Business Law

Illegal or unlawful contract

The word ‘illegal’ means ‘contrary to law’ and the term ‘contract’ means ‘an agreement enforceable by law’. As such to speak of an ‘illegal contract’ involves a contradiction in terms, because it means something like this an agreement enforceable by law and contrary to law. There is apparent contradiction in terms. Moreover, being of unlawful nature, such an agreement can never attain the status of a contract. Thus, it will be proper if we use the term ‘illegal agreement’ in place of ‘illegal contract’ an illegal agreement is void ab-initio.

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Agreement and Contract

  • An agreement is a promise or set of promises (s).
  • A contract is essentially an agreement, i.e., a promise or set of promise (s).

Differences

  • Enforceability – An agreement may or my not be enforceable at law. For example, social agreements are generally not enforceable while business agreements are enforceable at law. A contract is an agreement which is enforceable at law.
  • Effect – An agreement is not always a binding on the concerned parties. A contract is always concluded and binding on the concerned parties.
  • Scope – All agreements are not contracts. All contracts are agreements.

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Illegal and Void Agreements

Similarities

  • These agreements are not enforceable at law.

Differences

  • Scope- Illegal agreements are narrower in scope. All illegal agreements are void. Void agreements are wider in scope. An agreement may be void because of a reason other
    than illegality.
  • Effect on collateral transaction – Collateral transaction of an illegal contract also becomes illegal and contract not be enforced. Collateral transaction of an agreement which is void for a reason other than illegality are enforceable at law.
  • Punishment – Parties may be punished for making illegal agreement. Being void does not make a contract punishable.

Despite the similarity between an illegal and a void agreement that in either case the agreement is void ab-initio and cannot be enforced by law, I will explain the above points in detail now.

  1. An illegal agreement is narrower in scope than a void agreement. ‘all illegal agreements are void but all void agreements are not necessarily illegal.’ The object or consideration of an agreement way not be contrary to law but may still be void. For example, an agreement may not be contrary to law but may still be void. For example, an agreement with a minor is void as against him but not illegal. Again, an agreement the terms of which are uncertain is void but such an agreement the terms of which are uncertain is void an agreement is not illegal.
  2. An illegal agreement is wider in effect in relation to collateral transactions than a void
    agreement. When an agreement is illegal, other agreement which are incidental or collateral to it are also tainted with illegality, hence void, provided the third parties have the knowledge of the illegal or immoral design of the main transaction. The reason underlying this rule is that no person shall be allowed to invoke the aid of the court if he is himself implicated in the illegality. On the other hand, when an agreement is void (but not illegal), agreements which are collateral to it are not invalidated and remain valid.

Illustration

A engages B to Murder C and borrows Rs.5,000 from D to pay B. D is aware of the purpose of the loan. D is aware of the purpose of the loan. Here the agreement between A and B is illegal and the agreement between A and D is collateral to an illegal agreement. As such the loan transaction is illegal and void and D cannot recover the money. But the position will change if D is not aware of the purpose of the loan. In that case the loan transaction is not collateral to the illegal agreement and is a valid contract.

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Void Agreement and Void Contract

Similarities

  • A void agreement cannot create any legal rights. It is a total nullity.
  • A void contract cannot create any legal rights. It is a total nullity.

Differences

  • A void agreement is an agreement. It never takes form of a contract. It is a nullity since very beginning.
  • A void contract is a contract. When it is formed it is perfectly valid. Subsequently it becomes a nullity.

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Void and Voidable Contract

Similarities:

  • Restitution – If any benefit is passed between the parties, it may be restored back.

Differences:

  • Definition – When a contract ceases to be enforceable at law, it becomes void contract. A Voidable contract is a contract which is enforceable by law at the option of one or more parties thereof, but not at the option of others.
  • Status – A void contract cannot create any legal rights. It is a total nullity. A voidable contract takes its full and proper legal effect unless it is disputed and set aside by the person entitled to do so.
  • Nature – A void contract is valid when it is made. But subsequently it becomes void due to one reason or the other. A contract may be voidable since very beginning, or may subsequently become voidable.
  • Rights – A void contract is valid when it is made. But subsequently it becomes void due to one reason or the other. A voidable contract gives rights to the aggrieved party to rescind the contract, and claim the damages, etc. in certain cases.
  • Effect – When a contract is void because of illegality, its collateral transactions also becomes void. A voidable contract does not effect the collateral transactions.

