Public Policy In Contracts: Recent Trends

Naman Verma

RMLNLU, Lucknow

Editor’s Note: The paper deals with the concept of Public Policy as embodied in the fundamental principles of Contract Law. It analyses the English view on Public Policy in light of various Indian cases. The paper then looks at the various grounds under which contracts are voided on the ground of Public Policy in Common Law.”

INTRODUCTION

An agreement is unlawful if the court regards it as opposed to public policy. The term Public Policy[1] in its broadest sense means that sometime the courts will, on considerations of public policy, refuse to enforce a contract. The normal function of the courts is to enforce contracts; but consideration of public interest may require the courts to depart from their primary function and to refuse to enforce a contract. Interpretation of the concept of public policy is the function of the court and not of the executive.

It is not enough that the terms of contract have been brought to the knowledge of the other party by a sufficient notice before the court is entered into, it is also necessary that the terms of the contract themselves  should be reasonable. If the terms of the contract are unreasonable and opposed to public policy, they will not be enforced merely because they were printed on the reverse of a bill or a receipt or have been expressly or impliedly agreed upon between the parties. One of the leading case of public policies are:

Central Inland Water Transport Corporation Ltd. V Brojo  Nath[2]

 In this case one of the clauses in a contract of employment provided that the employer (corporation) could terminate the services of a permanent employee by giving him a 3 months’ notice or 3 months’ salary. In accordance with the above clause, the services of the respondent Brojo Nath and others were terminated instantly by giving them the notice , accompanied by cheque for 3 months’ salary.  The Supreme court held Rule 9 of service Discipline And Appeals of 1979 frames by the corporation empowering that such a clause in the service agreement between persons having gross inequality of bargaining power was wholly unreasonable and against public policy and was therefore void under section. 23 of the Indian Contracts Act.

Some general observation must be added upon the doctrine of Public Policy in the current law.[3]

 Since public policy reflects the fundamental assumptions of the community, the content of the rules should vary from country to country and from era to era. There is high authority for the view that in matters of public policy the court should adopt a broader approach than they usually do to the use of precedents.

INDIAN CASES ADOPTING ENGLISH VIEW ON PUBLIC POLICY:

The circumstances in which a contract is likely to be struck down as one opposed to public policy are well established in England. So a contract of marriage brokerage, the creation of  a perpetuity, a contract in restraint of trade, a gaming or wagering contract are all unlawful things on the ground of public policy.

“The Indian cases also adopt the same view.”  In Gherulal V Mahadeodas Maiya[4] enshrine the present position of the doctrine of public policy in India.  One of the question raised was whether the contract in dispute were illegal under HINDU LAW and immoral because of the doctrine of pious obligations of the sons to discharge the father’s debt, It was held that the tenets of Hindu Law could not be imported to give a novel content to the doctrine of public policy in respect of contract of gaming and Public policy is an elusive concept; it has been described as an “untrustworthy”, “unruly horse”, etc.

Explaining the scope of the expression public policy and the role of the judges, C.REDDY of the Andhra Pradesh High Court observed[5]:

The twin touchstone of public policy are advancement of the public good and prevention of public mischief and these questions have to be decided by the judges not as men of legal learning but as experienced and enlightened members of the community representing the highest common factor of public sentiment and intelligence. Indorsing this view, the Supreme Court added that going by prevailing social values, an agreement having tendency to injure public welfare is opposed to public policy.

Muniammal v. Raja.[6] A wife who is entitled to maintenance can give up her right in consideration of a lump sum payment. But the surrender of the right to claim revision of the amount in the context of rising prices would be opposed to public policy.

CONTRACTS WITH GOVERNMENT

The executive power of the Union of India and the states to carry on any trade or business, acquire, hold and dispose of property and make contracts is affirmed by article 298 of the constitution of India. If the formal requirements required by article 299 are complied with, the contract can be enforced against the Union or the states. The public policy and the public interest underlying article 299(1) is that ‘the State should not be saddled with liability for unauthorised contracts which do not show on their face that they are made on behalf of the state’.[7]  Article 299 of the constitution of India provides:

  1. All contracts made in the exercise of the executive power of the Union or of the state shall be expressed to be made by the President, or by the Governor of the state, as the case may be, and all such contracts and all assurances of property made in the exercise of that power, shall be executed on behalf of the president or the Governor by such persons and in such manner as he may direct or authorise.
  2. Neither the President nor the Governor shall be personally liable in respect of any contract or assurance made or executed for the purposes of this constitution, or for the purpose of any enactment relating to the Government of India heretofore in force, nor shall any person making or executing any such contract or assurance on behalf of any of them be personally liable in respect thereof.

