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Subordinate Legislation/Statutory Rules Also a ‘Law’ Under Section 23 Contract Act: Supreme Court

Team SoOLEGAL 19 Jan 2022 3:11pm

Subordinate Legislation/Statutory Rules Also a ‘Law’ Under Section 23 Contract Act: Supreme Court

NEW DELHI: According to Section 23 of the Indian Contract Act, Subordinate Legislation in the form of Statutory Rules is a “law”. According to Section 23 of the Contract Act, the consideration or goal of an agreement is legal unless prohibited by law.

The court was hearing an appeal arising from a particular performance suit in which the defendant claimed that Bangalore Rules of Allotment, 1972 Rule 18(2) contained a ten – year embargo against alienation and hence the contract was unenforceable. The question was whether the enforcement of an express or inferred agreement to sell would manifestly undermine this Rule.

In this case, the Trial Court, although rejecting specific performance, ordered the plaintiff to restore the sum paid under the contract. The High Court granted the appeal and ordered the defendants to execute the sale document pertaining to the plaint schedule property in favor of the plaintiffs. The bench of Justices KM Joseph and PS Narasimha noted in the defendants’ appeal 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 provision 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 further observed that in the aforementioned instance, it was dealing with a notification, which was, in effect, a ‘letter’ sent by the Government of India.

“What is contemplated under Section 23 of the Indian Contract Act is law, in all its forms, being immunized 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 further cited Gherulal Parakh V. Mahadeodas Maiya, AIR 1959 SC 781, and the ‘Pollock and Mullah’ Commentary on the Indian Contract Act, noting:

“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 this instance, the court determined that the contract was invalid because it plainly, both directly and implicitly, would undermine the goal of the Rules, which are statutory in character. Having made this observation and considered other circumstances of the case, the court granted the appeal and dismissed the Specific performance complaint. The Court, on the other hand, ordered defendants to pay plaintiffs Rs. 20,00,000/- within three months.

“Having regard to the entirely 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.


Tagged: Supreme Court   Section 23   Contract Act   Indian Contract Act  
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