Unlawful Consideration and Object

A useful distinction. An act may be prohibited or it may merely attract a penalty for a regulatory purpose. Where a statute imposes a penalty to raise revenue rather than to forbid the transaction, the contract may still be good, and the question is one of construing the statute.

(b) Would defeat the provisions of any law

Wider than (a). The agreement is not itself forbidden, but if the courts enforced it the purpose of some law would be frustrated. An agreement by a debtor not to plead limitation, or an arrangement designed to evade a rent control statute, or a transfer designed to defeat a law restricting land holdings, falls here.

(c) Fraudulent

Where the object is to commit a fraud on a third person. Two people agreeing on how to divide the proceeds of a fraud, or a transfer made to defraud creditors, is the standard case.

(d) Involves or implies injury to the person or property of another

Injury here means legal wrong. An agreement to beat a person, to publish a libel, or to damage goods, is caught. It also reaches agreements whose performance necessarily involves a tort.

(e) Immoral, or opposed to public policy

The open ended head, and the one that is examined most. Note the drafting: "the Court regards it as". This head expressly invites a judicial judgment, and the standard is that of the court and not of the parties.

Immorality in the settled Indian sense is narrow, and is confined largely to sexual immorality and to interference with the marital relation. It does not mean everything a judge disapproves of, and the point is made squarely by the leading case in the next section.

Public policy is the broader idea: the principle that no one may lawfully do that which has a tendency to injure the public good. It has traditionally been treated as a set of recognised heads rather than an at large discretion, and the recognised heads are these.

• Trading with an enemy in wartime.
• Stifling a prosecution, that is an agreement not to prosecute a non compoundable offence. The right to prosecute is public.
• Maintenance and champerty. Maintenance is supporting another's litigation without a lawful interest; champerty is doing so for a share of the proceeds. In India these are not by themselves void as they were in England, but an agreement that is extortionate, or made for an improper purpose such as gambling in litigation, is opposed to public policy.
• Interference with the course of justice, including an agreement to influence a judge or to give false evidence.
• Sale of public offices and titles, and agreements to procure a public honour for money.
• Agreements creating an interest opposed to duty, such as an agreement by a public servant to act in a way inconsistent with his office.
• Agreements in restraint of parental rights or of personal liberty, and agreements in restraint of marriage, of trade, and of legal proceedings, which the Act deals with separately in sections 26, 27 and 28.
• Unconscionable bargains between parties of unequal bargaining power, the modern head, established by Central Inland Water Transport.

The old debate. Judges have long divided over whether the heads of public policy are closed. The classic image is that public policy is "an unruly horse". The settled Indian position is that the courts will apply the recognised heads and will be cautious about inventing new ones, but that the doctrine is not frozen, and Central Inland Water Transport is the clearest modern example of the courts developing it.

The leading cases

Gherulal Parakh v. Mahadeodas Maiya, AIR 1959 SC 781.

Facts. Two parties entered a partnership to carry on wagering transactions in wheat, and one sued the other for a share of the losses paid on his behalf.

Held. A wagering agreement is void under section 30, but it is not unlawful under section 23: wagering is not immoral, nor is it opposed to public policy. Since the object of the partnership was not unlawful, the partnership itself was valid and the claim between the partners could be enforced. The Court also held that the scope of the word "immoral" in section 23 is confined to sexual immorality, and that public policy is a branch of the common law governed by precedent, so the courts should be slow to invent new heads.

Why it matters here. It is the case that keeps sections 23 and 30 apart, and the distinction is examined every year: void is not the same as unlawful. A wager is void, so no suit lies on the wager; but because it is not unlawful, transactions collateral to it are unaffected.

Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly, AIR 1986 SC 1571.

Facts. A service rule of a government company allowed it to terminate the service of a permanent employee by giving three months' notice or pay in lieu, without any reason and without a hearing. Employees terminated under it challenged the rule.

Held. The rule was void as opposed to public policy under section 23. The courts will strike down an unfair and unreasonable contract, or an unfair and unreasonable clause in a contract, entered into between parties who are not equal in bargaining power, where the weaker party had no real choice but to sign a standard form on a take it or leave it basis.

Why it matters here. It shows public policy operating as a living doctrine and not a closed list, and it is the bridge from section 23 to [Standard Form Agreements].

A worked example

Test five agreements against section 23.

