Introduction

The Indian Contract Act, 1872 (hereinafter "the Contract Act"), forms the bedrock of contractual jurisprudence in India. A fundamental principle enshrined within this legislation is that for an agreement to be enforceable as a contract, it must possess a lawful object and consideration. Section 23 of the Contract Act delineates what considerations and objects are unlawful, rendering agreements tainted by such unlawfulness void. Among these, agreements "forbidden by law" constitute a significant category, posing complex questions of interpretation and application. This article undertakes a comprehensive analysis of agreements forbidden by law within the Indian legal framework, drawing upon seminal judicial pronouncements and statutory principles. It explores the scope of the prohibition, the distinction between void and illegal agreements, the role of public policy, and the consequences of entering into such agreements.

Section 23 of the Indian Contract Act, 1872: The Legal Fulcrum

Section 23 of the Contract Act stipulates 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, and every agreement of which the object or consideration is unlawful is void. This article primarily focuses on the first two limbs: agreements "forbidden by law" and those that would "defeat the provisions of any law."

The Ambit of "Forbidden by Law"

The expression "forbidden by law" signifies an express or implied prohibition by a legislative enactment or other binding legal rule. The determination often hinges on the intent of the legislature and the construction of the relevant statute.

Direct Statutory Prohibitions

Where a statute explicitly prohibits the formation or performance of a certain type of agreement, such an agreement is unequivocally "forbidden by law." In Mannalal Khetan And Others v. Kedar Nath Khetan And Others (1977 SCC 2 424), the Supreme Court held that Section 108 of the Companies Act, 1956, which mandated a proper instrument of transfer for shares, was mandatory. A transfer of shares contrary to this provision was deemed void, as it contravened a statutory command. The Court emphasized that prohibitory language (e.g., "shall not register") typically indicates a mandatory provision, and contracts violating such statutes are void.

Similarly, in Waman Shriniwas Kini v. Ratilal Bhagwandas And Co. (1959 AIR SC 689), an agreement permitting sub-letting in contravention of the Bombay Hotel and Lodging Houses Rates Control Act, 1947, was held to be void. The Court noted that the non-obstante clause in the statute overrode any contractual terms to the contrary, rendering the agreement unlawful under Section 23 of the Contract Act as it was forbidden by the controlling statute.

The principle stated in Pollock and Mulla, cited in Shoba Viswanathan v. D.P Kingsley (Madras High Court, 1996), clarifies that the crucial question is "whether the intention of the Legislature was to prevent certain things from being done or only to lay down terms and conditions on which it may be done." If the act is forbidden in the public interest, merely paying a penalty does not legitimize it.

Scope and Interpretation of "Law"

The term "law" in Section 23 has been subject to judicial interpretation. In Udhoo Dass v. Prem Prakash (Allahabad High Court, 1963), it was contended that an order by a District Magistrate under Section 7(2) of the U.P. (Temporary) Control of Rent and Eviction Act was "law." The High Court, however, distinguished between "law" (juridical statute law) and an order which, though having the force of law, is not "law" itself for the purposes of Section 23 making the consideration forbidden. It opined that an agreement does not cease to be a contract merely because it is forbidden by such an order, unless its consideration or object is forbidden by "law" or the agreement itself is declared void by the Contract Act.

Conversely, a broader interpretation was adopted in Y.S Spinners Ltd. v. Official Liquidator, Ambica Mills Ltd. (Gujarat High Court, 1998), which, citing Abdul Hameed v. Mohd. Ishaq (1974 SCC ONLINE ALL 111), held that "law" includes an order by a competent authority having the force of law. Consequently, an agreement forbidden by an injunction of the Supreme Court was deemed an agreement forbidden by law under Section 23. The court in Abdul Hameed referred to the definition of "Indian law" in Section 3(29) of the General Clauses Act, 1897, which includes rules, orders, and bye-laws having the force of law.

Agreements Defeating Provisions of Law

Even if an agreement is not directly forbidden, it may be unlawful if its nature is such that, if permitted, it would defeat the provisions of any law. This limb of Section 23 targets agreements that circumvent or undermine the purpose of a statute.

