Unlawful Consideration and its Effect
Introduction
For a contract to be valid, both the consideration (something given in return) and the object (purpose or aim of the agreement) must be lawful. If either the consideration or the object is unlawful, the agreement cannot be legally enforced.
Section 23 of the Indian Contract Act, 1872 defines when consideration or object becomes unlawful. If an agreement involves unlawful consideration or an unlawful object, the agreement becomes void (not legally enforceable).
Meaning / Definition
Consideration refers to something of value given in return for a promise.
Object means the purpose or aim of the agreement.
According to Section 23 of the Indian Contract Act, the consideration or object of an agreement is lawful unless:
- it is forbidden by law,
- it would defeat the provisions of any law (make a law ineffective),
- it is fraudulent (based on cheating or deception),
- it causes injury to the person or property of another, or
- the court considers it immoral or against public policy (against the interests of society).
If any of these conditions are present, the agreement becomes void.
Modes or Types
Forbidden by Law
If the object or consideration of an agreement involves doing something forbidden by law, the agreement is void.
Acts that are prohibited by statutes (laws made by Parliament or State Legislatures) fall within this category. The prohibition may be express (clearly stated) or implied (understood from the law).
For example, certain activities may require a government license. If a person performs such activities without a license, the agreement becomes unlawful.
Example:
The sale of liquor without a license is prohibited under the Excise laws. Any agreement involving such sale is illegal and void.
Defeating the Provisions of Law
Sometimes an agreement may not directly break the law, but its purpose may defeat the provisions of law (make the law ineffective or meaningless).
In such cases, the agreement is also considered unlawful and void.
For example, if a law imposes a penalty for a particular act, any agreement that tries to avoid or bypass that law will be treated as unlawful.
Important Case Law
Rajat Kumar Rath v. Government of India
The Orissa High Court explained the difference between void agreements and illegal agreements.
- A void agreement has no legal effect between the parties.
- An illegal agreement is not only void but also makes related transactions illegal (legally contaminated).
This means that agreements connected with an illegal contract may also become unenforceable.
However, if an agreement is only collateral (secondary or supporting agreement) to another agreement that is void but not illegal, it may still be enforceable in certain situations.
Distinction / Comparison
Void Agreement vs Illegal Agreement
| Basis | Void Agreement | Illegal Agreement |
|---|---|---|
| Meaning | An agreement that has no legal effect | An agreement that is prohibited by law |
| Legal Status | Not enforceable in court | Not enforceable and also unlawful |
| Effect on Related Agreements | Collateral agreements may still be valid | Collateral agreements may also become illegal |
Practical Example
Suppose A enters into an agreement with B to sell liquor without a government license.
Since the sale of liquor without a license is forbidden by law, the agreement becomes void and illegal. Neither party can enforce the agreement in court.
Summary
- A valid contract requires lawful consideration and lawful object.
- Section 23 of the Indian Contract Act, 1872 defines when consideration or object becomes unlawful.
- An agreement becomes unlawful if it is forbidden by law, defeats the provisions of law, is fraudulent, causes injury, or is immoral or against public policy.
- Agreements with unlawful consideration or object are void (not legally enforceable).
- Illegal agreements also affect related agreements and may make them unenforceable.
- Courts will refuse to enforce agreements that involve unlawful consideration or unlawful object.