The Lawfulness Of Object And Consideration | Section 23

This article ‘Lawfulness Of Object And Consideration’ shall be analysing what is considered as valid objective and consideration of a contract and what are the criteria through which it can be decided whether the objective and consideration are illegal or not.

I. Introduction to the Lawfulness Of Object And Consideration

This article shall be analysing what is considered as valid objective and consideration of a contract and what are the criteria through which it can be decided whether the objective and consideration are illegal or not.

Every contract entered between the parties is entered into for gaining something out of the commercial transactions and giving something in return. Each and every contractual agreement follow this principle and barring certain exception, contract not having these two important clauses shall be regarded as a void contract.

Now, the “objective” clause of the contract states what’s the main aim of entering into a contract, it can be to sell certain things or to buy certain things or to even giving insurance for any future loss that may take place.

So the objective of the contract has to be legal, or else the contract will be regarded as void. Like if the objective of the contract is to kill someone or to burn someone’s house, or any such act which is against any statutory provisions or against public policy shall be deemed as illegal.

Now in regard to the consideration, it is something which is given in return for the performance of a contract. It can be money or can be something else, as long as it doesn’t amount to something illegal, like If A contracts to B stating that he will give him cocaine if he helps him to sell product, then the consideration given in the contract is against the statutory laws, so no consideration can be given which are not only against the statutory laws but are also against the public policy.

II. Section 23 of the act

Section 23 of the Act states that “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.”

As per section 23 of the Act, the word ‘object’ is not used as the same sense as ‘consideration’ but is used in a distinguishing way where it means ‘purpose’ or ‘design’.

It states that objective and consideration shall be considered illegal if it’s against the law, or if allowed then it would defeat the purpose of the law or if it’s fraudulent any other like reasons. So, this article shall be discussing in detail all the provisions which would make the objective and considered illegal.

• Forbidden by law

Where the object of an agreement is forbidden by law, then the agreement shall be considered illegal. The “law” mentioned therein means laws currently in force in India so it includes the Hindu & Mohammedan Laws and also the principle of unwritten laws.[1]

a) Violations of licence and permits

An agreement indirectly defeating the provisions of an Act would be equally void. But much depends upon the object of a particular statute and the object of the agreement as interpreted by the court. If the legislature intends to forbid an act in public interest an agreement to do the forbidden act will obviously be void.[2]

But if the intention is to merely regulate an act by prescribing certain terms & conditions a contract to do the act without fulfilling the statutory requirement may not be void even if the parties have to pay a penalty for the breach of the statute.[3]

Cases under this head are mostly found agreements involving a breach of laws enacted for the protection of public interest. Like in the case of Nandlal v Thomas[4], the plaintiff had the license to work on a liquor shop given under the Excise Act.

Now as per the Act, it has forbidden sale, transfer of the license or taking the partnership to run the shop. Now, the plaintiff has taken the defendant to run the shop as a partner into the business. The court held the partnership as avoid one as it would defeat the objective of the law if an unapproved person starts to work in an approved shop, this would be violating the provision of law in an indirect manner.

The objective of the law was to prohibit sale or transfer of the license, the licensee cannot form the partnership to work as that would amount to the transfer of the license to an unauthorized person.

b) Assignment of copyright

As per the Copyright Act 1957, it permits the assignment of copyright to any present or future work. It was not held violative of public policy as there was a safeguard for the protection of the owner within the ambit of the legislation itself.[5]

• Defeat any law

It may happen that sometimes the object or the consideration of the contract though not directly violate any provision of the law if it’s allowed then it would defeat the provisions of any law. Agreements like that are also held to be void.

For example in the case of Fateh Singh v Sanwal Singh[6], where the accused was under the provisions of Cr.P.C had to furnish surety for the amount of Rs 5000 for his good behaviour. So he deposited the sum with the defendant and asked him to be his surety.

After the period of suretyship was over, the accused sued the defendant for the recovery of the surety amount. The court held the agreement was held as void and the amount was recoverable as the whole objective of having the provision of suretyship was that surety shall at his own risk see to the appearance of the accused.

The underline purpose of the law will be defeated if agreement like this is given the legal stamp. A contract to indemnify the surety against his liability is illegal for the same reason. Another aspect of this provision is that when a statute provides a penalty for an act it is implied that the statue is indirectly forbidding the act itself.[7]

a) Laws of a friendly country

As per this section, contracts which defeat the laws of a friendly country will be considered as a void agreement. In the case of Ragazzoni v KC Sethia[8], GOI had come up with regulations under the Sea Customs Act 1878, stating that no export shall take place to South Africa.

Now the defendant in an attempt to bypass the laws had decided to export the goods to Genoa from there it shall be made available to South Africa for sale. But the defendant had failed to deliver the goods and they were sued. Denning LJ held that if any person decides to violate the laws of a friendly country then he can’t ask the court to give its aid for the enforcement of their agreement.

b) The ambit of the term “Law”

The term “Law”, as used in the section means the rules of law for the time being in force in India and includes the Hindu & Muslims laws as well. Like Supreme Court in a case held that contract between a husband and wife to enter into a separation deed by which the husband covenanted that his wife shall leave with her parents is not a valid contract.[9]

• Fraudulent

An agreement which has been entered for a fraudulent purpose shall be considered as a void agreement. It also extends to the contract where both the parties to the contract agreed to impose fraud on a third person then also their agreement shall be considered as a void agreement.

