Module 6: Limitations on Freedom of Contract

Syllabus:

 Legality of Object
 Void and Voidable Agreements
 Agreements against Public Policy- S. 23
 Agreements with Unlawful Consideration- S. 24
 Agreements w/o Consideration- S. 25
 Agreements in Restraint of Marriage- S. 26
 Agreements in Restraint of Trade- S. 27
 Agreements in Restraint of Legal Proceedings- S. 28
 Ambiguous and Uncertain Agreements- S. 29
 Wagering Agreements- Its exceptions- S. 30
 Contingent Contracts- S. 31
Legality of Object: One requirement for the formation of a valid contract is that parties must
Contract for a lawful object. An agreement, the object of which is opposed to the law of the land
may be either unlawful or simply void, depending upon the provisions of the law to which it is
opposed.

S. 23- What considerations 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 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.

In this Section 23, the words expressions used are ‘Void’, ‘object‘, and ‘consideration’. There
may not be ‘void object’ as such, but one can consider it as void contract having unlawful object
which can be declared void object. Similarly, there may not be ‘void consideration’ as such, but
one can consider it as void contract having unlawful/illegal consideration which can be declared
void consideration.

Void Contract: A void contract, also known as a void agreement, is not actually a contract. A
void contract cannot be enforced by law. Void contracts are different from voidable contracts,
which are contracts that may be (but not necessarily will be) nullified. An agreement to carry out
an illegal act is an example of a void contract or void agreement. For example, a contract
between drug dealers and buyers is a void contract simply because the terms of the contract are
illegal. In such a case, neither party can go to court to enforce the contract. A void contract is
void ab initio, i e from the beginning while a voidable contract can be voidable by one or all of
the parties A contract can also be void due to the impossibility of its performance. E g: If a
contract is formed between two parties A & B but during the performance of the contract the
object of the contract becomes impossible to achieve (due to action by someone or something
other than the contracting parties), then the contract cannot be enforced in the court of law and is
thus void. A void contract can be one in which any of the prerequisites of a valid contract is/are
absent for example if there is no contractual capacity, the contract can be deemed as void. In fact,
void means that a contract does not exist at all. The law cannot enforce any legal obligation to
either party especially the disappointed party because they are not entitled to any protective laws
as far as contracts are concerned.

Features of Void agreements:

• An agreement made by incompetent parties (Incapacitated Person) is void.

• Any agreement with a bilateral mistake is void.
• Agreements which have unlawful consideration are void.
• Agreement with an unlawful object is void.
• Agreements made without consideration is void.
• Agreement in restraint of marriage of any major person is void (absolute restriction).
• Agreement in restraint of trade is void.(reasonable reason)
• Agreement in restraint of legal proceedings is void.
• An agreement the terms of which are uncertain is void.
• An agreement by way of wager (betting/gambling) is void.
• An agreement contingent upon the happening of an impossible event is void.
• Agreement to do impossible acts is void.

Object and consideration must be legal: Section 23 is confined to the object of the transaction
and not to the reasons or motives which prompted it. In determining the validity of the contract,
the object of the agreement and not action actually taken under the agreement should be
considered. When a contract is invalid, every part of it, including the clause as to arbitration
contained therein, must also be invalid. The Section invalidates agreement whose objects or
consideration is unlawful. It of three matters, viz. (i) consideration for the agreement, (ii) object
of the agreement and (iii) the agreement.
Expression ‘If permitted by law’: The expression “if permitted, it would defeat the provisions
of law” occurring in the third paragraph of the Section should be understood as referring to
performance of an agreement which necessarily entails the transgression of the provisions of any
law. A bare possibility of such transgression, if there be also a possibility of performance without
such transgression, does not invalidate the agreement. The general rule of law is that parties to
contracts are to be allowed to regulate their rights and liabilities themselves, and the Court will
only give effect to the intention of the parties as it is expressed by the contract. Three principles
arise from the Section - they are: (i) an agreement or contract is void, if its purpose is the
commission of an illegal act;(ii) an agreement or contract is void, if it is expressly or impliedly
prohibited by any law, and (iii) an agreement or contract is void, if its performance is not
possible without disobedience of any law. The general rule of law is that facts showing illegality
must be pleaded, and if one of the contracting parties challenges an agreement as being
unenforceable, e.g., as being opposed to public policy, it is for him to set out and prove those
special circumstances which will invalidate the contract.

