Lawful Object and Lawful Consideration (Sections 10 & 23)
What Constitutes Lawful Object and Consideration?
For an agreement to be a valid contract, it must be made for a lawful object and with lawful consideration. This is one of the essential elements of a valid contract as specified in Section 10 of the Indian Contract Act, 1872, which requires, among other things, that agreements are made "for a lawful consideration and with a lawful object".
While the terms 'lawful object' and 'lawful consideration' are used, the concept is primarily elaborated by defining what makes the object or consideration *unlawful*. Section 23 of the Act lists the various grounds that render the consideration or object of an agreement unlawful. If the consideration or object is unlawful, the agreement is void.
The 'object' of an agreement refers to the purpose or design of the contract. It is the result that the parties intend to achieve through their agreement. The 'consideration' is the price for the promise, the 'something in return' exchanged between the parties.
Relationship between Object and Consideration
Often, the object and consideration are closely intertwined. For example, in a contract for the sale of illegal goods, the object is the unlawful transfer of forbidden goods, and the consideration (the price paid) is also tainted by this unlawful purpose. However, the Act treats them as distinct requirements for lawfulness. An agreement can have a lawful object but unlawful consideration, or lawful consideration but an unlawful object, or both can be unlawful. In any of these cases, the agreement is void.
Example: A agrees to pay B Rs. 10,000/- if B trespasses on C's property. The consideration for A's promise is B's act of trespassing (an unlawful act). The object is to cause trespass (unlawful purpose). Both are unlawful, making the agreement void.
Example: A agrees to sell legal goods to B. B agrees to pay A Rs. 5,000/- if A gives false testimony in Court. The object (selling legal goods) is lawful. But the consideration for B's promise (giving false testimony - perjury) is unlawful. The agreement for A to give false testimony in exchange for money is void.
The requirement for both lawful object and lawful consideration ensures that the courts are not used to facilitate transactions that are illegal, immoral, or against public interest.
Example 1. Mr. Sanjay agrees to pay Mr. Vijay Rs. 20,000/- if Mr. Vijay helps him smuggle electronic goods into India without paying customs duty. Is this agreement valid?
Answer:
No, this agreement is not valid. Smuggling goods without paying customs duty is an act forbidden by law (it is illegal). The object of the agreement (smuggling) and the consideration (the act of helping smuggle and the payment for it) are unlawful as they are forbidden by law and would defeat the provisions of customs law. Therefore, the agreement is void under Section 23 of the Indian Contract Act.
When is Object or Consideration Unlawful? (Section 23)
Section 23 exhaustively lists the conditions under which the consideration or object of an agreement is considered unlawful, rendering the agreement void. It states:
"The consideration or object of an agreement is lawful, unless—
it is forbidden by law; or
is of such a 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."
Let's examine each of these grounds:
Forbidden by law
An act or undertaking is forbidden by law if it is prohibited by any legislation, rule, or regulation in force in India. If the object or consideration involves doing something that is expressly prohibited by statute, it is unlawful. This often includes acts that are punishable under criminal law or other specific regulatory laws.
Example: An agreement to perform an act that constitutes a criminal offence (e.g., assault, theft, murder) is forbidden by law and thus unlawful. An agreement to trade in banned substances or to operate a business without required licenses (if the law prohibits carrying on the business without a license) can also be forbidden by law.
Defeats the provisions of any law
Even if an act is not directly 'forbidden' by law, it will be unlawful if its nature is such that allowing it would frustrate the purpose or intention of any law. This covers agreements that are designed to circumvent or evade the mandatory requirements of a statute.
Example: An agreement between a debtor and creditor to evade the provisions of an insolvency law or a rent control act. If a landlord makes a tenant agree to pay rent higher than the legally permissible limit under a Rent Control Act, the agreement for the excess amount would be void as it defeats the provisions of the Rent Control Act.
Fraudulent
If the object or consideration of an agreement involves or promotes fraud, the agreement is unlawful and void. Fraud here means deceit or misrepresentation intended to gain an unfair advantage. An agreement to carry out a fraudulent transaction is void.
Example: An agreement to divide gains acquired by fraud. A and B agree to cheat C, and share the money obtained. This agreement is fraudulent and void.
Involves or implies injury to the person or property of another
An agreement is unlawful if its object or consideration causes harm or damage to the person or property of another. This includes agreements to commit torts (civil wrongs) or crimes that cause injury.
