AGREEMENTS IN RESTRAINT OF TRADE: AGREEMENTS IN RESTRAINT OF LEGAL PROCEEDINGS; AMBIGUOUS AND UNCERTAIN AGREEMENTS & WAGERING AGREEMENTS

This Article is written by Manvi Verma of The Law School, University of Jammu, an intern under Legal Vidhiya.

ABSTRACT

This abstract discusses the Indian Contract Act, 1872, and its provisions regarding agreements, void agreements, agreements in restraint of trade, common law, exceptions to the agreements in restraint of trade, partnership act, agreements in restraint of legal proceedings, exceptions to the restraint of legal proceedings, ambiguous and uncertain agreements, and case laws related to certain and uncertain agreements. The background of the study is the legal framework provided by the Indian Contract Act, 1872, for forming agreements and the restrictions placed on certain types of agreements. The research problem is to understand the legal aspects of agreements, void agreements, and agreements in restraint of trade, and their implications in the Indian legal context. The aim of the study is to analyze the legal provisions related to agreements and their enforceability. The methodology involves a qualitative analysis of the Indian Contract Act, 1872, and relevant case laws to understand the legal provisions and their implications. The participants are legal experts and judges who have provided judgments related to agreements and void agreements. The context is the Indian legal system. The findings indicate that the Indian Contract Act, 1872, provides detailed provisions regarding agreements, void agreements, and agreements in restraint of trade. The implications of the study are that agreements in restraint of trade are generally void, except for specific exceptions such as the sale of goodwill and partnership agreements.

KEYWORDS:

Indian Contract Act, agreements, void agreements, restraint of trade, legal proceedings, exceptions, and ambiguous agreements, Wagering agreements, Indian Contract Act 1872, enforceability, legality, collateral contracts, betting, Indian states, legal implications.

INTRODUCTION

A valid contract is one that is legally enforceable. When there is a contract, both parties are legally obligated to each other. The Indian Contract Act, 1872 (ICA) defines a contract as an agreement that is legally enforceable under section 2(h). According to section 2(e) of the ICA, 1872, “every promise and every set of promises forming consideration for each other becomes an agreement” is the definition of an agreement. A legally enforceable agreement is one that is based on promises made by both parties, and it is called a valid contract. An agreement must consist of an offer and an acceptance in order for it to be deemed valid.[1]

An offer is the promisor’s mental expression and can be either positive or negative, meaning it can be to do something or not. Consent to this offer should be indicated and conveyed through an action or inaction. Acceptance is the expression of consent that the promisee, or the party accepting the offer, intends to convey. If the proposal’s consideration and object are lawful, it becomes a binding contract once it is approved by the other party and duly communicated to the proposer. It is the intention of the parties to establish legal relationships.[2]

AGREEMENT

An agreement is a legal commitment made by two parties to one another. “Every promise and every set of promises, forming the consideration for each other, is an agreement,” according to Section 2(e) of the Indian Contract Act, 1872, defines an agreement.[3]

The following components must come together in order to form an agreement:[4]

• Parties: For an agreement to be formed, two or more parties must be involved.
• Offer/Proposal: When someone expresses to another that he is willing to do something, or not do something, in order to get their consent
• Acceptance: The expression of agreement made by the recipient of a proposal for the same thing in the same context as that proposed by the offeror.
• Promise: Upon acceptance, a proposal turns into a commitment.
• Consideration: It is the cost of the guarantee. It is the compensation one receives for his deed or neglect.

VOID AGREEMENT

According to the Indian Contract Act of 1872, a contract that is not immediately enforceable by law is void. Stated differently, a void agreement is a contract that lacks any legal force and is considered void from the outset.[5]

A void agreement is defined by Section 2(g) of the Indian Contract Act as an agreement that is not legally enforceable. Any party to a void agreement is not bound by it, and there is no legal recourse for its enforcement. It appears as though there was never a contract to begin with.[6]

An agreement may be void for a number of reasons, such as fraud, immorality, violation of public policy, illegality, or deception, as well as being unable to carry out. Agreements to commit crimes or agreements that are against the law are examples of void agreements.[7]

AGREEMENT IN RESTRAIN OF TRADE

Section 27 of the Act declares void any agreement that restricts trade. In other words, any contract that prevents someone from beginning or pursuing their trade or career in exchange for payment is null and void. Thus, any agreement with another party that prevents a person from trading in a way that he or she chooses, provided that other party stands to gain from the other party’s cessation of trade or profession, will be classified as a restraint of trade agreement. With two exceptions that we will cover later, all agreements pertaining to trade restraint are null and void. The Sale of Goodwill and Partnership Act contain the two exceptions.[8]

ILLUSTRATIONS[9]

1. B works as an assistant to physician A for a period of three years. B promises not to practice medicine anywhere else for the next three years. Despite being a trade restraint, this agreement is legitimate.
2. A lawyer transfers his practice to B in exchange for goodwill. Additionally, A pledges to refrain from practicing law anywhere in the state for the next 20 years. The terms of this agreement are totally irrational, so it cannot be enforceable.

