What are Unlawful Agreements?

Definition 

A contract or arrangement that violates the law, public policy, or moral standards is considered unlawful. Such an agreement is null and void, meaning it is unenforceable in court from the outset. Unlawful agreements often involve actions that are illegal but not necessarily crimes, unlike illegal agreements, which typically involve criminal activity. In the case of Union of India v. A.K. Pandey[1] , the Court opined that no court will enforce an express or implied contract that is specifically or implicitly prohibited by law. Furthermore, a contract is void if it is forbidden by statute, especially when a penalty implies prohibition. In the case of Union of India v. Colonel L.S.N. Murthy[2], the court held that a contract would be legal unless its consideration and object are such that, if allowed, would violate the law; in that case, the consideration or object would be unlawful and would be void. The Court further held that an otherwise legal agreement cannot be declared void unless its effect results in the performance of an unlawful act; if the effect of an agreement does not result in the performance of an unlawful act, it should be refused as a matter of public policy in order to preserve the agreement between the parties and the solemn promises made under it.

For example, a contract that imposes unreasonable restrictions on employment or trade is void as it restricts an individual’s right to work or conduct business. By restricting an individual's capacity to work or conduct business beyond what is permitted by law, such agreements can undermine economic freedom and competition. A contract for the sale of products during a government-imposed embargo serves as another illustration. Agreements that violate intellectual property rights and public policy or morals are also appropriate examples of unlawful agreements. 

Illegality in the Contract under the Indian Contract Act, 1872

Every contract must be legally valid and enforceable under the law. Some contracts contain conditions that are against the law, rendering them illegal. In general, an illegal contract is one that violates the law or contradicts recognized moral values. When a contract is deemed illegal, it cannot be enforced in court, and the parties involved may suffer legal consequences. The word "illegal contract" is not clearly defined under the Indian Contract Act of 1872. The Act establishes the criteria under which contracts are considered unlawful or void. Section 23 of the Act specifies the situations in which the consideration or object of an agreement would be unlawful. According to this provision, the consideration or object of an agreement is unlawful if it fits into one of these categories.

• Forbidden by law: When the goal of an agreement is prohibited by law, the agreement is void. The term "law" in this context refers to the law that is currently in force in India, which encompasses Hindu and Mohammedan laws as well as unwritten law concepts. A simple example is the sale of liquor without a license. The sale is void, and the price is non-recoverable.
• Defeats legal provisions: If the nature of the agreement is such that enforcing it would undermine the objectives of current laws.
• Defeat any law: Sometimes the goal of, or consideration for, an agreement is such that, while not expressly outlawed by law, if approved, it would violate any law's requirements. Such an agreement is equally invalid. Simple examples can be seen in bail bond agreements.
• Fraudulent: An agreement made with the intent to commit fraud is void. When the parties agree to commit fraud on a third party, their agreement is unlawful. When, for example, a debtor agrees to pay a special commission or to give a creditor preference in order to obtain his permission to a composition suggested with other creditors, the arrangement is fraudulent.
• Injurious to others: An agreement between two people to harm the person or property of another is illegal. Similarly, if the purpose of an agreement is to cause or imply harm to another's person or property, the agreement is illegal and void. This category includes any agreement to commit a crime or a civil wrong, such as assaulting or beating someone, deceiving them, or publishing a libel against them.
• Immoral or against public policy: The court will not enforce an agreement with an immoral objective. As a result, any agreement with an immoral purpose or consideration is illegal. What is "immoral" is determined by the moral standards that predominate at the time and are upheld by the courts. However, many types of conduct have long been considered immoral and may continue to be so.

In case of Srimati Sabitri Thakurain v. Mrs. F.A Savi[3] the court concluded that the phrase "lawful agreement" does not include only agreements with illegal purposes, such as those whose purpose or consideration is illegal under the Contract Act, but also any agreements that are void on their face and will not be upheld by the court. According to Section 23 of the Indian Contract Act, an agreement's consideration or object is legal unless it is prohibited by law, is of a kind that, if allowed, would violate any law, is fraudulent, involves or implies harm to another person's person or property, or the court deems it immoral or against public policy. In each of these situations, the consideration or object of the agreement is unlawful[4]. Here are also some of the illustrations listed below to have the better understanding of Section 23 of the Indian Contract Act:

1. Rohan agrees to sell his house to Priya for Rs 10,000. Here, Priya promises to pay 10,000 rupees in exchange for Rohan's promise to sell the house. These mutual promises are valid considerations.
2. Vijay pledges to pay Anjali 1,000 rupees after six months if Rahul does not settle his debt to her. In exchange, Anjali offers to allow Rahul extra time to clear his loan. These commitments constitute valid considerations between the parties because they are reciprocal and legal.
3. If Lakshmi agrees to lease land to Ramesh without first alerting her principle, the deal is void. This is because there is fraud against Lakshmi's principle.
4. Sunil's promise to drop robbery charges against Vikram in exchange for Vikram returning the stolen items renders the agreement null and void. The act of dropping charges in exchange for something of value is illegal.
5. If Shyam's estate is sold for unpaid taxes and Rohit purchases it with the understanding that Shyam will reimburse the purchase price, the agreement is void. 

