This article is written by Puneet Chabra, and further updated by Pruthvi Ramkanta Hegde. This article discusses illegal contracts, especially with reference to the Indian Contract Act of 1872. The article further lays down the consequences of void agreements in comparison with illegal contracts. The article also covers the meaning, the importance of contracts along with important doctrines. The article elaborates on several important judicial precedents with regard to illegal contracts.  

Introduction

Louis D. Brandeis, a famous American lawyer and US Supreme Court justice, once said, “A good agreement in the past meant one person benefited more than the other. Today, a good agreement is when both people gain from it.” This statement shows how our view of contracts has changed.

Every transaction entered by the private parties or government requires a legal recognition, which is enforceable by the court of law for claiming a right. Thus, this legal recognition, which is enforceable in nature, is called a “contract”. A contract, at its core, is a mutual agreement between parties to do or not to do something. Contracts are meant to create trust and mutual benefit in business. 

However, in some situations where the subject matter, purpose, or terms of the agreement violate statutory law or public policy, it might lead to an illegal contract. An illegal contract does not just void the contract; it renders the agreement null and void from the start as if it never existed. If the contract is illegal, the very foundation of the agreement is against the law. This can turn a simple deal into a complex legal issue that will impact every party involved in the contract. There are a lot of situations in which a contract can be illegal. So, the question is, what makes the contract illegal? Which will be answered in this article.

Meaning of a contract

In general, a contract is an agreement that specifically defines the rights of the parties and the performance of an act each party has to fulfil, keeping in view certain boundaries on their behalf. It also acts as evidence where there is a need to prove a claim before the court.

Section 2(h) of the Indian Contract Act 1872 defines the term contract. Accordingly, it states that “an agreement enforceable by law is a contract.” 

This definition prescribes that for an agreement to be considered a contract, it must be legally enforceable. Similarly, if one party fails to perform his duties another party can go to court to make sure agreement is followed. The terms of the agreement must be fair and legally binding. This legal enforceability bifurcates a contract from a simple agreement that may not be binding in a court of law.

Importance of a valid contract

A valid contract is very important for several reasons. It includes:

• A valid contract clearly outlines the rights and obligations of each party. 
• Only valid contracts are enforceable by law; accordingly, if one party fails to fulfil its obligations, the other party can seek legal remedy. 
• A valid contract helps to reduce risks by structuring the terms and conditions of each party. 
• Having a valid contract builds trust between parties.

What makes an agreement a contract

As per Section 10 of the Indian Contract Act 1872, a contract includes certain factors that determine the agreement as a contract. It includes:

• Free consent: The parties involved in the contract must agree to the terms willingly and without any pressure, force, or fraud.
• Competent parties: The parties entering the agreement must be legally capable of doing so. This typically means they are of legal age of 18 years and sound mind, and not disqualified by any law.
• Lawful consideration and object: The agreement must involve something of value that is legal. The purpose of the agreement must also be legal and not against public policy.
• Not expressly void: The agreement should not be one that the law specifically declares as void.

Section 10 prescribes that any existing laws that require specific types of contracts to be written, witnessed, or registered remain valid and must be followed. It ensures that Section 10 does not override these additional formalities for certain contracts.

Illegality in the contract as per the Indian Contract Act, 1872

Every contract must be legally valid and enforceable before law. Some contracts contain certain terms which are against the law, making them illegal contracts.

In general, an illegal contract is an agreement that breaks the law or goes against accepted moral standards. When a contract is illegal, it cannot be enforced in court, and the parties involved may face legal consequences.

Conditions defining an illegal contract under the Indian Contract Act

The term “illegal contract” is not explicitly defined under the Indian Contract Act of 1872. The Act specifies conditions under which contracts are deemed to be unlawful or void. Section 23, of the Act outlines various circumstances under which the consideration or object of an agreement would be unlawful. According to this section, the consideration or object of an agreement is unlawful if it falls under any of these categories

• Forbidden by law: If the agreement involves actions that are explicitly prohibited by law.
• Defeats the provisions of law: If the agreement’s nature is such that, if allowed, it would undermine or defeat the purpose of existing laws.
• Fraudulent: If someone entered into the agreement with the intention to deceive or defraud someone.
• Injurious to others: If the agreement directly or indirectly causes harm to the other person or property of another party.
• Immoral or against public policy: If the agreement is considered immoral by the court or goes against public policy. 

In the English case of Fender vs. St. John Milday (1937), Lord Atkin has expressed the concept of public policy. Accordingly, he stated that public policy is about what is considered good for the community. The determination of public policy is tricky because people have different ideas about this concept. This can lead to confusion because what one person thinks is good for society might not be the same for someone else.

In each of these cases, the consideration or object of the agreement is considered unlawful. Contracts with unlawful considerations or objects are declared void. Such contracts are not legally enforceable. Therefore, Section 23 effectively defines and identifies what constitutes an illegal contract under the Indian Contract Act. While the Act does not use the specific term “illegal contract,” it provides criteria to determine when a contract is unlawful and such contracts are unenforceable.

Scope of the term “law” under Section 23 of Indian Contract Act

The scope of the term “law” under Section 23 of the Indian Contract Act is wider. This section does not provide a specific definition of “law”. It simply states that an agreement is void if it is forbidden by law or defeats the provisions of the law. This confusion leads to the question of how to determine what constitutes “law.” There are certain definitions with regard to “law” that include:

• Article 13(3)(a) states that “law” includes not only formal laws passed by the legislature but also rules, regulations, and customs that have the force of law in India. This broad definition is primarily used to determine if any laws conflict with fundamental rights. 
• Article 366(10) defines “existing law” as any law, ordinance, order, bye-law, rule, or regulation that was in place before the Constitution of India came into effect. It excludes notifications, customs, or usages. This definition is specifically used to understand and interpret the Constitution and applies to laws already in existence when the Constitution started.
• Section 3(29) of the General Clauses Act of 1897 defines “Indian law” to include acts, ordinances, regulations, rules, orders, bye-laws, and other instruments that had legal force either before or after the Constitution began. This broad definition is used for all central laws made after this Act was enacted. However, since the Indian Contract Act of 1872 was created before this Act, this definition is not directly used for interpreting it.

However, Section 23 of the Indian Contract Act is interpreted by looking at judicial decisions and precedents rather than relying strictly on constitutional and other legislative definitions. To understand what makes an agreement illegal or void, courts consider past rulings and legal interpretations specific to contract law. This approach helps to ensure the meaning of “law” under Section 23 of the Indian Contract Act of 1872.

