Wagering Agreements: The Position Of Law
Literally the word ‘wager’ means ‘a bet’ something stated to be lost or won on the result of a doubtful issue, and, therefore, wagering agreements are nothing but ordinary betting agreements.
Section 30 of the Indian Contract Act talks about wagering agreements, which reads as “agreements by way of wager are void”. The section does not define ‘wager.’ Section 30 states that,
“Agreements by way of wager are void; and no suit shall be brought for recovering anything alleged to be won on any wager, or entrusted to any person to abide the result of any game or other uncertain event on which any wager is made.”
Exception in favour of certain prizes for horse racing –
“This section shall not be deemed to render unlawful a subscription or any contribution, or
agreement to subscribe or contribute, made or entered into for or toward any plate, prize or
sum of money, of the value or amount of five hundred rupees or upwards, to be awarded to the winner or winners of any horse race.”
Section 294A of The Indian Penal Code not affected –
“Nothing in this section shall be deemed to legalize any transaction connected with horse
Racing, to which the provisions of S.294A of The Indian Penal Code (45 of 1860) apply.”
The expression “wager” has not been defined in the Indian Contract Act. A classic definition is however available in the case of Carlill v Carbolic Smoke Ball Co.
“ A wagering contract is one by which two persons, professing to hold opposite views touching the issue of a future uncertain event, mutually agree that, dependant on the determination of that event, one shall win from the other, and that other shall pay or hand over to him, a sum of money or other stake; neither of the parties having any other interest in that contract than the sum or stake he will so win or lose, there being no other consideration for making of such contract by either of the parties. If either of the parties may win but cannot lose, or may lose but cannot win, it is not a wagering contract.”
The above definition excludes event which have occurred. Hence Sir William Anson’s definition, “a promise to give money or money’s worth upon the determination and ascertainment of an uncertain event”, is nearer and more accurate.[ii] This seems to reduce the following essentials:
Essentials of Section 30:
· Mutual chances of gain and loss
There must be two parties, or two sides, and mutual chances of gain and loss,[iii] i.e., one party is to win and the other to lose upon the determination of the event. It is not a wager where one party may win but cannot lose, or if may lose but cannot win, or if he can neither win nor lose, ‘if one of the parties has the event in his own hands, the transaction lacks an essential ingredient of wager.’[iv] ‘It is of the essence of the wager that each side should stand to win or lose according to the uncertain or unascertained event in reference to which the chance or risk is taken.’[v]
· Two parties
There must be two persons, either of whom is capable of winning or losing.
‘….you cannot have two parties or more than two sides to bet. You may have a multi partite agreement to contribute to a sweepstake(which may be illegal as a lottery if the winner is determined by skill), but you cannot have a multipartite agreement for a bet unless the numerous parties are divided in to two sides, of which one wins or the others loses, according to whether an uncertain event does not happen’.[vi]
· Uncertain Event
Uncertainty in the minds of the parties about the determination of the event in one way or other is necessary. A wager generally contemplates a future event; but it may even relate to an event which has already happened in the past, but the parties are not aware of its result or the time of its happening
The first thing essential to wager is that the performance of the bargain must depend upon the determination of an uncertain event. A wager generally contemplates future events; but it may even relate to an event which has already happened in the past, but it may even relate to an event which has already happened in the past, but the parties are not aware of its result or the time of its happening. [vii]
· No interest other than stake
Neither party should have any interest in the happening of the event other than the sum or stake he will win or lose. To constitute a wager, the parties must contemplate the determination of the uncertain event as the sole condition of their contract. The stake must be the only interest which the parties have in the contract.[viii]
· Neither party to have control over the event
Lastly, neither party should have control over the happening of the event one way or the other. “If one of the parties has the event in his own hands, the transaction lacks an essential ingredient of a wager.” [ix]
Effects of Wagering Agreement
A wagering agreement is void ab initio, and S. 65 has no application to it.[x] Money paid directly by a third party to a winner of a bet cannot be recovered from the loser.[xi] Even if a loser makes a new promise to pay for his losses in consideration of his not being posted, the promise cannot be enforced; but if he gives a cheque in discharge of his liability, the cheque may not be tainted with illegality because of the winner’s promise not to have the name posted. The cheques will not be enforceable by the original payee, but may be enforced by a third party holder of the cheque, even if he knew of the facts leading up to giving of the cheque.
