Agreements Opposed to Public Policy in Indian Law: A Judicial Exposition

Introduction

The domain of contract law is founded upon the principle of freedom of contract, allowing parties to stipulate terms as they deem fit. However, this autonomy is not absolute and is circumscribed by considerations of public interest and welfare. Section 23 of the Indian Contract Act, 1872 (hereinafter "Contract Act"), embodies this limitation by declaring that an agreement whose object or consideration is unlawful is void. Among the grounds for unlawfulness, Section 23 explicitly includes agreements where the court regards their object or consideration as immoral or "opposed to public policy." This article undertakes a comprehensive analysis of the concept of "agreements opposed to public policy" under Indian law, drawing extensively from judicial pronouncements to delineate its contours, applications, and evolving nature.

The Concept of "Public Policy" under Indian Law

The term "public policy" is inherently nebulous and has been described as an "unruly horse." Its interpretation by the Indian judiciary has been dynamic, adapting to societal changes and the evolving needs of the community.

Section 23 of the Indian Contract Act, 1872

Section 23 of the Contract Act provides that the consideration or object of an agreement is lawful, unless: it is forbidden by law; or is of such a nature that, if permitted, it would defeat the provisions of any law; or is fraudulent; or involves or implies, injury to the person or property of another; or the Court regards 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, and every agreement of which the object or consideration is unlawful is void.

Judicial Interpretation of "Public Policy"

The Supreme Court of India and various High Courts have grappled with defining "public policy." In Gherulal Parakh v. Mahadeodas Maiya And Others (1959 SCC 0 781), the Supreme Court, while discussing wagering contracts, approached public policy with caution, emphasizing adherence to precedents and refraining from expanding its scope unless faced with clear and undeniable public harm. The Court noted that public policy is a broad concept reflecting societal norms and values.

A seminal exposition on public policy was provided in Central Inland Water Transport Corporation Limited And Another v. Brojo Nath Ganguly And Another (1986 SCC 3 156). The Supreme Court, while dealing with unconscionable terms in employment contracts, observed:

"From the very nature of things, the expressions “public policy”, “opposed to public policy”, or “contrary to public policy” are incapable of precise definition. Public policy, however, is not the policy of a particular government. It connotes some matter which concerns the public good and the public interest. The concept of what is for the public good or in the public interest or what would be injurious or harmful to the public good or the public interest has varied from time to time." (Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly, 1986).

This dynamic nature was reiterated in C.V Jain & Co. v. Hindustan Fertilizer Corporation Ltd. (Delhi High Court, 2001) and C. v. Jain And Company Versushindustan Fertilizer Corporation Limited (Delhi High Court, 2001), stating, "Public policy does not remain static in any given community. It may vary from generation to generation and even in the same generation. Public policy would be almost useless if it were to remain in fixed moulds for all time." The Supreme Court in Gurmukh Singh v. Amar Singh (1991) also affirmed that "The public policy is not static. It is variable with the changing times and the needs of the society. The march of law must match with the fact situation."

In the context of arbitration, Oil & Natural Gas Corporation Ltd. v. Saw Pipes Ltd. (2003 SCC 5 705) expanded the understanding of "public policy of India" under Section 34 of the Arbitration and Conciliation Act, 1996, to include awards that are "patently illegal." The Court referenced Central Inland Water Transport Corpn. Ltd. v. Brojo Nath Ganguly (1986) to highlight the evolving nature of public policy.

Categories of Agreements Opposed to Public Policy

Indian courts have identified various heads under which an agreement may be considered opposed to public policy. These are not exhaustive, as the concept itself is fluid.

Agreements Tending to Injure Public Service

Agreements that have a tendency to injure public service or compromise the integrity of public officials are void. In Kolaparti Venkatareddi v. Kolaparti Peda Venkatachalam (Andhra Pradesh High Court, 1963), it was observed that "agreements tending to injure the public service are always considered to be opposed to public policy." This principle is also reflected in provisions like Section 6(f) of the Transfer of Property Act, 1882, which makes a public office and the salary of a public officer inalienable. The Supreme Court in Rattan Chand Hira Chand v. Askar Nawaz Jung (Dead) By Lrs And Others (1991 SCC 3 67) held an agreement to influence governmental decisions to secure recognition of an heir to an estate as a "carrier" contract opposed to public policy, as it undermined the rule of law and public trust.

