Legality of object and consideration for CLAT - Practice Questions & MCQ

Legality of Object:

Definition:

• The legality of object in a contract refers to the requirement that the purpose or objective of a contract must be lawful, not prohibited by law, and not against public policy. Contracts with illegal or immoral objectives are deemed void and unenforceable.

Examples of Contracts with Illegal Objects:

• Agreements for Illegal Activities:
  • Contracts for activities that are illegal or against public policy are void. For instance, an agreement to engage in drug trafficking, prostitution, or gambling is unlawful.
• Agreements to Commit Crimes:
  • Contracts to carry out illegal acts or crimes are void. An agreement to hire someone for a burglary, fraud, or any criminal activity is illegal.
• Immoral Contracts:
  • Contracts that involve immoral actions, such as human trafficking or agreements that promote dishonesty or harm to individuals, are void.

Legal Consequences of Illegal Object:

• Contracts with illegal objects are void ab initio, which means they are void from the outset and have no legal effect.
• Courts will not enforce such contracts, and parties cannot seek remedies for non-performance.
• Public policy considerations play a significant role in determining whether an object is illegal or against public interest.

Legality of Consideration:

Definition:

• The legality of consideration pertains to the requirement that the consideration exchanged in a contract must be legal, not in violation of any laws, and not against public policy. Consideration can encompass money, goods, services, or promises.

Examples of Contracts with Illegal Consideration:

• Agreements in Violation of Statutes:
  • Contracts that breach specific statutes or regulations are void. For instance, a contract to sell a product that is banned or regulated by law is illegal.
• Agreements to Commit Fraud:
  • Contracts involving fraudulent intent, misrepresentation, or deceit are void. An agreement to deceive someone for financial gain or to engage in fraudulent activities is illegal.
• Usurious Contracts:
  • Contracts with excessively high interest rates that violate usury laws are illegal.

Legal Consequences of Illegal Consideration:

• Contracts with illegal consideration are void and unenforceable.
• Courts will not uphold such contracts, and parties cannot claim remedies for non-performance.
• The principle of legality of consideration ensures that contracts do not promote illegal activities or unjust enrichment.

Case Law example :Bhagwandas Goverdhandas Kedia v. M/s. M.J. Exports Ltd.:

• Background:
  • In this case, Bhagwandas Goverdhandas Kedia (the plaintiff) had entered into a contract with M/s. M.J. Exports Ltd. (the defendant) for the supply of groundnut oil.
  • The contract stipulated that the groundnut oil would be delivered to the defendant at a price significantly lower than the market rate, with the condition that the plaintiff would not disclose the actual market price to anyone.
• Issue:
  • The main issue in this case was whether the contract between the plaintiff and the defendant, which contained a clause preventing the plaintiff from disclosing the market price, was enforceable or whether it was against public policy.
• Court's Decision:
  • The court held that the contract was against public policy and therefore unenforceable.
  • It found that the clause preventing the plaintiff from disclosing the market price was an attempt to stifle competition and create a monopoly, which was detrimental to public interest.
  • The court emphasized that contracts against public policy or morality would not be enforced.
• Rationale:
  • The court's decision was based on the principle that contracts that are contrary to public policy or morality are void and unenforceable in India.
  • It recognized that the contract in question was designed to suppress competition and manipulate market prices, which goes against the principles of a free and competitive market.
• Significance:
  • The Bhagwandas Goverdhandas Kedia v. M/s. M.J. Exports Ltd. case is significant for several reasons:
  • It reinforces the principle that contracts against public policy or morality will not be upheld by the courts.
  • The case highlights the importance of upholding legality, ethics, and public interest in contractual agreements.
  • It serves as a precedent for cases involving contracts that seek to stifle competition or manipulate market conditions.

Indian Case Law and Constitutional References:

Section 23 of the Indian Contract Act, 1872:

• Section 23 of the Indian Contract Act explicitly states that agreements with unlawful objects or considerations are void.

Public Policy and Indian Constitution:

• Contracts that run contrary to public policy or morality are void in India.
• Article 19(1)(a) of the Indian Constitution guarantees freedom of speech and expression but is subject to reasonable restrictions in the interest of public order and morality, underscoring the importance of legality and public policy in contracts.