Lawfulness of Consideration | Lawful Consideration

Lawfulness of Consideration | Overview

• Introduction
• Essential pre-requisites of Consideration
• Examples of Consideration
• The requirement of a valid contract
• Instances of Unlawfulness
• Conclusion

The lawfulness of consideration | Lawful Consideration is very important to understand. Without the legality of this one aspect of the contract, the entire contract would be baseless. To make the consideration lawful, the same must NOT be forbidden by law, defeating provisions of law, causing injury to person and property of another, fraudulent, and opposed to public policy or immoral.

As a car cannot run without fuel, a contract would be incomplete without consideration. But, when the statute provides for a special condition the car can work even without the fuel. An example is that of the agency.[1]

Thus, it becomes important to understand in what situations the consideration would work. If the consideration is not lawful, it will not be considered valid. In those situations, the contract also becomes void.

I. Introduction

It is well known that there are two parties in a contract- A Promisor and a Promisee. Hence that valuable benefit that passes from the latter to the former is called consideration[2]. This shows an inherent element of a quid pro quo.[3]

It is, after all, something that has value in the eyes of law.[4] There can never be confinement of this vast concept to a mere payment of money.[5] That is the reason why the Indian Contract act uses the phrase “any act or abstinence” to show what consideration is.[6]

II. Essential pre-requisites of Consideration

Being something of value, Consideration must have the following traits-

1. “Reasonable” equivalent or other valuable benefits.[7]
2. Law regards it having some value.[8]
3. Must be real, need not be adequate. [9]
4. Any act or forbearance.[10] [It can be right, interest, profit, benefit or detriment, responsibility, loss]
5. Benefit not previously entitled to.[11]

III. Examples of Consideration

Apart from the involvement of money and other material benefits that are usually exchanged in a contractual arrangement, there are various other instances where consideration takes shape of other forms. Some such examples are appended herewith-

1. Receiving advantages under a compromise arrangement.[12]
2. Broker’s undertaking to pay the premium in the marine insurance contract.[13]
3. Forbearing to sue on old contract on the ground that new contract is executed.[14]

IV. The requirement of a valid contract

A contract would not be complete with a mere Offer + Acceptance+ Consideration. Adequacy of the consideration is not important as mentioned above. But, the contract becomes valid on the fulfilment of the conditions mentioned in Section 10 of the Indian Contract Act, 1872:

“10. What agreements are contracts.—All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void…”

Only on the fulfilment of all the five conditions, the agreement would transform into a contract.[15] For the purposes of this article, the focus would be on the aspect of consideration. As is clear from the provision, the consideration has to be lawful. Now, the question arises what and when the consideration would be lawful.

The answer is also provided in the Statute itself. Section 23[16] is important to consider.

“23. 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 is said to be unlawful. Every agreement of which the object or consideration is unlawful is void.”

The exceptions to the lawfulness have been provided in the mentioned in the form of unlawfulness. The object or the consideration is deemed to be unlawful, thus the agreement becomes the void. For such invalid or void contract, no right of action exists in respect of anything in connection with such transaction.[17]

V. Instances of Unlawfulness

Since the law has provided for certain formalities to be fulfilled, those formalities have to be fulfilled accordingly.[18] Otherwise, the end result would be defective. The broad example would be the restraint of marriage as the consideration for a contract.[19]

Such contracts cannot become valid even if the parties act according to the contract.[20] To not make the effort of entering into a contract between two parties a waste, let us consider what all instances are leading to unlawful consideration.

