Pari Delicto - Restitution's Nemesis?
Chetna Alagh
7 Feb 2024 10:01 AM IST
In the jurisprudence of contract law, various doctrines have established precedents which have helped the law to evolve with the efflux of time through robust judicial interpretation. One such intriguing doctrine is the doctrine of pari delicto, flowing from the latin expression meaning in equal fault. It closely bonds itself with another doctrine of ex turpi causa, which holds that...
In the jurisprudence of contract law, various doctrines have established precedents which have helped the law to evolve with the efflux of time through robust judicial interpretation. One such intriguing doctrine is the doctrine of pari delicto, flowing from the latin expression meaning in equal fault. It closely bonds itself with another doctrine of ex turpi causa, which holds that actions shouldn't follow from improper causes. The major thrust of both these doctrines circumscribes the role of the courts in legal tangles where the disputants are at equal fault. The result of the equal fault can be garnered from the misconduct of the parties, if any, or an action done incorrectly or any involvement of the parties in criminal offences. The Indian Contract Act, 1872, (hereinafter, Contract Act) throws emphasis on the fact that a party which has been profited wrongfully by virtue of an agreement termed as void, has to compensate the other party for that profit. Interestingly, the doctrine of pari delicto acts as an exception to the principle of the Contract Act enshrined in Section 65. Before dwelling into the aspect of the rationale of the doctrine of pari delicto it would be apposite to discuss the gravamen of Section 65 of the Contract Act.
The genesis of Section 65 can be garnered from the treatise of Pollock & Mulla's the Indian Contract Act. It elucidates that this provision has a circumscribed sweep and it, in no way, whatsoever, tries to fit into the shoes of the doctrine of pari delicto. This statement is also strengthened by the commentary on the Contract Act authored by R Yashod Vardhan and Chitra Narayan which reiterates that Section 65 applies in situations not addressed by these maxims. When an agreement that was initially found to be valid and compliant with the maxims turns out to be valid subsequently, Section 65 comes into the picture. Both the commentaries find strong resonance in the fact that Section 65 does not apply in circumstances where both parties were in pari delicto—that is, the parties were cognizant of the agreement being illegal from the inception. Hence, in accordance with the fundamental tenet of law restitution is not a remedy accessible to those in pari delicto, the applicability of Section 65 is limited to situations in which the party requesting restitution is not equally at fault with the counterparty.
The Hon'ble Supreme Court of India in Sita Ram v. Radbhai and Ors., 1968 AIR 534, explained the pari delicto doctrine and outlined exceptions to its strict application. The court elaborated that when a claimant is a party to an illegal agreement, the court should not enforce it. It was held that when the plaintiff is not equally at fault with the defendant; when the illegal purpose has not been substantially carried out prior to seeking recovery; and when the plaintiff's claim does not depend on the illegality to support its validity, the doctrine of pari delicto emerges. Further, in the case of Kuju Collieries Ltd. v. Jharkhand Mines Ltd.,1974 AIR 1892, a three-judge bench of the Hon'ble Supreme Court relied on the judgement in Budhulal v. Deccan Banking Company, A.I.R. 1955 Hyd. 69, pronounced by a five-judge Hyderabad High Court Bench, in which the Bench rejected the idea that Section 65 of the Indian Contract Act is applicable even in situations where the parties are in pari delicto. The court emphasized that the phrase "discovered to be void" in the section implies that the plaintiff has discovered it later. The court noted that Section 65 would not apply and the agreement would be void ab initio if both parties were aware of the illegality at the time of its creation. Elaborating on the maxim in pari delicto potior est conditio defendentis, the court explained that in cases of pari delicto, where both the transferor and transferee are equally at fault, the courts do not provide assistance. The ruling also emphasized the Indian Trust Act's Section 84 exception, which applies in situations where keeping the property would be illegal or where the transferor is not as guilty as the transferee. This notion can be said to be in consonance with the rule that states that an agreement is not subject to Section 65 if both parties knew from the beginning that it had an illegal purpose.
The Hon'ble High Court of Delhi analyzed the doctrine of pari delicto at length in Vinod Popli v. Ragini Popli, (2015) 219 DLT 294, wherein the court held that two parties to a lawsuit who are in pari delicto, neither may request a remedy from the court because they bear equal responsibility or guilt. Reliance was placed on the judgement of the U.S. Supreme Court in the case of Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299 (1985) wherein the court held that the common law defense in pari delicto cases is based on two claims i.e., first, that the courts shouldn't use their good offices to arbitrate conflicts between wrongdoers; and second, that depriving an admitted wrongdoer of judicial relief is a useful strategy for discouraging illegal activity.
Over and above that, in the year 2022 the Hon'ble Supreme Court of India in the matter of Loop Telecom and Trading Limited v Union of India and Another, 2022 LiveLaw (SC) 238, rejected the appellant's request to have the money paid under a void agreement returned. It was held that when both parties are equally at fault and know the agreement was illegal when it was made, Section 65 does not apply. In such a case, the law recognizes that Section 65, which addresses restitution, does not apply when there is joint and several liability for participating in an illegal act. Furthermore, it was clarified that the defense of illegality, which has its roots in the legal maxim "ex turpi causa non oritur actio" (no action can arise from a wrong cause), can be used against any claim for restitution. The defense based on 'ex turpi causa' is defined by the concept of "in pari delicto." It was clarified that while adjudicating a restitution claim under Section 65 of the Contract Act, a duty is cast upon the courts to scrutinise the illegality because of which the contract became void and the party's part in it who is claiming restitution. Therefore, in pari delicto principle, restitution is prevented when it is found that the party claiming it bears equal or greater responsibility for the wrongdoing.
Keeping in view the aforementioned discussion there is no gainsaying that the doctrine of pari delicto is a clear exception to Section 65 of the Contract Act. Whenever there is joint and several liabilities, Section 65 does not apply when the participation of the parties involves an illegal act. The principle of restitution will not apply when the party claiming restitution was equally involved in the illegality of the contract. In deciding a claim of restitution, the claiming party's involvement in the illegal act has to be understood and if it is found that the restitution claimed by a party was not carried out voluntarily, nothing will save such a party to be in pari delicto and its claim in restitution is bound to fail.
It is the bounden duty of the courts to chalk out the illegality in a void contract and the role of the parties in it especially of the party claiming restitution. It can also be seen that when it comes to cases involving parties engaged in illicit agreements or other transactions, the pattern of the Indian courts can be observed minutely, upholding the legal principle regarding participants in shared wrongdoing, regardless of whether the transactions are classified as mala prohibita (prohibited by law) or mala in se (inherently immoral). The Courts have refrained from interfering to provide any kind of relief to the parties who are equally at fault in their legal disputes.
Views are personal.
