# FIRM OF PRATAPCHAND NOPAJl v. FIRM OF KOTRIKE VENKATTA SETTY & SONS ETC

- **Citation:** [1975] 3 S.C.R. 1
- **Court:** Supreme Court of India
- **Decided:** 1974-12-12
- **Case number:** Civil Appeals Nos. 2382 to 2384 of 1968
- **Bench:** M. H. Beg, V. R. Krishna !Yer, P. K. Goswami
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/firm-of-pratapchand-nopajl-v-firm-of-kotrike-venkatta-setty-sons-etc-6709
- **Pages:** 20

## Headnote

Indian Co111ract Act (9 of 1872) Section 23, 222 and 224-Scope of-Collateral aweement, whm illegal.
The appellant firm sued for amounts as due to indemnify it under s. 222
of the Contract Act, on the strength of payments said to have been made by
the firm to third parties on behalf of the respondents who were alleged to
have directed the appellant to enter into 'Badia' transactions for them.
These
transactions are contracts for speculation in rise and fall of price of groundnut
and oilseeds purchased only notionally without any intention to actually deliver
them to the purchasers. In such a transaction, the purchaser is not at all expected
to make a demand for actual delivery of goods ostensibly sold.
Confirming the judgment of the High Court, held that,
having regard
to
the objects of the prohibitio·n imposed by the Central Government on forward
contracts on groundnut seeds and oilseeds in the interest of general public, so
that supply at reasonable rates of those essential commodities is not jeopardised; the absolute terms of the prohil)ition; the penalties imposed for its
infringement; and the careful manner in which only those contracts which are
for actual delivery and supply to bona fide purchasers are excluded from the
prohibition; the contracts were tainted with unlawfulness of their object and
are forbidden by law, and hence are strnck by the provisions of s. 23 of the
Contract Act.
[19B-D; 20 D-E}
( l) If an agreement iE merely collateral to another or constitutes an aid
facilitating the carrying out of the object of the other agreement which, though
void, is not in itself prohibited within meaning of s. 23, it may be enforced as
a collateral agreement.
If, -Un the other hand, it is part of a mechanism
meant to defeat what the law has actually prohibited, the courts will not
countenance a claim based upon the agreement, because, it will be tainted with
an illegality of the object sought to be achieved which is hit by the section.
The object of an agreement cannot be said to be forbidden or unlawful merely
because the agreement results in what is known as a 'void contract'. A void
agreement when coupled with other facts, may become part of transaction
which creates legal rights, but this is no so. if the object is prohibited or 'ma/
in Jc'.
[12D-G]
(2) The question whether the parties through whom the appellant. actually
alleged carrying out the contracts set up between himself and defendants, could
-themselves be regarded as principals .or agents of the appellants, will be immaterial if the objects of the contracts are found to be tained with the kind of
illegality which is struck bv s. 23 of the Contract Act.
Again, the mere fact
that the contrad& .were entered into at Kurnool in the State of Andhta Prndesh
would also not, make any difference in principle if the object of the
contrJcts
which were to ·be carried out at Bombay weu; of such a kind as to be hit by
the section. fl 3A-Cl
· (3) The contracts between the appellant and the respondents are not wagering contracts, though each party knew that their oblect was to indulge in
speculation. · [l OC-D]
Bhagwand9s Parasram v. Burjori Ruttomii Boma1tji 45 I.A. 29,
33,
referred to.
'
'>':" ·"·
( 4) But. the forward contracts violated the provisions of two Orders ismed under s. 2(2) of the Bombay Forward Contrncts Control Act. 1947.
·
[!6A-Bl
2L379Sup.CT (75
2
SUPREME COURT REPORTS
(1975] 3 s.c.R.
(5) Moreover, s. 17 of the Essential Supplies (Temporary Powers) Act,
1946
kept alive the provisions of the Oil-seeds (Forward Contracts Prohibition i Order, 1943.
The Central Act is enacted for the control of production,
supply and distribution of essential commoditie$ and covers food stuffs.
Under
s. 2(1:) of the Act food stuffs include edible oilseeds and oils, and s. 7(2)
makes the contravention of anv Order under s. 3, relating to food stuffs a
crime and punishable with imprisonment.
[16E; 17A-DJ
A
(6) The Central Government has issued a notification under s. 5 of the
Oil

## Text

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FIRM OF PRATAPCHAND NOPAJl
v.
FIRM OF KOTRIKE VENKATTA SETTY & SONS ETC.
December 12, 1974
[M. H. BEG, V. R. KRISHNA !YER AND P. K. GOSWAMI, JJ.]
Indian Co111ract Act (9 of 1872) Section 23, 222 and 224-Scope of-Collateral aweement, whm illegal.
The appellant firm sued for amounts as due to indemnify it under s. 222
of the Contract Act, on the strength of payments said to have been made by
the firm to third parties on behalf of the respondents who were alleged to
have directed the appellant to enter into 'Badia' transactions for them.
These
transactions are contracts for speculation in rise and fall of price of groundnut
and oilseeds purchased only notionally without any intention to actually deliver
them to the purchasers. In such a transaction, the purchaser is not at all expected
to make a demand for actual delivery of goods ostensibly sold.