Difference between Void and agreements that are illegal: The difference between agreements
that are void and agreements that are illegal lies in the effect which their peculiar character
imparts to collateral transactions. If an agreement is merely void and not illegal, the plaintiff can
recover from the third party who has received the money on his behalf under the void agreement,
the contract under which the money was received for the principal not being affected by the
collateral agreement under which the money was payable. If the agreement is illegal, that is
prohibited by law under a penalty, the plaintiff cannot recover, as his claim is founded on an
illegal act and the receipt of the money is itself an illegal act. This Section speaks of void
agreements. There is a distinction between illegal and void contract although it may be very thin
or small. An illegal contract will never indeed be enforced if it be executory, but if it be executed
in despite of a statute or rule of public policy prohibiting it, relief will often be granted not only
by setting aside the agreement but by ordering a repayment of money paid under it. Thus, a suit
for advances made on an unlawful agreement was held sustainable on the principle that as long
as an unlawful agreement remained unperformed, it might be treated as void, but any money paid
under it might be recovered back as received to the use of the person who so paid it. On the same
principle, an agreement to sell goods in black market in exchange for black money can be
enforced in a court of law. Contracts are sometimes said to be illegal either because the
consideration of the promise is illegal or because the promise itself is illegal. Section 23, speaks
of three matters; it speaks of consideration for the agreement, the object the agreement and the
agreement. Anything which is not lawful within the meaning of Section 23 is unlawful for the
purpose of an agreement or compromise, and is sufficient when incorporated in a decree to
render it a nullity.

Expression ‘Forbidden by Law’: The expression “forbidden by law” is not synonymous with
the word ‘void’ and hence it is not necessary that whatever is void is also “forbidden by law”.
Forbidden by law means an act forbidden by Indian Penal Code or by special legislative
enactments, regulations or orders. But there are certain things which the law does not forbid in
the sense of attaching penalties to them, but which are violations of established rules of decency,
morals or good manners and of whose mischievous nature in this respect the law takes so far
notice that it will not recognize them as a ground of any legal right. An agreement, which
contravenes the policy of the law as contained in an Act of the legislature or which has for its
object, the carrying on of a business in contravention thereto is illegal. As a general rule, the law
does not forbid things in express terms, but imposes penalties for doing them, and the imposition
of such penalties implies prohibition, and an agreement to do a thing so prohibited is unlawful
under this Section. A contract involving the contravention of the Provisions of the Motor
Vehicles Act or the Rules made thereunder is illegal. The words - if permitted it would defeat the
provisions of any law - refer to the performance of an agreement which necessarily entails the
transgression of the provisions of any law. A bare possibility of the transgression of the
provisions of any law does not invalidate the agreement. The provision of benefit of
retrenchment compensation as provided by the Industrial Disputes Act, and bonus claimed on the
basis of an award of Industrial Tribunals are not subject to any contract. Various Courts held
‘illegality under enactments such as: Tenancy Act, Transfer of Property Act, and Insurance Act.
Section 23 says that the consideration or object of the agreement is unlawful if it “is fraudulent”.
If the plaintiff cannot make out his case except through an immoral transaction to which he was a
party, he must fail. An agreement to pay a certain sum of money to a prostitute for cohabitation
is void.
Expression ‘Public Policy’: The expression “public policy” means and includes a wide range of
topics such as trading with the enemies in times of war, stifling prosecutions, champerty and
maintenance and various other topics which include certain recognized matters. The term ‘Public
policy’ does not admit of any definition. The existing heads of policy are: (1) By tending to the
prejudice of the state. It may be further divided into following two sub-heads: (a) Trading with
enemy (b) Sale of public offices and appointments. (2) By tending to the perversion of or
interference with the administration of justice. It may also be divided into the following heads:
(a) Perversion or interference in justice - (i) Maintenance; (ii) Champerty; (b) Agreement to stifle
prosecution. (3) Violation of public decency. It is equivalent to the policy of the law. It is
variable quantity and must vary with the habits, capacities and opportunities. An agreement by
the wife not to claim any maintenance in consideration of lump sum payment is not opposed to
public policy. Public policy imposes certain limitations on the freedom of contract by forbidding
the making of certain contracts. It is a settled principle that one who knowingly enters into a
contract with improper object cannot enforce his rights thereunder. Having regard to the context
and circumstances in which an award is made, it is manifest that the preemption clause must be
construed as binding upon the assignees or successor in interest of the original contracting
parties. The Contract Act does not define the expression “public policy” or “opposed to public
policy”. From the very nature of the things, the expression “public policy” or “opposed to public
policy” or “contrary to public policy” are incapable of precise definition. Public policy however,
is not the policy of a particular Government. It connotes some matter which concerns the public
good and the public interest. As new concepts take place, old transactions which were once
considered against public policy are now being upheld by the courts. There are two schools of
thought “narrow view” school and “broad view” school. While interpreting the meaning of
'public policy' in this case, it was held that the term should be given a wider meaning. It can be
stated that the concept of public policy connotes some matter which concerns public good and
the public interest. What is good for the public or in public interest or what would be harmful or
injurious to the public good or interest varies from time to time. However, an award, which is on
the face of it, patently in violation of statutory provisions cannot be said to be in public interest.
Such an award is likely to adversely affect the administration of justice. Hence, the award should
be set aside if it is contrary to (i) fundamental policy of Indian Law; (ii) the interest of India; (iii)
justice or morality; (iv) in addition, if it is patently illegal. The illegality must go to the root of
the matter and if the illegality is of a trivial nature, it cannot be held that the award is against the
public policy. An award can also be set aside if it is so unfair and unreasonable that it shocks the
conscience of the court. [ONGC Ltd. v. Saw Pipes Ltd. 2003 (2) RAJ 1 (SC)]

S. 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.

This section is used when when a part of the consideration for an object or more than one objects
of an agreement is unlawful. The whole of the agreement would be void unless unlawful portion
can be severed without damaging the lawful portion.

