Report No. 70
12.61. Dominant object of legislation to be concerned.-
Students of the law of contracts are familiar with difficult questions concerning section 23 of the Contract Act that arise when it becomes necessary to determine whether the object or consideration of an agreement is "unlawful" as defeating the provisions of any law. The dominant purpose of the legislation is to be taken into account in this context. Is the dominant purpose one of imposing a prohibition as a matter of policy, or has the law been passed primarily for facilitation of collection of revenue or for effecting other administrative object?
If the conduct, which is now challenged as illegal, was forbidden as a matter of policy, the transaction would be void. If, on the other hand, the legislation infringed was intended merely to prescribe certain terms and conditions for administrative purposes, then a transaction which infringes the law by failing to comply with the statutory requirements may not necessarily be void, although the transgression may be visited with a statutory penalty. The effect of a transfer in violation of the land ceilings law-a situation more likely to arise in modern times-is discussed in a judgment of the Supreme Court.1
1. AIR 1968 SC 1358: (1969) 1 SCJ 279.
12.62. Effect of illegality on parties.-
For the present purpose, it is not necessary to discuss in detail the various situations in which object or consideration becomes unlawful. From the practical point of view, the more important question relates to the effect of the illegality on the rights of the parties to the illegal transfer. The law on the subject is complex and not very satisfactory.
When one or other of the parties seeks to enforce or repudiate such a transfer, the question how far that party will succeed depends on several factual elements-which is the reason why the law is complex. These factual elements acquire relevance by reason of certain rules of law-some of them based on equitable doctrines-which we shall discuss in due course.
The effect of the provisions relating to illegality in section 6 is not completely stated in the section. Even though the section provides that the transfer cannot be made, that does not mean that if possession has been delivered, it can be recovered by the transferor.1 The transferee (except in certain special situations) is allowed to retain the property transferred. This is the effect of another rule of law, namely, that the court will not assist a person taking advantage of his illegality. If possession has been given, the transferor cannot recover back what he has transferred, except in certain special cases which will be dealt with in due course.
1. Mulla, (1973), p, 77.
12.63. Malaya case.-
Let us if, ustrate this. The Privy Council, in an appeal from Malaya, held that where two persons agreed together to a conspiracy to achieve a fraudulent or illegal purpose and one of them transfers property to the other in pursuance of the conspiracy, then, so soon as the contract is executed and the illegal purpose is achieved, the property (be in general or special) that has been transferred by the one to the other remains vested in the transferee, notwithstanding its illegal origin.1
In that case the transfer of a lorry was made in Mallacca (Malaya) in violation of legislation relating to road transport prohibiting the transfer in question, that is to say, the transfer of a registered motor vehicle with out a written permit from the Registrar. Subsequently, the seller of the lorry had taken it back from the purchaser and refused to return it and the action by the purchaser was against the seller in detinue.
Title was held to have passed to the transferee. The reason is that the transferor having fully achieved his unworthy end, cannot be allowed to turn round and repudiate the object with which he did it and the transferee, having got the property, can assert his title against all the world not because he has any merit of his own, but because there is no one who can assert a better title. The court has no power to confiscate the property. To quote Lord Eldon L.C., "Let the estate lie where it falls"2
While the matter, no doubt, is governed by statute in India, the principle that the transferor cannot recover in the circumstances mentioned, above, would be true of Indian law also.
1. Sajan Singh v. Sardara Ali, (1960) 1 All ER 269 (272) (PC).
2. Muckleston v. Brown, (1801) 31 English Report 19 (34).
12.64. Section 84, Trusts Act.-
The circumstances in which the transferor can recover are dealt with in the Trusts Act. The general rule under section 84 of the Trusts Act1 is as follows:-
"84. Where the owner of property transfers it to another for an illegal purpose and such purpose is not carried into execution, or the transferor is not as guilty as the transferee, or the effect of permitting the transferee to retain the property might be to defeat the provisions of any law, the transferee must hold the property for the benefit of the transferor."
For the present, we shall not enter into the question whether section 84 is exhaustive of all the special situations. But it is fairly well settled that it is not in every case that the transferor who is party to an illegal transfer can sue on the basis of illegality. That there are limitations is not now doubted, even in India.
1. Section 84, Indian Trusts Act, 1882.
12.64A. We take up, for the present, the limitations contained in section 84, Trusts Act. In the first case, there is a docus poenitentiae until the fraud is carried out and the transferor may sue to recover his property1 The second case is where the transferor is not so guilty as the transferee. In the analogous case of contract, section 27(1)(b) of the Specific Relief Act, 1963, allows a contract to be rescinded if the defendant is more to blame than the plaintiff. As to the third case mentioned in section 84, Trusts Act, its application again depends on the object underlying the legislative prohibition.2
1. Kedar Nath Motani v. Prahlad Rai, (1960) 1 SCR 861: AIR 1960 SC 213: 1960 SCJ 1072.
2. Qadir Ruksh v. Hakim, AIR 1932 Lah 503 (FB).
12.65. English law-Reason for bar.-
In English law, ordinarily speaking, a person cannot recover back money paid under an illegal contract, or property transferred by him under such a contract. There may be no strong reasons against recovery, but there are no strong reasons justifying it. The principle seems to be that as there is no strong reason to act, inertia prevails.