Confirming the judgment of the High Court, held that,
having regard
to
the objects of the prohibitio·n imposed by the Central Government on forward
contracts on groundnut seeds and oilseeds in the interest of general public, so
that supply at reasonable rates of those essential commodities is not jeopardised; the absolute terms of the prohil)ition; the penalties imposed for its
infringement; and the careful manner in which only those contracts which are
for actual delivery and supply to bona fide purchasers are excluded from the
prohibition; the contracts were tainted with unlawfulness of their object and
are forbidden by law, and hence are strnck by the provisions of s. 23 of the
Contract Act.
[19B-D; 20 D-E}
( l) If an agreement iE merely collateral to another or constitutes an aid
facilitating the carrying out of the object of the other agreement which, though
void, is not in itself prohibited within meaning of s. 23, it may be enforced as
a collateral agreement.
If, -Un the other hand, it is part of a mechanism
meant to defeat what the law has actually prohibited, the courts will not
countenance a claim based upon the agreement, because, it will be tainted with
an illegality of the object sought to be achieved which is hit by the section.
The object of an agreement cannot be said to be forbidden or unlawful merely
because the agreement results in what is known as a 'void contract'. A void
agreement when coupled with other facts, may become part of transaction
which creates legal rights, but this is no so. if the object is prohibited or 'ma/
in Jc'.
[12D-G]
(2) The question whether the parties through whom the appellant. actually
alleged carrying out the contracts set up between himself and defendants, could
-themselves be regarded as principals .or agents of the appellants, will be immaterial if the objects of the contracts are found to be tained with the kind of
illegality which is struck bv s. 23 of the Contract Act.
Again, the mere fact
that the contrad& .were entered into at Kurnool in the State of Andhta Prndesh
would also not, make any difference in principle if the object of the
contrJcts
which were to ·be carried out at Bombay weu; of such a kind as to be hit by
the section. fl 3A-Cl
· (3) The contracts between the appellant and the respondents are not wagering contracts, though each party knew that their oblect was to indulge in
speculation. · [l OC-D]
Bhagwand9s Parasram v. Burjori Ruttomii Boma1tji 45 I.A. 29,
33,
referred to.
'
'>':" ·"·
( 4) But. the forward contracts violated the provisions of two Orders ismed under s. 2(2) of the Bombay Forward Contrncts Control Act. 1947.
·
[!6A-Bl
2L379Sup.CT (75
2
SUPREME COURT REPORTS
(1975] 3 s.c.R.
(5) Moreover, s. 17 of the Essential Supplies (Temporary Powers) Act,
1946
kept alive the provisions of the Oil-seeds (Forward Contracts Prohibition i Order, 1943.
The Central Act is enacted for the control of production,
supply and distribution of essential commoditie$ and covers food stuffs.
Under
s. 2(1:) of the Act food stuffs include edible oilseeds and oils, and s. 7(2)
makes the contravention of anv Order under s. 3, relating to food stuffs a
crime and punishable with imprisonment.
[16E; 17A-DJ
A
(6) The Central Government has issued a notification under s. 5 of the
Oil-seeds (Forward Contracts Prohibition) Order but the two conditions imposed for excluding contracts relating the groundnuts are not satisfied in the
present case.
They are (al the contracts must be in respect of specifi1:d qualities or types, and (b) must be for specific deliveries and are not tralllsferable
to 3rd parties.
The word 'and' cannot be read as 'or' and both conditions must
be satisfied. The contracts, in the instant case, set up by the appellant. were
not and could not have been for actual delivery because they were only 'Badla'
transactions. If the contracts were not for genuine or actual delivery but only
for speculation on differences in prices the condition for the exclusion of the
contracts from the purview of the control Order, which contemplates actually
intended delivery, would not be satisfied. The contracts were, therefore, prohibited under the provisions of the Essential Supplies Act,
1946 mad with
Central Order of 1943, and hence the contracts were not merely void but
illegal in the sense that their objects are forbidden.
[18F-19B]
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(7) A claim for indemnification under s. 222, Contract .Act. is only maintainable if the acts, which the agent is employed to do, are lawful.
Agreements to commit criminal acts are expressly and specifically excluded by s.
224 from the scope of any right to an indemnity. The provisions of the Order
of 1943 are applicable thr,oughout India are not confined to forward •::Ontracts
entered into or meant to be carried out in any particular part of India and
their violation is a crime. The objects of th'e contracts set up by the appelJ;.ats cannot be carried out by m~rely entering into them outside Bombay or
engaging third parties as sub-agents or in any other capaCity to execute
them.
[20C-D]
(8) The High Court rightly relied on those decisions holding agreements
collateral to prohibited contracts to be also unenforceable, because, 1the taint
attaches to them which make_s them also contrary to public policy.
Such
agreements fall within the class of cases mentioned in Gherulal Parakll v. Mttlzadeodas Maiya & Ors. [1959) (2) Suppl. S.C.R. 406, where harmful n:sults of
permitting the contracts, in terms of. injury to the public at laree. are: evident
and indisputable.
[190-H]
-
ARGUMENTS:
For the Appellants : (1) The only contested point which survives in the
appeal is whether the plaintiffs acted lawfully when they entered into contracts
with the firms of P.W. 2 and P.W. 3 on behalf of the defendants.