Gopalarao v. Kallappa: A license was granted to a person for the sale of opium and ganja with
this restriction that he would not take any partner without the permission of the collector.
Without the permission of the collector he included a partner in the whole business on receiving
from him a fixed sum as his share of capital. Differences arose between them and the new entrant
filed for Dissolution and refund of his money. His claim was not allowed. The Court said that, “It
is impossible to separate the contract or to say how much capital was advanced for the opium
and how much for the ganja”.

Where the illegal part is severable from the legal, the latter would be enforced.

Poonoo Bibi v. Fyaz Buksh: A Muslim husband agreed by a registered deed to handover to his
wife the totality of his earnings and not to do anything without her permission and, if he did so,
she would be at liberty to divorce him. The latter part of the agreement was unlawful. It was
severed from the part under which he promised to handover all his earnings and this part was
enforced giving it this meaning that he was bound to give only maintenance amount and not
every bit that he might earn.

If a contract is, on the face of it, capable of legal performance, the fact that one party was
entertaining an undisclosed intention of performing it unlawfully or of using it as a part of an
unlawful scheme, would not disentitle the other party from enforcing it.
S. 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: An agreement made without consideration is void, unless—

(1) it is expressed in writing and registered under the law for the time being in force for the
registration of documents and is made on account of natural love and affection between parties
standing in a near relation to each other; or unless

(2) it is a promise to compensate, wholly or in part, a person who has already voluntarily done
something for the promisor, or something which the promisor was legally compellable to do; or
unless.

(3) It is a promise, made in writing and signed by the person to be charged therewith, or by his
agent generally or specially authorized in that behalf, to pay wholly or in part a debt of which the
creditor might have enforced payment but for the law for the limitation of suits.

In any of these cases, such an agreement is a contract.

Explanation 1.—Nothing in this section shall affect the validity, as between the donor and
donee, of any gift actually made.

Explanation 2.—An Agreement to which the consent of the promisor is freely given is not void
merely because the consideration is inadequate; but the inadequacy of the consideration may be
taken into account by the Court in determining the question whether the consent of the promisor
was freely given.

This section declares that an agreement without considerstion is void except in the following
circumstances. This section gives the exceptions to enforceability of agreemnts made without
considerations.

1. Natural love and Affection: A written and registered agreement based on natural love and
affection between near relatives is enforceable without consideration. Terms like “near
relative” and “natural love” have not been defined in the act. However, they are taken to
 mean parties related by blood or marriage and the instinctive love and afeection between
them.
Rajlukhy Dabee v. Bhootnath Mookerjee: The defendant promised to pay to his wife a
fixed sum for her separate residence and maintenance. This agreement was maintained in
a regd. Document which mentioned certain quarrels betwee them. So, the Calcutta HC
refused to consider it as one covered under the exception as there was a lact of love and
affection between the two.
Bhiwa v. Shivaram: A sued his brother b for a share in the lands but it was dismissed as
B solemnly affirmed that the property was not ancestral and agreed to give by regd.
Property one-half of it to B. The plaintiff admitted that he and his brother had long been
on bad terms but despite such admission the Court held that “this is just the case to which
S. 25(1) should be held to apply. The defendant had such love and affection for his
brother that to reconcile with him he was willing to give him his property.”
2. Past Voluntary Service: A promise to pay for a past voluntary service is binding. To
attract this section, it is necessary that the service should have been rendered voluntarily
and also for the promisor. Thus, where services were rendered for a company then not in
existence, a subsequent promise to pay for them could not be brought within the
exception. But a promise made after attaining majority to pay for goods supplied to the
promisor during minority has been held to be within the exception as at the time when the
thing was done the minor was unable to contract , the person who did it for the minor,
must in law, be taken to have done it voluntarily (Karam Chand v. Basant Kaur).
3. Time barred debt: A promise to pay a time barred debt is enforceable. The promise
shpuld be in writing and signed by the promisor or by his agent, generally or specially
authorized for the dame. The promise may be to pay the whole or any part of the debt and
the debt must be such of which the creditor might have enforced payment. This promise
must be an express one will be insufficient if the intention to pay is unexpressed and has
to be gathered from a number of circumstances. There must be a distinct promise to pay
before the document can be said to fall within the provisions of the section.
A brief note by the promisor on the back of the promissory note written at the expiry of
the period of limitation that he had taken the loan and unaccompanied by any words
 promising or undertaking to pay, was held to be not sufficient to attract this section (Tulsi
Ram v. Same Singh).
4. S. 25- Explanation I- Gift actually made: The provisions as to consideration do not affect
the validity of any gift made between donor and done. A gift of movables perfected by
delivery and a gift of immovable done by registration can’t be questioned as to their
validity on the grounds that they lack consideration.
5. S. 25- Explanation II- Inadequacy of Consideration: Inadequacy of consideration may be
evidence that the promisor was the victim of some imposition and that his consent was
not free. However, it is not conclusive and is not a bar even to a suit for specific
performance.

