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The 2G Spectrum Scam: Invoking In Equal Fault Exception

Aayush Pandey is a third-year law student at Gujarat National Law University.


The Supreme Court of India recently ruled Loop Telecom and Trading Limited v Union of India and Others that the Appellant wasn't entitled to funds it paid under a void agreement. The court denied the demand for reimbursement under Section 65 of the Indian Contract Act, 1872 ("Act"), relying on “in pari delicto,”(in equal fault) the doctrine laid down in N.V.P. Pandian vs M.M. Roy and underlined that Courts can't support a party that paid money or transferred property under an illegal or immoral transaction.

Facts of the Case

The Appellant and the Indian Government ("GOI") contracted for "Unified Access Services." The Appellant paid the Government of India an Entry Fee per the Unified Access Services Licence ("UASL") agreement. The Supreme Court later annulled the distribution of UASLs on the grounds that the GOI's criteria for allocating the same was arbitrary and unlawful, in the case of Centre for Public Litigation v. Union of India.

On the basis of this petition to the Telecom Disputes Settlement and Appellate Tribunal ("TDSAT"), the appellant claimed his entry fees from the Government of India. While the petition was pending, the appellant was subject to criminal proceedings in connection with awards of UASLs before a Special Judge of the Criminal Bureau of Investigation ("CBI"). The TDSAT denied the petition for a number of reasons, including:

  1. There is no legal basis for abolition of UASLs under Sections 23 and 56 of the Act. Section 65 of the Act doesn't apply to the appellant.

  2. For these reasons, the Appellant's Section 65 restoration request is barred by "in pari delicto potio rest condition defendentis,” (in case of equal fault, the position of defendant is stronger).

After criminal proceedings were dismissed, the appellant submitted another TDSAT plea, which was again denied. Pursuant to Section 18, TRAI Act (Telecom Regulatory Authority of India Act, 1997), the appellant filed civil appeals against the dismissal of both petitions before the Supreme Court, which has now been adjudicated.

Arguments by the Appellant

The Appellant asserted, among other arguments, that:

  1. Under Section 56 of the Act, each licence (as a contract) was deemed to have been frustrated by the Court's UASL revocation.

  2. Under Section 65 of the Act, the Appellant was entitled to a refund of the Entry Fee because the UASLs was nullified due to the GOI's error.

  3. After the Appellant was found not guilty in the criminal proceedings, the bedrock of the TDSAT ruling was obliterated.

  4. The Act is relevant to the Appellant's claim because no government action has prevented a reimbursement. The Act's implications followed the UASLs' nullification and quashing. The GOI must return all benefits and advantages gained from the appellant. This is why Sections 56 and 65 of the Act address frustration and restitution.

  5. Quashing of the UASLs gave rise to a right to compensation. Accordingly, the Appellant is not barred from asserting its reparation claim, even though the similar claim might have been asserted in the UASLs quashing proceedings.

Arguments by the Respondent

The Appellant asserted, among other arguments, that:

  1. The Appellant is not entitled to a refund of the Entry Fee since the UASL's quashing proceedings were not allowed.

  2. Refunding the Entry Fee is unaffected by Appellant's dismissal from criminal proceedings, as the matter merely addressed a breach of UASL Guidelines.

  3. When quashing the UASLs, the court awarded costs against the appellant for illegal and arbitrary UASL distribution profits. The Appellant is not entitled to in pari delicto restitution under contract law.

Ruling of the Court

The Court ruled, among other things, that the UASLs were in the character of a contract between the parties Union of India v. AUSPI, and thus the requirements of the Act applied.

Section 56 of the Act, which deals with contract frustration, isn't limited to physical impossibility, the court reaffirmed, citing Satyabrata Ghose vs Mugneeram Bangur & Co. For the purpose of determining whether the doctrine applies in a given situation, the test to be applied is whether the conduct agreed to be contractually performed is either impossible or illegal.