In the case of Union of India vs. L.S.N. Murthy & Another (2011) Honourable Supreme Court has interpreted the term “law” under Section 23 of the Indian Contract Act, of 1872. In this case, the Union of India invited tenders in 1999 to supply fresh fruits to its troops from October 1999 to September 2000. L.S.N. Murthy, one of the respondents, won the tender and began supplying fruits in October 1999. However, he stopped the supply of fruits in June 2000. This led to a rise in fruit prices, and thus, he could not fulfil the purpose of the contract. The petitioner issued a show-cause notice to the respondent, requesting an explanation for certain actions and failures. Since the response from the respondent was not satisfactory, the petitioner cancelled the contract. Petitioner further kept the respondent’s security deposit and also sought to recover additional expenses incurred due to the breach of contract. Later the dispute went to arbitration, where the respondent claimed over twelve lakh rupees, while the Union sought recovery of expenses. The arbitrator ruled in favour of the respondent, awarded him a small sum for the fruits supplied, and ordered the return of his security deposit with interest. The petitioner challenged this decision in the City Civil Court, and the court upheld the arbitrator’s award. Then, the High Court also dismissed the appeal of the Union.

Finally, the Honourable Supreme Court, however, found fault with the arbitrator’s conclusion that the contract was declared void ab initio because it violated a government notification that tenders quoting rates more than 20% below reasonable rates should be rejected. The arbitrator had interpreted this notification as a “law” under Article 13(3)(a) of the Constitution, which would make the contract’s purpose unlawful under Section 23 of the Indian Contract Act. The Honourable Supreme Court disagreed with this interpretation and held that the notification was an internal instruction which does not constitute a law. They emphasised that for a contract to be void under Section 23, it must involve an act that is inherently illegal or directly contravenes an existing law. The court said that an agreement does not automatically become invalid just because it goes against a government instruction. The agreement becomes invalid if following the agreement would mean doing something illegal. Consequently, the Supreme Court set aside the lower court’s decisions and the arbitrator’s award. The court ordered the arbitrator to reconsider the agreement.

Recently, in the case of G.T. Girish vs. Y. Subba Raju, (2022), the Supreme Court provided important clarification on the interpretation of “law” under Section 23 of the Indian Contract Act. 

The main issue was whether an agreement to sell was contrary to Section 23 if it violated statutory rules, specifically the Bangalore Rules of Allotment, 1972. 

The respondent cited the precedent set by the L.S.N. Murthy case, arguing that since the restriction was only in the rules, it did not constitute “law” as meant under Section 23.

However, the Supreme Court distinguished the L.S.N. Murthy case, noting that it dealt with a letter and not statutory rules. The Court pointed out that the L.S.N. Murthy’s decision had overlooked a prior three-judge Bench ruling in Gherulal Parakh vs. Mahadeodas Maiya (1959), which was relevant to the interpretation of “law.”

In its judgement, the Supreme Court stated that Section 23 of the Contract Act is meant to protect all forms of law from being undermined or infringed by contractual agreements. The Court held that a contract that is expressly or implicitly prohibited by “law” cannot be enforced. Importantly, the Court clarified that statutory rules and orders derived from legislative authority are forms of subordinate legislation and thus qualify as “law” under Section 23. The understanding agrees with Article 13 of the Constitution, which contains rules that are within the definition of “law.”

In terms of determining the validity and enforceability of contracts under Section 23, the court has pointed out that rules from statutes, orders and regulations of a similar nature issued under legislative authority are “law”. This interpretation was supported by the Allahabad High Court’s judgement in Abdul Hameed A.P vs. District Collector, (2019), which concluded that “law” encompasses orders by competent authorities that have the force of law. This interpretation is based on Section 3(29) of the General Clauses Act and Articles 13(3)(a) and Article 366(10) of the Constitution.

Examples of legal and illegal contracts under Section 23 of Indian Contract Act

To understand the concept of “legal” and “illegal” contracts, let us take a look at a few examples in general.

• A entered into a contract with B for the sale of a house of Rs 11,00,000, and both A and B have performed their obligations on their part. This is a valid contract between A and B. 
• Let us take another example: A and B entered into a contract for the sale of a house, but it was for the purpose of storing weapons, which is prohibited under the law. This is an illegal contract which is not enforceable by the court of law.

Illustrations as per Section 23 of Indian Contract Act

Under Section 23 of the Indian Contract Act, there are some illustrations that explain lawful and unlawful considerations. It includes: 

• Rohan agrees to sell his house to Priya for 10,000 rupees. Here, Priya’s promise to pay 10,000 rupees is given in exchange for Rohan’s promise to sell the house. These mutual promises constitute lawful considerations.
• Vijay promises to pay Anjali 1,000 rupees after six months if Rahul fails to repay his debt to Anjali. In return, Anjali promises to give Rahul more time to repay the debt. These promises form lawful considerations between the parties as they are mutual and lawful.
• If Raj’s ship is damaged or destroyed during a specific journey, Suresh promises to cover Raj’s losses. In return, Raj agrees to pay Suresh a certain amount of money as an insurance premium. This arrangement is legal because both promises are backed by valid consideration.
• Meena promises to financially support Nisha’s child, and in return, Nisha promises to pay Meena 1,000 rupees every year. This arrangement is valid because each promise is legal and constitutes lawful consideration.
• If Arun, Bhavesh, and Charu agree to share profits obtained through fraudulent activities, the agreement is invalid. This is because the purpose of the agreement is illegal and thus void.
• If Tanvi promises to get Ravi a job in public service and Ravi promises to pay Tanvi 1,000 rupees for this service, the agreement is invalid. The payment for securing a job through illegal means is unlawful.
• If Lakshmi agrees to lease land to Ramesh without informing her principal, the agreement is void. This is because it involves fraud against Lakshmi’s principal.
• If Sunil promises to drop robbery charges against Vikram in exchange for Vikram returning the stolen items, the agreement is void. The object of dropping charges in exchange for something of value is unlawful.
• If Shyam’s estate is sold for unpaid taxes and Rohit buys it with an agreement that Shyam will repay the purchase price, the agreement is void. 
• If Manju promises to use her influence on Anil’s behalf in exchange for payment from Nitin, the agreement is void. This involves immoral considerations, and the agreement is unlawful.
• If Kavita agrees to let her daughter be hired as a concubine by Deepak, the agreement is void. This is immoral and void, even if not punishable by the Indian Penal Code of 1860.

So, from the above examples, it is clear that not every contract entered between the parties is valid; there are some basic elements that make the contract illegal or unlawful. 

Illegal contracts in comparison with void contracts

Illegal contract

Illegal contracts and void contracts are both unenforceable before a court of law. However, they are different in their nature and consequences. Illegal contracts often involve activities that are against the law, such as agreements to commit a crime or fraud. 