It has been laid down by the Supreme Court, in Gherulal Parekh v.Mahadeo Das[xii] that though a wager is void and unenforceable it is not forbidden by law .Hence a wagering agreement is not unlawful under section 23 of the Contract Act and therefore the transactions collateral to the main transaction are enforceable.
Laws Related To Wager
This section represents the whole law of wagering now in force in India, supplemented by the Bombay state by the act for avoiding wagers (amendments) act 1865, which amended the act for avoiding wagers 1848. Before the act of 1848 the law relating to wagers in force in British India was the common law in England. By that law an action might be maintained on a wager, if it was not against the interest or feelings of third persons, did not lead to indecent evidence, and was not contrary to public policy. [xiii]
The nature of gambling is inherently vicious and pernicious.[xiv] Gambling activities which have been condemned in India since ancient times appear to have been equally discouraged and looked upon with disfavour in England, Scotland, the United States of America and Australia. The Hindu law relating to gambling has not been introduced in the law of contract in India.[xv] Gambling is not trade and commerce, but res extra commercium and therefore not protected under art 19(1) or art 301.[xvi]
Comparison with the English Law
Many countries have laws which render gaming or wagering contracts void. It is important to point out at the outset that these laws do not render gambling illegal. All they do is prevent the gaming and wagering contracts. The great majority of common law jurisdictions have adopted gaming laws based on the UK Gaming Act 1845. Legislation in all Australian jurisdictions for example is based on S. 18 of the Gaming Act, which provides that the contracts by way of wagering and gaming are null and void.[xvii] The Gaming and Wagering laws of Malaysia, Singapore, Hong Kong and New Zealand are also modeled after the UK Gaming Act.
Until the enactment of the Gaming Act, 1845, wagering contracts were not prohibited by law in England. But Section 18 of the Gaming Act, 1845 (UK) declared that all contracts or agreements by way of wager shall be null and void and that no suit shall be brought or maintained in any Court of law and equity for recovering any sum of money or valuable thing alleged to be won upon any wager. However, certain dealings in investments by way of business are excepted from invalidity under Section 18 even though they might amount to wagering contracts. For example, contracts for differences or bets on stock market indices.[xviii]
Section 30 of the Indian Contract Act 1872 is influenced by the English Gaming Act 1845. Heavily influenced by the English decisions, the judges have adopted the essential features of that of the gaming act. However, there is a major difference between the English and the Indian laws relating to wagers: under the English Gaming Act, 1845, agreements Collateral to the wagering agreement are also rendered to be void,38 whereas in India, collateral agreements are not necessarily void except in Bombay,[xix] because The object of such a collateral contract may not necessarily be unlawful. Further the Apex Court held that, “By law an act might be maintained on a wager if it was not against the interest or feelings of a third person, did not lead to indecent evidence and was not contrary to public policy.”[xx]
As previously mentioned, a number of Indian companies when incurring losses in foreign exchange dealings, construct an argument that derivative transactions are in the nature of wagering agreements, and are hence not enforceable in Indian Courts under Section [xxi], and hence do not give rise to any liability or financial obligations in respect of repayment of loan to the bank. As a result of this, many conservative Indian banks such as the State Bank of India refrained from entering into any sort of derivative transactions with their clients for a fairly long time.
In Gherulal Parakh v. Mahadeodas Maiya,[xxii] a question arose as to whether a partnership formed for the purpose of entering into forward contracts for the purchase and sale of wheat so as to speculate in rise and fall of price of wheat in future, was a wager and whether it was hit by Section 30 of the Contract Act. But the Supreme Court held that such a partnership was not illegal, although the business for which the partnership was formed, was held to involve wagering. It was held therein as follows:
After the enactment of the Gaming Act, 1845, a wager is made void but not illegal in the sense of being forbidden by law, and thereafter a primary agreement of wager is void but a collateral agreement is enforceable;
There was a conflict on the question whether the second part of Section 18 of the Gaming Act, 1845, would cover a case for the recovery of money or valuable thing alleged to be won upon any wager under a substituted contract between the same parties: the House of Lords in Hill's case[xxiii] had finally resolved the conflict by holding that such a claim was not sustainable whether it was made under the original contract of wager between the parties or under a substituted agreement between them;
So under the Gaming Act, 1892, in view of its wide and comprehensive phraseology, even collateral contracts, including partnership agreements, are not enforceable;
As Section 30 of the Indian Contract Act is based upon the provisions of Section 18 of the Gaming Act, 1845, and though a wager is void and unenforceable, it is not forbidden by law and therefore the object of a collateral agreement is not unlawful under Section 23 of the Contract Act; and partnership being an agreement within the meaning of Section 23 of the Indian Contract Act, it is not unlawful, though its object is to carry on wagering transactions.