COMMON LAW

A trade agreement’s delegitimization can be attributed to the historical tension between free markets and contract freedom. In order to guarantee contract freedom, parties would have to consent to reduce competition by granting legitimacy to trade restraint agreements. The current position of agreement in restraint of trade can be seen from the case: –[10]

Norden felt v Maxim Norden felt Guns and Ammunition Co Ltd[11]

In this case, Thorsten Norden felt was an English and Swedish gun manufacturer. After Thorsten sold his company to a business, Maxim Norden felt became the new owner. At this point, Thorsten signed a contract with Maxim promising not to manufacture any firearms for 25 years other than those he produces for the business. Thorsten later betrayed his word, arguing that the agreement was unenforceable because it restricted trade. Thorsten was the beneficiary of the court’s decision.

TEST OF REASONABILITY IN COMMON LAW[12]

The test of reasonability is applied in common law. A trade agreement is enforceable only if:

1. The party enforcing the restriction is attempting to safeguard a legitimate interest.
2. The amount of restraint is limited to what is required to safeguard this interest.
3. The public interest is not at odds with restraint.

POSITION IN INDIA

All agreements in restraint of trade are void pro tanto under Section 27 of the Indian Contract Act, with the exception of sales of goodwill. It’s crucial to realize, though, that these contracts are null and void rather than unlawful. This indicates that while it is not illegal for parties to make these agreements, they will not be enforceable in court if one of the parties breaches it. The Contract Act invalidates even partial agreements in restraint of trade or reasonable restraint in contrast to common law.[13]

EXAMPLE: –

Priya owns a book and office supply store in an Indore neighborhood. Ziana intends to launch a similar goods business in the same neighborhood. Fearing competition in the market, Priya makes a deal with Ziana to keep her company out of the area for 15 years in exchange for a monthly payment that will be made in full. Priya later defaults on the agreed upon amount. Ziana attempts to take the issue to court. Ziana has no case because the agreement is null and void.[14]

EXCEPTIONS TO THE AGREEMENT IN RESTRAIN OF TRADE[15]

There is just one exception defined in Section 27 of the Act, and that is the Sale of Goodwill. The Partnership Act is another example of an exemption.

MEANING OF SALE OF GOODWILL[16]

An intangible asset of a company is goodwill; it is present but not tangible or material. It basically refers to the company’s standing or reputation in society. Goodwill stems from a variety of sources, including customer advantage, staff morale, reputation, and brand value. It is a valuable asset because, due to the company’s name and reputation, customers are inclined to do business with the same reputable company that they did business with previously. This is the reason a company’s goodwill is valuable.

The company’s goodwill may be sold, just like other assets. When a company sells its goodwill, the buyer gets certain rights:

• The firm name may be used by him/her.
• He or she may speak for the company.
• He or she has the authority to prevent the goodwill seller from getting in touch with the company’s former clients.

Following a goodwill sale, the seller retains the ability to operate a rival company. However, these rights expire if it is stipulated in a contract that the seller will not enter into any such agreements.

CONDITIONS FOR THE VALIDITY OF TRADE RESTRICTIONS[17]

A trade restriction during a sale of goodwill is only legal under the following circumstances:

1. The seller may only be prohibited from operating a comparable business.
2. The limitation is only applicable to specific local boundaries.
3. The constraints or limitations ought to seem reasonable.

CASE: –

Chandra v. Parsullah[18]

In this case, the plaintiff owned a fleet of buses that were used to travel between Mahabaleshwar and Pune. Additionally, the defendant operated a comparable business nearby. In order to prevent competition, the plaintiff acquired the defendant’s company along with goodwill, and the contract required him to promise not to launch a rival company in the neighborhood for three years. The defendant launched his business in defiance of the law. The agreement was deemed valid by the court because it was covered by S. 27’s exception.[19]

PARTNERSHIP ACT[20]

The Partnership Act of 1932 provides another exemption to the statute of limitations on agreements in restraint of trade. Three exceptions are outlined in the Act. These are the following:

1. Under Section 11(2) of the Partnership Act, a partner’s agreement to refrain from operating his or her own business as long as the partner is a partner in the said firm is enforceable.
2. An agreement between partners to refrain from conducting business in a manner similar to that of the mentioned firm within designated geographic and temporal boundaries (period of restraint).
3. The partners may agree to restrict the operation of a similar business within certain geographical and temporal constraints in advance of the firm’s dissolution, provided that this restraint is reasonable.

