CHAPTER VI: Legality Of Object and Consideration. (Section 23 – 24 Indian Contract Act) & Breach of Contract 

Introduction 

In contract law, the validity of an agreement does not rest solely on offer, acceptance, and consideration,  it must also have a lawful object and lawful consideration. Under Sections 23 and 24 of the Indian Contract Act, 1872, the law ensures that agreements do not violate public welfare, morality, or statutory provisions. A consideration or object is said to be unlawful if it is forbidden by law, defeats the provisions of any law, is fraudulent, involves injury to person or property, or is deemed immoral or opposed to public policy. These provisions act as a safeguard to prevent courts from enforcing agreements that are contrary to the principles of justice and societal interest .

What considerations and objects are lawful, and what not : Section 23

According to section 23 of the Indian Contract Act 1872 , an agreement is considered to be lawful only if its consideration and object are lawful. In the cases whereby either the consideration or the object is unlawful, the entire agreement is void .

Void contract- the term void refers to a contract or agreement which is not legally enforceable from the time go .It is considered to have never existed . 

The section states that the consideration or object of an agreement is considered lawful unless if : 

• Forbidden by law

If the law prohibits a particular act any agreement which incorporates that act would be considered void as per this section. Forbidden acts include those that are prohibited by the Indian Penal Code , now known as Bharathiya Nyaya Sanhita as of 2024 and those enacted through special legislative enactments, orders and regulations. In Satyabrata Ghose v. Mugneeram Bangur & Co. the court stated that contracts which involve illegal or forbidden acts cannot be enforced.  

• Defeats the Provisions of Any Law

If the act, although not forbidden, aims to undermine the provisions of any law, the consideration and objects will be considered as unlawful. In Murlidhar Aggarwal v. State of U.P. it was held that if a contract circumvents a statute, it is void even if not explicitly prohibited.

• Fraudulent 

An agreement is void if its consideration or object involves any act of cheating or deceit .According to Shrikant v. Corporation of Calcutta (AIR 1954 Cal 245) ,fraudulent agreements are not enforceable  even if the parties have performed part of it.

• Involves or Implies Injury to the Person or Property of Another

Section 23 also states that an agreement is unlawful if it involves harming another person`s body or property. For example , an agreement to assault another person for payment or an agreement to damage their reputation or property. 

• Immoral or Opposed to Public Policy

If the court finds that the object or consideration of an agreement is immoral, that is, against decency or against public policy, the contract is void.

 Public Policy Includes the following :

1. Trading with an enemy
   
   
2. Marriage brokering contracts
   
   
3. Agreements that interfere with justice
   
   
4. Agreements promoting sexual immorality

Agreements void, if considerations and objects unlawful in part :Section24 

Section 24 of the Indian Contract Act 1872 deals with the validity of agreements in scenarios where the consideration or object is partly unlawful. The section complements Section 23 which declares that agreements with unlawful consideration or object are void.

Furthermore , the section addresses cases whereby lawful and unlawful elements are all present in a single agreement. If any part of the consideration or object is unlawful and cannot be separated from the rest, the entire agreement becomes void.

This section also upholds the principle that the courts will not enforce even a partially illegal agreement especially when the legal and illegal components are linked. This as a result ensures that no party benefits from a contract that involves elements contrary to law or public policy.

Principles under section 24

Section 24 brings forth important rules that help determine when an agreement becomes void 

• Composite Agreements

Composite agreements refer to contracts that include both lawful and unlawful parts, and the unlawful part cannot be separated from the lawful part.This means that the entire agreement is void.

• Single Consideration for Multiple Objects

When one consideration is given for multiple promises or purposes, and one object is unlawful, the whole agreement is void.

• Multiple Considerations for One Object

If there are several considerations for a single object, and any part of those considerations happens to be unlawful, the agreement is entirely void, unless the unlawful part can be clearly severed.

4. Inseparability 

If it is not possible to separate the lawful part from the unlawful one, the entire contract fails. However, if the unlawful part is severable, the lawful portion may still be enforced.

6. Applies Only Where Parts Are Indivisible

Section 24 is invoked only when the legal and illegal parts are linked in a manner that they cannot be separated without altering the nature of the agreement.

Doctrine of Severability 

It is also known as “Blue Pencil Rule” .The doctrine of Severability implies that when a part of a contract is unlawful but can be clearly separated from the lawful part the lawful portion may still be enforced whilst the unlawful part is discarded.

