2006 (11) TMI 636 - HC - Indian Laws

Agreement Void: Illegal Gratification Nullifies Contract; Cheque Not Enforceable Under Negotiable Instruments Act.

Virender Singh Versus Laxmi Narain and Ors.

The court determined the agreement between the petitioner and the complainant to be void under Section 23 of the Indian Contract Act, 1872, due to its ... Section 138 of the Negotiable Instruments Act, 1881(Act) - Dishonour of cheque - insufficiency of funds - discharge of legally enforceable debt or a security cheque - Section 23 and 65 of the Indian Contract Act, 1872 - illegal gratification - void agreement - HELD THAT:- A review of the legal position with regard to the scope and ambit of the said Section 65 indicates that it would not apply to cases falling u/s 23. In other words, agreements which are void ab initio and their illegality is known to the parties at the time of execution would not fall within the purview of Section 65. An agreement of the kind mentioned in illustration (f) to Section 23 and the one at hand being void ab initio and to the knowledge of the parties would also not benefit from the equitable principle of restitution embedded in Section 65. So, neither the sum of 1,000 rupees mentioned in the said illustration (f) nor the sum of ₹ 80,000/- paid in the present case is recoverable in law. If the facts of the present case are examined, it would be immediately clear that it does not fall in any of these three classes of cases. The first class of cases deals with situations or agreements where the object is unlawful. In the present case - securing a job in the Haryana Police for the nephew - is not an unlawful object. What is unlawful is the consideration paid for it. The consideration having already been paid, the illegality stood completed on the part of the respondent No.1. And, since the respondent No.1 would have to rely upon this illegality to make out his claim or enforce the same, this case does not also fall within the third class of cases mentioned above. This leaves us with the second class of cases where the parties are not in pari delicto. In the present case neither party is a victim of exploitation. Both had voluntarily and by their free will joined hands to flout the law. Therefore, in terms of the Supreme Court decisions in Sita Ram v. Radha Bai [1967 (10) TMI 70 - SUPREME COURT], themselves, the parties being in pari delicto, the doctrine would apply and the sum of ₹ 80,000/- could not be recovered in a court of law. Meaning thereby that there did not exist any legally enforceable debt or liability for the discharge of which it could be said that the cheque in question was issued. Consequently, Section 138 of the said Act would not be attracted. This legal position was not appreciated by the courts below and it is for this reason that they fell into error. That being the case, the conviction of the petitioner is set aside. It is, however, made clear by the learned Counsel for the petitioner that the sum of ₹ 1 lac, which had been deposited pursuant to the orders by the court below, has already been withdrawn by the respondent No.1 and that he would not be pressing for its return. The learned Counsel for the petitioner also submits that to maintain his bona fides, he would be paying a further sum of ₹ 20,000/- within two months to the complainant/respondent No.1. He submits that the said sum will be deposited in the trial court, which the complainant/respondent No.1 may withdraw immediately thereafter. With these observations, the revision petition is allowed. The petitioner is acquitted. However, the petitioner has already paid a sum of ₹ 1 lac to the complainant/respondent No.1 and has undertaken to pay a further sum of ₹ 20,000/- to the complainant/respondent No.1 within two months by depositing the same in the trial court, which the complainant/respondent No.1 may withdraw thereafter. Issues Involved:1. Legality of the agreement under Section 23 of the Indian Contract Act, 1872.2. Applicability of Section 138 of the Negotiable Instruments Act, 1881.3. Enforceability of the debt or liability.4. Doctrine of pari delicto and its exceptions.5. Applicability of Section 65 of the Indian Contract Act, 1872.Issue-wise Detailed Analysis:1. Legality of the Agreement under Section 23 of the Indian Contract Act, 1872:The court examined whether the agreement between the petitioner and the complainant, which involved securing a job in the Haryana Police for the complainant's nephew in exchange for Rs. 80,000/-, was legally enforceable. Section 23 of the Indian Contract Act, 1872, states that an agreement is void if its object or consideration is unlawful. The court referred to illustration (f) of Section 23, which clearly states that an agreement to obtain employment in public service in exchange for money is void. Thus, the agreement in question was void ab initio as it involved illegal gratification.2. Applicability of Section 138 of the Negotiable Instruments Act, 1881:Section 138 of the Negotiable Instruments Act, 1881, pertains to the dishonor of cheques for insufficiency of funds or if it exceeds the amount arranged to be paid. The court emphasized that for Section 138 to apply, the cheque must be issued for the discharge of a legally enforceable debt or liability. Since the agreement was void, the cheque issued in pursuance of such an agreement could not be considered for the discharge of a legally enforceable debt or liability.3. Enforceability of the Debt or Liability:The court highlighted that the explanation to Section 138 specifies that 'debt or other liability' means a legally enforceable debt or liability. Given that the agreement was void from the beginning, no legally enforceable debt or liability existed. Consequently, the cheque issued could not be regarded as being in discharge of any debt or liability under Section 138.4. Doctrine of Pari Delicto and Its Exceptions:The court discussed the doctrine of pari delicto, which means that in cases of equal fault, the condition of the party in possession is better. The court referred to the maxim 'in pari delicto potior est conditio possidentis' and noted that the courts will not assist a party to recover money paid in pursuance of an illegal or immoral contract. The court also examined exceptions to this doctrine, as outlined in the Supreme Court's decision in Sita Ram v. Radha Bai, which include:- Where the illegal purpose has not yet been substantially carried into effect.- Where the plaintiff is not in pari delicto with the defendant.- Where the plaintiff does not have to rely on the illegality to make out his claim.The court found that none of these exceptions applied in the present case as both parties were equally at fault and voluntarily engaged in the illegal agreement.5. Applicability of Section 65 of the Indian Contract Act, 1872:Section 65 of the Indian Contract Act, 1872, deals with the obligation to restore benefits received under an agreement discovered to be void or a contract that becomes void. The court clarified that Section 65 applies to agreements discovered to be void after they were entered into or contracts that become void due to subsequent events. Since the agreement in question was void ab initio and both parties were aware of its illegality, Section 65 did not apply. The court cited the Supreme Court's decision in Kuju Collieries Ltd v. Jharkhand Mines Ltd., which held that Section 65 does not apply to agreements that are void from the outset with the knowledge of the parties.Conclusion:The court concluded that the agreement between the petitioner and the complainant was void and unenforceable. Consequently, the cheque issued could not be considered for the discharge of a legally enforceable debt or liability under Section 138 of the Negotiable Instruments Act, 1881. The conviction of the petitioner was set aside. The court noted that the petitioner had already paid Rs. 1 lakh to the complainant and undertook to pay an additional Rs. 20,000/-, which would be deposited in the trial court for the complainant to withdraw. The revision petition was allowed, and the petitioner was acquitted.