In M/S APEX LABORATORIES P. LTD. v. THE DEPUTY COMMISSIONER OF INCOME TAX LARGE TAX PAYER UNIT II (Supreme Court Of India, 2022), the Supreme Court, referencing Bihari Lal Jaiswal & Ors. v. Commissioner of Income Tax & Ors, noted that an agreement to transfer a liquor license contrary to excise enactments would defeat the provisions of the excise law and is thus unlawful under Section 23. The object is to prevent strangers from being brought into the business, which is not conducive to the effective implementation of excise law.

Similarly, in Chet Ram And Others v. Sawanu Ram And Others (1984 SCC ONLINE HP 27), an agreement to divide nautor land (granted for subsistence under specific rules) was held to defeat the object of the grant and was thus forbidden by law and void under Section 23. The purpose of the grant, to help landless persons for their subsistence, would be frustrated if such alienations were permitted.

The Allahabad High Court in Nutan Kumar v. IInd Additional District Judge (1993 SCC ONLINE ALL 176) asserted that an agreement offending a statute, or which is of such a character that, if permitted, it would frustrate the provisions of any law, is invalid from nativity and unenforceable.

In Ram Kishore S/O Ramlal v. Smt. Battoobai Wd/O Munshi Keer And Another (Madhya Pradesh High Court, 1999), an agreement to sell land in violation of Section 165(6) of the M.P. Land Revenue Code was held void under Section 23, as it was forbidden by law and, if permitted, would defeat the provisions of the Code.

Distinction Between "Void" and "Illegal" Agreements

While all illegal agreements are void, not all void agreements are illegal. This distinction is crucial, particularly concerning collateral transactions. Section 30 of the Contract Act declares wagering agreements void. However, as clarified in Gherulal Parakh v. Mahadeodas Maiya And Others (1959 SCC 0 781), wagering contracts, though void and unenforceable, are not "forbidden by law" and are not necessarily illegal unless they fall under other heads of Section 23 like immorality or public policy. Consequently, a partnership formed to carry on wagering transactions was held not to be unlawful under Section 23.

The Supreme Court in Firm Of Pratapchand Nopaji v. Firm Of Kotrike Venkata Setty & Sons And Others (1974 SCC 2 208) dealt with forward contracts that were found to be speculative and in violation of the Bombay Forward Contracts Control Act and the Oilseeds (Forward Contract Prohibition) Order. These were held to be not merely void but illegal, as their object was unlawful and aimed at manipulating market conditions, thereby defeating public policy and statutory provisions. This case highlights that when a void agreement also contravenes a statute or public policy, it crosses into illegality.

The distinction was also noted in K.T.S. Sarma v. Subramanian (Madras High Court, 2001), citing DIP Narain Singh v. Nageshar Prasad (A.I.R 1930 Allahabad 1), which drew a line between agreements forbidden by law and those merely declared void.

Public Policy as a Ground for Prohibition

Agreements can also be "forbidden by law" in a broader sense if they are considered opposed to public policy. Public policy is an elusive concept, and courts exercise caution in invoking it.

General Principles

As observed in Gherulal Parakh v. Mahadeodas Maiya And Others (1959), public policy is a treacherous and unstable ground for legal decision, and courts should not invent new heads of public policy lightly. However, established heads of public policy must be moulded to fit new conditions. In Gurmukh Singh v. Amar Singh (1991 SCC 79), the Supreme Court noted that public policy is not static and varies with changing times and societal needs. A contract tending to injure public interest or public welfare is void under Section 23.

Specific Instances

In Rattan Chand Hira Chand v. Askar Nawaz Jung (Dead) By Lrs And Others (1991 SCC 3 67), an agreement to finance litigation in return for a share of the proceeds (champerty), where the financier also undertook to influence governmental decisions, was held void as against public policy. Such "carrier" contracts undermine the rule of law and public trust.

Agreements that involve speculative trading intended to manipulate market prices, as seen in Firm Of Pratapchand Nopaji, can be deemed against public policy if they harm market integrity and public welfare by violating essential economic regulations.