To add on, this doctrine helps preserve the enforceable parts of an agreement if they are independent and separable from the illegal parts.

Section 24 comes into use when the following circumstances are met :

1. There is a single consideration for multiple objects, or
2. There are multiple considerations for a single object, and
3. Any one part is unlawful and cannot be separated from the rest.

In such cases, the entire agreement is void under Section 24, due to this, section 24 rejects severability where the legal and illegal parts are intertwined or inseparable.

Conclusion 

In conclusion ,the legality of object and consideration reflects the foundational principle that a contract must serve a lawful purpose and be grounded in morality and public good. Sections 23 and 24 of the Indian Contract Act render agreements void when their purpose or consideration is tainted with illegality, fraud, immorality, or public policy concerns. These sections ensure that the law does not assist parties in enforcing obligations arising from unlawful or unethical dealings. Thus, they uphold the rule of law and reinforce the idea that private contracts cannot override public interest.

BREACH OF CONTRACT 

SECTION 73 – 75 

Introduction 

The term breach of contract refers to the failure of a party of an agreement to fulfill their contractual obligations. Contracts are generally central to both personal and commercial transactions, and if a  party fails to perform their part as per the agreement ,it disrupts the expectations of the other party. As a result, such a failure whether by refusal, delay, or defective performance is considered a breach of contract.

The breach can be actual, that is, when a party fails to perform on the due date or performs improperly or anticipatory which occurs when a party declares in advance that they will not perform their contractual obligations. The consequences of a breach often depend on the nature and seriousness of the non-performance and whether it goes to the root of the contract.

Legal systems, including Indian law, recognize that contracts create enforceable obligations, and when these are broken, the injured party should be entitled to remedies usually in the form of damages, specific performance, or rescission. The primary goal is to compensate the non-breaching party and place them in the position they would have been in had the contract been performed properly.

Compensation for Loss or Damage Caused by Breach of Contract:Section 73 

When a breach of contract occurs , the party who suffers is entitled to compensation for the following :

1. Loss or damage which naturally arose in the usual course of things; or
2. Loss or damage which the parties knew, at the time of contract, was likely to result from the breach.

Essential elements of section 73 

• Existence of a Valid Contract

Before claiming compensation under Section 73, there must be a legally enforceable contract between the parties. The contract must fulfill all essentials: offer, acceptance, consideration, capacity, and lawful object as stated in Sections 1–10 of the Indian Contract Act.Secondly, no compensation can be claimed if there was no contract or the contract was void ab initio.
For example , if A agrees to deliver goods to B under a valid agreement and fails to do so, B can seek compensation. But if the agreement was illegal for instance smuggling , Section 73 won’t apply.

• Breach of Contract by One Party

There must be a clear and unexcused failure by one party to perform their obligation under the contract. The breach can beActual (e.g., failure to deliver goods on the due date) or anticipatory (e.g., one party refuses to perform even before the due date) .The presence of a breach triggers the right to claim compensation.

• Loss or Damage Suffered by the Non-Breaching Party

The injured party must show that they suffered actual loss or damage due to the breach. Mere breach is not enough; the court needs proof of quantifiable loss. Loss may be in the form of monetary loss, Missed profits , Increased cost of substitute performance or extra expenses incurred due to breach .For example if B had to buy the goods from another seller at a higher price because A failed to supply them, the difference in cost is compensable.

• The Loss Must Arise Naturally or Be Contemplated by the Parties

There must be a causal connection between the breach and the loss claimed.Compensation is allowed only if the loss arises naturally from the breach, or the loss was within the contemplation of the parties when the contract was made. This rule stems from the famous case of Hadley v. Baxendale, which forms the backbone of Section 73.

•  No Compensation for Indirect or Remote Loss

If the loss is too remote, uncertain, or speculative, it is not recoverable under Section 73.
The damage must be a direct and proximate consequence of the breach, not something incidental or unforeseen.Courts do not award damages for emotional distress (unless specifically contemplated) ,loss of a future deal or government contract (unless explicitly known to the breaching party) , reputational damage (unless quantifiable and directly caused) .

Types of damages 

•  Ordinary Damages

Ordinary damages are also called general damages, these refer to the direct losses that naturally arise in the usual course of things due to a breach of contract.The law presumes them to be the result of the breach.No special communication is required between the parties.

• Special Damages

These refer to losses that are not natural or direct consequences, but arise due to special circumstances, which were known or communicated to the breaching party at the time of contracting.The claiming party must prove that the special loss was foreseeable and within the knowledge of both parties.

