VOID & ILLEGAL AGREEMENTS

This final draft is submitted in the fulfilment of project in Law of Contracts.

Submitted to: Submitted by:

Ms Sushmita Singh TEJAS,(2855)
B.B.A.,LL.B (Hons.)

February,2023
Chanakya National Law University, Patna

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 TABLE OF CONTENTS

S. No. Particulars Page No.

Declaration by Candidate 3

Certificate of Supervisor 4

Acknowledgement 5

1. Void & Illegal Agreements 6-15

1.1 Introduction
1.1.1 Background
1.1.2 Review of Literature
1.2 Present Study
1.2.1 Statement of Problem
1.2.2 Research Questions
1.2.3 Research Objectives
1.3 Hypothesis
1.4 Research Methodology
1.4.1 Sources of data
1.4.2 Mode of citation
1.5 Scope and Limitations of the study
2.
Project Chapters:
2.1 Void & illegal agreements
2.2 Illegal Agreements Vs Void Agreements
2.3 Case Laws
2.4 Critical Analysis
2.5 Remedies Available to Aggrieved Parties
3.
Conclusion

Bibliography 16

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 DECLARATION BY SCHOLAR

I, TEJAS, hereby declare that the work reported in B.B.A. LL. B (Hons.) project report titled
“VOID & ILLEGAL AGREEMENTS” submitted at Chanakya National Law University,
Patna is an authentic record of my work carried out under the supervision of Ms Sushmita
Singh. I have not submitted this work from elsewhere and I am fully responsible for the
contents of my project report.

TEJAS (2855)

B.B.A. LLB. (Hons.)

2nd Semester

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 CERTIFICATE OF SUPERVISOR

This is to certify that the work /project titled “VOID & ILLEGAL AGREEMENTS”,
submitted by TEJAS at Chanakya National Law University, Patna is a bona fide record of her
original work carried out under my supervision. To the best of my knowledge and belief, the
dissertation: (i) embodied the work of the candidate herself; (ii) has duly been completed; (iii)
is up to the standard both in respect of content and language for being referred to the
examiner.

(Signature of Supervisor)

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 ACKNOWLEDGEMENT

I take this opportunity to express my profound gratitude and deep regards to my guides Ms
Sushmita Singh (Teacher Associate), for her exemplary guidance, monitoring and constant
encouragement throughout the course of this project. The help and guidance given by her
from time to time shall carry the researcher a long way in the journey of life on which the
researcher is about to embark. The success and final outcome of this project required a lot of
guidance and assistance from many people and I am extremely privileged to have got this all
along the completion of this project. Last, but not the least, I am thankful to all the members
of my family, friends and teachers without whose assistance and encouragements I could not
have been able to complete my thesis.

THANK YOU,

TEJAS

B.B.A. LL. B (Hons.)

Roll No. 2855

SECOND SEMESTER,

SESSION – 2022-2027

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 1. INTRODUCTION
Illegal agreement can be defined as an agreement between parties which is not recognised as
legal by the courts because they have an illegal end. Illegal agreement is the type of the
agreement which cannot be treated by the official jurisdiction as the regular one. In simple
words, an agreement between two or more parties which results in violation of law is termed
as an illegal agreement. A contract is illegal if it involves doing something that is a criminal
act or a civil wrong, or against the public good. While making any agreement it is necessary
to ensure that the agreement is as per the law. It is only the legal agreements which give rise
to any kind of legal right. An agreement the object of which is opposed to the law of the land
may be either unlawful or simply void, depending upon the provision of the law to which it is
opposed.1 A classic example of an illegal agreement is an agreement for a theft.
Section 23 of the Indian Contract Act, 1872 renders certain considerations and agreements as
unlawful or illegal. An agreement hit by Section 23 is void ab initio and thereby in no
circumstances enforceable. It states what consideration and objects are lawful, and what not.
The consideration or object of an agreement is lawful, unless it is forbidden by law; or is of
such a nature that, if permitted, it would defeat the provisions of any law; or is fraudulent; or
involves or implies, injury to the person or property of another; or the Court regards it as
immoral, or opposed to public policy. In each of these cases, the consideration or object of an
agreement is said to be unlawful. Every agreement of which the object or consideration is
unlawful is void.2 A void contract cannot be enforced by law. Void contracts are different
from voidable contracts, which are contracts that may be (but not necessarily will be)
nullified.3 However, when a contract is being written and signed, there is no automatic
mechanism available in every situation that can be utilized to detect the validity or
enforceability of that contract. Practically, a contract can be declared to be void by a court of
law. So the main question is that under what conditions a contract can be deemed as void?

