1. This suit for the recovery of balance of the price of goods said to have been sold to the defendants involves a difficult question of considerable public importance viz., whether., 'A claim arising out of a transaction entered into between the parties otherwise than in the open market and intended to be carried out with the aid of unaccounted funds, popularly called the 'black money' and to defraud public revenues is invalid and unenforceable.
2. The plaintiff, a registered partnership carrying on wholesale business in textiles and hosiery goods in a large wav as a representative of a number of leading manufacturing units and having number of sister concerns, claims to have supplied on various dates between October 21, 1969 and December 28. 1969, hosiery goods of the total value of Rs. 1,68,059.25 to defendant No. 2 carrying on business in the name and style of defendant No. 1 against the said defendant's chits out of which the said defendant is said to have paid a sum of Rs. 25,000/- thereby leaving a balance of Rs. 1,58,857.11 inclusive of interest at 12% per annum-in accordance with the terms of the contract pursuant to which the goods were supplied. It is further claimed that the aforesaid chits contained the details of the goods, such as their description, quality, value and freight etc., and were duly signed by the said defendant No. 2 at the time of delivery; that the delivery was followed by regular bills containing all the details and the transactions and the payment recovered from the defendants in cash were duly reflected in the books of accounts of the plaintiff which were duly maintained in the ordinary course of business.
3. The defendants deny that any legal or valid contract of sale for the supply of goods was ever entered into between the parties or the goods a alleged were either purchased or received by the defendants from the plaintiff. It is contended that the bills are fake and fictitious and so are the entries in the books of accounts of the plaintiff and that the suit is based on a false claim as a counter-blast to the complaint of a criminal offence filed by the defendant against the plaintiff for fraud and should be dismissed with costs. It is further averred that the chits purporting to be delivery challans said to represent the delivery of goods to the defendant contained interpolations, over-writings and are suspicious in character: that these were never signed in token of receipt of goods and 'the plaintiffs have been procuring requirements of goods from time to time from the answering defendant on these chits which the plaintiffs were required to deliver later an as and when they received such goods from the wholesale dealers of the manufacturers'; that the plaintiff normally sent goods with regular delivery challans followed by bills on which plaintiff obtained the signature of the buyer; that the bills in the present case were also made from one bill book in a consecutive order showing thereby that the transactions were made up: that no payment towards the transactions in dispute was made by the defendant to the plaintiff and a sum of Rs. 25,000/- referred to by the plaintiff. represented a payment made by the defendant to the plaintiff towards another transaction in which the plaintiff did not deliver the goods even though they received the payment and got the goods released from the transporter and this transaction forms subject-matter of a criminal action filed by the defendant against the plaintiff.
4. On the pleadings of the parties, the following issues-were framed on February 12, 1971:
1. Whether the plaintiff is a registered partnership firm?
2. Whether the plaintiff supplied to the defendants the goods in suit? (Onus Objected to)
3. What ii the price of the goods supplied?
(After discussing issues Nos. 1 to 3 and the evidence produced by the parties (Paras. 5 to 27), the judgment proceeded):
28. The question that requires consideration under this issue is as to the relief to which the plaintiff would, in the circumstances, be entitled.
29. The position that emerges on my conclusions on Issues Nos. 2 and 3 is that the goods in question had been supplied by the plaintiff to the defendants pursuant to an agreement for the sale of the aforesaid goods entered into between the parties in the black market and the consideration for the promise to supply the goods was to consist of unaccounted funds popularly known as the 'black money'.
30. The question, and it is one of considerable public importance and great legal difficulty, that thus arises is whether such a contract is illegal, unlawful or void and, thereforee, unenforceable so that a Court of law would decline to assist a suitor in an action for the claim arising out of it.
31. Before embarking upon the examination of the aforesaid question, it may be proper to point out that, for reasons, which are quite obvious. The defendants did not resist the claim of the plaintiff on the ground that the contract was unlawful or void on account of taint of black money in its consideration or because of the illegality in the object of the contract, namely, the fraud of the revenues. While hearing arguments it occurred to me that, having regard to the suspicious manner of the execution of the contract and the suspicious circumstances attending an it, the contract was prima facie unenforctable as being opposed to public policy, in that, the consideration for the promise by the plaintiff to supply the goods and the object for the contract appeared to be unlawful as being opposed to public policy and I, thereforee, put it to learned counsel for both the parties, my first impression with regard to the nature of the transaction and invited such submissions in that behalf that they may have to make on law or on facts. Learned counsel for both the parties observed an understandable reticence on both the questions and almost gave a tacit assurance that even if it was found that the transaction had been entered into as found by me above, it would not vitiate the transaction or render it void on any ground or prevent enforcement of any claim based on it in a Court of law.
