court while deciding on the case of Kopparty Venkataratnam And Anr. Vs. Palleti Sivaramudu And An (1939) has observed that when consent to an agreement is obtained through coercion, fraud, or misrepresentation, Section 19 states that the agreement is a voidable contract at the discretion of the person whose consent was obtained in such a manner. Even if such consent was obtained using fraudulent means, such as misrepresentation or silence, as defined under Section 17 of the Act of 1872, the contract is not voidable if the person whose consent was obtained had the ability to learn the facts with ordinary diligence.
Illustration: A sells his car to B, concealing the fact that it has a defective engine. In this case B can rescind the contract upon discovering the fraud

4.Misrepresentation 
Section 18 of Indian Contract Act,1872 says that misrepresentation refers to the unintentional or innocent misstatement of facts that includes another party to enter into a contract. While there is no fraudulent intent, the misrepresentation still affects the validity of the consent and makes the contract voidable.

The Lordships of the Privy Council has observed In the case of Lewis Pugh vs. Ashutosh Sen (1929) that if “fraudulent within the meaning of Section 17 qualifies “misrepresentation, due diligence would be required in cases where misrepresentation became fraudulent, but not in cases where misrepresentation fell within Section 18 and was just short of fraud because the exception would be limited to the former kind only. Therefore, the case helped in understanding the overlapping relationship between fraud and misrepresentation under the Indian Contract Act, 1872, both of which contribute to rendering a contract voidable at the option of one of the parties to the same

5.Mistake 
Section 20, 21 and 22 talks about ‘mistake’, where it says that voidable contracts may also arise in cases of unilateral or bilateral mistake regarding essential facts. However, such mistakes must significantly impact the consent of the aggrieved party.

Illustration: if A and B enters into a contract under the mistaken belief that a particular property belongs to A, the contract is voidable upon discovery of the true facts.

Ranganayakamma v. Alwar Setti (1889): In this case, a widow was compelled to adopt a boy under Duress. The court held that adoption deed was what as her consent was obtained through coercion. 

Krishna Bahadur v Purna Theatre (2004): The Supreme Court emphasised that voidable contract remains valid until rescinded, and that the aggrieved party must act promptly to exercise their option to declare a contract voidable.

Derry v Peek (1889): This landmark case established the distinction between fraud and innocent misrepresentation, highlighting the importance of intent in determining the grounds for violability.