Business Law Complete Notes for BBS TU/ Legality of Object and Consideration

Question answer base note of Introduction to legality of object and consideration

1. Define the term legality of object and consideration. Explain the need and importance of the legality of object and consideration.

Answer

Introduction to legality of object and consideration

The legality of object and consideration is one of the most important elements for forming a valid contract. It grants legal status to an agreement. In such sense, the legality of object and consideration plays a vital role to convert an agreement into a contract.

‘Legality’ means ‘conformity’ with law or validity in the eye of law. ‘Object’ means the ‘purpose’ or ‘design’ or ‘plan’ of the contract. ‘Consideration’ is ‘something in return.’

To turn any agreement into a valid contract, the object and consideration of such the agreement should be associated with legal conformity. If the object and consideration of an agreement are unlawful and illegal, that cannot be enforceable. 

Thus, to be regarded as a valid contract, all aspects of the contract like subject matters, purpose, design, intention, motive, the procedure must be valid and lawful. Unless an agreement meets this parameter, it is not the contract or valid contract.

It is very simple to understand that if the contract or an agreement comprises unlawful objects then it is void or not legal at all and there is no need to appeal to the door of the court to declare void such as an agreement that consists of illegal objects.

The Civil Code, 2074 under Section 517(K), without defining the term legality of an object, simply states that ‘Agreements with an unlawful object are void’. Section 23 of the Indian Contract Act, 1872 reads that the consideration of an 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 provision 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.

Thus, the consideration and objective of an agreement, therefore, is unlawful if it is prohibited by the law if it defects the provisions of any law if it is fraudulent if it involves or implies injury to the persons or property of another, if the court regards it as immoral and where the court regards it as opposed to public policy.

The words object and consideration are not synonymous. They are different from each other. But they can also not be set aside easily from others. Whatever it is, there must be object and consideration in an agreement and both must be lawful to form a valid contract. Otherwise, the unlawful object and consideration agree to be void.

For example, A promises to support food, cloths to C, a child of B, and B promises to pay A Rs. 10,000 per month for the purpose. Here, each party’s promise is the consideration for the other party and they are lawful.

Need and importance of legality of object and consideration

‘Legality of object and consideration’ is one of the essential elements of a valid contract. An enforceable agreement is an amount to a contract. The agreement which is made for a lawful consideration and with a lawful object is always enforceable by law. 

The legality of object and consideration is necessary to turn an agreement into the line of law. The object, process, motive, and all the entire aspects of the contract must be lawful and valid. The major importance of legality of object and consideration can be pointed as below:

• To protect businesses from unfair competition and unfair business practices
• To discourage socially undesirable conduct and inappropriate judicial practices.
• To enforce the contract and maintain law and order in the business community.
• Not to allow carrying out illegal acts through the legal agreements.
• It saves time and effort of the court from engaging in such unintended dealings.
• It brings certainty by the imposition of various conditions where the remedy is not available even to the injured party, so a person may remain far from such dealings.
• The court should not be a means to enforce rights in unlawful transactions.
• It helps to keep good morals in a society and a state.

Thus, the legality of the object stresses the need for agreeing in the line of law. Any attachment of any part of an agreement with unlawful matters may alter the whole agreement to be invalid.

2. What are voidable agreements/contracts? Explain the legal effect of voidable agreements?

Answer

The union of offer and acceptance creates an agreement. But agreement alone does not create legal obligations to perform. The contract is a fusion of an agreement and enforceability of the agreement and where the parties make a binding contract, they create rights and obligations between themselves. 

The contractual rights and obligations are as a nail and skin of a finger because one’s right is the other’s obligation and one’s obligation is the other’s right.

All the agreements are not regarded as a contract. Any agreement to be a contract requires the fulfillment of different essential elements. One of the essential elements of a valid contract is free consent. 

When the consent is not caused by coercion, undue influence, fraud, mistake, or misrepresentation, it is called free consent. The contract without free consent is known as a generally voidable contract, which can be avoided by the aggrieved party at his option. 

Thus, a contract is voidable when the consent of the party is not obtained with free consent. The voidable contract is treated as a valid contract if the aggrieved party:

• Has not taken action against the contract, or
• Has not proved lacking free consent by presenting evidence to be presented by himself, or
• Has accepted the contract

For example: A signs a contract to sell a motorcycle for Rs. 2000 with B because of B extended threats of life to A for signing contracts. Here, the contract of A is not free but caused by coercion. As a result, A can avoid the contract.

Thus, where the consent to an agreement is taken by coercion, undue influence, misrepresentation, or fraud the party whose consent was not free can apply before the court to avoid the contract within a certain time period of limitation fixed by the law.

