Immoral agreements and heads of public policy

In one minute

An agreement is void if the Court regards its object as immoral or opposed to public policy (section 23). The Act does not list the heads of public policy. Courts have applied it to a settled set of cases.

The Act also names three kinds of agreement as void: restraint of marriage (section 26), restraint of trade (section 27) and restraint of legal proceedings (section 28). In exams, restraint of trade is the favourite problem. In real life it decides whether a non-compete clause can be enforced.

Exam focus

Frequency: No data
Usually asked as: No data

Legal provision

Section 23: the consideration or object is unlawful if the Court regards it as immoral or opposed to public policy. The agreement is then void.
Section 23, illustrations (j) and (k): a mukhtar (a legal agent) who promises to use his influence with his principal for money, and the letting of a daughter for hire for concubinage, are void as immoral. The second is void even though it may not be punishable under the Indian Penal Code.
Section 26: every agreement in restraint of the marriage of any person, other than a minor, is void.
Section 27: every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind is, to that extent, void.
Exception 1 to section 27: a person who sells the goodwill of a business may agree with the buyer not to carry on a similar business within specified local limits. This holds so long as the buyer carries on a like business there, and the limits appear reasonable to the Court.
Section 28: an agreement that absolutely restricts a party from enforcing his rights by the usual legal proceedings, or limits the time for doing so, is void to that extent. Exceptions allow agreements to refer disputes to arbitration.

Meaning and definition

An immoral agreement offends accepted standards of conduct. Public policy is the general good of the community. The Court decides what falls under either head.

Immorality is wider than crime. An agreement can be void as immoral although no criminal law forbids it (illustration (k)).

Heads of immorality and public policyHow to read this: start at the top box and follow the lines down. Green boxes are the kinds of void agreement.

Agreements void on moral or public-policy grounds sections 23, 26, 27, 28
- Immoral section 23
  - Selling influenceIllustration (j): a mukhtar's promise to use his influence for money.
  - ConcubinageIllustration (k): letting a daughter for hire.
- Opposed to public policy section 23
  - Interfering with justiceIllustration (h): dropping a prosecution for robbery in exchange for restoring the things taken.
  - Selling public employmentIllustration (f): paying Rs 1,000 to obtain employment in the public service.
- Declared void by their own sections
  - Restraint of marriageSection 26. A minor is outside the rule.
  - Restraint of tradeSection 27. Exception: sale of goodwill.
  - Restraint of legal proceedingsSection 28. Exceptions for arbitration.

Detailed explanation

Step 1: immoral agreements

The Act's two illustrations show immorality. Courts apply the head to similar cases, such as an agreement for an unlawful sexual purpose.

Example. Rohit promises Deepa Rs 20,000 to live with him as his concubine and be available to him on his terms. The object is immoral. The agreement is void, and Deepa cannot sue for the money.

Step 2: heads of public policy

Courts have treated the following as opposed to public policy. The list comes from decided cases, not from the Act.

Trading with an enemy: an agreement to trade with a country at war with India.
Interfering with the course of justice: illustration (h), dropping a prosecution for robbery.
Selling public offices or influence: illustration (f), obtaining public-service employment for money.
Marriage brokerage: an agreement to pay for arranging a marriage.

In Gherulal Parakh v. Mahadeodas Maiya, the Supreme Court said public policy should be applied to settled heads and not stretched to new ones. In Central Inland Water Transport Corporation v. Brojo Nath Ganguly (1986), it struck down a clause that let an employer end a permanent employee's service on three months' notice without giving reasons. The Court called the clause arbitrary, unreasonable and opposed to public policy, because the parties had very unequal bargaining power.

Step 3: restraint of marriage (section 26)

An agreement that restrains the marriage of any person, other than a minor, is void.

Example. A father promises his adult daughter Rs 5 lakh if she never marries. The promise restrains her marriage and is void.

Step 4: restraint of trade (section 27)

Section 27 voids an agreement to the extent it restrains a lawful profession, trade or business. The only statutory exception is the sale of goodwill within reasonable local limits. Indian courts read the section strictly, so even a partial restraint is void unless it falls within the exception.

Example. Imran sells his tea shop and goodwill in Hubli to Anil and promises not to open a tea shop within 2 km. The limits are reasonable for the business. This falls within Exception 1, and the promise is valid.

Step 5: restraint of legal proceedings (section 28)

A clause that stops a party absolutely from going to court, or that sets an unreasonably short time for suing, is void to that extent. An agreement to refer disputes to arbitration is saved by Exception 1.

Example. A construction contract says that the contractor can never go to court for any dispute. The clause is void under section 28. A clause that sends disputes to arbitration is valid.

Don't confuse: immoral, against public policy and forbidden by law

All three make an agreement void under section 23. They differ in how the Court identifies them.

Ground	Test	Example
Forbidden by law	A statute prohibits it	Selling banned drugs
Immoral	The Court regards it as immoral, even if no law punishes it	Illustration (k): letting a daughter for concubinage
Opposed to public policy	It harms the general good, in a head the courts recognise	Illustration (h): dropping a prosecution for robbery

Inside the idea. A witness promises to give false evidence in return for Rs 10,000. This interferes with the course of justice. It is void as opposed to public policy.

