S.23 draws the outer boundary of what agreements the law will enforce. Even where offer, acceptance, consideration, capacity, and free consent are all present, an agreement whose object or consideration is unlawful cannot be enforced.
Legal Framework
| Section | Act | Scope |
|---|---|---|
| S.23 | Indian Contract Act, 1872 | Consideration or object is unlawful if forbidden by law, defeats law's provisions, is fraudulent, involves injury to person or property, or is immoral or opposed to public policy |
| S.24 | Indian Contract Act, 1872 | If any part of consideration or object is unlawful, the entire agreement is void |
The Five Grounds Under S.23
1. Forbidden by Law. The consideration or object is directly prohibited by a statute.
Why: The law cannot lend its enforcement machinery to agreements that its own statutes expressly prohibit, without undermining the coherence of the legal system itself.
2. Would Defeat the Provisions of Any Law. The agreement, though not directly forbidden, is structured to circumvent or frustrate a law's purpose.
Why: Clever drafting that achieves an outcome the law forbids, without technically breaching the letter of the prohibition, is treated identically to a direct violation, since the substance of the transaction, not merely its form, determines lawfulness.
3. Is Fraudulent. An agreement designed to perpetrate fraud on a third party or the law itself.
4. Involves or Implies Injury to the Person or Property of Another. Agreements contemplating harm to a third party's person or property are void.
5. The Court Regards It as Immoral, or Opposed to Public Policy. A residual, judicially developed category capturing agreements offensive to prevailing standards of morality or the interests of society generally.
Categories of Agreements Opposed to Public Policy
Courts have developed recognised heads of public policy over time, including agreements: trading with an enemy, interfering with the course of justice, tending to create interest against duty, in restraint of parental rights, in restraint of marriage, in restraint of trade (subject to statutory exceptions under S.27), interfering with marital duties, and agreements that are unconscionable given grossly unequal bargaining power.
Why courts remain cautious in expanding this category: Public policy is famously described as "an unruly horse," capable of unpredictable and inconsistent application if courts freely invent new heads whenever a bargain seems distasteful. Judicial restraint keeps the doctrine anchored to well-established categories rather than ad hoc moral judgment.
Effect Under S.24: Severability
If any part of a single, indivisible consideration or object is unlawful, the entire agreement becomes void, even the lawful parts.
Why: Since the consideration was intended as one indivisible whole, courts cannot artificially sever it to save the lawful portion without rewriting the parties' actual bargain; the law simply declines to enforce any part of a transaction it cannot separate from its unlawful core.
Illustrations
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Forbidden by law: A agrees to sell a controlled substance to B without the required licence, where such sale is expressly prohibited by statute. The agreement is void under S.23's first ground.
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Defeats provisions of law: A landlord structures a lease agreement with an unusually high "deposit," refundable only on conditions designed to circumvent rent control legislation capping recoverable rent. Even though not directly forbidden by name, this structure defeats the rent control law's provisions and is void.
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Opposed to public policy, unconscionable bargain: An employment bond requires an employee to pay an exorbitant, disproportionate penalty for resigning within a fixed period, while the employer bears no reciprocal obligation. Applying the Central Inland Water Transport Corp reasoning, such a grossly one-sided term, given unequal bargaining power, may be struck down as opposed to public policy.
Recall Check
- List the five grounds under S.23 that render consideration or object unlawful.
- Why does the law treat an agreement structured to "defeat" a law's provisions the same as one directly forbidden by it?
- Explain the effect of S.24 where only part of the consideration is unlawful.
Key Cases
Gherulal Parakh v. Mahadeodas Maiya (1959) Gherulal-Parakh-v-Mahadeodas-Maiya-1959 Issue: Whether a wagering agreement, void under S.30, was also "immoral" or opposed to public policy so as to bar an associated partnership agreement for conducting such wagers. Rule: An agreement being void under a specific statutory provision does not automatically mean its object is also immoral or opposed to public policy under S.23; these are distinct grounds requiring separate analysis. Held: The wagering agreements were void under S.30, but were not necessarily "immoral" for the purposes of invalidating the separate partnership formed to conduct the business, since wagering, though void, was not treated as inherently immoral in this context.
Central Inland Water Transport Corp. v. Brojo Nath Ganguly (1986) Central-Inland-Water-Transport-v-Brojo-Nath-Ganguly-1986 Issue: Whether a grossly unfair service condition permitting termination at will, in a contract between parties of unequal bargaining power, was opposed to public policy under S.23. Rule: Unconscionable terms imposed by a party in a dominant bargaining position on a weaker party can be struck down as opposed to public policy. Held: The termination clause was void, being unconscionable and against public policy given the stark inequality of bargaining power involved.
Distinctions
| Basis | Illegal Agreement | Void Agreement (General) |
|---|---|---|
| Nature | Forbidden by law or involving an offence | May simply lack an essential, such as consideration, without any illegality |
| Collateral transactions | Collateral agreements connected to an illegal one are also tainted | Collateral agreements to a merely void agreement may survive independently |
| Consequence | Criminal or civil sanction may also attach | Only civil unenforceability, no punitive consequence |
| Example | Agreement to commit an offence under the IPC | Agreement without consideration, absent any S.25 exception |
Flashcards
Q: List the five grounds under S.23 rendering consideration or object unlawful. A: Forbidden by law, defeats provisions of any law, is fraudulent, involves injury to person or property, or is immoral or opposed to public policy.
Q: What is the effect under S.24 if only part of an indivisible consideration is unlawful? A: The entire agreement is void, since the unlawful part cannot be severed from an indivisible whole.
Q: Why is "public policy" described by courts as an "unruly horse"? A: Because its unpredictable and inconsistent application, if freely expanded, risks undermining certainty in contract law.
Q: What did Gherulal Parakh v Mahadeodas Maiya clarify about void and immoral agreements? A: That an agreement void under a specific provision, like wagering under S.30, is not automatically "immoral" under S.23; the two grounds require separate analysis.
Q: Name three recognised judicial heads of agreements opposed to public policy. A: Agreements trading with an enemy, interfering with the course of justice, and in restraint of marriage (among others, including unconscionable bargains).
Exam Scenario
A landowner agrees to lease his commercial property to a tenant, with the lease deed structured so that a large portion of the actual rent is disguised as a non-refundable "goodwill payment," specifically to keep the recorded rent below a statutory ceiling that would otherwise apply. The tenant later refuses to pay the disguised amount, and the landlord sues to recover it. Advise the landlord.
Approach: Identify the disguised goodwill payment as a structure designed to defeat the provisions of the rent control statute, falling within the second ground under S.23, notwithstanding that no single term is directly "forbidden" by name. Apply S.24 to consider whether this taints the entire lease consideration as an indivisible unlawful whole, or whether the lawful rent portion can be severed. Conclude that the landlord's claim for the disguised goodwill payment specifically is likely unenforceable as against public policy and the rent control law's purpose, regardless of the broader lease's validity.
See Also
- Consideration Features and Exceptions : lawful consideration as a distinct essential from lawful object, both required under S.10 and both tested against S.23's grounds.