NATIONAL UNIVERSITY OF STUDY AND RESEARCH OF LAW

RESEARCH PAPER AGREEMENTS AGAINST PUBLIC POLICY: WAGERING AGREEMENT

Submitted to: M.R.S Murthy Assistant Professor Law of Contracts-I

Submitted by: Mohit Sharma Roll No. - 118 Sec. - B Sem. 2nd

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INDEX

1. INTRODUCTION.2-3 2. ESENTIALS FOR WAGERING CONTRACT3 Uncertain event...3 Mutual chances loss or gain3 Neither parties to have control over the events...3 No other interest in the event..3 3. EFFECTS OF WAGERING AGREEMENT.4 4. LAWS RELATED TO WAGER4 5. COMPARISON WITH THE ENGLISG LAW..5-6 6. VARIATIONS: Wagers distinguished from contract of insurance7 7. CONTRACT OF GAMING..7 8. SPECULATIVE TRANSACTIONS8 9. AGREEMENT COLLATERAL TO WAGERING AGREEMENT...9-10 10. DERIVATIVES.10-12 11. CONCLUSION...13 12. BIBLIOGRAPHY...14

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INTRODUCTION

A contract is an agreement enforceable by law. It becomes enforceable only when it is valid contract. Thus there are five essentials mainly for forming a valid contract. These are: Free consent of parties. Parties should be competent to contract. For lawful consideration. With having lawful object. And should not be declared void by Indian contract act.

Here in this research paper I will be dealing with agreements against public policy which is defined in section 30 of Indian Contract Act, 1872. This can be read as: Section 30. Agreements by way of wager, void- Agreements by way of wager are void; and no suit shall be brought for recovering anything alleged to be won on any wager, or entrusted to any person to abide the result of any game or other uncertain events on which any wager is made. Exception in favor of certain prizes for horse-racing-This section shall not be deemed to render unlawful a subscription or contribution, or agreement to subscribe or contribute, made or entered into for or toward any plate, prize or sum of money, of the value or amount of five hundred rupees or upwards, to be awarded to the winner or winners of any horse-race. Section 294A of the Indian Penal Code not affected- Nothing in this section shall be deemed to legalize any transaction connected with horse-racing, to which the provisions of section 294A of the Indian Penal Code (45 of 1860) apply. Section 30 only says that agreements by way of wager are void. The section does not define wager. It can be defined by SUBBA RAO J: As a promise to give money or moneys worth upon the determination or ascertainment event.1 But the most illustrative definition of wager is that given by HAWKINS J: A wagering contract is one by which two persons professing to hold opposite views touching the issues of a future uncertain event, mutually agree that dependent on the determination of that event one shall pay or handover 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
1

Gherulal v Mahadeo (1959) 2 SCA 342

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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 of the event, and, therefore remaining uncertain until that issue is known. If either of the parties may win but cannot loose, it is not a wagering contract.2

ESSENTIALS FOR WAGERING CONTRACT

1. Uncertain Event: Uncertain event is one of the most essential elements for a wagering contract. It means that the performance of the bargain must depend upon the determination of an uncertain event. A wager generally contemplates with the future events, but it may even relate to an event which has happened in past but parties are not aware of its result or the time of its happening. 2. Mutual Chances Loss And Gain: For a contract to be a wagering contract there should be equal and mutual chances of loss and gain for both the parties. If there are no such chances then it is not considered as wager. Thus in Babasaheb v Rajaram3 court held that this agreement cannot be looked upon as one of wagering in eyes of law. Court held that it is the essence of contract that essence of wager is that either of the side should stand to win or lose. But in this case neither of the party stands wins nor loses. 3. Neither Parties to have Control over the Events: Neither party should have control over the happening of the event in one way or other. If one of the parties has event in his own hands, the transaction lacks an essential ingredient of wager.4