Example: An agreement to assault someone (injury to person). An agreement to damage someone's property (injury to property). An agreement to publish defamatory statements about someone.
Immoral or opposed to public policy
This is a broad category covering agreements that are considered harmful to society or against fundamental moral or public interests. The concepts of 'immoral' and 'opposed to public policy' are not precisely defined and have evolved through judicial decisions based on changing social values and public good.
Immoral: Agreements that are contrary to accepted standards of morality. Examples include agreements involving prostitution, or agreements based on illegal sexual relationships (e.g., an agreement to pay money in consideration of future illicit cohabitation). However, past illicit cohabitation is not unlawful consideration for a promise to pay money (though other legal issues may arise).
Opposed to Public Policy: Agreements that are injurious to the public welfare or are detrimental to the interests of the state or the public. Examples include:
- Trading with Alien Enemy: Agreements made during wartime with citizens of an enemy country (unless permitted by government).
- Stifling Prosecution: Agreements to drop a criminal prosecution in exchange for money or consideration (compounding of non-compoundable offences).
- Maintenance and Champerty: Agreements to assist a party in litigation in exchange for a share of the outcome, where the interference is improper and not for the benefit of the public or the party assisted.
- Agreements in Restraint of Trade: Agreements that restrict a person from carrying on a lawful profession, trade, or business are generally void (Section 27), as they are against public policy favoring free competition. (Subject to specific exceptions).
- Agreements in Restraint of Marriage: Agreements restricting a person's freedom to marry (Section 26).
- Agreements in Restraint of Legal Proceedings: Agreements that totally restrict a party from enforcing their rights through ordinary legal proceedings or limit the time for filing a suit to a shorter period than prescribed by the Limitation Act (Section 28). (Subject to specific exceptions).
- Agreements Tending to Create Monopolies.
- Agreements to Influence Public Officials.
The list of agreements opposed to public policy is not closed and can expand as society evolves.
Example 1. Mr. Gupta promises to pay Mr. Hari Rs. 50,000/- if Mr. Hari divorces his wife and marries Mr. Gupta's daughter. Is this agreement valid?
Answer:
No, this agreement is not valid. The object and consideration (divorcing one person to marry another) are considered to be against public policy as they interfere with marital relations and may be seen as promoting unethical behaviour. Such agreements are typically regarded by courts as opposed to public policy under Section 23 and are therefore void.
Example 2. Mr. Iyer files a criminal complaint against Mr. Javed for cheating. Mr. Javed approaches Mr. Iyer and offers to pay him Rs. 1 Lakh if Mr. Iyer withdraws the criminal complaint. Mr. Iyer agrees. Is this agreement valid?
Answer:
No, this agreement is not valid. This is an agreement to stifle prosecution (stopping a criminal case in exchange for consideration). Such agreements are considered opposed to public policy as they interfere with the administration of justice. If the offence is one that can be legally compounded (settled out of court with the permission of the court, as listed in Section 320 CrPC), then an agreement to compound it may be lawful. However, cheating under the IPC may or may not be compoundable depending on the specific section charged and the court. If it is a non-compoundable offence, the agreement to withdraw the complaint in exchange for money is unlawful and void under Section 23 as being opposed to public policy.
Agreements Opposed to Public Policy
Definition and Scope
As per Section 23 of the Indian Contract Act, 1872, the consideration or object of an agreement is lawful, unless, among other reasons, "the Court regards it as immoral, or opposed to public policy". An agreement whose object or consideration is unlawful under Section 23 is void.
Public policy is a broad and somewhat vague concept. It refers to the principle that no citizen can lawfully do that which has a tendency to be injurious to the public or against the public good. It concerns the welfare of the community and the interests of the state. Agreements that are detrimental to these interests are considered opposed to public policy.
The concept of public policy is often described as an 'unruly horse' because its application can vary depending on the prevailing social, economic, and moral standards recognized by the courts. Courts exercise caution when invoking public policy to invalidate agreements, as it can restrict the freedom of contract. However, it is a necessary power to prevent agreements that, while not explicitly forbidden by statute, are harmful to society.
The various heads of public policy have been developed over time through judicial decisions. While courts are reluctant to invent new heads of public policy, they interpret existing heads in light of contemporary circumstances.
Interference with course of justice / Interference with administration of justice
Agreements that tend to obstruct, impede, or pervert the normal course of justice or the administration of justice are considered opposed to public policy. The proper functioning of courts and legal processes is vital for public order and the enforcement of rights. Any agreement that interferes with this is unlawful.
