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Kantilal Manilal Parekh Vs. Ranchhoddas K. Bhatt - Court Judgment

LegalCrystal Citation
SubjectCompany;Contract
CourtMumbai High Court
Decided On
Case NumberO.C.J. Suit No. 3595 of 1947
Judge
Reported inAIR1953Bom98; (1952)54BOMLR786
ActsBombay Securities Contract Control Act, 1925 - Sections 5 and 6; Bombay Native Share and Stock Brokers' Association Rules - Rule 359; Indian Contract Act, 1872 - Sections 23 and 222
AppellantKantilal Manilal Parekh
RespondentRanchhoddas K. Bhatt
Appellant AdvocateR.M. Hathi and ;B.J. Kapadia, Advs.
Respondent AdvocateM.L. Maneksha and ;N.A. Mody, Advs.
Excerpt:
.....authorised by constituent to enter into transaction in accordance with rules of association--contract held void by high court under act--contract whether merely void or unlawful--whether broker entitled to indemnity from constituent.; a constituent authorised his broker to enter into certain share transactions in accordance with the rules made by the native share & stock brokers' association, bombay. subsequently by virtue of a decision of a division bench of the high court these contracts were held to be void under the bombay securities contract control act, 1925. on the question whether the broker was entitled to an indemnity from his constituent :--; that although the contracts were void, they were not unlawful under the act and the broker was, therefore, entitled to be..........delivery contract rules. therefore, by virtue of the decision of the division bench they are all void contracts. the only question that survives for determination is whether the broker is nonetheless entitled to an indemnity from his constituent.(4) now, before a broker can be entitled to an indemnity, he must of necessity establish that he had done something in pursuance of his employment as an agent. it is urged by mr. hathi, who appears for the constituent, that he employed the broker for the purpose of effecting transactions in accordance with the rules made by the native share & stock brokers' association, and if he entered into any contracts which were not in accordance with such rules, the broker has done no act in pursuance of the employment of agency and he can have no claim.....
Judgment:

(1) This was a suit filed by a constituent against a sharebroker claiming a certain sum of money as due from the share broker in respect of transactions effected by the broker on behalf of the plaintiff on the Bombay Stock Exchange. The defendant put in a counter-claim claiming a large sum of money as due to him and stating that the plaintiff had merely forestalled him by filing a suit. As the claim in the suit was below Rs. 10,000, I had no jurisdiction to deal with it and the suit stands transferred to the City Civil Court. As, however, the counterclaim exceeds that amount, I have jurisdiction to deal with it and have proceeded to do so.

(2) Now, the question that arises in this counter-claim (and also in several other suits which are on my board and which have been filed by brokers against their constituents) is whether, assuming that the contracts entered into by the brokers on behalf of their constituents were void, the brokers are entitled to an indemnity from their constituents.

(3) Now, the contracts in suit were effected under a set of rules entitled 'Additional Rules for Heady Delivery Contracts' which were made by the Native Share and Stock Brokers' Association and came into force on October 4, 1946. At that date there were in existence a set of rules for forward contracts which had been duly sanctioned by the Local Government; but the Association by a new rule (Rule 359) provided that contracts other than ready delivery contracts shall not be made within or without the ring, with the result that so far as the association was concerned, rules for forward delivery contracts were suspended or kept in abeyance for the time being; and the only transactions that were authorised were the so called ready delivery contracts under the rules which came into force on October 4, 1946. In a judgment of a Division Bench of this High Court, to which I was a party, in -- 'Goolbai Hormasji v. Jugalkishore', 53 Bom LR 870, it was held that the contracts which were described as ready delivery contracts under these rules were in fact forward contracts, and as they had not been made in accordance with the rules for forward contracts sanctioned by the Local Government, they were void. We were then dealing with an arbitration clause in a contract note rendered by a broker to a constituent; and we also held that the contract note the form for which was prescribed by the new rules was itself invalid inasmuch as the contract note should have been in the form prescribed for the forward delivery contract. All the contracts in the counterclaim before me are contracts which have been effected under the ready delivery contract rules. Therefore, by virtue of the decision of the Division Bench they are all void contracts. The only question that survives for determination is whether the broker is nonetheless entitled to an indemnity from his constituent.