S. 26: Agreement in restraint of marriage void: Every agreement in restraint of marriage of

any person, other than a minor, is void.

It is a policy of law to discourage agreements that restrain freedom of marriage. The restraint
may be general or partial, that is, to say, the party may be restrained from marrying at all, or
from marrying for a fixed period, or marrying a particular person, class etc., the agreement is
void. Only exception is in favor of a minor.

S. 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.

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.

Protection of freedom of trade and commerce: Public policy requires that every man shall be
at liberty to work for himself, and shall not be at liberty to deprive himself or the state of his
labour, skill or talent by any contract that he enters into. Thus, this section declares in plain terms
that every agreement by which any one is restrained from exercising a lawful profession, trade or
business of any kind, is, to that extent, void.

All restraints are covered, whether partial or general: Madhub Chandar v. Raj Coomar- The
plaintiff and defendant were rival shopkeepers in a locality in Calcutta. The defendant agreed to
pay a sum of money to the plaintiff if he would close his business in that locality. The plaintiff
accordingly did so, but the defendant refused to pay. The plaintiff sued for money and said that
the restriction was only partial and that he could run his business some place else. The court held
the agreement void. The sectin has abolished the distinction between partial and total restraints
of trade. Whether the restraint is general or partial, unqualified or qualified, if the agreement is in
the nature of a restraint of trade, it is void.

Exceptions

There are two kinds of exceptions to this rule:

 Those created by statutes

 Those arising from judicial interpretations
1. Statutory exceptions
a. Sale of goodwill: It is the only exception mentioned in the proviso to Section 27
relating to sale of goodwill. Apparently the object is to protect the interest of a
purchaser of goodwill. Far from being adverse to public interest, the restriction
operates as an additional inducement to individuals to employ there skills and capital
in trade by giving a real marketable value to the goodwill of a business and thus tend
to the advantage of public interest.
Limits of restraint: the agreement has to specify the local limits of the restraint. The
seller can be restrained within certain territorial or geographical limits and the limits
must be reasonable. The seller can only be restrained from carrying on a similar
business and only for such period for which the business sold is actually carried on
either by the buyer or by any person deriving title to the goodwill from him.
b. Partnership Act: There are 4 sections in the partnership act which validate agreements
in restraint of trade. Section 11 enables partners during the continuance of the firm to
 restrict their mutual liberty by agreeing that none of them should carry on any
business other than that of the firm. Section 36 enables them to restrain an outgoing
partner from carrying on a similar business within a specified period or within
specified local limits or any other restriction imposed which must be reasonable. A
similar agreement may be made upon or in the anticipation of dissolution.
2. Under judicial interpretation
a. Trade combinations: it is now almost a universal practice for traders or manufacturers
in the same line of business to carry on their trade in an organized way. Thus, there
are combinations of ice manufacturers, sugar producers etc. the primary object of
such associations is to regulate business and not to restrainit. Combinations of this
kind are often desirable in the interest of trade itself and also for the promotion of
public interest. They bring about standardized goods, fixed prices and eliminate
ruinous competition. Thus, “regulations as to the opening and closing of business in
the market, licensing of traders, supervision and control of dealers and the mode of
dealing are not illegal”, even if there is incidental deprivation of trade liberty. But the
Courts would not allow a restraint to be imposed disguised as trade regulations. Thus,
an agreement between certain persons to carry on business with the members of their
cast only (Baithelinga v. Saminada) and an agreement to restrict the business of a
sugar mill within a zone allotted to it have been held void (Carew and Co. Ltd. V.
North Bengal Sugar Mills). Agreements as to regulation of prices and output are
generally upheld as valid. Thus, in a Bombay case (Haribhai v. Sharafali) 4 ginning
factories entered into an agreement fixing uniform rate for ginning cotton, and
pooling their earnings to be divided between them in certain proportions. The action
was for division of profits and their being nothing in the agreement against S. 27, it
was allowed.
b. Solus or exclusive dealing agreements: Another business practice in vogue is that a
producer or manufacturer likes to market his goods through a sole agent or distributor
and the latter agrees in turn not to deal with the goods of any other manufacturer. A
producer may for eg.agree to sell all his output to one consumer who in turn agrees
not to buy his requirements from any other source. As long as the negative stipulation
is nothing but an ordinary incident of or ancillary to positive covenant there is hardly
 anything obnoxious to S. 27. Thus, an agreement by a manufacturer of Dhotis to
supply 1, 36, 000 pairs of certain description to the defendant and not to sell goods of
that kind to any other person for a fixed period (Carliles Nephews and Co. v.
Ricknauth Bucktermull) and an agreement by a person to sell all the salt
manufactured by him to a firm for 5 years have all been held to be outside the scope
of S. 27 and therefore, valid. (Mackinzie v. Striramiah). Such negative stipulations do
not have the effect of restraining the manufacturer “on the contrary he is encouraged
to exercise his business because he is assured of a certain market for the products of
his labour”. But where a manufacturer or supplier after meeting all the requirements
of a buyer, has surplus to sell the others he cannot be restrained from doing so. The
buyer cannot restrain the seller from dealing with others unless he can acquire a
whole stalk during a period of the agreement. The Court may not countenance the
agreement particularly where the buyer intends to cover or monopolise the
commodity so that he may resell at his own price or where he binds the seller for an
unreasonable period of time. Where a contact is reasonable and fair at the beginning,
but circumstances have arisen which show that it is being enforced by one party in a
manner which is prejudicial to the interest of the other, the courts will hold the
agreement to be unenforceable, though not void or invalid.
c. Restraints upon Employees
Restraints during employment: Agreements of service often contains negative
covenants preventing the employee from working elsewhere during the period
covered by the agreement. A servant may, therefore, be restrained from taking part in
business in direct competition with that of his employer in order to protect all the
objective information that belongs to the employer.
In V. N. Deshpande v. Arvind Mills Co. Ltd. The defendant took employment as a
weaving master in a mill and agreed not to serve in that capacity for 3 years for
anyone else in any part of India. An injunction was granted to restrain him in terms of
the agreement.
Restraints after termination of employment: But an agreement to restrain a servant
from competing with his employer after the termination of employment may not be
allowed by the courts. Thus, in Brahmaputra Tea Co. Ltd. v. E. Scarth where an
 attempt was made to restrain a servant from competing for 5 years after the period of
service the court observed that contracts by which persons are restrained from
competing after their term of agreement is over, with their former employers within
reasonable limits are not an exception to general prohibition made out in S. 27 which
indicates that it was not intended to give them a legal effect in this country.
Protection of trade secrets: One of the principles is that a master is not entitled to
restrain his servant after termination of employment from offering competition, but he
is entitled to reasonable protection against exploitation of trade secrets.
Agreement between employers: An agreement between employers that neither would
employ any person who had been others employee within a period of five years has
been held to be void as it imposed too wide and unreasonable restrictions upon
freedom of employment. The employees were free to move out of their jobs and join
rivals and no injunction could be issued against the other party restraining it from
taking in such turn away employees. If the employees can leave here and go without
solicitation , how can there be an injunction when they do so on solicitation.
Effect of premature removal: A restriction of this kind will cease to be effective
against an employee who has been prematurely removed without his fault. The only
ground on which it could be justified is by showing that it is necessary for the
protection of the employer’s goodwill. Such a restriction is valid only termination
takes place in its natural course and not wrongfully.
S. 28: Agreements is restraint of legal proceedings 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.
Restriction of legal proceedings: An agreement having for its object the restrain of an
individual from enjoying the fundamental right of resorting to a court of law for redress and
relief is invalid. Section 28 applies to agreements that wholly or partially restrain this right of the
parties. A contract having a clause that no action should be brought up on it is void since it
restricts both parties from enforcing their rights under the contract in a court of law. In Nihal
Chand Shastri v Dilawar Khan, it was held that a special agreement between an advocate and his
client that the latter would not be sued for fees has been held void under this section.
Limitation Of Time: An agreement which provides that a suit should be brought for the breach
of any terms or agreement within a time shorter than the period of limitation prescribed by law is
void. The effect of such an agreement is absolutely necessary to restrict the parties from
enforcing their rights after the expiration of the stipulated period, though it may be within the
period of the limitation. According to the Limitation Act, 1963, an action for breach of contract
may be brought within three years from the date of the breach. Hence, a rule under s.35 of the
Post Office Act limiting the liability in respect of sums specified by remittance unless a claim is
preferred within one year from the date of the posting of the article is void as beyond the powers
conferred by the section. And even if it be treated as a contract it is void under s.28 of the
Contract Act. In the same way, a clause in a policy of life insurance declaring that “no suit to
recover under this policy of life insurance shall be brought after one year from the death of the
assured” was held void.Cases sometimes occur where parties agree to extend the period of
limitation. No provision is made the section for agreements extending period of limitation for
enforcing rights under it. There is hardly any doubt that an agreement which provides for a
longer period of limitation than the law allows does not lie within the scope of this section. There
is no restriction imposed upon the right to sue; on the contrary, it seeks to keep the right to sue
subsisting even after the period of limitation.
Agreement Relating To Release Or Forfeiture Of Rights: Before the amendment of s.28 of
the Contract Act in 1997, agreements reducing the period of limitation were distinguished from
those which did not limit the time within which a party might enforce his rights, but which
provided for a release or forfeiture of rights if no suit was brought within the period stipulated in
the agreement. Under s.28, limiting the time for enforcing the rights was void. But a term in the
contract that rights accruing thereunder to party would be forfeited or released, if the party did
not sue within such short a time as given in the contract, would not fall within s.28. Clauses of
this kind are usually found in policies of insurance.