Wagers Distinguished From
· Contract Of Insurance
A transaction of insurance resembles a wager. Every contract of insurance is a wager if the insurer has no insurable interest in the event upon which insurance money is payable. The insurance interest lies normally in that the event is one which is prime facia adverse to the interest of the insurer.[xxiv] If a insures cargo which he has loaded on a vessel , his contract is not a wager because his property is at risk during the voyage; but if has no cargo on board, the contract is a wager; because if the vessel is not lost, he loses the amount of premium.
Section 6 of the Marine Insurance Act 1963, provides that every contract of marine insurance by way of wager is void; and that a contract of marine insurance is deemed to be a wagering contract where the assured has not an insurable interest. The (English) marine insurance act 1906, also provides that a contract or Marine Insurance is deemed to be a gaming or wagering contract if the insured has no interest in the adventure.
A truck owned by a was transferred benami to b who got it insured in his own name. The truck was involved in an accident and it seriously injured a young army officer who claimed heavy damages from the owner, driver and the benamidar and the insurance company. It raised the plea that an ostensible owner (a benamidar) had no insurable interest and that it was a wager for that reason. But these pleas were negatived by the high court. [xxv]
· Contract Of Gaming
A gaming contract consist of the mutual promises which the players of the game necessarily make, express or by implication, in paying for a stake as to its transfer upon the result of the game. Such contract may be a wager if the parties are two. [xxvi]
In K.R. Lakshmanan (Dr) v State of Tamil Nadu [xxvii], the Supreme Court had an occasion to decide whether horse racing amounts to gaming as defined under the Madras City Police Act 1888, and the madras gaming act. It stated:
Gambling in a nutshell is a payment of a price for a chance to win a prize. Games may be of chance or of skill and chance combined. A game of chance is determined entirely or in part by lot or mere luck. A game of skill- although the element of chance necessarily cannot be entirely eliminated- is one in which success depends principally upon the superior knowledge, training, attention, experience and adroitness of the player.
· Speculative Transactions
A speculative contract is not necessarily a wagering contract, and must be distinguished from agreements by way of wager. This distinction comes into prominence in a class of cases where the contracts are entered into through brokers. The modus operandi of the defendant in this class of cases is, when he enters into a contract of sale, to purchase the same quantity before the vaida day; and when he enters into a contract of sale, to purchase the same quantity before the vaida day. This mode of dealing, when the sale and purchase are to and from the same person, has the effect, of course, of cancelling the contracts, leaving only differences to be paid. When they are different persons, it puts the defendant in the position vicariously to perform his contracts. This is, no doubt, a highly speculative mode of transacting business; but the contracts are not wagering contracts, unless it be the intention of both contracting parties at the time of entering into the contracts, neither to call for nor give delivery from or to each other. “There is no law against speculation as there is against gambling.” A fortiori, dealings between stockbrokers, whose regular course of business is periodical settlement of differences, are not presumed to be wagering agreements. It may well be that the defendant is a speculator who never intended to give delivery, and even that the plaintiffs did not expect him to deliver; but that does not convert a contract, otherwise innocent, into a wager. Speculation does not necessarily involve a contract by way of wager, and to constitute such a contract a common intention to wager is essential. It is in cases of above description that ‘there is a danger of confounding speculation, or that which is properly described as gambling, with agreements by way of wager; but the distinction in the legal result is vital.’ Every forward contract is to some extent speculative, but is not a wager or gamble on that account. The distinction between the two is a narrow one.