32. Be that as it may, in view of the state of the pleadings and the attitude of the learned counsel for the parties with regard to the aforesaid question, I spent some time wading through the English as well as Indian reports on this aspect Of the law of contract to which I would presently make a reference. I may, however, point out that the failure or refusal of any party to raise the question as to the enforceability of a contract on the ground of its being void, unlawful or illegal, being contrary to public policy or any statute would not prevent a Court, nor absolve it from its obligation, to determine for itself if the process of law would be available to a suitor whose claim may be based on a contract which may be illegal, unlawful or void on account of being contrary to law or the consideration or the object of which may be opposed to public policy. It appears to me to be well settled that if the illegality or unlawfulness of a transaction is brought to the notice of a Court, the Court will not assist a suitor whose claim was based on such a transaction even if the defendant did or did not wish to set up such a defense. The legal position obtaining in England in that behalf and, the law in India do not appear to me to be any different and has been succinctly summarised by Halsbury's Laws of England, 3rd Edition, Vol. 8 at p. 125 in the following words:
'If the illegality of a transaction is brought to the notice of the Court, whether the contract ex facie shows illegality, or it appears in the course of the proceedings, and the person invoking the aid of the Court is himself implicated in the illegality. the court will not assist him, even if the defendant has not pleaded the illegality and does not wish to raise that objection.'
In Connally, (Connally v. Consumer's Cordage Co., (1903) 89 Lt 347 the question of illegality was raised on its own motion by the Court of Appeal for the first time. I have, thereforee, no hesitation in considering the question if the contract in the present case could be said to be unlawful or void and as to its impact on the claim of the plaintiff.
33. In England an agreement which tends to be injurious to the public or against public good is void at Common Law as being contrary to public policy.(Halsbury's laws of England . 3rd Edn. Vol. 8, Para 233 at p.130. ) Even though it is a country wedded to contractual freedom, it is recognised that any contract that tends to prejudice any social or economic interest of the country must he forbidden.'(Cheshire: Law of Contract. 8th Edition. Page 319. ) What contracts would be contrary to public policy has been subject-matter of considerable controversy. At one time. it was thought that the rules already established in that behalf by precedent may be moulded to fit the new conditions of a changing world, yet it was no longer legitimate for the courts to invent a new head of public policy. In course of time, however, this concept underwent considerable change and it was recognised that the determination of what was contrary to public policy must necessarily vary from time to time and it was pointed out that the rules remain but 'its application varies with the principles which for the time guide public opinion'. (Halsbury's Law of England. 3rd Edition. Vol. 8 .Para 224 at p.131. ) Recent thinking on this branch of the law favors a more dynamic approach and it is suggested 'the law relating to public policy cannot remain immutable. it must change with the passage of time. The wind of change blows upon it, '(Per Danckwerts, L. J.. in Nagle v. Feilden, (1966) 2 Qb 633 On the application of these principles, it has been universally recognised that a contract to defraud the revenues or that tends to promote corruption in public life or which tends to prejudice social and economic interest of the community would be void and unenforceable as being opposed to public policy. The general principle has peen exemplified and extended to contracts which may be ex-facie lawful but which were intended to be exploited for an illegal purpose, Alexander v. Rayson, (1936) 1 Kb 169 or to provide a setting for an act, which may be contrary to the policy of the law. 16 tLj 287. In all such cases, the Courts in England have refused to grant relief based on such contracts on the principle of ex dolo malo non oritur actio. that is, no Court will lend its support to a man who founds his cause of action upon an immoral or an illegal act. It has, however, been recognised in England that if the illegal consideration constituted a subsidiary or a minor part of the total consideration and if the illegality did not involve a criminal act or one contra bonos mores, the illegal part of the consideration may be severed from the rest of the consideration and the legal promises may be enforced and in such cases, the principle of severability has been applied. It has also been recognised that in case a claimant has relented and withdrawn from the contract before the illegal purpose has been substantially performed, money paid or goods delivered pursuant to such a contract could be recovered from the other party.(Halsbury's laws of England, 3rd Edn., Vol .8. Para 258 at p. 150. )
34. In India, the law on the subject is contained in Sections 10 and 23 of the Contract Act. According to Section 10, an agreement is enforceable only if it is made for a lawful consideration and with a lawful object. Section 23 however, declares what kinds of considerations and objects are not lawful. Section 23 is in the following terms:
'23. The consideration or object of an agreement is lawful, unless-
It is forbidden by law; or is of such a nature that, if permitted, it would defeat the provisions of any law: or
is fraudulent, or involves or implies injury to the parson or property of another; or the Court regards it as immoral, or opposed to public policy.
