Illegal & Unlawful Agreements and their effects

Unlawful agreements: Section 23 of the Contract Act lays down a plethora of circumstances wherein the object or consideration of an agreement is unlawful. An agreement hit by Section 23 is void ab initio and thereby in no circumstances enforceable.

Illegal agreements: Illegal agreements are those agreements that are: (i) void, and (ii) punishable by criminal law of the country or by any special legislation/regulation. Such agreements are not enforced by a court of law relying on the principle of er turpi causa. It refers cause of action arising from the transgression of positive laws of a country.

Resultantly, no court will lend its aid to a man who founds his cause of action upon an immoral or illegal act. (Nair Service Society v. KC Alexander)

There are two general principles – First, a contract that is entered into with the object of committing an illegal act is unenforceable. If the intent is mutual, it is not enforceable at all and if it is on part of one party, he cannot enforce the contract. Second, the court will not enforce a contract that is expressly or impliedly prohibited by the statute and it does not matter what the intent of the parties was, the agreement is unenforceable. This classic position has undergone some changes over the course of time. A strict application of the principle of illegality may cause injustice in some cases because of unjust enrichment; henceforth, the courts adopt an approach concerning various factors when it comes to enforcement of these contracts. These factors are:

INTENTION OF PARTIES: The effect of illegality depends upon the intention of the parties at the time of making the contract, to do an act forbidden by law. The rights and remedies will depend upon whether they knew of, or participated in, the illegal intention. While a party who enters into the contract with an unlawful purpose or with the intention to perform the contract unlawfully, he is not entitled to remedies, though remedies may be granted to the party who is innocent of the illegality, as held in Cowan v. Milbourn. Further, if such a party becomes aware of the illegality before the performance, it may refuse to perform the contract. For e.g. If a part who is to furnish a property does not know of the unlawful intention, the contract is voidable at his option when he discovers the other party’s intent. (Pragilal Kanhaiya Lal v. Ratan Lal)

IN PARI DELICTO: The true meaning of the maxim ‘in pari delicto potior est condition posidentis’ is that where circumstances are such that the court will refuse to assist either party, the consequence, must in fact follow that the party in possession should not be disturbed. It must not be understood to mean that where a transaction is vitiated by illegality, the person left in possession of goods after its completion is always and of necessity entitled to keep them. As no person can find a cause of action upon his immoral or illegal act, therefore despite there being a failure of consideration, no claim can lie on restitutionary principles. To put simply the consideration that has flown from the party for execution of an illegal agreement cannot be claimed back in cases of in pari delicto (for equal fault).

POSSIBILITY OF RESTITUTION: However, these are the few exceptions where courts have admitted claims and provided relief to the party, relieving it of the consequences of an illegal agreement. These are:

  1. Where the illegal purpose has not yet been substantially carried out and before it is sought to recover the money paid or goods delivered in furtherance of it (K. T. Mudali v. T. L. Mudali);
  2. Where the plaintiff is not in pari delicto with the defendant (Chettiar v. Chettiar);
  3. Where the plaintiff does not have to rely upon the illegality to make his claim.

COLLATERAL TRANSACTIONS: If an agreement is merely collateral to another or constitutes an aid facilitating the carrying out of the object of the other agreement, though void, is not in itself prohibited, within the meaning of Section 23 or any of the laws in the country, it may be enforced as a collateral agreement. The courts employ severability in dealing with questions of enforcement of such collateral agreements. The question adjudicated upon is whether the illegal or void parts may be separated or severed from the contract and the rest of the contract can be enforced without them. When severable, regardless of illegality being created by statute or by common law, bad parts can be rejected and good ones can be retained. When not severable, the contract is altogether void. This is mandated in terms of Section 24 of the Contract Act. For e.g., in a transaction for the sale of goods supplied in the black market payable by black money, payment for the goods supplied can be enforced because the transaction involved the purchase of goods against the price payable, which was not in itself illegal or opposed to public policy. (Anand Prakash Om Prakash v. Oswal Trading Agency)

Effects of illegal agreements: From the discussion undertaken above, the following points can be drawn out:

  1. The collateral transactions to an illegal agreement also become illegal and hence cannot be enforced.
  2. No action can be taken for the recovery or the money or property transferred under an illegal agreement.

REFERENCES

  • Nair Service Society v. K C Alexander , AIR 1986 SC 1165
  • Cowan v. Milbourn, 1867 LR 2 Ex 230
  • Pragilal Kanhaiya Lal v. Ratan Lal, AIR 1931 All 458
  • K. T. Mudali v. T. L. Mudali, AIR 1953 Mad 545
  • Chettiar v. Chettiar, (1962) 1 All ER 494 (PC)
  • Anand Prakash Om Prakash v. Oswal Trading Agency, AIR 1976 Del 24
  • R. K. Bangia, Law of Contracts
  • NALSAR University of Law, Law of Contracts

Aishwarya Says:

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