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PUNJAB, PATIALA
CERTIFICATE
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under the guidance and supervision of Ms. Sangeeta Taak and the same has not been
submitted anywhere for any purposes whatsoever.
Ankita Mittal
Debarati Dey
Prakhar Deep
Anshul Gupta
2
Trade Ethics and Illegal Contracts
ACKNOWLEDGEMENT
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Sangeeta Taak for inspiring us and guiding us during the course of this project work. We also
extend our sincere thanks to our parents and friends for the inspiration and guidance given to
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Ankita Mittal
Debarati Dey
Prakhar Deep
Anshul Gupta
3
Trade Ethics and Illegal Contracts
TABLE OF CONTENTS
Contents
TABLE OF CONTENTS...........................................................................................................4
Contents......................................................................................................................................4
TABLE OF CASES....................................................................................................................6
CHAPTER 1...............................................................................................................................7
INTRODUCTION......................................................................................................................7
Contracts with an Illegal Purpose ..........................................................................................8
Contracts Made Illegal by Operation of Law ........................................................................8
CHAPTER 2...............................................................................................................................9
GAMBLING CONTRACT........................................................................................................9
CHAPTER 3.............................................................................................................................11
SECURITIES............................................................................................................................11
CHAPTER 4.............................................................................................................................12
TRADE.....................................................................................................................................12
CHAPTER 5.............................................................................................................................15
SEVERANCE...........................................................................................................................15
CHAPTER 6.............................................................................................................................16
IMMORAL...............................................................................................................................16
CHAPTER 7.............................................................................................................................17
CONTRACTS PROMOTING SEXUAL IMMORALITY......................................................17
CHAPTER 8.............................................................................................................................18
WAGERING AGREEMENT...................................................................................................18
Prize Money in Lottery Tickets............................................................................................18
Speculative Transactions......................................................................................................19
Teji Mandi Transactions.......................................................................................................20
CHAPTER 10...........................................................................................................................22
CONCLUSION.........................................................................................................................22
4
Trade Ethics and Illegal Contracts
BIBLIOGRAPHY.....................................................................................................................23
5
Trade Ethics and Illegal Contracts
TABLE OF CASES
1. Appleton v Campbell
2. Armhouse Le Ltd v Chappell
3. Bai Vijli v Nansa Nagar
4. Brogden v Marriot
5. Buddulal v Shrikisan
6. Carlill v Carbolic Smoke Ball Co.
7. Carney v Herbert
8. Choga Lal v Piyari
9. Choga Lal v Piyari
10. Diggle v Higgs
11. Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd.
12. Gherulal Parakh v Mohadeodas
13. Kong Yee Lone & Co. v Lowjee Nanjee,
14. Lilley v Rankin
15. Napier v National Business Agency
16. Nordenfelt v Maxim Nordenfelt
17. Northwestern Salt Co. Ltd. V Electrolytic Alkali Co. Ltd.
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Trade Ethics and Illegal Contracts
CHAPTER 1
INTRODUCTION
As a general principle it can be said that the courts will not enforce contracts which
are tainted with illegality. There are two basic questions to consider:
The notion of illegality covers a wide spectrum of factors, which have been said at
one time or another to deprive contracts of legal force. The factors have little in common
other than that they are for the most part within the compass of the category of public policy
where the public interest prevails over whatever may be the intentions of the parties. Since
the general public interest is the predominant concern, illegality is an exception to the normal
rules on drafting claims and defences. The court is not obliged to wait for one or the other
party to raise the matter, but may raise the issue of illegality of its own motion. (Northwestern
Salt Co. Ltd. V Electrolytic Alkali Co. Ltd.1
The House of Lords in the important decision in Tinsley v Milligan2 , condemned any
approach to illegality of contracts which suggests that the courts simply have discretion as to
whatever as to whether to grant or refuse relief. However, the Law Commission has more
recently recommended that the courts should have such a discretion to decide whether
illegality should act as a defence to a claim in contract, in restitution or in respect of property
rights ‘Illegal Transactions: Effects of Illegality on Contracts and Trusts’, LCCP No. 154
(1999), discussed in more detail at 12.6.5).
The common law has historically been opposed to agreements that seek to limit an
individual’s freedom to exercise his/her lawful trade and profession. This position is rather
conflicting, however, because the only means by which the law is capable of protecting an
1
[1914] AC 461)
2
[1994] 1 AC 340 at 358
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Trade Ethics and Illegal Contracts
The chapters followed will individually deal with the types of illegal contract in perspective
of trade ethics.
