DR.

RAM MANOHAR LOHIYA

NATIONAL LAW UNIVERSITY,
LUCKNOW.

SUBJECT LAW OF CONTRACTS

TOPIC:- ROLE OF CONTRACT IN SOCIALIST STATE: THE

INDIAN CONTEXT

SUBMITTED TO: SUBMITTED BY:

Dr.Visalakshi Vegesna Faizan Khan &

Associate Professor ( Law ) Gauri Nagar

DR. RMLNLU Section A

Sem. II

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 ACKNOWLEDGEMENT

This project venture has been made possible due to the generous co-operation of various
persons. To list them all is not possible, even to pay them in words is beyond the domain of
my lexicon. I would like to express my sincere thanks and deep gratitude to Dr. Visalakshi
Vegesna, without whose thorough and insightful guidance this project work would not have
been a success. I also express my sincere thanks to the library staff of RMLNLU and my
friends for their co-operation in my endeavour.

- Faizan Khan & Gauri Nagar

-Semester II.

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 TABLE OF CONTENTS

Contents
TABLE OF CASES REFFERED.4

MARKET SOCIALISM OR SOCIALISM- INTRODUCTION............................................................................ 5

SOCIAL MARKET AND THE LAW OF CONTRACT ...................................................................................... 5
THE PLACE OF CONTRACT IN THE AMBITION OF A SOCIALIST STATE..................................................... 6
CONTRACT AS A REDISTRIBUTIVE MECHANISM ................................................................................... 10
ANALYSIS ............................................................................................................................................... 11
THE DISTRIBUTIVE FUNCTIONS OF THE LAW OF CONTRACT IN A SOCIALIST STATE LIKE INDIA .......... 12
INDIAN CASES ADOPTING ENGLISH VIEW FOR THE CONSERVATION OF PUBLIC RIGHTS IN A SOCIALIST
STATE .................................................................................................................................................... 14
ROLE OF CONTRACTS IN PROVIDING A SAFE GROUND TO THE SOCIALIST STATE .............................. 15
CONCLUSION......................................................................................................................................... 19

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LIST OF CASES

1) Ratanchand Hirachand v Askar Nawaz Jung, AIR 1976 AP 112.

2) Brown Jenkinson & Co Ltd v. Percy Dalton (London) Ltd [1957] 2 QB 621

3) Nand Kishore v. kunj beharilal, AIR 1933 All 303

4) Lord macnaghten in Janson v Driefontein Consolidated mines, (1902) AC 484, 499

5) Schaffenious v. Goldberg [1916] 1 KB 284

6) Mohini Jain v. state of Karnataka,(1992) 1 SCC 666.

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 MARKET SOCIALISM OR SOCIALISM- INTRODUCTION
Market socialism is a type of economic system involving the public, cooperative, or social
ownership of the means of production in the framework of a market economy. Market
socialism differs from non-market socialism in that the market mechanism is utilized for the
allocation of capital goods and the means of production. Depending on the specific model of
market socialism, profits generated by socially owned firms (i.e. net revenue not reinvested
into expanding the firm) may variously be used to directly remunerate employees, accrue to
society at large as the source of public finance, or be distributed amongst the population in a
social dividend.

Market socialism or a socialist economy is distinguished from the concept of the mixed
economy, because unlike the mixed economy, models of market socialism are complete and
self-regulating systems. Market socialism is also contrasted with social democratic policies
implemented within capitalist market economies: while social democracy aims to achieve
greater economic stability and equality through policy measures such as taxes, subsidies and
social welfare programs; market socialism aims to achieve similar goals through changing
patterns of enterprise ownership and management.

