Page | 1

RESEARCH PROJECT ON-

USEFULNESS OF A GUARANTOR UNDER CONTRACT
OF GUARANTEE

SUBMITTED TO-
THE TAMILNADU NATIONAL LAW SCHOOL, TIRUCHIRAPPALLI.

In Fulfillment of the Requirements for Internal
Component in

LAW OF CONTRACTS

By
Aditya Rajasthani
(Regd. No. BA0130003)

Under the guidance & Supervision of
PROF. KUMAR GOVIND RAJAN

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DECLARATION

I, Aditya Rajasthani, hereby declare that the project entitled Usefulness of a guarantor
under contract of guarantee submitted to the Tamil Nadu National Law School;
Tiruchirappalli, is a record of bonafide and independent work done by me under the
supervision and guidance of Assistant Professor Prof. Kumar Govind Rajan, Faculty of
Law, Tamil Nadu National Law School; Tiruchirappalli.

All information furnished in the project for scrutiny is the true to the best of my
knowledge and belief devoid of plagiarism. If plagiarism under the circumstances is truly
established, the Law School may be pleased to proceed with any action against me
according to the Universitys rules and regulations.



Aditya Rajasthani
Section--- A
10-10-14







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ACKNOWLEDGEMENTS

At the outset, I take this opportunity to thank my Professor Mr. Kumar Govind Rajan
from the bottom of my heart who has been of immense help during moments of anxiety
and torpidity while the project was taking its crucial shape. Hence, I as a student am
forever deeply indebted to him.
Secondly, I convey my deepest regards to the administrative staff of TNNLS who held
the project in high esteem by providing reliable information in the form of library
infrastructure and database connections in times of need.
Thirdly, the contribution made by my parents and friends by foregoing their valuable time
is unforgettable and highly solicited. Their timely advice and solid supervision paved the
way for the successful completion of this project.
Finally, I thank the Almighty who gave me the courage and stamina to confront all
hurdles during the making of this project. Words are insufficient to acknowledge the
tremendous contributions of various people involved in this project--- as I know Words
are Poor Comforters. I once again wholeheartedly and earnestly thank all the people
who were involved directly or indirectly during this project making which ultimately
paved the way for me to complete the task of project making within the stipulated time.









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SUPERVISORS CERTIFICATE

This is to certify that the Research Project entitled: USEFULNESS OF GUARANTOR
UNDER CONTRACT OF GUARANTEE submitted to the Tamil Nadu National Law
School; Tiruchirappalli, in fulfillment of the requirements for internal component for B.A.
LL.B (Hons.), 3
rd
semester is an original and bona-fide research work carried out by
ADITYA RAJASTHANI under my supervision and guidance. No part of this study has
been submitted to any University for the award of any Degree or Diploma whatsoever.


Prof. Kumar Govind Rajan ( )



Date: 15-10-14
Place: Tiruchirappalli.








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LIST OF ABBREVIATIONS


www World Wide Web
v. Versus
SCC Supreme Court Cases
SC Supreme Court
S. Section
i.e. That is
p. Page No.
Ltd. Limited
UK United Kingdom
Etc. Etcetera
Ed. Edition
Co. Company
Civ. Civil
Bom. Bombay
All E R All England Reporter
AIR All India Reporter
AC. Appeal Cases
Paragraphs
Paragraph
HC High Court
Q.B. Queens Bench
Rep Repeal
Dr. Doctor
Div. Division




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INDEX OF AUTHORITIES

























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TABLE OF CONTENTS

PREFACE
CHAPTER 1 : INTRODUCTION
CHAPTER 2 : MEANING OF GUARANTEE
CHAPTER 3 : KINDS OF GUARANTEE- BANK GUARANTEE
CHAPTER 4 : RIGHTS AND DUTIES OF THE RESPECTIVE PARTIES
CHAPTER 5 : USEFULNESS OF A CONTRACT OF GUARANTEE
CONCLUSION AND SUGGESTIONS
BIBLIOGRAPHY