The authorities of the President or the Governor may be conferred by the general order or an ad hoc order upon a particular contract. It may be proved by a notification[8] or by any other evidence[9]. A special authority may validly be given in respect of a particular contract or contracts by the governor to an officer other than the officer notified.[10]

A contract complying with the article can be enforced by or against the government. It is subjected to the general provisions of the contract law,[11] and its terms cannot be changed by resorting to article 14 of the constitution.[12] A contract not complying with any of the conditions of article 299(1) of the constitution is not binding on or enforceable by the government, and is absolutely void, though not so for collateral purposes and cannot be ratified and no damages can be claimed for breach unless the contract is  complete under this article.[13]

 An officer who enter into a contract without complying with the terms of the article will be personally liable. An agreement not complying with article 299 was held to be a contract for the purposes of disqualifying candidate for election.[14] This was the  reasoning of Chhaturbhuj’s case that article 299, though mandatory, did not render the contract void, as it was capable of ratification, is no longer sustained by later decisions, but it has been suggested that the conclusion  that it would disqualify a candidate is correct.

CONTRACTS ILLEGAL AT COMMON LAW ON GROUNDS OF PUBLIC POLICY

Certain types of contracts are forbidden at common law and therefore prima facie illegal. The first essential to an understanding of this head of the law, which has been clouded by much confusion of thought, is to discover if possible the principle upon which the stigma of illegality is based. The belief of judges of earlier period was that they would not tolerate any contract that in their view was injurious to society. It can be inferred from such belief’s that the judges were determined to establish and sustain a concept of public policy. This contention has its own disadvantage as it is imprecise. Modern judges have in fact taken more realistic view of this part of the law and have concluded that the so called illegal contracts fall into two separate groups according to the degree of mischief that they involve.[15] Some agreements are so obviously inimical to the interest of the society that they offend almost any concept of public policy; others violate no basic feelings of morality, but run counter only to social or economic expedience. The significance of their separation into two classes lies in different consequences that they involve.

Assuming that contracts vitiated by some improper element must be divided into two classes, how are the more serious examples of ‘illegality’ at common law to be distinguished from the less serious? Which of the contracts that have been frowned upon by the courts are so patently reprehensible – so obviously contrary to public policy – that they must be peremptorily styled illegal? Judicial authority is lacking, but it is submitted that the epithet ‘illegal’ may aptly and correctly be applied to following types of contracts:

  • A contract to commit a crime, a tort or a fraud on a third party.
  • A contract that is sexually immoral.
  • A contract to the prejudice of the public safety.
  • A contract prejudicial to the administration of justice.
  • A contract that tends to corruption in public life.
  • A contract to defraud the revenue.

A final observation may be made as to the way in which the courts may determine the content of public policy. Apart from reliance on previous precedents, this is done by a priori deduction from broad general principles. It is not the practice in English courts for the parties to lead sociological or economic evidence as to whether particular practices are harmful and it is doubtful to what extent such evidence would be regarded as relevant if it were adducted.

  • A contract to commit a crime, a tort or a fraud on a third party:

An agreement is illegal and void if its object, direct or indirect is the commission of the crime or a tort. An agreement made with the object of defrauding or deceiving a third party is illegal.[16] An illustration of this is where A agrees to recommend B for a post whether public or private, in consideration that B, if appointed, will pay part of the emolument or a secret commission to A.[17] In  this context it is appropriate to remember the ambit of the crime of conspiracy and that any agreement that which results in a criminal conspiracy will also be an illegal contract.

  • A contract that is sexually immoral

Under the precise ambit of this legal head it has been plausibly argued that sexual mores have changed radically and that public policy should reflect this, but it is not easy to state how far the changes have gone. It seems that if a landlord rents a prostitute ten times of the normal rent, knowing that she will use it to receive clients, the contract is surely illegal. On the contrary, an agreement where it is intended to bring about illicit cohabitation is illegal. This requires reconsideration. It is extremely common for landlords to let accommodation, knowing of reasonably suspecting that the occupants are living together but are not married. The courts have shown no disposition to resolve landlord – tenant related disputes like such cases by invoking public policy. Likewise, it is quite common that such unmarried couples enter into agreements to pool their incomes and also the acquisition of certain assets. Several cases like this have been there before the court and it has been assumed with a principle that such agreements are capable of being binding because of the reason that in such relationships there are other considerations to support it.

