Legality of Object and Consideration: The Pillars of Enforceability of an Agreement




By Garima Sen, Gautami Pradhan & Glito Davis


1.1 ENFORCEABILITY OF AGREEMENTS


It is pertinent to note that for an agreement to have enforceability of law, that is, for it to be accorded the status of a “valid contract”, a number of requisites need to be satisfied. These requirements have been enumerated under Section 10 of the Indian Contract Act, 1872 (hereinafter referred to as ‘the Act’) :

  1. It must not be expressly declared void.

  2. And be made with the free consent of the Parties.

  3. For a lawful consideration

  4. With a lawful object


1.2 LEGALITY OF OBJECT AND CONSIDERATION: THE PILLARS OF ENFORCEABILITY


Out of the above four requirements, the legality of consideration and object, are the two crucial pillars on which the enforceability of agreement rests. But before diving in, it is pertinent to understand what is meant by ‘consideration’ and ‘object’.


1.2.1 Consideration

Consideration is essential for a contract to be valid. Pollock defined consideration as “the price for which the promise of the other is bought, and the promise thus given is enforceable by law”. A contract without consideration is not binding on the parties.

It must be noted that a consideration can be a past, present or future consideration, meaning that the act or abstinence in return for the promise made has either already been done, is being done or is promised to be done in the future.

For instance, A promises to maintain B’s child, and B promises to pay A 1000 rupees yearly for the purpose. Here the promise of each party is the consideration for the promise of the other party. Thus, we see that consideration can be in the form of reciprocal promises. 1.2.1.1 Object

Whereas, consideration has been defined under Section 2(d)[1] of the Act, no formal definition for the term ‘object’ exists. “Object” can be best understood as the “purpose” or “designof an agreement. Thus, where a loan is taken under an agreement for the purpose of marriage, in such a case the marriage is the object of the agreement.


1.3 REQUIREMENT OF MUTUAL LEGALITY


Section 23[2] of the Act requires the mutual legality of both the consideration and object and creates a bar on a person’s liberty and right to enter into a contract on account of public policy and order, having an overriding effect over the private party agreements. In Section 23, the term ‘object’ pertains to the actual purpose of the Contract and is distinct in its meaning from ‘consideration’. Owing to this, even though the consideration may be lawful, the agreement may still be void if the object is unlawful. Similarly, if the object is lawful but the consideration is unlawful, the agreement will be void. Therefore, for the creation of a valid contract, object and consideration involved must be legal; otherwise, the agreement becomes void.



1.4 WHAT MAKES CONSIDERATION AND OBJECT UNLAWFUL- THE DICTATE OF SECTION 23


The object or consideration of an agreement is completely lawful unless it falls into any of the below given categories-


1. Consideration or Object forbidden by law.


The term “law” refers to any law that is for the time being in force in India. It would include not only statutory laws but also at many places, unwritten or customary laws. Such acts that are expressly prohibited by authorities having appropriate powers to do so through rules and regulations can also be included in this category. However, if these rules are not in conjunction with the prevalent laws of the land then these rules will not be applicable.

The object and consideration that are forbidden by law are unlawful and have the tendency to render a contract void. It is pertinent to note that the terms ‘forbidden by law’ and ‘void’ are distinct and not synonymous. The Hon’ble Supreme Court of India in GherulalParakh v. Mahadeodashad[3] observed that an act /object or consideration being forbidden by law can render a contract void, but it cannot be said that a void contract is a result of the object being forbidden by law.


A good illustration of this form of illegality of object/consideration is a 1999 case titled Balbir Singh v. Arjun Singh[4]. In this case, the High Court of Allahabad found that the plaintiff was not entitled to purchase the land which the defendant had agreed to sell under an agreement because the plaintiff was already in possession of sufficient land and was not entitled to purchase land in excess of the limit prescribed under Section 154 of the Zamindari Abolition and Land Reforms Act. Here clearly, the agreement was in violation of a legal provision and thus was held to be not specifically enforceable.


2. Consideration or Object defeats the provisions of law.


This category basically covers situations where though on the face of it, the object or consideration is not forbidden by law, however, permitting it would result in violation of a provision of law. Thus, where the court finds that the intention of the parties involved in a contract violate any of the provisions of law, the contract will be considered a void contract. For instance, Mr. X enters into a contract with Mr. Y that Y will not plead for limitation and in this case, Mr. X is the debtor. But in this situation, the intention of the parties to contract was to defeat the provision of Limitation Act and therefore, the contract can be termed as void. Similarly, where X enters into a contract with Y in which Y agreed not to pursue legal proceedings against X if X commits murder of another person. This contract violates the provisions mentioned in the Indian Penal Code and thus it is a void contract.



As early as 1878, an agreement that defeated the provisions of law was held to be void: in Fateh Singh v Sanwal Singh[5] the appellant was required by the Magistrate to furnish sureties for good behaviour. The respondent had agreed to become the surety on the condition that the sum be deposited to him by the appellant himself. Meanwhile, the appellant did not do anything to forfeit the security and the surety thus came to an end. The appellant applied to recover the amount from the respondent, but the lower Appellate Court refused to grant the relief, holding the consideration of the agreement to be unlawful as it defeated the object of law. The Court upheld the conclusion arrived at by the lower court explaining that under CrPC a Magistrate can require a person of “notoriously bad livelihood” to come up with sureties who are willing to be responsible for his conduct in monetary terms. If the surety’s amount is deposited by, or on behalf of, the person himself, in that case the surety is responsible not in reality but just in name. The Court further explained that no Magistrate with the knowledge of these facts is justified in accepting such surety as the object of the law would be defeated.



3. Fraudulent Consideration or Object


A great example of this is the case of Ram Nath Misra v. Rajendranath Sanyal[6]in which there were two decree holders against a debtor. One of the decree holders (the plaintiff) got the debtor’s property attached and thereon a sale was brought. The said decree holder then entered into an agreement with the defendant, a potential buyer that he will not bid against the defendant. In return, the defendant agreed to pay him off. Consequently, the defendant was able to buy the property at a negligible price. The Court held that the plaintiff was not entitled to recover any amount as the agreement was fraudulent in the sense that it deprived the other decree holder of the amount, he possibly could have fetched from the sale of the property had such a fraud not been played upon him.


Similarly, where an agreement is made between a creditor and debtor in which the creditor would get separate money for including other creditors to enter into composition of their debts, such an agreement will be considered void.


It must be noted that this category also includes situations in which even though one of the parties to the agreement has no intention to deceive the third person but has merely played into the hands of the other party committing fraud. In such cases the agreement will still be void. An example of this is the case of Taylor v. Bhail[7], In this case the ship owner, on the promise of indemnity made by the sender, issued a clean bill stating to the buyer that the barrels were shipped in a good condition even though in reality they were leaking. On arrival of the ship considerable damage was caused and thus the buyer suffered loss which the ship-owner had to make good. When the ship-owner sought to be indemnified as was promised, the Court held that since the ship-owner had made himself a vehicle not only for carrying goods but also for carrying a false representation, he was disentitled from relying on any part of the unlawful scheme as it sought to deceive the endorsees of the bill.

It is also pertinent to note that a consideration or object which is lawful can in no circumstance be fraudulent. Contracts which have fraudulent and unlawful consideration or object are void. But Contracts which are not unlawful and fraudulent must be continued to be observed.

4. Consideration or object entails injury to a person or property.