Project Report on CONTRACT DEPRIVING A PARTY OF

INTEREST: GROUND FOR VOID

Submitted to – MS. NANDITA S. JHA Submitted by – Swetank Sharma

Faculty of CORPORATE LAW II Roll No – 1179

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 ACKNOWLEDGEMENT

Writing a project is one of the most significant academic challenges I have ever faced. Though
this project has been presented by me but there are many people who remained in veil, who gave
their all support and helped me to complete this project.

First of all I am grateful to my subject teacher Ms. Nandita S. Jha without the kind support of
whom and help the completion of the project was a herculean task for me. She donated his
valuable time from his busy time to help me to complete this project and suggested me from
where and how to collect data.

I am very thankful to the librarian who provided me several books on this topic which proved
beneficial in completing this project.

I acknowledge my friends who gave their valuable and meticulous advice which was very useful
and could not be ignored in writing the project.

Swetank Sharma

Roll No. – 1179

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 DECLARATION

I hereby declare that the project work entitled “CONTRACT DEPRIVING A PARTY OF
INTEREST: GROUND FOR VOID” submitted to Chanakya National Law University,
Patna, is a record of an original work done by me under the guidance of Mrs. Nandita S.
Jha, Faculty-in-Charge (Corporate Laws), CNLU, Patna, and this project work is
submitted in the final fulfilment of the requirements for the Project Work for Corporate
Laws II (Semester VIII), CNLU, Patna. The results embodied in this project have not been
submitted to any other University or Institute for any purpose.

Date-22/04/2018,

Swetank Sharma

Roll No. – 1179

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Contents
RESEARCH OBJECT.....................................................................................................................5

HYPOTHESIS.................................................................................................................................5

METHODOLOGY..........................................................................................................................5

SOURCE OF DATA.......................................................................................................................5

CHAPTER I: INTRODUCTION....................................................................................................6

 VOID CONTRACTS............................................................................................................6

CHAPTER II:- FRAUDULENT....................................................................................................7

CHAPTER III : PUBLIC POLICY AND IMMORALITY AS GROUNDS FOR A CONTRACT

TO BE VOID...................................................................................................................................8

CHAPTER IV CASE STUDY AND ANALYSIS..........................................................................9

CHAPTER V CONCLUSION......................................................................................................11

BIBLIOGRAPHY..........................................................................................................................12

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 RESEARCH OBJECT
This project discusses about agreement depriving a party of interest and various ground for void.
The objective of the research is to analyze the various grounds for making a contract void
departing interest of a party by going through various provisions of law.

HYPOTHESIS
Any agreement by which party is deprived of interest would be void.

METHODOLOGY
The research methodology is doctrinal in nature.

SOURCE OF DATA
Library and Internet are main sources. Relevant statute, reports, books, case laws and research
articles have been referred.

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 CHAPTER I: INTRODUCTION
1
Section 23 of the Indian Contract Act, 1872 ("Act"), comprises of three issues, namely
consideration for the agreement, the object the agreement and the agreement per se. Section 23
sets an embargo on the freedom of a person in relation to entering into contracts and subjects the
rights of such person to the overriding considerations of public policy and the other morality
issues enunciated under it.2 'If the thing stipulated for is in itself contrary to law, the action by
which the execution of the illegal act is stipulated must be held as intrinsically null: pactis
privatorum juri publico non derogatur.3

 VOID CONTRACTS
A void contract, also known as a void agreement, is not actually a contract. 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. 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. A void contract is void ab initio, i e
from the beginning while a voidable contract can be voidable by one or all of the parties.

Section 23 of Indian Contract Act 1872 deals with lawful objects and consideration and the said
Section is reproduced below for ready reference.

“23. What considerations 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 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.

1
Section 23 of the Indian Contract Act, 1872
2
Per Wilmot, C.J., in Collins v. Blantern, (1867) 1 Smith LC 369
3
Arg., 4 Cl. & F. 241; Broom's Legal Maxims, p. 541

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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.