AGREEMENT IN RESTRAINT OF LEGAL PROCEEDINGS[21]

Any agreement between the two that prevents one or both of them from suing the other in the event that the other party breaches the terms of the agreement is null and void. According to Section 28 of the Indian Contract Act, an agreement that limits the amount of time that a party who has been wronged can take legal action against a relevant court or tribunal for a breach of contract is null and void. It goes on to state that any agreement that absolves any party of their obligations or releases any party from liability is null and void.

In simple words, any agreement is null and void if:

1. By agreement, they make it void for any party to file a complaint with the appropriate court or tribunal in the event that the party’s rights have been infringed.
2. Set a deadline for the harmed party to file a case with this kind of court or tribunal.
3. Create a contractual immunity for a party.

EXCEPTIONS TO THE RESTRAINT OF LEGAL PROCEEDINGS[22]

As stated in the Act, Section 28 has two exceptions. Agreements to stop legal action are enforceable only if:

1. Arbitration is used to resolve disputes, both past and future. That is, if the aforementioned agreement contains an arbitration clause.
2. Agreements that specify the time limit in accordance with the 1963 Limitation Act.

 For example, a lawsuit for breach of contract may be filed within three years of the date of the breach, according to the Limitation Act, 1963.

AMBIGOUS AND UNCERTAIN AGREEMENTS[23]

One of two reasons could be that the agreement is ambiguous or incomplete, or that certain terms are not clearly stated in it. According to general guidelines, no contract shall be legally enforceable if the terms of the arrangement are ambiguous or undefined and it is not reasonably possible to ascertain the parties’ intentions.

Illustration:  X consents to trade a metric ton of oil. Since it is impossible to determine the intended categorization, this agreement is unenforceable due to uncertainty.

CASE LAW

Bahadur Singh vs Fuleshwar Singh[24]

In this case, it was held by the court that, If the conditions of a contract can be made certain, then it is not null and void. The contract’s meaning shouldn’t be ambiguous, and it also needs to be demonstrated that it cannot be made certain. A contract is not voidable by mere vagueness or uncertainty that can be readily resolved through appropriate interpretation. If the terms of an oral agreement can be precisely ascertained, then it will not be deemed unclear.

Ashburn Anstalt v Arnol[25]

In this case, it was held that since the word is frequently used in the specific property trade, an agreement to lease a shop in a prime location could be verified by expert testimony.

Lani Mia vs Muhammad Easin Mia[26]

In this case, it was held that if a lease renewal covenant is silent on period or rent, it is assumed to be for the same duration and rent as the original lease and is therefore not null and void.

AGREEMENTS HELD CERTAIN[27]

S.R. Varadaraja Reddiar vs Francis Xavier Joseph Periaria[28]

It was decided that, if the identity of the property could be reasonably ascertained in this way, the agreement would not be ambiguous just because the precise boundaries, survey number, or location were not specified in the agreement, provided that both parties were fully aware of the identity of the property to be conveyed under it.

Daulat Ram Rala Ram vs State of Punjab[29]

Just because the arbitration agreement refers to the officer holding the office temporarily does not mean that the clause designating the superintending engineer will be ambiguous. The use of the word approximate, which refers to rounding off a few pounds to a round figure in the case of money, does not render a contract ambiguous (Edwards v. Skyways). The terms did not specify any additional costs that would need to be paid in addition to the purchase price for reconveyance and the execution costs. A contract is not ambiguous just because it does not specify the terms of performance, the maximum amount of goods to be purchased, or the time for performance.

AGREEMENT HELD UNCERTAIN AND AMBIGOUS[30]

Deojit v Pitambar[31]

 In this case, the hypothecation was deemed too ambiguous to be implemented in the case where the defendants, as inhabitants of a specific location, executed a bond and hypothecated as security for the sum of “our property, with all the rights and interest.” It was insufficient for the defendants’ self-description in the bond as residents of a particular location to prove that their property there was the property being hypothesized. It would have been reasonable to refer to the description of the indefinite expression if they had identified themselves as the owners of a specific property.[32]

It has been suggested that if there is no express time limit for performance or one can infer one from the facts of the case, the agreement is too ambiguous to be enforced. This doesn’t seem like a reasonable generalization. According to Carter v. Agra Savings Bank Ltd., a document in favor of a bank that promised to pay a specific amount on or before a given date and a similar sum each month thereafter could not be regarded as a promissory note because it did not specify the amount to be paid or the period for which it was to subsist. A party’s promise not to enforce check payment until the goods are received by it is null and void on the source of ambiguity because it’s unclear when the goods will be received.[33]