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Trade Ethics and Illegal Contracts
CHAPTER 2
GAMBLING CONTRACT
A gambling contract is a contract under which two persons mutually agree that upon the
determination of some uncertain event, one shall pay to the other, the winner, a sum of money
or other stake (Carlill v Carbolic Smoke Ball Co.)3. A contract will be treated in the same way
if its purpose is gambling even if the parties have dressed the contract in the guise of a sale
(Brogden v Marriot )4. Gambling, includes ‘gaming’ (betting is the outcome of games,
including horseracing) and other wagers, but the two are sometimes treated differently. There
is little good reason of policy why they should be.
At common law such contracts were valid, but a series of statutes have very largely
reversed that rule. Since the unenforceability in this area extends also to securities and loans,
detailed treatment must be left to practitioners’ work.
The effect of this section is threshold. In the first place, recovery on the basis of a gambling
contract is impossible. Secondly, collateral contracts associated with gambling contracts are
also unenforceable. Thus a contract to pay gambling debts in return for not being posted as a
defaulter, although not itself a gambling contract, is unenforceable since any claim would be
brought to recover a sum alleged to have been won on a wager (Will v William Hill Ltd.)5.
Lastly, money deposited with a stakeholder cannot be recovered as winnings, although the
3
[1892] 2 QB 484 at 490
4
(1836) 3 Bing NC 88
5
[1949] AC 530
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Trade Ethics and Illegal Contracts
The Act, however, makes the gaming and wagering contract void and unenforceable.
It does not make them illegal. This means that people are still free to enter into gambling
agreements; they simply cannot enforce them in the courts.
6
[1872] 2 ExD 422
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Trade Ethics and Illegal Contracts
CHAPTER 3
SECURITIES
Sometimes a winner receives a security, such as a cheque, in payment. Such a security has
been unenforceable in the case of gamming winnings since the passing of the Gaming Act
1710. This rule caused hardship in the case of negotiable instruments given as security, since
they might subsequently be given in payment to a third party who would be deprived of their
value for no good reason. Relief was provided by the Gambling Act 1835, which said that
such securities were that a third party receiving the negotiable consideration. The result was
that a third party receiving the negotiable instrument would be able to enforce it if able to
show that consideration had been given for it without notice of the illegality. In the case of
securities given for non-gaming winnings, after the Gaming Act, 1845 a similar rule applies,
but the burden of proof in this case is on the person drawing the instrument to show that no
value has been given (Lilley v Rankin ).7
The Gaming Act 1968 legalised some forms of gaming, and by s. 16 cheques which
are not post dated and which are given in exchange only for the face value of the cheque in
order to be able to take part (e.g., a cheque to purchase chips) are enforceable by the holder of
an appropriate licence under the Act.
7
[1887] 56 LJ QB 248
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Trade Ethics and Illegal Contracts
CHAPTER 4
TRADE
From as early as the seventeenth century, the English courts have held contracts in
restraint of trade to be prima facie void. Lord MacNaghten authoritatively states the current
position in Nordenfelt v Maxim Nordenfelt.8 The basic presumption is that contracts or
provisions within a contract, which are in restraint of trade, are unenforceable. That
presumption can be rebutted, however, if it is shown that the restraint is reasonable, both
between the parties themselves and in relation to the public interest.
Where the object of an agreement is to interfere with the freedom of a person to carry
on any lawful trade or profession the said agreement is called agreement in restrain of trade.
Freedom of contract and freedom of trade are well recognised rules of law. The public policy
requires that every man shall be at liberty, in welfare of the community to carry on his trade,
business or profession to the best of his capacity. Any restraint of trade not only affects the
means of livelihood of an individual% but also affects the industrial growth and enterprise
and thereby weakens the whole economic system of a country. Further it deprives the skill
and services of capable persons.
Currently, there are four types of contracts that fall within restraint of trade doctrine.
First, there are covenants imposed by an employer upon an employee whereby the former
imposes a restriction upon the latter after leaving employment; for example, that the
employee shall not work in a similar capacity for a specified period within a defined
geographical area. Secondly, as we have seen in the Nordenfelt case above, a covenant may
be imposed upon the seller of a business. Clearly, the purchaser of, for example, a corner
shop across the road and entice away all the established custom. Thirdly, there may be
contracts where a group of manufacturers or trade combine to restrict output or fix prices of
certain commodities. Such agreements fall within the common law doctrine of restraint but it
should be noted that they are also regulated by statute; the provisions are currently contained
in the Competition Act, 1998. Finally there are exclusive dealing contracts such as “solus”
agreements in the petrol trade where a garage proprietor agrees to sell only the products of a
particular oil company. It must be stressed again that all these agreements are prima facie
void and their validity depends upon it being established that they are reasonable.
