what is wagering agreements

8/15/2019 What is Wagering Agreements

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What is Wagering Agreements?

What is a wager? Literally the word ‘wager’ means a ‘a bet.: something to be lost or won on the result of a

doubtful issue” and, therefore, wagering agreements are nothing but ordinary bettingagreements. Thus A and

B mutually agree that if it rains today A will ay B !s "## it does not rain B will ay A !s "## or where $ and %

enter into agreement that on tossing u a &oin, if it falls head u wards $ will ay ' and if it falls tail u wards %will ay $ !s (#) there is, a wagering agreement

A ‘wager’ &an be des&ribed as, follows: *The agreement of gaming and wagering’ is that one arty is to win and

the other e u on a future e+ery whi&h at the time $ the &ontra&t is of an a in nature that is to say, if the e+ent

turns out one way A will lose) - it turns out the other way he will win.”

ossibly the most e/ ressi+e and all en&om assing definition of a *was agreement” was gi+en by, 0aw1ins., in

$arlill +s $arboli,& 2mo1e Ball $o.

‘A wagering &ontra&t is one by whi&h two ersons rofessing to hold o osite +iews tou&hing the issue of a

future un&ertain e+ent mutually agree inde endent u on the determination of that e+ent, one shall win from

the and the other shall ay or hand o+er to him, a sum ofmoney or other neither of the &ontra&ting arties

ha+ing any other interest ill that &ontra&t thanthe sum of sta1e he will so win or lose, there being ‘no other real

&onsideration ‘for the ma1ing of su&h &ontra&t by either of the arties. -t is essential to a wagering &ontra&t that

ea&h arty may under it either win or lose, whether he will win or lose being de endent on the issue of the

e+ent, and, therefore, remaining ‘un&ertain until that issue is 1nown. -f either’ of the arties may win but

&annot lose, or may lose but &annot win, it is not a wagering &ontra&t.”

$ertain as e&ts of the abo+e definition re3uire to be em hasised. -n me first la&e, wager is a game of &han&e

in whi&h the &ontingen&y of either gain or loss is wholly de endent on an ‘un&ertain e+ent.’ An e+ent may be

un&ertain., not only be&ause it is a future e+ent, but be&ause it is not yet 1nown to the arties. Thus a wager

may be made u on the result of the &ri&1et mat&h whi&h is to ta1e la&e”, ne/t month in $al&utta, or u on the

result of an ele&tion whi&h is o+er, if the arties do not 1now the result. 2e&ondly, the arties to a wager must

ha+e no interest in the e+ent’s ‘ha ening or non ha ening e/&e t the winning or losing of the bet laid be

tween them. -t is here that wagering agreements differ from insuran&e &ontra&ts whi&hare +alid be&ause

arties ha+e an interest to rote&t the life or ro erty, and ha+e, for that +ery reason, entered into the &ontra&t

of insuran&e.

4ssential features of a wager. The essentials of a wagering agreement may thus be summarised as follows:

5a6 There must be an romise to ay money or money’s

worth,7

5b6 The romise must be &onditional on an e+ent’s ha ening or not ha ening


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5&6 The e+ent must be an un&ertain one. -f one of the arties has the e+ent in his own hands, the

transa&tion is not a wager.

5d6 4a&h arty must stand to win or lose under the terms of agreement. An agreement is not a wager if one

arty may only win and &annot lose, or if he may lose but &annot win, or if he &an neither win nor lose.

5e6 8o arty should ha+e a ro rietary interest in the e+ent. The sta1e must be the only interest whi&h the

arties ha+e in the agreement.

