public policy and contract: the recent trend

INTRODUCTION

If a court finds that an agreement is against public policy, it is deemed illegal. In its fullest definition, the word “public policy” means that the courts may refuse to enforce a contract based on public policy reasonsThe courts’ fundamental function is to enforce contracts; but, public interest considerations may cause the courts to deviate from their core function and 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 sufficient that the terms of the contract have been brought to the attention of the other party by a proper notice before the court is engaged; the terms of the contract must also be reasonable. If the contract’s terms are irrational and against public policy, they will not be enforced simply because they were printed on the back of a bill or receipt, or though they were verbally or implicitly agreed upon by the parties. One of the most well-known examples of government policies is:

Central Inland Water Transport Corporation Ltd. V Brojo Nath

In this instance, one of the clauses in a contract of employment stated that the employer (company) could terminate a permanent employee’s services by giving him three months’ notice or three months’ salary. The services of the respondent Brojo Nath and others were terminated immediately in compliance with the aforesaid clause by giving them notice and a check for three 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.

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

In England, the circumstances under which a contract is likely to be knocked down as being against public policy are well established. So, on the basis of public policy, a marriage brokerage contract, the formation of a perpetuity, a contract in restraint of trade, and a gaming or wagering contract are all illegal.

The Indian cases take the same stance.  In Gherulal V Mahadeodas Maiya 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

The advancement of the public good and the prevention of public mischief are the twin touchstones of public policy, and these questions must be decided by judges as experienced and enlightened members of the community representing the highest common factor of public sentiment and intelligence, not as men of legal learning. 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 – 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. The contract can be enforced against the Union or the states if the formal requirements imposed by article 299 are met. Article 299(1)’s underlying public policy and public interest is that “the State shall not be held liable for prohibited contracts that do not appear on their face that they are formed on behalf of the state.” Article 299 of the constitution of India provides:

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, on behalf of the president or the governor, shall be carried out by such individuals and in such a way as he may instruct or permit.

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 any enactment relating to the Government of India previously in force, nor shall any person making or executing any such contract or assurance on their behalf.

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 or by any other evidence. 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.

A contract that complies with the article can be enforced by the government or against it. It is bound by contract law’s general principles, and its terms cannot be modified by using Article 14 of the constitution. A contract that does not meet any of the conditions of article 299(1) of the constitution is not binding on or enforceable by the government and is null and void, though not for collateral purposes. It cannot be ratified, and no damages can be claimed for breach unless the contract meets all of the conditions.

 An officer who enters 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. This was the  reasoning of Chhaturbhuj Vithaldas Jasani v. Moreswar Parashram 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 forms of contracts are prohibited by common law and, as a result, are presumed to be illegal. The first step toward understanding this branch of the law, which has been clouded by a lot of muddled thinking, is to figure out what principle underpins the stigma of illegality. Judges in the past believed that they would not tolerate any contract that they considered to be harmful to society. The judges’ determination to construct and maintain a sense of public policy can be deduced from such beliefs. Because it is vague, this argument has its own drawback. Modern judges have taken a more realistic perspective of this area of the law, concluding that so-called illegitimate contracts are divided into two categories based on the degree of harm they cause. Some agreements are so blatantly harmful to society’s interests that they violate nearly every concept of public policy; others violate no fundamental moral principles, but solely serve social or economic interests. The significance of their division into two divisions can be found in the various repercussions that they entail.

If contracts vitiated by some unlawful element must be classed into two types, how are the more serious situations of “illegality” at common law distinguished from the less serious ones?  Which of the contracts that the courts have disapproved are so blatantly abhorrent – so obviously against public policy – that they must be declared illegal? Although judicial authority is missing, it is proposed that the term “illegal” be used to the following categories of contracts:

• A contract that is sexually immoral.

• A contract that commits a crime, a tort, or a fraud on a third party.

• An agreement that jeopardises public safety.

• A contract that interferes with the administration of justice.

• In public life, a pact that encourages corruption.

• A contract with the intention of defrauding the government of money.

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:

If the goal of an agreement is the commission of a crime or a tort, it is illegal and void. It is prohibited to enter into an agreement with the intent of misleading or deceiving a third party. For example, suppose A agrees to suggest B for a public or private position in exchange for B paying a portion of the remuneration or a secret commission to A if B is appointed. 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 is an illegal contract.

  • A contract that is sexually immoral

It has been suggested that sexual mores have evolved dramatically and that public policy should reflect this, although it is difficult to say how far the changes have gone under this legal heading. The contract appears to be illegal if a landlord rents a prostitute 10 times the standard rent, knowing that she will use it to receive clients. An agreement that is designed to lead to illicit cohabitation, on the other hand, is criminal. This has to be reconsidered. It is fairly typical for landlords to rent out property knowing or suspecting that the tenants are living together but not married. In such circumstances, the courts have demonstrated no willingness to use public policy to address landlord-tenant disputes. Similarly, it is extremely normal for such unmarried couples to enter into agreements to pool their incomes as well as to purchase particular assets. There have been other cases like this before the court, and it has been assumed as a principle that such agreements are capable of being enforceable because there are other grounds to support it in such partnerships.

