FACULTY OF LAW

ALIGARH MUSLIM UNIVERSITY

Assignment IV
(GCT II)
LAW of CONTRACT

SUBMITTED By
Anas Ali
SEMESTER-II
ROLL NO. -19BALLB050
SECTION-A
Enrl. No. GK1043

SUBMITTED TO-
DR. GAURAV

Introduction
Section 231 of the Indian Contract Act, 1872 ("Act"), enumerates three issues, i.e. consideration
for the agreement, the object the agreement and the agreement per se. Section 23 creates a
limitation on the freedom of a person in relation to entering into contracts and subjects the rights
of such person to the overriding considerations of public policy and the others enunciated under
it.2 Section 23 also finds its bearing in the other sections of the Act, namely section 264, 275,
286 and 307.

The word "object" used in section 23 connotes means "purpose" and does not purport a meaning
in the same sense as "consideration". For this reason, even though the consideration of a contract
may be lawful and real, that will not prevent the contract from being unlawful if the purpose
(object) of the contract is illegal. Section 23 restricts the courts, since the section is not guided
by the motive, to the object of the arrangement or transaction per se and not to the reasons
which lead to the same.

'If the thing stipulated for is in itself contrary to law, the action by which the execution of the
illegal act is stipulated must be held as intrinsically null: pactis privatorum juri publico non
derogatur. 3

Key Elements of Section 23

1
Section 23 of the Indian Contract Act, 1872 - What considerations and objects are lawful and what not 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 said to be unlawful. Every agreement of which the object or consideration
is unlawful is void.

2
In Re: K.L. Gauba (23.04.1954 - BOMHC) [AIR 1954 Bom 478]. Para 11 : "...The freedom of the citizen, as indeed
the freedom of the lawyer, to enter into a contract is always subject to the overriding considerations of public
policy as enunciated in S. 23 of the Indian Contract Act. That freedom is also subject to the other considerations set
out in S. 23."

3
Arg., 4 Cl. & F. 241; Broom's Legal Maxims, p. 541
Forbidden By Law

Where the object or the consideration of an agreement is the performance of an act which is
forbidden by law, the agreement is void. Acts or undertakings forbidden by law are those
punishable under any statute as well as those prohibited (expressly or implicitly) by special
legislation of Parliament and state legislatures.

For example, the production or sale of excisable articles are prohibited under Excise Act except
upon a Government license. Sale of liquor without license are prohibited for this reason under
the Excise Act and is, therefore, illegal. A contract entered into in contravention of a statutory
prohibition will be null and void whether such prohibition is express or implied. To sum up, all
agreements involving breach of laws enacted for the protection or promotion of public interest
are void.

The word "forbidden by law" is not synonymous with the word 'void' and hence it is not
necessary that whatever is void is also "forbidden by law". 4 The above decision was approved
by the Supreme Court in Gherulal Parakh v. Mahadeodas (AIR 1959 SC 781) and the court held
that:

"The word 'immoral' is a very comprehensive word. Ordinarily it takes in every aspect of
personal conduct deviating from the standard norms of life It may also be said that what is
repugnant to good conscience is immoral. Its varying content depends upon time, place and the
stage of civilization of a particular society. In short, no universal standard can be laid down and
any law based on such fluid concepts defeats its own purpose. The provisions of Section 23 of
the Contract Act indicate the legislative intention to give it a restricted meaning. Its
juxtaposition with an equally elusive concept, public policy, indicates that it is used in a
restricted sense; otherwise there would be overlapping of the two concepts. In its wide sense
what is immoral may be against public policy covers political, social and economic ground of
objection. Decided cases and authoritative text-books writers, therefore, confined it, with every
justification, only to sexual immorality. The other limitation imposed on the word by the statue,
namely, "courts consider immoral" brings out the idea that it is also a branch of the common
law like the doctrine of public policy, and, therefore, should be confined to the principles

4
Mahadeodas and Ors. vs. Gherulal Parakh and Ors. (AIR 1958 Cal 703)
recognized and settled by Courts. Precedents confine the said concept only to sexual immorality
and no case has been brought to our notice where it has been applied to any head other than
sexual immorality. In the circumstances, we cannot involve a new head so as to bring in wagers
within its fold.``

The word "law" in section 23(1) means judicial law, that is, the law enacted by the government
and it is not permissible to a party to a contract to claim on the basis of a contract which is
prohibited by a law. The question, whether a particular transaction is forbidden by an Act or
tends to defeat its provisions is always one of construction of the Act, the rule for which is that it
should be construed according to the intention of the persons passing it and such intention
should be gathered from what they have said in the Act.