8
Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd; sub nom. Maxim Nordenfelt Guns & Ammunition
Co. v Nordenfelt [1894] A.C. 535, HL
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Trade Ethics and Illegal Contracts
Solus Agreements: Such agreements are common in the petrol industry whereby the operator
of a garage agrees to buy their petroleum products from only one oil company. In Petrofina
(Great Britian) Ltd v Martin9 the Court of Appeal confirmed that the restraint of trade
doctrine applied to solus agreements. The leading case is the decision of the House of Lords
in Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd.10
The facts of the case were that the respondents owned two garages, Mustow Green
and Corner, and entered into solus agreement with the respondents, a major oil company. In
relation to Mustow Green the agreement was to last for almost four and a half years and it
provided that the respondents should buy only the respondents’ petrol which was supplied at
a small discount. With regard to Corner, the appellants loaned the respondents sum of £ 7,000
who then mortgaged the garage premises to the appellants; repayment was to be over a period
of 21 years. The respondents began to sell petrol supplied by another manufacturer and the
appellants sought to enforce the two agreements. The House of Lords confirmed that the
agreements in question were within the doctrine of restraint of trade. In relation to the
Mustow Green Garage, the period of under five years was reasonable as being no longer than
necessary to protect the legitimate interest of the appellant, which was identified as the
maintenance of a stable system of distribution. It was not contrary to the public interest. With
regard to Corner garage the tie of 21 years went beyond what was reasonable – developments
over such a period were not necessary foreseeable and in the absence of evidence justifying
such a duration, the tie was struck down.
(a) an operator of a garage who is already in possession of land before they tie themselves
to an oil company; and
(b) a party who is out of possession and let into it by the company, for example, under a
lease.
The transaction in (a) is within the restraint of trade doctrine; (b), however, is not, as the
party going into possession surrenders no freedom they had previously enjoyed.
EXCEPTIONS:
9
[1966] Ch. 146
10
[1968] A.C. 269
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Trade Ethics and Illegal Contracts
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Trade Ethics and Illegal Contracts
CHAPTER 5
SEVERANCE
In the most cases, the illegality taints part of the agreement. In such situations the courts
have jurisdiction to sever the illegal part so long as the remainder of the agreement is left
substantially intact. If the entire contract is tainted by the illegality, severance will not be
possible. In Napier v National Business Agency11, the plaintiff was employed to act as the
defendant’s secretary and accountant at a salary of £13 a week together with £6 a week for
expenses. Both the parties knew that the plaintiff’s expenses would never reach £6 a week,
but this provision was included in order to defraud the Inland Revenue. Following his
summary dismissal, the paintiff’s expenses would never reach £6 a week, but this provision
was included in tiff brought a claim for payment in lieu of notice. The Court of Appeal denied
the claim on the basis that the whole agreement was tainted by illegality.
By contrast, in Carney v Herbert12, severance was permitted. The case concerned a
contract for the sale of shares by installments. The sellers asked for security for the payment
of these installments but the security given was illegal under s 67 of the Companies Act 1961.
The Privy Council held that the illegal security could be severed from the contract for the
purchase of the shares. The defendant therefore remained liable to pay the purchase price of
the shares.
11
[1951] 2 All E.R. 264
12
[1985] A.C. 301
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Trade Ethics and Illegal Contracts
CHAPTER 6
IMMORAL
If the consideration or object of an agreement is regarded by the Court to be immoral or
opposed to public policy, the agreement is unlawful and the same has also been declared void
by section 23.
A landlord letting his house, knowing that the same was to be used for the purpose of
running a brothel, cannot recover the rent of the same. 13 Advancing loan to a person for going
to brothels for prostitution, is unlawful, and the loan thus given cannot be recovered.
Similarly, advancing loan to a prostitute to enable her to carry on her trade, or lending her
ornaments to attract male customers, is unlawful and the money or ornaments so lent cannot
be recovered.
In Bai Vijli v Nansa Nagar14, the plaintiff advanced loan to the defendant, a married
woman, to enable her to obtain divorce against her husband and then marry the plaintiff. The
object of the agreement was held to be immoral and the plaintiff was not entitled to recover
the loan so advanced.