Illegal intention is one of the most important elements that determine the legality of the contract. If the subject matter of the contract is not authorised by the provisions of law. Then, the contract is considered to be ‘illegal’.

When the terms of the contract are misrepresented by either of the parties or a person is influenced to enter into a contract fraudulently, then the contract is considered to be illegal.

Here are some examples of illegal contracts:

• Contracts for the sale or distribution of illegal substances, i.e. drugs.
• Contracts of activities that are considered illegal by the law.
• Employment contracts for hiring workers who are not above the age prescribed by law.
• Contract to wage war against the State Government.
• Contract to illegal Mining.
• Agreement in Restraint of Legal Proceedings.
• Restraining Parental Rights.
• Agreement to illegally create monopolies.
• A contract to sell illegal drugs is illegal and not only unenforceable but also punishable by law.

Void agreement

On the other hand, void agreements are not illegal but are invalid from the outset due to some inherent defect. These agreements do not meet the essential criteria to be enforceable as per Section 10 of the Indian Contract Act. 

According to the Indian Contract Act:

As per Section 2(g), an agreement not enforceable by law is said to be void.

As per Section 2(j), a contract that ceases to be enforceable by law becomes void when it ceases to be enforceable.

For instance, Priya and Neha enter into an agreement to buy and sell a piece of land, both believing it is situated in Chennai when it is actually in Coimbatore. This agreement is void because it is based on a mutual mistake regarding a fundamental fact.

Indian Contract Act 1872 deals with the conditions when the agreement becomes void, which include:

Incompetency: Contracts with incompetent persons are void. Incompetent persons include, as per Section 11 a person must be 18 years old, mentally capable of understanding the contract, and not prohibited by law from contracting. As per Section 12, a person must have a sound mind at the time of entering the contract. Individuals generally of unsound mind can contract when in a sound state, and those temporarily unsound cannot contract during those periods.

Mistake of fact: As per Section 20, if both parties are mistaken about an essential fact, the contract is void. For example, if both parties are unaware that the subject matter of the contract is no longer in existence.

Agreement without consideration: As per Section 25, generally agreement without consideration is void except in cases like registered gifts, voluntary compensation for past acts, and promises to pay unenforceable debts.

Agreement in restraint of marriage: As per Section 26, agreements that restrict marriage are void except when they involve minors.

Agreements in restraint of lawful professions, trades, or businesses: As per Section 27, agreements that restrain lawful professions, trades, or businesses are considered void. However, reasonable agreements related to the sale of business goodwill are exceptions.

Agreements in restraint of legal proceedings: As per Section 28, agreements that prevent legal proceedings or extinguish rights are void. However, exceptions are provided for certain arbitration agreements and guarantees by banks or financial institutions under specified conditions.

Uncertain agreements: As per Section 29, agreements are void if their meaning is not clear or capable of being made clear.

Agreements by way of wager: As per Section 30, wagering agreements are void, except for certain horse-racing prizes over a specified amount.

Illegal contracts vs. Void contracts

Basis	Illegal Contracts	Void Contracts
Definition	Involve activities that are against the law	Invalid from the outset due to inherent defects
Legality	Illegal and against the law	Not illegal, but unenforceable
Enforceability	Unenforceable and punishable by law	Unenforceable, but not punishable
Examples	Sale of illegal drugs, hiring underage workers	Agreements with minors, contracts with unsound individuals
Legal consequences	Subject to legal penalties and punishment	No legal effect, but not subject to penalties
Nature of defect	Involves illegal activities or purposes	Lacks essential criteria for a valid contract
Impact on parties	Parties may face legal actions and penalties	Parties cannot enforce the contract in court

Remedies available to the aggrieved party

If the contract entered between the parties is found to be illegal, it is not enforceable by the court of Law. The court will declare that there was no contract between the parties and leave the parties “as they are” at the time of the breach. The parties who suffered the consequences of an illegal contract cannot recover the damages as the contract does not exist in the “eyes of the law”.

For instance, contracts for the sale of illegal substances are prohibited under the Narcotic Drugs and Psychotropic Substances Act, of 1985 and are considered to be illegal when the drugs are sold than what has been mentioned in the act. The party who suffered losses cannot recover the amount from the contract.

Therefore, the illegal contract does not have validity in the eyes of law, and neither of the parties can recover damages arising from an illegal contract.

Role of doctrine of severability and blue pencil rule in illegal contract 

Doctrine of Severability

Doctrine of Severability, also known as a doctrine of separability. This doctrine ensures that if any part of the contract is found to be illegal or unenforceable, the rest of the contract remains valid and enforceable. This doctrine states that the legal parts of a contract can be enforced even though other parts are illegal in nature. However, the illegal parts do not change the overall intention of the parties involved.

The purpose of the Doctrine of Severability is to save the valid parts of a contract while nullifying the illegal parts. This way, instead of rendering the entire contract void, only the invalid provisions are unenforceable. However, this severance should not affect the main intention of the parties.

Doctrine of severability under the Indian Contract Act

Under the Indian Contract Act of 1872,  the doctrine of severability is not expressly stated, but the doctrine of severability is reflected in Sections 57 and Section 58.

Section 57 states that if an agreement includes both legal and illegal promises, only the legal promises are considered a valid contract, but the illegal promises are considered void.

For instance, 

A and B agree that A will sell a house to B for 10,000 rupees is legal. They also agree that if B uses the house as a gambling house, he will pay A 50,000 rupees, which is an illegal contract. The promise to sell the house and pay 10,000 rupees is valid, but the promise to use the house as a gambling house and pay 50,000 rupees is void.

The Doctrine of Severability separates the legal part of the agreement, which is selling the house for 10,000 rupees, from the illegal part of using the house as a gambling house and paying 50,000 rupees. The legal promise of selling the house and paying 10,000 rupees can be enforced by the court. The illegal promise of using the house as a gambling house and paying 50,000 rupees is ignored and treated as void.

However, in the case of an alternative promise, Section 58 states that where one option is legal, and the other is illegal, only the legal option can be enforced.

For instance,

A and B agree that A will pay B 1,000 rupees. B will then deliver either rice or smuggled opium. Here, the promise to deliver rice is valid, but the promise to deliver smuggled opium is void.

Sections 57 and 58 of the Indian Contract Act show that only the illegal parts of an agreement are void, while the legal parts remain valid. However, if removing the illegal parts makes the contract inoperative, the entire contract becomes void. This principle allows contracts to stay effective even when specific provisions are invalidated.

