Lawful Object and Public Policy

Even when all the other elements are present — offer, acceptance, consideration, capacity, and free consent — a contract can still be void if its object or consideration is unlawful. Section 23 of the Contract Act sets out the categories of unlawful objects, and sections 24 to 30 expand on specific types of agreements that are expressly declared void. This is one of the most-litigated areas of Indian contract law because the boundaries are often imprecise and depend heavily on the facts of each case.

Section 23 — what makes an object unlawful

Section 23 lists five categories of unlawful object or consideration. If the object or consideration of an agreement falls into any of these, the agreement is void:

1. Forbidden by law. The object is something prohibited by a specific statute. Contracts to sell goods whose sale is prohibited (narcotics outside medical use, wildlife species protected under the Wildlife Protection Act, human organs prohibited under the Transplantation of Human Organs Act) fall here.
2. Of such a nature that, if permitted, it would defeat the provisions of any law. The object is not itself prohibited but achieving it would circumvent the intent of another statute. Contracts structured to evade rent control laws, labour protections, or tax obligations may be void on this ground.
3. Fraudulent. The object is to commit fraud, either on a third party or on a public authority. An agreement between two parties to defraud a creditor by transferring assets is void.
4. Involves or implies injury to person or property of another. The object is to cause physical or property damage to a third party. Agreements to assault, damage property, or otherwise harm someone outside the contract are void.
5. Against public policy. The catch-all. The object or consideration is something that Indian courts consider to be opposed to public policy. This category is the most flexible and the most difficult to predict.

What "public policy" means in Indian law

Public policy is one of those terms that lawyers and judges love and litigants find frustrating, because its meaning is not fixed. Indian courts have generally held that public policy is a flexible doctrine that evolves with society, and that it should not be defined too narrowly because doing so would limit the court's ability to refuse enforcement of contracts that genuinely shock the conscience.

The Supreme Court has repeatedly emphasised that public policy must be applied with caution. It is not a tool for courts to second-guess the parties' bargains. It is reserved for cases where the contract is contrary to fundamental notions of justice, morality, or the established interests of the community.

Categories of agreements that Indian courts have held to be against public policy include:

• Agreements that interfere with the administration of justice — paying a witness to give false testimony, paying a party not to file a case, agreeing to share the proceeds of a successful lawsuit with someone who has no genuine interest in the matter (champerty and maintenance, with nuances).
• Agreements that promote corruption — paying a public official to perform their duty, paying for influence over a regulatory decision.
• Marriage brokerage agreements — paying someone for procuring a marriage. The view is that marriage should not be a commercial transaction.
• Agreements that interfere with parental rights and duties — though specific child custody arrangements within a separation agreement are increasingly recognised when they serve the child's welfare.
• Agreements in restraint of marriage — preventing a person from marrying generally, though restrictions in specific contexts (such as employee marrying a competitor's employee, in some narrow circumstances) have been examined on their merits.
• Agreements that restrict trade — covered separately in Section 27 below.
• Agreements that restrict legal proceedings — covered in Section 28 below.

Section 27 — restraint of trade

This is the single most-litigated provision in Indian contract law and one of the most commercially important. Section 27 reads: "Every agreement by which any one is restrained from exercising a lawful profession, trade, or business of any kind, is to that extent void."

The provision is sweeping. Any contractual restriction on a person's right to pursue a profession, trade, or business is void to the extent of the restriction. The Indian rule is significantly stricter than the English common law equivalent, which allows reasonable restraints. Indian law generally does not balance reasonableness; the restriction is void if it restrains trade, full stop, subject only to a narrow exception for the sale of goodwill.

The exception in Section 27 itself is for the sale of goodwill — a seller of business goodwill can be restrained from carrying on a similar business within reasonable local limits. This exception is narrow and has not been expanded by Indian courts.

The commercial consequence is significant. Post-employment non-compete clauses, which are routine in employment contracts in other jurisdictions, are largely unenforceable in India. A clause saying "the employee shall not work for any competitor for 12 months after leaving the company" is void under Section 27 to the extent it restricts the employee from working in their field. Indian courts have struck down such clauses repeatedly.