An agreement by way of a wager , +oid. 2e&tion 9# lays down that *agreements by way of wager are +oid) and

no suit shall be brought or re&o+ering anything alleged to be won on any wager, or entrusted to any erson to

abide the result of any game or other un&ertain e+ent on whi&h any wager if made.” Thus, where A and B

enter into an agreement whi&h ro+ides that if4ngland’s &ri&1et team wins the test mat&h, A will ay B !s, "##,

and if it loses B will ay !s. "## to A, nothing &an be re&o+ered by the winning arty under the agreement, itbeing a wager. 2imilarly, where $ and % enter into a wagering agreement and ea&h de osits !s "## with .

instru&ting him to, ay or gi+e the total sum to the winner, no suit &an ‘be brought by thewinner for re&o+ering

the. bet amount from , the sta1e holder. ;urther, if -.. had aid the sum to the winner, the loser &annot bring

a suit. for re&o+ering his !s "##, either against the winneror against , the sta1e holder, e+en if had aid

after the loser’s definite instru&tions not to ay. 'f &ourse the loser &an re&o+er ba&1, his de osit if he ma1es

the demand before thesta1e holder’ had aid it o+ation the winner 5!atna1alli +s u arat. where su&h

an agreement is +oid and illegal.

The 2e&tion ma1es an exception in fa+our of &ertain ri@es for horse ra&ing by ro+iding further that *This

2e&tion shall not be deemed to render unlawful’” a subs&ri tion, or &ontribution, or agreement to subs&ribe or

&on tribute, made or entered into for or toward any late, ri@e or sum of money, of the +alue or amount of

fi+e hundred ru ees or u wards, to be awarded tothe winner or winners of any horse ra&e.” Thus, a bet on

a horse ra&e &arrying a ri@e of !s (## or more to the winners has been made +alid under the e/&e tion. But

with a +iew to rote&ting the oor ersons from gambling, a bet on a’ horse ra&e &arrying a ri@e of less than

!s (## remains a wager.

-t is im ortant to note that in the 2tates of =aharashtra and >u arat wagering agreements are, by a lo&al

statute, not only +oid but also illegal. As a result in these states the &ollateral transa&tions to wagering

agreements be&ome tainted with illegality and hen&e are +oid.

2 e&ial &ases. We now turn to &ertain s e&ial &ases in order to e/amine as to whether they are wagers:


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$ommer&ial transa&tions. Agreements for sale and ur&hase of any &ommodity or share mar1et transa&tions, in

whi&h there is a genuine intention to ‘do legitimate business i. e., to gi+e andta1e deli+ery of goods or shares,

are not wagering agreements. -f there is no su&h genuine intention and arties only want to gamble on the

rise or fall of the mar1et by aying or re&ei+ing the differen&es in ri&es only, the transa&tion would be a wa

gering agreement and therefore +oid. *-n order to &onstitute a wagering &ontra&t, neither arty should intend

to erform the &ontra&t itself, but only to ay the differen&es”

Lotteries. A lottery is a game of &han&e. 0en&e the lottery business is a wagering transa&tion. 2u&h a

transa&tion is not only +oid but also illegal be&ause C A of the -ndian enal $odede&lares ‘&ondu&ting of

lottery a unishable offen&e. -f a lottery is authori@ed by the >o+ernment, the only effe&t of su&h ermission is

that the ersons &ondu&ting the lottery (i. e., the ersons running the lottery and the buyer of lottery ti&1et6

will not. be guilty of a &riminal offen&e, but the lottery remains a wager alright 5%orab i Tata +s Lan&e6. .

. $rossword u@@les. Where ri@es de end u on a &han&e, it is ‘a lottery and therefore a wagering

transa&tion. Thus a &rossword u@@le, in whi&h ri@es de end u on &orres onden&e of the &om etitor’s

solution with a re+iously re ared solution, is a wager. But if ri@es de end u on s1ill and intelligen&e, it

is a +alid transa&tion. Thus ri@e &om etitions whi&h are games of s1ill and in whi&h an effort is made to

sele&t the best &om etitor e.g., i&ture u@@les, literary &om etitions and athleti& &om etitions are not

wagers. 4+en in su&h &om etitions .the amount of ri@e should not e/&eed !s ",###, otherwise they shall

be wagers as er the ro+isions of the ri@e $om etition A&t, " ((.

-nsuran&e &ontra&ts. -nsuran&e &ontra&ts are +alid &ontra&ts e+en though they ro+ide for ayment of

money by the insurer ,on the ha ening of a future un&ertain e+ent. 2u&h &ontra&ts differ from wageringagreements mainly in three res e&ts:

5a6 The holder of an insuran&e oli&y must ha+e an ‘insurable interest’ in the e+ent u on whi&h the

insuran&e money be&omes ayable. ‘thus &on tra&ts of insuran&e are entered into to rote&t an interest.

