Subordinate Legislation/Statutory Rules Also A 'Law' Under Section 23 Contract Act: Supreme Court

The Supreme Court held that Subordinate Legislation in the form of Statutory Rules is a 'law' under Section 23 of the Indian Contract Act.

Section 23 of the Contract Act states that the consideration or object of an agreement is lawful, unless it is forbidden by law.

The court was considering an appeal that arose from a specific performance suit in which the defendant pointed out that Bangalore Rules of Allotment, 1972 Rule 18(2) had an embargo against alienation for a period of ten years and therefore the contract is not lawful. The issue raised was whether the enforcement of an agreement to sell expressly or impliedly, lead to palpably defeat this Rule. 

In this case, the Trial Court while refusing specific performance, directed the return of the amount paid by the plaintiff under the contract. Allowing the appeal, the High Court directed the defendants to execute the sale deed relating to the plaint schedule property in favour of the plaintiffs.

In appeal filed by the defendants, the bench  comprising Justices KM Joseph and PS Narasimha noticed that in Union of India v. Col. L.S.N. Murthy (2012) 1 SCC 718, it was held that "the word "law" in the expression "defeat the provisions of any law" in Section 23 of the Contract Act is limited to the expressed terms of an Act of the legislature".

"With respect, the principle laid down, does not commend itself to us. We do agree that the illegality cannot be a matter of conjecture nor the purpose divined by the Court from parliamentary debates.", the bench said. The court also noticed that in the said case, the Court was dealing with a Notification, which was, in fact, a 'letter' written by the Government of India.

"What is contemplated under Section 23 of the Indian Contract Act is law, in all its forms, being immunised from encroachment and infringement by a contract, being enforced. Not only would a Statutory Rule be law within the meaning of Article 13 of the Constitution of India but it would also be law under Section 23 of the Indian Contract Act"

The court also noticed that Gherulal Parakh v. Mahadeodas Maiya AIR 1959 SC 781 and 'Pollock and Mullah' Commentary of Indian Contract Act and observed:

"72. In regard to the Commentary by the very same Author, under the Second Head of "illegal object or consideration" in Section 23 of the Contract Act, viz., if the consideration or object is of such a nature that if permitted, it would defeat the provisions of any law, it is that, this Court took the view that law for the purpose of Section 23 would be, law made by the Legislature. Quite apart from the fact that what is involved in the said case was only a letter, the Judgment of this Court in Gherulal Parakh (supra) and the Commentary from the very same Author, was not noticed by this Court. Therefore, it becomes all the more reason as to why we need not refer the matter to a larger Bench. We may also notice that 'law', for the purposes of Clauses (1) and (2) cannot be different. It is very clear that Regulations or Orders made under the Authority derived from the Legislature referred to by this Court, are species of subordinate 95 legislation. Statutory Rules would also, therefore, clearly be law"

In the instant case, the court found that, the contract was unenforceable for reason that it clearly, both expressly and impliedly, would defeat the object of the Rules, which are statutory in nature.

Observing thus and considering other aspects of the case, the bench allowed the appeal and dismissed the suit for Specific Performance. The court, however,  directed payment of Rs.20,00,000/- by defendants to plaintiffs within a period of three months. "Having regard to the entirety of the evidence and the conduct of the parties, noticing even the admitted stand of the second defendant that the plaint schedule property has a value of Rs.2.5 crores and the plaintiff has paid, in all, a sum of Rs.50,000/, which constituted the consideration for the agreement to sell several years ago, while we dismiss the Suit for Specific Performance, we should direct the appellants to pay a sum of Rs.20,00,000/- in place of the Decree of the Trial Court.", the court said in this regard.