An agreement to carry out an illegal act is an example of a void agreement. For example, a
contract between drug dealers and buyers is a void contract simply because the terms of the
contract are illegal. In such a case, neither party can go to court to enforce the contract. A
void agreement is void ab initio, i e from the beginning while a voidable contract can be
voidable by one or all of the parties. A voidable contract is not void ab initio, rather, it
becomes void later due to some changes in condition.

LITERATURE REVIEW

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Avtar singh, Contract and specific Relief , Lucknow: Eastern Book Company,2022,253
2
available at https://indiankanoon.org/doc/1625889/> last accessed on February 14,2023
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In the book “Contract and Specific Relief”, Avtar Singh brilliantly explain about the several
provisions regarding void & agreements along with illustrations.

RESEARCH OBJECTIVES

To understand the provisions given in Indian Contract Act regarding void &illegal
agreements.

RESEARCH QUESTIONS

1. When an agreement becomes void or illegal?

2. How is void agreement different from illegal agreement?

HYPOTHESIS

One of the factors that make an agreement void is the illegality of the contract, such as
contract whose object or consideration is unlawful.

SCOPE AND LIMITATIONS OF THE STUDY

The scope of research is to study the about various laws related to void & illegal agreements
in contract. The limitation of the research is that the researcher will be relying on case laws
from 2 or 3 other countries other than India for the study.

RESEARCH METHODOLOGY

The researcher will be relying on Doctrinal method of research to complete the project. The
doctrinal method helps in doing a comparative study of the topic. These include various
primary and secondary sources of literature and insights.

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MODE OF CITATION

The mode of citation used is Bluebook 20th Edition.

2. VOID & ILLEGAL AGREEMENTS

void contract cannot be enforced by law. Void contracts are different from voidable
contracts, which are contracts that may be (but not necessarily will be) nullified.4 However,
when a contract is being written and signed, there is no automatic mechanism available in
every situation that can be utilized to detect the validity or enforceability of that contract.
Practically, a contract can be declared to be void by a court of law. So the main question is
that under what conditions a contract can be deemed as void?

An agreement to carry out an illegal act is an example of a void agreement. For example, a
contract between drug dealers and buyers is a void contract simply because the terms of the
contract are illegal. In such a case, neither party can go to court to enforce the contract. A
void agreement is void ab initio, i e from the beginning while a voidable contract can be
voidable by one or all of the parties. A voidable contract is not void ab initio, rather, it
becomes void later due to some changes in condition. In sum, there is no scope of any
discretion on the part of the contracting parties in a void contract.5 The contracting parties do
not have the power to make a void contract enforceable.

A contract can also be void due to the impossibility of its performance. For instance, if a
contract is formed between two parties A & B but during the performance of the contract the
object of the contract becomes impossible to achieve (due to action by someone or something
other than the contracting parties), then the contract cannot be enforced in the court of law
and is thus void. A void contract can be one in which any of the prerequisites of a valid
contract is/are absent for example if there is no contractual capacity, the contract can be
deemed as void. In fact, void means that a contract does not exist at all. The law can not
enforce any legal obligation to either party especially the disappointed party because they are
not entitled to any protective laws as far as contracts are concerned.