In Hirabhai v Manufacturers Life Insurance, the Bombay High Court decided that a clause
providing that “no suit shall be brought against the company in connection with the said later
policy than one year after the time when the cause of action accrues” was held valid. The
justification for the court in this regard was that the effect of the agreement was not to limit the
time but to provide for surrender of rights if no action was brought within that time. If the policy
of insurance provides that if a claim is made and rejected and no action is commenced within the
time stated in the policy, the benefits flowing from the policy shall stand extinguished and any
subsequent action would be time barred. Such a clause would fall outside the scope of S. 28 of
the Contract Act.

Rights to be enforced under the contract should continue to exist even beyond the shorter period
agreed for enforcing those rights, to make such an agreement void under S.28. If, for example,
beyond the shorter period agreed upon the rights under the contract cannot be kept alive, no
limiting of the time to enforce the rights under the contract arises and hence the agreement
putting a time limit to sue will not be hit by S.28. So, a condition in a contract that the rights
thereunder accruing to a party will be forfeited or released if he does not sue within a time limit
specified therein will not offend S.28. This is because, as per the contract itself, the rights
accrued to the party cease to exist by the expiry of the limited period provided for in the contract.
In such a case, in effect, there is no limiting of the time to sue. So, an agreement which provides
for a simultaneous relinquishment of rights accrued and the remedy to sue for them will not be
hit by S.28. But, at the same time, an agreement relinquishing the remedy only, by providing that
if a suit is to be filed that should be filed within a time limit-the time limit being shorter than the
period of limitation under the Limitation Act - will be hit by S.28. This is because the rights
accrued continue even beyond the time limit as the same is not extinguished. In such a case,
there is really a limiting of the time to sue prescribed by the Limitation Act. In Kerala Electrical
& Allied Engineering Co. Ltd. v Canara Bank & Others, it is clear from Clause.6 of Ext. Al
guarantee that the liability of the bank will be alive only for a period of six months after the
expiry of the period of duration of the guarantee. It is also specified in Clause.6 that the
plaintiff's rights under the guarantee will also be forfeited by the end of that six months. There is
an extinction of the right of the plaintiff under the contract and a discharge of the defendants
from liability. So, the time limit imposed in Clause.6 cannot be hit by S.28 of the Contract Act.

Jurisdiction of the proper court: The jurisdiction of the Courts cannot be ousted by an
agreement of the parties. The principle contained in this section is an exception to the rule of the
‘maxim modus et conventio vincunt legem, the form of agreement and the convention of parties
overrule the law. But if the agreement merely provides that an award, fixing the debt or the
damages, shall be a condition precedent to the recovery thereof by action, it is not only valid, but
is a defence to the action if brought before the award and this is incorporated in Exception 1. It
may be noted that in a contract there may be two separate stipulations one of which is valid and
the other void, e.g., a provision to refer to arbitration and another ousting the jurisdiction of
Court. When two or more courts are competent to entertain a suit parties can contract to vest
jurisdiction in one court only. The section has not the effect of making the whole agreement
void, but only the stipulation in the contract which ousts the jurisdiction of the Court. The
validity of an agreement by which the parties prefer one of the two Courts depends upon the fact
that both the Courts must have jurisdiction in deciding the matter. It has been held that it is not
open to the parties by agreement to confer jurisdiction on any court which it did not otherwise
possess under section 20 of Code of Civil Procedure; [Patel Roadways –vs- Prasad Trading
Company, AIR 1992 SC 1514]. The parties can by mutual consent no more take away the
jurisdiction vested by law in any Court than they can confer on it when it is not so vested by law.
By a private agreement the parties cannot divest the Court of its inherent jurisdiction to try
disputes arising out of the agreement. The principle that the parties cannot by consent confer
jurisdiction on a Court or deprive a Court of jurisdiction only applies to cases of inherent
jurisdiction of a Court over the subject-matter of a suit, but the question of territorial jurisdiction
is not a question of inherent jurisdiction.
Exception 1: Reference Of Future Disputes To Arbitration: This exception applies to
contracts where the parties have agreed that no action shall be brought until some question of
amount has been decided by the arbitrators. Thus, in Scott v Avery and Atlantic Shipping and
Trading Co. v Louis Dreyfus & Co., clauses are saved by this exception. The former refers to
term in the contract which provides that, in the event of a dispute arising, it shall be referred to
arbitrators whose award shall be a condition precedent to any right of action in respect of the
matters agreed to be referred is valid. It is a clause which requires as a condition precedent of the
accrual of any cause of action that the arbitrator shall have made in an award. The latter clause is
the one which provides that no claim shall arise, unless it is put forward in writing and an
arbitrator appointed within a limited period. If a contract were to contain a double stipulation that
any dispute between the parties should be settled by arbitration, and that neither party should
enforce his rights under it in a court of law, that would be a valid stipulation so far as regards its
first branch, that all disputes between the parties should be referred to arbitration, because that of
itself would not have the effect of ousting the jurisdiction of the courts, but the latter branch of
the stipulation would be void because by that the jurisdiction of the courts would be naturally
excluded.

