BIBLIOGRAFÍA

7.2 Application of public policy principles to contracts (a) Forbidden by law

(b) Defeating the provisions of law (c) Fraudulent

(d) Injurious to person and property (e) Immoral

(f) Public policy of the State

7.3 Agreements void on account of public policy (a) In restraint on marriage

(b) In restraint on trade

(c) Restraining legal proceedings (d) Wagering agreements 7.1 INTRODUCTORY NOTE

The law of contract gives an opportunity of creating new rights and obligations to every individual. Such rights and obligations ex contractu create rights and obligating in personam. Contract therefore creates a legal infrastructure for a capitalist and mercantile society. In a capitalist framework each individual has absolute freedom to design his or her rights and obligations vis-a-vis other persons in the society, simply through the legal instrument of contract. Thus contract subserves the principle of private interest maximization. Generally speaking the question of public policy cannot operate in the sphere of private interests. The law of contract has to essentially operate within the constitutional framework of a country, and hence the private interest can not conflict with that higher constitutional public interest. A few examples may not be out of place here. No contract can be made between parties, with a view to obstructing the discharge of the State functions, either Executive, Legislative, or Judicial. A contract to opt out of the State jurisdiction of the country is against public policy. Therefore, parties to a contract can not prescribe that they shall be governed by the English law, instead of the Indian law. Any private contract, defacing any part of the constitutional regime is per se void. Similarly, there cannot be a contract with unlawful consideration, or for a criminal purpose. Public laws are always considered to be the higher laws vis-a-vis the contract laws. As such, while interpreting any contract, it has to be so interpreted, that no part of the contract infringes on any public law, viz.

constitutional law, criminal law, or administrative law.

7.2 APPLICATION OF PUBLIC POLICY TO CONTRACTS

It is evident that contract serves private interests. But it is the responsibility of the state to see that while serving the private interest through contracts, it does not conflict directly or indirectly with any other private or public interests. It means

7. ROLE OF PUBLIC POLICY IN CONTRACTS

that, while individuals are free to create rights and obligations in between themselves, it is always necessary for the state to protect such new rights and duties of individuals, so as not to affect the existing rights and duties towards the society or the social interest. When an individual crosses that boundary, and interferes with the rights of a third party or the society, such agreements are specifically made void. Some of these public interest policies, which invalidate any private agreement, making them unlawful, are incorporated in Sec 23 of the Contract Act. According to it, the consideration or object of an agreement is lawful unless (a) it is forbidden by any law or (b) is of such nature that, if permitted, it would defeat the provision of any law or (c) is fraudulent or (d) involves injury to the person or property of another or (e) the courts regard it as immoral or opposed to public policy.

In each of these cases the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful, is void.

At this stage it is proper to examine the meaning and scope of illegal and void agreements. It is necessary to bear in mind that in Sec. 23, the expressions like, unlawful or forbidden by law etc. have been used. According to Anson, the subject of illegality is one of great complexity and the effects of illegality are by no means uniform. The reason for this is not hard to find. The extent of illegality is not the same in all cases. Illegal objects may range from those which are tainted with gross moral turpitude e.g., murder, to those where the harm caused is relatively small. It is not surprising, therefore, that there are gradations in the degree of enthusiasm with which the judges are prepared to assist a person who has an illegal object in view or is a party to an illegal transaction. Attempts have been made to distinguish between illegal agreement and void agreements.

In the former case, it is said that the law will refuse to aid in any way a person who bases his cause of action upon such an agreement. In the latter case, the law simply says that the agreement will not have any legal effect. Undoubtedly some agreements can be thus classified, but it is both impractical and impossible to apply this classification to the whole subject.

Moreover, confusion is created by the fact that the judges have on many occasions treated the terms as interchangeable. It seems better to use the single word illegality, to cover the multitude of instances where the law, either because of public policy or as a result of an express prohibition, denies to one or both of the parties the rights to which he would otherwise be entitled.

Let us now examine the interpretation of each clause of section 23 in the light of judicial decisions.

(a) Forbidden by law: According to this clause, the consideration or object of an agreement becomes unlawful when it is forbidden by law. Such unlawful agreements are void. For example, in Bhikanbhai v. Hiralal [(1900) 24 Bom 622], the plaintiff was a lessee of certain tolls under the Bombay Tolls Act, 1875. One of the conditions of the lease was that lessee should not sublet

the tolls to any other person without the permission of the collector. A of Rs. 200/- was payable for a breach of condition.

The plaintiff contracted with the defendant to sublet the toll to him without obtaining the necessary permission. The question was whether the agreement to sub-lease was void. The court while negating such plea observed that, the object of statute was not to forbid such transactions but only to regulate. As such the transaction may be void as against the collector, but between the parties it stands.

(b) Defeating the provisions of any law: In some cases the enforcement of a particular agreement though not apparently or directly forbidden by law, but would, if permitted defeat the provisions of some law. For example, in Ram Sewak v. Ram [AIR 1962 All 177] the agreement between the partners of a firm to conceal income in certain respects so as to evade income-tax has been held to be unlawful.

