AGREEMENT AGAINST PUBLIC POLICY:

A LEGAL STUDY
OF
INDIAN LEGAL FRAMEWORK

Submitted by: Submitted to:

Nancy Shamim, Dr Papa Rao Sir
Roll No. 24,
I Semester,
LLM.

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CERTIFICATE OF DECLARATION

The I hereby declare that the project work entitled “Agreement against Public Policy: A legal
study of Indian Legal Framework” submitted to the Hidayatullah National Law University is a
record of an original work done by me under the guidance of Dr. Papa Rao of Hidayatullah
National Law University, Naya Raipur, and this project work has not been performed on the
basis for the award of any Degree or diploma/ associate ship/fellowship and similar project if
any.

Nancy Shamim
Roll No. 24

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ACKNOWLEDGEMENT

Firstly, I would like to express my profound sense of gratitude towards the almighty for
providing me with the authentic circumstances which were mandatory for the completion of my
project.
Secondly, I am highly indebted to Dr.Papa Rao, for providing me with constant encouragement
and guidance throughout the preparation of this project.
My cardinal thanks are also for my parents, friends and all teachers of law department in our
college who have always been the source of my inspiration and motivation without which I
would have never been able to unabridged my project.

Nancy Shamim
Roll No. 24

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TABLE OF CONTENT

 Chapter 1 Introduction and Research Methodology

 Chapter 2 Agreement Against Public Policy: Definition And Meaning
 2.1 Public Policy
 2.2 Public Policy: Common Law View
 CHAPTER 3 PUBLIC POLICY: Indian Judicial Interpretation
 3.1 Surrender of rights
 3.2 Minor girl’s marriage
 3.3 Payment out of Black Money
 3.4 Grabbing of privileges by extraneous influences
 3.5 Price escalation and interest clauses
 3.6 Agreement contrary to public policy of friendly Foreign State
 3.7 Alienation of Land by member of depressed class
 3.8 Chitty
 3.9 Arbitration award induced by fraud or corruption
 3.10 Things done under statutory provisions
 3.11 Divorce by mutual consent
 Chapter 4 Heads of Public Policy
 4.1 Trading with the enemy
 4.2 Trafficking in public offices
 4.2 Trafficking in public offices
 4.3 Interference with the administration of Justice
 4.3.1 Interference with the course of Justice
 4.3.2 Stifling prosecution
 4.3.3 Maintenance and champerty
 4.3.4 Marriage Brokage Contracts
 4.3.5 Unfair, unreasonable or uncontainable dealings
 4.3.6 Surreptitious Transfer of Shares
 4.3.7 Party with matching bargaining power
 Conclusion

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CHAPTER 1 INTRODUCTION and RESEARCH METHODOLOGY

1.1 Introduction
An Agreement is unlawful if the court regards it as opposed to public policy. The term Public
Policy1 in its broadest sense means that sometime the courts will, on considerations of public
policy, refuse to enforce a contract. The normal function of the courts is to enforce contracts; but
consideration of public interest may require the courts to depart from their primary function and
to refuse to enforce a contract. Interpretation of the concept of public policy is the function of the
court and not of the executive.
It is not enough that the terms of contract have been brought to the knowledge of the other party
by a sufficient notice before the court is entered into, it is also necessary that the terms of the
contract themselves should be reasonable. If the terms of the contract are unreasonable and
opposed to public policy, they will not be enforced merely because they were printed on the
reverse of a bill or a receipt or have been expressly or impliedly agreed upon between the parties.
One of the leading cases of public policies is:
Central Inland Water Transport Corporation Ltd. v. Brojo Nath2 In this case one of the clauses
in a contract of employment provided that the employer (corporation) could terminate the
services of a permanent employee by giving him a 3 months’ notice or 3 months’ salary. In
accordance with the above clause, the services of the respondent Brojo Nath and others were
terminated instantly by giving them the notice, accompanied by cheque for 3 months’ salary.
The Supreme court held Rule 9 of service Discipline And Appeals of 1979 frames by the
corporation empowering that such a clause in the service Agreement between persons having
gross inequality of bargaining power was wholly unreasonable and against public policy and was
therefore void under section. 23 of the Indian Contracts Act.
Some general observation must be added upon the doctrine of Public Policy in the current law.
Since public policy reflects the fundamental assumptions of the community, the content of the
rules should vary from country to country and from era to era. There is high authority for the
view that in matters of public policy the court should adopt a broader approach than they usually
do to the use of precedents.
The circumstances in which a contract is likely to be struck down as one opposed to public
policy are well established in England. So a contract of marriage brokerage, the creation of a
perpetuity, a contract in restraint of trade, a gaming or wagering contract are all unlawful things
on the ground of public policy.
“The Indian cases also adopt the same view.” In Gherulal V Mahadeodas Maiya3 enshrine the
present position of the doctrine of public policy in India. One of the question raised was whether
the contract in dispute were illegal under HINDU LAW and immoral because of the doctrine of
pious obligations of the sons to discharge the father’s debt, It was held that the tenets of Hindu
Law could not be imported to give a novel content to the doctrine of public policy in respect of

