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Assignment

On

LEGALITY OF OBJECT

For

Business Law

Submitted To Submitted By

Prof. Madhuri Kulkarni Ruchi Tiwari(85)

Date:21st AUG 2011

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ABSTRACT

All the elements of a contract, may be present, the parties may have been capable of contracting, they may have expressed their agreement in the proper form, a valid consideration may have been given, and the consent so expressed may have been a real consent, yet the contract will not be good unless the objects contemplated by it are LEGAL. By this we mean that the purpose of the contract must be a proper and a lawful one.

This can be also be stated as-

The object of a contract must be lawful . If the consideration or the object is unlawful or opposed to public policy, the agreement shall be void.

The object or consideration is unlawful

1. if it is forbidden by law or

2. if it is of such a nature that if permitted it would defeat the provision of law or

3. if it is fraudulent or

4. if it involves or implies injury to the person or property of another or

5. if the court regards it as immoral or opposed to public policy

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ACKNOWLEDGEMENTS

I take immense pleasure in thanking Prof. Madhuri Kulkarni, our course facilitator for

introducing us to the basic concepts of Law and initiating me into undertaking this topic.

Finally, I would like to thank all the people at the Reprography Room for helping us in

taking printouts.

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INDEX

Topic Page No.

1) Introduction 5i) Legality Of Objectii) Examples

2) Definition 6i) Literallyii) Traditionally

3) Unlawful Consideration & Object 6i) If it is forbidden by Law 6ii) If it were permitted, it would defeat the provisions of any

law 7iii) If it is fraudulent 7iv) If it involves or implies injury to the person or property of

another 7v) If the Court regards it as immoral 7vi) If the Court regards it as ‘Opposed to Public Policy’ 8

4) Object and Consideration Unlawful in Part 115) Contract in Restraint of Trade – Saving the Sale of Goodwill 126) Contract in Restraint in Marriage of a Person not Minor 137) Agreement by Way of Wager 148) Contract in Restraint of Legal Proceeding 159) Conclusion 1710) Bibliography 18

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INTRODUCTION

Legality of Object

Section 23 of the Indian Contract Act has specified certain considerations and objects as unlawful. The consideration or objects of an agreement is lawful, unless- it is forbidden by law; is of such a nature that, if permitted, it would defeat the provision of any law; or is fraudulent; or involves injury to the person or property of another; or the court regards it as immoral or opposed to public policy.In each of the above mentioned cases the consideration or object of an agreement is deemed to be unlawful. Every agreement in which the object or consideration is unlawful is void.

Some examples

X promises to obtain for Y an employment in the public service, and Y promises to pay X Rs. 1000 for that. This agreement is void as the consideration in this case is unlawful.

X agrees to let her daughter to hire to Y as a concubine. This agreement is void as it is immoral and as a result opposed to law.

The following agreements are considered to be against public policy:

Trade with the enemy: An agreement between the citizens of two countries at war with each other is void

and hence inoperative. Agreement in interference with the course of justice: All agreements which interfere with the normal course of law and justice are

deemed to be opposed to public policy and hence are void. Agreements which injure the public services are considered to be void. Agreements infringing personal freedom Agreements hindering parental duties. Agreements hindering marital duties

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DEFINITION

Literally

The word ‘Legality’ means ‘the state of being legal’ ‘Object’ means ‘purpose’ and ‘Consideration’ means ‘reason’. So the meaning of legality of object and consideration is the state of being any reason or purpose legal.

Traditionally

1. An agreement will not be enforced by the court if its object or the consideration is unlawful. By the expression “Object of an Agreement” is meant its purpose on design. The object and the consideration must both be lawful, otherwise the agreement is void.

2. The object or consideration of an agreement must be lawful. In order to make the agreement, a valid contract, for, Section 10 lays down that all agreements are contracts if made for lawful consideration and with a lawful object. Section 23 declares what kinds of consideration and objects are not lawful. If the object or consideration is unlawful for one or the other of the reasons mentioned in Section 23, the agreement is illegal and therefore void (Section 23).