Page | 8

PREFACE

INTRODUCTION:
Literally, the term wager implies bet. In todays scenario, wagering agreements,
bookies, etc. has been on constant rise and is a big menace to the society. As a result,
even legislations and laws have failed in preventing these kind of betting agreements
which are not only illegal but cause huge monetary loss indirectly or directly affecting the
governments exchequer and the economy. According to the Indian Contract Act, 1872,
wagering agreements are basically illegal and are not encouraged as per Section. 30. In
this regard, the wagering agreements in contracts become void ab initio. Since it is void,
it is not even backed up by law. Wagering agreements even include gambling, gaming,
cards, etc. The primary loophole is that there has been no effective law to completely
nullify these acts or to curb them from growing. As a result, it has extensively grown
roots and has posed a serious threat to the very life and breadth of law.

OBJECT OF STUDY:
This research has been broadly undertaken to study the following:
1. To understand the meaning of wager and its dimensions;
2. Analyzing the effects of wagering agreements;
3. Existing laws pertaining to wagering agreements;
4. Distinguishing wagering agreements from other branches of contract law;
5. Differentiating wagering agreements with their provisions in Indian law and
English law;
6. Understanding speculative transactions with respect to wagering agreements;
7. Agreements which are collateral to wagering agreements and;
8. Derivatives of wagering agreements.



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HYPOTHESIS:
1. Whether wagering agreements by its very nature are very grave and is the Indian
Contract law well-equipped to meet all the pros and cons of its legalities at present?? If it
were so, what are the other viable options available to the aggrieved party for claiming
relief as part of their substantial damages?
2. Can wagering agreements be rightly differentiated from its other derivates and be
established that there should be more severe laws dealing with such unprotected
agreements in Indian Contract Act??

METHODOLOGY:
I have done this research project relating to the topic WAGERING AGREEMENTS IN
CONTRACTS. Primarily, all information furnished in this project have been taken from
standard texts and authentic sources from the first and second hand legal sources. Also
recent trends and developments that took place in the issue of wagering agreements have
also been taken into account and highlighted. Standard footnotes have been provided at
appropriate places wherever needed to acknowledge the source.

LIMITATION OF RESEARCH:
This research project titled WAGERING AGREEMENTS IN CONTRACTS limits
itself to the domain of Wagering agreements and its associated derivatives which in the
recent years have taken exclusive developments and as a result deserves importance.
Though the subject matter is very exhaustive, only significant aspects in this project have
been primarily focused and highlighted.
Every effort has been to keep this project error free. But still, if some errors might have
crept in owing to many factors, I would gratefully acknowledge the suggestions of readers
to make this project more useful and enduring to everyone.


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CHAPTER 1: INTRODUCTION

A contract is an agreement enforceable by law. It becomes enforceable only when it is validcontract. 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 project, I will be dealing with agreements against public policy which isdefined in section 30 of
Indian Contract Act, 1872. This can be read as:-

What is a Wager?
Literally the word 'wager' means a 'a bet': something stated to be lost or won on the result
of a doubtful issue, and, therefore, wagering agreements are nothing but ordinary betting
agreements. Thus where A and B mutually agree that if it rains today A will pay B Rs.
100 and if it does not rain B will pay A Rs. 100 or where C and D enter into an agreement
that on tossing up a coin, if it falls head upwards C will pay D Rs. 50 and if it falls tail
upwards D will pay C Rs. 50, there is a wagering agreement.
In Thacker vs. Hardy Cotton
1
, L.J., described a 'wager' as follows: "The essence of
gaming and wagering is that one party is to win and the other to lose upon a future event
which, at the time of the on tract, is of an uncertain nature - That is to say, if the event
turns our own way, A will lose; but if it turns out the other way, he will win."
Wagering Agreements are non-enforceable under Section 30 of Contract Act.

