Analysis of Section 23 of the Indian Contract Act, 1872

Unlawful Considerations and Objects: A Comprehensive Analysis of Section 23 of the Indian Contract Act, 1872

Introduction

Section 23 of the Indian Contract Act, 1872 (hereinafter "the Act") stands as a cornerstone in the edifice of Indian contract law, delineating the boundaries of lawful agreements. It stipulates that for an agreement to be enforceable as a contract, its consideration and object must be lawful. This provision is pivotal in ensuring that contractual obligations do not contravene statutory mandates, public morality, or the overarching public policy of India. This article undertakes a comprehensive analysis of Section 23, examining its various limbs through the lens of judicial pronouncements and established legal principles. The core tenet, as underscored in numerous judicial decisions, is that an agreement with an unlawful object or consideration is void and thus unenforceable (Kiran Arora v. Ram Prakash Arora, Delhi High Court, 1979; Chandra Sreenivasa Rao v. Korrapati Raja Rama Mohana Rao And Another, Madras High Court, 1951; Gurmukh Singh v. Amar Singh, Supreme Court Of India, 1991).

The significance of lawful consideration and object is further emphasized by Section 10 of the Act, which mandates these as essential elements for an agreement to qualify as a contract (Sobhag Narain Mathur v. Pragya Agrawal, Delhi High Court, 2016). This article will explore the diverse circumstances under which an agreement's consideration or object may be deemed unlawful, drawing extensively from the provided reference materials to illustrate the application and interpretation of Section 23 by Indian courts.

The Ambit of Section 23: Defining Unlawful Agreements

Section 23 of the Indian Contract Act, 1872, provides:

"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 quoted in Kiran Arora v. Ram Prakash Arora, Delhi High Court, 1979; Udhoo Dass v. Prem Prakash, Allahabad High Court, 1963)

This section enumerates five specific categories under which the consideration or object of an agreement can be rendered unlawful.

1. Forbidden by Law

An agreement is unlawful if its consideration or object is expressly or implicitly forbidden by any statutory enactment. This includes acts that are directly prohibited by law. For instance, in Kuju Collieries Ltd. v. Jharkhand Mines Ltd. And Others (1974 SCC 2 533, Supreme Court Of India, 1974), a mining lease was held void ab initio because it was entered into without compliance with the Mines and Minerals (Regulation and Development) Act, 1948, and the Mineral Concession Rules, 1949. Similarly, in Chandra Sreenivasa Rao v. Korrapati Raja Rama Mohana Rao And Another (Madras High Court, 1951), a promissory note executed for a loan to facilitate a marriage in contravention of the Child Marriage Restraint Act was deemed unenforceable as its purpose was unlawful.

It is crucial to distinguish between an agreement that is merely "void" and one that is "forbidden by law" or "illegal." While all illegal agreements are void, not all void agreements are illegal. An agreement forbidden by law carries a taint of illegality beyond mere unenforceability (Gherulal Parakh v. Mahadeodas Maiya And Others, 1959 SCC 0 781, Supreme Court Of India, 1959; Firm Of Pratapchand Nopaji v. Firm Of Kotrike Venkata Setty & Sons And Others, Supreme Court Of India, 1974).

2. Defeating Provisions of any Law

This category encompasses agreements which, though not directly forbidden, would, if permitted, nullify or circumvent the provisions of any law. The object is to prevent parties from achieving indirectly what they cannot achieve directly. In Jaffer Meher Ali v. The Budge Budge Jute Mills Co., Ld. (1906 SCC ONLINE CAL 69, Calcutta High Court, 1906), an assignment of contract benefits made to defeat the provisions of the Insolvency Act was held to be for an unlawful object. The court noted that such a transfer falls under Section 6(h) of the Transfer of Property Act, 1882, read with Section 23 of the Contract Act, as its object would defeat the provisions of insolvency law (Jaffer Meher Ali v. The Budge Budge Jute Mills & Co., 1906 SCC ONLINE CAL 198, Calcutta High Court, 1906). Similarly, a compromise agreement whose object was to ignore a valid partition decree and thereby deprive certain parties of their rights under that decree was held to be hit by Section 23, as it would defeat the provisions of law (Kiran Arora v. Ram Prakash Arora, Delhi High Court, 1979). The Supreme Court in Gurmukh Singh v. Amar Singh (Supreme Court Of India, 1991) clarified that if the purpose and design of the contract tend to defeat any provision or purpose of law, it becomes unlawful.

