Unlawful consideration and object; e-contracts

1. Section 23: what consideration or object is lawful

The consideration or object of an agreement is lawful unless it:

• is forbidden by law: an act prohibited by statute or by rules having the force of law, such as an agreement to sell liquor without a licence where a licence is required;
• is of such a nature that, if permitted, it would defeat the provisions of any law: an agreement to evade tax, or to circumvent the bar on alienation of land granted to Scheduled Castes;
• is fraudulent: an agreement to defraud creditors or the revenue;
• involves or implies injury to the person or property of another: an agreement to beat someone, or to print a book in breach of copyright;
• is regarded by the court as immoral: in the sense of sexual morality, such as an agreement to let premises or hire a carriage for prostitution (Pearce v. Brooks, 1866); or
• is regarded by the court as opposed to public policy.

In each of these cases the consideration or object is unlawful, and every agreement of which the object or consideration is unlawful is void. One of the statutory illustrations: A promises to obtain for B an employment in the public service, and B promises to pay A Rs 1,000. The agreement is void, because the consideration for it is unlawful.

2. Public policy: Gherulal Parakh

Public policy is the most open-ended head, and the courts have been careful with it. In Gherulal Parakh v. Mahadeodas Maiya, 1959 INSC 24, AIR 1959 SC 781, two persons entered into a partnership to carry on wagering transactions in wheat. When losses were incurred, one sued the other for his share. The defence was that the partnership was void under s.23 because its object, wagering, was unlawful. The Supreme Court rejected this. A wagering agreement is void under s.30, but it is not forbidden by law or illegal, so a collateral agreement such as a partnership to carry on wagers is not affected. Nor was wagering “immoral” or “opposed to public policy”. Subba Rao J., recalling the old warning that public policy is an unruly horse, held that courts should apply the settled heads and should not invent new ones, though the categories are not closed.

The established heads of public policy include: trading with an enemy; stifling prosecution (compromise of a non-compoundable offence); interference with the course of justice; traffic in public offices and titles; marriage brokerage; agreements in restraint of parental duties; and unconscionable terms between parties of grossly unequal bargaining power. On the last, in Central Inland Water Transport Corporation v. Brojo Nath Ganguly, 1986 INSC 66, (1986) 3 SCC 156, a clause in a standard form service contract permitting termination of a permanent employee on three months’ notice was struck down as unconscionable and opposed to public policy under s.23. The point matters for standard online terms, discussed below.

3. Section 24: partial illegality

If any part of a single consideration for one or more objects, or any one or any part of any one of several considerations for a single object, is unlawful, the agreement is void. The illustration: A promises to superintend, on behalf of B, a legal manufacture of indigo and an illegal traffic in other articles. B promises to pay A a salary of Rs 10,000 a year. The agreement is void, the object of A’s promise and the consideration for B’s promise being in part unlawful. The rule is that where the lawful and unlawful parts cannot be separated, the whole fails. Where they can be separated, as with reciprocal promises under s.57 or distinct promises under s.58, the lawful part may be enforced.

4. E-contracts: the IT Act, 2000

The Contract Act contains no requirement of paper or signature for most contracts, so a contract can be made by email or on a website on ordinary principles. The Information Technology Act, 2000 confirms this and settles questions of attribution and timing.

• Section 10A (inserted in 2008): where in contract formation the communication of proposals, the acceptance of proposals, the revocation of proposals and acceptances are expressed in electronic form or by means of an electronic record, the contract shall not be deemed unenforceable solely on that ground.
• Section 11, attribution: an electronic record is attributed to the originator if it was sent by him, by a person authorised to act for him, or by an information system programmed by or on behalf of the originator to operate automatically.
• Section 12, acknowledgment of receipt: where no particular method is agreed, acknowledgment may be given by any communication or conduct of the addressee sufficient to indicate receipt. Where the originator has stipulated that the record is binding only on receipt of acknowledgment, it is treated as never sent until acknowledgment is received.
• Section 13, time and place: dispatch occurs when the record enters a computer resource outside the originator’s control; receipt occurs when it enters the addressee’s designated computer resource or, if none is designated, when the addressee retrieves it. An electronic record is deemed dispatched at the originator’s place of business and received at the addressee’s place of business, wherever the servers are.

Sections 4 and 5 give legal recognition to electronic records and electronic signatures. Under s.1(4) and the First Schedule, the Act does not apply to negotiable instruments (other than cheques), powers of attorney, trusts, wills, and contracts for the sale or conveyance of immovable property; these still need paper.

Kinds of online contract.

• Click-wrap: the user must click “I agree” to the terms before proceeding. Assent is express and such contracts are generally enforced.
• Browse-wrap: terms are available by a link and the site says that use amounts to acceptance. Enforceability depends on whether the user had reasonable notice of the terms; silence or mere browsing is weak evidence of assent (compare Felthouse v. Bindley).
• Shrink-wrap: terms are inside the package of software, and opening or installing it is treated as acceptance by conduct (s.8).

All three are standard form contracts. Terms that are unconscionable may be struck down under s.23 on the reasoning of Brojo Nath Ganguly, and the Consumer Protection Act, 2019 lets consumer commissions declare “unfair contract” terms null and void.

Proof. Electronic records are admissible on the conditions now laid down in section 63 of the Bharatiya Sakshya Adhiniyam, 2023 (which replaced s.65B of the Evidence Act, 1872, with effect from 1 July 2024), including the certificate requirement.

5. Trimex International v. Vedanta Aluminium

In Trimex International FZE v. Vedanta Aluminium Ltd., 2010 INSC 57, (2010) 3 SCC 1, the parties exchanged a series of emails on the supply of bauxite, settling the price, quantity, shipment and other terms, including arbitration. No formal contract was signed. When a dispute arose, Vedanta argued that there was no concluded contract and so no arbitration agreement. The Supreme Court held that a contract had been concluded through the email exchange. Once the essential terms are agreed, the contract binds even though the parties contemplated a formal document later, and a party cannot escape by pointing to the absence of a signed agreement. The arbitration clause was binding.

6. Problem

A, a trader, emails B offering to supply 100 tonnes of steel at a stated price. B replies by email, “Accepted. Formal agreement to follow.” The steel price rises and A refuses to supply, saying no contract was signed. Advise B.

Issue. Whether a contract concluded by email exchange is enforceable without a signed document.

Law. Section 10A of the IT Act provides that a contract is not unenforceable merely because offer and acceptance were in electronic form. Acceptance must be absolute (s.7). Trimex holds that agreement on essential terms by email concludes a contract even if a formal document is contemplated.

Application. A’s email set out the goods, quantity and price, and was an offer. B’s reply accepted without qualification; “formal agreement to follow” signals a later record, not a condition. Under s.13, B’s acceptance was received when it entered A’s designated mailbox.

Conclusion. A binding contract exists. B can sue A for breach and claim damages under s.73, measured by the difference between the contract price and the market price on the date of breach.

How this is examined

As an essay: “What considerations and objects are unlawful? Explain with examples”, or “Explain the doctrine of public policy.” List the six heads of s.23 with an example each, then Gherulal Parakh, then s.24 with its illustration. As short notes: e-contracts and the IT Act; click-wrap agreements; partial illegality. Email-contract problems are answered with s.10A, s.13 and Trimex.