SOCIAL MARKET AND THE LAW OF CONTRACT

The idea of a social market is central to contemporary debates within socialism. The crucial
question is whether the advantages of market economies with respect to the efficient
satisfaction of consumer preferences and the liberating effects of markets can be tailored so
that they fit into the ideals of socialism.1 In turn this question leads to others such as whether
a social market a social market can exist without private ownership of capital yet at the same
time achieve its intended benefits with respect to welfare and liberty. Debates within
socialism are currently exploring both questions of fundamental ideas- what are the ideals of
socialism into which a market economy must fit?- and practical questions about the extent to
which current market arrangements could be altered without sacrificing their desirable
properties with respect to liberty and welfare.

1
See Julian Le Grand and Saul Estrin, eds. Market Socialism Oxford, Clarendon Press (1989); David Miller
Market, State and Community Oxford, Clarendon Press (1989)

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THE PLACE OF CONTRACT IN THE AMBITION OF A SOCIALIST STATE

Social democratic governments have not lived up to their aspirations. The use of the taxation
and social security system to achieve greater equality has had only a limited impact apart
from the very poor, and any more stringent fiscal policies appear to undermine the strength of
the economy itself by provoking reduced investment. At same time the selective use of state
ownership seems to have added to the burden of taxation without always increasing social
equality and has sometimes reduced the quality of services or goods provided. Although this
social democratic model has managed to preserve a high degree of individual liberty and
recognizes a limited form of representative democracy, its compromise with free market and
libertarian ideologies leaves many socialists believing that it is not so much a social contract
between capital and labour as a sell-out.

Market socialism seeks a new mix of the dominant values of liberty and equality, in which
liberty becomes transformed into a fuller notion of autonomy under which society provides
real opportunities for each individual to be but at the same time to achieve through market
mechanisms both the efficient satisfaction of consumer preferences and a greater degree of
equality of wealth.

Socialist state believes that only by dismantling the economization of human relationships
found under capitalism will we be able to construct good life.

Upon further reflection, the law of contract becomes important to the practical elaboration of
the concept of the social market.

1. The law of contract provides general rules by which the state regulates market
transactions. If these markets transactions are to provide the basis for realization of
socialist ideals, then the law of contract will become deeply implicated in constructing
the new social order. In particular, it is doubtful that such measures as introducing a
worker cooperatives will by themselves suffice to achieve the degree of autonomy and
equality advocated by market socialists. In other kinds of market of market transactions,
such as consumer purchases, the law of contract will need to ensure that the market also
facilitates the realization of those ideals.

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2. The law also sets negative conditions, such as the rules against illegal transactions, so
that the courts will not enforce agreements which involve criminal activity. The law of
contract also regulates negotiating behaviour, so that lying and other forms of cheating
will be sanctioned by depriving the cheat of the benefit of the contract and forcing him to
pay compensation for any loss.
3. The law of contract also shapes the reciprocal obligations undertaken by contracting
parties. It will, for example, import into the ordinary consumers purchase of goods
such as food from the supermarket various implied promises on the part of the seller
that the goods are fit for human consumption.
4. The law of contract also provides remedies for breach of legally enforceable
transactions, such as the payment of damages, which are designed to provide
incentives for parties to a contract to keep their bargains on the whole.

The practical significance of the law of contract in commercial and consumer transactions
may sometimes be exaggerated, for no doubt ordinary consumers and even businessmen
rarely understand their full rights and obligations under the law. Nevertheless, it can be said
that this framework of legally enforceable obligations provides a secure and predictable
framework on which a market economy rests. Although many people would keep their
bargains with others for prudential or moral reasons, the law reinforces this behaviour and
deters deviance for the sake of buttressing the market as a fundamental institution of modern
capitalist economies.

A common misconception of the law of contract in a socialist state is that it merely

facilitates market transactions. On this view the law provides the means by which two
persons may agree upon the terms of a legally enforceable deal. The law then enforces the
distributive consequences which the bargain entails. If the relation which has been
established is exploitative in the sense that one person has struck a very bad bargain, by for
example agreeing to work for a low wage or to pay a price for some goods well above the
market price, then the law simply enforces the agreement without regard to the distributive
consequences of the bargain. It is this view of the law of contract which indubitably colours
the socialist orthodoxies which seek to distance socialism from the law of contract and which
makes it attractive to those seeking to establish neutrality of the state with respect to
distributive justice. But this view of the law of contract is wholly misconceived.