If Permitted It Would Defeat The Provisions Of Any Law

The words "if permitted, it would defeat the provisions of law" mentioned in section 23 ought to
be understood as referring to performance of an agreement which necessarily entails the
transgression of the provisions of any law. The general rule of law as followed by the courts is
based on exception to the maxim modus et conventio vincunt legem5. Meaning thereby, in case
the express provision(s) of any law is violated by a contract, the interests of the parties or of
third parties, would be injuriously affected by its fulfillment. The parties to a contract are
permitted to regulate their rights and liabilities themselves, and the court will only give effect to
the intention of the parties as expressed in the contract in accordance with the applicable laws of
the land.

In short three principles arise from the section12 :

i. an agreement or contract is void, if its purpose is the commission of an illegal act;

ii. an agreement or contract is void, if it is expressly or impliedly prohibited by any law;
iii. an agreement or contract is void, if its performance is not possible without disobedience
of any law.

5 the form of agreement and the, convention of the parties overrule the law
As per section 23, the difference between agreements that are void and agreements those are
illegal is very thin or small. According to Anson6, "The law may either forbid an agreement to
be made, or it may merely say that if it is made, the courts will not enforce it. In the former case,
it is illegal, in the latter only void, but in as much as illegal contracts are also void, though void
contracts are not necessarily, the distinction is for most purposes not important and even judges
seem to treat the two as interchangeable".

In Rajat Kumar Rath v. Government of India7 , the Orissa High Court has explained the
distinction in the following words:

"... A void contract is one which has no legal effect. An illegal contract through resembling the
void contract in that it also has no legal effect as between the immediate parties, has this further
effect that even transactions collateral to it become tainted with illegality and we, therefore, in
certain circumstances are not enforceable. If an agreement is merely collateral to another or
constitutes an aid facilitating the carrying out of the object of the other agreement which though
void is not prohibited by law, it may be enforced as a collateral agreement. If on the other hand,
it is part of a mechanism meant to carry out the law actually prohibited cannot countenance a
claim on the agreement, it being tainted with the illegality of the object sought to be achieved
which is hit by the law. Where a person entering into an illegal contract promises expressly or
by implication that the contract is blameless, such a promise amounts to collateral agreement
upon the other party if in fact innocent of turpitude may sue for damages".

Fraudulent

'pari delicto est conditio defendentis'8

The Hon'ble Supreme Court of India under plethora of judgments has observed / held that there
are several exceptions to the above rule. In this connection, the Hon'ble Supreme Court quoted
with approval the following observations of Anson: 9

6 Principles of the English Law of Contract, 22nd edn.

7 AIR 2000 Ori 32, 34-35

8 both parties are equally at fault

9 Principles of the English Law of Contract, 22nd Edition, p. 343.

"... there are exceptional cases in which a man will be relieved of the consequences of an illegal
contract into which he has entered, cases to which the maxim does not apply. They will fall into
three classes: (a) where the illegal propose has yet been substantially carried into effect before
it is sought to recover money paid or goods supplied or delivered in furtherance of it; (b) where
the plaintiff is not in pari delicto with the defendant; (c) where the plaintiff does not have to rely
on the illegality to make out his claim".

Section 23 says that the consideration or object of the agreement is unlawful if it "is fraudulent".
10
 But subject to such and similar exceptions, contracts which are not illegal and do not originate
in fraud, must in all respects be observed: pacta conventa quae neque contra leges neque dolo
mall inita sunt omnimodo observanda sunt (contracts which are not illegal, and do not originate
in fraud, must in all respects be observed).

Injury to Person or Property of Another

As per the provisions of section 23, an agreement which involves causing injury to a person or
property of a third party is void and cannot be enforced by court and therefore, no claim is
sustainable for the breach of such an unlawful agreement.

Opposed To Public Policy

It is trite law that one who knowingly enters into a contract with an improper object cannot
enforce his rights in relation to such contract. Notably, the Act does not anywhere define the
expressions "public policy" or "opposed to public policy" or "contrary to public policy".
However, one may note that the term "public policy" could plainly mean issues concerning the
public or public benefit and the interest of the public at large. 'Public Policy' is ".... a vague
unsatisfactory term calculated to lead to uncertainty and error when applied to the decision of
legal rights; it is capable of being understood in different senses; it may and does in ordinary
sense means political expediency or that which is best for common good of the community; and
in that sense there may be every variety of opinion; according to education, habits, talents and

10 Relevant Illustrations to Section 23: (e) 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 its
object is unlawful. (g) A, being agent for a landed proprietor, agrees for money, without the knowledge of his principal, to obtain for B a lease of land belonging to his principal. The agreement
between A and B is void, as it implies a fraud by concealment, by A, on his principal.
dispositions of each person who is to decide whether an act is against public policy or not..."
According to Lord Atkin 11,

"... the doctrine does not extend only to harmful effects, it has to be applied to harmful
tendencies. Here the ground is less safe and treacherous".