An agreement may be void if any of the following:

• Made by incompetent parties (e.g., under the age of consent, incapacitated)

• Has a material bilateral mistake

• Has unlawful consideration (e.g., promise of sex)

• Concerns an unlawful object (e.g., heroin)

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Supra no. 1 at 6
4
Puneet Chabra, “When is a Contract Considered Illegal?”, April 9 2019, at https://blog.ipleaders.in/contract-
considered-to-be-illegal/ last accessed on February 5 2023

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• Has no consideration on one side

• Restricts a person from marrying or remarrying

• Restricts trade

• Restricts legal proceedings

• Has material uncertain terms

• Incorporates a wager, gamble, or bet

• Contingent upon the happening of an impossible event

• Requires the performance of impossible acts

Void contracts are somewhat different from voidable contracts. When dealing with contracts,
the terms "void" and "voidable" are often confused. Even though these two contract types
seem similar, they are actually completely different.
A contract that is "void" cannot be enforced by either party., The law treats a void contract as
if it had never been formed. A contract will be considered void, for example, when it requires
one party to perform an act that is impossible or illegal.
A "voidable" contract, on the other hand, is a valid contract and can be enforced. Usually
only one party is bound to the contract terms in a voidable contract. The unbound party is
allowed to cancel the contract, which makes the contract void.
The main difference between the two is that a void contract cannot be performed under the
law, while a voidable contract can still be performed, although the unbound party to the
contract can choose to void it before the other party performs.

An agreement is said to be void when it fulfils the following terms:

 Fraudulent –When the terms of the contract are misrepresented by either of the

party or influence a person to enter into an agreement fraudulently then the
agreement is considered to be illegal.

 Forbidden by law – If an agreement is such a nature, that it would defeat the

provisions of law, the agreement is considered to be “void”. A simple illustration
is the sale of liquor without licence. The sale is void and the price in this case, is
irrecoverable.

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  Injury to a person or a property – An agreement between two persons to injure
the person or property of another is unlawful. When the agreement is of a nature
that it would cause injury to a person or a property then the agreement is
considered to be “void”. An agreement to commit a crime or a civil wrong, for
example, ton assault or beat a person or to deceive him or to publish a libel against
him, fall in this category.

 Opposed to public policy –When the agreement is opposed to public policy then

the contract is considered to be “void”.6 The term “public policy” in its broadest
sense means that sometimes the courts will, on consideration of public interest,
refuse to enforce a contract.
 Defeat any Law –Sometimes the object of, or the consideration for, an agreement
is such that though not directly forbidden by law, it would, if permitted, defeat the
provisions of any law. Such an agreement is also void. Also, an agreement which
defeats the law of a friendly country would be equally void. Foster vs Driscoll
gives an illustration for the same.
 When the terms and conditions of the contract are mistaken by either of the
party – When the terms and conditions of the contract have not been understood
by the party or are vague in nature.7
 Restraint of Trade- Contracts in restraint of trade are a variety of illegal contracts
and generally will not be enforced unless they are reasonable in the interests of the
contracting parties and the public. Contracts in restraint of trade if proved to be
reasonable can be enforced. When restraint is placed on an ex-employee, the court
will consider the geographical limits, what the employee knows and the extent of
the duration.

ILLEGAL AGREEMENT, under the common law of contract, is one that the courts will not
enforce because the purpose of the agreement is to achieve an illegal end. The illegal end
must result from performance of the contract itself. The classic example of such an agreement
is a contract for murder. A contract is illegal if it is forbidden by law; or is of such nature
that, if permitted, would defeat the provisions of any law or is fraudulent; or involves or