  • A contract prejudicial to the public safety

In the context of this remark, detrimental contracts are ones that enrich an adversary country or disrupt a government’s good relations with another. Contracts made during times of war must expressly react to a deal established with an alien enemy by a person subject to that country, because such a transaction may cause injury to that country. The meaning of the phrase “foreign adversary” isn’t always limited to its common connotation. Without the monarch’s permission, a subject of the king cannot trade with an alien enemy, that is, a person who owes loyalty to a government at war with the king. It denotes a status that is determined not by the contractual party’s nationality, but by whether he is willingly resident in or conducting business in the enemy’s country or in a country under the enemy’s effective authority. As a result, it goes without saying that a contract established with an alien adversary during a war is illegal.

If a contract is made during peacetime with a person who later becomes an alien enemy as a result of the outbreak of war, and it does not involve intercourse with the enemy country or is in any other way obnoxious from the standpoint of public policy, it is immediately abrogated insofar as it is still executor.

There is no universal law stating that all executor contracts with an alien adversary are void. The abrogated executor contract must either entail intercourse, or its continued existence must be against public policy in some other way.

  • A contract prejudicial to the administration of justice

Any arrangement or agreement that has the potential to obstruct the administration of justice is acknowledged to be illegal and void. There are numerous examples of this rule, including an agreement not to appear at a bankrupt’s public examination or to oppose his discharge, an agreement not to plead the Gaming Acts as a defence to an action on a check given for lost bets, an agreement to withdraw divorce proceedings, or an agreement by a witness not to give evidence or to give evidence for one side only. Any agreement that obstructs the normal course of justice is null and void. An agreement to postpone the implementation of a decree, as well as a commitment to pay money to persuade someone to submit false testimony, has been declared null and void. As a result, it is well established that the courts will not enforce or accept any agreement that has the effect of removing a prosecution for a public offence from the normal course of justice.

  • A contract liable to corrupt public life

It has long been the rule that any deal that leads to corruption in the administration of the nation’s affairs is prohibited. It is against public policy to enter into an arrangement with the intent of inducing a public official to act corruptly. For example, a contract in which a quantity of money was given to a charity in exchange for the charity obtaining a knighthood for the plaintiff was declared void and the money was declared unrecoverable. Similarly, an arrangement to pay a Member of Parliament in order to influence his decision 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.

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. After A had gotten the job, it was decided that no action would be taken against him for breaking the agreement. A contract to assign or mortgage future instalments of a public office’s pay is also illegal, because the law presumes that the purpose of the salary is to maintain the dignity of the office and to enable the holder to perform his obligations properly.

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

Even if the landlords and renters agreed that the eviction petition lodged against the tenant and subtenant of which the plaintiffs were a part would not be contested, and even if the eviction order was obtained in that hearing, no attempt would be made to evict the plaintiffs. The court stated that there was nothing illegal or against public policy in that agreement because there was no statute banning the landlord from allowing his tenant to remain in possession even after receiving an eviction order, even if at a higher rent.

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

Where an agreement between two parties simply stated that defendant had assigned certain copyrights to plaintiff. There are no obligations to the general public. The assignment of copyright was legal even under the Copyright Act, therefore such an agreement could not be claimed to be against public policy.

  • Consideration and Objects unlawful in part

The Indian Contract Act, 1872, discusses what happens when merely a portion of the consideration or object is illegal. The latter does not become invalid if there are two sets of distinct promises and the void part of the contract can be correctly isolated from the remainder.

Thus, if A undertakes to supervise legitimate Indigo manufacturing and unlawful trade in other commodities on behalf of B, and to pay A a salary of 10,000 rupees for both activities, the entire agreement is null and void. The goal of A’s promise and the reason for B’s promise are only partially illegal in this situation, but the two cannot be separated. The plaintiff, a married woman, agreed to live in adultery with the defendant in Alice Mary Hill v. William Clarke, and the defendant agreed to pay the plaintiff a single consolidated compensation of Rs. 50 each month. Because the lawful element could not be separated from the unlawful part, the entire agreement was declared void, and the plaintiff was unable to recover anything, including her services as a housekeeper.

CONCLUSION

The agreement becomes illegal under the terms of section 23 of the Indian Contract Act, 1872, if the consideration or the goal of the consideration is, in the opinion of the court, contrary to public policy. The right of a citizen, like the right of a lawyer, to engage into a contract is always subject to the overriding public policy concerns outlined in section 23. In other words, if the contract is against public policy, it will be declared void in Indian courts, and its outcome will not be contested on the grounds that it infringes on the citizen’s right to engage into any contract he wants. The Bombay High Court has stated that the word “public policy” is somewhat ambiguous, and that courts should refrain from inventing new grounds of public policy. On the other hand, there is no difficulty in construing the sentence “opposed to public policy” in the context of the administration of justice. As a result, under section 23 of the Indian Contract Act, 1872, all agreements that obstruct or influence the administration of justice would be declared null and void.

BIBLIOGRAPGY

  1. Contract and Specific Relief, Avtar Singh, Twelfth Edition, Pg 274
  2. Chhaturbhuj Vithaldas Jasani v. Moreswar Parashram AIR 1954 SC 236
  3. http://www.mondaq.com/india/x/447438/Contract+Law/Section+23+Of+Indian+Contract+Act+Lawful+Considerations+And+Objects

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