The above principle has been followed by the Hon'ble Supreme Court of India in Gherulal
Parekh v. Mahadevdas Maiya12, wherein Hon'ble Justice Subba Rao, referring to the
observation of Lord Atkin observed: "... Public policy or the policy of the law is an illustrative
concept. It has been described as an 'untrustworthy guide', 'variable quality', 'unruly horse', etc.;
the primary duty of a court of law is to enforce a promise which the parties have made and to
uphold the sanctity of contract which forms the basis of society but in certain cases, the court
may relieve them of their duty of a rule founded on what is called the public policy. For want of
better words. Lord Atkin describes that something done contrary to public policy is a harmful
thing; but the doctrine is extended not only to harmful cases; but also to harmful tendencies.... it
is governed by precedents. The principles have crystalised under different heads.... although the
heads are not closed and though theoretically, it may be permissible to evolve a new head under
exceptional circumstances of the changing world, it is advisable in interest of stability of society
not to make an attempt to discover new heads in these days' '. In Kedar Nath tawhat ni v.
Prahlad Rai13 , the Hon'ble Court held that "the correct view in law .... is that one has to see is
whether the illegality goes so much to the root of the matter that the plaintiff cannot bring his
action without relying upon the illegal transaction into which he had entered. If the illegality is
trivial or venial..... and the plaintiff is not required to rest his case upon that illegality, then
public policy demands that the defendant should not be allowed to take advantage of the
position. A strict view, of course, must be taken of the plaintiff's conduct, and should not be
allowed to circumvent the illegality by restoring to some subterfuge or by misstating the facts.
If, however, the matter is clear and the illegality is not required to be pleaded or proved as part
of the cause of action and the plaintiff recanted before the illegal purpose was achieved, then,

11 Fender v. St. John Mildmay, 1983 AC 1 (HC)

12 AIR 1959 SC 781

13 AIR 1960 SC 213
unless it be of such a gross nature as to outrage the conscience of the court, the plea of the
defendant should not prevail."

The Hon'ble Supreme Court of India has dealt with certain cases under section 23 holding that
some actions of entering into contract are void. In the matter titled "ONGC Ltd. v. Saw Pipes
Ltd."14 While interpreting the meaning of 'public policy' in this case, the Hon'ble Court observed
that it has been repeatedly stated by various authorities that the expression 'public policy' does
not admit of precise definition and may vary from generation to generation and from time to
time. Hence, the concept 'public policy' is considered to be vague, susceptible to narrow or
wider meaning depending upon the context in which it is used. Therefore, it was held that the
term 'public policy' ought to be given a wider meaning. The Hon'ble Court placed reliance
on "Central Inland Water Transport Corporation Limited and Anr. v. Brojo Nath Ganguly
and Anr." [(1986) IILLJ 171 SC] held that what is good for the public or in public interest or
what would be harmful or injurious to the public good or interest varies from time to time.
However, an award, which is on the face of it, patently in violation of statutory provisions
cannot be said to be in public interest. Such an award is likely to adversely affect the
administration of justice. Hence, the award should be set aside if it is contrary to (i) fundamental
policy of Indian Law; (ii) the interest of India; (iii) justice or morality; (iv) in addition, if it is
patently illegal. The illegality must go to the root of the matter and if the illegality is of a trivial
nature, it cannot be held that the award is against the public policy. An award can also be set
aside if it is so unfair and unreasonable that it shocks the conscience of the court.

Conclusion

On the basis of above discussed, it can be easily understood that the ambit and scope of section
23 is vast and therefore the applicability of its provisions is subject to meticulous scrutiny by the
court of the consideration and object of an agreement and the agreement itself. Therefore, in
order to bring a case within the purview of section 23, it is necessary to show that the object of
the agreement or consideration of the agreement or the agreement itself is unlawful. The three
matters, as referred to above, viz. (i) consideration for the agreement, (ii) object of the
agreement and (iii) the agreement are also required to be kept in mind, and the three principles,

14 2003 (2) RAJ 1 (SC)

arising from the Section – which are: (i) an agreement or contract is void, if its purpose is the
commission of an illegal act; (ii) if it is expressly or impliedly prohibited by any law, and (iii) if
its performance is not possible without disobedience of any law.

Bibliography

R.K.Bangia, Indian Contract Act

Avtar Singh, Law of Contract

Sarma B.V.R., “Lawful under Section 23 of Indian Contract Act 1872 – An analysis”

http://docs.manupatra.in/newsline/articles/Upload/01CAB3F7-FEF2-47EF-8D1B-AE4A3EB4C
2D8.pdf

Jayaram Swathy(2020),“Unlawful Consideration and Object”

https://www.legalsarcasm.com/legal-notes/unlawful-consideration-and-object/

Rathore Pranjal(2020), “Legality of Object and Consideration under Indian Contracts Act,
1872”
https://blog.ipleaders.in/legality-objects/