Possibly the most expressive and all-encompassing definition of "Wagering Agreement"

1
(1878) 4 Q.B. Div., 685

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was given by Hawkins, J., in Carlill vs. Carbolic Smoke Ball Co.
2
,i.e. ,
"A wagering agreement is one by which two person profession to hold opposite views
touching the issue of a future uncertain event mutually agree that, dependent upon the
determination of that event, one shall win from the other, and the other shall pay or hand
over to him, a sum of money or other stake; neither of the contracting parties having any
other interest in that contract than the sum of stake he will so win or lose, there being no
other real consideration for the making of such contract by either of the parties.
The above definition excludes event which have occurred. Hence Sir William Ansons
definition, A promise to give money or moneys worth upon the determination and
ascertainment of an uncertain event, is nearer and more accurate
3
.
It is essential to a Wagering Agreement that each party under it may 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
lose, or may lose but cannot win, it is not a Wagering Agreement."
Certain aspects of the above definition require to be emphasized. In the first place, wager
is a game of chance in which the contingency of either gain or loss is wholly dependent
on an 'uncertain event.' An event may be uncertain, not only because it is a future event,
but because it is not yet known the parties.
The meaning of wagering is staking something of value upon the result of some future
uncertain event, such as a horse race, or upon the ascertainment of the truth concerning
some past or present event.

Section 30 of the Indian Contract Act 1872, talks about Wagering Agreements, which
reads as-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 event on which any wager is made.


2
(1892) 4 Q.B. 484
3
See Ansons PRINCIPLES OF THE ENGLISH LAW OF CONTRACT, 22nd edition by A.G. Guest,(1964), p. 301

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CHAPTER 2: ESSENTIALS FOR WAGERING AGREEMENTS

Mutual chances of gain and loss-
There must be two parties, or two sides, and mutual chances of gain and loss, i.e., one
party is to win and the other to lose upon the determination of the event. It is not a wager
where one party may win but cannot lose, or if may lose but cannot win, or if he can
neither win nor lose, if one of the parties has the event in his own hands, the transaction
lacks an essential ingredient of wager. It is of the essence of the wager that each side
should stand to win or lose according to the uncertain or unascertained event in reference
to which the chance or risk is taken.If winning or losing is completely based on skill
there will be no wager (Cole v. Odhams press ltd.) it should be dependent on chance.

Two parties-
There must be two persons, either of whom is capable of winning or losing.
.you cannot have two parties or more than two sides to bet. You may have a
multipartite agreement to contribute to a sweepstake (which may be illegal as a lottery if
the winner is determined by skill), but you cannot have a multipartite agreement for a bet
unless the numerous parties are divided in to two sides, of which one wins or the others
loses, according to whether an uncertain event does not happen
4
.

Uncertain Event-
Uncertainty in the minds of the parties about the determination of the event in one way or
other is necessary. A wager generally contemplates a future event; but it may even relate
to an event which has already happened in the past, but the parties are not aware of its
result or the time of its happening.

4
Retrieved from http://www.legalserviceindia.com/article/l376-Wagering-Contracts.html

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The first thing essential to wager is that the performance of the bargain must depend upon
the determination of an uncertain event. A wager generally contemplates future events;
but it may even relate to an event which has already happened in the past, but it may even
relate to an event which has already happened in the past, but the parties are not aware of
its result or the time of its happening.

No interest other than stake-
Neither party should have any interest in the happening of the event other than the sum or
stake he will win or lose. To constitute a wager, the parties must contemplate the
determination of the uncertain event as the sole condition of their contract. The stake
must be the only interest which the parties have in the contract.

Neither party to have control over the event-
Lastly, neither party should have control over the happening of the event one way or the
other. Birdwood J. in (Dayabhai Tribhovandas v. Lakshmi Chand)
5
,If one of the
parties has the event in his own hands, the transaction lacks an essential ingredient of a
wager.








5
ILR P Bom 358

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CHAPTER 3: EFFECTS OF WAGERING AGREEMENTS

Section 30 provides 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 anyperson to
abide by the result of any game or other uncertainevent on which any wager is made.
Thus, in India all agreements by way of wager are void.
A wagering agreement is Void Ab Initio, and Section 65 has no application to it. Money
paid directly by a third party to a winner of a bet cannot be recovered from the loser.
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.

Firstly, the Contract Act applies to formation and operation of contracts, which are
private agreements, and have no penal effect. Section 30 merely makes a contract which
is entered into by way of a wager unenforceable in law; that is, you cannot go to the court
suing your counter-party for breaching any agreement that relates to a wager. However,
this does not render the contract illegal.