(2) In considering the above question it is important to notice that the
firms of P.W. 2 and P.W. 3 were tht~mselves the commission agent1; of the
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plaintiffs in these transactions.
The findings of both the lower courts are (a)
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that the plaintiffs were the commission agents of the defendants for the said
transaction; (b) that the plaintiffs acting as principals (i.e. without disclosing
their position as agents of the defendants) employed the firms of P.W. 2 and
P.W. 3 as commission agents to carry out the tra~actions and ( c) the firms of
P.W. 2 and J>.W. 3 acting as principals entered into the transactions
with
the
firms of P.W. I.
(3) These being the relevant fai;ts, the question is whether the 1:ontrncts
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'between the plaintiffs on the one hand and firms of P.W. 2 and P.W. 3 on the
·o.iier were unlawful by virtue of (a) Bombay Act III of 1865, (b) the Bombay
Forward Contracts Control Act. beinir Act LXIV of 1947 and (c) the Oil
·Seeds (Forward Contract Prohibition) Order, 1943.
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FIRM PRATAPCHAND V. FIRM VENKATA SETTY
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(4) The contracts between the plaintiffs and firms of P.W. 2 and P.W. 3
were not unlawful under the 1865 Bombay Act for the following reasons :-
(a) The plaintiffs did not enter into any agreements "by way of wager"
(in the words of section _30 of the Contract Act) with the firms of P.W. 2
and P.W. 3 as they had nothing to gain or to lose by the .rise or fall of the
forward market rates of oil seeds.
A wagering contract requires that the
gain of one party to the; contract should be the loss of the other party theret,o
(vide 45 I-A, 29; 39 Born. L.R. 1083; 1879 Q.B.D. 685; Pollocj; & 1\Iulla s
Indian Contract and Specific Relief .Acts,
page 313; Halsbury's Laws of
England, 4th Edition Vol. 1 para 809). By the same test, the principal contracts between the firms of P.W. 2-3 and the firm of P.W. 1 were also not
wagering contracts. The fact is that the defendants indulged in speculative
transactions through the agencv of the plaintiffs, but it is well settled that
speculative transactions du not by themselves result in wagering agreements.
The courts below erroneously held, merely from the fact that no· deliveries
were given or taken, that the transactions were ·by way of wager.
The loWl!r
courts failed to realise that when one party to the transactions (defendants in
this case) is interested in speculating on market fluctuations, he cancels one
contract by a cross contract, with the result that no delivery takes place,
although both the contracts are for delivery.
Since there were no wagers in
the present case, the Bombay 1865 Act has no application.
(b) The 1865 Bombay Act does not contain any punitive pro\Js1on. It
merely declares certain agreements to be void. Even supposing the agreements
between the plaintiffs and the firms of P.W. 2-3 were for wager (which they
clearly were not), they would merelv be void and not unlawful by Yirtue of
the Bombay Act.
Even in that casi;. the plaintiffs as agents are entitled to
recover their dues from the defendants, as held by this Hon'ble Court in
Gherum<IA Parakli's case [1959] Supp. 2 S.C.R . .406.
Obviously the Bombay
I 865 A.I was not operative in the region where the contracts between
th~
plaintiffs and defendants took place.
(5) The ·contracts between tl\e plaintiffs and the firms of P.W. 2-3 were
not unlawful under the Bombay For].Vard Contracts Control Act No. LXIV
of 1947 for the following reasons :-
(a) Even the principal contracts between the firms of P.W. 2-3 and the
firm of P.W. l were not unlawful under s. 8 of the Act. The contracts did
not violate clause l( a) of s. 8 of the said Act, because the defendants falied
to Jl()int out any bye-law of the Bombay Oil Seeds Exchange Ltd. which rendered agieements ma4ii in contravention thereof unlawful ( vide 59 Born. L.R.
4). The agreement also did not contravene clause 1 (b) of s. 8 since one of
contracting parties, namely the firm of P.W. 1 was a. member of the Bombay
Oil Seeds Exchange Ltd. (vide page 32 line 21 and tiage 55 line 26.)
(b) In any case, the transactions between the plaintiffs on the one hand.
and the firms of P.W. 2~3 on the other, were as between principal and agent.
and since these transactions did not 1:ome under the definition of forward
contracts, they were not
aff~cted by the provisions of the 1947 Bombay
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(6) The transactions between the plaintiffs and the firms of P.W. 2-3 were
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not unlawful under the Oil Seeds (Forward Contract Prohibition) Order. 1943
read with the Notification issued thereunder (page 285 of the paper book) for
the following reasons :-
(a) The contracts between the firms of P.W. 2-3 and the firm of P.W. l
were "forward contracts" as defined bv clause 2(ii) of the 1943 Order, but
not the agency contracts between the pjaintiffs on the one hand and the firms
of P.W. 2-3 on the other. These latter contracts \Vere therefore not affected
by the 1943 order and were not unlawful.
