Definition
An agreement whose object or consideration is forbidden by law, would defeat any law, is fraudulent, involves injury to another person or property, or is immoral or opposed to public policy — and is therefore void.
An illegal agreement is a subset of void agreements — all illegal agreements are void, but not all void agreements are illegal. The crucial distinction is that an illegal agreement also contaminates related or collateral transactions. Under Section 23 ICA, the consideration or object of an agreement is unlawful if it: (a) is forbidden by law; (b) is of such a nature that, if permitted, it would defeat the provisions of any law; (c) is fraudulent; (d) involves or implies injury to the person or property of another; or (e) is immoral or opposed to public policy. Courts apply the maxim 'ex turpi causa non oritur actio' (no right of action arises from a base cause) — parties in pari delicto cannot seek court's assistance.
Statutory Definition
Section 23, Indian Contract Act, 1872: '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. 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.'
Etymology & Origin
From Latin 'illicitus' (not permitted, unlawful) from 'in' (not) + 'licere' (to be permitted). An illegal agreement is one that the law does not permit — it violates a legal norm or public standard of morality.
Full Legal Analysis
Illegal Agreement: When the Law Turns Away
An illegal agreement is not merely void — it is an agreement the law refuses to assist either party in enforcing. The maxim is clear: “Ex turpi causa non oritur actio” — no action arises from a base cause. If both parties are equally guilty (in pari delicto), neither can seek the court’s help. The illegal agreement infects not just itself but collateral transactions made in connection with it — money lent to finance an illegal activity cannot be recovered.
Categories Under Section 23 ICA
(a) Forbidden by law: Agreements to commit crimes, violations of statutes (e.g., agreement to pay below minimum wage, agreement to smuggle goods). (b) Defeating law: Agreements designed to circumvent regulatory provisions (e.g., proxy arrangements to exceed FDI limits, sham structures to evade stamp duty). (c) Fraudulent: Agreements between parties to defraud third parties — both parties equally guilty. (d) Injury to person or property: Agreements to assault someone, to damage another's property. (e) Immoral: Agreements for prostitution, agreements for illegal sexual favours. (f) Public policy: Agreements against national security, sovereignty, justice administration, freedom of marriage.
Contamination of Collateral Transactions
Unlike a merely void agreement (where collateral transactions may survive), an illegal agreement contaminates related transactions. If A lends money to B specifically to enable B to commit a fraud on C, A cannot recover the loan from B — the loan agreement is tainted by the illegal purpose. The principle: a creditor who knowingly finances an illegal activity has no remedy from the illegality proceeds. This is broader than the void agreement rule, where money paid under the void agreement itself must be returned but loans to enable the transaction may survive.
“The court is not an instrument for enforcing illegal arrangements. When parties agree to do what the law forbids, the court leaves them where it finds them — with neither remedy nor restitution, because they chose to place themselves outside the law's protection.”
This Term in Indian Statutes
Indian Contract Act, 1872, 1872
"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. Every agreement of which the object or consideration is unlawful is void."
Section 23: six grounds for unlawfulness — forbidden, defeating law, fraudulent, injury, immoral, public policy