• Ashok pays Bela three lakh rupees to give false evidence in a pending suit. The object is to interfere with the course of justice, and the act is also an offence. Unlawful under heads (a) and (e). Void, and neither can sue.
• Chandan lends money to Dilip knowing it will be used to smuggle goods. The consideration, the loan, is lawful; the object is not. Unlawful, and the agreement is void. Chandan cannot recover the loan.
• The same loan, made without any knowledge of the purpose. The object as between these parties is simply a loan. Lawful, and the agreement stands.
• Elango agrees not to prosecute Farid for an offence of cheating, in return for Farid repaying what he took. Cheating is non compoundable, so the agreement stifles a prosecution and is opposed to public policy. Void, and Elango cannot enforce it.
• Two traders form a partnership to bet on cricket matches, and one sues the other for his share. On Gherulal Parakh the wager is void under section 30 but not unlawful under section 23, so the partnership is valid and the claim between the partners is good.

Consequences

The agreement is void. Section 23's last sentence says so.

Restitution, section 65. Where an agreement is discovered to be void, a person who has received an advantage must restore it or compensate for it. But the courts will not use section 65 to assist a party who knew of the illegality from the start: the maxim is in pari delicto potior est conditio defendentis, where both are equally at fault the defendant's position is stronger, and the court leaves them where it finds them.

Collateral transactions. Where the main agreement is unlawful, a transaction collateral to it is also tainted and unenforceable. Where the main agreement is merely void, as a wager is, a collateral transaction is unaffected. That is the practical payoff of Gherulal Parakh.

Severability. Where only part of the consideration or object is unlawful, section 24 decides whether the lawful part can be saved. See [Agreements Void in Part, and Severability].

What it does NOT mean

"Void and illegal are the same thing." They are not, and Gherulal Parakh is the authority. Every unlawful agreement is void; not every void agreement is unlawful. The difference shows in collateral transactions.

"Immoral means anything a judge disapproves of." In section 23 it has been confined largely to sexual immorality.

"Public policy lets a court refuse to enforce any harsh bargain." The doctrine works through recognised heads and the courts are cautious about new ones. Central Inland Water Transport did extend it, but on the specific ground of unequal bargaining power and a take it or leave it standard form.

"If a statute imposes a penalty, the contract is void." Not necessarily. Where the penalty is regulatory or fiscal rather than prohibitory, the contract may stand, and the question is one of construing the statute.

"Money paid under an unlawful agreement is always recoverable under section 65." Not where the party knew of the illegality. In pari delicto, the court leaves the parties where they are.

Quick revision

• s.23, five heads: forbidden by law; would defeat the provisions of any law; fraudulent; involves or implies injury to the person or property of another; the Court regards it as immoral or opposed to public policy.
• Object (the purpose) and consideration (what is given) are separate; either being unlawful makes the agreement void.
• Heads of public policy: trading with an enemy, stifling a prosecution, champerty and maintenance where extortionate, interference with justice, sale of public offices, interest opposed to duty, restraints on marriage, trade and legal proceedings, and unconscionable bargains between unequals.
• Gherulal Parakh, AIR 1959 SC 781: a wager is void under s.30 but not unlawful under s.23; "immoral" is confined largely to sexual immorality; public policy is governed by precedent. So collateral transactions survive.
• Central Inland Water Transport, AIR 1986 SC 1571: an unfair and unreasonable clause imposed by a party with superior bargaining power on a take it or leave it basis is void as opposed to public policy.
• s.65 restores advantages where an agreement is discovered to be void, but not for a party who knew of the illegality: in pari delicto.

Test yourself

1. State the five heads of section 23. The consideration or object of an agreement is unlawful if it is forbidden by law; if it is of such a nature that, if permitted, it would defeat the provisions of any law; if it is fraudulent; if it involves or implies injury to the person or property of another; or if the court regards it as immoral or opposed to public policy. Every agreement of which the object or consideration is unlawful is void.

2. Distinguish a void agreement from an unlawful one. Every unlawful agreement is void, but many void agreements are perfectly lawful. The practical difference lies in collateral transactions: those connected with an unlawful agreement are tainted and unenforceable, whereas those connected with a merely void agreement are unaffected. Gherulal Parakh v. Mahadeodas Maiya, AIR 1959 SC 781, is the authority, wagering being void under section 30 but not unlawful under section 23.

3. What did Central Inland Water Transport decide about public policy? That the courts will strike down as opposed to public policy under section 23 an unfair and unreasonable contract or clause entered into between parties of unequal bargaining power, where the weaker party had no real choice but to accept a standard form on a take it or leave it basis. It struck down a service rule allowing termination of a permanent employee without reason or hearing.

4. Is an agreement not to prosecute an offence valid? Not where the offence is non compoundable. Such an agreement stifles a prosecution and is opposed to public policy under section 23, so it is void and cannot be enforced, the right to prosecute a public wrong not being a matter for private bargain.

5. Can a party recover money paid under an unlawful agreement? Section 65 requires a person who has received an advantage under an agreement discovered to be void to restore it or compensate for it, but the courts will not assist a party who knew of the illegality when he entered the agreement. Where both are equally at fault the maxim in pari delicto potior est conditio defendentis applies and the court leaves them as it finds them.