-n a wagering agreement there is no interest to rote&t and the arties bet e/&lusi+ely be&ause they &an

thereby ma1e some easy money.

5b6 $ontra&ts of insuran&e are based on s&ientifi& and a&tuarial &al&ulation whereas wagering agreements are a

gamble without any s&ientifi& &al&ulation of ris1s.

5&6 $ontra&ts of insuran&e are regarded as benefi&ial to the ubli&, whereas wagering agreements do

not ser+e any useful ur ose.

Full Definition of WAGERING CONTRACT

: a contract by which a promisor agrees that upon the occurrence of an uncertain event or

condition he or she will render a performance for which there is no agreed consideration

exchanged, and under which the promisee or the beneficiary of the contract is not made


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whole for any loss caused by such occurrence (as in options, insurance contracts, trading in

futures, or betting contracts)

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 tal s about wagering agreements, which reads as

!agreements by way of wager are "oid#. $he section does not de%ne ‘wager.’ Section 30

states that,

!Agreements by way of wager are "oid& and no suit shall be brought for reco"ering anything

alleged to be won on any wager, or entrusted to any 'erson to abide the result of

any game or other uncertain e"ent on which any wager is made.#

()ce'tion in fa"our of certain 'ri*es 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 ve hundred rupees or upwards, to be awarded to

the winner or winners of any horse race.”

Section - A of $he Indian /enal Code not a ected +

!1othing in this section shall be deemed to legali*e any transaction connected with horse

2acing, to which the 'ro"isions of S. - A of $he Indian /enal Code 4 of 56708 a''ly.#

$he e)'ression !wager# has not been de%ned in the Indian Contract Act. A classic de%nitionis howe"er a"ailable in the case of Carlill " Carbolic Smo e 9all 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


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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. !f either of the parties

may win but cannot lose, or may lose but cannot win, it is not a wagering contract.”

The above de nition e"cludes event which have occurred. #ence $ir %illiam Anson&sde nition, “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. !t 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( *!t 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. ou may have a multi partiteagreement 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

/ncertainty 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 rst 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


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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

0either 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

1astly, neither party should have control over the happening of the event one way or the

other. “!f one of the parties has the event in his own hands, the transaction lacks an

essential ingredient of a wager.” 'i"(

E ects of !agering "gree#ent

A wagering agreement is void ab initio, and $. 23 has no application to it.'"( 4oney paid

directly by a third party to a winner of a bet cannot be recovered from the loser.'"i( 5ven 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 che6ue in discharge of his liability, the che6ue

may not be tainted with illegality because of the winner&s promise not to have the name

posted. The che6ues will not be enforceable by the original payee, but may be enforced by a

third party holder of the che6ue, even if he knew of the facts leading up to giving of the

che6ue.

!t has been laid down by the $upreme 7ourt, in 8herulal 9arekh v.4ahadeo :as'"ii( that

though a wager is void and unenforceable it is not forbidden by law .#ence a wagering

agreement is not unlawful under section ;< of the 7ontract Act and therefore the

transactions collateral to the main transaction are enforceable.

$aws %elated To !ager

This section represents the whole law of wagering now in force in !ndia, supplemented by

the =ombay state by the act for avoiding wagers -amendments act >?23, which amendedthe act for avoiding wagers >?@?. =efore the act of >?@? the law relating to wagers in force

in =ritish !ndia was the common law in 5ngland. =y 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. '"iii(

The nature of gambling is inherently vicious and pernicious.'"iv( 8ambling activities which


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have been condemned in !ndia since ancient times appear to have been e6ually discouraged

and looked upon with disfavour in 5ngland, $cotland, the /nited $tates of America and

Australia. The #indu law relating to gambling has not been introduced in the law of contract

in !ndia.'"v( 8ambling is not trade and commerce, but res e"tra commercium and therefore

not protected under art > -> or art .'"vi(

&o#parison with the English $aw

4any countries have laws which render gaming or wagering contracts void. !t 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 maCority of common law Curisdictions have

adopted gaming laws based on the /D 8aming Act >?@3. 1egislation in all Australian

Curisdictions for e"ample is based on $. >? of the 8aming Act, which provides that the

contracts by way of wagering and gaming are null and void.'"vii( The 8aming and %agering

laws of 4alaysia, $ingapore, #ong Dong and 0ew Eealand are also modeled after the /D 8aming Act.