1. Forbidden by Law

An agreement can be restrained by the authority of law, either expressly or impliedly. A person is completely stopped in law to proceed on such agreement that is being forbidden by law.[21]

The wideness of term law

The word law thus attracts discussion. It is not restricted to mere statutory law. Apart from a law enacted by the competent legislature, it can include personal or customary law.[22] Even an order by the court of law would be part of the term law.[23]

In case a mere penalty is being imposed, then the difficulty has to be closely examined.[24] In such situations, if the reason for such imposition is the protection of the general public, then the contravention of the condition in the statute is unlawful.[25] Example of this is the registration in the case of the moneylender.[26]

Cases of forbidden and not forbidden

If the statute is silent on the punishment or the restraint aspect of a particular act, it is said to be not forbidden by law. An example is the case where permission was not taken from the Forest Department before transferring the lease rights to a third party obtained from a bamboo forest. Court held since the Forest Act did not provide for any such stipulation, the act of the party could not be considered unlawful.[27]

But on the other hand, in the case of a transfer of agricultural land made within 15 years was held to be invalid. The sheer reason being, that the Karnataka Land Reforms Act, 1981 provided for the same.[28] Similarly, selling paddy above the maximum price fixed under the Maximum Price Control Order was held to be unlawful.[29]

2. Defeating the Provisions of Any Law

This subpart shows that the performance of the terms of a contract is not possible without the transgression of the provisions of law.[30] They cannot be allowed to ignore any law.[31]

Broad Principles

In this sub-part, courts have highlighted three important principles. They may seem overlapping but are crucial points.

1. The Purpose is illegal.
2. The agreement is against the law expressly or impliedly.
3. Performance is not possible without disobedience of law.[32]

Examples

An example can be taken of an employer entering into a contractual arrangement with his employees. The material aspect is to override the requirement to provide compensation under the Industrial Disputes Act, 1947.[33] This act would amount to defeating the provisions of the law in the face of them.

In another case, the parties of a joint family entered into a family settlement. But, the court did not find any dispute among the parties. Hence, there was an exchange of properties which required registration. Hence, the contract was held to be defeating the provisions of the Registration Act.[34]

There was an agreement entered into between the parties simply to postpone the registration of lease of the deed. In such circumstances where the savai amdani was being concealed to reduce the assessment of land revenue, the court held it to be defeating the provisions of Registration Act, Stamp Act and Transfer of Property Act.[35]

Thus, the action of the parties should be in conformity with the law. For instance, if the Textile Commissioner has issued a prohibition order against the sale of spindles, any consequent sale would be illegal.[36]

3. Fraudulent

The intent to deceive is important in such transactions where one of the parties may enter into the contract to appropriate some illicit benefit.[37]

Examples

If a party doesn’t apply for the allocation of a site and sets up someone else, it is said to be playing fraud. For such a Benami transaction, the plaintiff cannot get back the site since the contract was unlawful.[38]

If some creditors induce other creditors to join and form a composition via a secret preference, such would be deemed to be void. The plain reason given the court is that the practice of fraud and intent to deceive is inherently present.[39]

Approach to be followed by Court

The courts in such situations can’t help any party since they are at fault. It leads to the invocation of the crucial maxim- in pari delicto potior est condition possidentis. The intention of the fraud cannot, on the other hand, deprive the true owner of his right over the property.[40]

Another maxim of ex turpi causa can also be applied where the fraudulent object or purpose is being delved into by the court. The latter has to examine whether the presence of such illegality goes to the root of the matter or is merely ancillary.[41]

Onus

It is important also to note that the burden of proving the existence of fraud, as usual, rests upon the party alleging so. Example, in case a party claims that the compromise deed has been entered into through the inducement or fraud, some circumstantial or documentary evidence is required to be produced.[42]

4. Injury to the person or property of another

In the case of property, the classic example is that of a party entering into a property agreement for the want of title. If he/ she knows full well that the other party is not the owner, then also enters by will, the agreement becomes unlawful. The object was considered illegal involving injury to the property of another.[43]

5. Public Policy

Public Policy has been implored by the courts to be a highly vague, unsatisfactory and uncertain term.[44] It is also an elusive and varying term, described as an “unruly horse”.[45] Basically, it has a “variable” component that is subject to change with the change in time.[46] Hence, it is a fluctuating that varies with the habits, fashions and growth of commerce and usages.[47]

The transfer of the government land that was initially transferred for the purpose of residence would be opposed to public policy.[48] If a person or company surreptitiously acquire the shares of another company through some public financial institution, such clandestine act would amount to opposition to public policy.[49]