Examples:
- Stifling Prosecution: Agreements to drop or not pursue a criminal prosecution in exchange for consideration (like payment of money) are generally void as they interfere with the course of justice. This applies to 'non-compoundable' offences, where the law does not allow private settlement. For legally 'compoundable' offences, settlement (often requiring court permission under Section 320 CrPC) is allowed and agreements related thereto are not opposed to public policy.
- Agreements to influence Judges or Officials: Agreements for payment of money or other consideration to induce a judge or public official to act in a particular way in a matter before them are void.
- Maintenance and Champerty: Maintenance is an agreement whereby a person promises to maintain a suit in which he has no interest. Champerty is an agreement whereby a person agrees to assist another in litigation in exchange for a share of the proceeds of the suit. In India, such agreements are not automatically void. They are considered opposed to public policy only if they are found to be unconscionable, extortionate, or made with the improper motive of stirring up litigation for the purpose of harassing or oppressing others. An agreement to genuinely assist a poor person in litigation for a reasonable share is often upheld.
Agreements tending to create injury to person or property of another
This head of public policy is directly stated in Section 23 itself. Agreements whose object or consideration is to cause harm (physical, reputational, financial) to the person or property of another are unlawful and void.
Examples:
- An agreement to assault or physically harm someone.
- An agreement to publish a defamatory statement.
- An agreement to damage or destroy someone's property.
Such agreements promote civil wrongs (torts) or crimes and are clearly injurious to public order and individual safety.
Agreements tending to create corruption or dependence
Agreements that involve or promote corruption, or create improper dependencies, are opposed to public policy as they undermine the integrity of public administration and societal institutions.
Examples:
- Agreements for the sale or transfer of public offices or titles: Offering money or consideration in exchange for obtaining a government job, a public honour, or a title is void.
- Agreements to influence public servants: Agreements to pay a public servant to induce them to do or not to do something in their official capacity, or to exercise their influence to obtain favours, are void.
- Agreements to procure contracts from Government: Agreements to use influence to get a contract awarded by the government in exchange for a share of the profits can be void if they involve corrupt practices or improper influence.
Agreements against the interest of the state / Agreements relating to trading with enemy
These agreements are harmful to the security, sovereignty, and interests of the nation state.
Examples:
- Trading with an alien enemy: As discussed earlier, agreements to trade with citizens of a country with which India is at war, without governmental license, are void as being opposed to public policy (and often forbidden by law).
- Agreements prejudicing public service: Agreements that hinder the proper performance of a public service essential to the state.
- Agreements to publish state secrets.
Agreements tending to create monopolies
Agreements aimed at creating exclusive rights or control over a particular market or industry, thereby suppressing competition and potentially harming consumers through price manipulation or limited supply, are sometimes considered opposed to public policy, although specific legislation (like the Competition Act, 2002) now primarily governs such matters. Early case law under contract recognized agreements unduly restraining trade or tending towards monopolies as void under public policy.
While Section 27 specifically deals with agreements in restraint of trade, agreements creating monopolies might fall under the broader head of public policy under Section 23 if they are detrimental to public interest beyond mere restraint of trade.
Agreements relating to marriage brokerage
Agreements where a person agrees to procure a marriage for another in consideration of a sum of money are considered opposed to public policy and are void. Such agreements commercialize the institution of marriage and are seen as detrimental to the social good.
Example: An agreement to pay a 'marriage broker' a commission upon successful arrangement of a marriage is void.
Agreements tending to create interest against duty
Agreements that create a conflict between a person's private interest and their public or fiduciary duty are considered opposed to public policy.
Examples:
- An agent agreeing to accept a bribe or secret commission from a third party that conflicts with their duty to their principal.
- An agreement by a public servant that his private interest will override his official duty.
- An agreement by a trustee that conflicts with his duty towards the beneficiaries.
Other heads of Public Policy include:
- Agreements in restraint of personal liberty.
- Agreements unduly restricting parental rights.
- Agreements to defraud creditors.
The principle underlying all these categories is that the agreement is harmful to the welfare or interests of the public or the state and should therefore not be enforced by the courts.
Example 1. Mr. Ravi enters into an agreement with Mr. Sonu, a witness in a criminal case against Mr. Sonu's friend. The agreement states that Mr. Ravi will pay Mr. Sonu Rs. 10,000/- if Mr. Sonu does not testify in court. Is this agreement valid?