Agreements Stifling Prosecution

Agreements for stifling criminal prosecution, particularly for non-compoundable offences, are generally held to be opposed to public policy. The Supreme Court in V. Narasimharaju v. V. Gurumurthy Raju (1963 AIR SC 107) stated, "Agreement made by parties for stifling prosecution are not enforced by Courts on the ground that the consideration for such agreements is opposed to public policy." This was reiterated in Ouseph Poulo v. The Catholic Union Bank Ltd. (1965 AIR SC 166), where the Court clarified that the basis for this rule is that the consideration supporting such agreements is itself opposed to public policy, as it allows private parties to usurp the administration of criminal justice. The Jammu and Kashmir High Court in Auqib Qadir And Another v. Abdul Aziz Sofi (2023), referencing Ouseph Poulo, affirmed that a compromise for compounding a non-compoundable offence is unlawful and unenforceable.

However, Ouseph Poulo (1964) also cautioned to distinguish between the motive for an agreement and its consideration. The mere sequence of events or the joining of third parties does not automatically render an agreement void unless the prohibited consideration (stifling prosecution) is established.

Champertous Agreements

Champerty involves an agreement where one party finances another's litigation in exchange for a share of the proceeds. While English law on champerty and maintenance is not strictly applied in India, agreements found to be extortionate, unconscionable, or for improper objects like gambling in litigation can be held void as opposed to public policy. In Rattan Chand Hira Chand v. Askar Nawaz Jung (1991), the Supreme Court voided a champertous agreement intended to influence governmental decisions, emphasizing that it undermined the integrity of judicial proceedings. However, in Pandrangi Gopalam v. Chidamana Chinnayya (Andhra Pradesh High Court, 1957), it was noted that such agreements are not per se opposed to public policy and must be judged on the facts, particularly whether they are unconscionable or extortionate. Similarly, in Gurmukh Singh v. Amar Singh (1991), an agreement between bidders to participate jointly in an auction was held not opposed to public policy where there was no intention to peg down the price or defraud the government.

Agreements Defeating Provisions of Law

Agreements that, if permitted, would defeat the provisions of any law are void under Section 23. In Shyam Sunder Lal v. Lakshmi Narain Mathur (Allahabad High Court, 1961), an agreement contravening prohibitory orders under U.P. (Temporary) Control of Rent and Eviction Act, 1947, was held to defeat the purpose of the Act and thus be unlawful. The Supreme Court in Kuju Collieries Ltd. v. Jharkhand Mines Ltd. And Others (1974 SCC 2 533) dealt with a mining lease that was void ab initio for non-compliance with the Mines and Minerals (Regulation and Development) Act, 1948, and Mineral Concession Rules, 1949. Such an agreement, being in direct contravention of statutory requirements, would inherently be opposed to public policy if it sought to bypass these provisions.

The case of Kedar Nath Motani And Others v. Prahlad Rai And Others (1960 AIR SC 213) involved benami transactions allegedly to circumvent lease conditions. The Supreme Court, while acknowledging benami transactions, focused on whether the intended fraud was consummated. It held that since the alleged fraud was not successfully perpetrated, the claim could not be denied solely on that basis. This implies that the mere potential to defeat a provision of law might not suffice if the unlawful object is not achieved or is not central to the claim, though a clear agreement to do so would be void.

Unconscionable Bargains and Unequal Bargaining Power

Contracts that are unconscionable due to gross inequality in bargaining power can be struck down as opposed to public policy. The Supreme Court in Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly (1986) declared Rule 9(i) of the corporation's service rules, allowing termination of a permanent employee with three months' notice without reason, as unconstitutional (violating Article 14) and opposed to public policy under Section 23 of the Contract Act. The Court emphasized the unequal bargaining power of employees and the unfairness of such terms. This principle was reiterated in VIJAYA BANK v. PRASHANT B NARNAWARE (Supreme Court Of India, 2025), where it was argued that a clause in a standard form contract, signed under compulsion due to unequal bargaining power and resulting in unjust enrichment, was opposed to public policy. The Court in VIJAYA BANK noted A.P. Sen, J.'s view in Brojo Nath (supra):

"It is well settled that employee covenants should be carefully scrutinised because there is inequality of bargaining power between the parties; indeed no bargaining power may occur because the employee is presented with a standard form of contract to accept or reject."