As deposed to bv the plaintiffs'
partner P.W. 4 (Paper book page
83 line
11), the plaintiffs had never
authorised the firms of P.W. 2-3 to enter with anv illegal contracts. The Bad!~
transactions, which the plaintiffs had authorised the firms of P.W. 2-3 to
4
SUPREME COURT REPORTS
[1975] 3 S.C.R.
enter into, could have been brought about by P .W. 2-3 without infringing the
conditions. laid down in the Notifications issued under the 1943 Order. The
two conditions in the Notifications were that the contracts should be for specific
delivery and that the deliveries thereunder should not be transl'erable to third
parties. There is nothing in the nature of Badia transactions which requires
that they should not be for specific delivery or that the deliveries thereunder
shuuicl be transferable.
Since it was open to the firms of P.W. 2-3 to carry
out the instructions of the plaintiffs in a lawful manner, the act of the plaintiffs in entering into the contracts with. the firms of P.W. 2-3
was
nor
an
"unlawfol Act" within the meaning of s. 222 of the Contract Act and the
plaintiffs are therefore entitled to be indemnified by the defendants.
( b) The High Court was, with respect, wrong in differing from the trial
court which held that the contracts between the firms of P.W. 2-3 and the
firm of P. W. I were for specific delivery. In the case of Badia trnnsactions,
the mere fact that no deliveries actually take place should Pnt lead to the
inference that the contracts were not for specific
delivery. l!oth
the
cross
contracts in Badia transactions are for specific delivery,
bu~ no delivery takes
place because the later contract cancels the effect of the earlier one. This is
dear from the evidence of P .W. 2 from pages 39
to
43,
were
the
witness
gives details of specific delivery contracts for the purchase of 400 tons of
groundnut of a particular date (vaida), subsequent cross contracts for the
sale of 400 tons of groundnut of the ~;:ime vaida, and contemporaneous contracts for the purchase of 400 tons of groundnut of the next vaida.
Each of
these. c0ntr:icts were for specific delivery. On the other question of transferab1!Jty,
.however, both the courts below,
have held that the
deliv~ries
under these contracts were not made non-transferable. To that extent the
co~tracts between the firms of P.W. 2-3 and P.W. 1 may come under the mischief of the 1943 Order. · It was, however, open to the firms of P.W. 2-3
to carry out the instructions of the plaintiffs in a lawful manner.
(cl Having entered into lawful contracts with the firms of P.W. 2 and 3,
the plaintiffs were justified in paying the losses incurred in these transactions.
It was no part of the duty of the plaintiffs to go to Bombay andl find out
whether there was any lacuna in the contracts between the firms of P.W. 2-3
arid the firm of P.W. 1 so as to enable the plaintiffs' to avoid paying the
dues of the firms of P.W. 2-3 (vide Halsbury's Laws of England, 4th Edn. Vol.
I paras 808: ancl 809; also s. 223 Contract Act.)
(d) S. 224 of the Contract Act has no application to the facis of the
present case, because the plainiffs did not commit any criminal act in entering into contracts with the firms of P.W. 2-3 while carrying out the instmctions of th(~ defendants.
( e) After the issue of the notifications on 31st May, 1943, the provisions
of the 1943 Order were no more prohibitory.
The provisions were only
regulatory.
For th 0 Respondents :
!. Concurrent Findings of 1he Courts Below :
l. l. There are concurrent findings of the High Court and the trial court,
holdine inter alia,
(a) that the sllit contracts between the plaintiffs and the defendants would
defeat the provisions of law or are prohibited by law and Would thus become
unenforceable under s. 23 of the Jndbn Contract Act;
(b) that the suit contracts are in the nature of wagering contracts and are
not capable of enforcement;
(c) hat the plaintiffs are not entitled to indemnification from t:1e defendJnts ;mder s. 222 of the Contract Act.
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FIRM PRATAPCHAND V, FIRM VENKATA SETn
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2. S. 23 of the Contri:oct Act :
2.1. The suit agreements fall within the ambit of s. 23 of the· Contract M
in that" thev are (a) forbidden by law and (b) if permitted · they would
defeat the provisions of law.
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2.2 . .The suit contracts have as their 'object' or 'consideration' (mentioned
in s. 23 of the Contract Act) the doing of something which is forbidden Under
the Central Ordoer of 1943 or under the relevant Bombay Act of 1947.
2.3. No question of extra-terriioriality of the Bombav Acts w~ld arise in
view of the fact that although the Bombay Acts would apply only to Bombay
State, nevertheless, .the Agreements between the parties \!BS with the solo
object of breaking the said law. The terms 'object' 'consideration', 'forbid·
den by law' and 'defeat' the provisions of any law', under s. 23 of the Con·
tract .Act on a true and 12roper construction operate in respect of any law ·
and there is no requirement in the said sc:ction that such a law m~t be en-.
forced· ·at the place where such an agreement to break the said law · was
entered into. It is enough to attract tbe provisions of s. 23 . that the Agreement is entered into with _the _object of defeating a law al14 it is not
an
additional requirement that such law which is sought to be defeated sh11uld be
in force at the spot or the place where the aareemeni is entered i11to. "'If the
contrary interpretation urged by the plaintiffs is accepted, it would lead to a
perpetuation of a device to defeat the proviSions of law. To take an instance.
supposing there is a law of prohibition of intoxicating liquor in fofee in Delhi,
and if !wo people want to enter into an agreement to break that law against
manufacturing and selling such liquor and make the ·agreement enforceable,
all that they need do is to step acrpss the border into Haryana little beyond
Palam Airport, enter into an agreement and cross back to 1'elhi and still
make an agreement enforceable in the Haryana Courts. Such an interpretation would not be in consonance with' the tenor of s. 23 of the Conti:act
Act..
