Legality of Object and Consideration

INTRODUCTION
One of the main ingredients of a valid contract is that the consideration and the
object should be lawful and every agreement of which the object or consideration
is unlawful is void. Section 23 of the Indian Contract Act mentions that the
circumstances when the consideration or object of an agreement is not lawful. 

Section 23 of the Indian Contract Act has specified certain considerations and
objects as unlawful. The consideration or objects of an agreement is lawful, unless-
it is forbidden by law; is of such a nature that, if permitted, it would defeat the
provision of any law; or is fraudulent, or involves injury to the person or property
of another, or the court regards it as immoral or opposed to public policy. In each
of the above-mentioned cases, the consideration or object of an agreement is
deemed to be unlawful. Every agreement in which the object or consideration is
unlawful is void.

For a contract to be a valid contract two things are absolutely essential – lawful
object and lawful consideration. So the Indian Contract Act gives us the parameters
that make up such lawful consideration and objects of a contract. Let us take a look at
the legality of object and consideration of a contract.

Lawful Consideration and Lawful Object

Section 23 of the Indian Contract Act clearly states that the consideration and/or

object of a contract are considered lawful consideration and/or object unless they are

 specifically forbidden by law

  of such a nature that they would defeat the purpose of the law

 are fraudulent

 involve injury to any other person or property

 the courts regard them as immoral

 are opposed to public policy.

So lawful consideration and/or lawful object cannot contain any of the above. Let us
take a more in detail look at each of them.

1] Forbidden by Law

When the object of a contract or the consideration of a contract is prohibited by law,

then they are not lawful consideration or object anymore. They then become
unlawful in nature. And so such a contract cannot be valid anymore.

Unlawful consideration of object includes acts that are specifically punishable by the
law. This also includes those that the appropriate authorities prohibit via rules and
regulations. But if the rules made by such authorities are not in tandem with the law
than these will not apply.

Let us see an example. A received a license from the Forest Department to cut the
grass of a certain area. The authorities at the department told him he cannot pass on
such interest to another person. But the Forest Act has no such statute. So A sold his
interest to B and the contract was held as valid.
When something is forbidden by law, an agreement to that 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, is unlawful.

An agreement offending a statute or public policy is void from the very beginning
and the same cannot become valid even if the parties agree to that effect. Thus, it
has been held in Nutan Kumar v. IInd Additional District Judge AIR 1994 All
298, Banda that an agreement of lease between a landlord and tenant without
allotment or release order, as required by the law, is void and unenforceable.

An agreement to pay money if a person commits a crime or tort is unlawful, and,

therefore, unenforceable. Similarly, if a person transfers his business for the sale of
liquor to one, who does not possess the necessary license, it is in contravention of
law, and thus void (Fernandes v. Fernandes). Merely because a person does not
observe statutory requirements does not mean that the agreement is void. If a
statute requires that a dealer in tobacco should hold a license to sell the same and
also have his name painted outside the place of his business, such requirement is
only for the purpose of revenue. In case a dealer does not observe these statutory
requirements, he can still recover the price of the goods sold by him.

Section 23 covers only those cases where the agreement is forbidden by law. Thus,
if a sub-lease as such is not forbidden by law, but can be made only with the
consent of the landlord, the agreement of sub-lease would not be void under
Section 23. The person making the sub-lease without the consent of the landlord
will, therefore, be entitled to recover the rent from the tenant. (Banarasi Dass v.
Shakuntala).

2] Consideration or Object Defeats the Provision of the Law

This means if the contract is trying to defeat the intention of the law. If the courts find
that the real intention of the parties to the agreement is to defeat the provisions of the
law, it will put aside the said contract. Say for example  A and B enter into an
agreement, where A is the debtor, that B will not plead limitation. This, however, is
done to defeat the intention of the Limitation Act, and so the courts can rule the
contract as void due to unlawful object.

If the object or consideration of any agreement is of such a nature that, if it is

permitted, it would defeat the provisions of any law, such an agreement is void. If
the natural father pays a sum of Rs. 8,000 to a widow to induce her to adopt his
son, the payment is in the nature of bribe and as such, it is illegal according to
Hindu law (Sitaram v. Harihar (1910) 12 BOMLR 910). Similarly, if a
Mohomedan husband, who wants to have a second wife, executes a document in
favour of the first wife contemplating future separation, and payment of
maintenance allowance, the agreement is opposed to the public policy, and the first
wife cannot recover the allowance after the separation takes place (Bai Fatima v.
Ali Mohd. (1912) 14 BOMLR 1178, 17 Ind Cas 946). But an agreement
contemporaneous with marriage stipulating payment of customary maintenance
allowance by the husband in case of strained relations between husband and wife is
not void under any provisions of law (Jamila Khatoon v. Abdul Rashid, In the
High Court of Ranchi, I.A. No. 966 of 2015). An agreement to maintain an
illegitimate child has been held to be not unlawful.
In Sundara Gownder v. Balachandaran, AFA. No. 8 of 1990,  the plaintiff,
being in default of the payment of certain dues was not eligible to take any further
contract in his own name. To circumvent the law, the plaintiff agreed with the
defendant that the defendant will first take some liquor shops in his own name, and
then transfer the same to the plaintiff. The plaintiff paid some consideration for the
same to the defendant. The defendant having failed to do the needful, the plaintiff
sued him to back the consideration paid. It was held that since the agreement aimed
at defeating the provisions of law, the plaintiff’s action could not be entertained.