4. No other Interest in the Event: At last, neither of the parties should have any interest in the happening of the event other than the sum nor stake he will win or lose. This is what marks the difference between a wagering agreement and contract of insurance. If one of the parties has the event in his own hands, the transaction lacks essential ingredient of wager.5
2 3

Carlill v Carbolic Smoke Ball Co. (1892) 2 QB 484,490 AIR 1931 bom 264 4 Dayabhai Tribhovandas v Lakshmichand,(1885)9 bom 5 Birdwood j in Dayabhai Tribhuvandas v. Lakshmichand, (1885)9 Bom 358,363

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EFFECTS OF WAGERING AGREEMENT

A wagering agreement is void ab initio, and S. 65 has no application to it.6 Money paid directly by a third party to a winner of a bet cannot be recovered from the loser.7 Even if a loser makes a new promise to pay for his losses in consideration of his not being posted, the promise cannot be enforced; but if he gives a cheque in discharge of his liability, the cheque may not be tainted with illegality because of the winners promise not to have the name posted. The cheques will not be enforceable by the original payee, but may be enforced by a third party holder of the cheque, even if he knew of the facts leading up to giving of the cheque. It has been laid down by the Supreme Court, in Gherulal Parekh v. Mahadeo Das that though a wager is void and unenforceable it is not forbidden by law .Hence a wagering agreement is not unlawful under section 23 of the Contract Act and therefore the transactions collateral to the main transaction are enforceable.

LAWS RELATED TO WAGER

This section represents the whole law of wagering now in force in India, supplemented by the Bombay state by the act for avoiding wagers (amendments) act 1865, which amended the act for avoiding wagers 1848. Before the act of 1848 the law relating to wagers in force in British India was the common law in England. By that law an action might be maintained on a wager, if it was not against the interest or feelings of third persons, did not lead to indecent evidence, and was not contrary to public policy. 8 The nature of gambling is inherently vicious and pernicious. 9 Gambling activities which have been condemned in India since ancient times appear to have been equally discouraged and looked upon with disfavor in England, Scotland, USA and Australia. The Hindu law relating to gambling has not been introduced in the law of contract in

Dayabhai Tribhovandas v Lakhmichand Panachand (1885) ILR 9 Bom 358

7 CHT ltd v Ward [1963]3 ALL ER 835

8

Ram loll Thackoorseydasss v. Soojunmull Dhondmull (1848) 4 MIA 339

9 State of Bombay v. RMD Chamarboughwala [1957] SCR 874, AIR 1957 SC 699

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India. 10 Gambling is not trade and commerce, but res extra commercial and therefore not protected under art 19(1) or art 301.11

COMPARISON WITH THE ENGLISH LAW

Many countries have laws which render gaming or wagering contracts void. It is important to point out at the outset that these laws do not render gambling illegal. All they do is prevent the gaming and wagering contracts. The great majority of common law jurisdictions have adopted gaming laws based on the UK Gaming Act 1845. Legislation in all Australian jurisdictions for example is based on S. 18 of the Gaming Act, which provides that the contracts by way of wagering and gaming are null and void. 12 The Gaming and Wagering laws of Malaysia, Singapore, Hong Kong and New Zealand are also modeled after the UK Gaming Act. Until the enactment of the Gaming Act, 1845, wagering contracts were not prohibited by law in England. But Section 18 of the Gaming Act, 1845 (UK) declared that all contracts or agreements by way of wager shall be null and void and that no suit shall be brought or maintained in any Court of law and equity for recovering any sum of money or valuable thing alleged to be won upon any wager. However, certain dealings in investments by way of business are excluded from invalidity under Section 18 even though they might amount to wagering contracts. For example, contracts for differences or bets on stock market indices.13 Section 30 of the Indian Contract Act 1872 is influenced by the English Gaming Act 1845. Heavily influenced by the English decisions, the judges have adopted the essential features of that of the gaming act. However, there is a major difference between the English and the Indian laws relating to wagers: under the English Gaming Act, 1845, agreements Collateral to the wagering agreement are also rendered to be void, 38 whereas in India, collateral agreements are not necessarily void except in Bombay,14 because the object of such a collateral contract may not necessarily be unlawful. Further the Apex Court held that, By law an act might be maintained on a wager if it was not against the interest or feelings of a third person, did not lead to indecent evidence and was not contrary to public policy.15 As previously mentioned, a number of Indian companies when incurring losses in foreign exchange dealings, construct an argument that derivative transactions are in the nature of
10 Gherulal Parakh v. Mahadeodas Maiya [1959] Supp 2 SCR 406, AIR 1959 SC 781
11 12