An agreement whose object is fraudulent and unlawful, such as one to prevent land from being sold at its real value in revenue sales by collusive bidding, could be considered opposed to public policy, as suggested in the discussion within Jai Ram And Son v. Kahna Ram Hans Raj (Himachal Pradesh High Court, 1962), though the primary finding there was on limitation.

Consequences of an Agreement Being Forbidden by Law

Voidness and Unenforceability

The primary consequence of an agreement being forbidden by law, or its object/consideration being unlawful under Section 23, is that the agreement is void. As stated in Nutan Kumar v. IInd Additional District Judge (1993), such an agreement "is not merely void but it is invalid from nativity. It cannot become valid even if the parties thereto agree to it." No legal relations come into being from such an agreement, and neither party can enforce it.

Restitution under Section 65 of the Contract Act

Section 65 of the Contract Act provides for the restoration of any advantage received under an agreement that is "discovered to be void" or "becomes void." The applicability of this section to agreements void *ab initio* due to being forbidden by law is nuanced.

In Kuju Collieries Ltd. v. Jharkhand Mines Ltd. And Others (1974 SCC 2 533), the Supreme Court held that Section 65 does not apply if the parties were aware of the illegality from the outset. If the agreement was void due to non-compliance with statutory requirements (e.g., mining lease without requisite approval), and the plaintiff was aware or ought to have been aware of these requirements, they cannot claim restitution under Section 65. The agreement was not "discovered" to be void post-formation in such cases.

This principle was reiterated in Kanuri Sivaramakrishnaiah v. Vemuri Venkata Narahari Rao (Died) (1959 SCC ONLINE AP 185), where the Andhra Pradesh High Court stated that Section 65 cannot be taken advantage of by parties who knew from the beginning the illegality thereof; it applies where a party enters into an agreement believing it to be legal.

The Madras High Court in T.VIJAYA RAGHAVAN v. DR.SETHU RAMAPANDIYAN (DIED) (2022), following Kuju Collieries, denied refund where the party paying money knew of the illegal object or object opposed to public policy.

However, in V.R Lakshmanan Chettiar v. Minor S.K Kamarajendara Kadirveluswami Pandian (1955 SCC ONLINE MAD 55), where a contract for cutting trees required Collector's permission under the Madras Preservation of Private Forests Act, 1946, it was suggested that if the contract became void only when permission was denied (or not obtained), Section 65 might apply. This implies a distinction where the voidness is contingent and not known with certainty at inception.

The Maxims *Ex Turpi Causa Non Oritur Actio* and *In Pari Delicto*

The common law maxim *ex turpi causa non oritur actio* (from a dishonorable cause, an action does not arise) often bars relief when a claim is founded upon an illegal or immoral act. In Kedar Nath Motani And Others v. Prahlad Rai And Others (1960 AIR SC 213), the Supreme Court examined this maxim in the context of benami transactions allegedly intended to defraud. The Court held that if the fraudulent purpose is not carried out, the maxim may not prevent the true owner from recovering property. The application depends on whether the illegality is central to the claim and whether denying relief serves public policy.

The doctrine of *in pari delicto potior est conditio defendentis* (where both parties are equally at fault, the position of the defendant is stronger) often complements *ex turpi causa*. As seen in Kuju Collieries and discussed in T.VIJAYA RAGHAVAN, courts may refuse to assist either party to an illegal agreement if they are equally culpable.

Conclusion

Agreements "forbidden by law" under Section 23 of the Indian Contract Act, 1872, encompass a wide spectrum of transactions, from those directly contravening statutory mandates to those that undermine legislative policy or offend public interest. The judiciary in India has consistently interpreted these provisions to uphold the sanctity of law and public welfare, while also navigating the complexities arising from the distinction between void and illegal acts, and the nuanced application of restitutionary principles.

The determination of whether an agreement is forbidden by law requires a careful examination of the relevant statutes, the legislative intent, the nature of the agreement, and its potential impact on public interest or the administration of justice. While contractual autonomy is a cherished principle, it must yield to the overriding considerations of legality and public policy. The robust framework provided by Section 23, as elucidated by judicial precedents, continues to guide the courts in ensuring that contractual relationships operate within the bounds of law, thereby fostering a fair and orderly commercial and social environment in India.