Agreement is unlawful if Court regards it as opposed to public policy." Discuss meaning of public policy and when agreement is against it.

Section 27 states that "Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void."

This section declares every such agreement void, and does not allow any distinction between a total restraint or a partial restraint. This interpretation is supported by drawing a comparison with Section 28 (Restraint of legal proceedings), which uses the word "absolutely," a word absent in Section 27. Therefore, courts concluded that Section 27 was intended to prevent not merely a total restraint but also a partial restraint. The principle holds that whether the restraint is general or partial, unqualified or qualified, if it is in the nature of a restraint of trade, it is void.

This perspective was established in early cases like Madhub Chunder v Raj Coomar Doss, which interpreted Section 27 to prohibit both total and partial restraints based on the difference in wording compared to Section 28. More recently, in Zaheer Khan v. Percept D. Mark (India) Pvt Ltd (AIR 2004 Bom. 362), it was held that a contract restricting a party's future liberty to carry on affairs as they like and with persons they choose would be a contract in restraint of trade and hit by Section 27. Agreements restricting an employee's ability to work for a competitor after the termination of service are considered prima facie void under Section 27.

Freedom of trade and commerce is a fundamental right protected by the Constitution of India, and individuals cannot easily bargain it away by agreement. Public policy requires that everyone should be free to work for themselves and should not be allowed to deprive themselves or the State of their labour, skill, or talent through a contract.

Public Policy as a Ground for Unlawful Agreements (Section 23)

The principle that agreements opposed to public policy are void is a broader concept under the Indian Contract Act, primarily falling under Section 23, which lists the circumstances under which the consideration or object of an agreement is considered unlawful. Section 23 states that the consideration or object of an agreement is unlawful if "the Court regards it as immoral, or opposed to public policy." Consequently, every agreement of which the object or consideration is unlawful is void. Agreements opposed to public policy are expressly declared to be void agreements.

Meaning of Public Policy:

"Public policy" is described as a principle of judicial interpretation founded on the current needs of the community. It broadly means public good or public interest. An act which is injurious to society, affecting social or economic interests, is against public policy. It means the policy of the law at a stated time.

The concept of public policy is seen as an elusive concept, an "unruly horse" where one never knows where it will carry you. Traditionally, courts were reluctant to interfere with contracts on their own notions of public policy. However, the doctrine is applied to prevent not only harmful cases but also harmful tendencies.

While the primary duty of a court is to enforce promises and uphold the sanctity of contracts, courts may relieve parties of this duty based on public policy. The principles of public policy have been crystallized under different heads and courts generally rely on these well-settled heads. While the heads are not closed and theoretically new heads may be evolved in exceptional circumstances due to a changing world, courts are advised not to attempt to discover new heads frequently for the sake of stability.

However, modern judicial views, as seen in Ratan Chand v Askar (AIR 1976 A.P.112), suggest that courts should create new heads of public policy due to changing social values and concepts in a progressive modern society. The focus is increasingly on the social and economic interest of the community rather than solely individual interest. The Supreme Court in Central Inland Water Transport Copn, Ltd. v Brojo Nath (AIR 1986 SC 1571) observed that the principles governing public policy are capable of expansion or modification, and new heads can be evolved in light of the Fundamental Rights and Directive Principles in the Constitution of India.

When an Agreement is Against Public Policy - Categories:

Agreements can be considered opposed to public policy under various heads:

1. Restraint of Trade (Section 27): As discussed above, agreements restraining a lawful profession, trade, or business are generally void. This is a major head of public policy.

2. Trading with an Enemy: Agreements with a government or individuals of a country at war with the government are contrary to public policy as they hinder the government's efforts to cripple the enemy's commerce.

3. Trafficking in Public Offices / Promoting Corruption: Agreements intended to induce a public officer to act corruptly or involving the buying or selling of public offices, government contracts, or public awards are against public policy. For example, an agreement to pay money for obtaining public employment is void. English cases like Parkinson v College of Ambulance Ltd and Harrison (1925) KB (agreement for a knighthood in return for donation) illustrate this principle.

