Differences between void and illegal contracts

No parties to an unlawful contract can seek any remedy from the courts of law, as the principle behind is that “no polluted hand shall touch the pure fountain of justice.” Here is where the law distinguishes between ‘void contracts’ and ‘unlawful contracts’. It is imperative to understand the difference between them as the concepts can be quite confusing for laymen to comprehend and at the same time, it is essential for the lawyers who defend or seeks a remedy for such agreements. A contract is defined under the Indian Contract Act, 1872 to mean ‘an agreement enforceable by law.’ The parties can enter into a contract by due compliance with all legal formalities of law yet be unenforceable because it is unlawful. An unlawful contract is void when it is made with the wrong intent either to defeat the provisions of law or is fraudulent or for causing injury or damage to a person or his property or is immoral or for performing those acts as opposed to public policy. Thus when the consideration of an agreement is unlawful it is called an unlawful agreement (section 28). In other words, an agreement becomes unlawful, if:

1. The agreement is illegal i.e., opposed to the positive law as being forbidden by law;
2. The agreement is immoral i.e., contrary to the positive morality of the society or as recognized by the law;
3. Finally, when the said agreement is opposed to public policy i.e., contrary to the welfare of the State by interfering with the judicial or civil administration or with the liberty of the individuals.

Thus, if the parties enter into a contract with the wrongful intent as above mentioned, the contract is void even when the contract is valid in itself. It becomes voidable at the option of a party who did not know about such intent of the other party. Furthermore, a contract can become unlawful depending upon the past as well as future transactions connected to it. But, whatever the case is, a contract is enforceable by law if it is not entered with the purpose to defeat the provisions of law. Here to understand the statement better, a distinction between void and an illegal contract is necessary.

Void and illegal contracts

A void contract is one such contract which is not prohibited by law but has no legal effect for it. According to section 2(g) of the Contract Act, it is an ‘agreement not enforceable by law.’ On the other hand, an illegal contract is one which has no legal effect and also prohibited by law. Another essential point of an illegal contract is that any agreement or transaction which is collateral to the main contract also becomes illegal and thereby unenforceable. The concept of a void contract is much wider than illegal contracts as all illegal contracts are void but not all void contracts are illegal. One example of an illegal agreement is an agreement to kill a person and if the hitman didn’t receive the payment he cannot knock the doors of the courts for recovery of the same as it is an illegal contract and thereby void ab initio. A contract becomes void generally when the parties become incapacitated. For example; A entered into a lawful contract with B who was intoxicated at the time of signing the contract. Thereby, it is void ab initio. Now, if we slightly change the scenario of the above said example and say that B was not intoxicated but he was a minor at the time of making a contract. Now, this is an example of a voidable contract. In this case, at the option of B the contract can be declared void. The voidable contract can be nullified at the option of the party who is not bound. Mostly when contracts are entered without the free consent of the party, it becomes voidable.

Another difference between illegal and void contracts is that all the transactions and acts connected with the illegal contract is also illegal but the same is not the case with void contracts. In the case of void agreements, some of the transactions or acts linked to it can still be valid. For example; if A enters into a contract with B to kill X and borrows rupees 15000 from C for paying B. Now C is aware of why the loan is taken. This is a classic example of an illegal contract and A’s relation with C is that of collateral nature. So, C cannot recover any amount as the contract was illegal and void ab initio with the added fact that he had knowledge of the purpose with which the money was borrowed. However, if A borrows some money from C to pay off his wagering debts, wagering being defined under section 30 to be void, C can recover money from A as collateral agreements are not affected in case of void agreements.

A void contract is not prohibited under the Indian Penal Code, 1860 and is not penalized too. However, an illegal contract is not only prohibited by law but also strictly penalized under the IPC. Also, a void contract can be void ab initio or become voidable later on. However, every illegal contract is void ab initio.

Now, let’s see whether there is any way by which the parties to an illegal contract or void contract can recover their money. As earlier mentioned in illegal contracts, the parties cannot recover any sum of money even in collateral agreements. However, in void contracts, the parties to collateral agreements can recover the amount. But, suppose in a situation where B borrows a sum of rupees 5000 from A to buy a revolver to kill X, can A recover the said amount? The answer to it is no if A had the knowledge to which B was borrowing the money because illegal contracts taint the collateral acts too. If A did not have the knowledge about the purpose then he can seek remedy from the courts. It may appear at the first sight that courts refusing to help the plaintiffs is siding with the defendants but that’s not the reality. It is being neutral but one party gets advantage of it i.e., the defendant is in a better position as he does not have to pay back the borrowed money. As the principle behind it is “in pari delicto potior est conditio defendentis”. However, there are certain exceptions to it. If the plaintiff let’s his premises knowingly to the defendant for immoral purposes, the former cannot recover any sum of money but can get an order for ejectment and recovery of the possession of the premises.

Yet another point to be noted is that if in a contract a part of it is legal and another part is illegal and it is separable then the court can enforce the valid part. If it cannot be separated the whole of the contract is unenforceable. Also, if a part of the consideration is illegal, the whole of the contract is tainted (section 24, 25 and 58).

Conclusion

To sum up, even though a void and an illegal contract appear to be similar there is a thin line of difference mentioned in the Contract Act. Any agreement prohibited by law with an unlawful purpose is illegal and taints all collateral acts and any contract not enforceable by law is a void contract which does not taint all other transactions linked to it. This is the main difference between an illegal contract and a void contract. Further, the void contracts are of two types: Void ab initio such as an agreement for restraining marriage, restricting trade, legal proceedings etc. and examples of the voidable contract includes contracts entered by both minors or consent obtained by misrepresentation or coercion. A wagering agreement is void. Thus, a person must be careful while entering into a contract with anyone. Only when the person had no knowledge of fact he can recover the money in cases of void agreements, if ignorance of the law is the reason there is no excuse.