1
Contracts and Specific Relief, Avtar Singh, Tenth Edition, Pg 274
2
A.I.R 1986 S.C 1571
3
AIR 1959 SC 781: (1959) 2 SCA 342,370

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contract of gaming and Public policy is an elusive concept; it has been described as an
“untrustworthy”, “unruly horse”, etc.
Explaining the scope of the expression public policy and the role of the judges, C.REDDY of the
Andhra Pradesh High Court observed4:
“The twin touchstone of public policy are advancement of the public good and prevention of
public mischief and these questions have to be decided by the judges not as men of legal learning
but as experienced and enlightened members of the community representing the highest common
factor of public sentiment and intelligence. Indorsing this view, the Supreme Court added that
going by prevailing social values, an Agreement having tendency to injure public welfare is
opposed to public policy.”
In Muniammal v. Raja5, A wife who is entitled to maintenance can give up her right in
consideration of a lump sum payment. But the surrender of the right to claim revision of the
amount in the context of rising prices would be opposed to public policy.
1.2 Research Methodology: For this Study, the Researcher has followed Doctrinal Research
Methodology to analyse concept and development of principle of Agreement against Public
Policy.
1.3 Hypothesis: Indian Judiciary has played a vital role in defining the principle of ‘Agreement
against Public Policy’

4
Ratanchand Hirachand v Askar Nawaz Jung, AIR 1976 AP 112.
5
AIR 1978 Mad 103

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CHAPTER 2 AGREEMENT AGAINST PUBLIC POLICY: DEFINITION and
MEANING

The principle of Public Policy means that no person shall be lawfully permitted to do which can
be injurious to the welfare of public. Public policy aims to protect and promote public welfare. It
is a principle of Law, under which freedom for contract of private dealing is restricted by the law
for the good of the community.6 The benefit of the public at large has to be seen, other than the
parties involved.
In Gherulal Parakh v. Mahadeodas Maiya7 the Supreme Court of India opined, regarding the
public policy, the following:
‘Public Policy or the policy of the Law is an illusive concept, it has been described as
‘untrustworthy guide’, ‘variable quality’, ‘uncertain one’, etc; the primary duty of court of law is
to enforce a promise which the parties have made and to uphold the sanctity of contracts which
form the basis of the society, but in certain cases, the court may relieve them of their duty on a
rule founded what is called the public policy. The doctrine of public policy is not only extended
to the harmful cases but also to the harmful tendencies;...the principles have been crystallised
under different heads and thought it is permissible for the 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 heads (of public policy) aren’t closed and 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’
But if there is any statutory provision then it won’t be struck down on the basis of the public
policy.8
2.1 Public Policy
An Agreement is unlawful if the Court regards it as opposed to public policy. 9 The term ‘public
policy’ has not been defined under Indian Contract Act. These terms aren’t having precise
definition. The term public policy means that the court will, on the consideration of public
interest, refuse to enforce a contract. 10
A contract which has the penchant of injuring public interest or public welfare is one against
public policy. What constitutes an injury to the public interest or public welfare would depend
upon the time and the climes.11
The social milieu in which the contract is sought to be enforced would decide the factum, the
nature and the degree of the injury. 12

6
1Fredrick Pollock & Dinshaw Fardunji Mulla, The Indian Contract And Specific Relief Acts, 524, (Nilima
Bhadbhade Ed, 14th Ed. 2016)
7
AIR 1959 SC 781 At 795.
8
Sudha V. Sankappa Rai, AIR 1963 Mys 245.
9
Avtar Singh, Contract Act & Specific Relief, 272(12 th Ed. 2017)
10
Thomson-CSF V. National Airport Authority Of India, AIR 1993 Del 252.
11
1 Pollock & Mulla, Supra Note 1, 525
12
Id At 525.

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The normal function of the Court is to enforce contracts; but consideration of public interest may
require the court to depart from their primary function and to refuse to enforce the contract.13

The Supreme Court has held that public policy isn’t the policy of any specific government. It
connotes some matter which concerns public good and public interest.14

The concept of public policy is not immutable, since it must vary with the changing needs of the
society.15 These values may get sometime get incorporated in the legislation, but sometimes they
may not. The legislature often does not fail to keep pace with the changing needs and values nor
is it realistic to expect that it will have provided for all contingencies and eventualities. It is
therefore, not only necessary, but obligatory on the court to step into fill the lacuna.16

But the court should use extreme reserve in holding a contract as void against public policy and
should do so only when the contract is incontestable and on any view inimical to Public Interest.
The Doctrine should be invoked only in clear cases in which harm to the public is substantially
incontestable and does not depend upon the idiosyncratic incidences of a few judicial minds.17

2.2 Public Policy: Common Law View

Under common law, the situations in which the contract is likely to be struck down on the
grounds of public policy are fairly well established in England. “…So a contract of marriage
brokerage, the creation of perpetuity, a contract in restraint of trade, a gaming or wagering
contract, the assisting of the kings’ enemies, are all unlawful things” on the ground of a public
policy.18 The ordinary function of the Courts is to rely on the well settled heads of the public
policy and to apply them to varying situations.19 If the contract in question fit into one or the
other of these pigeon-holes, it may be declared void.20 The court may, however, mould the well
settled categories of public policy to put new conditions of a changing world.21 But a Court may
invent a new head of public policy?

