India: Section 23 Of Indian Contract Act – Lawful Considerations And Objects

"No polluted hand shall touch the pure fountains of justice."1

Section 232 of the Indian Contract Act, 1872 ("Act"), enumerates of three issues, i.e. consideration for the agreement, the object the agreement and the agreement per se. Section 23 creates a limitation on the freedom of a person in relation to entering into contracts and subjects the rights of such person to the overriding considerations of public policy and the others enunciated under it.3 Section 23 also finds its bearing in the other sections of the Act, namely section 264, 275, 286 and 307.

The word "object" used in section 23 connotes means "purpose" and does not purport a meaning in the same sense as "consideration". For this reason, even though the consideration of a contract may be lawful and real, that will not prevent the contract from being unlawful if the purpose (object) of the contract is illegal. Section 23 restricts the courts, since the section is not guided by the motive, to the object of the arrangement or transaction per se and not to the reasons which lead to the same.

'If the thing stipulated for is in itself contrary to law, the action by which the execution of the illegal act is stipulated must be held as intrinsically null: pactis privatorum juri publico non derogatur. 8

In a recent assignment9, our firm advised the client not to include any such terms in the document to be executed between the parties which would contravene any law in India. It was advised to the client that the if the contract is to be enforced by a party to the same, any enforcement in India of such contract or part thereof will not be possible in case the agreement or its object or the consideration involved therein is in violation of a statute in India. Further, that despite the inclusion of disclosures, indemnity, undertaking etc. in the contract and related transactional documents will not be of any advantage for the purpose of any action in India, in case the contract or any part thereof is in violation of any applicable statue, regulations, orders, bye-laws, guidelines etc. in India. In such case the contract will not be valid for the purposes of any action in India in light of the above discussed provision(s) of the Act since a party cannot consent to an agreement which is against the law. Moreover, the benefit of adding the said disclaimer, indemnity and undertaking in the contract will safeguard the interests of the foreign investee company (our client) only in the place whose law has been made applicable to the contract. However, in case any Indian law is violated such disclaimer, indemnity and undertaking will not be a ground for any defense, for any action in India, available to the party claiming a protection there under.

the above in perspective, it is pertinent to discuss the key elements of section 23 briefly; which are as under.

Forbidden By Law

The word "forbidden by law" is not synonymous with the word 'void' and hence it is not necessary that whatever is void is also "forbidden by law". 10 The above decision vas approved by the Supreme Court in Gherulal Parakh v. Mahadeodas (AIR 1959 SC 781) and the court held that:

"The word 'immoral' is very comprehensive word. Ordinarily it takes in every aspect of personal conduct deviating from the standard norms of life It may also be said that what is repugnant to good conscience is immoral. Its varying content depends upon time, place and the stage of civilization of a particular society. In short, no universal standard can be laid down and any law based on such fluid concept defeats its own purpose. The provisions of Section 23 of the Contract Act indicate the legislative intention to give it a restricted meaning. Its juxtaposition with an equally illusive concept, public policy, indicates that it is used in a restricted sense; otherwise there would be overlapping of the two concepts. In its wide sense what is immoral may be against public policy covers political, social and economic ground of objection. Decided cases and authoritative text-books writers, therefore, confined it, with every justification, only to sexual immorality. The other limitation imposed on the word by the statue, namely, "courts consider immoral" brings out the idea that it is also a branch of the common law like the doctrine of public policy, and, therefore, should be confined to the principles recognized and settled by Courts. Precedents confine the said concept only to sexual immorality and no case has been brought to our notice where it has been applied to any head other than sexual immorality. In the circumstances, we cannot involve a new head so as to bring in wagers within its fold."

The word "law" in section 23(1) means judicial law, that is, the law enacted by 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. The question, whether a particular transaction is forbidden by an Act or tends to defeat its provisions is always one of construction of the Act, the rule for which is that it should be construed according to the intention of the persons passing it and such intention should be gathered from what they have said in the Act.

If Permitted It Would Defeat The Provisions Of Any Law

The words "if permitted, it would defeat the provisions of law" mentioned in section 23 ought to be understood as referring to performance of an agreement which necessarily entails the transgression of the provisions of any law. The general rule of law as followed by the courts is based on exception to the maxim modus et conventio vincunt legem11. Meaning thereby, in case the express provision(s) of any law is violated by a contract, the interests of the parties or of third parties, would be injuriously affected by its fulfillment. The parties to a contract are permitted to regulate their rights and liabilities themselves, and the court will only give effect to the intention of the parties as expressed in the contract in accordance with the applicable laws of the land.

