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PUBLIC POLICY UNDER SECTION 23 OF INDIAN CONTRACTS ACT

PUBLIC POLICY IN SECTION 23 OF INDIAN CONTRACTS ACT - Suchetana Chakraborty (1)

BRIEF OVERVIEW

Any Contract which cannot be enforced by law is void. Section 23 of the Indian Contracts Act,1872 elucidates on what considerations and objects in a Contract are lawful and what is not. While Sections 10-22 deal with Agreements or Contracts voidable at the action of either party, Section 23 talks about Contracts that are void due to an unlawful(tends to defeat the provisions of any relevant law) consideration or the object of the agreement. Sections 24-30 describes various unlawful situations in which contracts become void. The term ‘law’ is to be understood as explained in article 13(3) of the Indian Constitution.

INTRODUCTION

A part of section 23 says an agreement is unlawful if it is “Opposed to Public Policy” or if the “Court regards it to be immoral”. The term public policy in this context is based on the Latin legal maxim maxim ‘Ex Turpi Causa Non Oritur Actio’ which means that from any ‘dishonourable cause’ no action can arise. This doctrine renders the plaintiff unable to extract contractual remedies if the breach arises from their own illegal subject matter of the agreement. Since an illegal contract is a void contract, there can be no breach of contract as there was no contract in the first place. Such contracts are not merely void but invalid from nativity. Ex Turpi causa, thus, is also known as “illegality defence” wherein a defendant may plead that even though he breached the terms and conditions of the contract, the claimant cannot sue, by the reason of their contract being illegal according to existing law/customs or directly/indirectly contrary to Public Policy.

Although ‘Public Policy’ is a very vague term, it means collective welfare of the society or community as well the public policies designed by the government. It is held that no contract shall be against the morals or developed interests of the society.

TYPES OF CONTRACTS AGAINST PUBLIC POLICY

Contracts vary in degrees of mischief. They vary in the seriousness of the illegality. While some contracts are laid on a principle that is wholly unlawful, eg. -Alice Mary Hill v. William Clarke, some contracts contain a part or parts of several considerations which is unlawful. If that part or those parts are not intrinsic to the object of the contract, it can be removed and struck off from consideration, thereby making the contract enforceable again. Also, while some contracts are outrageous to public morality, some are against social, political or economic expedience. These differences in significance lead to differences in consequences. Nevertheless, our law has classified some specific types of contracts which may aptly be called ‘illegal’-

  1. A contract to the prejudice of the public safety– A contract made with an alien enemy citizen which may benefit an enemy country or disrupt good relations with a friendly country is void for threatening public safety. All contracts executed with an enemy citizen are not illegal unless it categorically proves to be detrimental to the public policy.               

▪︎ Illustration – An Indian citizen A who serves in the Indian Army enters into a contract with a Pakistani citizen to provide him with sensitive information regarding the number of fighter jets to be manufactured in India during a certain period in lieu of a certain amount of money. This contract is void as it is against public policy. At the same time, a business contract for the supply of goods between these same people will be a lawful consideration.

  1. A contract prejudicial to the administration of justice– The court neither enforces nor recognizes any contract which hampers or withdraws from ordinary course of justice the prosecution of a case of public offence or delays the execution of a decree. 

▪︎ Illustration- Contracts inducing an individual to not appear as a witness in a court of law, provide with false evidence in regards to a case or any agreement to withdraw legal proceedings against an individual in place of a certain amount of money.

Exceptions- Any case where the contract mentions or both parties agree to refer any dispute to Arbitration instead of filing a case in a Court of Law. Also, in cases where a ‘Bank’ under article 28 exception 3 of ICA mentions a specified period for the exercise of certain rights.

  1. A contract to commit a crime, a tort or a fraud on a third party– Any agreement leading to a direct/indirect commitment of a crime or a tort is void. No agreement shall intend to defraud or deceive a third party. Any contract to defraud the revenue of a party is void as well

▪︎ Illustration- A who holds an influential position instead of a certain sum of money promises to recommend B to a certain public post to fire/expel C who is working under that public post. Example -Brown Jenkinson & Co Ltd. v. Percy Dalton Ltd (1) where the plaintiffs made a false representation to recover damages deceitfully from the defendants.

  1. A contract restraint of personal liberty– Any agreement causing restraint to the right of personal liberty guaranteed under our constitution is unlawful and against Public Policy. Any agreement depriving an individual of parental rights is also unlawful as in the case of Giddu Narayansih v. Annie Besant(2).

Example-  In the case of Sitaram Deokaran v. Baldeo Jairam (3), the agreement was declared against the spirit of personal liberty and deemed void. In this case, a party had agreed to serve at Rs. two per month for a period of one hundred twelve months at Rs. 2 per month. In Ramsarup Bhagat vs. Banshi Mandar & Ors (4) the defendant was subjected to human labour without any pay to recover the claims made by the plaintiff.