3] Fraudulent Consideration or Object

Lawful consideration or object can never be fraudulent. Agreements entered into

containing unlawful fraudulent consideration or object are void by nature. Say for
example A decides to sell goods to B and smuggle them outside the country. This is a
fraudulent transaction as so it is void. Now B cannot recover the money under the
law if A does not deliver on his promise.

If the consideration or object of an agreement is to commit fraud, the agreement is

void. If A, B, and C enter into an agreement for the division among them of gains
acquired, or to be acquired by them by fraud, the agreement is void as the object is
unlawful. If two persons agree not to compete with each other, and one of them in
consideration for the other person not competing in the submission of tenders
agrees to pay a certain sum of money, the agreement does not aim at defrauding
anybody, and the same is enforceable (Jai Ram v. Kahna Ram AIR 1963 HP .
Thus, an agreement to avoid competition with one another cannot be considered to
be either fraudulent or opposed to public policy.
If the object of an agreement is to manage to procure a contract for one party
which would otherwise be refused, the object is fraudulent within the meaning of
Section 23. In Manni Ram v. 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 as granted, A shall serve as the real contractor. A brought an auction to put
his claim as the real contractor. It was held that the object of the agreement was to
commit fraud upon the Railway Company and, therefore, the agreement was void.

4] Defeats any Rules in Effect

If the consideration or the object is against any rules in effect in the country for the
time being, then they will not be lawful consideration or objects. And so the contract
thus formed will not be valid.

The words “if allowed, it would defeat the provisions of law” referenced in Section
23 should be understood as referring to the execution of an agreement which
essentially involves the offence of the provision of any law. The general standard
of law as pursued by the courts depends on special case to the maxim: modus et
conventio vincunt legem. Which means, on the off chance that the express
provision(s) of any law is damaged by an agreement, the interests of the parties or
of outsiders, would be harmfully influenced by its satisfaction.

The parties to an agreement are allowed to direct their privileges(rights) and

liabilities themselves, and the court will just offer impact to the intention of the
parties as mentioned in the agreement as per the applicable laws of the country. 

In short three principles which emerge are:

 1. An agreement or contract is void if its motive is the commission of an
illegal act;
2. An agreement or contract is void, in the event that it is explicitly or
impliedly prohibited by any law;
3. An agreement or contract is void if its performance is unimaginable
without breaking down of any law.

According to Section 23, the contrast between agreements that are void and
agreements that are unlawful is extremely meagre or little. As said by Anson, “The
law may either prohibit an agreement to be made, or it might just say that on the
off chance that it is made, the courts will not implement it. In the previous case, it
is unlawful, in the latter it is just void, yet in as much as illegal agreements are
likewise void, however void agreements are not really, the difference is for most
purposes not significant and even judges appear to regard the two as
interchangeable”.

In Rajat Kumar Rath v. Administration of India, the Orissa High Court has
clarified the differentiation in the following words: 

“The void agreement is one which has no lawful impact. On the off chance that an
agreement is collateral to another or establishes a guide encouraging the
completion of the object of the other agreement which however void but is not
disallowed by law, it might be upheld as a security understanding. On the off
chance that it is a piece of a component intended to the law actually restricted,
can’t face a claim on the agreement, it is spoiled with the wrongdoing of the object
looked to be accomplished which is hit by the law.
Where an individual is entering into an illegal agreement, guarantees explicitly or
by the suggestion that the agreement is blameless, such a promise adds up to
collateral agreement upon the other party if in truth blameless of immorality may
sue for damages”.

5] When they involve Injury to another Person or Property

In legal terms, an injury means to a criminal and harmful wrong done to another
person. So if the object or the consideration of the contract does harm to another
person or property, this will amount to unlawful consideration. Say for example a
contract to publish a book that is a violation of another person’s copyright would be
void. This is because the consideration here is unlawful and injures another person’s
property, i.e. his copyright.