Approach to be followed by Court

The wideness of the term also calls for caution. It would give liberty to the courts to determine whatever it wishes as being opposed to public policy. Thus, it is authoritatively held that the Courts cannot invent a new head of public policy.[50]

Thus, the courts have to gauge all the circumstances before terming anything as so opposed. Like, agreements injuring the public service are usually considered to be opposed to public policy. Such agreement is opposed to the aspect of public good.[51]

Examples

In a peculiar case, the State government entered into a contract with a company. The terms were to lease certain areas for that company and exclude those from the limits of the municipality. The court straight away held the same to be against the public policy since the element of the public good is clearly been involved. [52]

Similarly, there was an agreement among the parties where one was supposed to influence the minister. Such form of the agreement was held against public policy. In this case, the court gave the reason that it tends to corrupt the decision making business and machinery.[53] To use the position of influence so as to obtain money or valuable consideration is anyway considered to be against the public policy.[54]

But acts such as subletting do not become opposed to public policy. They are valid under the regime of law.[55] On the other hand, acts such as stifling the prosecution and taking of money by the prosecutor to stop the criminal proceedings would make the agreement opposed to public policy.[56]

6. Immoral

Morality is a term can be as wide as the ocean. The statute provides for what the court considers to be immoral. Thus, a level of uncertainty also arises with it.

Approach to be followed by Court

Hence, the courts throughout the history of common law have tried to restrict this ever-burgeoning concept. A contract contra bonos mores is illegal, with regards to morality; the courts do not go far and concerns only with what is sexually reprehensible.[57]

However, it is open to the court to reject a claim that is tainted with immoral consideration.[58] In such situations, the courts have to consider all the circumstances of a case for deciding whether the plaintiff is entitled to any relief or right or not.[59]

Examples

The best example of an immoral consideration is that of a past or future cohabitation. Using that to get a sale deed registered in one’s favour has been considered immoral by courts and hence void under §6(h) of the Transfer of Property Act along with § 23 of the Indian Contract Act.[60]

The transfer of house would also be void on the ground s of immorality if the consideration would be of opening a brothel.[61] In such a situation, the parties who were not in pari delicto can sue for ejectment.[62]

VI. Conclusion

The discussion so mentioned above shows in the absence of the unlawful elements from the contract, the agreement would definitely be lawful. Pactis Privatorium Juris Publico Non Deragatur is a universally applicable maxim that a private contract cannot supersede the law.[63]

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[1] §185, Indian Contract Act, 1872.

[2] 1 PC Markanda, The Law of Contract 89 (Wadhwa and Company 1^st edn 2006).

[3] Surana Commercial Co. v. FCI, (1996) (4) Andh LD 732.

[4] Bryan A. Garner, Black’s Law Dictionary 300 (7^th edn)..

[5] Abdul Kader v. Tripura State Bank Ltd., AIR 1953 Tri 10.

[6] §2(d), Indian Contract Act, 1872.

[7] Sonia Bhatia v. the State of U.P., (1981) 2 SCC 585.

[8] Chidambara Iyer v. P.S. Renga Iyer, (1965) 2 SCJ 469.

[9] 1 Chitty on Contracts, 28^th Edn., ¶ 3.021, p. 179- 180.

[10] Sri Manadeo Ji v. Baldeo Prasad, AIR 1943 Oudh 89.

[11] Principles of the English Law of Contract, 1967Edn, p. 100.

[12] Abdul Kader v. Tripura State Bank Ltd., AIR 1953 Tri 10.

[13] Ramachandra Ramavallabh v. Gomtibai, AIR 1926 Bom 82.

[14] Bhoori v. Thakur Gulab Singh, AIR 1958 Raj 10.

[15] Ishwar Dayal Hingwasia v. Municipal Board, Rath, AIR 1980 All 148.

[16] §23, Indian Contract Act, 1872.

[17] Abdul Majid Khan v. Beni Khan, AIR 1938 Oudh 24.

[18] Sohan Lal v. Raghubir Sahai, AIR 1930 All 118.

[19] Putto Lal v. Samersinghji, AIR 1963 Raj 63.