RMDC v. Union of India AIR 1957 SC 628,[1957] SCR 930 P Latimer, Futures Contracts and Gaming Laws (1993) 14 In the company lawyer 67 13 City Index Ltd v. Leslie (1992) 1 Q.B. 92 14 The Act for Avoiding Wagers (Amendment) Act, 1865 (Bombay). 15 Gherulal Parakh v Mahadeodas Maiya, AIR 1959 SC 781. (H

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wagering agreements, and are hence not enforceable in Indian Courts under Section [xxi], and hence do not give rise to any liability or financial obligations in respect of repayment of loan to the bank. As a result of this, many conservative Indian banks such as the State Bank of India refrained from entering into any sort of derivative transactions with their clients for a fairly long time. In Gherulal Parakh v. Mahadeodas Maiya16 a question arose as to whether a partnership formed for the purpose of entering into forward contracts for the purchase and sale of wheat so as to speculate in rise and fall of price of wheat in future, was a wager and whether it was hit by Section 30 of the Contract Act. But the Supreme Court held that such a partnership was not illegal, although the business, for which the partnership was formed, was held to involve wagering. It was held therein as follows: 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; There was a conflict on the question whether the second part of Section 18 of the Gaming Act, 1845, would cover a case for the recovery of money or valuable thing alleged to be won upon any wager under a substituted contract between the same parties: the House of Lords in Hill's case17 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; So under the Gaming Act, 1892, in view of its wide and comprehensive phraseology, even collateral contracts, including partnership agreements, are not enforceable. As Section 30 of the Indian Contract Act is based upon the provisions of Section 18 of the Gaming Act, 1845, and though a wager is void and unenforceable, it is not forbidden by law and therefore the object of a collateral agreement is not unlawful under Section 23 of the Contract Act; and partnership being an agreement within the meaning of Section 23 of the Indian Contract Act, it is not unlawful, though its object is to carry on wagering transactions.

16 17

Supra at note 29 (1921) 2 KB 351

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VARIATION: wagers distinguished from contract of insurance

A transaction of insurance resembles a wager. Every contract of insurance is a wager if the insurer has no insurable interest in the event upon which insurance money is payable. The insurance interest lies normally in that the event is one which is prime facie adverse to the interest of the insurer.18 If insurers cargo which he has loaded on a vessel, his contract is not a wager because his property is at risk during the voyage; but if has no cargo on board, the contract is a wager; because if the vessel is not lost, he loses the amount of premium. Section 6 of the Marine Insurance Act 1963, provides that every contract of marine insurance by way of wager is void; and that a contract of marine insurance is deemed to be a wagering contract where the assured has not an insurable interest. The (English) marine insurance act 1906 also provides that a contract or Marine Insurance is deemed to be a gaming or wagering contract if the insured has no interest in the adventure. A truck owned by a person who was transferred benami to b who got it insured in his own name. The truck was involved in an accident and it seriously injured a young army officer who claimed heavy damages from the owner, driver and the benamidar and the insurance company. It raised the plea that an ostensible owner (a benamidar) had no insurable interest and that it was a wager for that reason. But these pleas were negated by the high court.19