  1. A contract that tends to corruption in public life– Any Contract is held illegal if it tends to corrupt the administration in a public office. Such an agreement that induces a public officer to act corruptly contrary to the values assigned to their position is against public policy.

▪︎ Illustration- An agreement of payment of money to a Member of Parliament or a judge to influence their decision is a void contract. Example- Rattan Chand Hira Chand v. Askar Nawaz Jung(5).

  1. Sale/transfer of public offices and title– Any agreement to sell or transfer appointments to public posts or seats in public institutions hampering the rights of a deserving candidate is against public policy as it deprives administrative posts of meritoriousness. Refer to the case of Sushil Kumar Yadunath Jha v. Union of India(6).
  2. Agreements in restraint of marriage– Any Contract made to deprive two consenting adults of their right to marry shall be deemed unlawful and void.
  3. Agreements in restraint of trade– No contract shall restrict any individual or a party from professing a trade or profession of their choice. Any contract preventing so is against public interest as well as public liberty. Exceptions- in a case where the goodwill of the business is sold, the buyer of such goodwill shall not establish a similar business within specified local limits.
  4. Agreements by way of wager– No suit can be initiated against anyone to recover the claims won or losses incurred by way of wager on an uncertain event. This principle is to prevent the practice of gambling among the public. Eg.- Gherulal Parikh vs. Mahadeodas Maiya and ors(7). Exceptions- Certain Prizes on Horse Racing Events.
AGREEMENTS UNOPPOSED TO PUBLIC POLICY
  1. Agreements consisting of two or more distinct promises where the void part can be separated from the other legally acceptable part, the other part is deemed valid under the law. But in a case where the unlawful part cannot be separated from the lawful part, the contract lies void.
  2.  Agreement of lease between tenants and landlord- In a case, where eviction notice has already been provided by the court against the tenants by the landlord, the landlord can still enter into a contract to let the tenants continue living in their premises, generally in consideration of increased rent. Eg.- M.K. Usman Koya v. C.S. Santha(8).
  3. Any Public Content Creator assigning any particular favoured individual certain copyrights through a contract is not against public interest and therefore enforceable.

CRITICISM

Since the term Public Policy varies from person to person, depending upon varied tastes, education, cultural backgrounds, religion, etc. it is bound to bring uncertainty in judicial decisions. A judge must interpret a recognized law and not merely speculating upon what is a public good and what is not. In P. Rathinam vs. Union of India(9), the Supreme Court held that the term ‘public policy’ is open for modification and expansion.

CONCLUSION

In Section 23 of the Indian Contracts Act, the public policy doctrine overlaps the freedom of an individual to enter into contracts of their choice. The ambit and interpretation of the word public policy are huge and therefore, the court must exercise utmost care while instrumenting the applicability of this article. It is upon the discretion of the court itself to determine on what grounds the agreement and object of a contract stand against public policy. The illegal contracts come to the notice of the authority only in case of breach of contracts. Thus, there could also be a mechanism so that the formation of illegal contracts are prevented in the first place.

Author(s) Name: Suchetana Chakraborty (Institute pf Law, Nirma University)

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References:

  1. https://www.lexology.com/library/detail.aspx?g=cee02d23-3ffa-41e4-839b-7b9866a0fead
  2. https://www.google.com/url?sa=t&source=web&rct=j&url=https://indiankanoon.org/doc/1736356/&ved=2ahUKEwicyojbtf7vAhVWzTgGHUmzAzkQFjAAegQIBhAC&usg=AOvVaw2DiWUT73H7DAqV00V2gdyi
  3. https://indiankanoon.org/doc/217714/
  4. https://indiankanoon.org/doc/1540527/
  5. https://indiankanoon.org/doc/527706/
  6. https://indiankanoon.org/doc/781597/
  7. https://indiankanoon.org/doc/930662/#:~:text=The%20trial%20Court%20dismissed%20the,Act%20and%20decreed%20the%20suit.
  8. https://www.google.com/url?sa=t&source=web&rct=j&url=https://indiankanoon.org/doc/241221/&ved=2ahUKEwicr46Ot_7vAhUczDgGHR8HDToQFjAAegQIBRAC&usg=AOvVaw0bIkxZ5Cdd11tHKQMLfkas
  9. https://indiankanoon.org/doc/542988/
  10. http://www.legalserviceindia.com/legal/article-1554-agreement-involving-injury-to-a-person-jurisprudential-aspects-of-section-23-of-indian-contract-act-1872.html
  11. https://www.ourlegalworld.com/void-agreement-under-section-24-to-30-of-indian-contract-act-1872/#:~:text=If%20any%20part%20of%20a,unlawful%2C%20the%20agreement%20is%20void.
  12. https://blog.ipleaders.in/agreements-against-public-policy-under-law-of-contracts/amp/
  13. https://indiankanoon.org/doc/171398/

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