6. Agreements Opposed to Public Policy, Unlawful Consideration and Object
The last three posts dealt with agreements where consent went wrong — a party was coerced, dominated, deceived, or mistaken. This post deals with a different failure: agreements where the parties agreed perfectly well, freely and knowingly, but the thing they agreed to do is something the law simply won't let anyone contract for.
The Problem This Topic Solves
Two business owners in the same street agree that one will pay the other to shut down and never compete again, anywhere, for the rest of his life. Both sides understand exactly what they're agreeing to, and neither is pressured or misled. Should the law enforce it anyway? Section 23 says no — even a perfectly consensual agreement fails if its consideration or object crosses certain lines the law has drawn in advance, independent of how the parties actually behaved toward each other.
Section 23 — the Six Grounds
Section 23 makes the consideration or object of an agreement unlawful, and the agreement void, if it is:
- forbidden by law
- of such a nature that, if permitted, it would defeat the provisions of any law
- fraudulent
- involves or implies injury to the person or property of another
- the Court regards it as immoral, or
- the Court regards it as opposed to public policy
If any one of these six grounds is met, the whole agreement is void.
Restraint of Trade — Section 27
Section 27 is the ground you'll meet most often in problem questions: every agreement by which anyone is restrained from exercising a lawful profession, trade, or business of any kind is, to that extent, void. The one statutory exception is the sale of goodwill — the seller of a business can validly agree not to carry on a similar business within reasonable local limits, so long as the buyer (or someone deriving title from the buyer) continues a like business there, and the restriction is reasonable for that kind of business.
Madhub Chander v. Raj Coomar Doss, (1874) 14 Beng LR 76 — Two competing shopkeepers agreed that one would close his business in a locality in exchange for payment from the other, and would not carry on the same business there again. The Calcutta High Court held the agreement void under Section 27, even though it was only a partial restraint (limited to one locality). Unlike English law, which allows "reasonable" partial restraints outside the statutory exception, Indian courts read Section 27 strictly — any restraint, however narrow, is void unless it falls within a recognised statutory exception.
Superintendence Company of India (P) Ltd. v. Krishan Murgai, AIR 1980 SC 1717 — An employee's contract barred him from working in a similar business for two years after he "left" his employer. When the company terminated him and he started a competing firm, the majority (Tulzapurkar and Untwalia, JJ.) sidestepped the Section 27 question entirely, holding instead that "leave" meant voluntary resignation, not dismissal — so the clause never applied to him at all. Sen, J., concurring in the result on this narrower ground too, went further and held directly that a post-service restraint is void under Section 27 unless it falls within the narrow goodwill-sale exception. Either way, a restrictive covenant that operates only during employment can be valid, but one meant to bind a person after they have left generally cannot be enforced.
- Section 23: consideration or object is unlawful if forbidden by law, defeats a law's provisions, is fraudulent, injures person or property, or is immoral or opposed to public policy — the effect is that the whole agreement is void
- Section 26: an agreement in restraint of the marriage of anyone other than a minor is void. Section 27: an agreement in restraint of a lawful trade, profession, or business is void, except a reasonable restriction on the seller in a sale of goodwill. Section 28: an agreement restricting a party's right to enforce their legal rights through the ordinary courts is void
- Madhub Chander v. Raj Coomar Doss: even a partial restraint of trade is void in India, unlike English law's "reasonableness" approach
- A restrictive covenant operating during employment (don't work for a competitor while still employed here) is generally valid — it's post-employment restraints, as in Superintendence Company v. Krishan Murgai, that Indian courts strike down
- The "opposed to public policy" head is deliberately open-ended — courts have used it over time to void marriage-brokerage agreements, agreements interfering with the course of justice, and agreements to trade with an enemy country, among others
A Practical Example
An employee signs a contract with a clause preventing him from working for any competing firm, anywhere in India, for five years after he resigns. He resigns and joins a competitor two months later; his former employer sues to enforce the clause. Applying Section 27 and Superintendence Company v. Krishan Murgai: this is a post-employment restraint, not a sale-of-goodwill restriction, so it falls outside the one statutory exception. The clause is void to the extent it restrains him — the former employer cannot enforce it, regardless of how the parties actually worded or intended it.
Quick Revision Points
- Section 23: six grounds make consideration/object unlawful — forbidden by law, defeats a law, fraudulent, injures person/property, immoral, or opposed to public policy. Any one ground voids the whole agreement
- Section 26: restraint of marriage (except a minor's) is void. Section 27: restraint of trade is void, except a reasonable restriction in a sale of goodwill. Section 28: restraint of legal proceedings is void
- Madhub Chander v. Raj Coomar Doss: Indian law voids even partial restraints of trade, stricter than the English "reasonableness" test
- Superintendence Company v. Krishan Murgai: post-employment non-compete clauses are generally void; during-employment restrictions can be valid
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