CHAPTER II:- FRAUDULENT

'pari delicto est conditio defendentis'4

The Hon'ble Supreme Court of India under plethora of judgments has observed / held that there
are several exceptions to the above rule. In this connection, the Hon'ble Supreme Court quoted
with approval the following observations of Anson: 5

"... there are exceptional cases in which a man will be relieved of the consequences of an illegal
contract into which he has entered, cases to which the maxim does not apply. They will fall into
three classes: (a) where the illegal propose has yet been substantially carried into effect before it
is sought to recover money paid or goods supplied or delivered in furtheranceof it; (b) where the
plaintiff is not in pari delicto with the defendant; (c) where the plaintiff does not have to rely on
the illegality to make out his claim".

Section 23 says that the consideration or object of the agreement is unlawful if it "is
fraudulent".6 But subject to such and similar exceptions, contracts which are not illegal and do
not originate in fraud, must in all respects be observed: pacta conventa quae neque contra leges
neque dolo mall inita sunt omnimodo observanda sunt(contracts which are not illegal, and do not
originate in fraud, must in all respects be observed)

4
Principles of the English Law of Contract, 22nd Edition, p. 34
5
AIR 2000 Ori 32, 34-35.
6
Supra note 1

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CHAPTER III : PUBLIC POLICY AND IMMORALITY AS GROUNDS FOR A
CONTRACT TO BE VOID

In the decision of Union of India v. M/s NK Garg & Co.7 (“NK Garg”), decided on 2 November,
2015, a single judge bench of the Delhi High Court (“Court”) held that any agreement by which
a party is deprived of interest would be void on the ground that it is immoral and violates public
policy. It is a classic example of judicial adventurism since the Court traversed a new path by
disregarding several Supreme Court (“SC”) judgements to drive its point home.

The issue before the Court came up for consideration when the Appellant filed an application under
Section 34 of Indian Arbitration Act, 1996 (“Act”) to set aside the impugned award to the extent that
the Arbitrator has awarded interest in favour of the respondent. Appellant contended that respondents
are not entitled to any interest because of a contractual clause to that effect. However, the Court,
accepting the contention of the respondents that the clause itself is void being violative of the third
limb of section 23 of Indian Contract Act, 1872 (“Contract Act”) which deals with public policy and
morality, upheld the award. After analysing couple of decisions of the SC, the Court extended the
scope of public policy and morality by stating that depriving the respondent of interest which he
otherwise would be entitled to but for an agreement is immoral and violative of public policy.

The concept of public policy8 connotes some matter which concerns public good and the public
interest. What is good for the public or in public interest or what would be harmful or injurious
to the public good or interest varies from time to time. However, an award, which is on the face
of it, patently in violation of statutory provisions cannot be said to be in public interest. Such an
award is likely to adversely affect the administration of justice. Hence, the award should be set
aside if it is contrary to (i) fundamental policy of Indian Law; (ii) the interest of India; (iii)
justice or morality; in addition, if it is patently illegal. The illegality must go to the root of the
matter and if the illegality is of a trivial nature, it cannot be held that the award is against the
public policy. An award can also be set aside if it is so unfair and unreasonable that it shocks the
conscience of the court.

7
UNION OF INDIA V/S M/S. N.K. GARG & CO.,High Court of Delhi, O.M.P. No. 327 of 2002.
8
B.V.R. Sarma, Lawful objects and considerations under Section 23 of Indian Contract Act 1872 – An
analysis, Available at http://http://docs.manupatra.in/newsline/articles/Upload/01CAB3F7-FEF2-47EF-
8D1B-AE4A3EB4C2D8.pdf, last seen on 28th March,2018

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CHAPTER IV CASE STUDY AND ANALYSIS
According to Lord Atkin9, "... the doctrine does not extend only to harmful effects, it has to be
applied to harmful tendencies. Here the ground is less safe and treacherous".