Answer:
No, this agreement is not valid. An agreement to prevent a witness from testifying in court is an agreement to interfere with the course of justice. It aims to suppress evidence and impede the administration of justice. Such an agreement is considered opposed to public policy under Section 23 of the Indian Contract Act and is therefore void. Mr. Ravi cannot be compelled to pay Mr. Sonu, and Mr. Sonu cannot claim the money.
Example 2. Mr. Amit promises to pay Mr. Kamal Rs. 50,000/- if Mr. Kamal uses his influence with a government minister to get Mr. Amit's license application approved quickly. Is this agreement valid?
Answer:
No, this agreement is not valid. An agreement to pay someone to use influence with public officials to obtain a favour is considered opposed to public policy as it tends to create corruption or undue influence in public administration. It falls under the head of agreements tending to create corruption or dependence. Such an agreement is void under Section 23 of the Indian Contract Act.
Agreements Void for Unlawfulness
Consequences of Unlawful Object or Consideration
As established under Section 10 and Section 23 of the Indian Contract Act, 1872, an agreement must have a lawful object and lawful consideration to be a valid contract. Section 23 specifically lists the grounds that render the object or consideration unlawful (forbidden by law, defeats provisions of law, fraudulent, involves injury, immoral, or opposed to public policy).
Effect on the Agreement
The direct and primary consequence of an agreement having an unlawful object or consideration is that the agreement is void.
- Void Agreement: A void agreement has no legal effect from the beginning (void ab initio). It is not enforceable in a court of law. Neither party can legally compel the other to perform their part of the agreement.
- No Legal Rights or Obligations: An unlawful agreement does not create any legal rights or obligations between the parties. They are left in the position they were before the agreement was made, in the eyes of the law.
- No Recovery of Money/Property (Generally): Money paid or property transferred under an unlawful agreement is generally not recoverable. This is based on the principle "In pari delicto potior est conditio defendentis", meaning that where both parties are equally in the wrong (involved in an illegal or immoral act), the position of the defendant is stronger (the court will not assist the plaintiff to recover). However, exceptions might exist if one party is not equally guilty, or if recovery is permitted by statute.
- Severability: If an agreement contains several distinct promises, and some are lawful while others are unlawful, the lawful promises can be enforced only if they are separable from the unlawful promises and are supported by lawful consideration. If the unlawful part cannot be severed, the entire agreement is void (Section 24).
- Collateral Agreements: A collateral agreement (an agreement connected to the main agreement) is generally void if it is dependent on or in furtherance of an unlawful agreement, and the parties were aware of the illegality of the main agreement.
The invalidation of agreements with unlawful elements serves the purpose of preventing courts from being used to facilitate illegal, immoral, or harmful activities and upholding public interest.
Example 1. Mr. Alok agrees to pay Mr. Bhavesh Rs. 50,000/- if Mr. Bhavesh sets fire to Mr. Chetan's warehouse. Mr. Bhavesh sets fire to the warehouse but Mr. Alok refuses to pay. Can Mr. Bhavesh sue Mr. Alok to recover the Rs. 50,000/-?
Answer:
No, Mr. Bhavesh cannot sue Mr. Alok. Setting fire to a warehouse is a criminal act forbidden by the Indian Penal Code. The object of the agreement (causing arson) and the consideration (the act of arson and the payment for it) are unlawful under Section 23 as being forbidden by law and involving injury to property. Therefore, the agreement between Mr. Alok and Mr. Bhavesh is void. A void agreement is not enforceable, so Mr. Bhavesh has no legal right to claim the Rs. 50,000/- from Mr. Alok in court.
Agreements in restraint of trade (Section 27)
Agreements that restrict a person's freedom to carry on a lawful profession, trade, or business are generally considered void as being opposed to public policy, which favours free competition and the ability of individuals to earn a livelihood. Section 27 of the Indian Contract Act, 1872, deals with such agreements.
Rule under Section 27
"Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void."
This section declares agreements in restraint of trade to be void to the extent of the restraint. The restraint can be partial or total; both are generally void. The broad wording indicates a strict approach in India, unlike the English common law position which allows restraints if they are reasonable between the parties and not injurious to the public.
Example: A promises B that he will not start a grocery shop in the same locality where B has his shop, in exchange for Rs. 10,000/-. This agreement is void as it restrains A from carrying on a lawful business.