UNLAWFUL CONSIDERATION AND OBJECT

1. If it is forbidden by law- If the consideration or the object of a contract were forbidden by law, it would be unlawful and hence unenforceable.

Example-

A promises to pay B Rs.1000 at the end of six months, if C, who owes that sum of B, fails to pay it. B promises to grant time to C accordingly. Here the promise of each party is a consideration for the promise of the other party, and they are lawful considerations.

Case-

Where a license to cut grass was given by the Forest Dept. and one of the terms of the license was that the licensee should not assign his interest on the license without the permission of the Forest Officer, and a fine was prescribed for a breach of this condition, it was held that there being nothing in the Forest Act to make it obligatory upon the parties to observe the conditions of the license the assignment would be binding upon the parties, though it was competent to the Forest Officer to revoke the license if he thought fit to do so. It was so held because the Act did not forbid the transaction but merely imposed a

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condition for administrative purpose. Nazarali v. Baba Miya (1916) 40 Bom. 64.

2. If it were permitted, it would defeat the provisions of any law The consideration of an agreement would be unlawful if it is of such nature that if permitted, would defeat the provisions of any law. (Section 23) Case-a) A trading partnership consisted of more than 20 persons and it was not registered rendering it an illegal association. A suit was brought for its dissolution. It was held that the suit would not lie for it would defeat the provisions of the Companies Act. Mewa Ram v. Ram Gopal, (1926) 48 all, 735.

b) An agreement buy the debtor not to rise the plea of limitation, should a suit have to be filed,is void as tending to limit the provisions of the Limitation Act (Rama Murthy vs Gopayya).

3. If it is fraudulent An agreement, whose object or consideration is to fraud others, is unlawful and hence void.

Example-A, B and C enter into an agreement for the division among them of gains acquired, or to be acquired, by them by fraud. The agreement is void, as its object is unlawful. [Illustration (e) to section 23].

Case-Where the object of an agreement between A and B was to obtain a contract from the commissariat department for the benefit of court , which could not be obtained for both of them without practicing fraud on the department, it was held that the object of the agreement was fraudulent, and that the agreement was therefore void. Shaib Ram Vs Nagar Mel, (1884) Punj. Record no 63.

4. If it involves or implies injury to the person or property of another An agreement, the consideration of which is the causing of an injury to a person or property of another, is void.[Section-23] Injury means criminal or wrongful harm.

Case-A bond, which compels the executant to daily attendance and manual labor until a certain sum is repaid in a certain month and penalizes default with overwhelming interest, is unlawful and void. Ram sarup v. Bansi Mudar , (1915) 42 Cal 742

5. If the court regard it as immoral An agreement, the consideration of which is immoral, is void. (Section 23). The scope of the word immoral here extend to the following:

Case-a) A gift deed executed in consideration of illicit has been held void, as its object is

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immoral. Ghumma v. Ram Chandra (1926), 47 All. 619.

b) Money advanced to a married woman to enable her to procure and to marry the plaintiff could not be recovered back as the object of the agreement was held immoral(Bai Vijli v. Nansa Nagar).

c) An agreement for future marriage, after death of first wife is against good public morals and hence would be void. Wilson v. Cornley (1908), 1 K.B. 729

d) A, who is B’s mukhtar, promises to exercise his influence, as such with B in favor of C and C promises to pay Rs.1000 to A. The agreement is void because it is immoral.[ illustration (j)to section 23]

6. If the court regards it as ‘opposed to public policy ’ If the court regards the object or consideration of an agreement as opposed to public policy, the agreement is void (Section 23).