• Consequential Damages

These damages are indirect or secondary damages that are not immediate, but are consequences of the breach and are recoverable only if they were within the contemplation of the parties.They usually overlap with special damages and include loss of reputation, loss of profit from third-party contracts to mention a few 

•  Nominal Damages

These are damages that are awarded when a legal breach has occurred, but no actual loss is proved by the non-breaching party.Their main purpose is to recognize the violation of a right and are usually a small amount of money like ₹1 or ₹100.

•  Mitigation of Damages

This is a duty imposed on the aggrieved party to take reasonable steps to reduce or avoid the loss resulting from the breach. The party cannot sit idle and allow the loss to increase.If the party fails to mitigate, compensation may be reduced accordingly.

Case laws 

Hadley v. Baxendale 

In this case ,a mill was shut down as a result of a broken shaft. The delivery of the new shaft was delayed. The plaintiff claimed loss of profits during the shutdown. It was held that only such losses can be recovered as may fairly and reasonably be considered either arising naturally from the breach or were within the contemplation of both parties.Lastly ,the case laid the foundation for determining ordinary and special damages and was incorporated into Section 73 of the Indian Contract Act .

Murlidhar Chiranjilal v. Harishchandra Dwarkadas

In this case, the seller failed to deliver cotton,due to this, the buyer sued for loss of resale profits.The buyer could only recover those damages that were within the contemplation of the parties at the time of contract. Special damages require prior knowledge of special circumstances.

Compensation for breach of contract where Penalty is Stipulated

Section 74 

According to section 74 of the Indian Contract Act, the aggrieved party is entitled to reasonable compensation, whether or not actual damage is proved.This happens when a contract is breached and a specific sum is stated , or a penalty is stipulated in the contract for such breach. However, this compensation cannot exceed the stated amount or the penalty prescribed.

The following conditions should be met for section 74 to apply :

1. Existence of a contract and its breach.
2. The contract mentions a specific sum or penalty for breach.
3. The court awards reasonable compensation, which may be less than the stipulated amount.
4. No need to prove actual loss, but loss must not be absent altogether.

It is important to note that when someone enters into a bail bond or public duty bond for example recognizance or government contracts for public acts, the full amount is recoverable, not just reasonable compensation.

Case Laws 

Fateh Chand v. Balkishan Das (1963)

The Supreme Court held that Actual loss does not need to be proved, however the compensation should be reasonable. It was also stated that Penalty clauses are not enforceable as-is and Courts will examine the fairness of the stipulated sum.

Right to Compensation Upon Rightful Rescission

 Section 75 

When a person lawfully cancels a contract due to the other party’s breach,  they are entitled to claim compensation for any loss or damage caused by the non-fulfilment of the contract.

The section comprises of the following essential ingredients 

1. There must be a rightful rescission of the contract.
2. Rescission should result from breach or default by the other party.
3. The non-breaching party is entitled to compensation for the damage suffered.
4. Applies when rescission is valid under Sections 39, 53, or 55 of the Act or other applicable legal grounds.

Purpose of section 75 

Section 75 protects the innocent party when they exercise their right to terminate a contract. The section further ensures that rescission does not deprive them of the right to claim damages for losses already incurred.

Case Law

M.L. Narayana Rao v. State of Andhra Pradesh 

In the case, a contractor failed to perform duties under a construction contract .The government rescinded the contract under a contractual clause and claimed damages.The court held that rescission was rightful due to breach.It was further emphasised that the party who rescinds is entitled to reasonable compensation for the breach as per section 75 of the Indian Contract Act .

Conclusion

To conclude, sections 73, 74, and 75 of the Indian Contract Act, 1872, all form the stronghold of the legal framework governing the consequences of breach of contract in India. Section 73 ensures that the aggrieved party is compensated on a fair basis for the loss or damage caused due to the breach, however this loss should have happened naturally or was in the contemplation of both parties at the time of the formation of the contract. The section  also bars compensation for remote or indirect losses, emphasizing the principle of reasonable foreseeability. 

Furthermore, section 74, on the other hand, deals with cases where a contract provides a specific  sum to be paid in case of breach or contains a penalty clause. Even in such cases, the court exercises its discretion to award reasonable compensation, ensuring fairness and preventing unjust enrichment. 

Lastly, Section 75 safeguards the interests of a party which lawfully rescinds a contract, granting them the right to recover damages for any loss sustained due to the non-performance of the other party.