Legal effect of voidable agreements/contract

Generally voidable contracts are not valid but they could be valid at the interest or option of the aggrieved party. It means the validity of the voidable contract is based upon the party whose consent was so caused. 

When a contract is a void then no party can make it valid but voidable contracts either can be valid or void. So, the voidable contract is different than a void contract. The legal effect of a voidable contract can be pointed as below:

1. The validity of the contract is always based on the option of the aggrieved party (the party whose consent was obtained without free consent). The voidable contract could be turned into a valid contract when the aggrieved party approves the contract as a valid one or if he did not declare the contract as a void within the time limit fixed by the court. For example, if A obtains the acceptance of B by coercion then the contract is voidable. Here the validity of the contract is based on the interest of A, if he wants to continue the contract then the voidable contract will be converted into valid one and if he declares the contract as a void before the court then the contract will be turned into void one and contractual relation between A and B is finished.
2. The voidable contracts are valid and binding upon the parties until it is avoided by the aggrieved party. Until the contract is avoided by the court the parties are bound by the contracts.
3. If the person in possession of goods under a voidable contract the property in such goods transfers to the third person who has published the goods in good faith and without having knowledge of the prior facts. 
4. The injured party can claim compensation or remuneration of his services under the voidable contract.
5. Parties of a voidable contract may be punished by law.
6. Burden of proof to prove the case of coercion or undue influence, or misrepresentation or fraud lies upon the party claiming the contract to be void.

Thus, an agreement including all the essential elements is called a valid contract. The valid contract is always enforceable by law without any difficulty. 

Among different essential elements of a valid contract, free consent is one of the important element and without free consent, the resulting contract is called voidable contract and which can be turned into valid at the option of the aggrieved party and if such party is not declared contract as a void within the time stipulated by the legal system of the nation.

3. Define the term unlawful agreement and explain the legal effect of unlawful agreements. 

Answer

Any transaction which is not supported by law of the land or nation directly or indirectly is called unlawful. Thus, the term unlawful refers to the situation or condition which is not accepted by law or which is against the provisions of existing law of the land. In the same way, an unlawful agreement is one which is void and not enforceable as it is discountenanced by law.

The unlawful agreement may be illegal, or immoral, or opposite to public policy. So, unlawful agreements have a wider scope to cover different types of agreements. All the category of agreements which come under unlawful agreements can be explained as below;

Illegal Agreements or Illegal VS Unlawful Agreements

All the agreements opposite to the legal provision of the state, opposite to any other special laws, act, directives are illegal agreements and these are void from the beginning as they don’t have any legal effect between the immediate parties.

An agreement to commit a crime or trot i.e., an agreement to assault, or theft or an agreement to publish a libel is illegal. Doing any illegal agreement is equal to doing crime and these all come under the jurisdiction of criminal law.

Illegal agreements are more harmful and criminal in nature as a comparison to unlawful agreements.

The unlawful agreement only lacking the fulfillment of legal formalities or legal principles but the illegal agreement are fully against the legal principles.

There is always a criminal mind behind the illegal agreement and is more dangerous for the society but in the unlawful agreement, there is no such criminal mind and comparatively less harmful to society too.

We can say that each illegal agreement is unlawful but every unlawful agreement is not essentially the illegal one. It means unlawful agreement may be immoral or opposed to public policy and solidarity. 

Let’s take some examples of the illegality of an agreement. If A borrows a sum of 20000 from B in order to bet with P as to the result of the football match. The contract of betting in sport is void and if A losses, P cannot recover from A. But B can recover the sum of money from A since his transaction with B is only collateral to avoid or unlawful agreement and is enforceable. 

Similarly, A had lent B Rs. 50,000 for the purchase of a gun to enable B to shoot C. Here the question of whether A recover sum of money from B depends upon whether A was aware of the purpose for which the money was borrowed. 

If A knowing the illegal purpose, had lent the money, he cannot recover, as his loan was an aid to the illegal object of B, and the illegal object defects collateral transaction also.  If, A did not know the purpose for which B borrowed the money even though B might have purchased a gun and shoot C, A can recover.

Thus, the validity of a collateral contract of illegal agreement is based on the knowledge of the participant to the contract.

Similarly, J lent Rs. 5000 to S to help him to purchase some prohibited goods from L, who is an alien enemy. If S enters into an agreement with L, the agreement will be illegal and agreement between J and S shall also become illegal, being collateral to the main transaction which is illegal.  

Here J could claim for his amount only if he did not have any knowledge of the purpose behind the loan.

Effect of illegality

The effect of illegality is based on the following two principles;

1. ‘Ex turpi causa non-oritur actio’; it means that the law discourages people from entering into an illegal agreement that arises from the base causes.
2. ‘In Pari delicto, Potior est conditio defendants’ it means in case of equal guilt, the defendant is in a better position. 