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 The law of contract is necessarily committed to particular distributive consequences. Here
two arguments should be observed:

First, how the law of contract in fact determines certain distributive consequences.
Second. by seeking to support the more analytical contention that the law of contract
necessarily determines particular distributive consequences

To understand the full extent to which the law of contract functions as an instrument of
distributive justice, we need to distinguish two dimensions of distributive justice in which it
operates, one which concerns economic wealth and the other which concerns power and
autonomy.

In the first place, we should consider the distribution of wealth in society. The market system
distributes wealth according to the cumulative effect of numerous individual transactions.
The law of contract shapes the distributive consequences for wealth of this host of market
transactions in two principal ways:

Most obviously the law will determine that the price agreed for certain transactions is
unacceptable because of its degree of exploitation. For example, the law may
determine that in a consumer credit transaction the interest charges when added to the
original price render the price extortionate and a court will refuse to enforce the
bargain at the suit of the creditor. Alternatively the law may determine that a price
being paid is too low by reference to some statutory provision. The extent to which
any given legal system reviews the fairness of bargains struck is a matter of degree,
but every legal system has always reserved some residual power to invalidate
unconscionable bargain. The effect of interventions is to shape the distributive
consequences of market economies by preventing transactions which redistribute
wealth to an unacceptable extent.
A second way in which the price of the bargain is indirectly regulated arises from the
laws control over bargaining practices. In many instances an unfair bargain which
shocks the conscience of the courts will result from a relation of oppressive
bargaining power. One party may find himself in the position of a monopoly supplier
of a service and if he tries to take undue advantage of this bargaining position by
imposing extortionate terms, then a court is likely to refuse to enforce the contract. By
drawing a rough and not wholly clear distinction between the 'ordinary interplay of

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 market forces' and 'taking advantage of aberrational circumstances', the law regulates
the distributive consequences of the market by invalidating bargains stuck in the latter
kind of situation.
5. As well as policing the price of the bargain, the law of contract in a socialist state also
considers the power relation established between the parties as a result of their
transactions. One party may seek with the benefit of legal advice to minimize any
obligations owed to the other under the contract and at the same time try to include in the
contract all kinds of unexpected additional obligations to be imposed on the other. For
example, the supplier of goods may seek through a standard form printed contract to
exempt himself from any liability for defects in the goods and any consequential damage
caused by those defective goods. The effect of such a transaction would be that in effect
the buyer of the goods has no guarantee that the goods are worth what he has paid for
them and no come-back against the supplier if the goods are faulty. The seller has reserved
to himself the position of dominant power, so that only if he chooses, perhaps for the sake
of trading reputation, to recompense the buyer will be liable for any defects.

6. The law of contract is needed in the secondary role to regulate the final stage of
distributive pattern of a socialist society even with a planned economy. Most of the terms
of these contracts may be fixed in advance by price and quality controls, but the very need
to make the contract at all must be left to the discretion of the individual consumer.

If, therefore, the law of contract must still be present in an economy based upon
centralized economic planning, it seems to follow that to the extent that modern socialism
moves away from this method of steering the economic system, it is likely to embrace the
law of contract as a mechanism for regulating the economy to an even greater extent. The
crucial question is not so much whether markets constituted by law of contract will find an
important place in a socialist economy but rather what such a contract should look like.

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 CONTRACT AS A REDISTRIBUTIVE MECHANISM

This argument may be afforded by perceiving the law of contract as one among the many
methods for determining the distributive consequences of market transactions. If socialism
is concerned about the distribution of wealth resulting from market transactions, judging
that unbridled markets lead to unacceptable disparities in wealth between citizens, then it
may seek to tackle this undesirable distributive pattern in a number of ways. Obviously
taxation can play a key role here, for taxes may prove an efficient mechanism for
redistributing wealth earned in the market away from the rich and into the pockets of the
poor. But the same effect can be achieved by the law of contract.