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2.4. Even if the suit agreement between the plaintiffs and defendants were
independent agreements, they would be hit by s. 23.
As a matter of fact,
the said agreement between the plaintiffs and P.Ws. 2, 3 and 4, in Bombay
and only in that sense have been termed .. collateral and such 'collateral' agree·
ments woul_d equally come within the ambit of s. 23.
.
2.5. The illegality of the agreement would also ari5e by being devoid of
any consideration on Jaw since P.W. 4 was under no lawful obligation to pay
the mo~ys to P.W, 2 and 3 in respect of the said agreement nor were P.W.
2 and 3 under a legal .obligation to pay moneys to P.W. J,
3. Forward Contract Prohibited by law_ :
3, l. The suit transancts, as concurrently held by the Courts b~low, are
forward contracts, prohibited bv the Central Order of 1943 and !I.!~. Bombay
Act of 1947.
Both the Courts below have also found that transacts are not
exempted under the notifications of exemption since the transactions 'were admittedly of transfer~ble nature (as admitted by P.W. 1 himse1f).
3.2. In finding the lega1itv of the suit transants and the plea of exemption
in respect of them, what is relevant is whether the transactions generally are
transferable (as admitted by P.W. 1) and not whether each transaction was in
fact transferred or not.
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4. /11dem11ification under s. 222 of Contradt Act:
ff
4.1. The suit agreements are in the nature of an employment of the pla.intiffs by the defendants and of P.W. 2 and 3 by. "'.>.V(. 1 and to do acts which
are criminal according to the concerned laws m view of the fact that such
offences render the concerned person liable to fine or iolprosnment.
By rea-
6
SUPREME COURT REPORTS
[1975} 3 s.c.R.
f
222 of the Contract Act
the defendants are not liable in law to
sons o s.
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th
'd
·mi al acts for
indemnify the plaintiffs against the consequences of
e sai en
n
violating the concerned Jaws.
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4.2. s. 222 of the Contract Act requires that the defendants should indemnify p W 4 only if the said P.W. 4 was bound to make payment for the
illegal ~gi'.eements to P.W.s. 2 and 3.
P.W. 4 was not so bound and therefore
the defendants were not liable to indemnify P.W. 4.
Since the agreeme~t of
agency was null and void, unlawful and ille~al a°:d was furl.her deyo1d . of
consideration, it cannot form a legal and vahd basis for the mdemmfica!lon
claim.
4:3. The agreement of agency in this case cann~t be disass~ciate:d from
the. consideration or the object of the agreement withm the meamng of. s. 23
of the Contra.ct Act in deciding .whether the said agreement of agency 1s null
and void, unlawful and illegal.
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4 4. The agreements for the sale and purchase of oil seeds in Bombay are
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in fact between the defendants (represented by P.W. 4) and P.Ws. 2 and 3.
The transactions between P.Ws. 2 and 3 on the one hand and P.W. 1 on the
other do not militate against the fact of the illegal agreements between P.W.
4 on one side: and P.Ws. 2 and 3 on the ot]ler, acting towards each other as
pri:icipals on either side.
P.W. 4 paid P.Ws. 2 and 3 on the basis that P.Ws.
2 and 3 are the principals with whom he was dealing as a principal himself,
that P.Ws. 2 and 3 and P.W. 4 himself were commission agents does not ~ffect
this fact.
This fact of their having acted as principals is a finding on an
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issue given by the High Court and the trial court.
4.5. Jf P.W. 2 and 3 were not the principal Parties to the illegal: agreements P.W. 4 had no justification at all to pay them in respect of the said
agreements ·and to claim indemnification from the defendants under s. 222.
4.6. There is no implication of extra territorial jurisdiction in either the
Bombay legislature or in the Bombay Courts involved in the plea of the
defendants. The agreements between the defendants (acting through P.W. 4)
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and P.Ws. 2 and 3 (or even P.W. 4) are agreements to which the !Bombay
Law applies and the lawful enforceability of which agreement in ttJe JBombay
State must be established before r.w. 4 can call upon the defendants to
indemnify him for payments made in the Bombay state in respect of the said
agreements.
The payments are even otherwise invalid under the laws
relating
to .sale and purchase of oilseeds in India.
5. Wai;erinR Contracts :
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5.1. The four sets of agreements (a) between P.W. 4 and P.W. 2, (bl
between P.W. 4 and P.W. 3. (c) between P.W. 2 and P.W. I and (d) between
P. W. 3 and P. W. 1 for the purchase and sale of groundnut and castor seed
were contracts as between principal and principaJ and amounted to wagering
contracts prohibited and rendered null and void, unla'Yful and illegal by Born ..
bay Act JIJ of 1865.
5.2. The law in Bombay state relating to wagers and the law in Tndia
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relatin11 to p1:ohibition of sale and purchase of oil seeds cannot be circumvented hv th~ a_ereements. referred to i!J ~aragraphs above be in~ made 'between
agents of prmclpals and. mstead of prmc1pals themselves.