Just outside it. A witness is paid reasonable travel costs to attend court and tell the truth. There is no harm to justice. The agreement is valid.

Common mistakes

Writing that public policy has a fixed list in the Act. Courts apply settled heads.
Forgetting that sections 26, 27 and 28 void agreements by their own terms.
Applying a reasonableness test to restraint of trade. Section 27 allows only the goodwill exception.
Saying an immoral agreement must also be a crime. It need not be.

Apply it

Problem

Anita signs an employment contract that bars her from working for any competitor in India for five years after she resigns. She resigns and joins a rival. Her former employer sues to enforce the clause. Can he succeed?

Issue. Is the clause void under section 27?

Rule. An agreement that restrains a person from a lawful profession, trade or business is void to that extent. The only statutory exception is the sale of goodwill.

Application. The clause operates after the employment ends and is not a sale of goodwill. In Superintendence Company of India v. Krishan Murgai, Sen J. held that such a post-service restraint is void under section 27, a view that later Indian cases widely follow.

Conclusion. The clause is void to that extent. The former employer cannot enforce it.

Leading case laws

Madhub Chander v. Raj Coomar Doss (1874)
Facts. Rival shopkeepers in a Calcutta locality agreed that Madhub Chander would close his business there and not carry it on again, for a sum of money paid by the others. He closed and sued for the money. The defendants said the agreement was void under section 27.

Principle. The Calcutta High Court held the agreement void under section 27, even though the restraint was partial and confined to one locality. He could not recover the payment.

Why it matters. Indian law admits no general reasonableness test for restraints of trade. Any restraint outside the goodwill exception is void.
Superintendence Company of India (P) Ltd. v. Krishan Murgai (1980)
Facts. A branch manager's letter of appointment barred him for two years after he "left" from serving a competitor or carrying on a similar business at his last posting. The company terminated him, and he started a competing business.

Principle. The Supreme Court dismissed the company's appeal. The majority held that the clause did not apply to a dismissed employee. Sen J. held directly that a post-service restraint is void under section 27.

Why it matters. It is the leading case on post-employment non-compete clauses. Only Sen J.'s view is a ruling on section 27 itself.
Gujarat Bottling Co. Ltd. v. Coca Cola Co. (1995)
Facts. Coca Cola licensed a Gujarat bottler and barred it from dealing in any other brand while the agreement lasted. Pepsi then bought control of the bottler.

Principle. A negative covenant that applies only while the agreement lasts, and promotes the trade, is not a restraint of trade under section 27.

Why it matters. It separates restraints during a contract from restraints after it. The Court did not decide whether reasonableness matters under section 27.
Gherulal Parakh v. Mahadeodas Maiya (1959), Supreme Court, AIR 1959 SC 781
Facts. Two managers of joint Hindu families formed a partnership for forward wheat contracts that were wagers. One sued the other for half of the losses. The other said the partnership was unlawful.

Principle. Wagering is void but not forbidden by law, and it does not offend public policy. The Court said new heads of public policy should not be invented. The partnership was valid.

Why it matters. It tells students that courts apply public policy cautiously, within settled heads.
Central Inland Water Transport Corporation v. Brojo Nath Ganguly (1986), Supreme Court, (1986) 3 SCC 156
Facts. A public corporation's service rules let it end a permanent employee's service on three months' notice without giving any reason.

Principle. The Court held the clause arbitrary, unreasonable and opposed to public policy, and so void under section 23. It said freedom of contract rests on equal bargaining power.

Why it matters. It extends public policy to unfair terms forced on a weaker party.

How to write this answer in the exam

5-mark answer

State the last ground in section 23: immoral or opposed to public policy.
Give illustrations (j) and (k) for immorality.
List three heads of public policy.
State the effect: void.

10-mark answer

Section 23 and the meaning of public policy.
Immoral agreements, with illustrations.
Heads of public policy, with Gherulal Parakh on settled heads.
Sections 26, 27 and 28 with their exceptions.
Madhub Chander and Superintendence Company on section 27.
A problem on a non-compete clause.

Key points to remember

Section 23 voids agreements that the Court regards as immoral or opposed to public policy.
Immorality does not need a crime (illustration (k)).
Courts apply public policy to settled heads and use it cautiously.
Sections 26, 27 and 28 void restraints of marriage, trade and legal proceedings, with limited exceptions.
Indian courts read section 27 strictly: even a partial restraint is void unless within the goodwill exception.

Quick self-test

1. Does an immoral agreement need to be punishable by law to be void?

No. Illustration (k) to section 23 is void as immoral though the letting may not be punishable.

2. What is the only statutory exception to section 27?

The sale of goodwill, with a promise not to carry on a similar business within reasonable local limits.

3. What did Madhub Chander v. Raj Coomar Doss decide?

An agreement restraining a trader from his business in one locality is void under section 27, even though the restraint is only partial.