Contract opposed to public policy void and same could not be enforced in the Court of
law
The right to claim maintenance by the wife, children and the old parents, who are not capable
to maintain themselves, has been provided under section 125 of the Code of Criminal
Procedure, 1973 as a public policy by the state. The definition of “wife” has also been given
extended meaning by the statute in order to provide security in life to a wife whose marriage
has been dissolved by a decree of divorce and who being a destitute is unable to maintain
herself. This is a matter of public policy and not of an individual. In such circumstances, the
statutory right which has been conferred on a person under a public policy cannot be waived
by the said person by mutual agreement. It is also well settled that any contract which is
opposed to public policy is void under Section 23 of the Indian Contract Act, 1872, and the
same cannot be enforced in a Court of Law. If the object or consideration of an agreement
would defeat the provisions of any law, and if it is against the public policy, the agreement
will be treated as unlawful and void.
13
Choga Lal v Piyari, (1909) 31 All. 58
14
(1885) 10 Bom. 152.
16
Trade Ethics and Illegal Contracts
CHAPTER 7
15
(1865-66) L.R. 1 Ex. 213, Ex Ct
16
id
17
(1826) 2 C & P 347; 172 ER 157
18
1996, CA (Civ Div) 17
Trade Ethics and Illegal Contracts
CHAPTER 8
WAGERING AGREEMENT
The Contract Act does not define a wagering agreement. The nature of such an agreement has
been explained by Hawkins J. in Carlill v Carbolic Ball Co.19 in the following words:
“A wagering contract is one by which two persons, professing to hold opposite views
touching the issue of a future uncertain event, mutually agree that, dependent upon the
determination of that event, one shall win from the other, and that other shall pay or
hand over to him, a sum of money or other stake; neither of the contracting parties
having any other interest in that contract than the sum or stake he will so win or lose,
there being no other real consideration for the making of such contract by either of the
parties. It is essential to a wagering contract that each party may under it either win or
lose, whether he will win or lose being dependent on the issue is known. If either of
the parties may win but cannot lose, or may lose but cannot win, it is not a wagering
contract.”
19
[1893] 1 Q.B. 256, CA
20
(1977) 2 M.P.W.N. 118
21
A.I.R. 2000 M.P. 109
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Trade Ethics and Illegal Contracts
Speculative Transactions
One of the forms of wagering contracts is an agreement to pay the difference only,
rather than actually making or taking the delivery of the goods. Although in a contract, the
parties may agree about sale of goods on the stated price at a future date, but their real
intention may not be the supply of the goods but only the payment of difference in the price
by one party to the other, depending on the rise or fall of market. Such an agreement is
wagering.
In Kong Yee Lone & Co. v Lowjee Nanjee,22 the owner of a rice mill, with the capital a
little over one lac of rupees, agreed to sell 1,99,000 bags of rice costing above 5 crores of
rupees, i.e., worth over 500 times the capital. The obvious inference in this case was that
neither party intended the performance of the contract. The agreement was held to be by way
of wager and thus void.
A contract which provides for repayment of differences only without intention on the
part of either of the parties to give or take delivery of the goods is admittedly a wager within
the meaning of section 30 of the Contract Act.23 Thus, if there is a contract of sale and
purchase of an article at place, where it has never been produced or traded, and according to
the course of dealing, the settlement in such cases is made by paying differences only, it is a
wagering agreement.
When the parties intend the performance of a future contract and such a performance is
not otherwise impossible, it would be a valid business transaction rather than a wagering
contract. Thus, if in a contract for sale of shares, an actual delivery is intended, it cannot be
considered to be a wagering contract. 24 “In all forward contracts, there is an element of
speculation. Such a contract is not a wagering contract unless both the parties intend not to
take delivery in any event, and, whatever happens, only to adjust the difference.”25
So long as the parties are not absolved in any event from delivering the commodity, and
the delivery has to be made when demand, it is not a wagering agreement.
22
(1903) 29 I.A. 239
23
Gherulal Parakh v Mohadeodas, AIR 1959 S.C. 781, per Subba Rao J.
24
Buddulal v Shrikisan, A.I.R. 1961 M.P. 57
25
id
19
Trade Ethics and Illegal Contracts
20
Trade Ethics and Illegal Contracts
CHAPTER 9
REFORMS SUGGESTED
21
Trade Ethics and Illegal Contracts
CHAPTER 10
CONCLUSION
22
Trade Ethics and Illegal Contracts
BIBLIOGRAPHY
23