According to Lord Halsbury, the categories of public policy are closed. 22 “I deny”, he said, and
“that any court can invent a new head of public policy”. “From time to time judges of the highest
reputation have ordered warning notes as to the danger of permitting judicial tribunals to roam
unchecked in this field.”23 For example a judge opined against public policy in an early case,
said, “It is a very unruly horse, and once you get astride it, you never know where it will carry
you”24. A few others opinion may be cited. “‘Public Policy’ is vague and unsatisfactory term.”25

13
Fender V. John Mildma, (1938) AC. 1, 723(HL)
14
Central Inland Water Transport Corpn. Ltd V Brojo Nath Ganguly AIR 1986 SC 1571.
15
Bhagwant Genuji Girme V. Gangabisan Ramgopal, AIR 1940 BOM 369.
16
Rattan Chand Hira Chand V Askar Nawab Jung, (1991) 3 SCC 67.
17
Gulabchand Gambhirmal V. Kudilal Govindram, AIR 1959 MP 151 (FB).
18
Janson V. Drienfontein Consolidated Mines Ltd., 1902 AC 484.
19
Gherulal Parakh V. Mahadeodas, (1959) 2 SCR 406.
20
Monkland V. Jack Barclay Ltd., (1951) 2 KB 252.
21
Supra Note 8.
22
Egeton V. Brownlow, 10 ER 359.
23
Supra Note 8.
24
Richardson V. Mellish, (1824) 2 Bling 229.
25
Egerton V. Brownlow, (1853) 4 HLC 1, 123.

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“Certain kinds of contract have been held void at common law on this ground-a branch of law,
however, which certainly should not be extended, as judges are more to be trusted as interpreter
of the law than as its expounders of what is called public policy.”26 Public Policy is always an
unsafe and treacherous ground for legal decisions, and in the present case it would not be easy to
say on side the balance at the convenience would incline.27 Yet the rule exists. In the words of
Lord Atkin, “the Doctrine should only be involved in clear cases in which the harm to the public
policy is substantially incontestable and does not depend upon the idiosyncratic inference of a
few judicial minds.28

26
Miram, Re, (1891) 1 QB 594, 595
27
Supre Note 13.
28
Supra Note 8.

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CHAPTER 3 PUBLIC POLICY: Indian Judicial Interpretation

“The Indian cases also adopt the same view.”29 The following words of Subbarao, J., in Gherulal
Parakh v. Mahadeo Das30 enshrine the present position of the doctrine of public policy in India:

“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 “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 a contract which forms the basis of the society; but in certain
cases, the Court may relieve them off 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
crystallized under different heads and do it is permissible for Courts to expound and apply them
to different situation, it should only be used 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.”

Explaining the scope of the expression “public policy” and the role of the judge, C. Reddy J of
the Andhra Pradesh High Court observed:31 The Twin touchstones of public policy are
advancement of the public good and prevention of public mischief and these questions have to be
decided by Judges not as men of legal learning but as experienced and enlightened members of
the community representing the highest common factor of public sentiment and intelligence.

Endorsing this view the Supreme Court added that going by present social values, an Agreement
having tendency to injure public interest or public welfare is opposed to public policy.32

3.1 Surrender of rights

A wife who is entitled to maintenance can give up her right in consideration of a lump sum
payment but the surrender of right to claim revision of the amount in the context of rising prices
would be opposed to public policy.33

Giving effect to an Agreement with overrides Section 125 CrPC would tantamount to not only
giving recognition to something which is opposed to public policy but would also amount to
negation of the statutory provisions. The Court said that public policy can broadly be equated
with policy of law.34 A marriage was dissolved on consent terms, one of which was that the wife
would not claim alimony on maintenance. It was held that such consent terms could not prevent

29
Supra Note 14.
30
AIR 1959 SCR 406.
31
Ratanchand Hirachand V. Askar Nawaz Jung, (1991) AP 112.
32
Supra Note 26.
33
Muniammal V. Raja, AIR 1978 Mad 103.
34
Hanamant Basappa Choudhari V. Laxmawwa, 2002 5 Kant LJ 405.

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the Court from granting maintenance on the application of the wife made subsequently. Such
rights are the larger part of right to life. It is against public policy to snatch them.35

An Agreement to give up one’s legal right is not hit by Section 23. The Agreement in question
was between the landlord and tenant. It was entered into during the pendency of eviction
proceedings and stipulated that even if an eviction order was passed, the landlord would not evict
the tenant. This was held to be not illegal or against public policy. The court followed the
Supreme Court ruling to the effect that what makes otherwise legal arrangements to be void is
that its performance is impossible except by disobedience of law.

The Employees’ State Insurance Act, 1948 has been enacted for the benefit of all the workers
covered by it. Its provisions are meant to protect employees from employers. It is a matter of
underlying principle of public policy. Such beneficial rights cannot be contracted out either by
employers or employees’ union. Such contracts are void and unenforceable. Waiver of
advantages conferred by law is opposed to public policy.