[20] Gauri Dutt Pandey v. Bandhu Pandey, AIR 1929 All 394.

[21] Waman Shriniwas Kini v. Ratilal Bhagwandas and Co., AIR 1959 SC 689.

[22] A.R.L.P. Firm v. U. Po Kyaing, AIR 1939 Rang 305.

[23] Abdul Hameed v. Mohammed Ishaq, AIR 1975 All 166.

[24] Balkrishnan v. Babu, 1994 (1) Ker LJ 904.

[25] Anson’s Law of Contract, 19^th Edn, p. 206.

[26] Id.

[27] Nutan Kumar v. IInd Additional District Judge, AIR 1994 All 298.

[28] Jayamma v. Maria Bai, AIR 2004 SC 3957.

[29] Rakurti Manikyam v. Medidi Satyanarayanan, AIR 1972 AP 367.

[30] Jaikishan v. L. Kanoria & Ors., AIR 1974 SC 1579.

[31] Madan Mohan v. Ra Chander Rao, AIR 1935 All 619.

[32] Neminath Appayya Hanamannanavar v. Jamboorao Satappa Kocheri, AIR 1966 Mys 154.

[33] U.P. Electric Supply Co. Ltd. v. H.V. Bowen, AIR 1968 All 95.

[34] Shakuntala Yadav v. Yadwinder Singh, 1998 (3) RCR 98 (P&H).

[35] Chagan Lal v. Kashi Ram, AIR 1923 Nag 76.

[36] Universal Plast Ltd. v. Santosh Kumar Gupta, AIR 1985 Del 383.

[37] Mushtaq Ali Beg v. Jwala Shanker Sahai, AIR 1930 All 372.

[38] Ganesa Naicken v. Arumugha Naicken, AIR 1954 Mad 811 (DB).

[39] Atumal Ramoomal v. Dipchand Kessumal, AIR 1939 Sind 33.

[40] Bansi Dhar v. Ajudhia Prasad, AIR 1925 Oudh 120.

[41] Kedar Nath motani v. Prahalad Rai, AIR 1960 SC 213.

[42] Kailash Narain v. Mahila Manbhota, AIR 1996 MP 194.

[43] Ramalinga Padayachi v. Natesa Padayachi, AIR 1967 Mad 461.

[44] Gherulal Pathak v. Mahadeodas Maiya, AIR 1959 SC 781.

[45] 1 PC Markanda, The Law of Contract 501 (Wadhwa and Company 1^st edn 2006).

[46] Winfield, Essay on Public Policy in the English Common Law 42 Harvard Law Policy 76.

[47] Pendleton v. Greever, 17 ALR 317.

[48] State of West Bengal v. Kailash Chandra Kapur, AIR 1963 HP 3.

[49] S.R. Nayak v. Union of India, AIR 1991 SC 1420.

[50] Bhagwant Genuji Girme v. Gangabisan Ramgopal, AIR 1940 Bom 369.

[51] Venkatareddi v. Venkatachalam, AIR 1964 AP 465.

[52] Associated Cement Companies Ltd. v. the State of Rajasthan, AIR 1981 Raj 133.

[53] Ratanchand Hirachand v. Askar Nawaz Jung, AIR 1972 AP 112.

[54] Montesfoire v. Menday Motor Components Co. Ltd., (1918) 2 KB 241.

[55] Mohar Singh v. Deen Dayal Gupta, 1996 (3) DRJ 760.

[56] Ouseph Poulo v. Catholic Union Bank Ltd., AIR 1965 SC 166.

[57] Cheshire & Fifoot, Law of Contracts 279 (3^rd Edn).

[58] Lakshmiayya v. Murahari, AIR 1930 Mad 647.

[59] Kamarbai v. Badrinarayan, AIR 1977 Bom 228.

[60] Sabava Yelappa v. Yamanappa Sbu, AIR 1933 Bom 209.

[61] Pranballow Saha v. Tulsibala Dassi, AIR 1958 Cal 713.

[62] Id.

[63] T.R. Desai et. al., The Law Relating to Tenders and Government Contracts 167 (Universal Book Agency Allahabad, 2000).

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