Legality and Object of Consideration | Indian Contract Act, 1872

The presence of consideration alone is not enough to make an agreement enforceable. The object and consideration of the agreement must also be lawful.

Section 23 of the Indian Contract Act, 1872 lays down the situations in which the consideration or object of an agreement becomes unlawful.

What is meant by “Object” and “Consideration”?

Consideration is what is given in return for a promise. And, Object refers broadly to the purpose or end for which the agreement is entered into.

For example, A agrees to pay B ₹50,000 to obtain a government licence through illegal means. Here, the payment of ₹50,000 may be the consideration, while obtaining the licence through illegal means is the object. The agreement cannot be enforced because the purpose is unlawful.

Section 23: When is Consideration or Object Unlawful?

Section 23 provides that the consideration or object of an agreement is unlawful if:

1. it is forbidden by law;
2. it would defeat the provisions of any law;
3. it is fraudulent;
4. it involves or implies injury to the person or property of another;
5. the court regards it as immoral; or
6. it is 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.

1. When Consideration or Object is Forbidden by Law

An agreement is unlawful where its consideration or object involves an act which is expressly prohibited by law. The prohibition may arise not only from the Indian Contract Act but also from another statute, rule, regulation or lawful order having statutory force.

It is not necessary that the act should be punishable under the Indian Penal Code. If a competent law prohibits the act, an agreement to do that act is unlawful.

Case Law: Universal Plast Ltd. v. Santosh Kumar Gupta (1985)

The plaintiff owned 4,200 spindles and agreed to sell them to the defendant. The transaction was made without obtaining the prior permission of the Textile Commissioner, although the Woollen Textiles (Production and Distribution) Control Order, 1962 prohibited the sale or disposal of spindles without such permission. The plaintiff sued for recovery of the balance price.

The Delhi High Court held that the agreement was void because the transfer was prohibited by the statutory Control Order. The plaintiff could not recover the balance consideration under an agreement which itself contravened the statutory prohibition.

Thus, where the law expressly prohibits the transaction, the agreement cannot be enforced merely because the parties have voluntarily entered into it.

2. When the Consideration or Object Defeats the Provisions of Law

An agreement may be unlawful even though the act contemplated by it is not expressly prohibited. If the agreement is designed to circumvent or defeat the object and purpose of an existing law, it is void.

The words “defeat the provisions of any law” refer to agreements which, if permitted, would frustrate the intention of the legislature. The parties cannot lawfully accomplish indirectly what the law seeks to prevent directly.

Case Law: Sundara Gownder v. Balachandran (1990)

The plaintiff, an Abkari contractor, was disqualified from participating in an auction of toddy shops because he was a defaulter to the Toddy Workers’ Welfare Fund. To circumvent this statutory disqualification, he entered into an arrangement with the defendant whereby the defendant would bid for certain shops and subsequently transfer them to the plaintiff. The plaintiff paid ₹22,080 to the defendant, who failed to perform the arrangement.

The Kerala High Court held that the agreement was void under Section 23 because its very object was to circumvent the statutory prohibition contained in Rule 5(4A) of the Abkari Shops (Disposal in Auction) Rules. The plaintiff, being aware of the statutory prohibition, could not enforce the agreement or recover the amount paid under it.

The case clearly illustrates the distinction between an act which is expressly forbidden by law and an agreement which, though not itself expressly prohibited, is intended to defeat the provisions of law.

3. When the Consideration or Object is Fraudulent

An agreement is unlawful if its object or consideration is intended to perpetrate fraud.

For example, if A, B and C agree to divide among themselves the profits obtained by defrauding another person, the agreement is void because its object is fraudulent.

Case Law: Manni Ram v. Purshottam Lal (1930)

A knew that the Railway Company would not grant him a contract. He therefore entered into an arrangement with B under which B would submit the application for the contract, although A was to become the real contractor after the contract was obtained.

The arrangement was held void because its object was to deceive and defraud the Railway Company. The agreement was intended to procure a contract by concealing the identity of the person who was to be the real contractor.

Thus, an agreement whose purpose is to obtain an advantage through fraud upon a third person is unlawful under Section 23.

4. When the Consideration or Object Involves Injury to the Person or Property of Another

An agreement is unlawful where its consideration or object involves or implies injury to the person or property of another. The expression “injury” includes wrongful or unlawful harm to another’s person or property.