CONTRACT OF GAMING

A gaming contract consists of the mutual promises which the players of the game necessarily make, express or by implication, in paying for a stake as to its transfer upon the result of the game. Such contract may be a wager if the parties are two. In K.R. Lakshmanan (Dr) v State of Tamil Nadu20the Supreme Court had an occasion to decide whether horse racing amounts to gaming as defined under the Madras City Police Act 1888, and the madras gaming act. It stated: Gambling in a nutshell is a payment of a price for a chance to win a prize. Games may be of chance or of skill and chance combined. A game of chance is determined entirely or in part by lot or mere luck. A game of skill- although the element of chance necessarily cannot be entirely

18 19

Prudential Insurance Co. v Commerce of Inland Revenue (1904) 2 KB 658. Northern India General Insurance Co. Ltd. V Kanwarjit Singh Sobti, AIR 1973 All 357. 20 AIR 1996 SC 1153.

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eliminated- is one in which success depends principally upon the superior knowledge, training, attention, experience and adroitness of the player.

SPECULATIVE TRANSACTIONS

A speculative contract is not necessarily a wagering contract, and must be distinguished from agreements by way of wager. This distinction comes into prominence in a class of cases where the contracts are entered into through brokers. The modus operandi of the defendant in this class of cases is, when he enters into a contract of sale, to purchase the same quantity before the vaida day; and when he enters into a contract of sale, to purchase the same quantity before the vaida day. This mode of dealing, when the sale and purchase are to and from the same person, has the effect, of course, of cancelling the contracts, leaving only differences to be paid. When they are different persons, it puts the defendant in the position vicariously to perform his contracts. This is, no doubt, a highly speculative mode of transacting business; but the contracts are not wagering contracts, unless it is the intention of both contracting parties at the time of entering into the contracts, neither to call for nor give delivery from or to each other. There is no law against speculation as there is against gambling. A fortiori, dealings between stockbrokers, whose regular course of business is periodical settlement of differences, are not presumed to be wagering agreements. It may well be that the defendant is a speculator who never intended to give delivery, and even that the plaintiffs did not expect him to deliver; but that does not convert a contract, otherwise innocent, into a wager. Speculation does not necessarily involve a contract by way of wager, and to constitute such a contract a common intention to wager is essential. It is in cases of above description that there is a danger of confounding speculation, or that which is properly described as gambling, with agreements by way of wager; but the distinction in the legal result is vital. Every forward contract is to some extent speculative, but is not a wager or gamble on that account. The distinction between the two is a narrow one.

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AGREEMENTS COLLATERAL TO WAGERING AGREEMENTS

Contract collateral to a wagering agreement is not necessarily unenforceable 21Section 30 of the Contract Act is based upon the provisions of S. 18 of the (English) Gaming Act 1845, and though a wager is void and unenforceable, it is not forbidden by law. Therefore the object of a collateral agreement is not unlawful under sec. 23 of the contract act. But it is otherwise under the (English) Gaming acts of 1845 and 1892, the acts being wider and more comprehensive in phraseology, because they expressly render void even collateral transactions. As a result, though an agreement by way of wager is void, contract collateral to it or in respect of a wagering agreement is not void except in Bombay state. There is nothing illegal in the strict sense in making bets. They are merely void and there would be no illegality in paying them or giving a cheque, but payment cannot be compelled22. But an arbitration clause in a wagering contract is a part of the contract and not collateral to it and cannot therefore be enforced. A collateral agreement is not unlawful under s 23 of the contract act. Apart from Bombay enactment 23 there is no statute declaring void agreements collateral to wagering contract. Nor is there anything in the present section to render such agreements void. The policy of law in India has been to sustain the legality of wagers and not to hit at collateral contracts. It has accordingly been held that a broker or an agent may successfully maintain a suit against his principal to recover his brokerage24 commission, or the losses sustained by him, even though contracts in respect of which the claim is made are contracts by way of wager.` The Supreme Court has held that if agreement collateral to another or of aid in facilitating the carrying out of the object of the other agreement, which though void, is not in itself prohibited within the meaning of s 23 of the contract act, may be enforced as collateral agreement. If on the other hand it is part of a mechanism to defeat what the law has actually prohibited, 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 s 23 of the contract act. An agreement cannot be said to be forbidden or unlawful merely because it results in a void contract. A void agreement when coupled with other facts may become part of a transaction which creates legal rights but this is not so if the object is prohibited or mala in se. In England also, agreements collateral to wagering contracts were not void before the enactment of the gaming act 1892. Thus in Read v Anderson25 a betting agent, at the request of the defendant, made bets in his own name on behalf of the defendant. After the bets were made and
21 22