A law of contract which seeks to control the distributive consequences of market

transactions, can redistribute wealth quite efficiently in many circumstances. Consider, for
example, legislation which provides for a minimum wage. If this minimum wage is well
publicized, then this control over the terms on which contracts of employment may be
formed functions to redistribute wealth from some employers to their employees. The
same effect of improving the position of the low paid could be achieved by taxation of the
employers and the provision through social security system of a supplement to earnings
based on need. Each system has slightly different distributive consequences, for the
minimum wage takes only from the group of employers who are prepared to pay below it,
whereas the option of taxation hits all employers. Similarly a minimum wage would
provide a flat rate benefit whereas the social security system would probably insist upon
payments being tied to some conception of need. The choice between these two
mechanisms for the redistribution of wealth could be made upon two principles. One
would reflect the desirability of the rival distributional impacts upon employers and
employees for the relief of the low paid. The second must consider the likely
administrative costs of the two regulatory systems. It seems likely that a minimum wage
law would be cheaper for the state to run since it would prove largely self-enforcing.

But this comparison between the relative advantages of taxation and contractual regulation
in terms of efficiency merely presents one aspect of potential grounds for choice between

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 the alternatives. We have noted, for example, that by regulating the terms on which
transactions may be made the law can have a profound influence upon the power relations
established between the parties. The law of unfair dismissal, amongst other things,
contributes to enhance the autonomy of workers against the potentially oppressive effects
of managerial disciplinary power. An important defect of taxation as a redistributive
mechanism consists in its relative indifference to questions concerning the distribution of
power and autonomy compared to regulation of contractual terms.

On the other hand, contractual regulation may suffer from certain defects itself. One
perennial worry concerns the risk that it may prove counterproductive. For example, a
minimum wage law may turn out not to improve the position of the poor but in fact to
exacerbate their hardship by raising levels of unemployment. But the gravity of this risk
must depend always upon the elasticity of supply and demand in particular markets, a
matter for empirical investigation, which cannot be a reason in principle for rejecting
contractual regulation for redistributive principles outright.

In some kind of social market system, therefore, it should be recognized that regulation
through the law of contract could prove an efficient and effective tool for the redistributive
goals to operate alongside the market system. At the very least, the law of contract should
not be ruled out as an option without its merits and disadvantages being considered in
individual cases.

ANALYSIS

As a contribution to further reflection upon the shape which the law of contract must take
in order to contribute to the realization of socialism, my observations merely pick out a
number of interrelated themes without describing in any detail the appearance of a law of
contract suitable for a social market economy. In selecting these points I am both
attempting to challenge various orthodox interpretations of socialism which deny the
relevance and significance of the law of contract to the realization of socialist ideals, and
at the same time to challenge interpretations of the law of contract.

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 Markets constituted by the law of contract are a necessary part of any distributive
system of justice. This proposition challenges an orthodox interpretation of
socialism which suggests that under a socialist economy the public planning of
production and distribution requires administrative measures which render private
contractual arrangements unnecessary.
The law of contract does not presuppose an absolute system of property rights
which must be ruled out by socialist ideals. This second orthodoxy of socialism
contends that the discourses and norms of the law of contract are based upon a
framework of individual property rights which will become otiose.
The law of contract as it constitutes the market order cannot be neutral with respect
to principles and competing conceptions of the good.
The law of contract should perform a central role in achieving the ideals of
socialism because it has greater potential for success than alternative mechanisms.

