Introduction
In its recent judgement of Loop Telecom and Trading Limited v Union of India and Another[1], the Supreme Court denied the Appellant restitution of certain sums paid by it under a void agreement. The Court, while rejecting the claim for restitution u/s 65[2] of the Indian Contract Act, 1872 (“Act”), placed reliance on the doctrine of ‘in pari delicto’, and reiterated that courts shall not assist a party who has paid the money or handed over the property in pursuance of an illegal or immoral contract[3].
Factual Background
The Appellant was awarded Unified Access Services Licenses (“UASL”) by the Government of India (“GOI”) and accordingly, UASL agreements were entered into between the parties. Under the UASL agreement, the Appellant paid an Entry Fee to the GOI. Subsequently, the grant of UASLs was quashed by the Supreme Court vide its judgement of Centre for Public Interest Litigation v Union of India[4] (“CPIL”) on the ground inter-alia that the policy of the GOI for allocation of the same was arbitrary and illegal.
The Appellant filed a petition before the Telecom Disputes Settlement and Appellate Tribunal (“TDSAT”) inter-alia to claim a refund of the Entry Fee from the GOI. During the pendency of the said petition, the Appellant was also facing criminal proceedings in relation to the grant of UASLs before a Special Judge, Central Bureau of Investigation (“CBI”). The said petition was dismissed by TDSAT inter-alia on the following grounds:
A. The quashing of the UASLs could neither be brought under the Act nor could it be equated with becoming void under Section 23 and 56 thereof of the Act. Hence, the Appellant cannot claim restitution under Section 65 of the Act.
B. In arguendo, in light of the criminal proceedings against the Appellant, the principle of in pari delicto potio rest condition defendentis (“in pari delicto”) would also bar the Appellant’s claim for restitution u/s 65 of the Act.
However, upon the Appellant’s acquittal from the criminal proceedings, a second petition was instituted by the Appellant before the TDSAT, which was also dismissed. Aggrieved by the TDSAT’s dismissal of both the petitions, the Appellant instituted (the instant) civil appeals under Section 18[5] of the Telecom Regulatory Authority of India Act, 1997 (“TRAI”), before the Supreme Court.
Arguments by the Parties
The Appellant inter-alia argued that:
A. The quashing of UASLs by the Court amounted to frustration of each license (which were in the nature of a contract) under Section 56 of the Act.
B. The Appellant was entitled to restitution of the Entry Fee in terms of Section 65 of the Act, as the UASLs were quashed due to the culpability of the GOI and not the Appellant.
C. The substratum of TDSAT’s decision was wiped off by the acquittal of the Appellant in the criminal proceedings.
D. The provisions of the Act would be applicable to the claim of the Appellant inter-alia considering the absence of any legislative intervention precluding the grant of refund. Once the UASLs were held void and quashed, the consequences under the Act followed. Hence, the benefits/ advantages received by the GOI ought to be returned to the Appellant. Therefore, the doctrines of frustration and restitution under Section 56 and 65 of the Act, respectively, are attracted.
E. The right to claim restitution arose after quashing of the UASLs. In arguendo, the Appellant is not precluded from raising its claim for restitution even if the same could have been made in the UASLs quashing proceedings.
The Respondent inter-alia argued that:
A. The Appellant cannot claim restitution of the Entry Fee, when the same was not granted on the adjudication of the UASLs quashing proceedings.
B. The Appellant’s acquittal from the criminal proceedings has no bearing on the refund of the Entry Fee as the same was only concerned with the violation of UASL Guidelines.
C. Moreover, costs were imposed by the Court inter alia on the Appellant while quashing the UASLs for earning wrongful benefits from the unconstitutional and arbitrary allocation of the UASLs. Therefore, under contract law, the Appellant is not entitled to restitution based on the principles of in pari delicto.
Court’s Findings
The Court inter-alia held that the UASLs were in the nature of a contract between the parties[6] and therefore the provisions of the Act were applicable.
The Court, placing reliance on the judgement of Satyabrata Ghose v Mugneeram Bangur & Co.[7], reiterated that Section 56 of the Act, which deals with the doctrine of frustration of the contract, is not limited to the cases of physical impossibility. While deciding applicability of the said doctrine, the test applicable is that of supervening impossibility or illegality of the act agreed to be contractually done.
Further, the Court while interpreting the principles of restitution as enshrined u/s 65 of the Act, more particularly in a situation when a contract is discovered to be/ becomes void, held inter-alia as under:
A. Section 65 of the Act does not operate in derogation of the maxim, in pari delicto potior est conditio possidentis (in equal fault, better is the condition of the possessor). Section 65 does not apply when both the parties knew of the illegality at the time the agreement was entered into and were in pari delicto[8].
B. All the claims for restitution are subject to a defence of illegality, which finds its genesis in the legal maxim ex turpi causa non oritur action (no action can arise from a bad cause). Hence, a court will not assist those who aim to perpetuate illegality[9].
C. The doctrine of in pari delicto is a way of qualifying the defence of ex turpi causa. Therefore, in situations where the claimant is equally responsible for the illegality, in pari delicto principles apply and restitution will be denied[10].
D. In determining a claim for restitution, courts must assess whether the claiming party participated in the illegal act involuntarily or if the rule of law offered them protection against the defendant. In the absence of the above conditions, the claiming party would be held to be in pari delicto. Reliance in this regard was placed on the decision of the UK Supreme Court in Patel v Mirza[11].
