FREEDOM OF CONTRACT vs. PUBLIC POLICY IN INDIAN LAW

 

FREEDOM OF CONTRACT vs. PUBLIC POLICY IN INDIAN LAW




This Article is written by- Supriya Chandra, 1st year (2nd semester) from SS Khanna Girls’ Degree College, UoA, Prayagraj

  

ABSTRACT

The doctrine of freedom of contract empowers individuals to decide the terms of agreements without undue interference, reflecting the liberal principles of autonomy and private law. However, this autonomy is not absolute; it is bounded by the overarching doctrine of public policy. Indian courts often grapple with the challenge of balancing these two principles, especially in contexts where personal liberty may conflict with societal welfare. This article critically examines the tension between freedom of contract and public policy within Indian jurisprudence. It evaluates statutory frameworks, judicial interpretations, and international perspectives to explore the extent of contractual autonomy and its limitations. The study also investigates reforms and doctrinal developments that attempt to harmonize individual freedom with collective good. The article aims to offer insights into the evolving nature of contract law and provide recommendations for a more consistent and equitable legal framework.

 

KEYWORDS

Freedom of Contract, Public Policy, Indian Contract Act, Constitutional Law, Judicial Review, Autonomy, Statutory Limits, Private Law.


INTRODUCTION

The principle of freedom of contract is a cornerstone of classical contract theory, rooted in the liberal philosophy that individuals should be free to determine their own legal relationships. In India, this concept is legally recognized under Section 10 of the Indian Contract Act, 1872, which allows parties competent to contract to enter into agreements, provided they are not expressly declared void. However, this liberty is qualified by the imperative of public policy, an undefined yet powerful doctrine designed to ensure that contracts do not undermine societal norms, morality, or statutory provisions.

 

Public policy, though conceptually abstract, acts as a legal checkpoint that restricts the enforcement of agreements considered harmful to the public interest. The Indian judiciary, through a series of landmark judgments, has attempted to define and refine the contours of public policy, often leading to debates on judicial overreach and inconsistency. This article explores the interplay between contractual freedom and public policy, analyses key statutory and case law developments, examines international approaches, and proposes a way forward for a more coherent application of these principles.

 

STATUTORY FRAMEWORK

The statutory framework governing the freedom of contract in India primarily stems from the Indian Contract Act, 1872, which serves as the cornerstone of contract law. Section 10 of the Act essentially recognizes that a valid contract emerges when capable individuals willingly agree to its terms, ensuring that their consent is genuine, the purpose and exchange involved are lawful, and the agreement itself isn’t explicitly prohibited. At its core, this provision embraces the idea of contractual freedom, allowing people to shape their legal commitments within the framework of the law.

 

However, this freedom is not unrestrained. Section 23 of the Act imposes a crucial limitation by declaring that the consideration or object of an agreement is unlawful if it is forbidden by law, defeats the provisions of any law, is fraudulent, involves injury to the person or property of another, or is regarded as immoral or opposed to public policy. Therefore, even if an agreement is consensual and satisfies all technical requirements, it will be deemed void if it contravenes public policy.

This clause acts as a gatekeeper, ensuring that contractual autonomy does not facilitate unethical or socially detrimental conduct. Additionally, statutes such as the Specific Relief Act, 1963, which governs the enforcement of contracts through specific performance, and the Arbitration and Conciliation Act, 1996, which regulates arbitration agreements and awards, also incorporate the public policy exception. Under Section 34 of the Arbitration Act, an arbitral award may be set aside if it contradicts India's public policy, ensuring that arbitration outcomes align with fundamental legal principles and societal interests.

 Moreover, Article 19(1)(g) of the Constitution upholds individuals' freedom to engage in any trade, profession, or business, inherently supporting the concept of contractual independence by allowing them to structure agreements within legal boundaries. This provision acknowledges the freedom to engage in economic activities, allowing individuals to negotiate agreements within the boundaries of legality. However, this right is subject to reasonable restrictions under Article 19(6) in the interests of the general public, thereby reaffirming the state's role in ensuring that private economic freedoms do not undermine public welfare.

Thus, Indian contract law weaves together a fine statutory balance, upholding individual freedom on one hand and safeguarding societal interests on the other.

 

CASE LAW DEVELOPMENT AND JUDICIAL INTERPRETATION

The tension between freedom of contract and public policy has been shaped by a series of landmark judgments over decades. In Gherulal Parakh v. Mahadeodas Maiya, (1959)[1], the Supreme Court recognized that public policy is an evolving concept that cannot be confined to a fixed definition. The Court held that what constitutes public policy must reflect changing social values and norms, thereby acknowledging the dynamic character of this doctrine.