Ram Gopal v Govind Das AIR 1944 ALL 196 (held to be wager) Hill v William Hill (park lane) ltd. [1949] 2 ALL ER 452. 23 Act for avoiding wagers (amendment) act 1856(born act 3 of 1856) 24 Firm Hagami Lal Ram Prasad v Bhuralal Ram Narain AIR 1961 Raj 52. 25 [1884] 13 QBD 779.

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lost, the defendant revoked the authority to pay conferred upon the betting agent. Notwithstanding the revocation, the agent paid the bets, and sued the defendant having empowered the agent to bet in his name, the authority was irrevocable, and that the agent was entitled to judgment. The statute of 1892, passed in consequence of this decision, is almost to the same effect as the Bombay act. It is interesting to note that the statute was not passed until 27 years after the Bombay act. It is hoped that in future, the revision of the contract act will corporate provisions of the Bombay act in the present section, so as to render the law uniform on this subject in the whole of India. The act for Avoiding Wagers (amendment) act 1865 (Bombay act 3 of 1865) The law is however, different in the state of Bombay. In that state, contracts collateral to or in respect of wagering transactions are prevented from supporting a suit by the special provisions of the act for avoiding wagers (amendment) act 1865 (Bombay act 3 of 1865). It was observed: That act was passed to close the doors of the courts of justice in the presidency to suits upon contracts collateral to wagering transactions where such collateral contracts have been entered into or have arisen since the act came into force, a purpose which it has effectually answered.

DERIVATIVES
The position of derivatives under the common law:
Two English decisions have caused concern among market participants that certain derivatives transactions may fall foul of the gaming and wagering laws. In Universal Stock Exchange v. Strachan26, the court held that wagering contracts included contracts for differences. Halsbury defines contracts for differences as; Agreements between those who are only ostensible buyers and sellers of stock and shares where the common interest of the parties is to pay or receive the differences between their prices on one day and their prices on another day27 In the second decision, City Index Limited v. Leslie28, the court declared that contracts akin to cash-settled derivatives were contracts for differences. The combined effect of both decisions is that cash-settled derivatives are wagering contracts and therefore unenforceable, unless exempted by legislation.

26 27

[1904] 2 KB 658. See Halsburys Law of England, above no.111, para 21. 28 [1927] 3 KB 234.