The following agreements are considered to be against the public policy.

i) Trading with an alien enemy: All trades with public enemies without a license from the government are unlawful. It is now fully established that trading with an alien enemy (i.e. a citizen of the other country at war with the state) is against public policy in so far as it tends to aid the economy of the enemy country. Such agreement is illegal.

ii) Agreements for stifling criminal prosecution: It is well-settled law that if a person has committed a crime, he must be punished. Hence any agreement, which seeks to prevent the prosecution of a guilty party is opposed to public policy and is void, for ‘no one can be allowed to make a trade of felony’. Agreement for stifling prosecution cannot be enforced. Example-Where the offence is non-compoundable as where the charge is one of criminal breach of trust and the offence is compounded by the accused passing a bond to the complaint, the latter cannot recover the amount of the bond. Case-Where A agreed to execute a kabala of certain lands in favor of B in consideration of B abstaining A with respect to an offence of simple assault which is compoundable, it was held that the contract was not against public policy and could be enforced. Amir Khan v. Amir Jan (1898) 3 C. W. N. 5. iii) Agreement interfering with the course of justice: An agreement for the purpose of using improper influence with judges is void.

Example-

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An agreement not to disclose misconduct to the other interested party or an agreement to influence a judge to induce him to decide the case in a party’s favor, is obviously opposed to the public policy and is void.

Case-An agreement to pay a fee to a holy man for prayers for the success of a suit is not an interference with the course of justice. Balasundra Mudaliar v. Mohamed Ossman, (1930) 53 Mad. 29; 57 Mad.L.J. 154.

iv) Champerty and maintenance: Maintenance is an agreement made by a disinterested party for litigation. It is a valid agreement. Champerty is an agreement made by a person to help a party to litigation, provided that the party receiving help promises to share the fruits of the litigation in the event of a favorable decision obtained by him in the suit. Case - A contract to assist litigant so as to delay the execution of a decree against him is opposed to public policy and cannot be enforced. Nand Kishor vs Kunz Behari, (1933) All. L. J. 85.

v) Traffic in Public Offices: Agreements for sale or transfer of Public Offices or for appointments for Public Offices in consideration of money are illegal, being opposed to public policy. Such agreements, if enforced, would lead to inefficiency and corruption in public life.

Case-a) The priests of a public temple agreed to share the offerings made to the deity. It was held that their arrangement was not against public policy. Kallu v. Rajinder(1922). b) If A pays money to B who promises to use his influence and to secure A’s son and appointment in the public service, A cannot recover the money if his son does secure the appointment. Ledu v. Hira Lal, (1916) 43 Calcutta 115.

vi) Agreements creating an interest opposed to duty: If a person enters into a contract with a public servant, which to knowledge might cast upon the public service obligations inconsistent with the public duty, the agreement is void.

Example-An agreement by an agent with a third party whereby he would be enabled to make secret profits is illegal and void, as it tends to create a conflict between interest and duty.

Case-An agreement is not to report in newspaper the activities of a public personality is a void agreement. Similarly, if a lawyer wants to create an interest, which will encourage him to perform his duties indifferently, the agreement shall be void. Nevile v. Dominion of Canada News Co(1915)

vii) Agreement opposed to parental duty:

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The authority of a father over children and a guardian of a ward is to be exercised in the interest of the children and the ward respectively. The authority of a father cannot be alienated irrevocably and any agreement purporting to do so is void.

Case-a) Where the adopting father promises money to the natural father in return for adoption of the latter’s son, such promise is void. Sitaram v.Harihur(1915) .

b) The father of two minor sons agreed to transfer their guardianship to Mrs. Annie Besant, on an irrevocable basis. Subsequently he wanted to rescind the agreement. Held their guardianship cannot be permanently alienated. So he got back their custody. Giddu Narayanish vs Mrs. Annie Besant.

viii) Marriage brokerage agreement: According to English Law an agreement to pay brokerage to a person for negotiating a marriage, is void because it is against public policy. The principal underlying this rule is that marriages should take place according to the free choice of parties and such choice should not be interfered with by third parties acting as brokers.

Bakshi vs Nadu Das (1902).. (i) Gifts made to the groom or the bride are valid transactions. (ii) Gifts made can be claimed back if the match fails.(iii) A promise to give a marriage in ret6urn for money is a void promise. (iv) A promise to remunerate the broker is void.