 

Subsequently, in Central Inland Water Transport Corporation v. Brojo Nath Ganguly, (1986)[2], the Court expanded the application of public policy to strike down oppressive and unconscionable contractual terms. The case involved a termination clause that allowed the employer to dismiss an employee without reason, which was deemed arbitrary and violative of public interest. This marked a progressive step towards a more justice-oriented reading of contract law.

 

In Rattan Chand Hira Chand v. Askar Nawaz Jung, (1991)[3], The Court reaffirmed the principle that agreements promoting unlawful or unethical activities would be invalid, as they conflict with public policy and broader legal standards. The case involved a pagdi arrangement, and the Court disapproved of the commercial exploitation it encouraged, thus emphasizing that contractual freedom cannot override societal interests.

 

The Supreme Court’s decision in ONGC Ltd. v. Saw Pipes Ltd. (2003)[4], represented a pivotal shift, establishing that an arbitral award could be overturned if it was deemed "patently illegal" and conflicted with public policy. . This interpretation extended the doctrine into the realm of arbitration law and raised concerns over excessive judicial intervention. Critics argued that such a broad reading of public policy compromised the autonomy of arbitration proceedings and ran counter to global norms promoting minimal court interference.

 

Lastly, in State of Gujarat v. Mirzapur Moti Kureshi Kassab Jamat, (2005)[5], the Court underlined that even fundamental rights or private arrangements, including those arising out of contracts, may be reasonably restricted in the public interest. This case reflected a constitutional alignment, reinforcing that freedom of contract is subordinate to collective welfare under Article 19(6) of the Constitution.

 

These cases demonstrate a clear judicial trendfrom cautiously interpreting public policy to actively employing it to invalidate contracts deemed unfair, immoral, or against the public good.

 

FREEDOM OF CONTRACT: ORIGIN AND EVOLUTION

The principle of contractual freedom emerged from classical liberal thought, influenced heavily by English common law. In India, this idea was initially embraced to encourage economic development and privatization. However, the evolution of welfare-oriented constitutional values necessitated the re-evaluation of absolute freedom.

 

In State of Gujarat v. Mirzapur Moti Kureshi Kassab Jamat, (2005)[6], the Supreme Court reaffirmed that individual rights, including those flowing from contracts, must yield to the collective interest if required by public policy.

 

INTERNATIONAL PERSPECTIVE

United Kingdom: In English law, the doctrine of public policy is similarly open-ended. Courts in the UK exercise restraint in applying this principle. In Printing and Numerical Registering Co. v. Sampson, (1875)[7], Sir George Jessel stated that public policy is dangerous when used to invalidate clear contractual obligations.

 

United States: The U.S. follows the principle of "freedom of contract" enshrined in the 14th Amendment's due process clause. However, in Lochner v. New York, (1905)[8], the U.S. Supreme Court faced backlash for prioritizing contractual freedom in a way that weakened labour protections, raising concerns about workers’ rights and economic fairness. Eventually, the pendulum swung in favour of regulated contracts in West Coast Hotel Co. v. Parrish, (1937)[9].

 

CRITICISM AND CHALLENGES

Despite the judiciary’s noble intent in curbing contractual abuse through the lens of public policy, several criticisms persist regarding its application. One of the foremost issues is the inherent uncertainty and unpredictability of the doctrine. As public policy lacks a clear statutory definition, its contours are often left to judicial discretion, resulting in inconsistent rulings across similar fact situations. This unpredictability becomes especially problematic in commercial transactions, where businesses seek clarity and stability in their legal obligations. A related concern is judicial overreach. Courts have at times used the umbrella of publicpolicy to substitute their own moral or ethical judgments in place of the parties’ agreedupon terms, which arguably infringes on private autonomy and contractual freedom.

 

Moreover, this ambiguity discourages foreign and domestic investors, who may be wary of contracts being invalidated on unpredictable grounds, thereby undermining economic certainty. The broad interpretation in arbitration contexts, especially post-Saw Pipes, has also been criticized for diluting the objective of the Arbitration and Conciliation Act, 1996, which aims to limit court interference and promote party autonomy. International commercial arbitration bodies have expressed concern that the expansive reading of “public policy” could hinder India's image as an arbitration-friendly jurisdiction. These challenges call for a re-evaluation of the doctrine to ensure that the principle of public interest does not become a tool of arbitrariness, but instead works in harmony with the foundational values of contract law.