3.2 Minor girl’s marriage

Where the consideration for contract of sale was the expenses of marriage of a minor girl, the
arrangement was held to be opposed to public policy, being in violation of the Child Marriage
Restraint Act.36

3.3 Payment out of Black Money

Delhi High Court has held that a contract for the sale of goods whose tenor shows that the price
was intended to be paid out of black money is not opposed to public policy and is, therefore,
valid and enforceable. The contract involved transfer of goods and payment of price and neither
is opposed to public policy, nor can it be said to be designed to hoodwink the revenue. And even
if it could be so said, the seller who had delivered his goods could always call for payment out of
the innocent money of the buyer. An Agreement to exclude the land of a company from notified
urban areas has been held to be not against public policy.37

3.4 Grabbing of privileges by extraneous influences

A sale of seats in a public institution, for example, a medical college, is equally opposed to
public policy. The Supreme Court has held that charging of capitalization fee in consideration of
admission to educational institutions is illegal and impermissible as it amounts to denial of
citizen’s right to education and is arbitrary and violative of Article 14 of the Indian Constitution.
The Madras High Court38 did not permit the recovery of a sum of money paid to a person to
enable him to secure a seat in a medical college. Any attempt to pervert selection by merit is
highly injurious to public interest. Money promised to a person to get the promisor declared as
the heir of a wealthy Nawab has been held to be not recoverable. The fulfillment of the promise

35
Geeta Satish Gokarna V. Satish Shankerrao
36
Mardia Chemicals Ltd. vs U.O.I. & Ors. on 8 April, 2004
37
M/S.Rajshree Sugars & Chemicals ... vs M/S.Axis Bank Limited on 14 October, 2008
38
Dr.Rajanikanth vs The Director Of Medical Education on 25 July, 2011

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involved influencing statesmen for private games, which is the same thing as corruption. Money
promised to be paid to a person for using his influence for obtaining a government order in
favour of a manufacturer for supply of spare parts, or to secure mining rights are in the same
category. A contract between A and B for wielding influence with the Government authorities to
secure a decision in favour of B has been held by the Supreme Court to be opposed to public
policy. Money paid under such a contract is not allowed to be recovered.39

3.5 Price escalation and interest clauses

On account of price instabilities, it has become usual to allow suppliers and project contractor the
benefit of price adjustment where the market prices increases to such an extent that it would be
unreasonable to ask anybody to go on performing at the originally reserved prices. The
Development Authorities can make such adjustments according as the market of selling plots or
houses fluctuates. If an authority is forced under a court order to pay more compensation for
acquisition, it can recoup from allottees with whom the deal is still not finalized. The Authority
can also categorise the beneficiaries of its services, for example, into auction-purchasers and
allottees. Demanding more prices from allottees only does not constitute discrimination. The
allottees may be further categorised into economically strong or weaker sections. Lesser prices
from weaker section do not in itself violate the Constitutional guarantee of Equality.

3.6 Agreement contrary to public policy of friendly Foreign State

The public policy over friendly foreign country where the Agreement in question has to be
performed can be taken into account while importing the Agreement in England. This principle
was laid down by the court of Queen’s Bench Division in Lemenda Trading Company Limited v.
African Middle East Petroleum Company Limited. An oil company in England wanted renewal
of a supply contract with the Qatar National Oil Company. For this purpose, it entered into an
Agreement with the plaintiff company which undertook to bring about the renewal by using their
influence with the officers of Qatar and this, in return, for a commission on oil supplies. Such
commission was against public policy under the law of Qatar. The supply was renewed and an
action was commenced in England to recover the agreed commission. The Court said that
recovery would not be allowed. The public policy of a friendly foreign state cannot, of course, of
itself prevent the enforcement of a contract in England, but even so, an English Court would not
enforce a contract related to a transaction which is contrary to English public policy founded on
general principles of morality and the same public policy is applicable in the friendly foreign
countries where the contract was to be performed is so that the contract would not be enforceable
under the law of that country, because in such circumstances the International Comity combined
with English domestic public policy would militate against enforcement. Since a contract for the
use of personal influence in return for money in circumstances where the person to be influenced
is likely to be unaware of the pecuniary motive involved is contrary to public policy in both
England and Qatar, such contract would not be enforced in England. The court cited the
following passage from the judgment of Halsbury LC. “Where a contract is void on the ground
of immorality, or is contrary to such positive law as would prohibit the making of such a contract

39
Sri Indra Das v. State of Assam (Criminal Appeal No. 1383 of 2007)

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at all, then the contract would be void all over the world, and you're civilized country would be
called on to enforce it.”40

3.7 Alienation of Land by member of depressed class

A portion of land was assigned by the government to a depressed class. It was done for the
fulfillment of its constitutional obligation under Article 39(b) of the Indian Constitution..

The grant was subject to the specific condition that the land would not be alienated. Because of
the violation of this condition and because of the public policy implications, the alienation of the
land was held to be of no effect. A land allotted on the basis of scheduled caste was put under 20
year restriction on disposal. This was held to be valid. A transfer in violation of the applicable
rules was natural invalid. The Rules permitted mortgage in favour of Banking companies and
recognised financial institution for raising a loan.