Case - a) An agreement to pay money to the parent or guardian of a minor in consideration of his consenting to give the minor in marriage is void as being opposed to the public policy. Dholidas vs Furchand, (1897) 22 Bom. 658. b) An agreement to pay a penalty in case a minor daughter is not given in marriage to a particular person is void. Devarayan vs Muthuvaman, (1914) 37 Mad. 393.

ix) Agreement tending to create monopolies in trade: Agreements having for their object, the creation of monopolies are void as opposed to the public policy. Somu Pillai vs MC Mayaveran, (1905) 28 Mad. 520.

x) Agreement to defraud revenue authority: Agreements to defraud revenue authorities are void and illegal.

Case-An agreement by which an employee was to get, in addition to salary, an expense allowance grossly in excess of the expenses actually incurred by him, was held illegal because the provision as to expenses was contrary to public policy being merely a device to defraud the Income Tax authorities. Napeier vs National Business Agency Ltd. (1951). 2 All. ER. 264.

xi) Agreement to give evidence: Agreements whereby money is given to induce persons to give evidences in a civil port are void because everyone is expected to perform his legal duty. Adhiraja Shatty vs Vittil Bhatta AIR (1914). Mad. 366

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xii) Agreement against personal freedom: Agreement which unduly restrict personal freedom have been held to be void and illegal as being against public policy. Case-When a debtor promises not to change his residence till repayment of a loan is complete, such promise is void. Harwood vs Millers Timber & Trading Co. (1917), 1KB 305.

xiii) Agreement opposed to marital duties: Agreement, which interferes with the performance of marital duties, is void as being against public policy. Case-a) An agreement to pay money so that a party to a marriage may be helped in obtaining a divorce shall be against public policy and void. Roshan vs Mohammed (1887)

b) An agreement that the husband will always stay at the mother in law’s house and that the wife would never leave her parental house is void. Tikyat vs Monohar 28 Cal. 751.

OBJECT AND CONSIDERATION UNLAWFUL IN PART

If the consideration or object is partially unlawful, the following rules will be applicable in such cases:

1. If any part of a single consideration for one or more objects, or any one or any part of any one or several considerations for a single object, is unlawful, the agreement is void.

Example-A promises to superintend, on behalf of B, a legal manufacture of indigo; and an illegal traffic in other articles. B promises to pay A salary of 10000 rupees a year. The agreement is void, the object of A’s promise and the consideration for B’s promise is in part unlawful. (Illustration to section 24). Case-A agrees to serve B as his housekeeper and also to leave the adultery with him at a fixed salary. The whole agreement is unlawful and void. A cannot sue even for service rendered as housekeeper because it cannot be ascertained as to what was due on account of adulterous intercourse and what was due for housekeeping. Alice Mary Hill v. William Clarke,(1905), 27 All. 266

2. Where there reciprocal promise to do things legal and also other things illegal, and the legal part can be separated from the illegal part (i.e. there is a separate consideration for different promises), the legal part is a contract and the illegal part is avoid agreement. (Section 57).

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Example-A and B agree that A shall sell B a house for Rs.10000 but if B uses it as a gambling house, he shall pay a Rs. 50000 for it. The first part of the agreement is valid and the second part is invalid.

3. In the case of alternative promise, one branch of which is legal and the other illegal, the legal branch alone can be enforced. (Section 58)

Example-A and B agree that, A shall pay Rs.1000 for which B shall afterwards deliver to A, either rice or smuggled opium. This is a valid contract to deliver rice and a void agreement as to opium.

CONTRACT IN RESTRAINT OF TRADE – SAVING THE SALE OF GOODWILL

Every agreement, by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent is void. (Section 27).

Exception-One who sells goodwill of business may agree with the buyer to refrain from carrying on a small business, within specific 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 limit appear to the Court reasonable, regard being had to the nature of the business. (Section 27). The words ‘restraint from exercising a lawful profession, trade or business’ do not mean an absolute restriction, and intended to apply to a partial restriction. Madhub Chunder v. Rajcoomer Dass, (1874) 14 B.L.R. 76.