(4) Now, before a broker can be entitled to an indemnity, he must of necessity establish that he had done something in pursuance of his employment as an agent. It is urged by Mr. Hathi, who appears for the constituent, that he employed the broker for the purpose of effecting transactions in accordance with the rules made by the Native Share & Stock Brokers' Association, and if he entered into any contracts which were not in accordance with such rules, the broker has done no act in pursuance of the employment of agency and he can have no claim against the constituent. His contention is that there were a set of rules sanctioned by the Local Government for forward delivery contracts. The rules for ready delivery contracts did not require the sanction of Government. The contracts in suit could quite obviously have been effected validly under the rules for forward delivery contracts, while they were effected in fact invalidly under the rules for ready delivery contracts. He urges that where a broker is employed to put through a transaction, it is implicit in that employment that the transaction should be put through in a valid manner and not in such a manner as to render the transaction invalid. For this proposition he has relied on the case of -- 'Coats, Son, and Co. v. Pacey', (1892) 3 TLR 474. There a stock broker filed a suit against his constituent on an indemnity for the price of twenty shares of a certain bank which he had purchased on behalf of the constituent. Now, under what was known as the Leeman's Act it was obligatory that the numbers of bank shares should be set out in the contract; but the stock exchange had studiously disregarded this provision of Leeman's Act and entered into contracts without mentioning the numbers of such shares. The jury found that the constituent had not authorised the broker to contract for unnumbered shares. Esher M. R. in his judgment stated (p. 475) :

' ...The order here was to purchase 20 shares in the English Bank of the River Plate. That order was given by the authority of the defendant. The meaning of that order was that the plaintiffs should make a binding contract for the purchase of the bank shares. That was the meaning of the order unless something were proved to the contrary. The jury found that the defendant did not know that the shares to be purchased would be unnumbered shares, and she did not know that the broker would take the order to mean that he was to buy unnumbered shares. The natural meaning of the order was that the broker was to make a valid contract, not a void contract.'

Fry L. J. who concurred observed as follows (p. 475) :

' ...The authority was to purchase certain bank shares. Leeman's Act provided that a contract for the sale or transfer of bank shares should be null and void to all intents and purposes unless the numbers of the shares were specified in the contract. Was the authority given to the plaintiffs to make a valid or a void contract? Was it an authority to make a real contract or no contract at all? Prima facie it was to make a real contract. It was said that the evidence showed that the order was to make a void contract, because in the previous transactions the numbers of bank shares were not specified in the contract note. That evidence came to nothing. The fact that the numbers were not on the contract note did not show that they were not specified in the contract itself. That, therefore, was no evidence in support of that view. The order accordingly was to make a valid contract.'

Lopez L. J. also observed that the authority given to the plaintiffs was to purchase numbered shares and to make a valid contract, not an invalid one. This case is no doubt an authority for the proposition that if it is open to the agent to enter into a valid contract or a void contract, the principal must be deemed to have authorised him to enter into a valid contract. Quite obviously in this case it was open to the stock broker to mention the numbers in the contract if he so chose. But the observations that I have set out above themselves indicate that it would be open to a constituent to authorise the agent to enter into a void contract; and if he did so, he would be bound to indemnify the agent if he had entered into any such contract. Now, in the case before me, it is admitted that all transactions were to be entered into in accordance with the rules of the Native Share & Stock Brokers' Association. Therefore, the constituent must be deemed to have had notice of what the rules were, and he must therefore, of necessity have had notice of Rule 359 which in terms provided that no contracts other than ready delivery contracts under the rules which came into force on October 4, 1946, could be effected. That being so, in my opinion the constituent had authorised the broker to enter into contracts under these rules; and if subsequently such contracts turned out to be void, it is not open to the constituent to say that he had authorised the broker only to enter into a valid contract.

(5) That brings me to the question as to whether an agent is entitled to an indemnity if he enters into a void contract on behalf of his principal with a third party. The position in law appears to be well-settled. The question as to whether an agent is entitled to an indemnity or not depends upon whether the contract was merely void or whether it was unlawful. If the contract was unlawful, there can be no indemnity; but if the contract was merely void, then there is an indemnity. In an unreported judgment delivered by Kama .T. (as he then was) in -- 'Madhubhai Amthalal Gandhi v. Dhunji Chhaganlal', O. C. J. Suit No. 995 of 1938, he was dealing with the case of a broker who had entered into transactions in cotton under the Rules of the Mahajan Association which were held to be void. The broker sued to enforce his right of indemnity against his constituent. The learned Judge in dealing with this right observed as follows (p. 220 of the judgment file) :-