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Kinds of contracts from the point of view of mode of creation

From the point of view of mode of creation a contract may be express or implied or constructive.

1. Express contract. Where both the offer and acceptance constituting an agreement enforceable at law are made in words spoken or written, it is an express contract. For example: A tells B on telephone that he offers to sell his car for Rs. 20,000 and B in reply informs A that he accepts the offer, there is an express contract.

2. Implied contract. Where both the offer and acceptance constituting an agreement enforceable at law are made otherwise than in words i.e., by acts and conduct of the parties, it is an implied contract. Thus, where A, a coolie in uniform takes up the luggage of B to be carried out of the railway station without being asked by B, and B, allows him to do so, then the law implies that B agrees to pay for the services of A, and there comes into existence an implied contract and N is under obligation to pay to M. It is relevant to state in respect of mode of creation, certain contracts may be a mixture of the ‘express’ and ‘implied’ types of contracts, that is, where out of the two components of an agreement, namely, offer and acceptance, one is expressed in words and the other is implied from acts and circumstances. Such contracts may be called as contracts of mixed character. For example, A offers to buy B’s scooter for Rs. 4,000 and B accepts the offer by sending the scooter itself. Here A’s offer is expressed in words and B’s acceptance is implied form his conduct. It is a contract of mixed character.

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Constructive or quasi contract

The term ‘constructive or quasi contract is a misnomer, the cases grouped under this type of contracts have little or affinity with contract. Such a contract does not arise by virtue of any agreement, express or implied between the parties but the law infers or recognizes a contract under certain special circumstances. For example, obligation to finder of lost goods to return
them to the true owner or liability or person to whom money is paid under mistake to repay it back cannot be said to arise out of a consent, but these are very much conversed under quasi contracts as per sections 71 and 72 respectively. The contract act has rightly named such contracts as “certain relations resembling those created by contract”.

A quasi contract is based upon the equitable principle that a person shall not be allowed to retain unjust benefit at the expense of another. Sections 68-72 of the contract act describe the cases which are to be deemed ‘quasi contracts’.

Example:

A says to B, If you dig my garden next Sunday, I will pay you Rs. 500.’ B makes no commitment, but says, I am not sure that I shall be able to, but if I do, I shall be happy to take Rs. 500. This arrangement is not bilateral. A has committed himself to pay Rs. 500 in certain circumstances, but B has made no commitment at all. He is totally free to decide whether he wants to dig A’s garden or not. If B does not turn up on Sunday to dig the garden, A cannot do anything about is. If, however, B reaches to A’s place on Sunday to do the work, it will amount to his acceptance a contract will be formed where both parties will be bound by their performance.

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Standard Form Contract

When a large number of contracts have got to be entered into by a person, from a practical point of view and for the sake of convenience, a standard form for the numerous contracts may be used. An insurance policy, shares or a railway ticket are few examples of such standardized contracts. The “special terms and conditions” become binding as part of the contract only if they are brought to the notice of the acceptor before or at the time of the contract. In view of the unequal bargaining power of the two parties, the courts and the legislature have evolved certain rules to protect the interest of the weaker party:-

(1) Reasonable notice – e.g. by printing on a ticket, “For conditions see back”, or obtaining signatures on the document containing terms, or otherwise explaining the the terms,. Where an adequate notice is not given the offeree is not bound by the terms.

(2) Notice should be contemporaneous with the contract – if a party to the contract wants to have exemption from liability he must give a notice about the exemption while the
contract is being entered into and not thereafter ( Olley Vs. Marlborough Court. Ltd.)

(3) Terms of contract should be reasonable – if the terms of the contract are unreasonable and opposed to public policy, they will not be enforced.

(4) Fundamental breach of contract – no exemption clause is allowed to permit the non-compliance of the basic contractual obligation i.e. obligation which is fundamental or core of the contract. Thus, the dry cleaner has to be answerable , even if the contract contains all sorts of exemption clauses, if the cloth is altogether lost.