3. Fraudulent

An agreement whose consideration or object is fraudulent is void. This typically involves an intention to deceive another party or to commit fraud. In Kedar Nath Motani And Others v. Prahlad Rai And Others (1960 AIR SC 213, Supreme Court Of India, 1959), the Supreme Court examined a benami transaction allegedly entered into to defraud the Bettiah Raj. While the Court acknowledged that benami transactions could be for fraudulent purposes, it found that the intended fraud was not consummated, and the maxim ex turpi causa non oritur actio was not fully applicable to deny relief. However, the principle remains that if an agreement's object is to perpetrate fraud, it is unlawful under Section 23.

4. Involves or Implies Injury to Person or Property of Another

If the consideration or object of an agreement involves or implies causing harm to an individual's person or property, it is unlawful. The term "injury" here means wrongful harm. In Kiran Arora v. Ram Prakash Arora (Delhi High Court, 1979), the court found that the object of the compromise agreement was to deprive other defendants of their rights in immovable property under a partition decree, thus affecting their property rights and rendering the compromise unlawful under this limb of Section 23.

5. Immoral or Opposed to Public Policy

This is arguably the most expansive and frequently invoked category under Section 23.

a. Immoral

The term "immoral" is not defined in the Act and is subject to judicial interpretation, often reflecting prevailing societal moral standards. Historically, courts have primarily associated "immorality" under Section 23 with conduct that is sexually reprehensible. In Gherulal Parakh v. Mahadeodas Maiya And Others (1959 SCC 0 781, Supreme Court Of India, 1959), the Supreme Court, while analyzing wagering contracts, observed that the scope of "immorality" is generally restricted to principles of sexual morality. In Bashir Ahmad v. Mst. Nanhi Jan Tawaif (Allahabad High Court, 1955), it was held that letting a house to a prostitute is not per se immoral unless it is let for the specific purpose of her carrying on prostitution therein.

b. Opposed to Public Policy

The concept of "public policy" is dynamic and evolves with societal values and needs. It refers to principles that underpin the welfare of the public and the integrity of the state. An agreement that contravenes public policy is void. Courts, however, exercise caution when invoking public policy, generally adhering to established heads and being wary of creating new ones (Gherulal Parakh v. Mahadeodas Maiya And Others, 1959 SCC 0 781, Supreme Court Of India, 1959; Firm Of Pratapchand Nopaji v. Firm Of Kotrike Venkata Setty & Sons And Others, Supreme Court Of India, 1974).

Several types of agreements have been held to be contrary to public policy:

  • Agreements tending to injure public service or administration of justice: This includes agreements to traffic in public offices or to influence public officials. In Rattan Chand Hira Chand v. Askar Nawaz Jung (Dead) By Lrs And Others (1991 SCC 3 67, Supreme Court Of India, 1991), an agreement to finance litigation in return for a share of the estate, coupled with an expectation of influencing governmental decisions, was held void as a champertous contract opposed to public policy. Payments made as bribes to secure favors are also void for being opposed to public policy (T.VIJAYA RAGHAVAN v. DR.SETHU RAMAPANDIYAN (DIED), Madras High Court, 2022).
  • Unconscionable Bargains: Agreements that are grossly unfair or exploitative, particularly where there is a significant inequality of bargaining power, may be struck down as opposed to public policy. In Central Inland Water Transport Corporation Limited And Another v. Brojo Nath Ganguly And Another (1986 SCC 3 156, Supreme Court Of India, 1986), a service rule allowing termination of a permanent employee's services with notice but without cause was held unconscionable and violative of public policy (and Article 14 of the Constitution), given the employer's dominant bargaining position. This principle was also discussed in M/S. Classic Motors Ltd.Petitioner v. Maruti Udyog Ltd.S (Delhi High Court, 1996) concerning a dealership agreement clause allowing termination without cause.
  • Agreements interfering with statutory duties or regulatory authority: An agreement that infringes upon the authority of a regulatory body or attempts to bypass statutory processes can be against public policy. In Rajasthan Rajysa Vidyut Prasaran Nigam Ltd. v. Shree Cement Limited (Appellate Tribunal For Electricity, 2015), a provision in an agreement for levy of notional loss was held to infringe on the Commission's authority and thus potentially hit by Section 23.
  • Agreements contravening established state policy for public good: In Shri Paresar v. Municipal Board, Mount Abu (1996 SCC ONLINE RAJ 364, Rajasthan High Court, 1996), a sale deed that violated a government policy decision prohibiting the transfer of regularized encroached land for ten years was held void ab initio under Section 23, as it obstructed a policy aimed at public good.
  • Arbitral Awards contrary to Public Policy: The Supreme Court in Oil & Natural Gas Corporation Ltd. v. Saw Pipes Ltd. (2003 SCC 5 705, Supreme Court Of India, 2003) expanded the scope of "public policy" for challenging arbitral awards under Section 34 of the Arbitration and Conciliation Act, 1996, to include awards that are "patently illegal." This was reiterated in Arunday Developers v. Gemini Arts Private Ltd (Madras High Court, 2009), referencing ONGC and Central Inland Water Transport Corpn.

Judicial Interpretation and Application

Distinction between Void and Illegal Agreements

As noted earlier, the distinction between "void" and "illegal" (or "forbidden by law") agreements is critical. While Section 30 of the Act declares wagering agreements void, the Supreme Court in Gherulal Parakh v. Mahadeodas Maiya And Others (1959 SCC 0 781, Supreme Court Of India, 1959) held that such agreements are not illegal per se. Therefore, a partnership formed to enter into wagering contracts was not considered unlawful under Section 23. The Court emphasized that an object cannot be said to be forbidden or unlawful merely because it results in a void contract. However, if the object is prohibited or *mala in se*, the agreement is tainted with illegality (Firm Of Pratapchand Nopaji v. Firm Of Kotrike Venkata Setty & Sons And Others, Supreme Court Of India, 1974).

Doctrines of Ex Turpi Causa Non Oritur Actio and In Pari Delicto

The maxim ex turpi causa non oritur actio (no action arises from a dishonorable cause) prevents a party from seeking legal remedy if their claim is founded on an illegal or immoral act. In Kedar Nath Motani (Supreme Court Of India, 1959), the Supreme Court considered this maxim but allowed the claim as the intended fraud was not fully perpetrated and the defendant was also a party to the scheme. The related maxim, in pari delicto potior est conditio defendentis (where both parties are equally at fault, the position of the defendant is stronger), often bars relief. This was relevant in Kuju Collieries Ltd. (Supreme Court Of India, 1974), where Section 65 restitution was denied because both parties were aware of the lease's illegality. Similarly, in T.VIJAYA RAGHAVAN (Madras High Court, 2022), a claim for refund of money paid as a bribe was dismissed based on the *in pari delicto* principle, as the payment was for an illegal object opposed to public policy.

Waiver of Statutory Rights

Parties may generally waive statutory rights conferred for their individual benefit, unless such waiver is prohibited by statute or contravenes public policy. The maxim is cuilibet licet renuntiare juri pro se introducto. However, if an Act is intended to have a more extensive operation as a matter of public policy, its provisions cannot be waived (Shri Lachoo Mal v. Shri Radhey Shyam, Supreme Court Of India, 1971). An agreement to waive such rights would be void under Section 23 if it infringes public right or policy.