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. For
example, if the borrower of money is made to execute a bond to do manual labour
until repayment, and in default agrees to pay an exorbitant rate of interest, the
agreement contained in the bond virtually amounts to slavery, it is opposed to
public policy, and thus void. Similarly, if the buyer of some property is aware that
the seller does not have a good title, and he persuades the seller to transfer the
property with the object of giving trouble to the true owner, an action by the buyer
against the seller to claim indemnity from him for the loss of the buyer in the
litigation of that property is not maintainable. In this case, “The validity of the
contract itself is questionable as opposed to Section 23 of the Contract Act as the
object of the agreement itself is a fraudulent practice involving injury to the person
or property of another. In the circumstances, it has to be held that the plaintiff
cannot recover the expenses incurred by him.

If the real object of the agreement between the parties is to promote their own
interests rather than to cause harm to another, the agreement is lawful. Also, an
agreement to jointly carry on the trade is not unlawful and does not amount to
conspiracy against the rival shipping company.

6] When Consideration is Immoral

If the object or the consideration is regarded by the court as immoral, then such
object and consideration are immoral. Say for example A lent money to B to obtain a
divorce from her husband C. It was agreed once B obtains the divorce A would
marry her. But the court passed the judgment that A cannot recover money from B
since the contract is void on account of unlawful consideration.

Immorality depends on the norms accepted by 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. 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. What is immoral depends on the norms accepted
by the society at any particular point of time. For instance, A agrees to let her
daughter to hire to B for concubinage. The agreement is void, because it is
immoral though the letting may not be punishable under the Indian Penal Code. A
landlord letting the house with the knowledge that the same is to be used for a
brothel, cannot recover the rent of the same. Similarly, if the object or
consideration for an agreement is future illicit cohabitation between a man and a
woman, the agreement is unlawful.

7] Consideration is opposed to Public Policy

For the good of the community, we restrict certain contracts in the name of public
policy. But we do not use public policy in a wide sense in this matter. If that was the
case it would curtail individual freedom of people to enter into contracts. So for the
purpose of lawful consideration and object public policy is used in a limited scope.
We only focus on public policy under the law.

If the Court regards an agreement as opposed to the public policy, the agreement is
void. Public Policy means the policy of the law at a stated time. Public policy is
not capable of any precise definition. An act which is injurious to the society is
against public policy. An agreement to exclude certain area out of the Municipal
limits is against the public policy. By such an agreement, the residents of the
locality are deprived of their right to be governed by a local body (A.C.C. Ltd. v.
The State of Rajasthan AIR 1981 Raj 133).

In Central Inland Water Transport Corporation v. Brojo Nath 1986 AIR

1571,, it has been held by the Supreme Court that a clause in a service contract that
the services of a permanent employee could be terminated either by giving him a
three months’ notice or paying him salary for the like period was opposed to the
public policy, and, therefore, void. The position of a Government Law Officer has
been held to be different from the above, by the Kerala High Court in P.K.K. Nair
v. State of Kerala 1961 AIR 552. Thus, in this case, the termination of service of
an Additional Government Pleader by giving him one months’ notice, was held to
be lawful.

If two courts have jurisdiction in a case, an agreement of maintenance and

champerty, trading agreement with an enemy, marriage brokerage contract, and
agreement tending to injure the public service, are amongst the agreements
opposed to the public policy.

So let us look at some agreements that are opposed to public policy,

1. Trading with the Enemy: Entering into an agreement with a person from a
country with whom India is at war, void be a void agreement. For example, a
trader entering into a contract with a Pakistani national during the Kargil war.

2. Stifling Prosecution: This is a pervasion of the natural course of law, and

such contracts are void. For example, A agrees to sell land to B if he does not
participate in the criminal proceedings against him.

3. Maintenance and Champerty: Maintenance agreement is when a person

promises to maintain a suit in which he has no real interest. And champerty is
when a person agrees to assist another party in litigation for a portion of the
damages or proceeds.

4. An Agreement to Traffic in Public Offices

5. Agreements to create Monopolies

6. An agreement to brokerage marriage for rewards

 7. Interfering with the Courts: An agreement whose object is to induce a 
judicial or state officials to act corruptly and interfere with legal proceedings.

Conclusion

So this was all about legality of objects and consideration under law of
contracts. To maintain a strategic distance from legitimate issues, later
on, parties must go to an agreement by setting an incentive to explicit
merchandise, administrations, or employment execution. Consideration
lawfully ties an agreement, shielding the two parties from potential
claims or false impressions.

Likewise, consideration regularly incorporates an area that decides

misfortunate obligation. Having an agreement that obviously expresses
this data causes the court to figure out where the disappointment
happened, who is to blame, and what punishment is to be granted. The
full proof guideline anticipates the presentation of outward proof that
could adjust the conditions of an agreement in any capacity. Security
contracts enable parties to make augmentations to fundamental
agreements.