In short three principles arise from the section12 :

  1. an agreement or contract is void, if its purpose is the commission of an illegal act;
  2. an agreement or contract is void, if it is expressly or impliedly prohibited by any law;
  3. an agreement or contract is void, if its performance is not possible without disobedience of any law.

As per section 23, the difference between agreements that are void and agreements those are illegal is very thin or small. According to Anson13, "The law may either forbid an agreement to be made, or it may merely say that if it is made, the courts will not enforce it. In the former case, it is illegal, in the latter only void, but in as much as illegal contracts are also void, though void contracts are not necessarily, the distinction is for most purposes not important and even judges seem to treat the two as inter-changeable".

In Rajat Kumar Rath v. Government of India14 , the Orissa High Court has explained the distinction in the following 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".

Fraudulent

'pari delicto est conditio defendentis' 15

The Hon'ble Supreme Court of India under plethora of judgments has observed / held that there are several exceptions to the above rule. In this connection, the Hon'ble Supreme Court quoted with approval the following observations of Anson: 16

"... there are exceptional cases in which a man will be relieved of the consequences of an illegal contract into which he has entered, cases to which the maxim does not apply. They will fall into three classes: (a) where the illegal propose has yet been substantially carried into effect before it is sought to recover money paid or goods supplied or delivered in furtheranceof it; (b) where the plaintiff is not in pari delicto with the defendant; (c) where the plaintiff does not have to rely on the illegality to make out his claim".

Section 23 says that the consideration or object of the agreement is unlawful if it "is fraudulent".17 But subject to such and similar exceptions, contracts which are not illegal and do not originate in fraud, must in all respects be observed: pacta conventa quae neque contra leges neque dolo mall inita sunt omnimodo observanda sunt (contracts which are not illegal, and do not originate in fraud, must in all respects be observed).

Injury To Person Or Property Of Another

As per the provisions of section 23, an agreement which involves causing injury to a person or property of third party is void and cannot be enforced by court and therefore, no claim is sustainable for the breach of such an unlawful agreement.

Opposed To Public Policy

It is trite law that one who knowingly enters into a contract with improper object cannot enforce his rights in relation to such contract. Notably, the Act does not anywhere define the expressions "public policy" or "opposed to public policy" or "contrary to public policy". However, one may note that the term "public policy" could plainly mean issues concerning the public or public benefit and the interest of public at large. 'Public Policy' is ".... a vague unsatisfactory term calculated to lead to uncertainty and error when applied to the decision of legal rights; it is capable of being understood in different senses; it may and does in ordinary sense means political expediency or that which is best for common good of the community; and in that sense there may be every variety of opinion; according to education, habits, talents and dispositions of each person who is to decide whether an act is against public policy or not..." According to Lord Atkin18,

"... the doctrine does not extend only to harmful effects, it has to be applied to harmful tendencies. Here the ground is less safe and treacherous".

The above principle has been followed by the Hon'ble Supreme Court of India in Gherulal Parekh v. Mahadevdas Maiya19, wherein Hon'ble Justice Subba Rao, referring the observation of Lord Atkin observed: "... Public policy or the policy of the law is an illustrative concept. It has been described as an 'untrustworthy guide', 'variable quality', 'unruly horse', etc.; the primary duty of a court of law is to enforce a promise which the parties have made and to uphold the sanctity of contract which forms the basis of society but in certain cases, the court may relieve them of their duty of a rule founded on what is called the public policy. For want of better words. Lord Atkin describes that something done contrary to public policy is a harmful thing; but the doctrine is extended not only to harmful cases; but also to harmful tendencies.... it is governed by precedents. The principles have crystalised under different heads.... though the heads are not closed and though the oretically, it may be permissible to evolve a new head under exceptional circumstances of thechanging world, it is advisable in interest of stability of society not to make attempt to discover new heads in these days". In Kedar Nath Motani v. Prahlad Rai20 , the Hon'ble Court held that "the correct view in law .... is that what one has to see is whether the illegality goes so much to the root of the matter that the plaintiff cannot bring his action without relying upon the illegal transaction into which he had entered. If the illegality be trivial or venial..... and the plaintiff is not required to rest his case upon that illegality, then public policy demands that defendant should not be allowed to take advantage of the position. A strict view, of course, must be taken of the plaintiff's conduct, and should not be allowed to circumvent the illegality by restoring to some subterfuge or by misstating the facts. If, however, the matter is clear and the illegality is not required to be pleaded or proved as part of the cause of action and the plaintiff recanted before the illegal purpose was achieved, then, unless it be of such a gross nature as to outrage the conscience of the court, the plea of the defendant should not prevail."