Exceptions
Section 27 itself and other statutes provide specific exceptions to the general rule, where agreements in restraint of trade may be valid:
(a) Exception 1 to Section 27: Sale of Goodwill:
"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."
This allows the seller of a business's goodwill to agree not to compete with the buyer within reasonable geographical limits, to protect the value of the goodwill sold. The limits must be reasonable in terms of area and duration (as long as the buyer carries on the business).
(b) Partnership Act, 1932: The Indian Partnership Act contains several exceptions:
- Agreement by a partner not to carry on competing business during the continuance of the firm (Section 11(2)): Partners can agree that while they are partners, they will not carry on any business other than that of the firm, or any business of a competing nature. This is valid.
- Agreement by a partner not to carry on similar business upon dissolution of the firm (Section 36(2)): Partners may agree that upon dissolution of the firm, any partner shall not carry on a business similar to that of the firm within a specified period or within specified local limits. Such agreements are valid if the restrictions are reasonable.
- Agreement by a partner not to carry on similar business upon sale of firm's goodwill (Section 54): Similar to Exception 1 of Section 27, when the goodwill of a firm is sold after dissolution, a partner can agree not to carry on a similar business within reasonable limits.
Similar provisions exist under the Limited Liability Partnership Act, 2008.
(c) Trade Combinations: Agreements between traders to regulate trade practices (e.g., fixing prices, regulating supply) are not necessarily void, provided they do not completely restrain trade and are intended to promote or regulate the trade rather than stifle competition unfairly. The Competition Act, 2002 now plays a significant role in governing such agreements.
(d) Service Agreements: Covenants in employment contracts by which an employee agrees not to compete with the employer *during the period of employment* are generally considered valid if reasonable, as they are necessary for the protection of the employer's business interests and are not strictly in restraint of trade (the employee is already contractually bound to serve the employer exclusively). However, covenants restraining an employee from competing *after the termination of employment* are generally held void under Section 27, even if they appear reasonable (unless they fall under a specific exception or relate to protection of trade secrets/confidential information, which is a complex area with varying judicial views).
The exceptions are specific and narrowly interpreted; the general rule is that restraints on trade are void.
Example 1. Mr. Sharma sells his famous sweet shop and its goodwill in Lucknow to Mr. Verma for Rs. 1 Crore. They agree that Mr. Sharma will not open a sweet shop in Lucknow for the next 5 years. Is this agreement valid?
Answer:
This agreement is likely valid under Exception 1 to Section 27. Mr. Sharma is selling the goodwill of his business and agrees not to carry on a similar business (sweet shop). The restraint is within specified local limits (Lucknow). The duration (5 years) appears reasonable, as long as Mr. Verma (or subsequent buyer of goodwill) continues the business in Lucknow. The Court will check if the specified local limits and duration are reasonable having regard to the nature of the sweet shop business. If deemed reasonable, the agreement is a valid exception to the rule against restraint of trade.
Example 2. A clause in Mr. Kapoor's employment contract with a software company states that after leaving the company, he cannot work for any competing software company anywhere in India for a period of 2 years. Is this clause valid?
Answer:
No, this clause is likely void under Section 27. Restraints on trade during employment are generally valid if reasonable. However, covenants restraining an employee from taking up employment or carrying on a similar business *after* the termination of service are generally held void in India, even if they appear reasonable in terms of time and geographical area. Section 27 takes a strict stance against post-employment restraints. The restriction preventing Mr. Kapoor from working for any competitor across the entire country for 2 years after leaving is a restraint on his ability to exercise his profession and would typically be considered void under Section 27.
Agreements in restraint of marriage (Section 26)
Marriage is regarded as a fundamental social institution. Agreements that interfere with the freedom of individuals to marry are considered void as being opposed to public policy.
Rule under Section 26
"Every agreement in restraint of the marriage of any person, other than a minor, is void."
This section declares agreements that restrict a person from marrying to be void. The restraint can be total (e.g., promising not to marry at all) or partial (e.g., promising not to marry a specific person or a person from a specific community), provided the partial restraint is substantial enough to amount to a general restraint on marriage. An agreement to marry only a specific person is not a restraint of marriage.
Example: A agrees to pay B Rs. 1 Lakh if B does not marry during A's lifetime. B agrees. This agreement is void.
Example: An agreement between two friends that neither will marry until the other gets married is in restraint of marriage and void.