  • A contract prejudicial to the public safety

Detrimental contracts within the meaning of this statement are those which tend either to benefit an enemy country or to disturb the good relations of a country with another. Contracts which are made in time of war must clearly react upon  a contract made with an alien enemy by a person subject to such country since it may result in injury to such country. The expression alien enemy is not necessarily restricted to its popular meaning. The king’s subject cannot trade with an alien enemy, i.e. a person owing allegiance to a government at war with the king, without the king’s licence.[18] It denotes a status that depends not upon the nationality of the contracting party, but upon whether he is voluntarily resident in or carrying on a business in the enemy’s country or in a country within the effective control of the enemy. So it goes without saying that a contract made during war with an alien enemy is illegal.

If such contract is made during the peace time with a person who later becomes an alien enemy owing to the outbreak of war and if it involves intercourse with the enemy country nor is in other respects obnoxious from the standpoint of public policy, then it is immediately abrogated in so far as it is still executor.[19]

There is no general rule that  all executor contracts with an alien enemy are abrogated. The executor contract which is abrogated must either involve intercourse, or its continued existence must be  in some other way against public policy .

  • A contract prejudicial to the administration of justice

it is admitted that any contract or engagement having a tendency to affect the administration of justice, is illegal and void. There are many examples of this rule, as for instance an agreement neither to appear at the public examination of a bankrupt nor to oppose his discharge, an agreement not to plead the Gaming Acts as a defence to an action on a cheque given for lost bets, and an agreement to withdraw divorce proceedings, or an agreement by a witness not to give evidence or only to give evidence for one side. Any aagreement which obstructs the ordinary process of justice is void. An agreement to delay the execution of a decree,[20]  and a promise to give money to induce a person to give false evidence, have been held void.

It is therefore well established that the courts will neither enforce nor recognise any agreement which has the effect of withdrawing from the ordinary course of justice a prosecution for a public offence.

  • A contract liable to corrupt public life
  1. It has long been the rule that any contract is illegal which tends to corruption in administration of the affairs of the nation. An agreement by which it is intended to induce a public officer to act corruptly is contrary to public policy. An agreement for example, by which a sum of money was provided to a charity on the condition that latter would procure a knighthood for the plaintiff, was held void and the money irrecoverable. Similarly, an agreement to provide money to a Member of Parliament to influence his judgement is void. Charging of capitation fee for admission to prestigious institutions is contrary to public policy. The Supreme Court has described it as unreasonable, unjust and unfair.[21]

Like if in a situation where A agreed that if by the influence of B he were appointed Customs Officer of a port, he would appoint such deputies as B should nominate and would hold the profits of office in trust for B. It was held, after A had secured the post, that no action lay against him for breach of this agreement. On the same principle an agreement to assign or mortgage future instalments of the salary of a public office is void, since the law assumes that the object of the salary is to maintain the dignity of the office and to enable the holder to perform his duties in a proper manner.

Agreements not in contravention to section 23

Permission of Collector under section 43 of Bombay Tenancy and Agricultural Lands Act, 1948, it was not required for agreement for sale of lands of old tenure. Permission of Collector was also not required as land was already covered under the provisions of Bombay Tenancy and Agricultural Lands Act. Held that agreement was not in contravention of section 23 as there was no definite evidence on record as to what date these lands were given final plot numbers.[22]

  • Validity of agreement between landlord and tenant during pendency of eviction proceedings:

Where the agreement between the landlords and the tenants provided that the petition of eviction brought against the tenant and sub tenant of whom the plaintiffs were included would not be contested and nevertheless even if the order of eviction was obtained in that proceeding, no effort would be made to evit the plaintiffs. Court observed that it could not be said that there was anything illegal or against public policy in the matter of that agreement, as there was no law prohibiting the landlord to allow his tenant to continue in possession even after getting an order for eviction, may it be on a higher rent.[23]

  • Copyright agreement could not be said to be violative of public policy:

Where in an agreement there was merely agreement between two parties under which defendant had assigned certain copyrights in favour of plaintiff. There is no obligation to public. Held that such an agreement could not be said to be violative of public policy as the assignment of copyright was permissible even under Copyright Act.