To this general rule, there are exceptions in special cases. These may be enumerated as-
(a) class-protection "Statutes";
(d) repudiation of illegal transaction in time by a voluntary act;
(e) cases where the plaintiff does not rely on the illegal transaction as such for recovery, and the cause of action is based on any other ground.
Examples of this are1-
(i) Expiry of the period of hire in case of goods let out on hire under illegal contract;
(ii) Money deposited with a stake holder under an illegal wager;
(iii) Expiry or illegal lease;
(iv) Establishment of a title without reference to the contract or its illegality.
1. The categories are based on Treitol Contracts, (1966), pp. 342 to 350.
12.67. The case where there has been fraud or oppression,1 on the part of one person, is really an instance of a situation where the guilt is not equa.- not a case of par delictum. "It can never be predicated as per delictum where one holds the rod and the other bows to it."2
In particular, this aspect might become important in rent restriction cases where the tenant is made to pay an illegal premium in order to obtain a lease or sub-lease. This is so even where there is no provision in the relevant legislation enabling the premium to be recovered back. Courts have so held,3 on the ground that the duty of observing the law being placed on the shoulders of the landlord for the protection of the tenant, the parties were not in pari delicto.
As regards the case of repudiation,4 the law encourages repentance and therefore, assists a man who has paid money under an illegal contract, provided he repudiates the transaction before the illegal purpose is carried out. Such repentance must be proved, and assistance is not given to a party who is prevented from fulfilling the illegal purpose by the refusal of the other party who refuses to co-operate.5
1. Para. 12.66(b) and (c), supra.
2. Smith v. Cuff, (1817) 6 M&S 160 (165) (Lord Ellenborough).
3. Kiriri Cotton Co. Ltd. v. Ranchordas Dewani, (1960) 1 All ER 179 (180) (PC).
4. Para. 12.66(d), supra.
5. Bigos v. Bausted, (1951) 1 All ER 92.
12.68. Locus Poenitentiae.-
In a case in which the transaction is still inchoate, or the grantor still retains a locus poenitentiae, the formal act may be relieved against by reference to the real intention of the parties, the reason being that in such cases the violation or infringement of the law had not been completed.1
Hence, when an illegal purpose has been effected by a transfer of the property, the transferee is not to be treated as holding it for the benefit of the transferor.2 and the transferor is ever afterwards precluded from proving the real nature of the transaction.3
1. Sham Lall v. Amarendro Nath, ILR 23 Cal 460; and the cases therein cited.
2. (a) Chenvirappa v. Puttapa, ILR 11 Born 708 (719);
(b) Tamarasherri v. Maranat Vasudevan, ILR 3 Mad 21.
3. (a) Goberdhan v. Ritu Roy, ILR 28 Cal 962;
(b) Kali Charan v. Basik Lal, ILR 23 Cal 962, note.
12.69. Incidentally, this aspect is not clearly brought out in section 84 of the Trusts Act,1 where that section refers to the fact that such purpose is not carried into execution apparently because the provision in the Trusts Act might have been based on the observations of Mellish, L.J. in a case2 reported in 1876. His observations were as follows.-
"If money is paid for goods delivered for an illegal purpose, the person who has so paid the money or delivered the goods may recover them back before the illegal purpose is carried out."
These are too wide if divorced from the facts. The transferor in that case took proceedings in time thus showing repentance.
1. Para. 12.64, supra.
2. Taylor v. Bowers, (1876) 1 QBD 291 (300).
It would appear that where a person who has transferred property for an unlawful object or consideration seeks to rescind the transfer the courts have a discretion in the matter. This discretion is not conferred in so many words by statute, but can be inferred from certain statutory provisions and judicial decisions. The statutory provisions of principal relevance are sections 27, 31 and 34 of the Specific Relief Act, 1963 and section 84 of the Indian Trusts Act, 18821. The judicial decisions on the subject emphasise the equitable principle which has been followed in cases where the plaintiff seeks the assistance of the court to regain property after transferring it for purposes of illegal activities.
1. Para. 12.64, supra.
12.71. Although the provisions in the specific Relief Act, referred to above, do not in so many words apply to transfers and are framed with reference to agreements, courts seems to have applied them to transfer either directly or by analogy1
1. Kamarbai v. Badri Narain, (1976) 78 Born LR 579 (Vaidya and Shimpi, JJ.).