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Law of contracts by R.K Bangia
6
SETTING ASIDE ILLEGAL & VOID CONTRACTS , Vishnu Kumar
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implies injury to a person or property of another, or court regards it as immoral or opposed to
public policy. These agreements are punishable by law. These are void-ab-initio.8
“All illegal agreements are void agreements but all void agreements are not illegal.”
However, a contract that requires only legal performance on the part of each party, such as
the sale of packs of cards to a known gambler, where gambling is illegal, will nonetheless be
enforceable. A contract directly linked to the gambling act itself, such as paying off gambling
debts (see proximate cause), however, will not meet the legal standards of enforceability.
Therefore an employment contract between a blackjack dealer and a speakeasy manager, is
an example of an illegal agreement and the employee has no valid claim to his anticipated
wages if gambling is illegal under that jurisdiction.
In Bovard v. American Horse Enterprises (1988), the California Court of Appeal for the
Third District refused to enforce a contract for payment of promissory notes used for the
purchase of a company that manufactured drug paraphernalia. Although the items sold were
not actually illegal, the court refused to enforce the contract for public policy concerns.
In Canada, one cited case of lack of enforceability based on illegality is Royal Bank of
Canada v. Newell, 147 D.L.R (4th) 268 (N.S.C.A.), in which a woman forged her husband's
signature on 40 cheques, totalling over $58,000. To protect her from prosecution, her
husband signed a letter of intent prepared by the bank in which he agreed to assume "all
liability and responsibility" for the forged cheques. However, the agreement was
unenforceable, and struck down by the courts, because of its essential goal, which was to
"stifle a criminal prosecution." Because of the contract's illegality, and as a result voided
status, the bank was forced to return the payments made by the husband.
Contracts in restraint of trade are a variety of illegal contracts and generally will not be
enforced unless they are reasonable in the interests of the contracting parties and the public.
Contracts in restraint of trade if proved to be reasonable can be enforced. When restraint is
placed on an ex-employee, the court will consider the geographical limits, what the employee
knows and the extent of the duration. Restraint imposed on a vendor of business must be
reasonable and is binding if there is a genuine seal of goodwill. Under common law, contracts
to fix prices are legal. Sole supplier ("solus") agreements are legal if reasonable. Contracts
which contravene public policy are void. Void Contract means that a contract does not exist
at all. The law can not enforce any legal obligation to either party especially the disappointed
party because they are not entitled to any protective laws as far as contracts are concerned.
An agreement to carry out an illegal act is an example of a void contract or void agreement.
For example, a contract between drug dealers and buyers is a void contract simply because
the terms of the contract are illegal. In such a case, neither party can go to court to enforce the
contract. 9

Agreement in restraint of legal proceedings is void. (Section 28) :- An agreement purporting

to oust the jurisdiction of the courts is illegal and void on grounds of public policy.Section 28
of the Act renders void two kinds of agreement , namely:

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 An agreement by which a party is restricted absolutely from enforcing his legal rights arising
under a contract by the usual legal proceedings in the ordinary tribunals.

An agreement which limits the time within which the contract rights may be enforced.
However this is also not an absolute rule and it has two exceptions to it which is as follows :-
This section shall not render illegal a contract , by which two or more persons agree that any
dispute which may arise between them in respect of any subject or class of subjects shall be
referred to arbitration , and that only the amount awarded in such arbitration shall be
recoverable in respect of the dispute so referred.
Nor shall this section render illegal any contract in writing, by which two or more persons
agree to arbitration any question between them which has already arisen , or affect any
provision of any law in force for the time being as to references to arbitration

3.ILLEGAL AGREEMENTS VS VOID AGREEMENTS

Definition of Void Agreement

The term ‘void’ means no legal binding and ‘agreement’ means consensus between parties
regarding a course of action. To simply, put a void agreement is an agreement which is not
legally binding, i.e., an agreement which lacks enforceability by law is void.

A void agreement loses its legal binding nature when declared void. Such agreement does not
create any rights and obligation for the parties, as well as the parties, do not get any legal
status. The transactions associated with the void transaction would be valid.

Certain agreements are void ab initio as per Indian Contract Act, which are – Agreement in
restraint of marriage, agreement in restraint of trade, agreement in restraint of legal
proceeding, agreement with minor, agreement whose object or consideration is unlawful,
wagering agreement, etc.

Key Differences Between Void and Illegal Agreement

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The difference between void and illegal agreement can be drawn clearly on the following
grounds:

 An agreement which loses its legal status is a void agreement. An illegal agreement is
one which is not permissible under law.
 Certain void agreements are void ab initio while some agreements become void when
it loses its legal binding. On the other hand, an Illegal agreement is void since the very
beginning. A void agreement is not prohibited by Indian Penal Code (IPC), but IPC
strictly prohibits an illegal agreement.
 The scope a void contract is comparatively wider than an illegal contract as all
agreements which are void may not necessarily be illegal, but all illegal agreements
are void from its inception.
 A void agreement is not punishable under law whereas an illegal agreement is
considered as an offence, hence the parties to it are punishable and penalised under
Indian Penal Code (IPC).
 Collateral agreements of a void agreement may or may not be void i.e. they may be
valid also. Conversely, collateral agreements of an illegal agreement cannot be
enforceable by law as they are void ab initio.10

10
7 Surbhi S, “Difference Between Void and Illegal Agreement”, 2nd June 2017 at <
https://keydifferences.com/difference-between-void-and-illegal-agreement.html> last accessed on February 5
2023

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 4.CASE LAWS

 In Alice Mary vs. William, Clarke the plaintiff, married women agreed to live in
adultery with the man who agrees to pay her a single consolidated remuneration of
Rs 50 per month. It was held by the court, that carrying out a lawful part from
unlawful one cannot be considered as valid, hence is void or unlawful.