(5) Strict construction – a strict construction shall be applied to exemption clause, and any ambiguity is to be resolved in favour of the weaker party.

(6) Statutory protection – The English Unfair Contract Terms Act, 1977 severely limits the right of the contracting parties to exclude or limit their liability through exemption clauses
in the agreement. India lacks such an Act.

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The Indian Contract Act, 1872

The law of contract in India is contained in the Indian Contract Act 1872. This Act is based mainly on English common law, which is to a large extent made up of judicial precedents. (there being a separate contract act in England). It extends to the whole of India except the state of Jammu and Kashmir and came into force on the first day of September 1872(Sec.1 Indian Contract Act 1872). The act is not exhaustive. It does not deal with all the branches of the law of contract. There are separate acts, which deal with contracts relating to negotiable instruments, transfer of property, sale of goods, partnership, insurance, etc. Again the act does not affect any usage or custom of trade (Sec.1).

Scheme of the Act.

The scheme of the Act may be divided into two main groups:

1. General principles of the law of contract (Secs. 1-75).
2. Specific kinds of contracts, Viz;

(a) Contracts of indemnity and Guarantee (Secs. 124-147).
(b) Contracts of Bailment and pledge (Secs. 148-181).
(c) Contracts of Agency (Secs. 182-238).

Before 1930 the Act also contained provisions relating to contracts of sale of goods and partnership. Sections 76-123 relating to sale of goods were repealed in 1930 and a relating to
partnership were repealed in 1932 when the Indian separate Act called the Sale of Goods Act was enacted. Similarly, sections 239-266 partnership Act was passed.

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What are the sources of Mercantile Law in India?

  • The Indian statutes on mercantile law
  • English/ Foreign law
  • Precedents(previous judgments of the courts.)
  • Customs and usage

Most of the Indian Mercantile Law is contained in the statutes. The prime legislation is the Indian Contract Act 1872 but it is not exhaustive to deal with all kinds of contracts. In addition to this there are the Sale of Goods Act, 1930, The Indian Partnership Act 1932, The Negotiable Instruments Act 1881 etc. wherever the Indian Contract Act is silent, the Indian courts may apply the principles of the English Common Law.

It is interesting to know that in England there is no English Contract Act in the form of a statute. It has been derived from common law, the usage of merchants and traders in different spheres of trade, substantiated or ratified by decisions in the court of law. The judicial precedents are an important source of law. Sometimes, there is no provision, which can answer a particular question of law. In such cases the court will look into the previous decisions on similar matters to find the relevant law.

Custom and usage of a trade play an important role in business dealings of that trade. To have a binding force, the custom or usage must be certain, reasonable and well known. Now it is more than a century that that the mercantile laws are governing trade and commerce. The law of contract is the foundation upon which the superstructure of modern business is built. It is common knowledge that in business transactions quite often promises are made at one time and the performance follows later. In such a situation if either of the parties were free to go back on its promise without incurring any liability, there would be endless complications and it would be impossible to carry on trade and commerce. Hence the law of contract was enacted which lays down the legal rules relating to promises, their formation, their performance, and their enforceability. Explaining the object of the law of contract Sir William Anson observes:

“The law of contract is intended to ensure that what a man has been led to expect shall come to pass, that what has been promised to him shall be performed”.

The law of contract is applicable not only to the business community but also to others. Every one of us enters into a number of contracts almost everyday, and most of the time we do so without even realizing what we are doing from the point of law. A person seldom realizes that when he entrusts his scooter to the mechanic for repairs, he is entering into a contract of bailment; or when he buys a packet of cigarettes, he is making a contract of the sale of good; or again when he goes to the cinema to see a movie, he is making yet another contract; and so on.

Besides, the law of contract furnishes the basis for the other branches of mercantile law. The enactments relating to sale of goods, negotiable instruments, insurance, partnership and
insolvency are all founded upon the general principles of contract law. That is why the study of the law of contract precedes the study of all other sub-division of mercantile law.

The Indian contract act was enacted from the 1st day of September; 1872.it is applicable to the whole of India except the state of Jammu and Kashmir. There may be some occasions where
Indian law disagrees with the English laws. In such cases, the Indian law will prevail.

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