Report No. 199

Section 23 of the Indian Contract Act, 1872: Illegality and public policy

One other relevant provision which needs to be discussed is Section 23 of the Contract Act: This deals with 'substantive' matters which invalidate a contract but does not refer to 'unconscionability' specifically.

Section 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 a 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.

The section does not speak of 'unconscionability' as one of the grounds. 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.

Section 23 provides that the consideration or object of an agreement is lawful, unless it is forbidden by law or unless they are such a nature that if permitted, they would defeat the provision of any law; or are fraudulent; or involve or imply, injury to the person or property of another; or the court regards it as immoral or opposed to public policy. The last clause in section 23 thus declares that no man can lawfully do that which is opposed to public policy. It comprehends the protection and promotion of public welfare. It is a principle of law under which freedom of contract or private dealings are restricted by the law for the good of the community.

The Indian Contract Act does not define the expression 'public policy' or what is meant by being 'opposed to public policy'. From the very nature of things, the expressions "public policy", "opposed to public policy", or "contrary to public policy" are incapable of precise definitions. Unlike, in cases falling under section 16 which permits a party to avoid a contract, section 23 enables a Court to hold clauses opposed to law or public policy, to be void ab initio.