Consideration of Contract & Legality of Object - Contract, Business Law | Business Law - B Com PDF Download

Introduction

• The phrase "No polluted hand shall touch the pure fountains of justice" emphasizes the importance of purity and integrity in the pursuit of justice.
• Section 23 of the Indian Contract Act, 1872, addresses three key aspects of an agreement: consideration, object, and the essence of the agreement. This section restricts an individual's freedom to enter into agreements by prioritizing public policy and other stipulated provisions. It is important to note that the term "object" in this context refers to the "purpose" of the agreement, not its significance in relation to consideration.
• Even if the consideration of an agreement is legal and genuine, the agreement can still be unlawful if its purpose is illicit. Section 23 guides the courts to focus on the object of the transaction rather than the motives behind it, as seen in Section 264.

Difference Between Agreement and Contract

The following points are important and significant regarding the difference between contract and agreement is concerned:

Agreements:

• Guarantees and commitments forming consideration for the parties to a similar assent are known as an agreement.
• The definition of the agreement is characterized in Section 2 (e).
• Each agreement isn’t a a contract.
• The agreement doesn’t legitimately head or bound any party for the exhibition of contract.
• The extent of the agreement is more extensive than a contract since it covers a wide range of agreement just as a contract.

Contracts:

• The agreement, which is lawfully enforceable is known as a contract.
• The definition contract is characterized in Section 2 (h) of the Indian Contract Act, 1872.
• Each contract is an agreement.
• In the contract, the individuals are undoubtedly bound to execute their part.
• The extent of a contract is moderately smaller than an agreement since it covers just those agreements which have lawful enforceability.

Essentials of Valid Consideration

Definition of Consideration:

• Consideration refers to an act, forbearance, or promise that is done at the request of the promisor.
• It can be provided by the promisee or any other individual.
• Consideration is essential for the validity of a contract.

Lawful Consideration:

• According to Section 23 of the Indian Contract Act, 1872, the consideration or object of an agreement is lawful unless it falls under specific categories.
• Consideration is unlawful if it is prohibited by law, immoral, or against public policy.

Practical Definition of Consideration:

• The definition of consideration in Section 2(d) is practical and avoids the complexities of other theories.
• It emphasizes that any act or forbearance done at the promisor's request is sufficient consideration.

Acts Done at the Request of the Promisor:

• An act is considered good consideration for a promise if it is done at the request of the promisor, regardless of its utility to him.
• Example: In the case of Kedar Nath v. Gorie Mohamed, the court held that the defendant was liable for his promise even though he did not benefit from it.

Promisee or Any Other Individual:

• Consideration can be provided by the promisee or any other individual.
• It is not necessary for the consideration to come from the promisee alone.
• This principle is based on English common law, as established in the case of Dutton v. Poole.

Example of Dutton v. Poole:

• In Dutton v. Poole, a father promised his daughter £1,000 if he refrained from selling a portion of wood.
• The son, the defendant, promised to pay the daughter but failed to do so.
• The court held that the father provided consideration for the promise, and the daughter was entitled to the £1,000.

Position of Beneficiary who isn’t a Party

In the case discussed, it was clear that the agreement aimed to benefit the plaintiff. Allowing one party to keep the wood while denying the other would have been unfair, so the responsible party was held liable.

Key Principles from English Law

• Consideration: Consideration must come from the promisee alone, regardless of the circumstances. If someone else provides it, the promisee becomes a stranger to the consideration and cannot enforce the promise.
• Enforcement of Agreement: An agreement cannot be enforced by someone who is not a party to it, even if it is made for their benefit. They are considered an outsider to the agreement and have no rights under it.

Case Background: Tweedle v. Atkinson

• The recommendations mentioned above were established in the case of Tweedle v. Atkinson, which introduced the concept of "privity of contract." This means that a contract is only between the parties involved, and no third party can sue on it, even if they stand to gain from it.
• Legal Principle: Whitman J. regarded it as a settled principle that “no stranger to the consideration can take advantage of a contract, even if it is made for his benefit.” This principle was upheld by the House of Lords in the case of Dunlop Pneumatic Tire Co. v. Selfridge and Co.

