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Report No. 199

Section 23 and Public Policy

The circumstances in which a contract is likely to be struck down as one opposed to public policy are fairly well established in England. Lord Halsbury refers to certain contracts such as "... contract of marriage brokerage, the creation of perpetuity, a contract in restraint of trade, a gaming or wagering contract, or what is relevant here, the assisting of the King's enemies, are all undoubtedly unlawful things", and that these are grounds of public policy (Earl of HalsburyL.C. in Janson vs. Drienfontein Consolidated Mines Ltd. [1902] A.C. 484 at 491-92).

The ordinary function of the court is to rely on the well-settled heads of public policy and to apply them to varying situations. If the contract in question fits into one or the other of these pigeons-holes, it may be declared void (Asquith J., Mank L and v. Jack Barclay Ltd. [1951] All ER 714 at 723). The courts may, however, mould the well-settled categories of public policy to suit new situations in a changing world. But may a court invent a new head of public policy? This question is still under debate.

According to Lord Halsbury the categories of public policy are closed. "I deny", he said that any court can invent a new head of public policy". But, public policy is a vague and unsatisfactory term". Even so, "From time to time judges have uttered warning notes as to the danger of permitting judicial tribunals to roam unchecked in this field. Lord Atkin in Fender V. St. John Mild May 1938 AC 1 (p 12) further said that "the doctrine should only be invoked in clear cases in which the harm to the public is substantially incontestable, and does not depend upon the idiosyncratic inferences of a few judicial minds".

In the same strain, about hundred eighty years ago in Richardson vs. Mellish (1824) All ER 258, Burrough, J., protesting against public policy, said that "it is a very unruly horse, and when once you get astride it, you never know where it will carry you".

The orthodox view on public policy in India was explained nearly fifty years ago, by Subba Rao, J. (as he then was) in Gherulal v. Mahadeodas (AIR 1959 SC 781). The Supreme Court cautioned against expansion of grounds in practice though in theory, they could be expanded. It said:-

"Public policy or the policy of law is an elusive 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 contracts 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 though it is permissible for the courts to expand public policy and apply them to different situations, it should 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."

However, a more flexible and liberal approach was advocated by the Apex Court in the recent case in Central Inland Water Transport Corporation case: AIR (1986) 1571 (at 1612). The Supreme Court held that:

"public policy is not the policy of a particular Government, it connotes some matter which concerns the public good and public interest. The concept of what is for the public good or in the public interest or what would be injurious or lawful to the public good or the public interest has varied from time to time. As new concepts take the place of old, transactions which were once considered against public policy are now being upheld by the courts and similarly where there has been a well-recognized head of public policy, the courts have not shirked from extending it to new transactions and changed circumstances and have at times not even flinched from inventing a new head of public policy.

It is thus clear that the principles governing public policy must be and are capable on proper occasions of expansion or modification. If there is no head of public policy which covers a case, then the court must in consonance with public conscience and in keeping with public good and public interest declare such practice to be opposed to public policy."

The meaning of 'public policy' has been referred to recently by the Supreme Court in Zoroastrian Corp. Housing Society Ltd. vs. DC Registrar of Cooperative Societies 2005(4) SCALE, page 156, and it was stated that when the statute referred to public policy, it meant 'public policy' of the particular Act which dealt with membership of cooperative society.

Whether public policy covers unconscionability?

The Law Commission of India, in its 103 rd Report (1984) (p 5), had considered the question, whether there was a possibility of striking down an "unconscionable bargain" by resorting to 'public policy' under Section 23 of the Indian Contract Act, 1872. The Commission was, however, of the view that section 23 was not of help in meeting the situation. It also observed that courts have held (as the law in 1984 was) that the heads of public policy cannot be extended to a new ground in general, with certain exceptions, and that the terms of a contract exempting one party from all liability was not opposed to public policy.



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