Such restrictions are in the interest of the assignees of lands and are based upon public policy to
meet guaranteed social needs. They do not operate as a clog. They are intended to make
assignees full owners. Any such restriction which is not in the interest of the class to which the
assignee belongs is likely to be declared void.41

3.8 Chitty

The conduct of a Chitty in violation of Acts enacted in the interest of uniformity of practices was
held to be not opposed to public policy within the meaning of Section 23. The cheques issued
under the scheme were found to be issued for payment of legally enforceable debts. The
dishonour of such cheques amounted to an offence under Section 138 of the Negotiable
Instruments Act 1881.42

3.9 Arbitration award induced by fraud or corruption

An arbitration award induced by fraud or corruption has been held to be against public policy. It
is, therefore, liable to be set aside under Section 34(2)(b)(11), Explanation of the Arbitration and
Conciliation Act 1996.

3.10 Things done under statutory provisions

Banking business includes recovery. The assignment of a debt and non performing asset by
SBI to a banking company under the provisions of an Act with the right to recover the debt was
held to be valid transaction. The transaction in question was neither prohibited under the
Transfer of Property Act nor it was violative of public policy. Things expressly permitted by
laws cannot be held as opposed to public policy. In this case there was a transaction in
derivatives, which is a financial instrument used to transfer or hedge the risk. This was permitted

40
Emenda Trading Co. Ltd. v. African Middle East Petroleum Co. Ltd.[1988] 1 Lloyd's Rep. 361
41
V.D.S.R.Re.Rolling Mill v.The Special Commissioner on 10 July, 2012
42
Daya Shankar vs . Piyush Saini on 23 May, 2012

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by Master circulars issued by the Reserve Bank from time to time and Regulations framed under
FEMA, 1999.43

3.11 Divorce by mutual consent

The parties to a marriage entered into a compromise over their marriage which had already
suffered irretrievable breakdown with no chance of reunion between them. According to the
terms of the settlement the husband had already deposited the entire amount of the permanent
alimony and returned all articles of streedhan to the wife. The compromise was voluntary and
without any coercion or undue influence. The court granted divorce.

43
M/S National Highways Authority v. M/S Oriental Structural on16 January, 2015

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Chapter 4 Heads of Public Policy

4.1 Trading with the enemy

“The King's subject cannot trade with an alien enemy, that is, a person owing allegiance to a
Government at war with the King, without the King’s licence.” 44“It is now fully established that
the presumed object of war being as much to cripple the enemy’s commerce as to capture his
property, a declaration of war imparts a prohibition of commercial intercourse and
correspondence with the inhabitants of the enemy’s country, and that such intercourse, except
with the licence of Crown, is illegal.” “The Doctrine applies to all contracts which involve
intercourse with the enemy or tend to assist the enemy, even though no enemy is a party to the
contract.”

4.2 Trafficking in public offices

An Agreement by which it is intended to induce a public officer to act corruptly is contrary to

public policy. An Agreement, for example, by which a sum of money was provided to a charity
on the condition that the later would procure a knighthood for the plaintiff was held void and the
money is irrecoverable. Similarly, Agreement to provide money to a member of parliament to
influences his judgment is void. Sale of public offices, that is, appointments in consideration of
money, are also against public policy. The sale of the office of her bait has been held invalid45.
Charging of capitation fee for admission to prestigious educational institutions is contrary to
public policy. The Supreme Court has described it as unreasonable, unjust and unfair.

4.3 Interference with the administration of Justice

A contract with the object of which is to interfere with the administration of Justice is obviously
opposed to public policy. It may take any of the following forms:

4.3.1 Interference with the course of Justice

Any Agreement which obstructs the ordinary process of justice is void. An Agreement to delay
the execution of a decree, and promise to give money to induce a person give false evidence,
have been held void. An extreme illustration is an Agreement to perform Puja to secure success
to the defendant in a litigation, which was held void.46

4.3.2 Stifling prosecution

It is in Public Interest that criminal should be prosecuted and punished. Hence, an Agreement
not to prosecute an offender or to withdraw a pending prosecution is void if the offence is of
public nature. Such Agreements are called Agreements to stifle prosecution. “You shall not
make a trade of a felony.” No Court of law can countenance or give effect to an Agreement
which attempts to take the administration of law out of the hands of the judges and put it in the

44
Janson v. Drienfontein Consolidated Mines Ltd., 1902 AC 484,499.
45
Om Prakash vs The State AIR 1955 All 275, 1955 CriLJ 754
46
M.Sankar Nadar vs Deva Krishnan on 20 January, 2017

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hands of the private individuals. However, the law allows compromise Agreement in respect of
compoundable offences. But the compromise of a non compoundable offence is not allowed.
An illustration is found in the decision of the Supreme Court in Narasimbharaju v. Gurumurthy
Raju.47

In The dissolution and settlement of accounts of a partnership firm, one of the partners filed
criminal complaint against his co-partners alleging forgery in and manipulation of account by
taking in a fake partner. Subsequently, the partners entered into an Agreement to refer the matter
to arbitration in pursuance of which the complainant did not offer any evidence and his
complaint was accordingly rejected. When the question of enforcement of the arbitrator’s award
arose, it was alleged that the reference to arbitration was the result of an Agreement to stifle
prosecution.