Based on the above principle, the overall effects of the illegality of contract are;

• The collateral transaction to an illegal agreement become tainted with illegality and are treated as illegal even though they would have been lawful themselves.
• Illegal agreements are always void-ab-initio.
• No action can be taken either for the recovery of money paid or property transferred under an illegal agreement or for the breach of it.
• In case of equal guilt in an illegal agreement, the position of the defendant is better than that of the plaintiff. The plaintiff, if innocent, may, however, sue to recover money paid or property transferred:      

1. Where he is not equally guilty with the defendant i.e., where he was induced to enter into an agreement by fraud, undue influence, or coercion.
2. Where the party does not have any information relating to illegal transition in the contract.
3. Where a considerable portion of the illegal deal has not been passed out and he is truthfully and honestly apologetic.  

The point to be noted is that when a contract contains several distinct promises or a promise to do several distinct acts of which some are legal and some are illegal and if the illegal promises or act is separable from the legal one, the court will enforce the legal promise or act and reject the one which is illegal. 

On the other side, if the illegal promise or act cannot be separated from the legal one, the whole contract is declared illegal.

Immoral Agreements

The term Moral or morals refer to the values or ideologies or philosophies or principles as well as ethics that we follow in our daily lives and with the help of them people know the variance among right and wrong or bad and good. If anyone is said immoral, we can assume that he makes decisions that deliberately and intentionally interrupt a moral agreement. 

Sometimes the concept of immoral may clash with the concept of amoral, which defines someone who has no morals and doesn't know what right or wrong means.

The subject of morality is a very complex matter and any act regarded as moral and immoral is a difficult task as the matter of morality may vary in between different persons, societies as well as different periods of time.

If any act is regarded as immoral in the eye of law or court, the court refuses to enforce the obligations in it.

In general, morality is related to personal affairs either martial or sexual that are affecting negatively to the publicly recognized morality in a particular society. Immoral acts are not crime/illegal until they are prohibited by law but are unlawful as the society intends to avoid for the shake of the well-being of the people.

An agreement relating to the following cases may be regarded as immoral:

• Where an agreement between a husband and wife for the future separation: Any agreements between husband and wife for the future separation are always immoral. However, agreement for the immediate separation between a husband and wife is enforceable.
• Illicit co-habitation: A man and women agree to live together without being married is immoral. Similarly, a father is agreed with someone to get his daughter for illicit cohabitation, the agreement is immoral and unlawful. 
• Agreement to provide the service of prostitution: It is sexual immorality and an agreement to deliver a prostitute and any claim in present time for service of the prostitute in the past are void in the ground of immorality.
• Agreement to the furtherance of sexual immorality: Any act or promise for lending money or assets to a prostitute to help her in her trade is immoral.
• Agreement to misuse of the influence acquired to others or agreement relating to misuse of influence: When there are parties in relation to trust and confidence then such trust should not be misused or breached.

Effect of immorality

All the agreement which is considered as immoral are always void and cannot be converted into a valid one. The contracts/agreement containing any sort of immorality in their content never get maturity to the valid contract and are unable to create any legal relationship between parties to a contract.

The matter of immorality is recognized in the particular society as a particular period of time and during such period or during the act is regarded as immoral all the contracts or agreements relating to such actions are illegal. 

Immoral acts are not a crime until they are declared by the law of land but they are unlawful as the society intends to avoid for the sake of well being of the human beings and society as a whole.

Agreements opposed to Public Policy

Public the policy is the general rule that ‘no one can do anything against the general good of all people’. The term ‘Public Policy’ is a vague and wide term in a sense that any act or transaction may be regarded as valid and later or maybe against the public policy with reference to time like slavery system and sati system followed in Nepal.

The public policy simply contains something or some matters which concern the public good and public interest and establish the general rules that no one can do anything against the general good of all the people.

Thus, any agreement made in connection with a transaction contrary to public policy is regarded as the agreement opposed to public policy and such agreement does not have any legality.

Some of the agreements which the court will not enforce because they are contrary to public welfare and public policy and are unlawful may be mentioned as below:

• Agreement of trading with an alien enemy
• Agreement interfering with personal rights
• Agreement restraining personal freedom
• Agreement to obtain and transfer public property
• Agreement in restraint of trade
• Agreement in restrain of marriage
• Agreement relating to marriage brokerage
• Agreement tending to create a monopoly
• Agreement to interfere with the administration of justice:

1. Agreement to interference with the course of justice
2. Agreement of shifting prosecution
3. Agreement for maintenance and champerty
4. Agreement of ousting the jurisdiction of the court
5. Agreement to vary the period of limitation

Effect of agreements opposed to public policy

The agreement which conflicts with the public interest, public good, and public morals or contravenes any matter concern to public welfare may be said to be opposite to public policy.