The above principle has been followed by the Hon'ble Supreme Court of India in Gherulal
Parekh v. Mahadevdas Maiya10, wherein Hon'ble Justice Subba Rao, referring the observation of
Lord Atkin observed: "... Public policy or the policy of the law is an illustrative concept. It has
been described as an 'untrustworthy guide', 'variable quality', 'unruly horse', etc.; the primary
duty of a court of law is to enforce a promise which the parties have made and to uphold the
sanctity of contract which forms the basis of society but in certain cases, the court may relieve
them of their duty of a rule founded on what is called the public policy. For want of better words.
Lord Atkin describes that something done contrary to public policy is a harmful thing; but the
doctrine is extended not only to harmful cases; but also to harmful tendencies.... it is governed by
precedents. The principles have crystalised under different heads.... though the heads are not
closed and though the oretically, it may be permissible to evolve a new head under exceptional
circumstances of thechanging world, it is advisable in interest of stability of society not to make
attempt to discover new heads in these days". In Kedar Nath Motani v. Prahlad Rai11 , the
Hon'ble Court held that "the correct view in law .... is that what one has to see is whether the
illegality goes so much to the root of the matter that the plaintiff cannot bring his action without
relying upon the illegal transaction into which he had entered. If the illegality be trivial or
venial..... and the plaintiff is not required to rest his case upon that illegality, then public policy
demands that defendant should not be allowed to take advantage of the position. A strict view, of
course, must be taken of the plaintiff's conduct, and should not be allowed to circumvent the
illegality by restoring to some subterfuge or by misstating the facts. If, however, the matter is
clear and the illegality is not required to be pleaded or proved as part of the cause of action and
the plaintiff recanted before the illegal purpose was achieved, then, unless it be of such a gross
nature as to outrage the conscience of the court, the plea of the defendant should not prevail."

9
Fender v. St. John Milday, 1983 AC 1 (HC)
10
AIR 1959 SC 781
11
AIR 1960 SC 213

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In Associate builders v. Delhi development authority 12 Wherein a narrow scope of ‘public
policy’ and ‘morality’ was adopted. In DDA it was clarified by the SC that morality has been
confined to ‘sexual morality’ by the the SC as far as Section 23 of Contract Act is concerned,
and “if it is to go beyond sexual morality an agreement would have to be against prevailing
mores of the day”. The SC also cautioned in the same judgment that “interference on this ground
would also be only if something shocks the court’s conscience”. It is not clear as to how non-
payment of interest would shock the court’s conscience. Moreover, the concept of morality being
a branch of common law would largely depend upon the judicial decisions to bring in new heads
under it as held in Gherulal. The Court did not cite a single judicial decision to support its view
to bring non-payment of interest within the ambit of ‘immorality’. Similarly in Gherulal
parakh v. Mahadeodas maiya & others13 Decided by the SC wherein it was held that “no
universal standard can be laid down for a fluid concept of morality, even though, legislature’s
intention was to give it a restrictive meaning i.e. “sexual immorality””. The Court thought that,
according to the SC the scope of morality can be extended depending upon time and age.

12
Associate Builders v. Delhi Development Authority 2014 (SCC)
13
1959 AIR 781, 1959 SCR Supl. (2) 406

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CHAPTER V CONCLUSION

On the basis of above discussed, it can be easily understood that the ambit and scope of section
23 is vast and therefore the applicability of its provisions is subject to meticulous scrutiny by the
court of the consideration and object of an agreement and the agreement itself. Therefore, in
order to bring a case within the purview of section 23, it is necessary to show that the object of
the agreement or consideration of the agreement or the agreement itself is unlawful.
The Courts in India and England have been quite reluctant to extend the scope to “public policy”
or “morality” to a contract type to which it has never been applied before. Because of such
restriction it is expected of the Court to not develop its own idiosyncratic conception of these
concepts as happened in the said case. From the above research and case analysis it can be said
that courts are favouring parties whose interest are being deprived regardless the decisions of the
Supreme Court.

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 BIBLIOGRAPHY

STATUTE: -
1. The Companies Act, 2013
2. Indian Contract Act, 1872

BOOKS:

 G.K. Kapoor, “Company Law”, Taxmann’s Publications Ltd., 16 th Edition,

2013.
 Singh, Avtar, “Company Law”, Eastern Book Company, 14th Edition,
Lucknow, 2013.
 Anantharaman, K.S., “Lectures on Company Law and Company Act”, Lexis
NexisButterworthsWadhwa Publications, 10th Edition.
 Bhandari, M.C., ‘Guide to Memorandum, Articles and Incorporation of
Companies’ 4th edition, Nagpur, Wadhwa Publishers, 2005.

WEB SITES VISITED:

1. http://taxguru.in/company-law/procedures-incorporation-company-
india.html
2. http://business.mapsofindia.com/doing-business-in-india/types-of-
business-entities-in-india.html
3. http://madaan.com/incorporate.htm
4. http://www.indianentrepreneur.com/resources/the-different-types-of-
business-entities-in-india/

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