/ntil the enactment of the 8aming Act, >?@3, wagering contracts were not prohibited by law

in 5ngland. =ut $ection >? of the 8aming Act, >?@3 -/D 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 7ourt of law and e6uity for recovering any sum of money or valuable

thing alleged to be won upon any wager. #owever, certain dealings in investments by way of

business are e"cepted from invalidity under $ection >? even though they might amount to

wagering contracts. For e"ample, contracts for diGerences or bets on stock market indices.

'"viii(

$ection ?H; is inIuenced by the 5nglish 8aming Act >?@3.

#eavily inIuenced by the 5nglish decisions, the Cudges have adopted the essential features

of that of the gaming act. #owever, there is a maCor diGerence between the 5nglish and the

!ndian laws relating to wagers) under the 5nglish 8aming Act, >?@3, agreements 7ollateral

to the wagering agreement are also rendered to be void,


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wagering agreements, and are hence not enforceable in !ndian 7ourts under $ection '""i(,

and hence do not give rise to any liability or nancial obligations in respect of repayment of

loan to the bank. As a result of this, many conservative !ndian banks such as the $tate =ank

of !ndia refrained from entering into any sort of derivative transactions with their clients for

a fairly long time.

!n 8herulal 9arakh v. 4ahadeodas 4aiya ,'""ii( a 6uestion 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 $ection ?@3, a wager is made void but not illegal in thesense of being forbidden by law, and thereafter a primary agreement of wager is void but a

collateral agreement is enforceable

There was a conIict on the 6uestion whether the second part of $ection >? of the 8aming

Act, >?@3, 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 #ouse of 1ords

in #illJs case'""iii( had nally resolved the conIict 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

$o under the 8aming Act, >? ;, in view of its wide and comprehensive phraseology, even

collateral contracts, including partnership agreements, are not enforceable

As $ection ? of the

8aming Act, >?@3, and though a wager is void and unenforceable, it is not forbidden by law

and therefore the obCect of a collateral agreement is not unlawful under $ection ;< of the

7ontract Act and partnership being an agreement within the meaning of $ection ;< of the

!ndian 7ontract Act, it is not unlawful, though its obCect is to carry on wagering transactions.

'ariation

!agers (istinguished )ro#

· &ontract *f +nsurance

A transaction of insurance resembles a wager. 5very contract of insurance is a wager if the


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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.'""iv( !f 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.

$ection 2 of the 4arine !nsurance Act > 2 B2, also provides that a contract or 4arine !nsurance 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. Thetruck was involved in an accident and it seriously inCured a young army oKcer who claimed

heavy damages from the owner, driver and the benamidar and the insurance company. !t

raised the plea that an ostensible owner -a benamidar had no insurable interest and that it

was a wager for that reason. =ut these pleas were negatived by the high court. '""v(

L 7ontract Mf 8aming

A gaming contract consist of the mutual promises which the players of the game necessarily

make, e"press or by implication, in paying for a stake as to its transfer upon the result of the

game. $uch contract may be a wager if the parties are two. '""vi(

!n D.N. 1akshmanan -:r v $tate of Tamil 0adu '""vii(, the $upreme 7ourt had an occasion to

decide whether horse racing amounts to gaming as de ned under the 4adras 7ity 9olice Act

>???, and the madras gaming act. !t stated)

8ambling in a nutshell is a payment of a price for a chance to win a prize. 8ames 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 skillO although the element of chance necessarily cannot be

entirely eliminatedO is one in which success depends principally upon the superior

knowledge, training, attention, e"perience 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