Such types of agreements are illegal and void. The contracts which are against public policy can not get the maturity of a valid contract and cannot create any types of legal and binding relationship between contracting parties.

All the agreement which is against the public welfare comes under an unlawful agreement and all the unlawful contracts are void ab initio. Law has not recognized any type of legal remedies for the aggrieved party under any contract which is opposed to public policy so these types of contracts are void.

Contracts which are opposite to public policy are not illegal and immoral but they are declared void as they can destruct the social balance and harmony if they are approved to implement. So, the matter of public policy and its violation is based on social understanding, practice and principles that are followed generally and widely.  

Therefore, the unlawful agreement includes illegal, immoral and agreements which are opposite to public policy and public goods.

If we have to say any examples of unlawful agreements than we can enlist the following agreements under the title of unlawful agreements;

• All the agreements having objective or consideration forbidden by law,
• Agreements whose objective and consideration defecting the provision of any law,
• Agreements with the fraudulent object,
• Agreements having immoral object or consideration,
• Agreement having objective or consideration opposite to public good or public policy, and
• Agreements including objective or consideration injuring to any person or property.  

Void agreements

Any agreement whose legal status is null and not valid is called a void agreement. Sometimes it is also known as synonymous to void contract but in fact no contractual rights and obligations arising out from such an agreement. So, it cannot be said to be a contract. 

The status of such agreement is equivalent to the agreement of social nature based on mutual understanding and belief. In such a way, a void agreement is a mere agreement and not a contract at all and it cannot be enforced by law because such an agreement is void from the beginning.

The Civil Code of Nepal has not defined this term but Section 517 of the Civil Code has stipulated some legal provisions relating to the void agreement. Agreement in restraint od trade, marriage, enjoying facilities/public facilities, consisting of impossible performances, etc. fall under this category.

According to Section 2(g) of the Indian Contract Act, 1872 has defined this term as an agreement not enforceable by law. It means any agreement that cannot be enforced legally is a void agreement. Some agreements’ may be void from the beginning and some may become void at the time of performance.   

(For more detail please click HERE)

Void VS Illegal Agreements

Both types of agreements are legally unenforceable and not able to create any legal rights and obligations between the parties. 

However, there are certain differences between above two types of agreement which we can show as below;

Basis	Void agreement	Illegal agreement
Fulfillment of essentials	It does not fulfill one or more essential elements of a valid contract.	It is the contract against the law of crime. /criminal law.
Punishment	It may or may not be punishable.	It is essentially punishable.
Status	It may not be considered as a crime.	It is essentially a crime.
Other agreements	Other agreements relying on it and having good faith may be valid.	Other agreements relying on it is also illegal and void.
Legal jurisdiction	Void agreements are not dealt with criminal law or criminal code.	Illegal agreements are the subject matter of criminal code.
Degree of loss	Comparatively the outcome is less harmful.	The consequences are more harmful and devastating.

Void Agreement VS Voidable Contract

Contract which lacks one of the essential elements to be a valid contract and is not declared as void by the law is called a voidable contract. A lack of free consent can make a contract voidable.  

On the another side, any agreement whose legal status is null and not valid is called a void agreement. It means any agreement that cannot be enforced legally is a void agreement. Some agreements’ may be void from the beginning and some may become void at the time of performance.  

The major differences between void agreement and voidable contracts are as below;

Basis	Void Agreement	Voidable Contract
Lack of elements	It lacks one or all the essentials of a valid contract.	It lacks only one element i.e. free consent.
Time of void	It is void from beginning.	It is voidable from and could be valid at the option of an aggrieved party.
Bendiness	Parties are not bound by the void agreement from the beginning.	Parties are bound until it is avoided by the aggrieved party.
The option of the parties	Validity does not depend on the interest of the parties.	Validity depends on the interest and will of the aggrieved party.
Unlawful	The void agreement comes under unlawful agreements.	Voidable contracts are not unlawful.
Transfer pf ownership	No property is transferred in void agreement.	Property may transfer in the voidable contract.
Scope	Larger scope	Limited scope.

 

References

Mishra B.P. (2014), Mercantile Law, Kathmandu: Asia Books Distributers

Upreti Shreepraksh. (2018), Business Law, Kathmandu: Samjhana Publication Pvt Ltd

Kuchhal M.C. (1978), Mercantile Law, New Delhi: Vikas Publishing House Pvt Ltd

Panday Yugraj. (2019), Business Law, Kathmandu: Asmita Books Publisher & Distributors Pvt Ltd