When is the consideration or object of an agreement said to be opposed to public policy? Mention relevant case law.

Question: When is the consideration or object of an agreement said to be opposed to public policy? Mention relevant case law.

Find the answer to the mains question of the Law of Contract only on Legal Bites. [When is the consideration or object of an agreement said to be opposed to public policy? Mention relevant case law.]

Answer

It is trite law that one who knowingly enters into a contract with an improper object cannot enforce his rights in relation to such a contract. The consideration or object of an agreement is said to be opposed to public policy when it is prohibited by law or when it is immoral or opposed to the public interest. The Indian Contract Act, 1872 provides that an agreement whose consideration or object is unlawful is void. Section 23 of the Act defines the situations where the consideration or object of an agreement is said to be opposed to public policy.

According to Section 23, an agreement is said to be opposed to public policy in the following situations:

• If it is forbidden by law: If the agreement is prohibited by law, such as an agreement to commit a crime, it is considered to be opposed to public policy and is therefore void.
• If it is of such nature that, if permitted, it would defeat the provisions of any law: For example, an agreement to evade taxes is against public policy.
  
• If it is fraudulent: If the agreement is intended to deceive someone or to cause loss to someone by means of misrepresentation or fraud, it is considered to be opposed to public policy.
  
• If it involves injury to the person or property of another: An agreement that involves causing harm or injury to the person or property of another is considered to be opposed to public policy.
  
• If the court regards it as immoral or opposed to public policy: The courts have the discretion to determine whether an agreement is immoral or opposed to public policy. For example, an agreement to bribe a public official is considered to be immoral and opposed to public policy.
  

So lawful consideration and/or lawful object cannot contain any of the above.

Notably, the Contract Act does not anywhere define the expressions "public policy" or "opposed to public policy" or "contrary to public policy". However, one may note that the term "public policy" could plainly mean issues concerning the public or public benefit and the interest of public at large. 'Public Policy' is ".... a vague unsatisfactory term calculated to lead to uncertainty and error when applied to the decision of legal rights; it is capable of being understood in different senses; it may and does in an ordinary sense means political expediency or that which is best for the common good of the community; and in that sense, there may be every variety of opinion; according to education, habits, talents and dispositions of each person who is to decide whether an act is against public policy or not.

According to Lord Atkin in Fender v. St. John Milday, 1983 AC 1 (HC),

"... the doctrine does not extend only to harmful effects, it has to be applied to harmful tendencies. Here the ground is less safe and treacherous".

In Shyam Sunder Lal v. Lakshmi Narain Mathur, 1961 All LJ 333: (AIR 1961 All 347) Nigam and Misra, JJ., held that a contract of letting out accommodation in contravention of an order made under Section 7(2) defeats provisions of law and also is against public policy and is therefore, void.

This case is a direct authority on the point under consideration. In the case it was held by a Division Bench of this Court that, an agreement for letting of accommodation in contravention of an order passed under Section 7(2) of U. P. Act No. III of 1947, if permitted, would defeat the provisions and, in fact, the very purpose of the Act. Further, such contracts are opposed to public policy which is to control letting in view of the scarcity of accommodation and also to control rents that may be demanded in respect of buildings constructed before January 1951. Such an agreement is void.

The above principle has been followed by the Hon'ble Supreme Court of India in Gherulal Parekh v. Mahadevdas Maiya AIR 1959 SC 781, wherein Hon'ble Justice Subba Rao, referring to the observation of Lord Atkin observed:

"... Public policy or the policy of the law is an illustrative concept. It has been described as an 'untrustworthy guide', 'variable quality', 'unruly 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 of 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.... it is governed by precedents. The principles have crystalised under different heads.... though the heads are not closed and though theoretically, it may be permissible to evolve a new head under exceptional circumstances of the changing world, it is advisable in interest of stability of society not to make attempt to discover new heads in these days".

In the matter titled ONGC Ltd. v. Saw Pipes Ltd, 2003) 5 SCC 705,  while interpreting the meaning of 'public policy' in this case, the Hon'ble Court observed that it has been repeatedly stated by various authorities that the expression 'public policy' does not admit of precise definition and may vary from generation to generation and from time to time. Hence, the concept of 'public policy' is considered to be vague, susceptible to narrow or wider meaning depending upon the context in which it is used. Therefore, it was held that the term 'public policy' ought to be given a wider meaning.