Gajendragadkarm J held the Agreement to be opposed to public policy. He said: “if a person sets
the machinery of criminal law into action on the allegation that the opponent has committed a
non-compoundable offence and by the use of coercive criminal process, he compels the opponent
to enter into an Agreement, that Agreement would be treated as invalid for the reason that its
consideration is opposed to public policy.” The Learning judge referred to the decision of the
Privy Council in Bhawanipur Banking Corporation Ltd. v. Durgesh Nandini Dassi48, where a
mortgage was executed by the respondent as a part of the consideration for a promise by the
bank to withdraw criminal proceedings instituted by it against the mortgagor’s Husband and the
bond was held invalid, notwithstanding that the debt was itself was real and valid. Lord Atkin
observed:

To insist on reparation as a consideration for promise to abandon criminal proceedings is a

serious abuse of the right of Private prosecution. The citizen who proposes to vindicate the
criminal law must do so whole-heartedly in the interest of the justice, and must not seek his own
advantage.

Where a compromise Agreement is made before any complaint is filed, it would not amount to
stifling prosecution, even if it is implemented after the filing of a complaint which is then
withdrawn. This was pointed out by the Supreme Court in Ouseph Poulo v. Catholic Union
Bank Limited.49

A bank found that the good in a godown, which was pledged to it against a loan, were either
fraudulently Overvalued or withdrawn in collusion with the bank officials. The borrowers agreed
to make up for the deficiency by hypothecating more property. Some delay having taken place in
the hypothecation, the bank filed a complaint which was withdrawn after the hypothecation was
completed.

Approving cases of this kind in its decision in Union Carbide Corporation vs. Union of India the
Supreme Court pointed out the distinction between motive and consideration for withdrawing a
prosecution. Where dropping of criminal proceedings is a motive for entering into the
47
1963 AIR 107
48
(1942) 44 BOMLR 1
49
Infra note 36.

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Agreement- and not its consideration- the doctrine of stifling of prosecution is not attracted.50
Where there is also a pre existing civil liability, the dropping of criminal proceedings need not
necessarily be a consideration for the Agreement to satisfy that liability. Withdrawal of
prosecution is the motive but not the object for consideration of the contract, public policy is not
affronted. The settlement of the Bhopal gas disaster51 was, therefore, valid.
An Agreement not to appear as a witness is void.
4.3.3 Maintenance and champerty. - Explaining “maintenance”, Lord Haldane says52:
“It is unlawful for a stranger to render officious by money for otherwise to another person in a
suit in which the third person has himself no legal interest, police prosecution or defence.”53
“Champerty” in its essence means “a bargain where by one party is to assist the other in
recovering property, and is to share in the proceeds of the action”. “Agreements by which a
stranger advances money for maintenance of litigation with a view to obtaining and
unconscionable gains are called champertous Agreements”.54 The MP High Court observed that
in India there is no law prohibiting champertous Agreements as that in England55. But a number
of High Courts in India have been of the view that the English principle is applicable. In Hari
Lal Nauthlal Talati vs Bhailal Pranlal Shah56, the division bench of the Bombay High Court dealt
with an Agreement in which a person had agreed to give half share of the property to the
financer, valued at rupees 30000 from such property as he might get whether by a suit or by
private settlement or in any other manner from his father's estate.
The court held that the Agreement was extortionate and undecidable and opposed to public
policy. An Agreement which provided that the financer should get three fourth of the property
was not regarded as reasonable or fair. A fair Agreement to assist a person in the enforcement of
his legal rights may be held valid even if the person providing the assistance is to be reimbursed
out of the proceeds of the action. Much, however, depends upon the quantum of share which the
financer has stipulated to get in the fruits of the action. Stipulation for 3/4 share in the property,
if recovered, has been held to make the Agreement champertous.
On the other hand in Ramswaroop v. Court Of Wards57, which went up to the Privy Council, the
Agreement provided that the financer should bear all the expenses of the case and in return
therefore get a three-anna share of the immovable property recovered provided that it should be
increased to 4 annas. , should the case go to the Privy Council, the Agreement was held to be
valid. Similarly, Agreements to pay 3/6th share, 1/4th share and 1/8th share have been upheld.
But an Agreement to pay 1/6th part of the property to be inherited has been held to be unlawful.
The estate being very vast, even one-sixth would net Rupees 3 lakhs for the promisee and this is
exorbitant. Principles that ensure justice, fair play, transparency, objectivity and probity in
discharging public functions are basis of public policy, i.e., any rule, contract all arrangement
that is in public good and public interest. An Agreement to pay the financial 40 % of the value of
the property in question or its sale proceeds was held to be of importance nature. Where the
50
Ouseph Poulo And Three Others vs Catholic Union Bank Ltd. And Ors 1965 AIR 166
51
Union Carbide Corporation Etc. ... vs Union Of India 1992 AIR 248,
52
Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] UKHL 1
53
Ajai Kumar Singh {P.I.L.} v. State Of U.P.Thru Secreatry on 28 June, 2010
54
Khaja Moinuddin Khan And Others v. S.P. Ranga Rao And Others on 1 October, 1999
55
Passarilal Mannoolal v. Mst. Chhuttanbai And Ors. AIR 1958 MP 417
56
(1940) 42 BOMLR 165
57
(1940) 42 BOMLR 307