' ...The only case in which the right to indemnity did not arise was when the direction was to do an illegal or an unlawful act. On the principle of there being no agency in respect of an illegal or unlawful act, in such cases the right to indemnity does not naturally exist. In a case where the resulting transaction was merely void the right to indemnity clearly exists and has been held to be so. The decision in -- 'Shibho Mal v. Lachman Das', 23 All 165 is clear on the point. In -- 'Parakh Govardhanbhai Haribhai v. Ransordas Dulabhdhas'. 12 Bom HCR 51, the point decided was the same and that decision still holds good, so far as our Courts are concerned. Under the circumstances even if the transactions effected by the defendant in pursuance of the plaintiff's instructions being under the rules of the Mahajan Association Ltd. are held to be void, the right to indemnity exists. ...'

The matter went to the Appeal Court and the decision of the learned Judge was confirmed by Beaumont C. J. and B. J. Wadia J. on April 8, 1940. The question, therefore, to determine is whether the contracts which the Division Bench has hold to be void are illegal or merely void. Now, it must be observed that, the words 'illegal' and 'void' are often loosely used as synonymous terms even by lawyers, jurists and sometimes Judges. None the less, for the purposes of the present discussion it is essential to distinguish between what is illegal and what is merely void. All unlawful or illegal agreements are void; but all void agreements are not necessarily illegal. It is often difficult to determine whether an agreement which is void is or is not also illegal. But a long line of cases in England enables one to deduce certain principles for the purpose of determining whether a contract or agreement in merely void or is illegal. Sir Fredrick Pollock in his Principles of Contract (13th edn.) after reviewing a number of cases lays down the following propositions (p. 276) :

'When conditions are prescribed by statute for the conduct of any particular business or profession, and such conditions are not observed, agreements made in the course of such business or profession --

(e) are void if it appears by the context that the object of the legislature in imposing the condition was the maintenance of public order or safety or the protection of the persons dealing with those on whom the condition is imposed :

(f) are valid if no specific penalty is attached to the specific transaction, and if it appears that the condition was imposed for merely administrative purposes ... :

(h) Where no penalty is imposed, and the intention of the legislature appears to be simply that the agreement is not to be enforced, there neither the agreement itself nor the performance of it is to be treated as unlawful for any purpose.'

(6) Now, turning to the provisions of the Bombay Securities Contract Control Act, 1925, the preamble states that it is an Act to regulate and control certain contracts for the purchase and sale of security, the important point to note being that it is not an Act to prohibit contracts. Section 5 provides that a stock exchange may make rules with the sanction of the Governor-General for transactions in securities, and Section 6 provides that every contract for the purchase or sale of securities other than ready delivery contracts shall be void unless the same is made subject to and in accordance with the rules duly sanctioned. The section further provides that no claim shall be allowed in any civil Court for the recovery of any commission, brokerage, fee or reward in respect of any such contract. The operative part of this section brings about two results: One is that contracts which are not in accordance with the rules are void and the other is that a broker shall not be entitled to claim any commission, brokerage, fee, or reward in respect of any such contract. It is plain that no penalty is imposed for entering into a contract contrary to the rules or not in accordance with the rules; all that is done is that such a contract cannot be enforced, it being void. This, in my opinion, clearly falls within the ratio (h) which I have set out above from Pollock. I cannot read the Act as prohibiting the entering into of a contract except in accordance with the rules. Mr. Hathi has further urged that the contracts in suit are in any event unlawful, because if allowed they would defeat the provisions of the Bombay Securities Contract Control Act, 1925. Now, as I have pointed out, the provisions of this Act only bring about two consequences: (1) that a contract not in accordance with the rules is void and (2) no claim by a broker for his commission, etc. shall be allowed. Even if the contract is held to be lawful, I do not see how it can defeat the provisions of the law. A claim for commission, etc. would still remain within the ban of Section 6 and would not be sustainable and the contract itself would be void. I am, therefore, of the opinion that although these contracts are void, they are not unlawful; and in any case in which a broker can prove that he has in fact paid any amounts to a third party on behalf of the constituents, he is entitled to be indemnified by the constituent. Of course, it is quite plain that he shall not be entitled to any commission, brokerage, fee or reward in respect of any such transaction.

(7) Per Curiam: Counter-claim referred to the Commissioner to ascertain what amount, if any, the plaintiff to the counter-claim paid to third parties through the clearing house or otherwise in respect of transactions entered into by him under instructions from the defendant to the counter-claim. Costs and further directions reserved.

(8) Order accordingly.


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