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The common law position in Australia has been modified by statute. Section 1141 of the Australian corporations law protects the following categories of derivative contracts from the gaming and wagering laws: Those made on the futures market of the futures exchange, or a recognized futures market; those made on an exempt futures market; those permitted by the business rules of a futures association, a futures exchange, or a recognized futures exchange. The risk that a contract may not be enforceable on the grounds of illegality is one that needs to be addressed. Generally, there is little risk of exchange traded derivatives falling foul of the gaming and Wagering laws in either the UK or other common law jurisdictions. Regardless of the interest of the counterparties, there is no justification for treating derivative contracts as wagering or gaming contracts. They are no different from other commercial contracts entered into by parties on the daily basis. It is true they are more risky than other commercial contracts and some parties are attracted to derivatives by the prospects of windfall gains. But these factors do not make them wagering or gaming contracts any more than contracts to undertake some highly speculative business. Apart from the need to remove the existing uncertainties, regulators should also address the broader question of whether it is appropriate for gaming and wagering legislation to be applicable in the realm of financial transactions. However, Indian contract law is indeed woefully deficient with regard to provisions That clarifies the legality of derivative contracts. The problematic question whether Derivative contracts are in the nature of wagering agreements is not answered by the Act till date and no Amendment to that effect has been passed either. Under Indian Exchange control laws, an Indian corporate, being a person resident in India, can Enter into a foreign currency derivative contract only to hedge an exposure to foreign exchange risk and not for speculating and yielding profits. In the case of Rajshree Sugars &Chemicals Limited v Axis Bank Limited29 Since March 2008, Axis Bank and Rajshree Sugars have been fighting a legal battle over the foreign exchange derivatives contract, sold by the Bank to the company, thereby resulting in huge losses for the company estimated to be around Rs. 46-50 crores. The company had refused to make any loan repayment to the bank contending that the contract was a wagering deal, and hence untenable on such grounds. The court answered this issue in the negative. Based on the elucidations of various landmark judgments on wagers, the court evolved a threefold test to determine whether the contract is a wager - First, there must be two persons Holding opposite views touching a future uncertain event; second, one of those parties is to win and the other is to lose upon the determination of the event; third, both the parties have no actual interest in the occurrence or non-occurrence of the event, but have an interest only on the stake. The case in question fulfilled the first criteria, but the second was not satisfied because in the light of the facts of the case, the
29

MANU/TN/0893/2008.

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plaintiff did not always stand to lose. Citing Indian case law30 the judges make an interesting observation, that though every wagering contract is speculative in nature, every speculation need not necessarily be a wager. Further, a common intention to wager is essential, and an element of mutuality has to be present in the sense that the gain of one party would be the loss of the other on the happening of the uncertain event which is the subject matter of wager. In the light of abovementioned points and also adhering to the Supreme Court judgment in Gherulal Parakh v. Mahadeodas Maiya31 the Judges in this case concluded that the sequence of events in the present case reflected that the nature of the transaction was not in the form of a wager. Even though the plaintiff was susceptible to incurring huge losses yet that by itself could not deem the contract to be a wager.

30 31

Bhagwandas Parasram v Burjori Ruttonji Bornanaji, AIR 1917 PC 101 Supra at note-29.

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CONCLUSION

As section 30 of the Indian Contract Act 1872 reads about agreements by way of wager, void. Further The Contract Act does not define what constitutes a wager or a wagering agreement. It only mentions that such agreements will be void and unenforceable and no action can lie to either recover anything that is due under a wager or for performance of a contract that is in the nature of a wager. A wager is in the nature of a contingent contract but is prevented from being enforceable by Section 30. Therefore, the Contract Act should provide an express definition that would clarify as to what constitutes a wager, thereby removing any ambiguity with regard to legality of derivative contracts which are in the nature of wagering agreements. Also through the, in depth analysis of various cases, books and views of the learned scholars in this project it can be said that Section 30 of Indian Contract Act, 1872 needs to be reviewed critically. Hence Section 30 should be amended to define the word wager. Since a lot of inconvenience and ambiguity have been faced by the judiciary while dealing with the issue of wagers, specifically as to what all constitute wagers and what all comes under the ambit of wagers. As different jurists and in different judgments the ambit of wagers is defined in different ways. In other words the scope of section 30 needs to be widened.

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BIBLIOGRAPHY

Primary sources Pollock & Mulla, Indian Contract and Specific Relief Acts, thirteenth edition, volume Chitty on Contract, volume II, Thomson Reuters (Legal) Limited. Avatar Singh, Contract & Specific Relief, tenth edition, Eastern Book Company. Ansons Law of Contract, 29th Edition, OXFORD.

Secondary sources Websites www.lexisnexis.com/academics www.manupatra.com www.legalindia.com www.parliamentofindia.com www.indialawjournal.com www.citeman.com www.preservearticle.com www.slideshare.net

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