Lawful and Unlawful Consideration under Sections 23 and 24 of the Indian Contract Act, 1872: The Six Heads of Unlawfulness and the Rule Against Severance

Section 10 requires a contract to be made for a lawful consideration as well as with a lawful object. Section 23 then tells us when consideration is unlawful, and Section 24 tells us what happens when only part of it is. The two sections are usually studied together with the law on illegal agreements, but they repay separate attention on one point: consideration and object are distinct, and an agreement fails if either is unlawful. This topic takes the six heads as they apply to consideration, works through severance under Section 24, and sets out the consequences for the parties.

1. The Statutory Scheme

Three features of Section 23 govern its operation. It applies to the consideration or object, so unlawfulness in either is fatal. The heads are stated disjunctively, so an agreement falling within any one of them is void. And the last two heads, immorality and public policy, are expressly committed to the Court's view, which is why they have developed judicially while the first four have been applied as questions of construction.

2. Consideration and Object Distinguished

The section speaks of both, and they are different things. The consideration is what moves from one party in return for the other's promise. The object is the purpose the transaction is intended to achieve. An agreement may have a perfectly lawful consideration and an unlawful object, or the reverse, and in either case it is void.

• Lawful consideration, unlawful object. A loan of money, which is lawful consideration, advanced for the purpose of enabling the borrower to do something forbidden by law.
• Unlawful consideration, lawful object. A promise to procure an unlawful advantage, given in return for a payment which is itself an ordinary lawful payment.
• Both unlawful. An agreement to divide the proceeds of a fraud, where each party's promise and the purpose of the whole are equally tainted.

2.1 Object is not motive

Section 23 is directed at the object of the agreement, meaning the purpose the transaction sets out to achieve on its own terms, and not at the private motive that led a party to enter into it. A sale of goods is not unlawful because the seller intends to spend the price disreputably, and a loan is not unlawful because the lender's motive is to gain influence over the borrower. The inquiry is into the transaction, not into the state of mind behind it.

3. The Six Heads Applied

3.1 Forbidden by law

The consideration is forbidden where a statute prohibits the act that constitutes it. Prohibition may be express, or may be inferred from the imposition of a penalty; the question in the second case is whether the legislature intended to prevent the act altogether or merely to impose a charge on doing it. The word law covers statutes, and also rules and orders made under statutory authority, which are law within the meaning of Article 13 of the Constitution.

3.2 Defeating the provisions of any law

This head catches the agreement that is not itself prohibited but whose performance would necessarily entail transgressing a statutory scheme. Agreements to transfer a licence that the governing statute makes personal, or to evade a statutory restriction by an indirect route, fall here. The words 'if permitted, it would defeat' require the court to look at what performance would actually involve, and not merely at the form of the bargain.

3.3 Fraudulent

The consideration is fraudulent where it consists in the doing of something intended to deceive a third person. Agreements to conceal assets from creditors, to divide the proceeds of a fraud, or to procure a document that will mislead a public authority are of this kind.

3.4 Injury to the person or property of another

3.5 Immoral

The courts have kept this head narrow, confining it largely to sexual immorality and to interference with the marital relationship. The reason for the restraint is that a wide reading would convert Section 23 into a general moral supervision of bargains, which is not what the section was intended to achieve. Agreements for future cohabitation outside marriage, and agreements to procure a separation between spouses, fall within it.

3.6 Opposed to public policy

This is the widest head and the only one whose content has been left to judicial development. The recognised categories include trading with an enemy, stifling a prosecution, maintenance and champerty in their objectionable forms, trafficking in public office, agreements interfering with the course of justice, marriage brokerage, and agreements in unreasonable restraint of personal liberty. On how freely new heads may be created, the authorities pull in two directions: Gherulal Parakh v. Mahadeodas Maiya, AIR 1959 SC 781 counsels that the doctrine be invoked only in clear and incontestable cases of harm to the public, while Rattan Chand Hira Chand v. Askar Nawaz Jung, (1991) 3 SCC 67 confirms that the category is not closed and must reflect prevailing social and economic conditions.

4. Section 24: Partial Unlawfulness and Severance

Section 24 states an unforgiving rule. If any part of a single consideration for one or more objects, or any one or any part of any one of several considerations for a single object, is unlawful, the whole agreement is void. There is no general power to enforce the lawful residue.

Severance is possible only in the narrow case where the lawful and unlawful parts rest on distinct and separable considerations, so that the lawful promise can stand on its own without drawing support from the unlawful one. Three tests are applied in practice.

1. Is the consideration single and entire, or divisible? Where one undivided sum or one undivided promise covers both elements, as in Alice Mary Hill, it is single and the whole fails.
2. Can the lawful promise be enforced without relying on the unlawful part? If the claimant must plead the tainted element to make out his case, severance is impossible.
3. Would severance rewrite the bargain? The court may strike out; it may not supply. Where removing the unlawful part would leave a contract materially different from the one the parties made, the whole falls.

5. Consequences of Unlawful Consideration

• The agreement is void. No right arises under it at any stage, and neither party may sue on it. Part performance does not cure the defect.
• Money paid is ordinarily irrecoverable, because the claimant would have to found his case on the unlawful transaction. The recognised departures are where the parties are not in pari delicto, where the claimant repents before the unlawful purpose is substantially carried out, and where he can make out his title without relying on the transaction at all.
• Collateral transactions are tainted where the unlawfulness amounts to illegality, which distinguishes this class from agreements that are merely void.
• An arbitration clause contained in the agreement falls with it, since a clause in a void agreement has nothing to attach to.
• The court may act of its own motion. Unlawfulness goes to the existence of the cause of action, and a court that sees it on the material before it will not enforce the agreement even if neither party has pleaded the point.

6. The Position Stated Shortly

1. Section 10 requires lawful consideration as well as a lawful object, and Section 23 states when either is unlawful.
2. The six heads are: forbidden by law; defeating the provisions of any law; fraudulent; involving injury to person or property; immoral; opposed to public policy.
3. Consideration and object are distinct, and unlawfulness in either voids the agreement.
4. Section 23 looks at the object of the transaction, not at the motive of a party.
5. Ram Sarup v. Bansi Mandar: a bond requiring personal service without wages until a debt is repaid is an unreasonable restraint on liberty and unlawful.
6. Alice Mary Hill v. William Clarke: where a single consideration is partly immoral and indivisible, Section 24 voids the whole agreement.
7. Severance is possible only where the lawful and unlawful parts rest on distinct and separable considerations.
8. Gherulal Parakh counsels restraint in extending public policy; Rattan Chand Hira Chand confirms the category is not closed.
9. The consequences are voidness, irrecoverability of money paid subject to three exceptions, tainting of collateral transactions where there is illegality, and the fall of any arbitration clause.

7. Related Topics and Provisions