Blue pencil rule in India

Origin of blue pencil doctrine

The term “Blue Pencil Doctrine” comes from colonial-era cases. The judiciary has used this doctrine to enforce contracts by removing irrelevant or illegal parts. Earlier, this doctrine was applied to non-compete clauses and trade restrictions-related matters, but now its use has expanded to cover many other areas. It now includes arbitration agreements, memoranda of understanding, real estate sales, and contracts that go against public policy.

Application in India

Section 24 of the Indian Contract Act, of 1872, states that if any part of the consideration in a contract is unlawful, the entire contract is void. Section 27 states that any restriction on lawful profession or trade is void to that extent. The Blue Pencil Doctrine, initially used in non-compete agreements, which has been expanded to apply to other parts of a contract.

In India, the Blue Pencil Doctrine is not limited to clauses related to restraint of trade or non-compete agreements; it also applies to arbitration clauses. This principle was highlighted in the case of Sunil Kumar Singhal vs. Vinod Kumar (2007). In this case, Vinod Kumar, a financier operating under the name ‘M/S Vinod Financier,’ lent Rs. 36,000 to Sunil Kumar Singhal through a hire purchase agreement dated May 23, 1975. Sunil Kumar was supposed to repay the loan in 24 monthly instalments of Rs. 1,500. Sri Ram Singhal, the appellant, acted as a guarantor for the repayment. When Sunil Kumar failed to repay the loan, Vinod Kumar sought arbitration as per the agreement. However, Sunil Kumar refused to accept the proposed arbitrator, Prem Shanker Kapoor.

The main issue in this case was the validity of the arbitration clause. The arbitration clause had left the arbitrator’s name blank, which was also questioned.

The petitioner argued that no valid agreement existed between the petitioner and the respondent. He further contended that the respondent obtained his signature on blank papers. Additionally, he alleged that the vehicle, which was the subject of the agreement, was transferred to someone connected with Vinod Kumar. However, the respondent claimed that the agreement was legal and also contended that the dispute should be resolved through arbitration as per the terms laid out in the agreement.

The court held that the hire purchase agreement existed and a dispute had arisen that was referable to arbitration. It was found that the respondent was the sole proprietor, but the arbitration agreement did not specify the arbitrator’s name. The court appointed a new arbitrator, Sri Magan Behari Maheshwari, instead of Prem Shanker Kapoor. The court applied the “blue pencil rule,” which allows invalid parts of a contract to be struck out while keeping the rest enforceable. Here, even though the arbitrator’s name was left blank, the court found the rest of the arbitration agreement valid. The court severed the blank part and upheld the arbitration clause’s validity. It emphasised that an arbitrator’s name is not necessary for an arbitration agreement to be enforceable. The court said that if some parts of a contract are illegal, those parts can be taken out. The rest of the contract can still be valid if it makes sense on its own and follows the main purpose of the agreement.

In the Babasaheb Rahimsaheb vs. Rajaram Raghunath Alpe (1930) case, two wrestlers agreed to compete in Pune. They made an agreement. Accordingly, if one wrestler did not show up on the agreed day, they would have to pay Rs 500 to the other wrestler. Additionally, the winner of the match would receive Rs. 1,125 from the money collected from ticket sales to spectators. 

The plaintiff claimed that the agreement involving uncertain rewards is gambling, is illegal gambling under Bombay Act III of 1865, and contended it depended on uncertain events.

The court found that since the prize money came from ticket sales, not the wrestlers themselves, it was not considered illegal gambling. The court said that if one part of a contract is found illegal, but the other parts can be separated from it and are legal on their own. Those legal parts can be enforced and honoured. So, the whole agreement is not considered void just because one part of it is illegal. Therefore, they dismissed the case and ordered the petitioner to pay costs.

The court applied the doctrine of severability that if parts of an agreement can be separated, only the illegal parts are void. In this case, they ruled that because the prize money was not funded by the wrestlers but by the public buying tickets, it was not illegal gambling. 

In the case of Shin Satellite Public Co. Ltd vs. M/S Jain Studios Limited (2006), the Supreme Court of India dealt with issues regarding the doctrine of severability and the Blue Pencil rule in contracts. 

In this case, the parties had a contract with an arbitration clause. One part of the clause said the arbitrator’s decision could not be challenged in any court, which was against the law. This made some people wonder if the whole contract was bad or if just that part could be cut off. The court decided to use the “Blue Pencil Rule” to cut out the bad part and keep the rest of the contract. 

The main legal question was whether the valid parts of the agreement could be enforced despite the invalidity of other parts.

The Supreme Court emphasised the principle of “substantial severability.” This means that even if parts of an agreement are invalid, the valid parts can still be enforced if they can stand alone and fulfil the original intentions of the parties without giving any unfair advantage. The court reasoned that enforcing valid clauses promotes fairness and upholds the intentions of the parties.

However, the doctrine of severability allows a contract to stay valid even if some parts are invalid as long as the remaining parts still make sense. The Blue Pencil Rule involves removing specific invalid words or clauses from a contract without changing the rest. But both aim to save the enforceable parts of a contract.

Doctrine of “Ex Turpi Causa Non Oritur Actio”

The doctrine “Ex Turpi Causa Non Oritur Actio” is a legal principle that means “no action can arise from an illegal act.” It is one of the defences available to the defendant. It states that courts will not help parties whose claims are based on immoral or illegal actions. This idea comes from old common law and was established in the English case of Holman vs. Johnson (1775). In this case, it was decided that courts should not support someone whose claim is founded on wrongdoing. Historically, this principle has a strict and moralistic approach. In the past, if someone tried to make a legal claim based on illegal actions, their claim would be dismissed. This situation would not change, as courts would not get involved to help if the claim was based on wrongdoing. 

This principle is also recognised in Indian law. This doctrine is applied by Indian courts that courts do not assist plaintiffs who base their claims on their own illegal actions or immoral conduct. 

In the case of H.H. Sir Jiwanjirao Scindia vs. Muzammil Khurshid (1957), the plaintiffs initially sued to remove the defendants from a flat and claimed the defendants were occupying it by leave and licence agreement, which had been terminated. The plaintiff wanted the defendants to vacate the flat and sought compensation for its use. However, the defendants argued that they were subtenants, not licensees. Further held they had paid rent to the plaintiffs. Plaintiff No. 1 was renting a flat in “Sindoola” on Gamadia Road and had allowed his friend, Plaintiff No. 2, to use it. Plaintiff No. 2 then let the defendants stay in the flat. The plaintiffs claimed the defendants were just licensees and had not paid any compensation for using the flat. On the other hand, the defendants stated that they had been subtenants since 1949 and had been paying rent regularly.