Exception of the rule –

1. A seller in business and its goodwill may be restrained reasonably from carrying on any business that similar to the one sold (Section 27).

2. A partner may be restrained by the others from carrying any business similar to that of the firm [Section 11(2) of the Partnership Act, 1932].

3. An outgoing partner may be reasonably restrained by the remaining partners from carrying any business similar to that of the firm[Section 36(2) of Partnership Act, 1932]

4. On the dissolution of the firm, the partners may reasonably restrain each other from carrying any business similar to that of the dissolved firm (Section 54 of the Partnership Act, 1932).

In all these cases, the restraint must be reasonable. Other exceptions from Sri Gopal Paper Mills v. S. Malhotra are discussed below.

Other exception-

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Trade combination: In spite of section 27 in spite of any restraint that might be imposed upon a party to an agreement seeking to establish an economic combination, such combinations will be valid if (a) they are not against the interests of any of the contracting parties, and (b) they are not against public interest.

Fraser & Co. V. Bombay Ice manufacturing Co. (1904): An agreement between different ice manufacturing companies not to sell at a price below the agreed one and to share profits in a certain proportion is a valid one.

Oakes & Co. V. Jackson (1876): The plaintiff agreed with the defendant that that after termination of services, the defendant would not take up similar employment within 800 miles of Madras. Held restraint was void.

CONTRACT IN RESTRAINT IN MARRIAGE OF A PERSON NOT MINOR

Every agreement is restraint of the marriage of any person, other than a minor, is void. (Section 26). A minor’s marriage is not encouraged by the law and, in fact, prohibited in certain cases. Wherever it is allowed, if two adults make an agreement to the effect that a minor will jot be given in marriage, their agreement will be valid under this section.

Example-

An agreement by a husband at the time of his marriage with his wife not to marry a second wife while the first wife was living would be void.

WITHOUT CONSIDERATION:

As agreement without consideration is void but consideration has been dispensed within the following cases [Section 25(2)].

Registered writing: An agreement made without consideration is valid if, ‘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 near relation to each other.’ – Section 25(1).

An agreement without consideration is valid under section 25(1) only if the following requirements are complied with:

i) The agreement is made by a written document.

ii) The document is registered according to the law relating to registration in force at the time.

iii) The agreement is made on account of natural love and affection.

iv) The parties to the agreement stand in a near relation to each other.

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Case-a) A registered agreement between a Muslim husband and his wife to pay his earnings to her does not need any consideration. Poono Bibee v. Fyez Baksh, (1874), 15 B.L.R. App. 5.

b) A, for natural love and affection, promises to give his son B, Rs.1000. A puts his promise in writing and registered it. This is a contract. [ Illustration (b) to section 25].

Compensation of voluntary services: If a promise were made to compensate a person who has already voluntarily done something for the promisor, it would be enforceable although there is only past consideration. This is an exception to the principle that past consideration is no consideration [section 25(2)], and it has been dealt with before.

Example- a) D finds B’s purse and gives it to him. B promises to give D Rs.50. This is contract.

b) D supports B’s infant son. B promises to pay D’s expenses in so doing. This is a contract.

Promises to pay a time-barred debt: If a promise is made in writing and signed by the person to be charged, to pay a debt of which the creditor might have enforced payment but for the law for limitation for suits, the promise would be considered made with good consideration.

Example-D owes B Rs.1000 but the debt is barred by the Limitation Act. D signs a written promise to pay B Rs.500 on account of the debt. This is a contract.

AGREEMENT BY WAY OF WAGER

Definition of Wager: A wager is an agreement by mutual promises, each of them conditional on the happening or not happening of an unknown event. Example-a) A contract by A to pay money to B on the happening of a given event, in consideration of B paying to him money on the event not happening, is a contract by way of wager.

b) A share market transaction, in which there is no intention to give or take delivery of the shares and where the parties intend to deal only with the differences in prices, is a wagering transaction.