Oui facit per alium
facit per se.
A person might not do by means of another what he 'is prohibited
from doing himself.
5.3. A wagering contract does not cease to be one by the intervention of
commission a1tents or by a principal or his agent entering into such a eontract
with another agent or that al!ent's prineljlal.
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5.4. The decision in [1959) Supp. 2 S.C.R. 406 and [1955]1 S.C.R. 439
do not apply to this case because firstly they do not deal with prohibited
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FIRM PRATAPCHAND V. FIRM VENKATA SETTY (Beg, J,)
. 7.
forward contracts in Bombay or elsewhere and secondly they do not involve
violation of the law of wagering contracts to the State of Bombay under
Bombav Act III of 1865.
·
5.5. j1 is to be further noticed that the suit transactions do not conform
to the requirements o( bye law 123 concerned because there were neither no
contracts notes at all or in a few cases (in which ther.e were contract notes) .
they wer~ not in conformity with the prescribed forms.
5.6. The duty of courts in Kurnool .to prevent the circumve1;tion and violation of Bombay law cannot be less than the duty of British courts to prevent
circumvention and violation of foreign law when the foreign law is no repug-.
nant to British law and when the foreign country is a. friendly co,untry.
6. 'Badia' Tr1111sactions :
C
6.1. 'Badia' automatically involves two or more forward contr.acts.
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CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 2382 to 2384
of 1968.
Appeals by special leave from the judgment & decree dated the 27th
September, 1967 of the Andhra Pradesh High Court in A. No.- 4-6/
1962
M. C. Chagla, V. M. Tarkunde, H. K. Puri and K. K. Mohan, for
the appellant. (In all the appeals)
B. V. Subramanian, A. V. Rangam and A. Subhashini, for respond·
ent Nos. 2 & 3 (In C.A. No. 2382/68). and for respondent nos. 1 & 5.
(In C.A'. No. 2384/68)
.
.
The Judgment of the Court was delivered by
B.Ec., J,-"" The three consolidated appeals before us by grant
of
special leave are directed against a ,common judgment of the High
Court of Andhra Pradesh, by. whtch the plaintiff's appeals in three .
suits, filed on similar facts, wered.ismissed.
They can be ~de~ided by
us on the question whether the contracts set up by the plamtlff-appellant were struck by the provisions of Section 23 of the Contract Act.
The section reads as follows :
"23. The . consideration or object of an agreement is lawful. unless~it is forbidden by law; or ·
· .· . ·
:
is of .such a nature that, if permitted, it would defeat the
provisions of any law; or
is fraudulent; or
involves or implies injury to the person or property of
another; or
·
the Court regards it as immoral, or opposed to public
polieiy.
In each of these .cases, the consideration or object of .an
agreement is said t<;> be ~nla~ul. Every _agre~~~nt of which
the object or cons1derat1on 1s unlawful, 1s v01d .
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SU\'REME COURT REPORTS
[1975] '.i S.C.R.
The appellant, Firm of Pratapchand NopaF, is the plaintiff in all
the three suits but the defendants of each smt, the respondents before us, are different.
The plaintiff claimed Rs .. 78,~~l.15 ~ns. in
original suit No. 106 of 1954, Rs. ~3,97.8.,4 ans .. m ongmal smt No.
107 of 1954 and Rs. 91,697.4 ·ans. m ongmal suit No. 114of 1954,
as amounts due to indemnify him under section 222 of the Contract
Act on the strength of payments said to have been made by the plaintiff to third parties on behalf of the defendants who are alle:ged to
have directed the plaintiff to enter into "badla" transactions for them.
Three othe:r suits, claiming amounts alleged to have been borrowed,
also filed by the same plaintiff, were tried together with these three
suits; but, we are not ooncerned here with the other three suits from
the dismissal 1Jf which no appeal was preferred.
The~ character of the contract set up in each case is brought out
. by paragiaph 3 of the original suit No. 106 of 1954 where the plain.
tiff S(.lid ;
·
"The defendants are big merchants and have been carrying
on trade outside Dhone, even in places like Bombay.
They
wanted to do the business of purchasing and selling groundnut seeds and oil seeds in Bombay market and for this purpose engaged the plaintiffs a~ commission agents to contact
with Bombay Commission Agents, who were entering into
contracts with customers for. purchasing or selling groundn\!t seeds and castor oil seeds, according to the orders of
the dlefendants which the ~laintiffs were communicating to
them.
The Bombay oomm1ssion agents used to give intimation to the plaintiffs of the fact of having executed the orders
(the contracts of sale or purchase) and the terms, the rate
etc., of the contracts.
The plaintiffs were immediately communicating the information to the defendants. The business
was according to the custom prevaili.ng in the Bombay
market, viz. the custom of Badia. The defendants not only
agreed in general to abide by the custom of Badia, but specifically consented to every such Badla. At the requei;t of
the defendants the transactions were settled after undergoing
a few badlas.
Such settlements were beneficial to the .1fofendants as the market was falJing and delay would have meant
greater los~ when the marke:t was falling ,the Bombay agents
were pressmg for cash settlement on pain of declaring them
as ~efaulters which will result in a ~isability to do any further
busmess.