E. In the event both the parties before the court are confederates in fraud and/or are in pari delicto, the Court shall not assist them. It shall lean in favour of an approach that is less injurious to public interest[12].
Therefore, the Court, in light of (a) the judgement of CPIL, whereunder the Appellant was held to be among the group of licensees who were found to be complicit in obtaining benefits under the allocation policy of the GOI at the cost of the public exchequer, i.e., were in pari delicto; and (b) the well-settled principles of inter-alia restitution u/s 65 of the Act as enunciated above, held that the Appellant was not entitled to claim a refund of its Entry Fee.
Lastly, in reference to the Appellant’s acquittal by the CBI, the Court inter-alia held that the acquittal was on separate grounds and the same would not obliterate the findings of the Court in the decision of CPIL. Therefore, the acquittal of the Appellant had no bearing on the case of the Appellant.
Analysis and Conclusion
Section 65 of the Act deals with the principle of restitution, in a situation where a benefit has been received, and the agreement is later discovered to be void, or when the contract becomes void[13]. Under the said section, any person who has received any advantage under such an agreement is bound to restore the same or compensate for it.
However, it is trite law that Section 65 of the Act does not apply where the parties knew that the agreement is not lawful, and therefore void i.e., where the parties are in pari delicto[14]. This is also supported by the use of the expressions “discovered to be void” and “becomes void” in the said section, which clarifies that it is applicable to agreements which are either void ab initio but was not known to be so by the parties at the time of entering into it[15], or it became void on account of a subsequent event.
Therefore, it would not be incorrect to state that Section 65 of the Act is inapplicable where the aspect of the agreement being illegal, was to the knowledge of the parties at the time it was entered into. In such a case, evidently the agreement would be void ab initio. Section 65 ensures that a particeps criminis cannot obtain restoration of any advantage received by the other party under an illegal agreement[16]. Hence, the net effect of the doctrine of restitution u/s 65 of the Act is that it enables a person to claim restoration, provided that such person is not in pari delicto, since it is not based on an illegal contract but dissociated from it[17].
However, the Supreme Court in the case of Sitaram v. Radha Bai[18] inter-alia carved out certain defences/ exceptions to the rule of in pari delicto and observed that the said rule shall not be applicable where (a) the illegal purpose has not been carried out before the subject money is paid or goods are delivered; (b) the plaintiff does not have to rely upon the illegality to make out the claim; and (c) the plaintiff is not in pari delicto with the defendant.
From the above discussion, it may be concluded that the Courts in India, in consonance with the principles of law and equity, have rightfully barred restitution of any claim originating from an underlying illegality. Pertinently, the Courts do not allow themselves and their procedures to aid litigants who are in pari delicto or particips criminis[19].
For further information, please contact:
Aditya Mehta, Partner, Cyril Amarchand Mangaldas
aditya.mehta@cyrilshroff.com
[1] 2022 SCC OnLine SC 260
[2] Section 65. Obligation of person who has received advantage under void agreement, or contract that
becomes void.—When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it to the person from whom he received it.
[3] N.V.P. Pandian v. M.M. Roy, 1978 SCC OnLine Mad 40
[4] (2012) 3 SCC 1
[5] Section 18. Appeal to Supreme Court.– (1) Notwithstanding anything contained in the Code of Civil Procedure, 1908 (5 of 1908), or in any other law, an appeal shall lie against any order, not being an interlocutory order, of the Appellate Tribunal to the Supreme Court on one or more of the grounds specified in section 100 of that Code.
(2) No appeal shall lie against any decision or order made by the Appellate Tribunal with the consent of the parties.
(3) Every appeal under this section shall be preferred within a period of ninety days from the date of the decision or order appealed against:
Provided that the Supreme Court may entertain the appeal after the expiry of the said period of ninety days, if it is satisfied that the appellant was prevented by sufficient cause from preferring the appeal in time.
[6] Union of India v. AUSPI, (2011) 10 SCC 543
[7] 1954 SCR 310 (Para 10)
[8] R Yashod Vardhan and Chitra Narayan, Pollock & Mulla’s The Indian Contract Act and Specific Relief Acts Volume I (16th edition, LexisNexis)
[9] Graham Virgo, The Principles of Law of Restitution (3rd Edition, OUP), Holman v Johnson 98 ER 1120, 1121
[10] Ibid.
[11] [2016] 3 WLR 399
[12] Kuju Collieries Ltd. v Jharkhand Mines Ltd. (1974) 2 SCC 533 (Para 8), Inmani Appa Rao v Gollapalli Ramalingamurthi (1962) 3 SCC 739 (Para 12), Narayanamma v Govindappa (2019) 19 SCC 42 (Para 28)
[13] R Yashod Vardhan and Chitra Narayan, Pollock & Mulla’s The Indian Contract Act and Specific Relief Acts Volume I (15th edition, LexisNexis)
[14] Kuju Colleries Ltd. v Jharkhand Mines Ltd., [1975] 1 SCR 703 (Para 6)
[15] Ibid
[16] Pranballav Saha and Anr v Tulshi Bala Dassi and Anr, 1958 SCC OnLine Cal 103 (Para 98)
[17] Sivaramakrishnaiah v. Narahari Rao, AIR 1960 AP 186, Supra 13 (Para 9)
[18] A.I.R. 1959 S.C. 781
[19] Supra 14