 In Central Inland Transport Corporation Ltd. vs. Brojo Nath, the terms of a
Contract of employment arbitrary and unreasonable which provided that the
employer could terminate the services of a permanent employee by giving him a 3
months notice or 3 months salary. The Supreme Court held the terms of the
contract to be unreasonable and against the public policy and therefore void under
section 23 of the Indian Contracts Act.
 In Bovard v. American Horse Enterprises (1988), the California Court of
Appeal for the Third District refused to enforce a contract for payment of
promissory notes used for the purchase of a company that manufactured drug
paraphernalia. Although the items sold were not actually illegal, the court refused
to enforce the contract for public policy concerns.
 In Hussainali Casan v Dinbai, Macleod CJ and Crump J held that a contract
which was immoral at the time, and therefore, could not support an immediate
promise to pay, did not become innocent by merely being past consideration.

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 5.CRITICAL ANALYSIS

The particular provision of the Indian Contract Act in question at the current instance
provides in detail, what objectives behind entering into a contract might render it illegal and
void. These provisions are clear and detailed, and have been commented on by judicial
experts in multiple precedents over the years. However, the segment involving ‘opposed to
public policy’ still creates an area of ambiguity with respect to determining if a contract is
illegal or not. As mentioned in a few cases, public policy is generally construed to be
something for public good; however, its definition keeps evolving according to
circumstances. Therefore, the interpretation of this provision does not stay uniform and
concrete. It has to be determined based upon the situation, which sometimes is largely based
on opinions. Such opinions are subjective and fall on how a particular person choose to
analyze a given situation. This creates an ambiguous and unsettling circumstance for decision
makers.

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 6.REMEDIES AVAILABLE TO AGGRIEVED PARTIES

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
from an illegal contract cannot recover the damages as the contract does not exist in the “eyes
of Law”.

Contracts for the sale of illegal substances is prohibited under Narcotic Drugs and
Psychotropic Substances Act, 1985 is considered to be illegal when the drugs are sold, then
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
party can recover damages arises from an illegal contract.

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 7.CONCLUSION

Section 23 of the Indian Contract primarily focuses on the object, i.e., the purpose of entering
into a contract. It determines that if such object is illegal and opposed to public policy, the
contract itself is illegal and void, having no legal enforceability. Such types of contracts
create no valid obligations of the parties of its performance, and bind them with criminal
liability in case the act performed in lieu of consideration is illegal in nature. It is clear from
the light of above Judicial decisions, that the contract legality totally depends upon its nature
and terms of the contract. If the terms of the Contract are illegal or opposed to the policy
which affects the public at large and are unreasonable, then the contract is considered to be
“null” in the eyes of law and it cannot be enforceable in the court. An agreement that violates
any law or whose nature is criminal or is opposed to any public policy or immoral is an
illegal agreement. These agreements are void ab initio, and so the agreements collateral to the
original agreement are also void. Here collateral agreement refers to the transaction
associated or incidental to the main agreement.
The law strictly prohibits such agreements, hence entering into an illegal agreement is called
a punishable offence in the eyes of law. Therefore, the parties are penalised for the same,
under Indian Penal Code.
.

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 8.BIBLIOGRAPHY

 Books:

Avtar Singh, Contract and Specific Relief (2020)

 Websites:

https://lexlife68840978.wordpress.com/2020/06/04/law-of-contract-illegal-agreements/

https://keydifferences.com/difference-between-void-and-illegal-agreement.html

https://aishwaryasandeep.com/2022/02/07/contract/

https://indiankanoon.org/doc/1625889/

https://lawhandbook.sa.gov.au/ch10s03s09.php

https://lawaspect.com/illegal-contracts/

https://blog.ipleaders.in/contract-considered-to-be-illegal/

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