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defendant in this class of cases is, when he enters into a contract of sale, to purchase the

same 6uantity before the vaida day and when he enters into a contract of sale, to purchase

the same 6uantity before the vaida day. This mode of dealing, when the sale and purchase

are to and from the same person, has the eGect, of course, of cancelling the contracts,

leaving only diGerences to be paid. %hen they are diGerent persons, it puts the defendant inthe 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 diGerences, are not presumed to be wagering

agreements. !t may well be that the defendant is a speculator who never intended to give

delivery, and even that the plaintiGs did not e"pect him to deliver but that does not convert

a contract, otherwise innocent, into a wager. $peculation does not necessarily involve acontract by way of wager, and to constitute such a contract a common intention to wager is

essential. !t 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.& 5very forward contract is to some

e"tent speculative, but is not a wager or gamble on that account. The distinction between

the two is a narrow one.

"gree#ents &ollateral to !agering "gree#ents

7ontract collateral to a wagering agreement is not necessarily unenforceable.'""viii( $ection

? of the -5nglish 8aming Act

>?@3, and though a wager is void and unenforceable, it is not forbidden by law. Therefore

the obCect of a collateral agreement is not unlawful under s ;< of the contract act.'""i"( =ut

it is otherwise under the -5nglish 8aming acts of >?@3 and >? ;, the acts being wider and

more comprehensive in phraseology, because they e"pressly 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 e"cept in =ombay 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 che6ue, but payment cannot be compelled.'"""( =ut

an arbitration clause in a wagering contract is a part of the contract and not collateral to it

and cannot therefore be enforced.'"""i(

A collateral agreement is not unlawful under s ;< of the contract act.

Apart from =ombay enactment,'"""ii( there is no statute declaring void agreements


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collateral to wagering contract. 0or is there anything in the present section'"""iii( to render

such agreements void. The policy of law in !ndia has been to sustain the legality of wagers

and not to hit at collateral contracts.'"""iv( !t has accordingly been held that a broker or an

agent may successfully maintain a suit against his principal to recover his brokerage,'"""v(

commission, or the losses sustained by him, even though contracts in respect of which theclaim is made are contracts by way of wager.'"""vi(

The $upreme 7ourt has held that if agreement collateral to another or of aid in facilitatingthe carrying out of the obCect of the other agreement, which though void, is not in itself

prohibited within the meaning of s ;< of the contract act, may be enforced as collateralagreement. !f on the other hand it is part of a mechanism to defeat what the law hasactually prohibited, courts will not countenance a claim based upon the agreement becauseit will be tainted with an illegality of the obCect sought to be achieved, which is hit by s ;< 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 obCect is prohibited or malain se.

!n 5ngland also, agreements collateral to wagering contracts were not void before theenactment of the gaming act >? ;. Thus in Nead v Anderson'"""vii( a betting agent, at there6uest of the defendant, made bets in his own name on behalf of the defendant. After thebets were made and lost, the defendant revoked the authority to pay conferred upon thebetting agent. 0otwithstanding the revocation, the agent paid the bets, and sued thedefendant having empowered the agent to bet in his name, the authority was irrevocable,and that the agent was entitled to Cudgment. The statute of >? ;, passed in conse6uence of this decision, is almost to the same eGect as the =ombay act. !t is interesting to note that the statute was not passed until ;H years after the =ombay act. !t is hoped that in future,the revision of the contract act will corporate provisions of the =ombay act in the present section, so as to render the law uniform on this subCect in the whole of !ndia.

The act for "voiding !agers ,a#end#ent- act ./ 1 ,2o# ay act 3 of ./ 1-

The law is however, diGerent in the state of =ombay. !n 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 >?23 -=ombay act < of >?23 . !t was observed)

That act was passed to+..to close the doors of the courts of Custice in the presidency to suits

upon contracts collateral to wagering transactions where such collateral contracts havebeen entered into or have arisen since the act came into force, a purpose which it haseGectually answered.