In each of these cases, the consideration or object of an agreement is said to be up-lawful. Every agreement of which the object or consideration is unlawful is void. '
To the extent it is relevant to the present discussion, the Section provides that 'the consideration or object of an agreement is lawful unless - the Court regards it .......... opposed to public policy ' in which case, the consideration or object would be unlawful and further provides that 'every agreement of which the object or consideration is unlawful is void.' It has been recognised in India that Section 23 was inspired by the Common Law of England and should be construed in that light, per Subba Rao, J., in Gherulal parakh v. Mahadeo Das, : AIR1959SC781 , and has in fact been construed in the light of the principles and precedents that have prevailed in England. It is thereforee, beyond controversy that where the consideration or the object of an agreement is opposed to public policy, such an agreement would be void and could not be enforced in any Court of law. As regards the concept of public policy the cautious approach of Courts in England that new heads of public policy should not be propounded has been adopted in India and it has been pointed out that the Courts should ordinarily 'expound' and not 'expand' the frontiers of public policy. It has, however, at the same time been recognised, as in England, that the existing heads are not closed and theoretically it may be permissible to evolve new heads in the circumstances of a changing world, it was advisable in the interest of stability of a society not to make any attempt to discover new heads in these days, : AIR1959SC781 . The maxim ex dolo malo non oritur actio has also been applied to India and so have the principles of severability and the various exceptions to the rule that the Court will not lend its aid in a cause founded on illegal contract. . The maxim as applied in India was thus stated by Hidayatullah, J., while speaking for the Court in Kedar Nath Motani v. prahlad Rai, : 1SCR861 .
'The correct position in law, in our opinion. is that what one has to see is whether the illegality goes so much to the root of the matter that the plaintiff cannot bring his action without relying upon the illegal transaction into which he had entered. If the illegality be trivial or venial, as stated by Williston and the plaintiff is not required to rest his case upon that illegality, then public policy demands that the defendant should not be allowed to take advantage of the position. A strict view, of course, must be taken of the plaintiff's conduct, and he should not be allowed to circumvent the illegality .by resorting to some subterfuse or by misstating the facts. If, however, the matter is clear and the illegality is not required to be pleaded or proved as part of the cause of action and the plaintiff recanted before the illegal purpose was achieved, then, unless it be of such a gross nature as to outrage the conscience of the Court, the plea of the defendant should not prevail.'
35. It, thus, appears to me to be beyond doubt, both on principle and precedent, that, except in exceptional cases, referred to by Hidavatullah, J., the Court would not lend its, assistance to a suitor whose cause was based on a contract which was opposed to public policy. As regards the true concept of public policy, it appears to me that if the Courts in England, where free trade obtains, could deviate from the accepted notions of public policy and propound the theory, as was done by Danckwerts L. J. in Nagla (1966) 2 Qb 633 (Supra), that the law relating to public policy could not remain 'immutable' and must change with the passage of time because 'the wind of change blows upon it', why would it remain static in a developing society like India where the content of socio-economic policy of the State, as envisaged in the Constitution, is based on social control of means of production and where, having regard to the almost total crisis of character among those engaged in industry, trade and commerce, there was extensive fraud of the revenues and the widening pernicious influence of the black economy was casting its evil influence in polluting the entire system to the point of posing a threat to its very stability. The frontiers of public policy need not necessarily be confined to the conservative limits conceived in England and must undergo drastic change so as to meet the new situations that emerge. In any event, it became clear that whichever way one looks at the concept of public policy, a contract which had for its objects the fraud of the revenues or the generation or consumption of black money would be considered to be sufficiently tainted so as to disentitle a suitor to a relief in a Court of law based on such a contract.
36. Two further questions must however, be answered before a decision could be arrived at in the present case, namely, (1) whether a contract, as in the present case for the sale of goods which is ex-facie innocuous could be said to be tainted and be within the mischief of the provisions of Section 23 of the Contract Act merely because it was carried out in such a way or was intended to be carried out in such a way so as to defraud the revenues and to find an outlet for or generate black money: (2) if the answer to the first question be in the affirmative, whether the plaintiff would be entitled to the relief because the hands of the defendants were equally soiled and the plaintiff having recanted, did not rely on the part of the contract which involved the taint.