Case Details: Dunlop Pneumatic Tire Co. v. Selfridge and Co.

• The plaintiffs, Dunlop and Co., sold certain goods to Dew and Co. and secured an agreement from them not to sell the goods below a specified price. They also required Dew and Co. to impose the same price restriction on any subsequent sales to other dealers.
• Breach of Agreement: Dew and Co. sold the tires to the defendants, Selfridge and Co., who agreed not to sell the tires to any retail customers at prices lower than the specified list prices.
• Legal Action: The plaintiffs sued the defendants for breaching the agreement.
• Court Ruling: The court held that, even if the plaintiffs were undisclosed principals, no consideration moved from them to the defendants. Therefore, the agreement was unenforceable by the plaintiffs.

Privity of Consideration in India

• In India, the principles mentioned earlier do not apply. According to the clear language of Section 2(d), it is not necessary for the consideration to come from the promisee. A promise is enforceable as long as there is consideration, regardless of whether it comes from the promisee or someone else.
• Case Example: Chinnaya v. Ramayya
• In the case of Chinnaya v. Ramayya, an old woman gifted certain property to her daughter, the defendant, through a deed of gift. The deed stipulated that an annuity of Rs. 653 should be paid annually to the plaintiff, the sister of the old woman.
• Defendant’s Promise: The defendant executed an understanding (Iqrarnama) promising to fulfill the stipulation in favor of the plaintiff. However, the annuity was not paid, and the plaintiff sued to recover it.
• Legal Argument: The defendant argued that the consideration for her promise was provided by the gift from the old woman to her, and therefore, the plaintiff had provided no consideration for the promise.
• Court’s Decision: The court ruled in favor of the plaintiff, stating that consideration can be provided by “some other individual” and is equally valid. The court compared the case to Dutton v. Poole, concluding that the defendant’s promise was causing a loss to the plaintiff, which constituted sufficient consideration.
• Legal Principle: The case established that a promise causing loss to the promisee is sufficient consideration, and the plaintiff had provided consideration in this instance.

Unlawful Agreements

• In Bovard v. American Horse Enterprises (1988), the California Court of Appeal for the Third District declined to enforce an agreement involving promissory notes for the purchase of a company that produced drugs and similar products. Although the items sold were not illegal, the court rejected the agreement due to public policy concerns.
• In Canada,. notable case illustrating unenforceability due to unlawfulness is Royal Bank of Canada v. Newell. In this case, a woman forged her husband's signature on 40 cheques totaling over $58,000 without his consent. To protect her from legal action, her husband signed a letter agreeing to take on all responsibility for the forged cheques. However, the court deemed the agreement unenforceable because its primary purpose was to evade criminal prosecution.

As a result of the agreement's unlawfulness and void status, the bank was required to refund the payments made by the husband.

Object and Consideration

• Forbidden by Law. When the object or consideration of an agreement is prohibited by law, they become unlawful in nature. This means such an agreement cannot be valid or substantial anymore. Unlawful consideration or object includes acts that are explicitly punishable by law or forbidden by regulations.
• The term “forbidden by law” is not the same as “void.” It is not necessary that something void is also illegal by law. This distinction was upheld by the Supreme Court in Gherulal Parakh v. Mahadeodas.
• The word “immoral” is broad and encompasses various aspects of life, from personal conduct to general standards of living. What is considered immoral can vary based on time, place, and cultural context. The Supreme Court emphasized that this concept should be understood in a limited sense, similar to public policy.
• The word “law” in Section 23(1) refers to law enacted by the government, and it is not permissible to involve an agreement prohibited by law to claim based on such an agreement. Whether a particular contract is prohibited by an Act or tends to violate its provisions is a matter of interpretation of the Act.

Violation of Licenses and Provisions

• If a provision regarding violation of licenses is not stipulated in the concerned Act, then it will not be considered illegal or illegitimate. For example, if ‘A’ obtains a permit from the Forest Department to cut grass in a specific area, and the authorities inform him that he cannot transfer this right to someone else, but the Forest Act does not have such a provision, ‘A’ can still legally transfer his right to ‘B’.

