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VOID AGREEMENTS AND ILLEGAL CONTRACTS  

Author–Anshika Agrawal

Introduction

A contract is an agreement enforceable by law. Section 2 of The Indian Contract Act,1872 defines an agreement as a proposal which a person makes to another signifying his will to do or abstain from doing an act for which an adequate amount of consideration is given.

Section 2(g) states that an agreement not enforceable by law is said to be void. An agreement becomes void in case of absence of any pre-requisite conditions to form a contact. The term Void means that a contract does not exist. The law cannot enforce any legal obligations upon the parties for the performance of the agreement.

Example- A condition to form a contract is that Parties must be competent enough to understand the provisions mentioned in the contract. Section 11 figures out that a minor, an idiot and a person disqualified by law are not eligible to sign a contract. Thus, not adhering to any of the above competency will make the agreement void.

An illegal contract is the one in which the object is illegal or anything against the law. The illegal activity is achieved from the contract itself.

The illegality of a contract depends upon

  • The law governing the nation
  • The law of place of performance of contract

Thus, any agreement for which the object is unlawful is said to be Void.

Explanation

It must be clear that every illegal agreement is Void but every void agreement is not Illegal. The ambit of Void agreements is very large and may include:

  • Incompetency to perform
  • Object is unlawful
  • No consideration
  • Consent obtained by coercion, fraud, undue influence, misrepresentation and mistake
  • Restraint of marriage
  • Restraint of trade
  • Restraint against legal proceedings
  • Wagering contracts
  • Contract to do an impossible act

Any agreement which adheres with the above mentioned provisions will be termed as Void.

A contract is illegal if it entails committing a criminal conduct, committing a civil wrong, or acting against the public interest. Selling a firearm to someone who isn’t licenced to own one, for example, is unlawful, thus a contract to sell a firearm under these circumstances is also illegal. It is also prohibited to enter into a contract with the intent of forcing the other party to breach another legally binding contract that the party has already entered into.

Illegality is usually seen as a defence against legal claims. For example, if one party attempts to sue the other for breach of contract, but the court determines that the contract is illegal for some reason, the party who brought the suit will not receive any damages, and the breaching party will not be held liable for a breach because the agreement is illegal.

Finally, depending on the circumstances and the substance of the contract, a court may enforce an illegal agreement if deleting the illegal clauses will render the remainder of the contract valid and enforceable.

Example- An agreement made to commit someone’s murder is illegal agreement and thus void by law.

But, an agreement can be enforced if the illegality is removed or the government declares that act as legal from now.

In the above example if murder is legalised then it forms a valid contract provided that other requisites are met.

Now, highlighting the key difference between the two on the basis of set parameters.

PARAMETER VOID AGREEMENT ILLEGAL AGREEMENT
Meaning An agreement which is not enforceable is said to be void agreement. An agreement whose object is unlawful i.e.. against the law is said to be illegal agreement.
Scope Wide. Every void agreement is not illegal. Narrow. Every illegal agreement is void.
Prohibition by IPC Void agreement is not prohibited by IPC. Illegal agreements are prohibited by IPC.
Penalty Parties in void agreement are not penalized. Parties in Illegal agreements are penalized.
Example A agrees to B to pay Rs.10000 if B brings moon and stars to earth. A agrees to B to pay Rs.10000 if B murders C.

Illustration

Void agreement:

  1. A agrees to sell to B “a hundred tons of oil”. It has not been specified which type of oil has to be sold. The agreement is void for uncertainty.

But if B deals in only coconut oil then the agreement is valid.

  1. A agrees to B, to pay a sum of money when B marries C. C dies without being married to B. The contract becomes void. Thus, it specifies that any contract in restraint of trade is void.
  2. A says to B, “I will give you Rs.2000 if C wins the race” . This is wagering agreement and hence void.
  3. A says to B, “I will pay you Rs.3000 if two parallel lines meet.” This agreement is void for uncertainity.

All the above mentioned examples are of Void agreements but they are not Illegal contracts because their object was not unlawful.

