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Restitution Under the Contracts Act: The In Pari Delicto Exception

The Supreme Court recently denied the Appellant restitution of certain sums paid under a void agreement in Loop Telecom and Trading Limited v Union of India and Others. While rejecting the restitution claim under Section 65 of the Indian Contract Act, 1872 (“Act”), the Court relied 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.

The Government of India (“GOI”) granted the Appellant Unified Access Services Licenses (“UASL”), and UASL agreements were entered into between the parties. The Appellant paid an Entry Fee to the GOI under the terms of the UASL agreement. Following that, the Supreme Court quashed the grant of UASLs in Centre for Public Interest Litigation v Union of India (“CPIL”) on the grounds that the GOI’s policy for allocating them 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 UASLs could not be quashed under the Act, nor could they be equated with becoming void under Sections 23 and 56 of the Act. As a result, the Appellant is unable to seek restitution under Section 65 of the Act.

B. In light of the Appellant’s criminal proceedings, the principle of in pari delicto potio rest condition defendentis (“in pari delicto”) would also bar the Appellant’s claim for restitution under Section 65 of the Act.

However, following the Appellant’s acquittal in the criminal proceedings, the Appellant filed a second petition before the TDSAT, which was also dismissed. Dissatisfied with the TDSAT’s dismissal of both petitions, the Appellant filed civil appeals before the Supreme Court under Section 18[5] of the Telecom Regulatory Authority of India Act, 1997 (“TRAI”).

Arguments by the Parties

The Appellant, among other things argued that:

A. The Court’s cancellation of the UASLs amounted to the cancellation of each licence (which was in the nature of a contract) under Section 56 of the Act.

B. The Appellant was entitled to restitution of the Entry Fee under Section 65 of the Act because the UASLs were quashed due to the GOI’s fault, not the Appellant’s.

C. The Appellant’s acquittal in the criminal proceedings wiped away the foundation of TDSAT’s decision.

D. The provisions of the Act would be applicable to the Appellant’s claim, particularly in the absence of any legislative intervention precluding the grant of refund. When the UASLs were declared null and void, the Act’s consequences followed. As a result, the GOI’s benefits/advantages should be returned to the Appellant. As a result, the doctrines of frustration and restitution under Sections 56 and 65 of the Act are invoked.

E. Following the abolition of the UASLs, the right to seek restitution arose. Consequently, the Appellant is not barred from pursuing its restitution claim, even if it could have done so in the UASL’s quashing proceedings.

The Respondent, among other things argued that:

A. The Appellant cannot seek restitution for the Entry Fee because it was not granted during the UASLs quashing proceedings.

B. The Appellant’s acquittal in the criminal proceedings has no bearing on the refund of the Entry Fee because the criminal proceedings were only concerned with the violation of UASL Guidelines.

C. Furthermore, the Court imposed costs on the Appellant while quashing the UASLs for obtaining wrongful benefits from the unconstitutional and arbitrary allocation of the UASLs. As a result, the Appellant is not entitled to restitution under contract law based on the principles of in pari delicto.

Court’s Findings

The Court held, among other things, that the UASLs were in the nature of a contract between the parties[6], and thus the Act’s provisions applied.

The Court, citing Satyabrata Ghose v Mugneeram Bangur & Co.[7], reiterated that Section 56 of the Act, which deals with the doctrine of contract frustration, is not limited to cases of physical impossibility. The applicable test for determining the applicability of the said doctrine is that of supervening impossibility or illegality of the act agreed to be contractually performed.

Furthermore, while interpreting the principles of restitution enshrined in Section 65 of the Act, particularly in a situation where a contract is discovered to be/becomes void, the Court held, inter alia, as follows:

A. Section 65 of the Act has no effect on 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 parties were in pari delicto and were aware of the illegality at the time the agreement was made.

B. All claims for restitution are subject to an illegality defence, which derives from the legal maxim ex turpi causa non oritur action (no action can arise from a bad cause). As a result, a court will not assist those seeking to perpetuate illegality.

C. The doctrine of in pari delicto qualifies the ex turpi causa defence. As a result, when the claimant is equally responsible for the illegality, in pari delicto principles apply and restitution is denied.

D. When determining a restitution claim, courts must consider whether the claiming party participated in the illegal act voluntarily or whether the rule of law provided them with protection against the defendant. In the absence of the aforementioned conditions, the claiming party would be considered in pari delicto. The decision of the UK Supreme Court in Patel v Mirza was cited in this regard.

E. If both parties in court are confederates in fraud and/or are in pari delicto, the Court will not assist them. It will lean toward a less harmful approach to the public interest.

As a result, the Court held that the Appellant was not entitled to a refund of its Entry Fee in light of (a) the CPIL judgement, in which the Appellant was found to be complicit in obtaining benefits under the GOI’s allocation policy at the expense of the public exchequer, i.e., was in pari delicto; and (b) the well-established principles of restitution u/s 65 of the Act as enunciated above.

Finally, with regard to the Appellant’s acquittal by the CBI, the Court held, inter alia, that the acquittal was on separate grounds and would not invalidate the Court’s findings in the CPIL decision. As a result, the Appellant’s acquittal had no bearing on the Appellant’s case.

Analysis and Conclusion

Section 65 of the Act addresses the principle of restitution when a benefit has been received and the agreement is later discovered to be void, or when the contract becomes void. According to the said section, anyone who has benefited from such an agreement is obligated to restore or compensate for it.

However, it is well established law that Section 65 of the Act does not apply where the parties were aware that the agreement was illegal and thus void, i.e. where the parties were in pari delicto. 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 that are either void ab initio but were not known to the parties at the time of entering into it[15], or became void due to a subsequent event.

As a result, it would not be incorrect to state that Section 65 of the Act is inapplicable where the illegal aspect of the agreement was known to the parties at the time it was entered into. In such a case, the agreement would be null and void from the start. Section 65 makes it impossible for a party criminis to recover any benefit received by the other party as a result of an illegal agreement. As a result, the net effect of the doctrine of restitution under Section 65 of the Act is that it allows a person to claim restoration if he or she is not in pari delicto, because it is not based on an illegal contract but is dissociated from it.

However, in the case of Sitaram v. Radha Bai, the Supreme Court, among other things, carved out certain defenses/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 on the illegality to make out the claim; and (c) the plaintiff is not in pari delicto with the defendant.
Based on the foregoing discussion, it is possible to conclude that Indian courts, in accordance with the principles of law and equity, have rightfully barred restitution of any claim arising from an underlying illegality. Pertinently, the Courts do now no longer permit themselves and their methods to useful resource litigants who’re in pari delicto or particips criminis.

By Anoushka Amar