Exception: Restraint of Marriage of a Minor:
Section 26 explicitly makes an exception for agreements in restraint of the marriage of a minor. This means an agreement restraining a minor from marrying is *not* void under Section 26. Such agreements are typically found in family arrangements or agreements related to the welfare of the minor. However, the validity and enforceability of such agreements might still be questioned on other grounds (e.g., if against the minor's welfare, or if the agreement itself violates some other law or public policy).
Example: An agreement in a will leaving property to a minor on the condition that she does not marry until she is 21 might not be void under Section 26 (as she is a minor), though other legal considerations might apply.
Example 1. Mr. Verma's grandfather promises him Rs. 5 Lakhs if he does not marry until he completes his 30th birthday. Mr. Verma is 25 years old. Is this agreement valid?
Answer:
No, this agreement is void. Mr. Verma is 25 years old, which is above the age of majority (18 years). The agreement restrains him from marrying until he is 30. This is an agreement in restraint of the marriage of a person who is not a minor. According to Section 26, such an agreement is void.
Agreements in restraint of legal proceedings (Section 28)
Every person has a right to access courts and tribunals to enforce their legal rights and seek remedies. Agreements that restrict this right are considered opposed to public policy. Section 28 addresses such agreements.
Rule under Section 28 (as amended)
The original Section 28 has been amended over time, notably in 1997. The current Section 28 broadly states that the following two types of agreements are void:
(a) Agreements restricting access to legal proceedings:
"Every agreement, 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, is void to that extent."
This clause declares void any agreement that completely prevents a party from going to court to enforce their contractual rights (absolute restraint). It also covers agreements that restrict access to 'ordinary Tribunals' using 'usual legal proceedings'. An agreement to sue only in a court that has no jurisdiction would fall under this.
However, agreements conferring jurisdiction on one of several competent courts (exclusive jurisdiction clauses) are generally considered valid, as they don't restrict the right to sue but merely channel it to a specific competent forum.
(b) Agreements limiting the time for filing suit:
The second part of Section 28(a) (post-1997 amendment) explicitly states that an agreement which "limits the time within which he may thus enforce his rights, is void to that extent." This addresses clauses commonly found in contracts that stipulated a shorter period of limitation than that prescribed by the Limitation Act, 1963. Such clauses are now void.
Example: A contract contains a clause stating that "No suit shall be brought against the company after the expiry of six months from the date of the cause of action." If the Limitation Act provides a period of 3 years for such a suit, this clause limiting the time to 6 months is void under Section 28. The party can file the suit within the period allowed by the Limitation Act.
Before the 1997 amendment, agreements extinguishing the *right* after a specified period were distinguished from those extinguishing the *remedy*. The amendment clarifies that agreements limiting the time to enforce rights are void.
Exception (Explanation 1 to Section 28): Arbitration Agreements:
Section 28 provides an important exception for arbitration agreements. It states that Section 28 "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."
Agreements to refer present or future disputes to arbitration are valid. Arbitration is recognized as an alternative dispute resolution mechanism, and agreeing to resolve disputes through arbitration instead of civil court is not considered a restraint on legal proceedings in a manner opposed to public policy. The Arbitration and Conciliation Act, 1996 governs arbitration proceedings.
Example 1. A clause in a contract between a supplier and a buyer states, "Neither party shall have the right to file a suit in court for any dispute arising under this contract." Is this clause valid?
Answer:
No, this clause is void under Section 28. It absolutely restricts the parties from enforcing their rights under the contract through the usual legal proceedings before the ordinary Tribunals (courts). This amounts to an absolute restraint on legal proceedings and is against public policy.
Example 2. A contract for construction work includes a clause that states, "Any claim for payment must be made within 3 months of the completion of the work, failing which the claim shall be deemed to have been waived and no suit shall lie thereafter." The Limitation Act provides 3 years to file a suit for such claims. Is this clause valid?
Answer:
The part of the clause stating that "no suit shall lie thereafter" is void under Section 28 as it limits the time within which a party may enforce their rights to a period shorter than that provided by the Limitation Act. The Limitation Act provides a minimum period, and parties cannot contractually shorten it to bar legal proceedings prematurely. However, the first part of the clause requiring the claim to be made within 3 months might be interpreted as a condition precedent for filing the suit or claiming payment, which may be valid, but the extinction of the right to sue after 3 months is void.