illegal agreements
Sections 23, 24, 57, 58 and 65 of the Indian Contract Act, 1872
In one minute
An illegal agreement is one whose object or consideration the law forbids or otherwise treats as unlawful under section 23. Every illegal agreement is void, so no one can sue on it. But not every void agreement is illegal.
The difference matters for connected deals. A connected deal made to further an illegal purpose is also tainted. Exams ask for this void and illegal contrast. In real life it decides whether a lender or an agent can recover money linked to a bad deal.
Exam focus
- Frequency: Rarely asked
- Usually asked as: Short answer (4 to 6 marks)
Legal provision
- Section 23: an agreement whose object or consideration is unlawful is void.
- Section 24: if any part of a single consideration for one or more objects, or any part of one of several considerations for a single object, is unlawful, the agreement is void.
- Section 57: where persons reciprocally promise, first, to do certain legal things and, second, under specified circumstances, certain illegal things, the first set of promises is a contract and the second is a void agreement.
- Section 58: in an alternative promise, one branch legal and the other illegal, the legal branch alone can be enforced.
- Section 65: when an agreement is discovered to be void, or a contract becomes void, a person who received an advantage under it must restore it or make compensation for it.
Meaning and definition
The Act does not use the word "illegal" as a defined term. It speaks of an unlawful object or consideration and says such an agreement is void. In practice, illegal means an agreement the law forbids or condemns on a ground in section 23.
A void agreement is wider. It includes agreements that are void for a reason short of illegality, such as an agreement without consideration or a wager.
Detailed explanation
Step 1: no enforcement
Neither party can sue on an illegal agreement. The court will not help a party who relies on his own illegal act. The maxim ex turpi causa non oritur actio (no action arises from a base cause) states the idea.
Example. Hari agrees to pay Mohan Rs 1 lakh to bribe an official for a licence. Mohan keeps the money. Hari cannot sue Mohan on the agreement, because its object is unlawful.
Step 2: collateral transactions
A collateral transaction is a separate deal connected to the main one. If the main agreement is illegal, a collateral deal made to further the illegal purpose is tainted and also unenforceable. If the main agreement is merely void, such as a wager, a collateral deal is not automatically tainted (Gherulal Parakh v. Mahadeodas Maiya).
Step 3: restoring benefits (section 65)
Section 65 requires a person to restore an advantage received under an agreement discovered to be void. The Act's illustration (a): A pays B Rs 1,000 for B's promise to marry C, A's daughter. C is dead at the time of the promise. The agreement is void, but B must repay the Rs 1,000.
Section 65 speaks of an agreement "discovered" to be void, which presupposes that a party did not know. Where both parties know of the illegality, the maxim in pari delicto potior est conditio defendentis applies. It means that where both are equally at fault, the defendant's position is stronger. The court usually leaves the parties where it finds them.
Step 4: separating legal and illegal parts
Section 24 treats an unlawful part as spoiling the whole agreement. Sections 57 and 58 are two special cases that save the legal part.
- Section 57, reciprocal promises. A and B agree that A will sell B a house for Rs 10,000, but that if B uses it as a gambling house he will pay A Rs 50,000. The sale is a contract. The gambling-house promise is a void agreement.
- Section 58, alternative promises. A pays B Rs 1,000 for B's delivery of either rice or smuggled opium. It is a valid contract to deliver rice, and a void agreement as to the opium.
Don't confuse: void and illegal
Every illegal agreement is void. The reverse is not true, and the difference decides what happens to connected deals.
| Point | Merely void agreement | Illegal agreement |
|---|---|---|
| Ground | A rule of the Act makes it void, with no illegality | Unlawful object or consideration (section 23) |
| Enforceable | No | No |
| Collateral transactions | Not automatically tainted | Tainted if made to further the illegal purpose |
| Example | A wager (section 30) | An agreement to bribe an official |
Inside the idea. Kavita lends Rs 50,000 to Ramesh knowing he will use it to buy smuggled goods. The loan was made to further an illegal purpose. It is tainted and cannot be enforced.
Just outside it. Two friends bet Rs 500 on a cricket match, and a third friend lends the loser Rs 500 to pay up. The bet is void but not illegal. The loan is a collateral deal that is not automatically tainted.
Common mistakes
- Using "void" and "illegal" as the same word. Illegal is the narrower group.
- Forgetting that collateral transactions depend on whether the main agreement is illegal or merely void.
- Applying section 65 where both parties knew of the illegality.
- Forgetting sections 57 and 58, which save the legal part in two cases.
Apply it
Problem
Hari pays Mohan Rs 20,000 in advance for the delivery of either sugar or smuggled liquor, at Mohan's choice. Mohan delivers nothing. Hari sues. What is the position?
Issue. Is the agreement enforceable when one branch of the alternative is illegal?
Rule. In an alternative promise, one branch legal and the other illegal, only the legal branch can be enforced (section 58).
Application. The sugar branch is legal. The liquor branch is illegal and void.
Conclusion. Hari can enforce the promise to deliver sugar. He cannot enforce the promise as to smuggled liquor.
Leading case laws
- Gherulal Parakh v. Mahadeodas Maiya (1959), Supreme Court, AIR 1959 SC 781
Facts. Gherulal Parakh and Mahadeodas Maiya, managers of two joint Hindu families, formed a partnership to enter forward contracts in wheat with two firms at Hapur, sharing profits and losses equally. The dealings were for differences, with no intention to deliver goods, so they were wagers. Mahadeodas sued Gherulal for half of the losses.
Principle. A wagering agreement is void under section 30 but is not forbidden by law. So the partnership's object was not unlawful under section 23, and the partnership was not void. Mahadeodas Maiya was allowed to recover half the losses.
Why it matters. It is the clearest example that void and illegal are different, with different effects on connected deals.
How to write this answer in the exam
5-mark answer
- State that every illegal agreement is void but not every void agreement is illegal.
- Give the section 23 grounds in one line.
- State the effects: no enforcement and taint on collateral deals.
- Give one example of each.
10-mark answer
- Section 23 and the meaning of unlawful.
- Void versus illegal, with a comparison table.
- Gherulal Parakh v. Mahadeodas Maiya.
- Effect on collateral transactions.
- Section 65 and the maxim in pari delicto.
- Sections 57 and 58 against section 24.
Key points to remember
- Illegal agreements are void. Not every void agreement is illegal.
- A collateral deal made to further an illegal purpose is tainted. A collateral deal to a merely void agreement is not automatically tainted.
- Section 65: advantages under an agreement discovered to be void must be restored.
- Where both parties know of the illegality, the court usually leaves them where it finds them.
- Sections 57 and 58 save the legal part in reciprocal and alternative promises.
Quick self-test
1. Is every void agreement illegal?
No. Every illegal agreement is void, but a void agreement such as a wager or one without consideration is not illegal.
2. What does section 58 say?
In an alternative promise with one legal and one illegal branch, only the legal branch can be enforced.
3. What is the effect of illegality on a collateral transaction?
A collateral deal made to further the illegal purpose is also unenforceable.