The main legal issue was whether the defendants were subtenants or not. If they were subtenants, the sub-tenancy was illegal under the Bombay Rents, Hotel and Lodging House Rates Control Act, of 1947, which prohibited such subletting.

The camp controller of Plaintiff No. 1 denied any knowledge of the sub-tenancy agreement and payments. However, Defendant No. 1 testified that he was a subtenant and had paid rent to Plaintiff No. 1’s camp controller.

The court permitted the plaintiff to make a necessary amendment to their plaint to claim that even if there was a subtenant agreement, it was illegal. The plaintiffs claimed they were entitled to possession of the flat as they were the owners of the property. The court had to decide whether the plaintiffs could recover possession, even though the illegal subtenant existed.

The court held that the plaintiff could seek possession of their property even though an illegal subtenant arose. The court held that the plaintiffs were entitled to get back the possession of the flat because they had a legal title over that flat. The court also looked into the maxim “Ex turpi causa non oritur actio”. The court held this maxim did not prevent the plaintiffs from reclaiming their property possession. In this case, the court ruled that the plaintiffs’ claim was based on their rightful ownership and not on the illegal subtenant agreement. 

The court further held that though illegal acts exist, they do not prevent the rightful owner from reclaiming their property. The illegal act does not give the occupier any legal right to stay in the property. The court allowed the plaintiff to reclaim possession of the flat based on their legal title.

Judicial pronouncements

English cases

Taylor v. Chester, (1869)

Facts

Taylor vs. Chester, (1869) is an English case. In this case, the plaintiff gave half of a banknote to the defendant as security for a debt. The debt was for using services at a brothel owned by the defendant. Later, the plaintiff wanted his half banknote back.

Issue

The main issue was whether the plaintiff could get back the half banknote that he gave as security for an illegal service.

Contention

The defendant argued that the plaintiff could not get the note back because the whole deal was illegal and involved immoral services.

Judgment

The court decided that since the agreement was illegal and related to brothel services, the law would not help the plaintiff get the half banknote back. The principle “in pari delicto potior est conditio possidentis” was applied. The doctrine suggests that when both parties are at fault, the one in possession of the item, the defendant, gets to keep it. The court held it wouldn’t support anyone who knowingly entered into an illegal or immoral agreement, which in this case was the brothel services. Therefore, the plaintiff could not get his half banknote back. It was held that the true test for determining whether both the parties were in equal fault is by considering whether the party suffered could make out his case otherwise than through the medium and by the aid of the illegal transaction to which he is also involved.

Indian cases

Alice Mary vs. William Clarke (1904)

Facts

In the Alice Mary vs. William Clarke, (1904) case, the plaintiff, a married woman, agreed to live in adultery with a man who agreed to pay her a single consolidated remuneration of Rs 50 per month, and she lived separately from her husband. 

Issue

The main issue was whether the agreement between the petitioner and the respondent, Clarke, would be enforced in court.

Judgment

The court decided that the agreement was not enforceable even though the payment might seem lawful. The overall purpose of the agreement is for adultery, which is unlawful. The court noted that in England, adultery is not a criminal offence, but in India, it is. The court concluded that the consideration for the contract was unlawful. The court dismissed the suit and declared that agreement as unlawful, and held that the plaintiff could not enforce it. The court also held that carrying out a lawful part from an unlawful one cannot be considered valid and, hence, is unlawful.

Palaniyappa Chettiar vs. Chockalingam Chettiar, 1920

Facts

In the Palaniyappa Chettiar vs. Chockalingam Chettiar, 1920 case, Palaniyappa Chettiar (plaintiff) was a judgement-debtor under a decree. He entered into an agreement (Exhibit A) with Chockalingam Chettiar (defendant), where the defendant would take over the decree and execute it to collect money from the other judgement-debtors. The defendant was to collect the money, deduct a 20% commission for his efforts, and then return the remaining amount to the plaintiff. This arrangement was made because Order XXI, Rule 16 of the Civil Procedure Code prohibits one judgement-debtor from executing a decree against co-debtors.

Issue

The main issue was whether the agreement between the plaintiff and the defendant was illegal under Section 23 of the Indian Contract Act because it violated Order XXI, Rule 16 of the Civil Procedure Code.

Contentions

The plaintiff contended that the defendant should return the collected money after deducting his commission.

The defendant contended that the agreement was illegal and void, as it was against the rule, and hence, he was not obligated to pay the money to the plaintiff.

Judgment

The court held that while the contract aimed to defeat the provisions of Order XXI, Rule 16, the defendant, acting as the plaintiff’s agent, had collected money for the plaintiff. Therefore, the defendant could not keep the money collected on behalf of the plaintiff. The court differentiated between enforcing an illegal contract and recovering money collected from such a contract. It ruled that the defendant must pay the collected money by deducting the agreed commission to the plaintiff.

The court decision states that if a contract’s purpose is illegal, it cannot be enforced. However, if one party receives money under an illegal contract, they cannot retain it because that would result in injustice.

Shivram Govind Darshane vs. Viswanath Govind Darshane (1956)

Facts

In the Shivram Govind Darshane vs. Viswanath Govind Darshane (1956) case, the family house of the parties was destroyed in a fire after Gandhi’s assassination due to communal violence in 1949. After this incident, criminal charges were filed against 108 accused individuals. Village elders arranged for these individuals to pay compensation to the victims to withdraw the criminal cases. The accused paid Rs. 10,800, which was distributed among the victims. The defendant, Viswanath Govind Darshane, received Rs. 600 as part of this arrangement. The plaintiffs, Shivram Govind Darshane and others, also claimed Rs. 600 for their joint family property; they were entitled to a share.

Issue

The main issue was whether the contract, which facilitated the payment of Rs. 600, was illegal and whether the plaintiffs could claim a share of this amount under Section 218 of the Indian Contract Act,  even though the alleged illegality of the contract.

Contentions

The plaintiff contended that the amount of Rs. 600 received by the defendant was compensation for the destruction of joint family property. The defendant acted as their agent in receiving this amount and must account for their share under Section 218 of the Indian Contract Act of 1872.

The defendant contended that the contract that led to the payment was illegal under Section 23 of the Indian Contract Act, as it was based on withdrawing criminal charges.

Judgment

The court found that the contract’s consideration of withdrawing criminal prosecutions was illegal under Section 23 of the Indian Contract Act, and such the contract is unenforceable. However, the court held that, in this case, the plaintiffs were not seeking to enforce the illegal contract. Instead, they were claiming their share of the amount already received by the defendant as their agent. Under Section 218 of the Indian Contract Act, an agent must account for all sums received on behalf of the principal. The defendant cannot use the illegality of the original contract to keep the money meant for the plaintiffs. The court decreed in favour of the plaintiffs and allowed them to recover Rs. 450 from the defendant. The court emphasised that the plaintiffs were not enforcing the illegal contract but were claiming the money received on their behalf.