The defendants knew this state of affairs and they
realised that a settlement was the only course beneficial to
them.
So they specifu:ally told the plaintiffs that they must
at any cost preserve their reputation in the Bombay market
and with plaintiffs. The defendants hence agreed to pay the
~moun~ and on their request and on their behalf the plaintiffs pa.id all amounts ~ue to the Bombay Commission Agents
accordmg to the Patties sent by the Bombay Agents in respect of the transactions relating to the defendants. The defen·
dants also agreed to pay to the plaintiffs interest 011 the
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FIRM PRATAPCHAND V. FIRM VENKATA SETTY (Beg, /.)
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amounts so advanced by the plaintiffs for payment to the
Bombay agents.
The Bombay Commission agents
were
sending patties of transactions to the plaintiffs. As already
stated; at the request of the defendants, the plaintiffs paid
all such losses and other charges according to the
patties
sent by Bombay Commission agents on the promise Of the
B
defendants to repay all such amounts to the ·plaintiffs with
interest.
The extracts of the accounts filed with this plaint
show the transactions and the amoiJnts paid by the plaintiffs
at the request of and on behalf of the defendants".
The plaintiff's case was that the authority to engage in Badia
. transactions on forward contracts, which are contracts for the delir
c very of specified goods on future dates, implied what is known as
..
"continuation" or "carrying over" .in the. terminology of the Sto<:k
Exchange.
The meaning of such a trans-action is given, in Halsbury's
Laws of England-3rd Edn. Vol. 36 at p. 547 (para 842) as follows:
"ff a purchaser of securities during a dealii;ig period does
not wish to co:ylete his purchase during the next following
D
settlement peri
he may arrange to resell for the current
account the securities which he has ·agreed to~bd for that
account, and to purchase for the new acoount._
onversely,
a seller of securities during a dealing period who does not
·' l
wish to deliver during the next following settlement period
I
may arrange tio repurchase for the current account the secuI
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rities which he has agreed to sell, and to sell for the new
account. 4Such an arrangement is known as a continuation
or carrying over".
This is explained further and· distinguished from a loan (at page 548--l
para 845) : ;
.
,
\
"Continuation or carrying-over is in form· and in law a
F
sale and repurchase, or a purchase and resale, as the case
may be.
It is a new contract, and not merely getting further
· time for the performance of the old contract.
·
A continuation being a contract of sale and repurchase
and not a loan, the original seller becomes again the absolute
owner of the securities carried over, and is not .'bound to reG
deliver the identical securities but an equal amount of. similar securities. If, therefore, he sells the securities taken in
by him and makes a profit thereon, he may retain it ·to his
own use. In the ~
of a loan, however, if the lender sells
the securitieli deposited, the borrower may charge him with
the price obtained for them if he finds it to his interest to
do ao".
'
.R
Under the Defence pf India Rules, the detiniti9n of Badia
provides that it "includes a contang(> and a backwardation
and any other arranpment whereby the performance of any
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SUPREME COURT REPORTS
[1975], 3 s.c.R.
ob~;ation under a contract to take or give delivery of ·securities: within a stipulated period is postponed t? some. future
date in consideration of thi~ payment or receipt of mterest
or olther chargea".
"CarryinBk>ver or "continuation" is also given as one of the me:rnings
of the te:rm "contango" or "back-wardation" in'Halsbury's Laws of
England--3rd Edn. Vol. 36 at p. 548. If we substitute "goods", in
resi;>ect · oJ~ which forward contracts are made, for "securitieg", we get
the exact nature of the transactions set up by the plaintiff in each
case. They are nothing short of contracts or speculation in rise and
fall of prices of goods purchased only notionally without any intention to actually deliver the:n to the purchasers. In such a transaction,
a purchaser is not at au expected to make a demand for ac;tual delivery of goods oEtcnsibly sold.
·
·
We fu1d considerable force in the plaintiff's contention that at least
contracts between the plaintiffs and defendants were not wagering
, contracts although we think, in agreement with the High Court, that
each party knew that their object was to indulge in speculation. In
Bhagwt111das Parasram (A firm) v. · Bur;ori R,uttom;i Bomanji,(l)
after exam.inin!! the facts of a case hi which a firm of "pucca adatias"
was authcirised, by a defendant intending to speculate in differences,
to sell and then to recsell for the purpose of making profits,
.~t was
found that, as the plaintiff oould not be said to either lose •:>r benefit
correspondinglv from variations in price, there could be no agreement
·in the nature of a wager between the principal and the agent whatever
may have been intentions of the principal. It was held that, in a
w~eriag contraC'I, there has to be mutuality in the sense tha1: the _gain
of one party would be the loss of the other on the happening of the
uncertain event which is the subjc:ct matter of a wager. It was point·
ed out th1:re (at p.33) :
•
"Spec:ulation does not necessarily involve a contract by way
of wager, and to constitute such a contract a common intention
to wager is essential. No such intention has been proved".
We, therefore, accept the oontention of the appellant that 1there was
no wagering contract between the plaintiff and any of the d1:fendants.