Agreements Collateral to Wagering Agreements
Contract collateral to a wagering agreement is not necessarily unenforceable.[xxviii] Section 30 of the Contract Act is based upon the provisions of S. 18 of the (English) Gaming Act 1845, and though a wager is void and unenforceable, it is not forbidden by law. Therefore the object of a collateral agreement is not unlawful under s 23 of the contract act.[xxix] But it is otherwise under the (English) Gaming acts of 1845 and 1892, the acts being wider and more comprehensive in phraseology, because they expressly render void even collateral transactions. As a result, though an agreement by way of wager is void, contract collateral to it or in respect of a wagering agreement is not void except in Bombay state. There is nothing illegal in the strict sense in making bets. They are merely void and there would be no illegality in paying them or giving a cheque, but payment cannot be compelled.[xxx] But an arbitration clause in a wagering contract is a part of the contract and not collateral to it and cannot therefore be enforced.[xxxi]
A collateral agreement is not unlawful under s 23 of the contract act.
Apart from Bombay enactment,[xxxii] there is no statute declaring void agreements collateral to wagering contract. Nor is there anything in the present section[xxxiii] to render such agreements void. The policy of law in India has been to sustain the legality of wagers and not to hit at collateral contracts.[xxxiv] It has accordingly been held that a broker or an agent may successfully maintain a suit against his principal to recover his brokerage,[xxxv] commission, or the losses sustained by him, even though contracts in respect of which the claim is made are contracts by way of wager.[xxxvi]
The Supreme Court has held that if agreement collateral to another or of aid in facilitating the carrying out of the object of the other agreement, which though void, is not in itself prohibited within the meaning of s 23 of the contract act, may be enforced as collateral agreement. If on the other hand it is part of a mechanism to defeat what the law has actually prohibited, courts will not countenance a claim based upon the agreement because it will be tainted with an illegality of the object sought to be achieved, which is hit by s 23 of the contract act. An agreement cannot be said to be forbidden or unlawful merely because it results in a void contract. a void agreement when coupled with other facts may become part of a transaction which creates legal rights but this is not so if the object is prohibited or mala in se.
In England also, agreements collateral to wagering contracts were not void before the enactment of the gaming act 1892. Thus in Read v Anderson[xxxvii] a betting agent, at the request of the defendant, made bets in his own name on behalf of the defendant. After the bets were made and lost, the defendant revoked the authority to pay conferred upon the betting agent. Notwithstanding the revocation, the agent paid the bets, and sued the defendant having empowered the agent to bet in his name, the authority was irrevocable, and that the agent was entitled to judgment. The statute of 1892, passed in consequence of this decision, is almost to the same effect as the Bombay act. It is interesting to note that the statute was not passed until 27 years after the Bombay act. It is hoped that in future, the revision of the contract act will corporate provisions of the Bombay act in the present section, so as to render the law uniform on this subject in the whole of India.
The act for Avoiding Wagers (amendment) act 1865 (Bombay act 3 of 1865)
The law is however, different in the state of Bombay. In that state, contracts collateral to or in respect of wagering transactions are prevented from supporting a suit by the special provisions of the act for avoiding wagers (amendment) act 1865 (Bombay act 3 of 1865). It was observed:
That act was passed to…..to close the doors of the courts of justice in the presidency to suits upon contracts collateral to wagering transactions where such collateral contracts have been entered into or have arisen since the act came into force, a purpose which it has effectually answered.
The position of derivatives under the common law
Two English decisions have caused concern among market participants that certain derivatives transactions may fall foul of the gaming and wagering laws. In Universal Stock Exchange v. Strachan[xxxviii], the court held that wagering contracts included contracts for differences. Halsbury defines contracts for differences as;
Agreements between those who are only ostensible buyers and sellers of stock and shares where the common interest of the parties is to pay or receive the differences between their prices on one day and their prices on another day’. [xxxix]
In the second decision, City Index Limited v. Leslie[xl], the court declared that contracts akin to cash-settled derivatives were ‘contracts for differences.’ The combined effect of both decisions is that cash-settled derivatives are wagering contracts and therefore unenforceable, unless exempted by legislation.
The common law position in Australia has been modified by statute. Section 1141 of the Australian corporations’ law protects the following categories of derivative contracts from the gaming and wagering laws:
· Those made on the futures market of the futures exchange, or a recognised futures market,
· Those made on an exempt futures market,
· Those permitted by the business rules of a futures association, a futures exchange, or a recognised futures exchange.