Secondly, where a transaction happens upfront that is money or transferable
instruments which are treated like money, such as cheques/drafts are handed over to
fulfill the obligations under a wagering agreement, we can say that the transaction was
complete on the spot. After this, if the party required to the under the wagering agreement
wants to reverse the transaction, or do not honor the cheque or draft issued, this provision
will not protect her.


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Thirdly, this provision necessitates that any commercial gambling activity in India, even
if legal and held under licenses granted by the government or otherwise, cannot let
anyone participate on credit. If someone wants to play, they should be required to pay on
the spot before participating in the wager.
It is theoretically possible to receive payment in cheque or draft, but these are more likely
to be withheld or litigated upon, and given the cost and time taken in India to resolve any
legal dispute, it is not an advisable to take payment though these instruments.
Payment through credit cards in India is banned by Reserve bank of India.

The Calcutta High Court in Badridas Kothari vs. Meghraj Kothari
6
held that although a
promissory note was executed for the payment of the debt caused through wagering
transaction, the note was held not to be enforceable. Similarly, money deposited with a
person to enable him to pay to the party winning upon a wager cannot be recovered. The
winner cannot recover the money, but before it is paid to him the depositor may recover
from the stake holder. But where the money has already been paid over, it cannot be
recovered back (Bridger v. Savage
7
)
It has been laid down by the Supreme Court, in Gherulal Parekh vs. Mahadeo Das
8
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 is enforceable.
Wagering Agreement Void and not Illegal
In India, unless the wageramounts to a lottery, which is a crime according to Section 294-
A ofthe Indian Penal Code, it is not illegal but simply void. Thus, except incase of
lotteries, the collateral transactions remain enforceable.



6
AIR 1967 Cal 25
7
(1885) 15 QBD 363
8
AIR 1959 SC 781

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LOTTERIES
Lottery is an arrangement for the distribution by chance amongpersons purchasing
tickets. The dominantmotive of the participants need not be gambling. Where a
wageringtransaction amounts to a lottery,it is illegal as per Sec. 294-A of the Indian Penal
Code. WheretheGovernment of India had sanctioned a lottery, the Court held thatthe
permission granted by the Government will not have the effect ofoverriding Sec. 30 of the
IndianContract Act and making such a lottery legal. Its only effect was thatthe persons
responsible for runningthe lottery would not be punishable under the Indian Penal Code.
However, in H. Anraj v. Govt. of Tamil Nadu
9
, theSupreme Court upheld lotteries with
the prior permission of theGovernment as legal, thereby conferring upon the winner of a
lottery,a right to receive the prize and the sale of lotteries subject topayment of sales-tax.
Supreme Court held that a sale of lottery ticketconfers on the purchaser thereof two rights
(a) a right to participate in the draw and(b) a right to claim a prize contingent upon his
being successful in thedraw.
Exceptions (Transactions Held Not Wagers).
The following transactions have been held not to be wagers:
1. Transactions for the sale and purchase of stocks and shares, or forthe sale and delivery
of goods,with a clear intention to give and take delivery of shares or goods, asthe case
may be. Notice that, where the intention is only to settle inprice difference, the transaction
is a wager and hence void.
2. Prize competitions which are games of skill, e.g., picture puzzles,athletic competitions.
Thus, an agreement to enter into a wrestlingcontest in which the winner was to be
rewarded by the entire sale.





9
AIR 1986 SC 63

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CHAPTER 4: LAWS RELATED TO WAGERING AGREEMENTS

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 Act
10
, 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.
The nature of gambling is inherently vicious and pernicious. 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, the United States of
America and Australia. The Hindu law relating to gambling has not been introduced in
the Law of Contract in India. Gambling is not trade and commerce, but res extra
commercial and therefore not protected under Art. 19(1) or Art. 301.











10
DayabhaiTribhovadas v. Lakshmichand, (1885) 9 Bom 358 at 362

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CHAPTER 5: 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
11
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. 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 accepted from invalidity under Section 18 even though they might
amount to wagering contracts. For example, contracts for differences or bets on stock
market indices.