The rationale behind the court decision was that illegal consideration involved in any contract cannot be enforced in court. However, if money has already been received under such a contract, those entitled to the money, like principals from an agent, can claim their share.

Gherulal Parakh vs. Mahadeodas Maiya and others (1959)

Facts

In Gherulal Parakh vs. Mahadeodas Maiya and others, 1959 case, Gherulal Parakh (the appellant) and Mahadeodas Maiya (the first respondent) entered into a partnership agreement to engage in wagering contracts with two firms from Hapur: Messrs. Mulchand Gulzarimull and Baldeosahay Surajmull. According to their agreement, profits and losses from these transactions would be shared equally between the appellant and respondent. Respondents acting on behalf of the partnership entered into 32 contracts with Mulchand and 49 contracts with Baldeosahay, which resulted in a net loss. Maiya paid the entire loss amount to the Hapur merchants and subsequently asked the appellant to share half of the loss. Appellant refused to pay his share.  Respondent and his sons filed a suit in the Court of the Subordinate Judge, Darjeeling, to recover half of the loss. This initial suit resulted in arbitration, and the court issued a decree in favour of the respondent for Rs. 3,375. After finalising the accounts with the Hapur merchants, the respondent filed another suit to recover additional losses of Rs. 5,300 plus interest. The appellant defended the suit by arguing that their partnership agreement was illegal under Section 23 of the Indian Contract Act because it involved wagering contracts. The Subordinate Judge agreed with the contention of the Appellant and dismissed the suit on the grounds that the agreement was void and unlawful.

Upon appeal, the High Court ruled that the partnership was valid and was not between the joint families but rather between the two managers. It held that the partnership was not barred by Section 69 of the Partnership Act and that the transactions under Section 30 were not illegal under Section 23. The High Court awarded Maiya Rs. 3,80,780 but dismissed the claim for interest. 

Issue

The primary issue before the court was whether the contract entered into by the appellant was legal or illegal under the Indian Contract Act of 1872, specifically under Section 23, which deals with contracts considered against public policy.

Contentions 

The appellant argued that the partnership established for conducting wager activities was illegal according to Section 23 of the Indian Contract Act. They also contended that the term ‘immorality’ in the contract should invalidate the contract. In essence, the appellant wanted to use moral rules from Hindu law and argued that the partnership agreement should not be legally enforceable. 

On the other hand, the respondents argued that the partnership was not immoral under Hindu law or any other legal standards. They claimed that immorality, as defined in contract law, typically relates to sexual misconduct but not business agreements like this one. Therefore, the respondent contended that the partnership agreement was legally valid and enforceable.

Judgment

After hearing both parties’ arguments, the court found that not all wager agreements are illegal in India. In order to consider a contract as illegal, it must involve actions that are clearly banned by law, like betting on horse races or casino games, which go against public policy. 

The court also referred to Section 23 of the Indian Contract Act. Section 23 says that contracts are not valid if they are based on illegal or immoral activities. The court clarified that in legal terms, “immorality” means only sexual misconduct, not business agreements like partnerships. Since the partnership in question did not involve any such immoral activities, the court held that it was not void for immorality.

On the other hand, the court discussed illegal contracts that involved activities against the law or public policy. According to Section 23 of the Indian Contract Act, contracts based on such activities are void. The court said that for a contract to be illegal, it must involve actions that are explicitly prohibited by law or extremely immoral. The court referred to void contracts under the law. These are contracts that are prohibited by statute or regulations. The agreements to gamble on races or games of chance are against public policy. However, the specific partnership in question did not break these legal rules and did not involve such immoral actions.

The court held that, in this case, the partnership agreement was not illegal. Further held that for a contract to be illegal, it must be against specific immoral actions in a sexual context.

Kedar Nath Motani And Ors. vs. Prahlad Rai And Ors (1959)

Facts

In the Kedar Nath Motani and Ors. vs. Prahlad Rai and Ors, (1959) case Radhumal, the plaintiff’s predecessor, leased village Bijbania from the Bettiah Raj in 1922 and renewed the lease in 1931. Between 1920 and 1925, Radhumal acquired 136 bighas of land, including some special agricultural lands, through different methods like buying at court auctions and from private sellers. Radhumal wanted to avoid paying high fees to the Bettiah Raj, so he put 27 bighas of land under the names of his relatives, Prahlad Rai, Gulraj Rai, and Nawrang Rai. This arrangement, where the property is held by someone else on behalf of the real owner, is known as a benami arrangement. The appellants (Kedar Nath Motani and others) filed a suit for declaration of their title to 136 bighas of ryoti land and sought possession jointly with the defendants. They also claimed mesne profits and interest.

The Subordinate Judge of Motihari decreed in favour of the appellants. They have stated that the defendants (Prahlad Rai and others) were benamidars (nominal owners) for the plaintiff’s predecessor, Radhumal. The High Court of Patna reversed this decision and accepted the defendant’s contentions that the benami transactions were intended to defraud the Bettiah Raj estate. Thus dissented the plaintiffs from claiming the property.

Issues

• Whether the defendants were benamidars of the plaintiffs with respect to the suit lands.
• Whether the plaintiffs are entitled to claim the property despite the alleged fraud upon the Bettiah Raj estate.
• Whether the doctrine of “ex turpi causa non oritur actio” (no action arises from a dishonourable cause) or “in pari delicto” (in equal fault) applies to the plaintiffs’ case.

Contentions

The appellant argued that the lands were acquired by their predecessor, Radhumal, in the name of the defendants to avoid resumption by the Bettiah Raj after the lease’s termination. They contended that the High Court erred in denying their claim based on the alleged fraud.

The respondent claimed they were the actual owners and that the transactions were conducted fraudulently to deceive the Bettiah Raj. They argued that even if they were benamidars, the plaintiffs could not claim the property due to the fraudulent nature of the transactions.

Judgment

The Court acknowledged that the acquisition of lands was benami, where Radhumal had used the names of Prahlad Rai and others to acquire the property. This finding was accepted by both the trial court and the High Court. The High Court said the deals were fraudulent because they were meant to deceive the Bettiah Raj. However, the Supreme Court found out that Bettiah Raj knew about the benami deals and decided not to do anything about it.

The Honourable Supreme Court determined that two legal principles, “in pari delicto” and “ex turpi causa,” did not apply in this case because,

“In pari delicto“: This maxim means “in equal fault.” It applies when both parties involved in a legal dispute are equally at fault for the wrongdoing. The Supreme Court found that the parties were not equally at fault in this situation.