Illegal Agreements

  1. A promises B to drop a prosecution which he has instituted against B for robbery, and B promises to restore the value of the things taken. The agreement is void, as its object is unlawful.
  2. A promises B to pay Rs.2000 if he supplies him with 500gm of cocaine. This agreement is illegal and thus void. Here, the parties can be penalized for forming such object as consideration.

CASE LAWS

Alice Mary Hill v William Clarke  

FACTS: The plaintiff (Hill), a married lady, consented to live in adultery with the defendant and serve him as his housekeeper in this case. In exchange, the defendant agreed to pay the plaintiff a monthly aggregated salary (payment) of $50.

JUDGEMENT:

In this case, the Court concluded that the valid and unlawful parts of the agreement could not be separated since the entire agreement was declared void. Even for the work she gave as a housekeeper, the plaintiff was unable to receive any type of remuneration.

GENERAL OBSERVATION:

If the parties’ agreement in this instance included a payment of $30 for housekeeping and another $20 for living in adultery, the plaintiff would have been allowed to seek the payment of her cleaning services since it was valid and could be isolated from the illegal component of the contract.

Madhub Chander v. Rajcoomer Dass

FACTS: In this scenario, A and B decided to do business in the same neighbourhood in Kolkata. If A closed his business, B promised to give him a sum of money.

A terminated his business, but then sued B for the amount of the agreement he made with B to reclaim the promised sum.

JUDGEMENT: Even though the order was only partially effective in preventing A from operating his company in a certain region, it was found to be unlawful since it imposed a trade restriction. As a result, A was not able to collect the money.

GENERAL OBSERVATION- Any agreement that precludes one of the parties from conducting business or delivering services for any length of time will be evaluated.

Gherulal Parakh v Mahadeodas Maiya Case

FACTS: The Appellant and Respondent entered into a partnership arrangement for the sale and purchase of wheat with other enterprises on the condition that the Respondent would engage into a contract on behalf of the partnership and that profit and loss would be split equally.

The transaction resulted in a loss, which the respondent paid in full to the third parties. Respondent requested that appellant share blame, but appellant declined.

The respondent filed a lawsuit against the appellant in order to reclaim the money that the appellant had refused to pay.

ISSUE: Is it possible that the partnership agreement to engage a wagering arrangement was prohibited under section 23 of the Indian Contract Act of 1872?

RATIO DECIDENDI:

A error of fact must be bilateral, and both parties must be guilty of it in order for an agreement to be declared void.

If the underlying contract is invalid, the earnest money (byana) or any other deposit cannot be forfeited.

The forfeiture of earnest money (byana) is permitted only when a completed contract has been formed, not before.

DECISION: Although the wagers are unlawful under section 30 of the Indian Contract Act, 1872, the court concluded that the individual forming a wagering contract cannot be prohibited by law under section 23 of the Indian Contract Act.

As a result, the wagering arrangement cannot be ruled void since it is prohibited by law under section 23.

SUMMARY: In the case of Gherulal Parakh versus Mahadeodas Maiya, the term “forbidden by law” was defined under section 23 of the Indian Contract Act. It indicates that the term “banned by law” is not synonymous with the term “void,” therefore anything that is invalid is not necessarily forbidden by law.

Every wagering arrangement is invalid under Section 30 of the Indian Contract Act of 1872. Wager is a phrase that refers to a quantity of money gambled on an unknown occurrence or item on which a bet is placed. In simple terms, it is gambling.

CONCLUSION

A void agreement is one that is not banned by law, but an unlawful agreement is one that is explicitly prohibited by law and can result in penalties for the parties involved.

Because it is invalid from the start, a void agreement has no legal effects. Illegal agreements, on the other hand, have no legal consequence once they are initiated. All unlawful contracts are null and invalid, but the opposite is not true. Other agreements linked to an unlawful arrangement are stated to be invalid.

Certain void agreements are void from the start, while others become void when they lose their legal force. An illegal agreement, on the other hand, is null and invalid from the start. A void agreement’s collateral agreements may or may not be void, i.e. they may be lawful as well. Collateral agreements of an illegal agreement, on the other hand, cannot be enforced by law since they are void from the start.

The illegality of the contract, such as a contract whose goal or consideration is illegal, is one of the elements that renders an agreement void. Furthermore, both agreements lose their legal enforceability.