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CA Foundation · Business Laws · The Indian Contract Act, 1872

Ravi lends Rs 1,00,000 to Sameer, knowing that Sameer will use it to buy smuggled goods. Sameer buys the goods, makes a profit, but refuses to repay the loan. Ravi sues him for repayment. Which statement is correct?

Ravi cannot recover the loan. He knew the money would be used for smuggling, so the object and consideration of the agreement are unlawful. Such an agreement is void and the court will not help either party to enforce it.

  1. ARavi can recover the amount because the loan and the smuggling are separate transactions
  2. BRavi cannot recover, because the consideration for the loan is unlawful, being the furtherance of an illegal object known to himCorrect
  3. CRavi can recover only the principal without interest
  4. DRavi can recover half the amount as both parties are equally at fault

Explanation

Consideration or object is unlawful if it is forbidden by law. Ravi knew the loan was meant for an illegal purpose, so his consideration is tainted and the agreement is void. Courts do not enforce it or split the amount between the parties. The separate-transaction argument fails because the loan was advanced for that very purpose.

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