Like in a case[10] where the debtor had agreed to pay a certain amount to the creditor in order to induce his consent to a composition which is proposed with other creditors was held as a void one as it had a fraudulent objective.

For an agreement to fall, under this category, the important thing is that the parties should have the “intention to deceive”. But it was also decided in English case[11], that even if one of the parties doesn’t have the intention to deceive but the other does, then also the agreement shall be considered as a void one.

• Injurious to person and property

An agreement entered by two parties with the objective of injuring any person or any person’s property shall be considered as a void agreement. Similarly, if the contract is such that it implies injury to the person or injury to the property of another person, then also the agreement is considered as unlawful.

Like in the case of Ram Sarup Bhagat v Bansi Mandar[12], here the plaintiff borrowed a certain amount of money from the defendant and then executed a bond to work for the plaintiff without any pay for the period of two years.

And if the plaintiff failed then he has to pay an exorbitant amount of interest along with the principal money as a penalty. The court held that the contract entered between the parties had no difference with the contract for slavery which involves injury to the person and was held void agreement.

• Immoral contract

Any contract entered between the parties which are tainted with immorality to be enforced as they are deemed to be illegal and unlawful. Now the question arises what shall be considered as “immoral”- it depends upon the standards of morality prevailing at a particular time and as approved by courts.

But the caveat in this regard is that a certain act has been considered immoral since time immemorial and will perhaps always be regarded as such. The profession of the person is not taken into consideration to analyse whether the contract is tainted with immorality or not, only the objective of the contract is seen.

Like help promised to dance girls are not considered immoral as the objective of the contract is not immoral, but if a contract is entered into where the objective was to have sexual relations with a woman, then the contract shall be deemed as an immoral contract.

a) Interference in marital relations

Any contract which involves interference between the marital relationship of husband and wife shall be considered as unlawful. Like if a married woman was given money so to enable her to get a divorce for her husband on the pretext that the lender will subsequently marry her was held to be an immoral & void contract.

Or a promise to marry a married woman after the death of her husband or after her divorce is also considered as an immoral contract[13]. This principle works both ways as if a promise to marry a married man after the death of his wife or after his divorce is also considered as an unlawful contract.

• Public policy

A contract entered between the parties shall be considered as unlawful if it’s against the public policy. The term “public policy” means the court will undertake the consideration of public interest before either accepting or rejecting the agreement.

The concept was further explained by Reddy J, where he stated that “the twin touchstone of public policy is the advancement of the public good and prevention of public mischief and these questions have to be decided by judges not as amen of legal learning but as an experienced and enlightened member of the community representing the highest common factor of public sentiment and intelligence.”

Following are the different head of public policy: –

a) Trading with enemy

It’s an established principle that one of the objectives of the war is to cripple the enemy’s commerce as to capture his property. So the declaration of war prohibits a commercial transaction with the inhabitants with the enemy country.[14]

b) Trafficking in public offices

An agreement which has the objective to induce a public officer to act in a corrupt manner is also against the public policy. This includes the sale of public offices that is appointments in consideration of money are also against the public policy.

c) Unfair and unreasonable dealings

These are the contract where one of the parties to the contract is not economically in the equal footing in respect to the other party and there is a wide gap in the bargaining power, where the one party has the power to exploit the other economically weaker and vulnerable party, then such contacts are considered as contracts against the public policy.

Like in the case of Central Inland Water Transport v Brojo Nath Ganguly[15], that held that government company imposing upon a needy employee a term that he can be removed just by three months’ notice without any grounds is nothing but the exploitation of the power and was held against the public policy.

III. Conclusion

After thoroughly analysing the various ambit of section 23 of the Act, it can be said that there is much to the section than those 4 lines inscribed in the Act. The understanding of the section is very vital as it would help in differentiating the contract which is though seemed legal in prima facie but only after it has been seen through the lens of section 23 that it can be assessed whether the agreement is legal or not.

Various aspect of section 23-like immorality, public policy, are important factors which have to be taken into considerations before declaring any contract legally sound.

---

[1] Gherulal Parakh v Mahadeodas AIR 1959 SC 781

[2] Babiah v Mohd Abdus Subhan Khan AIR 1954 Hyd 156

[3] Bhikanbhai v Hiralal ILR (1900) 24 Bom 622

[4] Nandlal v Thomas 171 IC 948

[5] Prentice Hall India v Prentice Hall Inc AIR 2003 Del 236

[6] Fateh Singh v Sanwal Singh 1889 Punj Rec 1

[7] Nutan Kumar v Addl District Judge AIR 1994 All 298

[8] Ragazzoni v KC Sethia (1956) 2 QB 490

[9] Abdul Piroj Khan v Hussenbi (1904) 6 Bom LR 728.

[10] Atamal Ramoomal v Deepchand Kessurmal AIR 1939 Sind 33

[11] Brown Jenkinson & Co v Percy Dalton (London) Ltd (1957) 2 QB 621

[12] Ram Sarup Bhagat v Bansi Mandar ILR (1915) 42 Cal 742

[13] Baivijli v Nansa Nagar ILR (1885) 10 Bom 152

[14] Esposito v Bowden 110 RR 822

[15] Central Inland Water Transport v Brojo Nath Ganguly (1986) 3 SCC 56

---

1. Insurance Contract and Indemnity In India(Opens in a new browser tab)
2. Lawfulness of Consideration | Lawful Consideration