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Hasnath K.H is a BCom LL.B student of Government law college, Ernakulam. she is a editor trainee of ljrfvoice.com
A agreed with B to conduct a liquor shop for which A advanced rupees 5 lakhs. B invested the money and carried on the business in the liquor shop for about a month, but the excise officials confiscated all the articles in the shop and prevented B from carrying on the liquid business for want of a permit from the department concerned. When A sued B for the return of the money advanced, B raised the contention that the agreement was ab initio void, how would you deal with their suit?
Introduction
In this scenario, the central issue revolves around whether the agreement between A and B is void ab initio due to its illegality. By Article 19 (1) (g) of the Indian Constitution guarantees all citizens the right to practice any profession, or to carry on any occupation, trade or business. However, this right is subject to reasonable restrictions imposed by the State in the interest of the general public which is mentioned in Article 19 (1)(2). By section Section 23 of The Indian Contract Act, states that for a contract to be valid, there must be the legality of object and consideration. The object is the purpose for which the parties enter into a contract. The fulfilment of the object leads to the transfer of the consideration agreed from one party to the other. The section creates a limitation on the freedom of a person in relation to entering into contracts and subjects the rights of such person to the overriding considerations of public policy and the others enunciated under it.
Illegality in Contracts:An illegal contract is one that violates the law or public policy. Courts generally refuse to enforce such contracts.Illegality can arise in various ways:Expressly Forbidden by Statute: If a contract is expressly or impliedly prohibited by law, it is void. Unlawful Purpose: Even if the contract is capable of lawful performance, if the agreed purpose is illegal, the contract may be void. Knowledge of Illegality: If a party knowingly enters into an illegal contract, it cannot seek legal remedies based on that contract.
Void Ab Initio: “Ab initio” means “from the beginning.” A contract is considered void ab initio if it was never valid from its inception. Examples of situations leading to void ab initio: Duress: If a party is coerced or deceived into entering the contract. Illegal Purpose: If the contract’s purpose is illegal. Violation of Statute: If the contract contravenes a specific law. In such cases, both parties are released from their obligations, and the contract is treated as if it never existed.
Section 23 of the Indian Contract Act specifies that the consideration or object of an agreement is lawful unless it falls into certain categories: it is forbidden by law, would defeat the provisions of any law, is fraudulent, involves injury to another person or property, or is regarded as immoral or opposed to public policy123. This section limits the freedom of individuals in entering into contracts and ensures that the consideration and object are lawful4
Section 24 of the Indian Contract Act, 1872 states that if any part of a single consideration for one or more objects or any part of the several consideration for a single object is unlawful, the agreement is void.
Illegality by Statute: Statutory illegality arises in two different ways: express: the statute states expressly that the contract of the type agreed or provisions in it are unenforceable, or implied: the illegality is implied from the statute.
Types of Statutory Illegality: Statutory illegality can arise in at least 3 ways. For example a statute could: outlaw parties entering into a type of agreement render carrying on a particular activity or business illegal, without regulatory approval ban particular types of clauses designed to achieve a particular end or objective.
When parties nevertheless do so, the contract is usually void for illegality. The rationale is that Parliament intended to outlaw the type of agreement, and legal effect is given to that intention by courts. The legislative provision may also provide that the entire type of contract or some particular term, is unenforceable by one or other party, rather than outlaw it altogether. Also, a statute can: ban one or more parties forming or performing a contract when they have no authority to do so, or impose a penalty if they do so. When that happens, the contract is prohibited. It does not necessarily follow that the contract is void or unenforceable by both parties. It might only be enforceable by one of the parties. For one party it is enforceable, and for the other party it might be unenforceable.
Consequences of Illegal Contracts: The possibilities for the consequences of an illegal contract now rides on what is essentially a reasoned value judgment based on the particular circumstances of the illegality, the law that has been offended, the other factors to assess what the outcome should be. The consequences of illegality include the possibilities of money paid under an ineffective (eg :a void), transaction may be recoverable reversing transfers of ownership of money and property; not enforcing any claim by awarding compensation; injunctions or make a declaration that would result in a profit being made to a person acting illegally or making orders such as those to unwind transactions to avoid that consequence no remedy being ordered in favour of either party ; declare that loans and guarantees as void contracts; severance of the terms of the contract, whereby the parts that remain constitutes an enforceable agreement. “Ab initio” is a Latin term that means “from the beginning” or “from inception.” In legal documents, this term is used to indicate that a certain fact or situation has existed since the start of a relevant time period. It’s often used in the context of something being void from the beginning, such as a marriage that was never legally valid. Imagine you’re signing a contract, and there’s a clause that says any disputes must be resolved through arbitration “ab initio.” This means that, from the moment the contract is signed, any disagreements between you and the other party must be handled through arbitration, not in a court of law. Using the term “ab initio” in legal documents helps create clarity and avoid confusion. It ensures that all parties involved understand the exact timeline and circumstances surrounding a particular fact or situation.
Relevant case laws: (Illegal contract cases)
“Union of India v. Colonel L.S.N Murthy and Another”: In August 1999, the Union of India invited tenders for the supply of fresh fruits for its troops from October 1, 1999, to September 30, 2000. Respondent 2 submitted a tender, which was accepted. However, on June 13, 2000, the Union of India issued a notice to Respondent 2 regarding the non-supply of fresh fruits. Respondent 2 explained the price increase of fruits and the impossibility to perform the contract due to increased prices.The arbitrator found the contract to be void ab initio due to the rates quoted by Respondent 2 being below 20% of the reasonable rates as per a government instruction. However, the court disagreed with the arbitrator’s decision. It held that the government instruction did not render the contract void because it did not constitute a “law” within the meaning of Section 23 of the Contract Act. Therefore, the contract between the Union of India and Respondent 2 was enforceable.
The doctrine of severability : It is a legal principle that allows a court to separate invalid provisions of a statute or contract from the valid ones, narrowing down the application of the law or agreement to only those parts that remain enforceable. This means that if any part of a law or contract is found to be unconstitutional or otherwise invalid, the remaining sections can still stand and be enforced, as long as they can operate independently.
The blue pencil rule in contract law: It refers to a legal doctrine that allows a court to modify or sever specific terms of a contract that are deemed unenforceable or invalid, while still enforcing the remaining parts of the agreement. This can save a contract from being voided in its entirety due to certain problematic clauses.
“Ex turpi causa non oritur actio”: It is a legal maxim that translates to “from a dishonorable cause an action does not arise”. This principle means that a person cannot pursue legal remedies if it arises from their own illegal or immoral act. This means that if both parties are aware they are at fault, they cannot hold each other liable in a way that would allow them to benefit from their own wrongdoing. In the case of Holman v. Johnson (1775), the court dealt with the issue of a contract for the sale of goods that were considered illegal due to being stolen. The plaintiff, Holman, sought to recover the price paid for the stolen goods from the defendant, Johnson. The court ruled that the contract was void as it pertained to illegal activities, affirming the principle that no action can be maintained for a consideration that is illegal. As a result, Holman could not recover the money because the sale was deemed unlawful. Other relevant cases are: Jeevanji Rao v. Mussamil, Tailor v. Chester.
CONCLUSION
In this case, if the agreement between A and B was void ab initio, it means that the contract was never valid from the beginning. Since the agreement was never lawful, both parties would be released from their obligations, and A would not be entitled to the return of the money advanced. Thus, unlawful consideration and unlawful object is forbidden by law so not enforceable and no person can claim damages. Therefore, B’s contention holds, and A’s suit would likely be unsuccessful.
(Question VIII (2), Kerala Judicial Services Mains Exam 2007)
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