There cannot be a completed contract between the builders and potential buyers of apartments in the event of an agreement to sell real estate if the property cannot be positively identified and there is no agreement among the parties regarding the amount to be paid.[34]

WAGERING AGREEMENTS[35]

Wagering agreements are just regular betting agreements because the word “wager” refers to “a bet,” which is something declared to be won or lost on the outcome of a questionable matter. Section 30 of the Indian Contract Act, 1872 provides further details regarding the legality of wagering agreements. According to this, wagering agreements are null and void, and no action may be taken to reclaim anything purportedly won on a wager or given to another party to follow the result of a game or other undetermined event on which a wager is placed. The ICA, 1872, does not define the term wagering agreement.[36]

Definition of a wagering agreement: A wagering agreement is when two people who claim to have opposing views on an uncertain event mutually agree that, depending on the outcome of the event, one will win from the other and the other will pay or hand over to him a sum of money or another stake; none of the parties has any other interest in the contract than the sum or stake he will win or lose. This definition was established in the seminal decision of Carlill v. Carbolic Smoke Ball Co. by the Queen’s bench. If both parties have the possibility to succeed but not fail, or if one of them has the possibility to lose but not fail, or in the event that one party is unable to win but lose. It follows that while all contingent agreements are not wagering agreements, all wagering agreements are contingent contracts based on the explanation provided above. Therefore, a wagering agreement is a futuristic contract that is predicated on a specific event occurring in the future.[37]

ENFORCEMENT OF WAGERING AGREEMENTS[38]

Wagering contracts are void-ab-initio because they are expressly declared void under section 30 of the Indian Contract act, 1872.

Since wagering contracts are void-ab-initio, even section 65—which addresses the responsibility of the party that has benefited under the void agreement or contract—does not apply. However, it hasn’t been stated anywhere that these kinds of agreements are illegal; as a result, wagering agreements are allowed in some states but prohibited in others. Section 30 further specifies that no action may be taken to reclaim anything purportedly won from a wager or assigned to another party in order to comply with the result of any game or other undetermined event on which a wager is placed.[39]

Promissory notes that are executed for the purpose of paying off debts resulting from wagering transactions may lose their enforceability. However, since wagering agreements are not stated to be unlawful anywhere, agreements that are collateral to wagering agreements are valid. Therefore, in the event that a partnership agreement is in place to conduct wagering transactions, any partner may file a claim for recovery of their share of the loss against any other partner. As previously mentioned, wagering agreements are prohibited in some states but lawful in others.

ILLUSTRATION

Since the Indian Civil Code of 1872 does not repeal the Bombay Act III of 1856, which declares void agreements collateral to wagering transactions, Maharashtra’s wagering agreements also become void. Therefore, wagering contracts are unenforceable under the Indian Contract act, 1872; however, agreements that are a collateral part of wagering agreements may be enforceable in accordance with state law.[40]

CONCLUSION

Certain agreements violate public policy and interest, making them unenforceable in court. These kinds of agreements are still permissible and cannot be enforced in court, but they are not unlawful. That is to say, if any party to the agreement neglects to carry out his or her obligations under it, the injured party will not be able to take the matter before a court or other appropriate body to have his or her rights upheld. Examples of these agreements include those pertaining to trade restrictions, and legal proceedings.[41]

REFERENCES

1. https://blog.ipleaders.in/agreements-void-for-uncertainty-under-section-29/
2. https://lawtimesjournal.in/wagering-agreements-and-their-enforceability-under-indian-contract-law/
3. https://lawbhoomi.com/limitations-on-freedom-of-contract-under-indian-contract-act/
4. https://blog.ipleaders.in/agreements-in-restraint-of-trade-marriage-and-legal-proceedings/
5. https://www.tutorialspoint.com/uncertain-agreement-section-29-of-the-indian-contract-act-1872
6. https://www.tutorialspoint.com/uncertain-agreement-section-29-of-the-indian-contract-act-1872
7. Indian Contract Act, 1872 by R.K. Bangia
8. https://www.toppr.com/guides/business-laws/indian-contract-act-1872-part-ii/expressly-void-agreements/
9. https://indiankanoon.org/doc/1081796

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[39] https://lawtimesjournal.in/wagering-agreements-and-their-enforceability-under-indian-contract-law/

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[41] https://blog.ipleaders.in/agreements-in-restraint-of-trade-marriage-and-legal-proceedings/

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