Unlawful Agreements v/s Illegal Agreements

In the case of Pearce v. Brooks[5] court emphasized the issue of unlawful agreements. The court found a contract between a prostitute and her customer invalid because it was deemed immoral. Similarly, agreements that attempt to circumvent legal protections for employees or consumers, such as labour laws or consumer rights, are illegal. For example, an employment contract that violates minimum wage rules or safety regulations would be deemed illegal. The Unlawful agreements, like illegal agreements, are void and unenforceable, but they differ in nature and legal repercussions. Unlawful agreements violate public policy, societal norms, or legal requirements, but may not result in criminal charges. These agreements are null and void from the outset, and neither party may enforce them in court. Civil remedies are largely applicable to unlawful agreements, preventing both parties from obtaining legal redress or damages for violations. Unlawful agreements include contracts that unfairly restrict trade or employment, thereby undermining public policy.

Illegal agreements involve conduct that is expressly prohibited by law and can result in criminal charges. Illegal agreements are not only null and void, but they can also lead to criminal charges, including fines and imprisonment. A contract for the selling of illicit substances, for example, would be considered illegal. While both unlawful and illegal agreements are unenforceable, the former violates legal provisions without resulting in criminal charges, whilst the latter involves criminal action and serious legal consequences.

While an unlawful agreement is unenforceable, it can impact the immediate parties involved. Subsequent parties or those entering into agreements as a result of the unlawful arrangement are not obligated. The recovery of money paid under such an agreement is conceivable, depending on the type of the agreement and the circumstances. Unlawful agreements include those that restrict trade, impede judicial proceedings, or include trading with an enemy. An illegal agreement is also void and unenforceable, just like an unlawful agreement. This form of agreement affects not just the immediate participants, but also any collateral transactions associated with the illegal agreement, making them illegal as well. Recovery of funds paid under an illegal agreement is impossible. Illegal agreements are typically more serious in nature and frequently include criminal behaviour. Agreements to deceive creditors, defraud revenue, commit crimes, or participate in immoral actions are some examples. While every illegal agreement is unlawful, the opposite is not always true. There is an extremely fine distinction between unlawful and illegal agreements, and distinguishing between the two requires careful scrutiny.

Illegal Contracts v/s Void Contracts 

Illegal and void contracts are both unenforceable in a court of law. They differ in their nature and implications. Illegal contracts frequently include unlawful activity, such as agreements to commit a crime or engage in fraud. Illegal purpose is one of the most essential factors determining the contract's legality. If the contract's subject matter is not permissible under the law. The contract is then regarded as 'illegal'. When either party misrepresents the terms of the contract or when a person is encouraged to engage into a fraudulent contract, the contract is considered illegal.

Void agreements, on the other hand, are not illegal but are declared invalid from the start due to an inherent flaw. These agreements do not meet the necessary elements for being enforceable under Section 10 of the Indian Contract Act.

According to the Indian Contracts Act:

Section 2(g) states that an agreement that is not legally enforceable is void. Section 2(j) states that when a contract is no longer legally enforceable, it becomes void. For example, Priya and Neha agree to buy and sell a piece of land, assuming it is in Chennai when it is actually in Coimbatore. This agreement is void because it is founded on a mutual error involving fundamental fact.

Remedies available to the aggrieved party 

If a contract is judged illegal, it is unenforceable by a court of law. The court will decide that there was no contract between the parties and leave them "as they are" at the moment of the breach. The parties who incurred the effects of an illegal contract cannot seek damages since the contract does not exist in the "eyes of the law".

Contracts for the sale of illegal substances, for example, are outlawed by the Narcotic Drugs and Psychotropic Substances statute of 1985, and they are regarded as illegal when the drugs are supplied in quantities other than those specified in the statute. The party which suffered losses cannot collect the sum under the contract.

Conclusion 

Understanding the distinction between illegal and unlawful agreements is critical for anyone studying contract law or entering into contracts. Illegal agreements entail illegal action and are void from the outset, with substantial legal ramifications. Unlawful agreements may contravene public policy or ethical standards, but they are not criminal. Furthermore, both sorts of agreements are unenforceable in court. The numerous sorts of agreements defined in the Indian Contract Act of 1872 are extremely vital in everyone's daily life. Understanding the various forms of agreements will assist you in protecting your rights and carrying out your duties in accordance with the law. Furthermore, a person should only enter into an agreement if it is legally binding. Courts have consistently refused to offer remedies to parties, citing the non-enforceability of these agreements.

[1] (2009) 10 SCC 552.

[2] (2012) 1 SCC 718.

[3] AIR 1940 Bom 60 (G).

[4] The Indian Contract Act, 1872, s. 23.

[5] (1866) LR 1 Ex 213.