What does it mean for a contract or contractual term to be “contrary to public policy”? By what principle are such contracts void at common law?
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It would be a fundamental contradiction for the courts to force a party to violate the law. Theft is against the law, and a contract that requires a person to engage in theft will not be enforced. Some forms of illegality are so deemed because of statutory enactment, but many forms of illegality especially under English common law arise because the sovereign declared a policy which has been "the law" for a millennium or so. In Holman v Johnson (1775) 1 Cowp 341, the court declared:
The principle of public policy is this; ex dolo malo non oritur actio. No Court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act. If, from the plaintiff’s own stating or otherwise, the cause of action appears to arise ex turpi causâ, or the transgression of a positive law of this country, there the Court says he has no right to be assisted.
The meaning of "against public policy" isn't obscure and arcane, but the determination that something is against public policy is a very unruly horse: once you get astride it you never know where it will carry you.
You will find explicit declarations by legislative bodies declaring that such-and-such is "against public policy". For example, RCW 49.44.085
A provision of an employment contract or agreement is against public policy and is void and unenforceable if it requires an employee to waive the employee's right to publicly pursue a cause of action arising under chapter 49.60 RCW or federal antidiscrimination laws or to publicly file a complaint with the appropriate state or federal agencies, or if it requires an employee to resolve claims of discrimination in a dispute resolution process that is confidential.
See Brandon Kain & Doublas T. Yoshida, "The Doctrine of Public Policy in Canadian Contract Law" (2007):
The concept of public policy is one of the most ancient, esoteric and pervasive creations in the history of the common law. Its origins have been traced by one author to the fifteenth century, although it is probable that the doctrine is as old as the concept of the law itself. ... It has been referred to as 'the one principle rule at the foundation of the whole system of English law,' ... One of the most interesting manifestations of public policy is its status as a doctrine of law that is capable of nullifying the validity of private agreements.
Douez v. Facebook, Inc., 2017 SCC 33, at para. 52:
... freedom of contract is not unfettered. A court has discretion under the strong cause test to deny the enforcement of a contract for reasons of public policy in appropriate circumstances.
Uber Technologies Inc. v. Heller, 2020 SCC 16, at para. 109 (Brown J., concurring; citations removed):
This public policy doctrine has been described by this Court as fundamental to Canadian contract law, and its “role in the enforcement of contracts has never been doubted.” Of course, and as Côté J. cautions, public policy must not be used as a tool to prioritize idiosyncratic judicial views over the interests of contracting parties. But that is not a live concern under our law: courts have cautioned against the recognition of new heads of public policy, and the existing public policy grounds for setting aside specific types of contractual provisions are narrow and well‑established. This Court has relied on public policy sparingly, and most recently to limit the operation of forum selection clauses and exclusion clauses, which raise concerns relating to the administration of justice, and to limit the operation of restrictive covenants. While the considerations relevant to each type of clause vary, public policy furnishes the common and narrowly framed solution. And by focusing on the specific rationale that suggests a certain type of clause is unenforceable, this Court has sought to ensure a disciplined approach by providing concrete guidance and developing specific principles that apply to similar provisions.