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, 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

11
See Universal Stock exchange ltd. V. Strachan , (1896) AC 166 , (1895-99) All ER Rep 751

Page | 19

interest or feelings of a third person, did not lead to indecent evidence and was not
contrary to public policy.
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
wagering agreements, and are hence not enforceable in Indian Courts under Section, 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 Parekh v. MahadeodasMaiya
12
, 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 Case
13
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,

12
AIR 1959 SC 781
13
Hill v. William Hill (Park Lane) Ltd. (1949) AC 530, (1949) 2 All ER 452

Page | 20

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. If at all, such provisions can be called unlawful, then that doesnt beget the
Section 23 as cited above it ultimately defeats the provisions of the above said Section 18
of the Gaming Act which is absurd.
















Page | 21

CHAPTER 6: VARIATIONS- WAGERS DISTINGUISHED FROM CONTRACT OF
INSURANCEAND CONTRACT OF GAMING

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 facia adverse
to the interest of the insurer
14
. If a insures 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
15
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
16
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.

For e.g. a truck owned by A 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 negative by
the High Court.

14
See Prudential Insurance co. v. Commrs of inland revenue, (1904) 2 KB 658 at 663
15
Retrieved From
http://www.advocatekhoj.com/library/bareacts/marineinsurance/index.php?Title=Marine%20Insurance%20Act,
%201963
16
Retrieved from http://www.jus.uio.no/lm/england.marine.insurance.act.1906/doc.html

Page | 22

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 Nadu
17
, the 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 eliminated- is one in which success depends principally upon the
superior knowledge, training, attention, experience and adroitness of the player.












17
1996 AIR 1153, 1196 SCC (2) 226

Page | 23

CHAPTER 7: SPECULATIVE TRANSACTIONS

A speculative contract is not necessarily a wagering contract
18
, 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 be 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.




18
See BhagwandasParasram v. BurjorjiRuttonjiBomanji, (1918) 45 IA 29, AIR 1917 PC 101

Page | 24

CHAPTER 8: AGREEMENT COLLATERAL TO WAGERING AGREEMENT

Contract collateral to a wagering agreement is not necessarily unenforceable
19
. Section 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 S. 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
20
. 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
compelled. 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, 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 brokerage, 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

19
Ram Gopal v. Govind Das, AIR 1944 All 196 (held to be a wager)
20
(1959) Supp 2 SCR 406 at 432, AIR 1959 Sc 781 at 792

Page | 25

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.

In England also, agreements collateral to wagering contracts were not void before the
enactment of the Gaming Act 1892. Thus in Read v Anderson
21
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 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).


21
(1884) 13 QBD 779

Page | 26

CHAPTER 9: 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 vs. Strachan
22
, the court held that wagering contracts included
contracts for differences.
Halsbury
23
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 day.

In the second decision, City Index Limited v. Leslie
24
, 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.

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.

22
(1896) AC 166
23
See Halburyslaws of Engliand, Vol. 4
th
ed, para 9
24
(1991) 3 All ER 180 (CA)

Page | 27

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
clarify 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 Limited
25
.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

25
AIR 2011 MAD 144

Page | 28

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 plaintiff did not always stand to lose. Citing Indian
case law, 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 Parekh vs.
Mahadeodas Maiya, 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.







Page | 29

CONCLUSION AND SUGGESTIONS

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.




Page | 30

BIBLIOGRAPHY

BOOKS REFERRED-
Pollock &Mulla, Indian Contract and Specific Relief Acts, thirteenth edition,
volume 1
st
.
Chitty on Contract, volume II, Thomson Reuters (Legal) Limited.
Avatar Singh, Contract & Specific Relief, tenth edition, Eastern Book
Company.
Ansons Law of Contract, 29
th
Edition, OXFORD UNIVERSITY PRESS,
London, 2010
R.K. Bangias Law of contract-1
st
, 6
h
Edition, Allahabad Law Agency, 2009.

WEBSITES REFERRED-
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
www.scribd.com
www.legalservicesindia.com
www.indiankanoon.com
www.advocatekhoj.com