Lawful Object and Consideration under Section 23 of the Indian Contract Act, 1872: The Doctrine of Public Policy, Its Heads, Section 24 and Severability, and the Maxims In Pari Delicto and Ex Turpi Causa

Section 23 is the provision through which the general law refuses its assistance to bargains it disapproves of. Five of its six heads are reasonably definite. The sixth, public policy, is committed expressly to the Court's view and has generated a doctrine of its own, with recognised heads, a long-running argument about whether new heads may be created, and two Latin maxims that govern what happens to the parties once the agreement has been condemned. This topic concentrates on the doctrine of public policy, its heads, and the consequences; the treatment of unlawfulness as it affects consideration specifically, and severance under Section 24, are developed in the companion topic.

1. The Provision

1.1 Object and consideration

The section names both, and they are distinct. The consideration is what moves from one party in return for the other's promise. The object is the purpose the transaction is designed to achieve. An agreement is void if either is unlawful, so a loan of money, which is perfectly lawful consideration, is void where it is advanced for a forbidden purpose. Motive is a third thing and is outside the section altogether: a sale is not unlawful because the seller intends to spend the price disreputably.

The six heads, and what public policy has been held to cover

2. The First Five Heads

1. Forbidden by law. The act constituting the consideration or object is prohibited by statute or by a rule having statutory force. Prohibition may be express or may be inferred from a penalty, and the question in the second case is whether the legislature intended to prevent the act or merely to charge for it.
2. Defeating the provisions of any law. The agreement is not itself prohibited, but its performance would necessarily entail transgressing a statutory scheme, as with an arrangement to transfer a licence the governing statute makes personal.
3. Fraudulent. The object is to deceive a third person, as in an agreement to conceal assets from creditors or to divide the proceeds of a fraud.
4. Injury to the person or property of another. Agreements to assault, to damage property, or to bind a person to personal service without wages until a debt is discharged, which imposes an unreasonable restraint on liberty.
5. Immoral. Confined by the courts largely to sexual immorality and to interference with the marital relationship, because a wider reading would turn Section 23 into a general moral supervision of bargains.

3. The Doctrine of Public Policy

Public policy is the only head whose content the Act leaves to the courts, and the authorities have long been divided on how freely it may be developed. The familiar metaphor is that public policy is an unruly horse, and the counter-metaphor is that a good rider can keep it under control.

3.1 The two positions

• The restrictive view. In Gherulal Parakh v. Mahadeodas Maiya, AIR 1959 SC 781 the Supreme Court held that the heads of public policy are well settled, that the doctrine should be invoked only in clear and incontestable cases of harm to the public, and that courts should be slow to create new heads. The reasoning is that judges are not well placed to decide what the public interest requires, and that certainty in commerce is itself a public good.
• The expansive view. In Rattan Chand Hira Chand v. Askar Nawaz Jung, (1991) 3 SCC 67 the Court held that the category is not closed, that its content must reflect prevailing social and economic conditions, and that the courts are not powerless to strike down a transaction whose harm to the public is demonstrable. Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly, (1986) 3 SCC 156 is the fullest application of this approach, holding an unconscionable term imposed through grossly unequal bargaining power void under Section 23.

The working position is that the recognised heads are applied as settled law, while a new head will be recognised only where the harm to the public is clear and the case cannot be accommodated within an existing category.

4. The Recognised Heads of Public Policy

4.1 Trading with the enemy

An agreement with an alien enemy made during hostilities is void, because performance would supply the enemy with resources. Contracts made before the war are dissolved where performance would involve intercourse with the enemy and suspended where it would not.

4.2 Stifling prosecution

An agreement not to prosecute, or to withdraw a prosecution, for a non-compoundable offence is void. The principle is that the right to prosecute for a public offence belongs to the State and is not a commodity the complainant may sell. Where the offence is compoundable under the criminal procedure law, a compromise is expressly permitted and the agreement is lawful.

4.3 Maintenance and champerty

Maintenance is the support of litigation by a stranger who has no interest in it. Champerty is maintenance in return for a share of the proceeds. In England both were unlawful; in India the position is materially different and more permissive.

The exception is the legal practitioner. An advocate who stipulates for a share of the subject matter of the litigation acts contrary to professional conduct rules made under the Advocates Act, 1961, and such an agreement is opposed to public policy.

4.4 Marriage brokerage agreements

An agreement to procure a marriage for reward is void. The objection is that marriage should proceed from the free choice of the parties and not from a commercial transaction between intermediaries. Agreements to pay a sum to a parent or guardian in consideration of giving a child in marriage fall within this head, as do arrangements for the payment of dowry, which are separately prohibited by the Dowry Prohibition Act, 1961.

4.5 Trafficking in public offices

Agreements for the sale of a public office, for the procurement of a public appointment or a title for reward, or for the payment of money to procure a government contract or licence through influence, are void. Two reasons are given: the public is entitled to the disinterested service of those who hold office, and appointments should be made on merit. Rattan Chand Hira Chand applied this head to an arrangement that included an undertaking to use influence to procure a favourable government decision.

4.6 Interference with the administration of justice

• Agreements to obstruct or delay the course of justice, or to influence a judge or a public officer exercising judicial functions.
• Agreements not to appear or to give false evidence, and agreements to indemnify a person against the consequences of a criminal act.
• Agreements ousting the jurisdiction of all courts, which are separately dealt with by Section 28, and agreements to refer matters to a body that has no lawful authority to determine them.

4.7 Agreements to commit a crime or a tort

An agreement to commit an offence, or to indemnify a person for committing one, is void under the head of public policy and also as forbidden by law. An agreement to commit a tort against a third party is similarly void as involving injury to the person or property of another. An indemnity against the consequences of an act innocently done, which afterwards turns out to be tortious, stands differently and is enforceable.

5. Section 24 and Severability

Section 24 provides that 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 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, and where striking out the offending part would not rewrite the bargain the parties made.

6. In Pari Delicto and Ex Turpi Causa

Two maxims govern what happens between the parties once the agreement is condemned. Ex turpi causa non oritur actio means that no action arises from a base cause: a court will not assist a plaintiff whose claim is founded on his own illegality. In pari delicto potior est conditio defendentis means that where both are equally at fault, the position of the defendant is the stronger: the loss lies where it falls, and the court refuses to intervene for either.

7. The Position Stated Shortly

1. Section 23 renders an agreement void if either its consideration or its object falls within one of six heads; motive is outside the section.
2. The first five heads are forbidden by law, defeating the provisions of any law, fraudulent, involving injury to person or property, and immoral.
3. Public policy is committed to the Court's view, and the authorities are divided between the restrictive approach in Gherulal Parakh and the expansive approach in Rattan Chand Hira Chand.
4. The recognised heads include trading with the enemy, stifling prosecution, maintenance and champerty, marriage brokerage, trafficking in public offices, interference with the administration of justice, and agreements to commit a crime or tort.
5. V. Narasimha Raju: an agreement to stifle a prosecution for a non-compoundable offence is void; a compromise of a compoundable offence is not.
6. Ram Coomar Coondoo: champerty is not per se unlawful in India, and the test is whether the bargain is extortionate or made for an improper object.
7. An advocate stipulating for a share of the subject matter of the litigation is an exception, such an agreement being opposed to public policy.
8. Section 24 voids the whole agreement where any part of a single consideration is unlawful, and severance requires distinct and separable considerations.
9. Ex turpi causa and in pari delicto deny relief, subject to the exceptions for unequal fault, timely repentance, an independent title, and protective statutes.

8. Related Topics and Provisions