In order to conform to this exception, the jurisdiction of the courts must be excluded in all
respects except in the matter which is the result of the arbitrator's award. This section does not
forbid action for damages for breach of such agreement to refer to arbitration. In Union
Construction Co. Pvt. Ltd. v Chief Engineer, Eastern Command, the court held that a lawful
agreement to refer a matter to arbitration can be made a condition precedent before going to the
courts, and it does not violate s.28. All such cases have to be decided according to the Arbitration
and Conciliation Act 1996. It is also possible to contemplate an agreement appointing one of the
contracting parties as an arbitrator for matters arising out of a contract. The decision given by
such a person is binding on the party and no party can be heard to say that such decision is not
binding being a decision by a person in his own cause, unless it can be shown to be arbitrary or
otherwise unjust. The parties can also question the finality of such a decision despite any
agreement.

Exception 2: Reference Of Existing Question To Arbitration: The exception saves any

contract in writing by which two or more persons agree to refer for arbitration any question
between them which has already arisen, though such a contract would now also be dealt with by
the law relating to arbitration.

Resolution of disputes is governed by Arbitration and Conciliation Act 1996 under which parties
may by means of an agreement in writing to refer to arbitration disputes which have arisen
between them in a contract. Where the parties agreed to refer their disputes to arbitration, they
were held to be bound to do so. Certain excuse will not be enough to nullify the arbitration when
the parties had accepted the agreement with full conscience. If a suit is filed in the same subject
matter as the arbitration agreement, the party desirous of reference to arbitration may apply to the
court seeking reference, which the party must do before submission of the first statement of
substance or dispute in the court. If the suit is in the same matter as the arbitration agreement, the
court shall refer the parties to arbitration. The Arbitration and Conciliation Act 1996 allows
discretion to the court in referring the matter. Section 77 of that act provides that the parties shall
not initiate, during the conciliation proceedings any arbitral or judicial proceedings in respect of
a dispute that is the subject matter of the conciliation proceedings except where such proceedings
are necessary to preserve his rights.

S. 29: Agreements void for uncertainty: Agreements, the meaning of which is not certain, or
capable of being made certain, are void.

It is a necessary requirement that a agreement in order to be binding must be sufficiently definite

to enable the court to give it a practical meaning. Its terms must be so definite or capable of
being made definite without further agreements of the parties and that promises rendered by each
party are reasonably certain.

In Guthing v. Lynn A horse was bought for a certain price coupled with a promise to give 5
Pounds or more if it proved to be lucky. The agreement was held to be void for uncertainty as the
court had no machinery to determine what luck the horse had brought to the buyer.

Agreement to Agree or Negotiate: An agreement to agree in the future is void, for there is no
certainty that the parties will be able to agree. In May and Butcher Ltd. v. R, there was an
agreement for the sale of the tentage with a stipulation that the price, dates of payment and
manner of delivery shall be agreed upon from time to time. The agreement was held to be void
for uncertainty. Thus, if the execution of a further contract is a condition or term of the bargain,
no contract arises because the law does not recognize a contract to enter into a contract.

Preliminary Negotiations taking Definite Shape: where on the other hand preliminary
negotiations have crystallised into a definite shape, the parties can be compelled to contract on
those terms.

Partial Uncertainty: “Capable of being made certain”- Where only a part or a clause of the
contract is uncertain, but the rest is capable of bearing a reasonably certain meaning, the contract
will be regarded as binding. In a contract to sell 3000 tons of steel reinforcing bars, the buyer
accepted, but subject to “the usual conditions of acceptance only”. There being no evidence of
any such usual conditions, the buyer was held to be bound by the rest of the contract. (Nicolene
Ltd. v. Simmonds)

Agreement to Increase Wages: An act of state to increase wages of its employees is a welfare
measure. When such increase takes place with a retrospective effect, its validity can be upheld
because it is for the benefit of its employees. This could not be enforced against the licensee of
the state. The licensee would have been bound if there was a specific term in the license to that
effect.