What survives, however, are related restrictions that achieve similar protections without operating as direct restraints of trade:

• Confidentiality obligations — restrictions on using or disclosing confidential information acquired during the employment. These do not restrain the employee from working; they restrain the employee from misusing specific information.
• Non-solicitation — restrictions on poaching the company's customers or employees. Indian courts have generally upheld reasonable non-solicit clauses provided they are limited in time and scope.
• Non-poaching — restrictions on hiring the company's employees. Similar treatment to non-solicit.
• Garden leave — paid notice periods during which the employee is on the company's payroll but not working. This is enforceable because the employee is being paid.
• Restraint during the term of employment — restrictions on competing with the employer while still employed. These are enforceable; Section 27 applies primarily to post-employment restrictions.

The practical drafting consequence is that Indian employment contracts use these alternative mechanisms instead of the post-employment non-compete. Verbatra's employment generator is drafted to use enforceable mechanisms rather than the post-employment non-compete that would be struck down.

Section 28 — restraint of legal proceedings

Section 28 voids agreements that restrict a party's right to enforce their rights through ordinary legal proceedings, or that limit the time within which they can enforce those rights. The provision is targeted at contractual clauses that try to lock parties out of courts or shorten the limitation period below what the Limitation Act allows.

Two important exceptions are written into Section 28 itself:

• Arbitration agreements are not invalid. Section 28 expressly carves out arbitration. An agreement to refer disputes to arbitration is enforceable, and once parties have entered into a valid arbitration clause, they are bound to arbitrate rather than litigate. This carve-out is what makes commercial arbitration possible in India.
• Limitation of liability clauses that cap the amount of damages recoverable are generally enforceable, distinct from clauses that restrict the right to claim at all.

What Section 28 does void includes:

• Clauses purporting to restrict claims to a specific court that does not naturally have jurisdiction. However, parties can validly select between two or more courts that have natural jurisdiction.
• Clauses purporting to extinguish a right or remedy on expiry of a period shorter than the period of limitation prescribed by the Limitation Act, 1963.
• Clauses that require a party to give a contractually-shortened notice as a precondition to claim, where the effect is to defeat the claim within the limitation period.

Other express prohibitions

Sections 29 and 30 add two more categories of void agreements:

Section 29 — agreements void for uncertainty. "Agreements, the meaning of which is not certain, or capable of being made certain, are void." This is the provision that defeats vague contracts. If the parties have agreed on something but the terms are so unclear that a court cannot determine what was agreed, the agreement is void. Drafting precision matters because vagueness can be fatal.

Section 30 — wagering agreements. "Agreements by way of wager are void." Pure wagers — bets on the outcome of an uncertain future event — are void in India and the winner cannot sue for the wager. There are statutory exceptions for horse racing under specified conditions, and contracts of insurance and futures trading are treated as commercial contracts rather than wagers because the insured or the trader has an underlying insurable or commercial interest.

The doctrine of severability

When a contract contains some lawful and some unlawful elements, what happens? The doctrine of severability addresses this. If the lawful and unlawful parts can be cleanly separated, courts will sever the unlawful parts and enforce the rest. If the lawful and unlawful parts are so intertwined that the contract cannot be cleanly separated, the entire contract may fall.

Many commercial contracts include a "severability clause" that expressly states the parties' intention: if any provision is held to be unenforceable, the remainder of the contract continues in force. This clause is helpful but not determinative — courts apply the doctrine based on whether the unlawful parts are merely incidental to the contract's purpose or central to it.

Practical implications

The lawful object rules have several practical consequences for commercial drafting:

• Restrictive covenants in employment. Indian employment contracts must use confidentiality, non-solicit, and garden-leave mechanisms rather than post-employment non-competes.
• Dispute resolution drafting. Arbitration clauses must be carefully drafted to be enforceable; jurisdiction clauses must select courts that have natural jurisdiction; limitation periods cannot be contractually shortened below the statutory minimum.
• Uncertainty. Vague price terms ("a reasonable price to be agreed"), vague performance specifications, and vague deliverables can render entire clauses or contracts void. Drafting precision is not a stylistic preference — it is a legal requirement.
• Severability. Including a severability clause is standard practice and protects against the entire contract failing if one provision is later held unenforceable.

Module 6, the final substantive module, covers performance, breach, and remedies. What happens when one party fulfils, partly fulfils, or fails to fulfil their obligations under a contract, and what the other party can do about it.