The risk that a contract may not be enforceable on the grounds of illegality is one that needs to be addressed. Generally, there is little risk of exchange traded derivatives falling foul of the gaming and Wagering laws in either the UK or other common law jurisdictions.
Regardless of the interest of the counterparties, there is no justification for treating derivative contracts as wagering or gaming contracts. They are no different from other commercial contracts entered into by parties on the daily basis. It is true they are more risky than other commercial contracts and some parties are attracted to derivatives by the prospects of windfall gains. But these factors do not make them wagering or gaming contracts any more than contracts to undertake some highly speculative business. Apart from the need to remove the existing uncertainties, regulators should also address the broader question of whether it is appropriate for gaming and wagering legislation to be applicable in the realm of financial transactions.
However, Indian contract law is indeed woefully deficient with regard to provisions That clarifies the legality of derivative contracts. The problematic question whether Derivative contracts are in the nature of wagering agreements is not answered by the Act till date and no Amendment to that effect has been passed either. Under Indian Exchange control laws, an Indian corporate, being a person resident in India, can Enter into a foreign currency derivative contract only to hedge an exposure to foreign exchange risk and not for speculating and yielding profits.[xli]
In the case of Rajshree Sugars &Chemicals Limited v Axis Bank Limited.[xlii] Since March 2008, Axis Bank and Rajshree Sugars have been fighting a legal battle over the foreign exchange derivatives contract, sold by the Bank to the company, thereby resulting in huge losses for the company estimated to be around Rs. 46-50 crores. The company had refused to make any loan repayment to the bank contending that the contract was a wagering deal, and hence untenable on such grounds. The court answered this issue in the negative. Based on the elucidations of various landmark judgments on wagers, the court evolved a threefold test to determine whether the contract is a wager - First, there must be two persons Holding opposite views touching a future uncertain event; second, one of those parties is to win and the other is to lose upon the determination of the event; third, both the parties have no actual interest in the occurrence or non-occurrence of the event, but have an interest only on the stake. The case in question fulfilled the first criteria, but the second was not satisfied because in the light of the facts of the case, the plaintiff did not always stand to lose. Citing Indian case law,[xliii] the judges make an interesting observation, that though every wagering contract is speculative in nature, every speculation need not necessarily be a wager. Further, a common intention to wager is essential, and an element of mutuality has to be present in the sense that the gain of one party would be the loss of the other on the happening of the uncertain event which is the subject matter of wager. In the light of abovementioned points and also adhering to the Supreme Court judgment in Gherulal Parakh v. Mahadeodas Maiya,[xliv] the Judges in this case concluded that the sequence of events in the present case reflected that the nature of the transaction was not in the form of a wager. Even though the plaintiff was susceptible to incurring huge losses yet that by itself could not deem the contract to be a wager.
Suggestions and Conclusion
As section 30 of the Indian Contract Act 1872 reads about agreements by way of wager, void.
Further The Contract Act does not define what constitutes a wager or a wagering agreement. It only mentions that such agreements will be void and unenforceable and no action can lie to either recover anything that is due under a wager or for performance of a contract that is in the nature of a wager. A wager is in the nature of a contingent contract but is prevented from being enforceable by Section 30.
Therefore, the Contract Act should provide an express definition that would clarify as to what constitutes a wager, thereby removing any ambiguity with regard to legality of derivative contracts which are in the nature of wagering agreements.
Also through the, in depth analysis of various cases, books and views of the learned scholars in this project it can be said that Section 30 of Indian Contract Act, 1872 needs to be reviewed critically.
Hence Section 30 should be amended to define the word wager. Since a lot of inconvenience and ambiguity have been faced by the judiciary while dealing with the issue of wagers, specifically as to what all constitute wagers and what all comes under the ambit of wagers. As different jurists and in different judgments the ambit of wagers is defined in different ways. In other words the scope of section 30 needs to be widened.
1891-94 All ER Rep 127
[ii] Sir William anson, law of contracts, quoted with approval by the supreme court in Gherulal Parekh v Mahadeodas Mahiya,  Supp 2 SCR 406, AIR 1959 SC 781.
