When Consideration and Object is Unlawful?

According to Section 23, in the following cases consideration or object of an agreement is unlawful:

1. If it is forbidden by law:

Where the object of a contract is forbidden by law, the agreement shall be void. An act is said to be forbidden if it is punishable by criminal law or any special statute, or if it is prohibited by any law or order made in exercise of powers or authority conferred by the legislature.

Example:

(1) A and B agreed to deal in smuggled goods. It is forbidden by law and therefore void.

(2) A committed B’s murder in the presence of C. A promises to pay Rs. 500 to C, if C does not inform the police about the murder.

The agreement in example No. 2 given above is illegal as its object is unlawful. Besides, A and C will be liable for the act of murder and its concealment under the Indian Penal Code.

2. If it is of such a nature that if permitted, it would defeat the provisions of any other law:

The object of an agreement may not be directly forbidden but indirectly, it may defeat the object of any other law, the agreement would be void in such a case.

Example:

(1) A failed to pay his land revenue. Therefore, his estate was sold for arrears of revenue by the Government. By the law, the defaulter is prohibited from purchasing the land again. A asks B to purchase the estate and later on, transfer the same to him at the same price. The agreement is void as it will defeat the object of the law which prohibits a defaulter to purchase back the land, for indirectly A will again become the owner of the estate.

The second agreement is also void as it would defeat the provision or object of the law of limitation. [Rama Murthy y Goppayya],

3. If it is fraudulent:

If the object of an agreement is fraudulent, i.e., to cheat people, it is void. Example:

A, B & C enter into an agreement to sell bogus plots of land in Delhi. The agreement is void as it is fraudulent and thereby unlawful.

4. If it involves or implies injury to the person or property of another: Law protects property and person of its citizens. It cannot permit any contract which results in an injury to the person or property of any one.

Examples:

(1) A promises to pay Rs. 500 to B if B beats C. It involves injury to C, hence it is unlawful and void.

5. If the Court regards it as immoral or opposed to public policy: If the object of an agreement is immoral or opposed to public policy, it will be void. Morality here means something which the law regards as immoral.

Examples:

(1) A agrees to give his house on rent to a prostitute for her immoral purpose. A cannot recover the rent of his house if he prostitute refuse to pay. However, he may be allowed to get his house vacated from the prostitute as it will put an end to the immoral purpose.

(2) A agrees to give his daughter on 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.

Effect of Illegality :

1. An illegal agreement is void:

It is not enforceable at law.

2. Collateral transactions to illegal transactions are also void:

Not only the illegal agreement is void but also the collateral transactions are void.

Example:

A borrows Rs. 2,000 from B to buy a revolver to shoot C. Since the object of the transaction is illegal, B cannot recover his Rs. 2,000 if he has given the loan, knowing that A is taking the loan to purchase a revolver to shoot C.

Thus people will be discouraged to finance or assist illegal transaction when they know that they will not be able to recover their loans.

3. Law does not help any party:

Where the agreement is illegal, the law will not help any of the parties. The reason is that both the parties are equally guilty and the law does not help a guilty person. The law wants to discourage both the parties.

Example:

A promise to pay a bribe of Rs. 200 to B, if B does his work. The agreement is illegal. B cannot recover the amount of Rs. 200 after doing A’s work. Similarly, if A has paid the bribe in advance, he cannot get it back if B does not do his work.

4. Indirectly defendant is helped:

Defendant is a person against whom the suit is filed. When the law does not help any of the parties, it means the party who has paid the amount will not be able to get it back as we have seen in the above example. The party who has received the amount is thus helped to keep the money with it and is not asked by the Court to return it. The Court is neutral and the defendant gets the benefit of the Court’s neutrality. In the example given above, B can keep Rs. 200, even if B does not do the work of A. The Court will not ask B to return the amount. Thus B is indirectly benefited or helped by the refusal of the Court to intervene.

5. In cases of fraud, coercion, etc., money or property transferred can be recovered:

Where the illegality is the result of coercion and fraud of the other party, the Court can compel the guilty to return the money paid or property transferred.

6. Agreement partly legal and partly illegal (Sec. 24):

An agreement may consist of promises which are legal and illegal. If the legal promise can be separated from the illegal one, the legal promise can be enforced. In Such a case the illegal part will be void.

Where the legal promise cannot be separated from the illegal one, the whole of it would be void.

Where there is a single consideration for one or more unlawful objects, the agreement is void.

Example:

(1) A promises to manage B’s factory, where genuine and bogus motor parts are manufactured. B agrees to pay A (Manager) a salary of Rs. 1,000 per month.

The agreement is void as partly it is legal and illegal and the legal part cannot be separated as the salary is for both the parts.

7. Reciprocal promises, legal and illegal (Sec. 57):

Where persons reciprocally promise, firstly to do certain things which are legal, and secondly under specified circumstances to do certain other things which are illegal, the first set of promise is a contract, but the second is a void agreement.

Example:

A and B agree that A shall sell a house to B for Rs. 10,000 but that if B uses it as a gambling house, he shall pay A Rs. 50,000 for it.

The first set of promise, i.e., to sell the house and to pay Rs. 10,000 is a contract.

The second set of promise, i.e., B may use the house as a gambling house and pay Rs. 50,000 is a void agreement.

8. Alternative promise, legal and illegal (Sec. 58):

In the case of an alternative promise, one branch of which is legal and the other illegal, the legal branch alone can be enforced.