It is important to note that not all contracts of personal service are unenforceable on grounds of public policy in this sense. Pearlite Liners (P) Ltd. v. Manorama Sirsi (2004 SCC 3 172) reaffirmed that contracts of personal service are generally not specifically enforceable, but this is based on principles of the Specific Relief Act, 1963, and the nature of personal service, rather than necessarily being "opposed to public policy" under Section 23 unless they contain unconscionable terms as discussed above.

Wagering Agreements

The Supreme Court in Gherulal Parakh v. Mahadeodas Maiya (1959) clarified that while wagering contracts are void under Section 30 of the Contract Act, they are not illegal. Consequently, a partnership formed to enter into wagering contracts was held not to be unlawful under Section 23 as being forbidden by law, immoral, or opposed to public policy. The Court distinguished between "void" and "illegal," stating that an agreement being void does not automatically render it opposed to public policy.

Agreements for Withdrawal of Tenders / Stifling Competition

In M. Mohammed v. A. Narayana Rao (Kerala High Court, 1973), relying on Md. Isack v. Sreeramalu (AIR 1946 Mad 289), an agreement where one tenderer agreed to withdraw their tender in consideration for payment from another was held not unlawful or opposed to public policy under Section 23. Such agreements were likened to agreements between intending bidders where one agrees to keep off from bidding.

Agreements to Charge Premium for Tenancy (Pagari)

In the context of rent control legislations aimed at preventing exploitation due to housing scarcity, agreements for payment of 'pagari' (premium) by an incoming tenant to an outgoing tenant for vacating premises have been held opposed to public policy. The Allahabad High Court in Mahesh Chandra v. Kishan Prakash Gupta (1981) held such an agreement void under Section 23, reasoning that it would lead to harassment of incoming tenants and defeat the purpose of rent control laws.

Public Policy in the Context of Arbitration

The concept of public policy plays a crucial role in arbitration law, particularly in challenges to arbitral awards and determining the arbitrability of disputes.

Setting Aside Arbitral Awards

Section 34(2)(b)(ii) of the Arbitration and Conciliation Act, 1996, allows a court to set aside an arbitral award if it is in conflict with the "public policy of India." The Supreme Court in Oil & Natural Gas Corporation Ltd. v. Saw Pipes Ltd. (2003) significantly expanded the scope of this ground, holding that an award could be set aside if it is "patently illegal." The Court explained that "public policy of India" in this context would include: (a) fundamental policy of Indian law; (b) the interest of India; or (c) justice or morality, and further, if it is patently illegal. Illegality, in this sense, must go to the root of the matter and not be a trivial error. An award could be contrary to substantive provisions of law, provisions of the Arbitration Act itself, or terms of the contract, and if so, it would be considered patently illegal.

This interpretation was followed in cases like M/S. Techno Electric And Engineering Co. Ltd. v. M/S. Satluj Jal Vidyut Nigam Ltd. (Himachal Pradesh High Court, 2015), which noted that ONGC v. Saw Pipes made it clear that courts can interfere if an award is against specific contract terms, deeming it patently illegal and opposed to public policy. The Karnataka High Court in Maharashtra Apex Corporation Ltd. v. Sandesh Kumar, A. & Ors. (2006) also discussed setting aside awards conflicting with the "public policy of India."

Non-Arbitrability of Disputes Involving Serious Fraud

Certain disputes are considered non-arbitrable as a matter of public policy. In N. Radhakrishnan v. Maestro Engineers And Others (2010 SCC 1 80), the Supreme Court upheld the refusal to appoint an arbitrator where serious allegations of fraud and malpractice were involved. The Court reasoned that such matters necessitate judicial intervention and detailed evidence, which may not be adequately addressed in arbitration. This aligns with the principle that matters affecting public interest or requiring the exercise of sovereign functions are often reserved for courts.