For example, an agreement to damage another person’s property or to cause unlawful harm to another person is void. Similarly, an agreement which, in substance, imposes conditions amounting to slavery or unlawful personal servitude is opposed to the law.

Case Law: Ram Sarup Bhagat v. Bansi Mandar (1916)

The agreement in this case required the borrower to perform manual labour until repayment of the debt and imposed an oppressive rate of interest in the event of default. The Calcutta High Court regarded the arrangement as indistinguishable from slavery and held it to be opposed to public policy and unenforceable.

5. When the Consideration or Object is Immoral

An agreement is void when its consideration or object is regarded by the Court as immoral. The expression “immoral” does not cover every act which may merely appear undesirable or objectionable to an individual. The courts have traditionally applied the expression within recognised legal principles, particularly in cases involving sexual immorality.

Case Law: Bai Vijli v. Nansa Nagar (1886)

The defendant had advanced money to a married woman to enable her to obtain a divorce from her husband, on the understanding that she would subsequently marry him. He sought to recover the money advanced. The Bombay High Court held that the object of the agreement was immoral and that the agreement was void. Consequently, the money advanced under the immoral arrangement could not be recovered.

Scope of “Immoral” [Gherulal Parakh v. Mahadeodas Maiya (1959)]

The Supreme Court explained that the expression “immoral” in Section 23 cannot be given an unlimited or subjective meaning. The doctrine must remain within recognised legal principles. The Court observed that judicial decisions had traditionally confined this ground principally to recognised forms of sexual immorality and that a wagering transaction could not simply be treated as immoral merely because it was a wager.

6. When the Consideration or Object is Opposed to Public Policy

An agreement is void when its consideration or object is opposed to public policy. Public policy refers to principles under which the law refuses to enforce agreements which are harmful to the interests of society or inconsistent with fundamental public interests.

However, the doctrine of public policy must be applied with caution. Courts do not invalidate agreements merely because they appear undesirable. The agreement must fall within a recognised principle of public policy or be clearly injurious to public interest. The Supreme Court has emphasised that the doctrine should not be expanded unnecessarily so as to unduly restrict freedom of contract.

Case Law: N.V.P. Pandian v. M.M. Roy (1979)

The respondent paid ₹15,000 to the appellant in connection with an attempt to secure a seat for her son in Madras Medical College through the appellant’s influence. The seat was not obtained and the respondent sought recovery of the money.

The Madras High Court held that the arrangement was opposed to public policy. Selection to a medical college was required to be made according to prescribed norms and merit, and an agreement to use personal influence to secure a seat amounted to an improper attempt to influence a matter of public importance. The agreement was therefore invalid.

Case: Gheru Lal Parakh v. Mahadeo Das (1959)

Explaining the scope of 'Public Policy' under Section 23, Subba Rao, J. held that public policy is an ‘unruly horse’. The doctrine of public policy is open-ended, but courts must be extremely cautious and must not create new heads of public policy outside well-settled judicial boundaries. An agreement is not ‘opposed to public policy’ merely because it is void under another provision (e.g., a wagering agreement under Section 30). Collateral transactions to an agreement that is merely void (and not illegal/forbidden) remain lawful and enforceable.

Agreements Opposed to Public Policy

Certain classes of agreements have traditionally been regarded as opposed to public policy.

1. Trading with an Enemy

An agreement to trade with a person owing allegiance to a Government at war with India, without the requisite permission of the Government, is opposed to public policy. The reason is that such transactions may prejudice the interests and security of the State during wartime.

2. Stifling Prosecution

An agreement to prevent a criminal prosecution from proceeding in the ordinary course is generally void as opposed to public policy. The law does not permit a person to make a private bargain for suppressing a criminal prosecution. Such an agreement tends to interfere with the administration of criminal justice.

• For example, where A promises to abandon a prosecution for robbery in consideration of B promising to compensate him for the property stolen, the agreement is void if the offence is not legally compoundable.

The rule is based upon the principle that criminal proceedings should not ordinarily be made the subject of private bargaining. However, where the law expressly permits an offence to be compounded, an agreement relating to such lawful compounding is not necessarily opposed to public policy.

3. Maintenance and Champerty

• Maintenance is an agreement under which a person, having no legitimate interest in litigation, agrees to maintain or support the litigation of another.
• Champerty is an agreement under which a person agrees to assist another in litigation in return for a share in the proceeds of the litigation.