Assignment of Copyright

• According to Section 18 of the Copyright Act, 1957, the owner of the copyright for a work has the right to assign their copyright to another individual. This means that the assignee becomes entitled to all the rights associated with the copyright of the assigned work. However, simply granting the right to publish, distribute, and sell the copyrighted work does not constitute an assignment of copyright; it is considered a publishing right.

Qualification for Privileges

• If the person chosen for copyright assignment qualifies for any privilege involved in the copyright, they will be treated as the copyright owner regarding those rights.
• The assignor will be treated as the copyright owner for unassigned rights.
• The legal representatives of the assignee will be entitled to the benefits of the assignment if the trustee passes away before the work is completed.

Case Study: Video Master v. Nishi Production

• The Bombay High Court examined whether the assignment of video rights included the right of satellite broadcast.
• The court acknowledged that there are different methods of public communication, such as TV broadcasting, satellite communication, and video TV.
• The film owner has separate copyright in each mode and can assign them to different parties.
• Therefore, satellite broadcast copyright is a separate right from video copyright.

Method of Assignment

• According to Section 19 of the Copyright Act, 1957, assignment of copyright is valid only if it is in writing and signed by the assignor or their authorized agent.
• If the time of assignment is not mentioned, it will be considered as five years from the date of assignment.
• If the territorial extent of the assignment is not specified, it will be applicable throughout India.

Restrictions on Assignment

• Section 19(8) states that assignment of copyright against the terms and conditions of rights assigned to a copyright society is void.
• Section 19(9) and Section 19(10) clarify that assignment of copyright for making cinematograph films or sound recordings does not affect the creator's right to claim a share of royalties and consideration for the use of their work.

Future Works

• In Saregama India Ltd v. Suresh Jindal, it was established that the copyright owner of a future work can assign the copyright to anyone, either wholly or partially.
• Once the copyright assignment is made, the assignee is treated as the copyright owner for the purposes of the Act.

Defeat any law

• The phrase "if allowed, it would defeat the provisions of law" in Section 23 refers to agreements that violate legal provisions.
• The principle of modus et conventio vincunt legem allows parties to determine their rights and liabilities within legal boundaries.
• Agreements are void if their purpose involves illegal acts, if they are explicitly or implicitly prohibited by law, or if their performance requires legal violations.

Distinction between Void and Illegal Agreements

• Void agreements have no legal effect, while illegal agreements are prohibited by law.
• Courts may enforce collateral agreements that are not forbidden by law, even if they are part of a void agreement.
• Parties entering illegal agreements may sue for damages if they are innocent of wrongdoing.

Example from Case Law

• In Rajat Kumar Rath v. Administration of India, the Orissa High Court explained that void agreements have no legal impact.
• Collateral agreements related to void agreements may be enforced if they are not prohibited by law.
• However, agreements that are part of illegal schemes are invalid.

Injury to Person or Property of Another

As per Section 23 of the Indian Contract Act, an agreement that involves causing harm to an individual or the property of a third party is considered void. Such agreements cannot be enforced by the court, and therefore, no legal action can be taken for breaching such an unlawful agreement.

Fraudulent

‘Pari delicto est conditio defendentis’

• The Hon'ble Supreme Court of India, in several decisions, has recognized exceptions to the rule that a party cannot benefit from an unlawful agreement they entered into.
• The court referred to Anson's observations, stating that there are rare cases where a person is relieved from the consequences of an unlawful agreement, and these cases do not apply the maxim.
• The exceptions fall into three categories:
• Where the unlawful purpose has been substantially carried out before the attempt to recover money or goods related to it;
• Where the plaintiff is not in pari delicto (equally at fault) with the defendant;
• Where the plaintiff does not rely on the illegality or unlawfulness to support their case.

Immoral Interference in Marital Relations/ Immorality According to Law

• An object or consideration is deemed immoral if the court finds it to be so. For example, if 'A' lends money to 'B' to facilitate her divorce from 'C', with the agreement that 'A' will marry 'B' after the divorce, the court may rule that 'A' cannot recover the money from 'B' because the agreement is void due to immoral consideration.