Case-a) Lotteries- A lottery is a game of chance. Therefore an agreement to buy a ticket for a lottery is wagering agreement. The government may authorize a lottery. The only effect of such authorization is to attempt the persons conducting the lottery from criminal prosecution but it remains a wagering transaction. Dorabji v. Lance (1918) 42 bom 676.

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b) Cross – word puzzles - In an English case it has been held that a cross-word puzzle, in which pieces depend upon sameness of the competitors solution with a previously prepared solution kept with the editor of a newspaper, is a lottery and therefore a wagering transaction. Coles v. Odham’s Press,(1936) 1 K.B. 416 .

Characteristics of wagering agreements:

1. The consideration for the promise under a wagering agreement is to pay or get money.

2. The money is payable on the happening or the non-happening of an event.

3. The agreement depends on a future or uncertain event.

4. The essence of gaming and wagering is that one party is to win and other loses.

5. In wagering agreement no party has control over the event.

6. Commercial transactions are valid, but to pay price differences in a wagering agreement is void. Exceptions-It has been held that the following transactions are not wagers:

a) Shares: Share market transaction in which there is clear intention to give and take delivery shares.

b) Games of skill: Prizes and competitions which are games of skill, e.g., picture puzzles; athletic competitions etc.

c) A statutory exception: An agreement to contribute to the payment of prize of the value Rs.500 or upward to the winners of a horse race is valid. This is statutory exception laid down in section 30 of the Contract Act.

d) Contract of insurance: A contract of insurance is not a wagering agreement.

e) Badla: Badla transaction are exactly similar to the transaction of ‘conversion’ or ‘carrying over’ in the terminology of the stock exchanges with regard to dealing in securities. Mere agreement to engage in speculation on the rise and fall in prices goods is not necessarily a wagering contract. But in a case this contract was held void under section 23 of Contract Act because it prohibited forward contracts by a statute on this subject.

CONTRACT IN RESTRAINT OF LEGAL PROCEEDING

Every agreement by which any party is restricted absolutely from enforcing his rights under any contract by usual legal proceedings in the courts is void. However there is an exception to the effect that if two persons agree that any dispute arising between them shall be referred to arbitration and only the amount awarded in such arbitration shall be

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recoverable, is valid (section28).

IMPOSSIBLE ACTS:

An agreement to do an act impossible in itself is void. – Section 56 (Para-1). Example-

a) A agrees with B to discover treasure by magic. The agreement is void.

b) A contracts to marry B, being already married to C, and forbidden by the law to which he is subject to practice polygamy. The contract is void. But A must make compensation to B for the loss caused to her by the non-performance of the promise.

The examples cited above are cases of Pre-contractual Impossibility. Contracts that become impossible to perform by subsequent event are called Post-contractual Impossibility.

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CONCLUSION

In the real world, where the framework of business goes as in the following three steps:

1) Idea Generation2) Feasibility Study3) Implementation

where implementation involves the following steps:

1) Buying Of Raw Materials and Machinery (in all inventories of all kinds)2) Hiring of Labour3) Production4) Packaging5) Quality Check6) Marketing and Advertising7) Distributing

Now, all these steps involved require one or the other kind of agreements, wherein all the activities are legally enforced, as an effective manager one must know the Legality Of Object.By studying all about the constraints, legal boundaries and limitations, a manager can, 1) perform efficiently without obstacles as well as can get the work done honestly,2) manage the labour, 3) do knows about the rights of the company, as well as the rights of an individual and 4) also can help save the firm from frauds and any kinds of illegal misconducts.

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BIBLIOGRAPHY

1. Business Law in IndiaBy Surajit Sen Gupta

2. Business Law : A Text Book for School and CollegesBy Thomas Raeburn White

3. Commercial law and Industrial LawBy Arun Kumar Sen & Jitendra Kumar Mitra ;Twenty Second enlarged edition; the World Press Private Limited

4. Mercantile Law in PakistanBy A.G Chowdhury

5. Mercantile LawBy M.C Kuchhal

6. Oxford DictionaryBy Jonathon Crowther ;5th edition; Oxford University Press

7. http://www.lexuniverse.com/contract-law/india/Legality-of-Object.html