 

REFORM PROPOSALS AND LEGISLATIVE RECOMMENDATIONS

1. Codification of Public Policy Principles: A structured legislative framework could clarify which types of contracts are opposed to public policy.

 

2. Judicial Guidelines: Supreme Court or Law Commission may issue binding guidelines to ensure uniformity in public policy rulings.

 

3. Restraining Arbitral Interference: Amendments to the Arbitration Act have already sought to minimize the misuse of the public policy exception; continued refinement is needed.

 

4. Training for Judges: Judicial academies should train judges in balancing freedom of contract and public welfare without excessive intervention.

 

CONCLUSION

The Indian legal system’s approach to balancing freedom of contract and public policy reflects an ongoing struggle between individual autonomy and societal values. While contractual freedom remains a core principle, its boundaries continue to evolve in response to shifting public policy, ensuring agreements align with broader societal values and legal standards. Through a series of landmark judgments, Indian courts have ensured that exploitative or socially harmful agreements do not gain legal sanction.

 

However, this discretionary power should be exercised thoughtfully to ensure that commercial stability is not unintentionally disrupted. The unpredictable application of public policy, especially in areas like arbitration and commercial transactions, has the potential to erode investor confidence and hamper the ease of doing business in India. Parties to a contract require clarity and predictability in the enforcement of their agreements. When judicial interpretations vary widely, it creates ambiguity that may discourage parties—particularly in cross-border contextsfrom choosing India as a preferred seat of dispute resolution or business operation.

 

Therefore, the way forward lies in clearer statutory definitions of public policy, more precise guidelines laid down by the Supreme Court, and efforts to harmonize judicial interpretation across jurisdictions. Judicial restraint in interfering with freely negotiated contracts, particularly in the commercial sphere, is vital to preserving the sanctity of contract law. At the same time, courts must remain vigilant against unjust terms that violate constitutional values or exploit weaker parties.

 

Balancing these doctrines is essential not only for justice but also for India’s economic and legal credibility in the global arena. A principled and structured approach that protects both private autonomy and the public interest will strengthen the rule of law and support India’s aspirations as a modern, investor-friendly economy grounded in social justice.

 

REFERENCES

1.      1.https://en.wikipedia.org/wiki/Freedom_of_contract (Last visited at June 14, 2025).

 

2.      2.https://www.linkedin.com/pulse/introduction-indian-contract-act-1872-ykt-talentica-india-pvt-ltd-fzr8f(Last visited at June 14, 2025).

 

3.      3.https://www.npr.org/2018/05/21/605012795/supreme-court-decision-delivers-blow-to-workers-rights(Last visited at June 13, 2025).

4

https://www.bing.com/ck/a?!&&p=6d7b183c2d1ad02c444f397b4a9cdb0d2027d1f27f35ad96affdad3b2c f4e17cJmltdHM9MTc0OTk0NTYwMA&ptn=3&ver=2&hsh=4&fclid=0ad0093b-3409-67ef-0586-1c5b350f667c&u=a1aHR0cHM6Ly93d3cuanVzY29ycHVzLmNvbS9wdWJsaWMtcG9saWN5LXVuZGVyLXNlY3Rpb24tMjMv&ntb=1(Last visited at June 14, 2025).

5. https://indiankanoon.org/research/topic/28059/(Last visited at June 14, 2025).



[1]Gherulal Parakh v. Mahadeodas Maiya, AIR 1959 SC 781

[2]Central Inland Water Transport Corporation v. Brojo Nath Ganguly, (1986) 3 SCC 156

[3]Rattan Chand Hira Chand v. Askar Nawaz Jung, (1991) 3 SCC 67

[4]ONGC Ltd. v. Saw Pipes Ltd. (2003) 5 SCC 705T

[5]State of Gujarat v. Mirzapur Moti Kureshi Kassab Jamat, (2005) 8 SCC 534

[6]State of Gujarat v. Mirzapur Moti Kureshi Kassab Jamat, (2005) 8 SCC 534

[7]Printing and Numerical Registering Co. v. Sampson, (1875) LR 19 Eq 462

[8]Lochner v. New York, 198 U.S. 45 (1905)

[9]West Coast Hotel Co. v. Parrish, 300 U.S. 379 (1937).

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#FreedomOfContract #PublicPolicy #IndianContractLaw #LegalDoctrine #ContractVsPolicy #LawStudentsIndia #IndianLawExplained #PublicInterest #ContractualLimits #LegalAwareness

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