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· The n1~xt question we may consider is whether the contracts set up
could be E:aid to be collateral contracts quite unaffected by the objects
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or intenticms ~f defendants in entering into these contracts •which involved making of other contracts which may or may not be wagering
contracts but were not "prohibited". Strong reliance wu placed upon
Gherulal Parakh v. Mahadeodas Maiya cl Or.r.;(2) where the object of
a contract or partnership was to enter into 'forward contrac1s for the
purchase and sale of wheat so as Jo--spa:ulate in rise and fall of price
of wheat in future.
The oblect of the partnership was held to be not
H
illegal, within the meaning of section 23 of the Contract Act, although
(1) 4S I.A. p. 29 @ 33.
(2) [1959) 2 supp. S.C.R. 406, 431.
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FJRM PRATAPCHAND V. FI1'M VENKATA SETTY (Beg, ].)
11
the business for which the partnership was formed was held to involve
wagering.
The position was thus summarised there (at p. 431) :-
"The aforesaid discussion 1yields the following results :
-,
{ 1) Under the common Law of England a contract of wager
is valid and therefore both the' primary 1.:ontract- as well as
the collateral agreement in respect thereof are enforceable;
(2) after the enactment of the Gaming Act, 1845, a wager
is made void but not illegal in the sense of being forbidden
by law, and thereafter a primary agreement of wager is void
but a collateral agreement is enforceable; (3) there was a conflict on the question whether the second part of s.18 of the
Gaming Act, 1845, would cover a case for the recovery of
money or valuable thing alleged to be won 'Jpop any wager
under a substituted contract between the sa1ne /parties ; the
House of Lords i~ Hill's case (1921}(2) K.B. 351) had
finally resolved the conflict by holding that such a claim
was not sustainable whether it was made under the original
contract of wager between the parties or under a substituted
agreement between them; ( 4) under the Gaming Act; l89~, ..
in view of its wide and comprehensive phraseology, even'
collater<!l -contracts, including partnership agreements, are not
enforceable; (53) s. '30 of the Indian Contract Act is based
upon the provisions .of s. 18 of the Gaming Act, 1845, and
though a wager is void and unenforceable, it is not forbidden
by_ law .and therefcye the object of a collateral agreement
is not unlawful under s.23 of the Contract Act; and (6)
partnership being an agreement within the meaning .of s.23
of ·the Indian Contract Act, it is not unlawful, though its
-_objecUs to_ carry on wagering transactions.
We, therefore,
hold that in the present case the partnership is not 1inlawful
within the meaning of s. 23 (A) of the Contract Act.
Re. (ii) Public Policy : The learned Counsel for
the
appellant contends that the concept of public policy is very
comprehensive and that in India, particularly after independence, its content should be measured., having regard to poli· · ·
tic al, social and economic policies of a welfare State, : and the
· traditions of this ancient country reflected in, Srutis, Smritis
and Nibandas.
Before adverting. to the argument of
the
learned Counsel, it would be convenient at the outset to ascertain the meaning of this concept and to note how the·
Courts in England and India have applied i'. to different
situations.
Ch~hire and Fifoot in their book on "Law of ·
Contract", 3rd &In., obs~rve at page 280 thus : _
·
The public interests which it is designed to protect are
_ so comprehensive and heterogeneous, and opinions as to what
is injurious must of necessify vary so greatly with the social
and moral convictions,. and at times even with the political
views; of different judges, that it forms a treacherous and
um.table ground for legal decision. . . . . . . . These questions;
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SUPREME COURT REPORT~
[1975] 3. s.c.R.
have agitated the Courts in the past, but the present siate of
the Jaw would appear to be reasonably clear.
Two cbservations may be made with some, degree of assurance.
First, although the rules already established by prect:-
dent mlllSt be moulded to fit the new conditions of a changin.3
world, it is no longer legitimate for the Courts to invent a
new head of public policy. A judge is not free to speculate
upon what, in his opinion, is for the good of the community.
He mur.t be content to apply, either directly or py way of
analogy, the principles laid down in previous decisions.
He
must expound, not expand, this particular branch of the
law.
Seccmdly, even though the contract is one which prima
jacie falls under one of the recogniz.ed heads of public policy,
it will .not be ·held illegal! unless its harmful qualities are
indisputable. The doctrine, as Lord Atkin remarked in a
leading case, should only be invoked in clear cases in whkh
the harm to the public is substantially incontestable,
and
does not depend upon the idiosyncratic inferences of· a fe:w
·judicial minds . . . . . . In popular language . . . . . . the
contr{lct sboul~ be given the benefit of the doubt."
If an agreement is mere~y collateral to another or constitutes an
aid facilitating the carrying out of the object of the other agreement
which, though void, is not in itself prohibited, within· the meaning of
section .23 i0f the Contract Act, it may be enforced as a collateral
asr~ent. If, on the other hand, it is part of a mechanism meant
to defeat what the law has actu~ly prohibited, the Courts will not
countc~nce a claim based upon the agreement because it will be
tainted with an illegality of the object sought to be achieved which is
bit by S«:ticm 23 of the Contract Act. Itis well established that the
~
of. an agreement cannot be said to be forbidden or unlawful
inerely because the agreement results in what is known a~ a "void
contract". A void agreement, when coupled with other facts, may
become part of a tr;utsaction wh,!ch creates legal rights, but this is not
so if the object is prohibited or "mala in se".