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property forming the subject matter of litigation is agreed to be sold to the financer, the mayor
fact that the consideration for the sale is inadequate, may not render the Agreement
champertous.
Agreement by a client to pay his wife according to the result of the case is against public policy.
It is professional misconduct for an advocate to stipulate for or agree with his client to accept as
his fee or remuneration a share of the property is sued or other matter in litigation upon the
successful issue thereof. An Agreement for solicitor retainership on the basis that the solicitors’
standard remuneration would be paid on successful cases and there would be 20% reduction of
their fee for lost cases has been held to be champertous.
Neither the amount not paid, could be recovered, nor the fee amount already paid could be
claimed back. The court said that a contingency fee which is contrary to public policy is not
confined to a direct or indirect sure of the spoils but it includes a differential field dependent on
the outcome of the litigation.58
4.3.4 Marriage Brokage Contracts
Agreement to procure the marriage of a person in consideration of a sum of money is called in
marriage brokage contract. Agreements are void. The typical illustration would be an Agreement
for the sale of a girl. Custom of paying bride price to the parents of a girlis well known in India.
According to decision of the Punjab, Calcutta and Madras High Courts59, an Agreement to pay
money to the parents of a minor to induce him in marriage is void. Where, however, the money
has already been paid, but the marriage fails to go through, it has been held in a few cases that
the money may be taken back.
An attempt to make gain of materials nature out of a marriage would be equally opposed to
public policy. When a father or other guardian of a boy or a girl has to betroth his ward, his
primary and only consideration out to be happiness and welfare of the child. The stipulating for a
monetary payment for himself is an incentive to the parent or other guardian to have regards to
other considerations than the child's happiness in marrying him or her into another family. Such
an Agreement would clearly be invalid. Decision of the Orissa High Court provides a suitable
illustration:
The defendant proposed the marriage of his widowed niece to the plaintiff and offered to give
her gold and jewellers and land. The marriage took place, but the defendant refused to fulfill the
rest of his promise.
The court observed: we would like to make it clear at the outset that if gifts or present to the
groom or the bride are made voluntarily it cannot be but that has anything Immoral or opposed to
public policy. But if pecuniary gain is made the consideration of marriage, it is bound to be
condemned as reprehensible to all sense of decent morals. In the present case, monetary gain
was the sole consideration for the marriage between the two, inter caste marriage arrangements
have been held to be valid.60
4.3.5 Unfair, unreasonable or uncontainable dealings
(Dealings with employees)

58
N.V. Ramanaiah And Ors. vs State Of Andhra Pradesh And Ors. on 1 January, 1800
59
A. Premchand vs V. Padmapriya AIR 1997 Mad 135
60
A. Suryanarayan Murthy vs P. Krishna Murty And Anr. AIR 1957 Ori 124

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Where the parties are not economically on equal footing and there is a wide gap in the
bargaining power of the parties, Where one of them is in a position to exploit and the other is
vulnerable and the contract made with that other is apparently unfair, it can in circumstances be
also regarded as opposed to public policy. For example, the Supreme Court laid down in
Central Inland Water Transport Corporation vs BrojoNath Ganguly61 that Government
Corporation imposing upon a needy employee a term that he can be removed just by three
months notice or pay in lieu of notice and without any ground is an exploitation and every
ruthless exploitation is against public policy. The Allahabad High Court distinguished this case
in of Jagat Bahadur v. District Supply Officer62, Allahabad where the contract was for the
allotment of a fair price shop for distribution of food grains and it contained a clause for
termination of the Agreement and withdrawal of the privilege without assigning any reasons. the
same was held to be needed opposed to public policy not violative of Article 14 of the
constitution. Person aspiring for the grant of fair price shop is perfectly free not to enter into
such a contract Because she has all the opportunities of trading in the free food grain market.
His position cannot be compared with that of an employee.
A rule permitting Administrator of Board of Control for Cricket in India (BCCI) to have
commercial interest in events conducted by BCCI was held to be capable of defeating higher
ideas of fairness and objectivity in discharge of public function and therefore opposed to public
policy. It is liable to be struck down. The court said that principles that ensure justice, fairplay,
transparency, objectivity and property in discharge of public functions our facets of public
policy. A rule, contract or arrangement which is in public good and interest cannot be regarded
as opposed to public policy.63
4.3.6 Surreptitious Transfer of Shares
Reference to the conduct of public Financial Institutions holding shares in Companies, it has
been held by the supreme court that a surreptitious transfer of a bulk of shares in one company
without caring to see whether it would result in the creation of monopoly adverse to public
interest, If it is done with a mala fide intention, the deal would be illegal.64
4.3.7 Party with matching bargaining power
As between the parties whose bargaining power is fairly matched and the standard contract with
all its clauses has not only been duly signed but also is one which has been widely used over the
years, 65this will create a presumption of fairness. Where experienced Businessman are involved
in a commercial contract and there is no inequality of bargaining power, the agreed terms must
ordinarily be respected as the parties must be taken to have had regard to the matters known to
them. The sellers and buyers in this case were the Businessman and they had agreed on all the
terms on the basis that they were in conformity with international trade and commerce. The
clause for reimbursement for or repayment of the price if the seller could not deliver the goods
within the specified time was neither unreasonable nor unjust. It was also not extravagant The