In interpreting the principles of restitution as outlined in Section 65 of the Act, the Court has found, among other things:

  1. Section 65 of the Act does not function in contravention of the maxim "in pari delicto potior est conditio possidentis," (in equal fault, better is the condition of the possessor). It is not applicable where both parties were in pari delicto and both sides were aware of the illegality when they participated in the transaction, according to Section 65 of the Indian Contract Act.

  2. The legal maxim “ex turpi causa non oritur action,” (no action can arise from a bad cause) is the root of the argument of illegality that applies to all demands for restoration. As a result, a court will not provide assistance to those who seek to prolong illegality as per the Principle of Law of Restitution.

  3. The theory of in pari delicto serves to qualify the ex turpi causa defence. Thus, if the claimant bears an equal share of the blame for the wrongdoing, in pari delicto rules apply and compensation is rejected as per the Principle of Law of Restitution.

  4. The Supreme Court, while relying on the judgement of the UK Supreme Court in the case of Patel vs Mirza held that the courts must consider whether the claiming party was complicit in the illegal wrongdoing out of necessity, or if the rule of law protected them from the defendant in order to determine whether restitution should be awarded to them. Absent the fulfilment of the aforementioned requirements, the claiming party would be deemed to be in pari delicto.

  5. The Court will not intervene if both parties are involved in fraud and/or are in pari delicto. As a result, it will lean toward an approach that is less likely to hurt public interest. (Naraynamma And Anr vs Govindappa And Ors).

Considering that: (a) the Appellant was determined to be in pari delicto in the GOI's allocation scheme, which entailed receiving advantages at the public's expense; and (b) the well-established principles of restitution outlined in the preceding section, the Court decided that it was not appropriate for the Appellant to seek reimbursement for any amount paid as the Entry Fee.

In conclusion, the Court concluded that the Appellant's acquittal by the CBI was on separate grounds and would not contradict the Court's judgments in the CPIL verdict. The Appellant's acquittal did not affect its position.

Analysis and Concluding Remarks

Section 65 of the Act states that a benefit receiver is entitled to repayment if an agreement is later proved to be void. In the Indian Contract Act, according to the aforementioned provision, every person who has benefited from such an arrangement is obligated to reimburse or recompense the party who has benefited from it.

Although it is common knowledge that Section 65 of the Act applies if the parties were aware that their agreement was not valid and hence void, this is not the case in situations where the parties are “in pari delicto” (Kuju Collieries Ltd vs Jharkhand Mines Ltd). The wording "found to be void" and "becomes void" in the clause imply that it applies to agreements that were void ab initio but not known to the parties at the time of their entering, or that became void as a result of subsequent event (Kuju Collieries Ltd vs Jharkhand Mines Ltd).

Section 65 of the Act does not apply since both parties knew the arrangement was illegal when they signed the contract. The contract was void from the start. Section 65 assures that a party to an unlawful agreement can't get back whatever benefit they obtained from the other side (Pranballav Saha And Anr. vs Sm. Tulsibala Dassi And Anr). This means that under Section 65 of the Act, a person can claim restitution, provided that they are not in pari delicto since the notion of restitution is not premised on an unlawful contract, but is instead separated from it as per Kanuri Sivaramakrishnaiah vs Vemuri Venkata Narahari Rao

In the case of Sita Ram vs Radhabai And Ors, the Supreme Court carved out specific defenses/exceptions to the rule of in pari delicto and remarked that the said rule shall not be applied when (a) the unlawful intention has not been carried out before the subject payment is made or the subject commodities are delivered; (b) the claimant does not have to depend on the illegality to bring out the claim; and (c) the claimant is not in pari delicto with the respondent.

In view of the above rationale, it is reasonable to conclude that the Indian courts have appropriately prohibited restoration of any illegality-based claim. Furthermore, the Courts do not permit themselves or their processes to be used to assist claimants who are in “pari delicto or particips criminis”.

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