  • Consideration and Objects unlawful in part

Section 24 of the Indian Contract Act, 1872 explains the position in cases when only a part of the consideration or object are unlawful. When there are two sets of distinct promises, and when the void part of the contract can be properly separated from the rest, the latter does not become invalid.[24]

Thus if A promises to superintend, on behalf of B, legal manufacture of Indigo  and an illegal traffic in other articles , and promises to pay to A salary of 10,000 rupees for both the jobs, the whole of the agreement is void. In this case, the object of A’s promise and the consideration for B’s promise are unlawful in part only, but the two cannot be separated. In Alice Mary Hill v. William Clarke[25] the plaintiff, a married woman agreed to live in adultery with the defendant agreed to pay the plaintiff a single consolidated remuneration of Rs. 50 per month. It was held that because the lawful part could not be severed from the unlawful one, the whole of the agreement was void, and the plaintiff could not recover anything even her services as a house-keeper.

CONCLUSION

It is quite clear that if the consideration or the object of the consideration is, in the opinion of the court, opposed to public policy, the agreement becomes invalid under the provisions of section 23 of Indian Contract Act, 1872. The freedom of citizen, as indeed the freedom of the lawyer, to enter into a contract is always subject to the overriding considerations of public policy as enunciated under section 23. In other words, if the contract is opposed to public policy, it would be treated as invalid in courts of India and its conclusion cannot be challenged on the ground that in involves encroachment on the citizen’s freedom to enter into any contract he likes. The Bombay High Court has said, that the term Public Policy is somewhat vague and th0e courts should not be astute to invent newer and newer grounds of public policy. But on the other hand, the construction of the clause “opposed to public policy” in context of administration of justice does not present any difficulty. Therefore, all agreements that obstruct or affect the administration of justice would be treated invalid under section 23 of Indian Contract Act, 1872.

Edited by Amoolya Khurana

[1] contracts and specific relief, Avtar Singh, tenth edition, pg 274

[2] A.I.R 1986 S.C 1571.

[3] Law of Contract, Michael Furmston, fifteenth edition

[4] AIR 1959 SC 781: (1959) 2 SCA 342,370

[5] Ratanchand Hirachand v Askar Nawaz Jung, AIR 1976 AP 112.

[6] AIR 1978 Mad 103.

[7] Bhikraj Jaipuria v. Union of India AIR 1962 SC 113

[8] Timber Kashmir Pvt Ltd (M/s) v. The Conservator of the Forest, Jammu AIR 1977 SC 151

[9] Bhikraj Jaipuria v. Union of India, AIR 1962 SC 113, [1962] 2 SCR 880.

[10] State of Bihar v. Karan Chand Thapar & Bros Air 1962 SC 110; Bhikraj Jaipuria v. Union of India AIR 1962 SC 113, [1962] 2 SCR 880.

[11] Union of India v. Steel stock Holders Syndicate AIR 1976 SC 879.

[12] Bareilly Development Authority v. Ajay Pal Singh AIR 1989 SC 1076.

[13] State of Uttar Pradesh v. kishori Lal AIR 1980 Sc 680.

[14] Chhaturbhuj Vithaldas Jasani v. Moreswar Parashram AIR 1954 SC 236

[15] Bennet v. Bennet [1952] I KB 249. The actual decision in Bennet v. Bennet was reversed by the maintainance Agreements Act 1957. (Now the Matrimonial Causes Act 1973, s 34)

[16] Brown Jenkinson & Co Ltd v. Percy Dalton (London) Ltd [1957] 2 QB 621

[17] Waldo v. Martin (1825) 4 B & C 319

[18] Lord macnaghten in Janson v Driefontein Consolidated mines, (1902) AC 484, 499

[19] Schaffenious v. Goldberg [1916] 1 KB 284

[20] Nand Kishore v. kunj beharilal, AIR 1933 All 303

[21] Mohini Jain v. state of Karnataka,(1992) 1 SCC 666.

[22] Ravvjibhai Mathurbhai Solanki v. Bijalbhai Devjibhai Prajapati, AIR 2004 Guj. 102

[23] M.K. Usman Koya v. C.S. Santha, AIR 2003 Ker. 191

[24] B.O.I Ltd. V. The Custodian, A.I.R 1997 S.C 1952

[25] I.L.R (1905) 28 All. 266; Also see Roshen v. Muhammad (1887) Punj. Rec. No. 46

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