In India, agreements of maintenance and champerty are not invariably void. Such an agreement may be valid if it is entered into bona fide and the terms are fair and reasonable. However, an agreement may become unlawful where it is unreasonable, malicious, oppressive, or amounts to gambling in litigation.

Case: Ram Coomar Coondoo v. Chunder Canto Mookerjee (1876)

The Privy Council held that the English common law rules against maintenance and champerty do not apply in India in their full rigidity. Assistance given to a poor litigant to enforce a just claim in return for a reasonable share of the proceeds is valid, provided it is not extortionate, unconscionable, or motivated by malicious gambling in litigation.

4. Trafficking in Public Offices

An agreement for the sale or procurement of a public office for money is opposed to public policy. Public offices must be filled according to the qualifications and suitability of candidates and not by private payment or influence.

For example:

• An agreement to pay money to a public servant to induce him to vacate his office so that another person may obtain the appointment is void.
• An agreement to procure a public honour or official position in return for money is void.

The principle is that public offices and public honours cannot lawfully be treated as articles of private bargain.

5. Marriage Brokerage Agreements

An agreement to procure or negotiate a marriage in return for monetary consideration is opposed to public policy and is void. The law does not prohibit a person from providing ordinary information or matrimonial introductions as part of a legitimate service. What is objectionable is an agreement which treats the procurement or negotiation of marriage as a commercial bargain.

6. Interference with the Course of Justice

An agreement intended to improperly influence a judge, witness, public officer or other person concerned with the administration of justice is opposed to public policy.

For example:

• An agreement to induce a witness to absent himself from court;
• An agreement to induce a judicial officer to act partially;
• An agreement to corruptly influence a public officer in the discharge of official duties.

Such agreements are void because they tend to undermine the administration of justice.

7. Agreements Creating Interest Against Duty

An agreement which creates an interest in a person contrary to the duty which he owes to another is opposed to public policy.

For example, where an agent secretly receives a commission from another person for acting in a manner favourable to that person without the principal’s knowledge or consent, the arrangement is unlawful. Similarly, an agreement by a manager of a firm to award a contract to X in return for a secret personal payment is opposed to public policy.

The law does not permit a person entrusted with a duty to place himself in a position where his personal interest conflicts with that duty.

8. Agreements Tending to Create Monopolies

Agreements which are designed to create unlawful monopolies and thereby prejudice the public interest may be opposed to public policy. The doctrine is applied where the arrangement is intended to suppress competition or secure an improper advantage contrary to the interests of the public.

Agreement Void If Consideration or Object is Unlawful in Part [Section 24]

Section 24 provides:

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

The section deals with agreements in which the consideration or object is partly lawful and partly unlawful. The general principle is that where the lawful and unlawful parts are inseparable, the entire agreement is void. Where distinct and independent promises can be separated, the lawful portion may, where legally permissible, be enforced independently of the unlawful portion.

Illustration

A agrees to manage B’s lawful manufacturing business and, at the same time, to assist B in carrying on an unlawful trade. B agrees to pay A a single salary for undertaking both activities.

Since part of the consideration and object is unlawful and the obligations form part of one indivisible arrangement, the agreement is void.

Case Law: Alice Mary Hill v. William Clarke, Allahabad High Court (1904)

The plaintiff, a married woman, claimed a monthly allowance under an agreement made by the defendant. The evidence established that the relationship between the parties involved cohabitation and that such cohabitation formed part of the consideration for the agreement.

The Allahabad High Court held that, because the cohabitation forming part of the consideration was adulterous and therefore unlawful under the law then applicable, the unlawful consideration was an indivisible part of the agreement. The agreement was consequently void under Section 24 and the plaintiff’s claim failed.

Therefore, where the unlawful portion of the consideration is inseparable from the lawful portion, the entire agreement becomes void under Section 24.

Doctrine of Severability

Under the Blue Pencil Rule, if a contract contains reciprocal promises to perform both legal and illegal acts, courts will enforce the legal portion and sever the illegal portion, provided the two are distinctly separable. This statutory mechanism is reflected in Section 57, which provides that where parties reciprocally promise firstly to do certain legal things, and secondly, under specified circumstances, to do illegal things, the first set forms a valid contract while the second remains void. Similarly, under Section 58, in the case of an alternative promise where one branch is legal and the other illegal, only the legal branch can be enforced.

Distinction between Section 23 and Section 24