The Hon'ble Supreme Court of India has dealt with certain cases under section 23 holding that some actions of entering into contract are void. In the matter titled "ONGC Ltd. v. Saw Pipes Ltd."21 while interpreting the meaning of 'public policy' in this case, the Hon'ble Court observed that it has been repeatedly stated by various authorities that the expression 'public policy' does not admit of precise definition and may vary from generation to generation and from time to time. Hence, the concept 'public policy' is considered to be vague, susceptible to narrow or wider meaning depending upon the context in which it is used. Therefore, it was held that the term 'public policy' ought to be given a wider meaning. The Hon'ble Court placing reliance on "Central Inland Water Transport Corporation Limited and Anr. v. Brojo Nath Ganguly and Anr." [(1986) IILLJ 171 SC] held that what is good for the public or in public interest or what would be harmful or injurious to the public good or interest varies from time to time. However, an award, which is on the face of it, patently in violation of statutory provisions cannot be said to be in public interest. Such an award is likely to adversely affect the administration of justice. Hence, the award should be set aside if it is contrary to (i) fundamental policy of Indian Law; (ii) the interest of India; (iii) justice or morality; (iv) in addition, if it is patently illegal. The illegality must go to the root of the matter and if the illegality is of a trivial nature, it cannot be held that the award is against the public policy. An award can also be set aside if it is so unfair and unreasonable that it shocks the conscience of the court.

Conclusion

On the basis of above discussed, it can be easily understood that the ambit and scope of section 23 is vast and therefore the applicability of its provisions is subject to meticulous scrutiny by the court of the consideration and object of an agreement and the agreement itself. Therefore, in order to bring a case within the purview of section 23, it is necessary to show that the object of the agreement or consideration of the agreement or the agreement itself is unlawful.

Footnotes

1. Per Wilmot, C.J., in Collins v. Blantern, (1867) 1 Smith LC 369

2. Section 23 of the Indian Contract Act, 1872 - What considerations and objects are lawful and what not 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 said to be unlawful. Every agreement of which the object or consideration is unlawful is void.

3. In Re: K.L. Gauba (23.04.1954 - BOMHC) [AIR 1954 Bom 478]. Para 11 : "...The freedom of the citizen, as indeed the freedom of the lawyer, to enter into a contract is always subject to the overriding considerations of public policy as enunciated in S. 23 of the Indian Contract Act. That freedom is also subject to the other considerations set out in S. 23."

4. Agreement in restraint of marriage void

5. Agreement in restraint of trade void

6. Agreements in restraint of legal proceedings void

7. Agreements by way of wager void

8. Arg., 4 Cl. & F. 241; Broom's Legal Maxims, p. 541

9. Review of a Private Placement Memorandum to be issued by a US company to selected investors in India.

10. Mahadeodas and Ors. vs. Gherulal Parakh and Ors. (AIR 1958 Cal 703)

11. the form of agreement and the, convention of the parties overrule the law

12. Neminath v. Jamboorao, AIR 1966 Mys 154: (1965) 1 Mys LJ 442

13. Principles of the English Law of Contract, 22nd edn.

14. AIR 2000 Ori 32, 34-35

15. both parties are equally at fault

16. Principles of the English Law of Contract, 22nd Edition, p. 343.

17. Relevant Illustrations to Section 23: (e) A, B and C enter into an agreement for the division among them of gains acquired or to be acquired, by them by fraud. The agreement is void, as its object is unlawful. (g) A, being agent for a landed proprietor, agrees for money, without the knowledge of his principal, to obtain for B a lease of land belonging to his principal. The agreement between A and B is void, as it implies a fraud by concealment, by A, on his principal.

18. Fender v. St. John Milday, 1983 AC 1 (HC)

19. AIR 1959 SC 781

20. AIR 1960 SC 213

21. 2003 (2) RAJ 1 (SC)

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