THE DISTRIBUTIVE FUNCTIONS OF THE LAW OF CONTRACT IN A

SOCIALIST STATE LIKE INDIA
The argument must commence with a description of the law of contract. What is the
function of this branch of the law? How does it achieve its goals? Broadly speaking, the law
of contract provides the legal rules and principles which regulate market transactions. In the
first place, it determines which transactions will be legally enforceable. It sets positive
conditions which have to be satisfied, such as the doctrine or requirements that transactions
be evidenced in writing, so that failure to meet one of these conditions will result in the
bargain being legally unenforceable. The law also sets negative conditions, such as the rules
against illegal transactions, so that the court will not enforce agreements which involve
criminal activity. The law of contract also regulate negotiating behaviour, so that the lying
and other forms of cheating will be sanctioned by depriving the cheat of the benefit of the
contract and forcing him to pay compensation for any loss. The law also shapes the
reciprocal obligations undertaken by contracting parties. It will, for example, import into the
ordinary consumers purchase of goods such as food from the supermarket various implied
promises on the part of the seller that the goods are fit for human consumption. The law of
contract also provides remedies for breach of legally enforceable transactions, such as the
payment of damages, which are designed to provide incentives for parties to a contract to
keep their bargains on the whole.

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 The practical significance of the law of contract in commercial and consumer
transactions may sometimes be exaggerated, for no doubt ordinary consumers and even
businessmen rarely understand their full rights and obligations under the law. Nevertheless,
it can be said that this framework of legally enforceable obligations provides a secure and
predictable framework on which a market economy rests. Although many people would
keep their bargains with others for prudential or moral reasons, the law reinforces this
behaviour and deters deviance for the sake of buttressing the market as a fundamental
institution of modern capitalist economies.

A common misconception of the law of contract is that it merely facilitates market

transactions. On this view the law provides the means by which two persons may agree
upon the terms of a legally enforceable deal. The law then enforces the distributive
consequences which the bargain entails. If the relation which has been established is
exploitative in the sense that one person has struck a very bad bargain, by for example
agreeing to work for a low wage or to pay a price for some goods well above the market
price, then the law simply enforces the agreement without regard to the distributive
consequences of the bargain. It is this view of the law of contract which colours the socialist
orthodoxies which seek to distance socialism form the law of contract and which makes it
attractive to those seeking to establish the neutrality of the state with respect to distributive
justice. But this view of contract is wholly misconceived.

The market system distributes wealth according to the cumulative effects of the numerous
individual transactions. The law of contract shapes the distributive consequences for wealth
of the host of market transactions.

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INDIAN CASES ADOPTING ENGLISH VIEW FOR THE CONSERVATION OF
PUBLIC RIGHTS IN A SOCIALIST STATE:
The circumstances in which a contract is likely to be struck down as one opposed to public
policy are well established in England. So a contract of marriage brokerage, the creation of a
perpetuity, a contract in restraint of trade, a gaming or wagering contract are all unlawful
things on the ground of public policy.

The Indian cases also adopt the same view. In Gherulal V MahadeodasMaiya2 enshrine the
present position of the doctrine of public policy in India. One of the question raised was
whether the contract in dispute were illegal under HINDU LAW and immoral because of the
doctrine of pious obligations of the sons to discharge the fathers debt, It was held that the
tenets of Hindu Law could not be imported to give a novel content to the doctrine of public
policy in respect of contract of gaming and Public policy is an elusive concept; it has been
described as an untrustworthy, unruly horse, etc.

Explaining the scope of the expression public policy,its conservation and the role of the

judges, C.REDDY of the Andhra Pradesh High Court observed3:

The twin touchstone of public policy are advancement of the public good and prevention of
public mischief and these questions have to be decided by the judges not as men of legal
learning but as experienced and enlightened members of the community representing the
highest common factor of public sentiment and intelligence. Indorsing this view, the Supreme
court added that going by prevailing social values, an agreement having tendency to injure
public welfare is opposed to public policy.

Muniammal v. Raja.4 A wife who is entitled to maintenance can give up her right in
consideration of a lump sum payment. But the surrender of the right to claim revision of the
amount in the context of rising prices would be opposed to public policy.