Enforceability and Consequences of Agreements Opposed to Public Policy

Voidness of Agreements

As per Section 23 of the Contract Act, an agreement whose object or consideration is opposed to public policy is void. This means it is unenforceable in a court of law and creates no legal rights or obligations between the parties. It is crucial to distinguish between agreements that are "voidable" (e.g., due to fraud or misrepresentation, as discussed in Husain Yar Beg v. Radha Kishan (1934 SCC ONLINE ALL 238) concerning Order XXIII, Rule 3 CPC) and those that are "void" ab initio due to unlawful consideration or object under Section 23. A contract voidable for fraud is valid until set aside, whereas a contract void under Section 23 is a nullity from its inception.

Restitution under Section 65 of the Contract Act

Section 65 of the Contract Act provides for the obligation of a person who has received any advantage under an agreement discovered to be void, or a contract that becomes void, to restore it or make compensation for it. The applicability of Section 65 to agreements void for being opposed to public policy has been subject to judicial scrutiny. In Kuju Collieries Ltd. v. Jharkhand Mines Ltd. (1974), the Supreme Court held that Section 65 does not apply if the agreement was known to be void by the parties at its inception (i.e., void ab initio due to illegality of which parties were aware). The Court reasoned that Section 65 applies when an agreement is "discovered to be void" or "becomes void," implying a lack of knowledge of its void nature at the outset, or a supervening event. If parties enter into an agreement knowing it to be illegal or opposed to public policy, they cannot seek restitution under Section 65, often invoking the principle of in pari delicto potior est conditio defendentis (where both parties are equally at fault, the defendant's position is stronger).

The Maxim "Ex Turpi Causa Non Oritur Actio"

This Latin maxim, meaning "from a dishonorable cause an action does not arise," is central to the non-enforcement of agreements opposed to public policy. It signifies that no court will lend its aid to a person who founds their cause of action upon an immoral or illegal act. In Kedar Nath Motani v. Prahlad Rai (1960), the Supreme Court discussed this maxim in the context of a benami transaction allegedly intended to defraud. The Court allowed the claim because the intended fraud was not consummated, suggesting that the application of ex turpi causa requires careful consideration of the facts and whether the illegality is central to the claim and has been effected.

The Evolving Nature of Public Policy Revisited

The judiciary has consistently emphasized that public policy is not a static concept. As societal values, economic conditions, and public interest considerations change, so too does the understanding of what constitutes "public policy." The Supreme Court in Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly (1986) and subsequent High Court rulings like C.V Jain & Co. v. Hindustan Fertilizer Corporation Ltd. (2001) have underscored this evolutionary aspect. This flexibility allows courts to address new forms of agreements that may be detrimental to public good, while also re-evaluating older heads of public policy in light of contemporary standards. For instance, the approach to champertous agreements has evolved, moving from a stricter English view to a more nuanced assessment based on the specific terms and potential for abuse (Rattan Chand Hira Chand v. Askar Nawaz Jung, 1991; Pandrangi Gopalam v. Chidamana Chinnayya, 1957).

Conclusion

Agreements opposed to public policy represent a critical limitation on the freedom of contract, safeguarding broader societal interests against private arrangements that could undermine law, justice, morality, or public welfare. Section 23 of the Indian Contract Act, 1872, serves as the statutory bedrock for this doctrine. The Indian judiciary, through a catena of pronouncements, has interpreted "public policy" as a dynamic and evolving concept, applying it to diverse situations ranging from stifling prosecution and injuring public service to unconscionable bargains and defeating statutory provisions. While cautioning against its indiscriminate use, courts have not shied away from invalidating agreements that are demonstrably harmful to the public good. The principles governing agreements opposed to public policy, particularly in areas like arbitration and restitution, continue to be refined, reflecting the ongoing endeavor to balance contractual autonomy with the imperative of upholding public interest in a changing society.