Public Policy in Contracts

• Definition and Context: Public policy refers to the principles and standards that are considered beneficial for the public and society as a whole. It is a key concept in determining the legality and enforceability of certain contracts.
• Contracts and Public Policy: Contracts that are formed with an illegal or harmful objective cannot be enforced. The term "public policy" is not explicitly defined in legal texts, but it generally pertains to issues that affect the public interest and welfare.
• Ambiguity of Public Policy: The concept of public policy is ambiguous and can be interpreted in various ways. It may relate to political practicality or the overall well-being of the community. Different individuals may have different opinions on what constitutes public policy based on their experiences and perspectives.
• Judicial Interpretation: Courts play a crucial role in interpreting public policy. The Hon’ble Supreme Court of India has emphasized that public policy is a flexible concept that can adapt to changing circumstances. It has been described as a "deceitful guide" or an "unruly horse," indicating its unpredictable nature.
• Harmful Tendencies: Public policy is not only concerned with harmful effects but also with harmful tendencies. This means that actions that may not have immediate harmful effects but pose a potential threat to public welfare can be scrutinized under public policy.
• Judicial Precedents: Judicial precedents play a significant role in shaping the understanding of public policy. Courts rely on past rulings to determine whether a particular action or contract violates public policy. For example, in the case of Gherulal Parakh v. Mahadevdas Maiya, public policy was described as a guiding principle that can vary based on societal norms and values.
• Kedar Nath Motani v. Prahlad Rai Case: In this case, the court highlighted the importance of assessing the severity of illegality in a contract. If the illegality is trivial, the court may not consider it a valid reason to invalidate the contract. Conversely, if the illegality is fundamental to the case, it can bar the plaintiff from pursuing legal action.
• ONGC Ltd. v. Saw Pipes Ltd. Case: The Supreme Court emphasized that the concept of public policy is not rigid and can vary over time. What is considered beneficial or harmful to the public interest can change, and courts must adapt their interpretations accordingly.
• Central Inland Water Transport Corporation Limited v. Brojo Nath Ganguly Case: This case further reinforced the idea that public policy is dynamic. Awards that may seem to violate statutory provisions cannot be automatically deemed against public policy. Courts must assess the impact on justice and public interest when evaluating such awards.
• Grounds for Setting Aside Awards: Courts can set aside awards if they violate fundamental principles of Indian law, public interest, or justice. Awards that are grossly unfair or shock the court's conscience can also be annulled, even if the illegality is minor.

Agreements Against Public Policy

• Trading with the Enemy: Entering into a contract with an individual from a nation at war with India renders the agreement void. For example, a broker striking a deal with a Pakistani national during the Kargil conflict.
• Smothering Prosecution: This involves interfering with the normal course of law, making such agreements invalid. For instance, if person A agrees to sell land to person B on the condition that B does not pursue criminal charges against him.
• Maintenance and Champerty: Maintenance refers to an agreement where one party agrees to support a lawsuit in which they have no personal interest. Champerty involves agreeing to assist another party in a lawsuit in exchange for a portion of the damages or compensation.
• An Agreement to Traffic in Public Offices: This refers to contracts that involve the illegal trade or manipulation of public office positions.
• Agreements to Create Monopolies: Contracts aimed at establishing monopolistic practices are considered against public policy.
• A Consent to Arrange Marriages for Compensation: Agreements to broker marriages for monetary rewards are deemed invalid.
• Interfering with the Courts: Agreements intended to induce judicial or state authorities to act corruptly and disrupt lawful procedures are void.

Conclusion

• This article covered the legality of objects and consideration under the law of contracts. To avoid legal issues in the future, parties must establish a clear value for specific goods, services, or job performance when entering into an agreement. Consideration is what legally binds a contract, protecting both parties from potential claims or misunderstandings.
• Additionally, consideration often includes a clause that determines liability in case of a breach. Having a contract that clearly outlines this information helps the court determine where the breach occurred, who is at fault, and what penalties should be imposed. The full proof rule prevents the introduction of external evidence that could alter the terms of a contract in any way. Security contracts allow parties to make extensions to basic agreements.