Legality of Object & Consideration

INTRODUCTION

One of the essentials of a valid contract is that the consideration and the object should be lawful. Every agreement of which the object or consideration is unlawful is void. Section 23 the circumstances when the consideration or object of an agreement is not lawful.

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
  • 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.

ESSENTIALS

In the following cases the consideration or object has been considered to be unlawful by Section 23:

  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. The court regards it as opposed to public policy

FORBIDDEN BY LAW

An agreement to do something which is forbidden by law is unlawful. An agreement to do what has been prohibited by the Indian Penal Code or by some other law cannot be enforced. A contract to pay some money if a crime or a tort is committed is not enforceable. If the contract stipulates indemnifying a person against liability for an intentional wrong like deceit, it is unlawful.

An agreement offending a statute or public policy is void ab initio and the same cannot become valid even if the parties agree to that effect. It has been held in Nutan Kumar vs. IInd Additional District Judge, Banda A.I.R 1994 All 298 that an agreement of lease between landlord and tenant without allotment or release order, as required by the law, is void and unenforceable.

VOID AND ILLEGAL CONTRACTS

In Rajat Kumar Rath vs. Govt of India A.I.R 200 Orissa 32 it has been held that distinction has to be drawn between void contracts and illegal contracts. Both kind of agreement have no legal effect. If the contract is merely void the collateral contracts thereto are not affected. But, if a contract is unlawful, then the contracts which are collateral thereto is also void.

In order that an action is barred on the ground that it would give effect to what is forbidden by law, it is necessary that the ground that it would give of the litigation itself should be forbidden by law.

DEFEAT THE PROVISION OF ANY LAW

If the object or consideration of an agreement is of such nature that, if it is permitted, it would defeat the provisions of any law, such an agreement is void. Certain acts may not be expressly forbidden by law, but if they result in circumventing any law, they cannot be encouraged.

An agreement for future separation between a Mahomedan husband and wife is also void because the same is opposed to public policy as held in Bai Fatma vs. Ali Mohomed I.L.R (1912) Bom 280.If the law prohibits the doing of something, the same cannot be done in a roundabout way. If doing of a thing in a certain manner would defeat the provisions of law, the same is unlawful.

FRAUDULENT PURPOSE

An agreement that is void if the consideration or object is to commit fraud. In Manni Ram vs. Purshottam Lal AIR 1930 All 732. A knew that the railway company would not grant him a contract, he entered into a contract with B that B should put forward an application for the contract and after the contract was granted, A shall serve as real contractor. A brought an action to put his claim as the real contractor. It was held that the object of agreement was to commit fraud upon the railway company and therefore the agreement is void.

AGREEMENT INJURIOUS TO THE PERSON OR PROPERTY OF ANOTHER.

If the consideration or the object of an agreement is to cause an injury to the person or property of another, the agreement is unlawful and therefore void. Injury here means harm which is unlawful. For example an agreement to commit fraud or a tort. If the real object of the agreement between the parties to promote their own interest rather than to cause harm to another, the agreement is lawful. Thus if two persons agree that they will not compete in submitting tenders, and one will submit a higher tender and the other lower, the agreement is not void under section 23 as held in Jai Ram vs. Kahna Ram AIR 1963 H.P 3.

IMMORAL

If the consideration or object of an agreement is regarded by the court to be immoral or opposed to public policy, the agreement is unlawful and void as under Section 23.

For example; A, who is B’s mukhtar, promises to exercise his influence, as such, with B in favor of C, and C promises to pay 1000 rupees to A. The agreement is void, because it is immoral.

The Indian Contract Act does not define what is immoral. Immorality depends on the norms accepted by the society at a particular point of time.  Generally, the concept of immorality has been given a restricted meaning and it has been confined only to sexual immorality.

In Bai Vijli vs. Nansa Nagar (1885) 10 Bom 152 the plaintiff advanced loan to the defendant, a married woman, to enable her to obtain divorce against her husband and then marry the plaintiff. The object of the agreement was held to be immoral and the plaintiff was not entitled to recover the loan so advanced.

If the object or consideration for an agreement is future illicit combination between a man and a woman, the agreement is always unlawful. In such case it does not make any difference whether such an illegal cohabitation would amount to the offence of adultery or not.

OPPOSED TO PUBLIC POLICY

An agreement which the court regards as opposed to public policy, is void. Public policy is not capable of any precise definition. Public policy means the policy of the law at a stated time. An act which is injurious to the interest of society is against public policy.

If an agreement is prejudicial to social or economic interest of the community, it will be against public policy to enforce such an agreement. The courts do play a great role in interpreting whether the agreement is in consonance with the recognized notions of the interest of the community at a particular time. Notions could vary from country to country and time to time.

In Central Inland Water Transport Corpn Ltd. vs. Brojo Nath, AIR 1986 SC 157.

It was held that the part of the clause, which empowered the Corporation to dispense with the services of payments employee instantly was injurious to public interest for it tends to create sense of insecurity in the minds of those whom it applies and is unconscionable and opposed to public policy and thus void under Section 23 of the Contract Act. It was also held that the part of the clause which empowered and employee to resign from service was not void, because the person entering into a contract of employment does not sign a bold of slavery and therefore, a permanent employee cannot deprived of his right to resign”.

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