Lawfulness of Compromise Decrees

Order XXIII, Rule 3 of the Code of Civil Procedure, 1908, allows courts to record lawful agreements or compromises. The term "lawful" in this context is interpreted in light of Section 23 of the Contract Act. If a compromise agreement is unlawful under Section 23, it cannot be recorded by the court (Palden Bhutia & Ors. v. Januka Chettri & Ors., 2006 SCC ONLINE SIKK 9, Sikkim High Court, 2006). An agreement aimed at defeating a prior decree, thereby affecting the rights of others, is unlawful (Kiran Arora v. Ram Prakash Arora, Delhi High Court, 1979).

Consequences of Unlawful Agreements

The primary consequence of an agreement having an unlawful consideration or object is that it is void ab initio (Kuju Collieries Ltd. v. Jharkhand Mines Ltd. And Others, Supreme Court Of India, 1974; Shri Paresar v. Municipal Board, Mount Abu, Rajasthan High Court, 1996). Such an agreement is unenforceable at law, and no party can claim any rights under it.

Regarding restitution, Section 65 of the Act provides that when an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it. However, the applicability of Section 65 to agreements void due to unlawful consideration or object known to both parties at the outset is limited. In Kuju Collieries Ltd. (Supreme Court Of India, 1974), the Supreme Court held that Section 65 does not apply where the parties were aware of the illegality from the inception and were *in pari delicto*. The phrase "discovered to be void" implies that the invalidity was not apparent at the time of making the agreement. Relief under Section 65 was also implicitly denied in *Rattan Chand Hira Chand (Supreme Court Of India, 1991)* where the agreement was void for being against public policy.

Public Policy: An Evolving Concept

Public policy is not a static concept; it evolves with the changing social, economic, and political fabric of society (Rattan Chand Hira Chand v. Askar Nawaz Jung (Dead) By Lrs And Others, Supreme Court Of India, 1991; Central Inland Water Transport Corporation Limited And Another v. Brojo Nath Ganguly And Another, Supreme Court Of India, 1986). While courts are cautious about creating new heads of public policy, preferring to "expound, not expand" this branch of law (Gherulal Parakh v. Mahadeodas Maiya And Others, Supreme Court Of India, 1959, citing Anson), they also recognize the need to adapt its application to new situations to uphold justice and public good (Shri Paresar v. Municipal Board, Mount Abu, Rajasthan High Court, 1996). The interpretation of public policy is often intertwined with constitutional principles, particularly Article 14 of the Constitution of India, which guarantees equality and prohibits arbitrariness (Central Inland Water Transport Corporation Limited And Another v. Brojo Nath Ganguly And Another, Supreme Court Of India, 1986; Oil & Natural Gas Corporation Ltd. v. Saw Pipes Ltd., Supreme Court Of India, 2003, as discussed in Arunday Developers v. Gemini Arts Private Ltd, Madras High Court, 2009).

Conclusion

Section 23 of the Indian Contract Act, 1872, serves as a critical gatekeeper, ensuring that the freedom of contract does not extend to agreements detrimental to law, morality, or public interest. Through its various clauses, it invalidates agreements whose considerations or objects are forbidden by law, defeat legal provisions, are fraudulent, involve injury to person or property, or are deemed by courts as immoral or opposed to public policy. The judiciary plays a vital role in interpreting and applying these principles, balancing the sanctity of contracts with the imperative to uphold legal norms and public welfare. The evolving nature of concepts like "public policy" demonstrates the adaptability of the law to contemporary challenges. Ultimately, Section 23 reinforces the principle that contractual autonomy must operate within the bounds of legality and societal good, thereby fostering a just and equitable contractual regime in India.