2
AIR 1959 SC 781: (1959) 2 SCA 342,370

3
RatanchandHirachand v Askar Nawaz Jung, AIR 1976 AP 112.

4
AIR 1978 Mad 103.

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ROLE OF CONTRACTS IN PROVIDING A SAFE GROUND TO THE
SOCIALIST STATE

CONTRACTS ILLEGAL AT COMMON LAW ON GROUNDS OF PUBLIC POLICY

Certain types of contracts are forbidden at common law and therefore prima facie illegal. The
first essential to an understanding of this head of the law, which has been clouded by much
confusion of thought, is to discover if possible the principle upon which the stigma of
illegality is based. The belief of judges of earlier period was that they would not tolerate any
contract that in their view was injurious to society. It can be inferred from such beliefs that
the judges were determined to establish and sustain a concept of public policy. This
contention has its own disadvantage as it is imprecise. Modern judges have in fact taken more
realistic view of this part of the law and have concluded that the so called illegal contracts fall
into two separate groups according to the degree of mischief that they involve.5 Some
agreements are so obviously inimical to the interest of the society that they offend almost any
concept of public policy; others violate no basic feelings of morality, but run counter only to
social or economic expedience. The significance of their separation into two classes lies in
different consequences that they involve.

Assuming that contracts vitiated by some improper element must be divided into two classes,
how are the more serious examples of illegality at common law to be distinguished from the
less serious? Which of the contracts that have been frowned upon by the courts are so
patently reprehensible so obviously contrary to public policy that they must be
peremptorily styled illegal? Judicial authority is lacking, but it is submitted that the epithet
illegal may aptly and correctly be applied to following types of contracts:

A contract to commit a crime, a tort or a fraud on a third party.

A contract that is sexually immoral.
A contract to the prejudice of the public safety.
A contract prejudicial to the administration of justice.
A contract that tends to corruption in public life.
A contract to defraud the revenue.

5
Bennet v. Bennet [1952] I KB 249. The actual decision in Bennet v. Bennet was reversed by the maintainance
Agreements Act 1957. (Now the Matrimonial Causes Act 1973, s 34)

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A final observation may be made as to the way in which the courts may determine the content
of public policy. Apart from reliance on previous precedents, this is done by a priori
deduction from broad general principles. It is not the practice in English courts for the parties
to lead sociological or economic evidence as to whether particular practices are harmful and
it is doubtful to what extent such evidence would be regarded as relevant if it were adducted.

A contract to commit a crime, a tort or a fraud on a third party:

An agreement is illegal and void if its object, direct or indirect is the commission of the crime
or a tort. An agreement made with the object of defrauding or deceiving a third party is
illegal.6 An illustration of this is where A agrees to recommend B for a post whether public or
private, in consideration that B, if appointed, will pay part of the emolument or a secret
commission to A.7In this context it is appropriate to remember the ambit of the crime of
conspiracy and that any agreement that which results in a criminal conspiracy will also be an
illegal contract.

A contract that is sexually immoral

Under the precise ambit of this legal head it has been plausibly argued that sexual mores have
changed radically and that public policy should reflect this, but it is not easy to state how far
the changes have gone. It seems that if a landlord rents a prostitute ten times of the normal
rent, knowing that she will use it to receive clients, the contract is surely illegal. On the
contrary, an agreement where it is intended to bring about illicit cohabitation is illegal. This
requires reconsideration. It is extremely common for landlords to let accommodation,
knowing of reasonably suspecting that the occupants are living together but are not married.
The courts have shown no disposition to resolve landlord tenant related disputes like such
cases by invoking public policy. Likewise, it is quite common that such unmarried couples
enter into agreements to pool their incomes and also the acquisition of certain assets. Several
cases like this have been there before the court and it has been assumed with a principle that
such agreements are capable of being binding because of the reason that in such relationships
there are other considerations to support it.

