Lawful Consideration

Consideration is one of the most important essentials of a valid contract. The principle of consideration ensures that a contract is not one-sided and that each party gives or promises something of value. Under the Indian Contract Act, 1872, consideration must not only exist but must also be lawful. An agreement without lawful consideration is void and unenforceable.

Meaning of Consideration

According to Section 2(d) of the Indian Contract Act, 1872:

“When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or abstain from doing something, such act or abstinence or promise is called a consideration for the promise.”

Thus, consideration is the price paid for the promise and forms the basis of contractual obligations

Meaning of Lawful Consideration

Consideration is said to be lawful when it is permitted by law and does not violate any legal or social principles. According to Section 23 of the Indian Contract Act, consideration is unlawful if:

• It is forbidden by law

• It defeats the provisions of any law

• It is fraudulent

• It involves injury to person or property

• It is immoral

• It is opposed to public policy

If the consideration is unlawful, the agreement becomes void, even if all other essentials of a valid contract are present.

Importance of Lawful Consideration in Contract

Lawful consideration is the backbone of a valid contract under the Indian Contract Act, 1872. It ensures that contractual agreements are not only supported by value but are also legally and socially acceptable. The importance of lawful consideration lies in the fact that it determines the enforceability, fairness, and legality of a contract.

• Gives Legal Validity to a Contract

Lawful consideration is essential to give legal validity to a contract. An agreement supported by unlawful consideration is void and unenforceable in a court of law, even if all other essentials of a valid contract are present. Consideration acts as the foundation upon which contractual obligations rest. Without lawful consideration, an agreement remains merely a moral obligation and lacks legal recognition. Thus, lawful consideration transforms an agreement into a legally binding contract.

• Ensures Fairness and Mutuality

Lawful consideration ensures fairness and mutual exchange between the contracting parties. It prevents one-sided agreements where only one party benefits. Each party must give or promise something of value, which promotes balance and equity in contractual relationships. Lawful consideration ensures that both parties consciously enter into obligations and receive benefits in return, making contracts fair and reasonable.

• Prevents Illegal and Immoral Agreements

The requirement of lawful consideration prevents contracts based on illegal, immoral, or unethical activities. Agreements involving crimes, fraud, injury to person or property, or acts opposed to public policy are declared void. This protects society from harmful transactions and ensures that contracts align with moral and legal standards. Lawful consideration thus acts as a safeguard against misuse of contractual freedom.

• Protects Public Interest and Public Policy

Lawful consideration plays a crucial role in protecting public interest. Contracts that are opposed to public policy, such as agreements restraining legal proceedings or encouraging corruption, are void. By insisting on lawful consideration, the law ensures that private agreements do not harm society at large. This maintains social order and upholds justice and ethical business practices.

• Determines Enforceability of Contract

Only contracts supported by lawful consideration are enforceable in a court of law. If the consideration is unlawful, the courts refuse to provide any legal remedy. This principle helps courts decide whether an agreement deserves legal protection. It also discourages parties from entering into illegal contracts by denying legal enforcement.

• Provides Certainty and Security in Business Transactions

Lawful consideration provides certainty and security in commercial dealings. Businesses can confidently enter into contracts knowing that agreements supported by lawful consideration will be upheld by law. This stability promotes trust, smooth transactions, and long-term commercial relationships. It also reduces disputes and litigation.

• Discourages Fraudulent Practices

By requiring consideration to be lawful, the law discourages fraud and deception in contracts. Fraudulent consideration makes the agreement void, ensuring that dishonest practices do not receive legal protection. This promotes honesty and transparency in contractual dealings.

When Consideration is Unlawful (Section 23)

Under the Indian Contract Act, 1872, not only must consideration exist, but it must also be lawful. Section 23 clearly states the circumstances under which the consideration or object of an agreement becomes unlawful. If the consideration is unlawful, the agreement is void and unenforceable in a court of law, even if all other essentials of a valid contract are present.

Consideration is said to be unlawful when it is prohibited by law or opposed to legal and moral principles. Section 23 provides specific situations in which consideration is regarded as unlawful. Such agreements are void ab initio, and the courts will not grant any relief to the parties.

1. Consideration Forbidden by Law

Consideration is unlawful if it involves an act that is expressly prohibited by law. Any agreement to do an act that the law forbids is void.
For example, an agreement to pay money for committing theft, bribery, or any criminal act is unlawful. Contracts involving illegal activities such as smuggling or drug trafficking are also void. The law does not permit enforcement of agreements that violate statutory provisions.

2. Consideration Defeating the Provisions of Law

If the consideration is such that it defeats or circumvents the provisions of any law, it is considered unlawful. Even if the act is not directly forbidden, if it is done to avoid or misuse the law, the agreement becomes void.
For example, an agreement to transfer property to avoid payment of income tax or to escape creditors defeats the provisions of law and is therefore unlawful.

3. Fraudulent Consideration

Consideration involving fraud or deceit is unlawful. If an agreement is entered into with the intention to cheat, deceive, or defraud another person, it is void under law. Fraudulent consideration undermines trust and fairness in contractual relationships.
For instance, an agreement to sell fake goods as genuine products or to misrepresent facts for monetary gain is void due to fraudulent consideration.

4. Consideration Involving Injury to Person or Property

If the consideration involves causing injury to a person or damage to property, it is unlawful. Injury may be physical, mental, or financial.
For example, an agreement to assault someone, destroy property, or cause financial loss in return for money is void. The law does not allow contracts that encourage harm or violence.

5. Immoral Consideration

Consideration is unlawful if it is immoral in the eyes of law. Although morality is not clearly defined, agreements promoting sexual immorality or corrupt practices are considered void.
For example, an agreement to pay money for illicit relationships or immoral acts is unenforceable. Courts refuse to recognize agreements that violate accepted moral standards.

6. Consideration Opposed to Public Policy

Consideration opposed to public policy is unlawful. Public policy refers to principles that protect public welfare and social interests.
Examples include agreements:

• Restraining legal proceedings

• Interfering with justice

• Promoting corruption or bribery

• Creating monopoly without legal authority

Such agreements are void as they harm society at large.

Effect of Unlawful Consideration

• The agreement becomes void ab initio

• No legal remedy is available to either party

• Collateral transactions may also become void

• Courts refuse to enforce such agreements