(erivativesThe position of derivatives under the co##on lawTwo 5nglish decisions have caused concern among market participants that certainderivatives transactions may fall foul of the gaming and wagering laws. !n /niversal $tock


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5"change v. $trachan'"""viii(, the court held that wagering contracts included contracts for diGerences. #alsbury de nes contracts for diGerences as

Agreements between those who are only ostensible buyers and sellers of stock and shareswhere the common interest of the parties is to pay or receive the diGerences between their

prices on one day and their prices on another day&. '"""i"(!n the second decision, 7ity !nde" 1imited v. 1eslie'"l(, the court declared that contracts akinto cashOsettled derivatives were *contracts for diGerences.& The combined eGect of bothdecisions is that cashOsettled derivatives are wagering contracts and thereforeunenforceable, unless e"empted by legislation.

The common law position in Australia has been modi ed by statute. $ection >>@> of the Australian corporations& law protects the following categories of derivative contracts fromthe gaming and wagering laws)

L Those made on the futures market of the futures e"change, or a recognised futuresmarket,

L Those made on an e"empt futures market,

L Those permitted by the business rules of a futures association, a futures e"change, or arecognised futures e"change.

The risk that a contract may not be enforceable on the grounds of illegality is one that needs to be addressed. 8enerally, there is little risk of e"change traded derivatives fallingfoul of the gaming and %agering laws in either the /D or other common law Curisdictions.

Negardless of the interest of the counterparties, there is no Custi cation for treatingderivative contracts as wagering or gaming contracts. They are no diGerent from other commercial contracts entered into by parties on the daily basis. !t is true they are more risky than other commercial contracts and some parties are attracted to derivatives by the

prospects of windfall gains. =ut these factors do not make them wagering or gamingcontracts any more than contracts to undertake some highly speculative business. Apart from the need to remove the e"isting uncertainties, regulators should also address thebroader 6uestion of whether it is appropriate for gaming and wagering legislation to beapplicable in the realm of nancial transactions.

#owever, !ndian contract law is indeed woefully de cient with regard to provisions That clari es the legality of derivative contracts. The problematic 6uestion whether :erivativecontracts are in the nature of wagering agreements is not answered by the Act till date and

no Amendment to that eGect has been passed either. /nder !ndian 5"change control laws,an !ndian corporate, being a person resident in !ndia, can 5nter into a foreign currency derivative contract only to hedge an e"posure to foreign e"change risk and not for speculating and yielding pro ts.'"li(

!n the case of NaCshree $ugars P7hemicals 1imited v A"is =ank 1imited. '"lii( $ince 4arch;BB?, A"is =ank and NaCshree $ugars have been ghting a legal battle over the foreigne"change derivatives contract, sold by the =ank to the company, thereby resulting in huge


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losses for the company estimated to be around Ns. @2O3B crores. The company had refusedto 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. =asedon the elucidations of various landmark Cudgments on wagers, the court evolved a threefoldtest to determine whether the contract is a wager O First, there must be two persons #oldingopposite views touching a future uncertain event second, one of those parties is to win andthe other is to lose upon the determination of the event third, both the parties have noactual interest in the occurrence or nonOoccurrence of the event, but have an interest only on the stake. The case in 6uestion ful lled the rst criteria, but the second was not satis edbecause in the light of the facts of the case, the plaintiG did not always stand to lose. 7iting!ndian case law,'"liii( the Cudges make an interesting observation, that though every wagering contract is speculative in nature, every speculation need not necessarily be awager. Further, a common intention to wager is essential, and an element of mutuality hasto be present in the sense that the gain of one party would be the loss of the other on thehappening of the uncertain event which is the subCect matter of wager. !n the light of abovementioned points and also adhering to the $upreme 7ourt Cudgment in 8herulal9arakh v. 4ahadeodas 4aiya ,'"liv( the Qudges in this case concluded that the se6uence of

events in the present case reIected that the nature of the transaction was not in the form of a wager. 5ven though the plaintiG was susceptible to incurring huge losses yet that by itself could not deem the contract to be a wager.

Suggestions and &onclusion As section ?H; reads about agreements by way of wager,void.Further The 7ontract Act does not de ne what constitutes a wager or a wageringagreement. !t only mentions that such agreements will be void and unenforceable and noaction can lie to either recover anything that is due under a wager or for performance of acontract 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 $ection

what is wagering agreements

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