6
Brown Jenkinson & Co Ltd v. Percy Dalton (London) Ltd [1957] 2 QB 621
7
Waldo v. Martin (1825) 4 B & C 319

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 A contract prejudicial to the public safety

Detrimental contracts within the meaning of this statement are those which tend either to
benefit an enemy country or to disturb the good relations of a country with another. Contracts
which are made in time of war must clearly react upon a contract made with an alien enemy
by a person subject to such country since it may result in injury to such country. The
expression alien enemy is not necessarily restricted to its popular meaning. The kings subject
cannot trade with an alien enemy, i.e. a person owing allegiance to a government at war with
the king, without the kings licence.8 It denotes a status that depends not upon the nationality
of the contracting party, but upon whether he is voluntarily resident in or carrying on a
business in the enemys country or in a country within the effective control of the enemy. So
it goes without saying that a contract made during war with an alien enemy is illegal.

If such contract is made during the peace time with a person who later becomes an alien
enemy owing to the outbreak of war and if it involves intercourse with the enemy country nor
is in other respects obnoxious from the standpoint of public policy, then it is immediately
abrogated in so far as it is still executor.9

There is no general rule that all executor contracts with an alien enemy are abrogated. The
executor contract which is abrogated must either involve intercourse, or its continued
existence must be in some other way against public policy .

A contract prejudicial to the administration of justice

it is admitted that any contract or engagement having a tendency to affect the administration
of justice, is illegal and void. There are many examples of this rule, as for instance an
agreement neither to appear at the public examination of a bankrupt nor to oppose his
discharge, an agreement not to plead the Gaming Acts as a defence to an action on a cheque
given for lost bets, and an agreement to withdraw divorce proceedings, or an agreement by a
witness not to give evidence or only to give evidence for one side. Any aagreement which
obstructs the ordinary process of justice is void. An agreement to delay the execution of a
decree,10 and a promise to give money to induce a person to give false evidence, have been
held void.

8
Lord macnaghten in Janson v Driefontein Consolidated mines, (1902) AC 484, 499
9
Schaffenious v. Goldberg [1916] 1 KB 284
10
Nand Kishore v.kunjbeharilal, AIR 1933 All 303

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It is therefore well established that the courts will neither enforce nor recognise any
agreement which has the effect of withdrawing from the ordinary course of justice a
prosecution for a public offence.

A contract liable to corrupt public life

1. It has long been the rule that any contract is illegal which tends to corruption
in administration of the affairs of the nation. An agreement by which it is intended to
induce a public officer to act corruptly is contrary to public policy. An agreement for
example, by which a sum of money was provided to a charity on the condition that
latter would procure a knighthood for the plaintiff, was held void and the money
irrecoverable. Similarly, an agreement to provide money to a Member of Parliament
to influence his judgement is void. Charging of capitation fee for admission to
prestigious institutions is contrary to public policy. The Supreme Court has described
it as unreasonable, unjust and unfair.11
Like if in a situation where A agreed that if by the influence of B he were appointed
Customs Officer of a port, he would appoint such deputies as B should nominate and
would hold the profits of office in trust for B. It was held, after A had secured the post
that no action lay against him for breach of this agreement. On the same principle an
agreement to assign or mortgage future instalments of the salary of a public office is
void, since the law assumes that the object of the salary is to maintain the dignity of
the office and to enable the holder to perform his duties in a proper manner.

11
Mohini Jain v. state of Karnataka,(1992) 1 SCC 666.

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 CONCLUSION

The role and importance of contracts is not limited to a particular aspect of a socialist
state, instead it encompasses many aspects and helps in the smooth functioning of
economy in a socialist state. As the business environment is full of agreements
between business and individuals (which forms the base of socialism), written
contracts provide individuals and businesses with a legal document stating the
expectation of both the parties and how negative situations can be resolved. The law
of contracts provide general rules by which the state regulates the market transactions
and also shapes the reciprocal obligations undertaken by contracting parties. The law
enforces the distributive consequences which the bargain entails. Most importantly
law of contracts determines, the degree of exploitation and how unacceptable some
transactions become. Above all contracts help in eliminating social orthodoxies
revolving in the present market conditions. Without contracts the functioning of
economy in a socialist state especially like that of India would be much harder to
visualise.

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