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