[iii] Anson’s law of contract, twenty seventh edn , p 337; Sobhagmal Gianmal v. Mukundchand Balia AIR 1926 PC 119
[iv] Dayabhai Tribhuvandas v Lakshmichand Panachand (1885) ILR9 Bom 358(after citing the passage from anson’s law of contracts , as it stood in an earlier edition)
[v] E Sassoon v Takersey Jadhawjee (1904)ILR 28 Bom 616;Tote Investors Ltd v. Smoker3 ALL ER 242
[vi] Ellesmere v. Wallace 2 ch I
[vii] See Anson’s PRINCIPLES OF THE ENGLISH LAW OF CONTRACT, 22nd edition by A.G. Guest,(1964), p. 301
[viii] Carlill v Carbolic Smoke Ball Co [1891-1894] ALL ER Rep 127.
[ix] Birdwood j in Dayabhai Tribhuvandas v. Lakshmichand, (1885)9 Bom 358,363
[x] Dayabhai Tribhovandas v Lakhmichand Panachand (1885) ILR 9 Bom 358
[xi] CHT ltd v Ward 3 ALL ER 835
[xii] 1959 Supp (2) SCR 406 
[xiii] Ramloll Thackoorseydasss v. Soojunmull Dhondmull (1848) 4 MIA 339
[xiv] State of Bombay v. RMD Chamarboughwala  SCR 874, AIR 1957 SC 699
[xv] Gherulal Parakh v. Mahadeodas Maiya  Supp 2 SCR 406, AIR 1959 SC 781
[xvi] RMDC v. Union of India AIR 1957 SC 628, SCR 930
[xvii] See P Latimer, Futures Contracts and Gaming Laws (1993) 14 In the company lawyer 67
[xviii] City Index Ltd v. Leslie (1992) 1 Q.B. 92
[xix] The Act for Avoiding Wagers (Amendment) Act, 1865 (Bombay).
[xx] Gherulal Parakh v Mahadeodas Maiya, AIR 1959 SC 781. (Herein the dispute arose as to whether a partnership formed for the purpose of entering into forward contracts for the purchase and sale of wheat so as to speculate in rise and fall of price of wheat in future, was a wager and whether it was hit by Section 30 of the Contract Act. But the Supreme Court held that such a partnership was not illegal, although the business, for which the partnership was formed, was held to involve wagering).
[xxi] Rajshree Sugars & Chemicals Limited v. Axis Bank Limited, MANU/TN/0893/2008, ¶56.
[xxiii] (1921) 2 KB 351
[xxiv] Prudential Insurance Co v Commrs of Inland Revenue 2 KB 658
[xxv] Northern India General Insurance Co Ltd v Kanwarjit Singh Sobti, AIR 1973 All 357
[xxvi] Halsbury’s law of England, vol 4 fourth Edn, para 9
[xxvii] AIR 1996 SC 1153
[xxviii] Ram Gopal v Govind Das AIR 1944 ALL 196 (held to be a wager)
[xxix] Gherulal Parakh v Mahadeodas Maiya  supp 2 SCR 406, AIR 1959 SC 781
[xxx] Hill v William hill (park lane)ltd2 ALL ER 452
[xxxi] Karunakumar Data Gupta v Lankaran Patwari AIR 1933 Cal 59
[xxxii] Act for avoiding wagers(amendment) act 1865(bom act 3 of 1865)
[xxxiii] The expression ‘void’ in the section does not mean unlawful: Pringle v Jafar Khan(1883)ILR 5 ALL 443
[xxxiv] Gherulal Parekh v Mahadeodas Maiya Supp 2 SCR 406, AIR 1959 SC 781
[xxxv] Firm Hagami Lal Ram Prasad v Bhuralal Ram Narain AIR 1961 Raj 52
[xxxvi] Shibho Mal v Lachman Das (1901)ILR 23 ALL 165
[xxxvii]  13 QBD 779
[xxxviii]  2 KB 658
[xxxix] See Halsbury’s laws of England, above no.111, para 21.
[xl] 3 KB 234
[xli] M. R. Umarji, Legality of Derivative Transactions, Available at http://economictimes
.indiatimes.com / Opinion/Todays_Features/ Money_Banking/Legality_of_derivative_
transactions/articleshow/29178 85.cms (Last visited on December 4, 2009).
[xlii] MANU/TN/0893/2008, ¶56.
[xliii] Bhagwandas Parasram v. Burjori Ruttonji Bomanji, AIR 1917 PC 101
[xliv] Supra at note-29
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