“Ex turpi causa”: This maxim means “from a dishonourable cause.” It states that a person cannot bring a legal claim if it arises from their own illegal or immoral act. The Supreme Court concluded that the fraud was not carried out successfully.

Therefore, the court decided that these principles were not relevant to the case because the attempted fraud did not succeed, and the parties did not share equal blame for the situation. The Court noted that while the transactions were designed to avoid certain lease conditions, the intended fraud was not executed because Bettiah Raj was aware of these facts. The Supreme Court reversed the High Court’s decision and restored the decree of the Subordinate Judge in favour of the plaintiffs.

V. Narasimha Raju vs. V. Gurumurthy Raju And Others, (1962)

Facts

In the case of V. Narasimha Raju vs. V. Gurumurthy Raju And Others (1962), the Supreme Court of India addressed the validity of an arbitration agreement under Section 23 of the Indian Contract Act, 1872. V. Narasimha Raju, the appellant, had leased the Parlakimedi Samasthanam Rice and Oil Mill and formed a partnership with six partners to operate it. Disputes arose over the division of profits from a separate business involving paddy and ground nuts, which led to a disagreement between Respondent No. 1 and Respondent No. 4 regarding their shares. The appellant and respondents executed an arbitration agreement on December 30, 1943, to settle the dispute, with the appellant contending that the agreement was invalid as its consideration was against public policy. The specific contention was that the agreement was made to settle the dispute and have a criminal case against the appellant withdrawn.

Judgment

Both the Trial Court and the Orissa High Court rejected the appellant’s contention, upholding the validity of the agreement. However, the Honourable Supreme Court observed whether the arbitration agreement’s consideration was against public policy or not. The Court found that the agreement’s consideration for the agreement was illegal. The Supreme Court noted that an agreement’s consideration, which is opposed to public policy, is illegal,. The purpose of the agreement was the promise not to prosecute the criminal complaint, which is illegal within the meaning of Section 23 of the Indian Contract Act, 1872.  The court also held that such agreement itself is invalid. Accordingly, the court overturned the decisions of the lower courts. The Supreme Court allowed the appeal and thereby held the arbitration agreement as illegal due to its illegal consideration.

Inderjit Singh vs. Sunder Singh, (1968)

Facts

In Inderjit Singh vs. Sunder Singh (1968) case, Inderjit Singh (petitioner) and Sunder Singh (respondent) entered into a partnership to operate a bus with permit RJL 218 on the Shahpura-Bhilwara route. The partnership agreement involved sharing the bus permit, which required authorisation under Section 59 of the Motor Vehicles Act. Such permits cannot be transferred without official approval.

Issue

The main issue was the legality of the partnership agreement under Section 59 of the Motor Vehicles Act. 

Arguments

Petitioner argued for the recovery of his investment in the partnership under Section 65 of the Indian Contract Act, despite the agreement’s illegality.

Respondent contended that the partnership agreement was void from the beginning because it violated Section 59 of the Motor Vehicles Act.

Judgment

The court determined that the partnership agreement was indeed illegal as it contravened Section 59 of the Motor Vehicles Act. According to the court, such agreements are void ab initio due to their illegal nature. The court strictly interpreted the illegality of the contract under Section 59 and emphasised that any agreement violating statutory provisions governing permit transfers is void. However, even though it was illegal, the court recognized Inderjit Singh’s right to seek restitution under Section 65 of the Indian Contract Act. 

Central Inland Transport Corporation Ltd. vs. Brojo Nath, Ganguly, (1986)

Facts

In the case of Central Inland Transport Corporation Ltd. vs. Brojo Nath, Ganguly, (1986) Brojo Nath Ganguly worked for a company that later shut down. His job was then taken over by the Central Inland Water Transport Corporation Ltd., a government-owned company. Years later, he was accused of not handling funds properly. Rule 9(i) of the company’s rules stated that an employee could be terminated for reasons such as negligence in duties. It provided that permanent employees could be dismissed either with three months’ notice or by paying them an amount equal to three months’ basic pay and dearness allowance in place of notice. So, when Brojo Nath Ganguly was accused of negligence in duty, the company used this rule to terminate his employment without giving a reasonable period of notice. 

Contentions 

Brojo Nath Ganguly argued that Rule 9(i) was arbitrary and violated his rights. The Corporation claimed it had the right to terminate employees under its rules. When the matter was brought before the court, he contended that this rule was unfair and against the Constitution’s Article 14, which guarantees everyone equal treatment under the law. The court observed that the terms of a contract of employment were arbitrary and unreasonable, which provided that the employer could terminate the services of a permanent employee by giving him a 3-month notice or  3 months salary. 

Judgment

The Supreme Court held Rule 9(i) was not allowed under Section 23 of the Indian Contract Act because it gave too much power to the company without any fair reasons. Section 23 states that any agreement restraining someone from exercising a lawful profession, trade, or business of any kind, except for reasonable protection, is void. In this case, the Supreme Court interpreted Section 23 to invalidate Rule 9(i) because it gave the Corporation excessive power to terminate employees, which was deemed against public policy.

The Supreme Court ruled in favour of Brojo Nath Ganguly. It held that Rule 9(i) was void under Section 23 of the Indian Contract Act, 1872, and violated Article 14 of the Constitution. The Court reinstated Ganguly and awarded him all unpaid salaries. The Supreme Court held the terms of the contract to be unreasonable and against public policy and, therefore, void under section 23 of the Indian Contracts Act.

B.O.I. Finance Ltd vs. The Custodian & Ors (1997)

Facts

In the case of B.O.I. Finance Ltd vs. The Custodian & Ors, (1997) involved where banks entered into contracts with brokers of ready-forward transactions, also known as buy-back transactions with brokers before June 6, 1992. These transactions typically involved two parts. The “ready leg,” where securities were bought or sold at a specified price, and the “forward leg,” where the same or similar securities were sold or bought at a future date for a determined price.

The major issues were,

• Whether the entire contract or only the illegal part, the forward leg should be considered illegal.
• Whether the banks, having already received securities under the ready leg, could retain ownership despite the illegality of the forward leg.

Contentions 

The appellant contended that the transactions did not violate the Banking Regulation Act of 1949 or RBI circulars and were thus legal. They claimed that even if the forward leg of the contracts was illegal, the ready leg should be considered separately and valid. They also argued against the return of securities and claimed that since they had already received and paid for the securities under the ready leg, they should retain ownership despite any illegality in the forward leg. 