(c) Fraudulent: In a given agreement whenever an element of fraud or intention to deceive creeps in, it would become a void agreement. For example, A being an agent for a landowner, agrees for money, without the knowledge of his principal to obtain for B, a lease of land belonging to his principal. The agreement between A and B is void, as it implies a fraud by concealment, perpetuated by A on his principal.

(d) Injurious to person or property: If the object of an agreement involves injury to a person or property, per se the agreement becomes unlawful and thereby void. For example, in Kanklal v. Pambayan (AIR 1927 Mad. 531) a bond to pay an exorbitantly high rate of interest, in case the borrower left the lender's service, has been held to be void.

(e) Immoral: While explaining the scope of the expression 'immoral' in Gherulal v. Mahadeodas (AIR 1959 SC 781) Justice Subba Rao observed that: "The case law both in England and India confines the operation of the doctrine to sexual immorality.

To cite only some instances, settlements in consideration of concubinage, contracts of sale or hire of things to be used in brothel or by a prostitute for purposes incidental to her profession, agreements to pay money for future illicit cohabitations, promises in regard to marriage for consideration or contracts facilitating divorce are held to be void on the ground that the object is immoral.

(f) Public Policy: According to this clause, whenever the object of an agreement is opposed to public policy, it becomes a void agreement. The crucial task of a judge in this regard is to interpret what is public policy. In the words of Justice Subba Rao in Gherulal's case.

"The doctrine of public policy may be summarised thus: public policy or the policy of the law is an illusive concept, it has been described as an 'untrustworthy guide', variable quality, 'untruly horse', etc; the primary duty of a court of law is to enforce a promise which the parties have made and to uphold the sanctity of contract which forms the basis of society; but in certain cases, the court may relieve them of their duty on a rule founded on what is called the public policy; for want of better words Lord

Atkin describes that something done contrary to public policy is a harmful thing; but the doctrine is extended not only to harmful cases but also to harmful tendencies; this doctrine of public policy is only a branch of common law, and just like any other branch of common law, it is governed by precedents; the principles have been crystallised under different heads and though it is permissible for courts to expound and apply them to different situations, it should only be invoked in clear and incontestable cases of harm to the public; though the heads are not closed and though theoretically it may be permissible to evolve a new head under exceptional circumstances of a changing world, it is advisable in the interest of stability of society not to make any attempt to discover new heads in these days".

The following heads of public policy have been consistently invoked and interpreted by the Courts, in this regard.

1. Trading with an enemy.

2. Trafficking in public offices.

3. Interference with administration of justice.

4. Marriage brokerage contracts.

7.3 AGREEMENTS VOID ON ACCOUNT OF PUBLIC POLICY

Several agreements are specifically made void on account of public policy. As for example, an agreement in restraint of marriage is against the natural rights of a person, i.e. the right to family. None can deprive another by virtue of a contract to have/not to have family relations. Even in the absence of a clear positive prescription, agreements in restraint of marriage cannot be held valid. Under Sec. 26 of the Contract Act, an agreement in restraint of marriage of any person, other than a minor, is void. Similarly, an agreement in restraint of trade, is totally against the fundamental freedom of trade, commerce, industry and profession. No one, including the State can take away these rights by virtue of a contract. Under Sec. 27 of the Contract Act such agreements are void. Some other agreements declared to be void as being against public policy are discussed below.

Void agreements enumerated in sections 24-30

Sections 24-30 deal with specific void agreements. They are as follows:

a. Agreements void, if considerations and objects unlawful in part - (S.24)

b. Agreements without consideration - (S.25) (has been explained in the earlier module)

c. Agreements in restraint of marriage (S.26) d. Agreements in restraint of trade (S.27)

e. Agreements in restraint of legal proceedings (S.28) f. Ambiguous agreements (S.29)

g. Wagering agreements (S.30)

Section 24 merely reiterates the principle enshrined in Section 23. The important feature of this provision is that, in case, if

part of the agreement only takes within its fold either unlawful consideration or object, that part alone would become void, provided in such agreements; such demarcation is possible.

(a) Agreements in restraint of marriage:

According to section 26, every agreement in restraint of marriage of any person, other than a minor is void.

It seems that the policy is in favour of discouraging agreements which restrict freedom of marriage. In an earlier case i.e., Rao Rani v. Gulab Rani (AIR 1942 All 351) there was an agreement between two co-widows that if any of them remarried she should forfeit her right to her share in their deceased husband's property.

This agreement was upheld, because as the Court pointed out, no restraint on their remarriage had been imposed on either of the widows. The restraint was only with reference to enjoyment of property rights.

(b) Agreement in restraint of trade:

The basic public policy principle underlying this provision is that, every person shall be given the liberty of trade, occupation etc. so as to exercise his powers either for his own benefit or for community interest.

In Nordenfelt v. Maxim Nordenfelt Guns & Ammunition Co.