Lock out Agreement: A lock out agreement by which one party for good consideration agrees for
a specified period of time, not to negotiate with anyone except the other party for the sale of his
property, can constitute an enforceable agreement. Such an agreement enables the would-be
buyer to purchase, for a price, an exclusive right of negotiations, for finalizing the deal.

S. 30: Agreements 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 the 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 rewarded to the winner or winners of any horse-race.
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.

Requirements of the definition

1. Uncertain event: the first thing essential to wage is that the performance of the bargain
must depend upon the determination of an uncertain event. A wager generally
contemplates a future event; but it may even relate to an event which has already
happened in the past, but the parties are not aware of its result or the time of its
happening.
2. Mutual chances of gain or loss: the second essential feature is that upon the determination
of the contemplated event each party should stand to win or lose. If there are no such
mutual chances of gain or loss, there is no wager. In Badasaheb v. Rajaram, 2 wrestlers
agreed to play a match on the condition that the party failing to appear on the day fixed
was to forfeit 500 Rs. To the opposite party, and the winner was to receive Rs. 1125 out
of the gate money. The defendant didn’t appear in the ring and the plaintiff sued him for
Rs. 500. It was held that the agreement was not a wager as in a wager each side should
stand to win or lose according to the result of uncertain events.
3. Neither Party to have Control over the Event: no part should have control over the
happening of an event one way or the other otherwise it will lack an essential ingredient
of the event.
4. No other interest in the Event: no party should have any interest in the happening of the
event except for the money at stake. This is what differentiates a wagering contract from
an insurance contract. Every insurance contract requires for its validity the existence of
insurable interest. An insurance without an interest is a wagering contract and hence void.
5. Collateral transaction: it has been held by the SC in Gherulal v. mahadeodas, that though
a wager is void and unenforceable it is not forbidden by law. Wagering is not
unenforceable under S. 23 of contract act. Hence, the transactions collateral to the main
transaction are enforceable.

Exceptions
 1. Horse race: this section does nit render void a subscription or contribution, or an
agreement to subscribe or contribute towards any plate, prize or sum of money of the
value or amount of Rs. 200 or upwards to the winner or winners of any horse races.
2. Crossword Competition and Lottery: If skills play a substantial part in the result and
prizes are awarded according to the merits of the solution, the competition is not a lottery.
Otherwise it is. Thus, literary competitions which involve the application of skill and in
which an effort is made to select the best and most skilful competitor, are not wagers. But
where prizes depend upon a chance, it is a lottery. The Madhya Pradesh High Coirt has
defined lotteries as wager. The court further said that provisions of neither a Central act
nor a State act will change the basic nature of the transaction.

S. 31: “Contingent Contract” defined: A “Contingent Contract” is a contract to do or not to do

something, if some event, collateral to such contract, does or does not happen.

Conditional Contract: It is a kind of a conditional contract and the condition is of uncertain

nature. A contract to pay a sum of money on the expiry of a time or on the death of a person is
not a contingent contract because these events are of a certain nature. The time or the person in
question will definitely expire and the money will become payable. When the condition is of a
certain nature, then only the contract can be regarded as truly contingent. Ordinarily, therefore, a
contingent contract will contemplate a future event. But a contract may also relate to an event
which has already happened and the only thing uncertain being that the parties do not know
which way it happened.

Contingency to be Collateral to Contract: the contingency has to be collateral to the contract,

that is, a contract has already arisen or a subsisting contract is there, but its performance cannot
be demanded unless the contemplated event happens or does not happen. Such a contract has to
be distinguished from a proposal which does not result in a contract unless the condition is first
fulfilled. Example: an offer to pay a sum of money on the discovery of a missing dog is not a
contract at all. It becomes a contract only when the dog is searched out and then it is no more
contingent.
Contingency depending upon the will of a person: A contract will be no less contingent where
the happening or non-happening of the contingency depends upon the will of a party. A contract
the performance of which depends upon the promisee’s marriage is a contingent contract, though
his marriage is a contingency exclusively within his control.

Contingency to be condition precedent: Generally a condition collateral to the performance of

a contract is a condition precedent. It has to be satisfied first and then performance can be
demanded. It has to be distinguished from a condition subsequent, namely, a condition which has
to be satisfied after the formation of a contract. Where, for example, a person applied for shares
in a company subject to his being appointed as a cashier in the company, it was held that the
shares could not be allotted to him without first making him a cashier. On the other hand where
the application for shares was subject to the condition that the applicant would pay nothing until
the company paid dividends, the contract was held to be not a contingent contract.