61
1986 AIR 1571
62
AIR 1990 All 113
63
Board of Control for Cricket in India v. Cricket Association of Bihar & Ors. Civil Appeal No.4235 OF 2014
64
N. Parthasarathy Vs. Controller of Capital Issues & Anr [1991] INSC 105 (16 April 1991)
65
Bihar City Electricity Board v. Green Rubber Industries,(1990) 1 SCC 731

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Supreme Court said that the arbitration award on its basis could not be regarded as contrary to
public policy.66
A clause enabling the contracting authorities to very the quantum of work upward or downward
to be computed adding up variations both upward and downward has been held to be based on
good reason that there is nothing unconscionable if the power is excised for legitimate causes. 67
A clause in a contract of hiring of three vessels for a period of 3 years, entitled the higher to
terminate the Agreement after one year without assigning any reason. The clause was held to be
not unconscionable or opposed to public policy. It was covered by Section 14 (1)(c) and of the
Specific Relief Act 196368.
In the opinion of the Karnataka High Court,69 in order to attract Section 23 of the Act it is not
necessary that the contract should be tainted with illegality. It would be enough if it contains
terms which are so unfair and unreasonable that they shock the conscience of the Court. But this
general observation has been held to be not applicable where a guarantor agreed not to claim the
benefit of Section 133, 134, 135, 139 and 141 of the Act which give to guarantor certain
protective rights. Such rights being variable with the consent of the surety, there is no violation
of the Act if he agrees not to claim any of those rights.70
A clause in a loan Agreement permitting the financer to seize the financed vehicle in the event of
default in payment was held to be void.71 A clause in bank loan Agreement in event of the
payment in extra interest would be charged was held to be arbitrary and unreasonable.72
An Agreement for selling the recognition and no objection certificate is opposed to public policy
as the educational institution is granted recognition for the benefit of the public and if such right
is sold like a tradable commodity without approval of the competent authority, It would be an act
opposed to public policy and Forbidden under Section 23 of the Contract Act.73

66
Phoolchand Exports P. Ltd v. OOO Patriot, (2011) 10 SCC 300
67
National Fertilizers v. Puran Chand Nangia, (2000) 8 SCC 300
68
ONGC Ltd v. Streamline Shipping Co. (P) Ltd. AIR 2002 Bom 420
69
Ms. Nidhi Kaushik vs Union Of India & Ors. on 26 May, 2014
70
Anil Kumar And Ors. vs Central Bank Of India And Ors. on 4 January, 1996, AIR 1997 HP 5
71
Tarun Bhargava vs State Of Haryana And Anr. 2003 (3) KLT 397
72
Citicorp Maruti Finance Ltd. vs S. Vijayalaxmi on 27 July, 2007
73
Evva Memorial Teacher Training v. The Regional Director on 23 January, 2008

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CONCLUSION

It is quite clear that if the consideration or the object of the consideration is, in the opinion of the
court, opposed to public policy, the Agreement becomes invalid under the provisions of section
23 of Indian Contract Act, 1872. The freedom of citizen, as indeed the freedom of the lawyer, to
enter into a contract is always subject to the overriding considerations of public policy as
enunciated under section 23. In other words, if the contract is opposed to public policy, it would
be treated as invalid in courts of India and its conclusion cannot be challenged on the ground that
in involves encroachment on the citizen’s freedom to enter into any contract he likes. The
Bombay High Court has said, that the term Public Policy is somewhat vague and the courts
should not be astute to invent newer and newer grounds of public policy.
Indeed the principles need to be defined regarding Public Policy but we can’t deny that the
Indian Judiciary is doing its best to define the basic principles. Thus, we can hope in near future
that the concept will be defined in better and clearway.

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BIBLIOGRAPHY
 Pollock & Mulla, The Indian Contract Act, 1872, LexisNexis, (14th Edition, 2016)
 Avtar Singh, Law of Contract & Specific Relief, Eastern Book Company, (12th Edition,
2017)
 Akhileshwar Pathak, Contract Law in India: Text and Cases, Oxford (2011 edition)

STATUTES REFERRED
Indian Contract Act, 1872

JOURNALS REFERRED:
All India Reporter (A.I.R)

WEBLIOGRAPHY
www.manupatra.com
www.scconline.com
www.jstor.com
www.livelaw.com
www.legallyindia.com
www.legalservicesindia.com
www.scribd.com
www.casemine.com
www.barandbench.com

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