A, C and D agree to divide gains acquired by fraud. A acquires gains but doesn't share. Can C and D sue A for division?

The Governing Provision: Section 23

Section 23 of the Indian Contract Act declares that the consideration or object of an agreement is unlawful if it is fraudulent — and every agreement of which the consideration or object is unlawful is void. The framers of the Act, with almost prophetic foresight, incorporated the precise facts of our problem as Illustration (e) to Section 23: "A, B and C enter into an agreement for the division among them of gains acquired, or to be acquired, by them by fraud. The agreement is void, as its object is unlawful."

This is not a marginal example. It is the statute speaking with absolute clarity. The object of the agreement between A, C and D — to divide gains obtained through fraud — is fraudulent within the meaning of Section 23. Fraud, as understood under this section, refers to an agreement made for a purpose that involves deceit or imposition upon a third party. It is a species of injury to another person's property or interests, and the law refuses to recognise such agreements as enforceable contracts.

The Principle of In Pari Delicto

Even if C and D were to approach a court, they would be met with the ancient and unyielding maxim of common law: ex turpi causa non oritur actio — no action can arise from a base cause. Its companion, in pari delicto potior est conditio defendentis, holds that where both parties are equally guilty, the defendant is in the stronger position.

The rule was powerfully applied in Scott v Brown Doering McNab & Co (1892 2 QB 724), where the plaintiff, who had himself entered into a contract to fraudulently inflate share prices and mislead the public, was denied any relief by the court. The court was unsparing: the sole object of the scheme was to cheat and mislead, and ex turpi causa non oritur actio was applied without mercy. C and D, being co-architects of the fraudulent scheme, are participes criminis — partakers in the crime — and a court will not become their instrument of recovery.

No Relief Even Through Collateral Claims

One might ask whether C and D could argue that A made a separate enforceable promise to share the gains. The answer remains no. A fraudulent agreement does not acquire legality merely because the wrongdoers clothe it in the language of a private contract or invoke principles of restitution. The Supreme Court has laid down clearly in Kedar Nath Motani v Prahlad Rai (AIR 1960 SC 213) that if both sides have knowledge of the illegality, the agreement is unenforceable, and no suit can be maintained for recovery under it or for the enforcement of obligations arising from it. In the present case, C and D were not innocent bystanders — they were co-conspirators from the very inception of the scheme. There is no question of them being "less guilty."

The One Exception That Does Not Help Here

Indian law does recognise that where the parties are not in pari delicto — where one party is far less culpable than the other — the less guilty party may, in certain circumstances, recover money paid or property transferred. The law will protect a person who was duped or pressured into an unlawful transaction. But C and D were equal participants in the design to defraud. They agreed, at the outset, to share in gains that they knew were to be obtained by fraud. They are perfectly in pari delicto with A, and no exception rescues them.

The Position on Locus Poenitentiae

There is one remaining question worth examining: could C or D argue that the fraudulent purpose has not yet been fully carried out, and claim the benefit of locus poenitentiae — the right to withdraw before the illegal act is executed? This doctrine does allow a party to recover money paid under an illegal contract before its object is accomplished. However, the facts tell us that A has already acquired the gains — the fraudulent purpose has, at least in large measure, been carried out. Once the illegal purpose has been substantially achieved, the courts will not extend the benefit of locus poenitentiae to any of the parties. The position is well settled: where the fraudulent or illegal object has been accomplished, the transferee will not be disturbed, and the guilty parties are left where they stand.

The Decision

The suit by C and D against A for the division of fraudulently acquired gains must fail entirely. The agreement is void under Section 23, its object being fraudulent. C and D are equally guilty participants in the scheme. The maxims ex turpi causa non oritur actio and in pari delicto operate as absolute bars to their claim. No court will assist them in enforcing an agreement to share the fruits of fraud, and they walk away without remedy — a consequence the law deliberately imposes, not as an accident, but as a sanction against those who design and execute fraudulent schemes together.