Effect of Illegal Agreements on Collateral Transactions

We have already seen that an ‘illegal agreement’ like the ‘void agreement’ is unenforceable as between the immediate parties. But an ‘illegal agreement’ has this further effect that other transactions whether incidental or collateral to it are also tainted with illegality and, therefore, are not enforceable, provided the parties to the collateral transaction had the knowledge of the illegal or immoral design of the main or primary agreement ( a void agreement does not invalidate collateral transaction).

Illustrations

(a) A enters into a smuggling of goods agreement with B and borrows Rs 1,000 from C for giving an advance to B. C cannot recover the money lent - if he knew the illegal purpose, because his loan agreement was a collateral transaction to an illegal agreement. Of course if C. did not know the purpose of the loan, he can recover even though A had used the money for an illegal object. -

(c) A bets on - a horse race with B and borrows Rs 500 from C for this purpose. C can always recover the money lent, whether he knew the purpose of loan or’ not, because his loan agreement was collateral of a void (wagering) agreement only.

No restitution is allowed. Parties to an illegal agreement cannot get all help from a court of law, for, “no polluted hand shall touch the pure fountain of justice.” So, nothing can be recovered under an illegal agreement and if something has been paid it cannot be recovered back, whether the illegal object has been carried out or has not been carried out, is immaterial. The rule of law is that “no action is allowed on a illegal agreement” and “in case of equal guilt, the position of the defendant is better than that of the plaintiff.

Illustration X promises Y to pay Rs 10,000 if he murders Z. If Y commits the murder, he cannot recover the amount from X. If X has already paid the amount and Y fails in murdering Z, X cannot recover the amount back.