37. At this stage, it occurred to me that it may be proper to direct the attention of the learned counsel for the parties to the aforesaid material and to give them an opportunity if they had anything to say in relation to it or if they could bring to bear any fresh thinking on the question or could rely on any other principle or precedent one way or the other. I, thereforee, had the matter reheard vis--vis the aforesaid two questions. in the course of a brief hearing, learned counsel for the defendant followed the line convenient to his client and contended that on the basis of the principles and the precedents referred to above, no relief could be given to the plaintiff on the basis of the aforesaid contract and that on the test laid down by Hidayatullah. J., in Kedar Nath Motani : 1SCR861 (supra), the plaintiff would not even be entitled to the relief of return of the goods and that the suit must, thereforee, be dismissed. On the other hand, learned counsel for the plaintiff, however, contended that the contract could not be said to be contrary to public policy even on the basis of the finding which I propose to return and that in any event, the hands of the defendants being equally soiled, there was no reason why the relief of return of goods be denied to the plaintiff. Learned counsel invoked the provisions of Section 65 of the Contract Act in support of his claim for such a relief and relied on the decision of the Supreme Court in the case of Kuju Collieries Ltd. v. Jharkhand Mines Ltd., : 1SCR703 . Learned counsel further contended that in the present state of the pleadings it was not open to the Court to refuse relief on ground of alleged taint to the transaction.
38. To my mind both the questions mooted above must in the present state of law, be answered in favor of the plaintiff. On the finding of fact returned by me that the contract for the sale of goods was entered into between the parties to be carried out with the aid of unaccounted funds to enable the purchaser to consume such funds, the seller to generate the same and as a result to defraud the revenue, the relief could not be refused to the plaintiff either on the basis of the provisions of Section 23 of the Contract Act or the general principles applied in England. Section 23 makes a contract illegal of which the 'consideration' or the 'object' is contrary to public policy. The consideration could not be said to be contrary to public policy because the corresponding considerations are the payment of money and delivery of goods because when the Section refers to consideration for the agreement it obviously implies consideration for the promise. Neither the payment of money by itself nor the delivery of the goods could be said to be contrary to public policy. The object of the contract could also not be said to be opposed to public policy because the object of the contract was not to consume or to generate unaccounted funds or to defraud the revenues. The object obviously was to do business - so far as the seller is concerned to sell the goods end so far as the purchaser is concerned to buy goods for further sale and in the process to make income. Neither the consumption nor the generation of unaccounted funds nor to defraud there venues could, thereforee, be said to be the object of the agreement. The object is, however, at times, given an extended meaning of a 'design' but neither of these can constitute a design for the agreement because the substantial design again was to do business. It may at best be described as an incidental purpose of the agreement to be achieved in the manner in which an innocuous agreement was to be carried out. Assuming, however, that the taint of unlawfulness attaches to the agreement even if it was ex-facie legal but was intended to be carried out by improper means, the claim of the plaintiff would still be saved on an application of the principle enunciated by Hidavatullah, J., both because the taint is clearly severable from the main agreement because under the compulsion of circumstances which led to the filing of the suit, the plaintiff had to recant from the original design. The taint is severable in the sense that the plaintiff sues on the innocent part of the contract when he claims recovery by a decree of the Court for the sale of the goods made by him, The manner in which the payment was to be made or the type of funds to be used for the purpose is not part of the relief sought by the plaintiff. The tainted part, thereforee, which consists in the manner in which the agreement was to be carried out, both by the defendant and the plaintiff, is clearly severable and beyond the scope of the relief. In the peculiar circumstances of the case, thereforee, no taint could attach to the part of the agreement which is sought to be enforced and to hold to the contrary would be tantamount to a differential treatment to the two persons whose hands are equally soiled and if the relief is refused to the plaintiff, I would be virtually making a wholly undeserved gift of a large amount of money to the defendants whose conduct was equally, if not more, reprehensible than that of the plaintiff.
39. In the result, the plaintiff succeeds and the claim of the plaintiff for Rs. 1,68,059.25 is decreed with costs. The plaintiff would also have interest on the said amount from the date of the suit till the date of the payment at 6% per annum.
40. Before parting with this case I must point out that if the way I have looked at the matter as to the enforceability of the c1aim represents the true legal position, there is urgent need of reform in the law of contract with a view to plug some of the loopholes in it so that any taint in the manner in which a contract may be carried out or may be intended to be carried out such as the fraud of the revenues or the generation or consumption of tainted money may vitiate the contract and bar a Court from giving any relief so that it may operate as a deterrant against such nefarious activities which need to be curbed in the interest of national economy and political stability.
41. Suit decreed.