[(1894) A.C. 535] the House of Lords for the first time interpreted this principle. In this case the appellant, Nordenfelt, was a maker and inventor of guns and ammunition. He sold his business to the respondent company for £ 287,500 and entered into a covenant (later to be repeated in a contract of service) that he would not for twenty-five years 'engage... either directly or indirectly in the trade or business of a manufacture of guns, gun mountings or carriages, gunpowder explosives or ammunities or in any business competing or liable to compete in any way with that for the time being carried on by the Company, but expressly reserved the right to deal in explosives other than gunpowder, in torpedoes or submarine boats, and in metal castings or forgings. After some years Nordenfelt joined the business of a rival company dealing with guns and ammunition, and the respondents sought an injunction to restrain him from doing so.

It is clear that the restraint entered into by Nordenfelt was of a general, and not merely of a partial, nature, since there was no limit placed on the area to which it was to extend. Nevertheless, the House of Lords held that this did not, of itself, mean that the covenant was void. They were of the opinion that the covenant not to compete with the company in any business competing or liable to compete in any way with that for the time being carried on by the Company was unreasonable, as it attempted to protect not only the business as it was when sold, but any future activities of the company, and it was therefore void; but this clause was distinct and severable from the rest of the agreement. As for the remainder of the restraining condition, in so far as it was for the protection of the business actually sold, it was reasonable between the parties, because Nordenfelt not only received a large sum of money, but also by his reservation retained scope for the exercise of his inventive and

manufacturing skill. Moreover the wide area over which the business extended necessitated a restraint co-extensive with that area for the protection of the respondents. Finally it could not be said to be contrary to the public interest since it transferred to an English Company, the manufacture of guns and ammunition for use in foreign lands. The restraint was therefore valid.

From the above judgement one can infer the following propositions:

(i) All restraints of trade, in the absence of special justifying circumstances, are contrary to public policy and therefore void.

(ii) Whether special circumstances do or do not justify the restraint is a question of law, and the court interprets it very strictly.

(iii) The restraint can only be justified if it is reasonable (a) in the interest of the contracting parties; or (b) in the public interest.

(iv) The burden of proof relating to reasonableness of restraint is on the person who pleads it.

According to Sec. 27 of the Contract Act every agreement by which, any one is restrained from exercising a lawful profession, trade or business of any kind, is to the extent of restraint void.

Accordingly in India all agreements in restraint of trade whether general or partial, qualified or unqualified are void. As such the Indian Law is different from Law in England. [See Khemchand v. Dayal Das, AIR 1942 Sind 114]. In Sheikh Kalu v. Ram Sharan Bhagat [(1909) 13 CNN 388], 29 out of 30 makers of combs in the city of Patna agreed with the defendant to supply him all the combs manufactured by them, and not to sell their combs to anyone else. But the defendant had the right to reject the goods if he found that there was no market for them in Patna, Calcutta, or elsewhere. The court held the agreement to be void. So also, in case of an employer and employee there cannot be a restraint of trade after the term of the employment is over. In Oakes & Co v. Jackson [(1876)1 Mad 134], an employee of the company agreed not to employ himself in any similar concern within a distance of 800 miles from Madras after leaving the company service. The restraint was held void. The Indian Court is not supposed to go into the question of reasonableness or otherwise. Any restraint on the employee after the tenure of service is void in India. In this case however English Courts would also have come to the same decision because of unreasonableness. Restriction can however be imposed during the term of employment. As for example, if A takes a whole time employment in B's factory the restriction imposed upon joining another employment at the same time is entirely valid. An agreement of service by which a person binds himself during the term of employment from taking any other service is valid. As for example, in Charles v. Mcdonald [(1899) 23 Bom 103], A agreed to become an assistant for 3 years to B who was a doctor practising in Zanzibar. It was agreed that during the term of agreement A was not to have his own practice.

After one year A left B's job and began to practise on his own.

It was held that the agreement was valid and A was restrained by injunction from practising. But in case the employee is wrongfully dismissed, the employee becomes free from the restrictive covenant.

In this connection one has to examine the legality of cartelization and trade agreements to form monopoly. Sec 27 of the Indian Contract Act does not take away the right of a trader to regulate his business according to his own discretion and choice.

In Daulat Ram v. Dharachand [1934 Lah 170] the court held that an agreement for trade combination for the purpose of avoiding competition is not necessarily unlawful. But where the agreement is clearly not for the mutual benefit of the parties but is an attempt to create a monopoly it would be void as against public policy.

There are exceptions to this agreement in restraint of trade being void. These are:

(i) Sale of goodwill: According to exception to sec 27, a buyer of a good will may impose reasonable restrictions as to time and place on the seller of good will of a business. As for example A buys the right to ply ferries from B with a restriction that B shall not start a ferry service within 10 miles for a period of 5 years. This restriction is reasonable and valid. [See Chandra v.

Mallik (1921) 48 Cal 1030].

(ii) Partners' agreements: (a) Under the Partnership Act Partners may agree not to carry on any other business, other than the firm business, while being a partner [Sec. 11(2)(b)]. A

(ii) Partners' agreements: (a) Under the Partnership Act Partners may agree not to carry on any other business, other than the firm business, while being a partner [Sec. 11(2)(b)]. A