4. Interference with Administration of Justice: Agreements obstructing the process of justice are void.

   • Stifling Prosecution: Agreements not to prosecute an offender or withdraw a pending public prosecution are void. In Narasimha Raju v Gurumurthy Raju (AIR 1963 SC 107), an agreement to refer criminal complaints between partners to arbitration, leading to the complaints being dropped, was held to have unlawful consideration and thus void. However, a compromise made before a complaint is filed, even if implemented after filing and withdrawal, may not amount to stifling prosecution. The Supreme Court distinguished between the motive and the consideration in Union Carbide Corporation v Union of India (AIR 1992 SC 317).

   • Ousting Court Jurisdiction (Section 28): Agreements that absolutely restrict the right to enforce a contract through legal proceedings or limit the time for bringing an action shorter than the limitation period are void. However, clauses selecting one out of multiple competent courts' jurisdiction or arbitration clauses (provided they don't completely oust court jurisdiction initially) are generally valid. An agreement conferring jurisdiction on a court that otherwise does not have it is void as being against public policy. The Supreme Court in Harshad Chiman Lal Modi v D.L.F. Universal Ltd. (AIR 2005 SC 4446) held that such agreements conferring jurisdiction on a court without it have no effect and cannot be enforced.

5. Agreements Prejudicial to Marriage (Section 26): Agreements restraining the marriage of any person (other than a minor) are void as it is public policy to discourage such restraints. This includes general or partial restraints, such as not marrying at all, for a fixed period, or a specific person. An example from English law, Lowe v. Peers, illustrates a promise not to marry anyone other than a specific person being held void.

6. Injurious to Person or Property: Agreements between persons to injure the person or property of another are unlawful. An agreement forcing a borrower into manual labour until repayment or face exorbitant interest was held to amount to slavery and thus opposed to public policy, as seen in Ram Sarup v Bansi Mandar (1915) 42 Cal 742. An agreement to sell doubtful property to create trouble for the real owner was also considered injurious to property and person, as in Ramalingam v Natesa (AIR 1967 Mad 461).

7. Immoral Agreements: The law does not enforce agreements tainted with immorality, which depends on prevailing standards. In India, this is often confined to sexual immorality. Examples include agreements for future concubinage. However, wagering agreements are not regarded as immoral.

8. Agreements Defeating Provisions of Law: Although not directly forbidden, agreements that, if permitted, would defeat the provisions of any law are void. Examples include accepting a son in adoption for money, agreements aimed at evading tax laws, as in Ram Sewak v. Ram Charan (AIR 1982 All. 177), or agreements to transfer land assigned to a member of depressed classes to a third person, which is against public policy, seen in Papaiah v State of Karnataka (AIR 1997 SC 2670).

9. Unfair or Unreasonable Bargains (Unequal Bargaining Power): Contracts entered into between parties with unequal bargaining power where one party exploits the other with unfair or unreasonable terms can be opposed to public policy. In Central Inland Water Transport Copn, Ltd. v Brojo Nath, the Supreme Court held that an unfair and unreasonable contract between a government corporation and its employees (unequal in bargaining power), such as a term allowing removal by three months' notice without ground, is injurious to public interest and void. Similarly, in D. T.C. v D. T.C Mazdoor, unfair service conditions were held opposed to public policy.

10. Other examples: These include champertous agreements that are unfair or oppressive (Ram Coomar Coondoo v Chunder Canto Mookerjee), agreements for lawyer's fees contingent on the outcome (Kothi Jairam v Vishvanath), agreements restraining freedom of the press, and collusive agreements in bidding/tendering which may be considered restrictive trade practices. The regulation and prohibition of the liquor trade by the State are based on public policy, and there is no fundamental right to trade in liquor (State of Andhra Pradesh v. McDowell and Co., Khoday Distilleries Ltd. v. State of Karnataka).

In summary, Section 27 specifically voids agreements in restraint of trade, whether partial or general, based on public policy favouring freedom of occupation. More broadly, Section 23 declares any agreement void if the court regards its object or consideration as opposed to public policy. Public policy is a dynamic concept interpreted by courts based on community welfare, social values, and constitutional principles, applied cautiously but capable of evolving to address new forms of harm to the public interest.

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