The respondents argued that the entire ready-forward contracts were illegal under the provisions of the Banking Regulation Act, RBI circulars, and the Securities Contract Regulation Act of 1956. They asserted that these contracts violated statutory provisions meant to regulate banking and securities transactions. They further argued that appellant banks’ claim of severability of the contracts. According to the respondents, the ready leg and the forward leg of the transactions were inseparable parts of the same illegal contract. Therefore, they argued that the entire contract should be considered illegal, including the ready leg, despite any partial performance.

Judgment

The Special Court ruled against the banks, holding that the entire ready-forward contracts were illegal because they violated RBI circulars and Securities Contract Regulation Act provisions. It rejected the banks’ argument of severability and stated that both legs were integral to the same transaction.

The Supreme Court, however, overturned the special court decision. It held violations of RBI instructions alone did not invalidate these contracts. The ready-forward contracts could be seen as having two distinct parts, the completed ready leg and the uncompleted forward leg. Since the ready leg had been fulfilled with securities transferred and payment made, the illegality of the forward leg did not affect the ownership of transferred securities. The court allowed the appeal and dismissed the applications to return securities.

The State of Jharkhand & Ors. v. M/s HSS Integrated SDN & Another, (2019)

Facts

In the case of the State of Jharkhand & Ors. vs. M/s HSS Integrated SDN & Another (2019), the Honourable Supreme Court dealt with the matter concerning the determination of an illegal contract. In this case, the State of Jharkhand terminated a consultancy agreement with M/s HSS Integrated SDN over disagreements about the quality of work on the Ranchi Ring Road project. M/s HSS Integrated SDN disputed the termination and claimed it was not done according to the contract’s procedures.

Issue

The main issue is whether the termination of the consultancy agreement by the State of Jharkhand was legal under the terms of the contract.

Contentions

The petitioner argued that the termination was justified because of M/s HSS Integrated SDN’s unsatisfactory performance and further contended that it followed the contract’s provisions.

Respondent contended that the termination was illegal because proper procedures for termination were not followed as per the contract.

Judgment

The Arbitral Tribunal, which acts like a specialised court for resolving disputes outside regular courts, reviewed the evidence and concluded that the termination by the State of Jharkhand was illegal because it did not adhere to the contractual requirements for termination. This included issues like not giving proper notice or following the correct procedures. As a result of the illegal termination, certain claims made by respondents were allowed, while counterclaims by the petitioner were dismissed. 

However, an appellate court upheld the Arbitral Tribunal’s decision and agreed that the termination was deemed illegal because it did not meet the specific steps outlined in the contract. Courts also held they would uphold decisions made by Arbitral Tribunals, especially regarding contract terms and factual evidence. However, they may intervene only for clear errors or legal violations in the decisions of the arbitrators.

M/S. Bbp Studio Virtual Bharat Pvt Ltd vs. Dr. Selvakumar. S, (2024)

Facts

In the M/S. Bbp Studio Virtual Bharat Pvt Ltd vs. Dr. Selvakumar. S, (2024) case, the petitioner was a film producer. He entered into a contract with the government, the respondent, to produce a 3D film for a specific event. However, the respondent had cancelled the work order and had refused to exhibit the film. This led the petitioner to claim compensation for breach of contract.

Issue

The main issue in this case was whether the respondent’s actions amounted to a breach of contract or not.

Judgment

The court, after listening to both parties’ contentions, stated that any agreement that contains illegal elements or goes against public policy is illegal under Section 23 of the Indian Contract Act. The respondents’ arbitrary termination of the work order and denial to screen the film were considered arbitrary actions. These actions of the respondent were in violation of the contractual terms and against public policy. The court also held that such termination of the contract is illegal. Thus, the petitioner was awarded appropriate remedies for the breach of the contract.

Conclusion

It is clear in light of the above judicial decisions that the legality of the contract depends upon its nature and terms. If the terms of the contract are illegal or opposed to the policy, which affects the public at large and is unreasonable, then the contract is considered to be “null” in the eyes of the law, and it cannot be enforced in court. 

On the other hand, the judiciary has been interpreting illegal contracts through its decisions. In India, the judicial decision with respect to illegal contracts has protected the interests of the aggrieved parties. Though illegal contracts are not explicitly mentioned in the Indian Contract Act, several recent judicial decisions have played important roles in the determination of illegal contracts. However, there is a need to define illegal contracts in the legislation itself to avoid ambiguities.

Frequently Asked Questions (FAQs)

Are illegal contracts enforceable?

No, illegal contracts are generally not enforceable in court. Courts will not uphold the validity of contracts that involve illegal activities or violate public policy. Such contracts are considered void ab initio and cannot be enforced by either party.

Is a breach of contract illegal?

A breach of contract is not illegal, however, it is a failure to fulfil the terms of a legally binding agreement. When one party does not do what they promised in the contract, it is called a breach. It is not a crime, but it can lead to legal action to fix the situation or cover any losses. So, while breaking a contract can lead to legal problems, it is not the same as breaking the law.

For instance, Rina hires Sam to paint her house. They agree that Sam will complete the painting in two weeks for 20,000 rupees. However, after starting the job, Sam only finishes half of the painting and then stops working without a valid reason. This situation is a breach of contract because Sam did not fulfil his promise to complete the work within the agreed time. As a result, Rina can take legal action against Sam to recover her money or to compel Sam to finish the painting. While this breach of contract leads to legal consequences, it is not considered a crime. Thus it is not an illegal contract.

What if one party did not know the contract was illegal?

Ignorance of the law is generally not a defence. Even if one party did not know the contract was illegal, the contract is still void if its purpose is illegal. However, courts may consider the innocence of a party who genuinely did not know about the illegal nature while determining any penalties or liabilities.

Can illegal contracts be ratified or made legal?

No, illegal contracts cannot be ratified or made legal. The illegality affects the entire contract and cannot be cured by subsequent actions or agreements.

Can illegal contracts ever be partially enforceable?

In some jurisdictions, courts may enforce the legal parts of a contract if they can be separated from the illegal parts. This is known as severability. However, if the illegal part is integral to the contract’s purpose, the entire contract may still be deemed unenforceable.

What if both parties to the contract are unaware of its illegality?

If both parties are unaware that the contract is illegal, it still remains void and unenforceable. 

References 

• https://www.scconline.com/blog/post/2022/07/23/analysing-law-under-section-23-of-the-contract-act/
• https://www.scconline.com/blog/post/2021/01/30/validity-of-a-contract-voidable-contract-and-void-agreement-as-given-under-indian-contract-act-1872/
• https://blog.ipleaders.in/all-about-different-types-of-contracts/
• https://www.manupatra.com/corporate/Blog/blue-pencil-doctrine.aspx
• https://www.mondaq.com/india/contracts-and-commercial-law/456278/doctrine-of-blue-pencil