Lawful consideration is one of the most essential elements to constitute a legally valid contract. This has been enumerated in the Section 10 of Indian Contract Act 1872 where it has been given alongside the free consent, competence of parties and Lawful object to contract.
A contract where the object or consideration is unlawful is deemed to be void.
Section 23 of Indian Contract Act gives us the parameters to judge whether the consideration of an agreement is lawful or not.
It states that 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.
- Forbidden by law-
When a consideration is prohibited by law, it becomes unlawful and cannot conclude a contract, rendering the contract void.
The word “law” in section 23(1) means 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.
For example in the case of ‘Gherulal Parakh vs Mahadeodas¹ it was held that the contract between the parties to enter into wagering contracts depending upon the rise and fall of the market was void as the set object was forbidden by law and opposed to the public policy.
- Is of such nature that if permitted would defeat the provisions of any law-
Conventio Et Modus Vincunt Legem meaning that a contract can be formed In such a manner as to overrule laws.
Section 23(2) is essentially an exception to this maxim because it says that those considerations and objects which are immoral in any law are deemed to be unlawful. Hence the contract also become void.
This section highlights the difference between the void and illegal contracts. The altogether forbidden contracts are illegal and ones made but not enforceable in court are void contracts.
It was discussed in case Rajat Kumar Rath v. Government of India² in the 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 became tainted with illegality and we, therefore, in certain circumstances 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”.³
This tells us that when an object or the consideration to an agreement is fraudulent, it is unlawful and thus the contract based on this will be void.
Fraud has been defined under section 17 of Indian Contract act 1872 as when false information and deception is used by one party to enter into a contract with another party. Thus fraudulent consideration is unlawful.
Furthermore,the maxim ‘pacta conventa quae neque contra leges neque dolo mall inita sunt omnimodo observanda sunt’ means contracts which are not illegal, and do not originate in fraud, must in all respects be observed.
- involves or implies, injury to the person or property of another-
An agreement which inflicts injury to a person or to the property of a person is void. It is not enforceable in the courts of law because it is an unlawful agreement with unlawful consideration or object.
For example- A signed a contract with B to publish a book in violation of C’s copyright rights on it. Since the consideration and object is unlawful, the contract stands void.
- the Court regards it as immoral-
When a court regards something or some act as immoral, that cannot be used as the consideration or object for an agreement. They are unlawful and thus make the contracts void.
For example- A agrees to let her daughter B for concubinage. This agreement is void since it is immoral but not illegal because this is not penalized under the IPC.
- opposed to public policy-
For the welfare of the society certain types of contracts are prohibited by the Government under the ‘Public Policy’. These types of contracts are unlawful contracts pertaining to their unlawful consideration and object.
Following contracts have being deemed unlawful due to public policy-
- Trade with the Enemy: – Entering into a contract with the citizens of the enemy country during war is unlawful.
- Stifling Prosecution: – The agreements made to evade justice and keeping up with illegal work. For example, A agrees to buy a house for B of he does not testify against him in the court.
- Maintenance and Champerty: – Maintenance agreement is when a person promises to maintain a suit in which he has no real interest. And when a person agrees to assist another party in litigation for damages or a portion of the proceeds, then the Chomperty occurs.
- Agreement to create a monopoly
- An agreement for brokerage marriage for the rewards
- Interference with the Courts: – An agreement with any judicial or state officials to do corrupt work and interfere in legal proceedings.
In ‘Gherulal Parakh vs Mahadeodas’ the wagering contracts between two parties violated the public policy set by the government and thus it was deemed an unlawful contract.
In ‘Union Carbide corporation vs Union of India’⁴, although the payment of 470 million dollars as compensation was not considered to be stifling prosecution and the consideration was held lawful but the question arose that the matter of public concern like this should not be passed around subject to private bargains of big corporations.
The consideration is an essential part of a valid contract. Lack of validity of consideration itself makes the contract hold no legal standing and thus void. This law protects the interest of the person whose consent is obtained on fraudulent consideration or the third parties who are at the receiving end of injury and loss due to illegal contracts between two parties.
¹1959 AIR 781, 1959 SCR Supl. (2) 406
²AIR 2000 Ori 32
⁴1992 AIR 248, 1991 SCR Supl. (1) 251
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