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Janardhanan Vs. Sreedharan - Court Judgment

LegalCrystal Citation
SubjectContract
CourtKerala High Court
Decided On
Case NumberS.A. No. 1028 of 1979-E
Judge
Reported inAIR1985Ker199
ActsContract Act, 1872 - Sections 23; Evidence Act, 1872 - Sections 101-104
AppellantJanardhanan
RespondentSreedharan
Appellant Advocate K. Raman and; K. Pavithran, Advs.
Respondent Advocate T.R. Raman Pillai,; T.R. Ramachandran Nair and; C.C. Tho
DispositionAppeal allowed
Cases Referred(Vide Murlidhar v. State of U. P.
Excerpt:
.....for a lawful object and for lawful consideration, as such the agreement is perfectly valid. the partnership business can also be carried on with vehicles belonging to the partnership firm on the basis of permits obtained by a partner in respect of those vehicles, because a partner though not owner of those vehicles is clearly in possession of those vehicles. the court observed that it does not fall under the well settled classes of contracts which have been held as contrary to public policy and it cannot be declared to be a contract opposed to public policy by inventing a new head of public policy. the agreement entered into by the parties is perfectly legal in the sense that it was not for any unlawful object or for any unlawful consideration. secondly, the plaintiff must have been..........the correctness of this madras decision. : air1959ap647 was a direct case where a party to an illegal contract invoked the aid of the court to have such a contract carried into effect. the court said that the law will not tolerate any party to violate any moral or legal duties.15. the counsel invited my attention to the observation of balakrishna menon, j. in abdulkhader v. plantation corporation of kerala : air1983ker1 which is quoted below (at p. 4 of air) : -'the total length of the road to be constructed as per the agreement is 4560 metres out of which an extent of 600 metres at the entrance to the site of the work belongs to third parties and the same had not been acquired even on the date of the suit. ext. a1 agreement between the parties is therefore for the construction of.....
Judgment:

Varghese Kalliath, J.

1. This is an appeal by the plaintiff. He filed the suit for recovery of an amount of Rs. 3,203/- from the defendant. Plaintiff says that for the purpose of conducting a trade in rice a partnership was formed with the defendant as one of the partners. The management of the partnership business was with the defendant. The business was carried on only for a short period. When the accounts of the business were settled, it was found that the plaintiff was entitled to an amount of Rs. 3203.83 from the defendant. The amount represented the capital investment and share of profits. The capital investment was Rs. 2,995/- and the share of profits was Rs. 208.83. The defendant promised payment but refused when demanded. The suit was laid for recovery of this amount.

2. The defendant contended that he is not liable to pay the amount. He admitted that there was a partnership business but contended that he was not the managing partner. He asserted that there was no settlement of accounts and that no amount was due to the plaintiff. He also pleaded that the suit was not maintainable since the partnership carried on the business in rice without a licence.

3. The trial court after evaluating the evidence found that the case pleaded by the defendant was peccant. The court found that the defendant was bound to pay an amount of Rs. 2,995/- to the plaintiff and decreed the suit to that extent. The defeated defendant filed an appeal before the appellate court. The appellate court also considered very elaborately as to the liability of the defendant to pay the amount claimed by the plaintiff. The appellate court found that the case pleaded by the defendant is false. It found that the defendant is liable to pay the investment of the plaintiff. Nevertheless, the appellate court reversed the judgment and decree of the trial court and dismissed the suit holding that the suit is not maintainable. The court held that the plaintiff is not entitled to a decree since the claim was based on a contract which was hit by Section 23 of the Contract Act and so it is opposed to public policy to decree the suit. Plaintiff now appeals to this court.

4. The only question that arises for my consideration is whether the finding of the court below that the suit is not maintainable in view of Section 23 of the Contract Act is correct or not. Section 23 of the Contract Act reads thus : --

'23. The consideration or object of an agreement is lawful, unless -- it is forbidden by law; or is of such a nature that, if permitted, it would defeat the provisions of any law, or is fraudulent; or involves or implies injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy.

In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void.'

5. The case of the defendant is that the agreement under which the claim is made is an agreement forbidden by law. There is no written agreement in this case. The agreement which is said to be forbidden by law is the agreement of partnership. There is no clear case for the defendant that by the agreement of partnership, a partnership was formed to conduct a trade in rice in an unlawful manner. The averment in the written statement is to this effect:

(........)

The counsel for the respondent submits that a licence under Section 3 of the Kerala Foodgrains Dealers' Licensing Order, 1967 was necessary for the conduct of the trade. It is stated neither in the pleading nor in the deposition of the defendant that a licence under Section 3 of the Kerala Foodgrains Dealers' Licensing Order, 1967 was needed for the business. Defendant has not deposed when he was examined that the partnership was a dealer under the Kerala Foodgrains Dealers' Licensing Order. It is not stated clearly in the deposition of the defendant that a licence was absolutely necessary for the trade conducted by the plaintiff and the defendant since the nature of the business would have attracted the provisions of Sections 2 and 3 of the Kerala Foodgrains Dealers' Licensing Order, 1967.

6. Section 3 of the Kerala Foodgrains Dealers' Licensing Order, 1967 provides that no person shall carry on business as a dealer except under and in accordance with the terms and conditions of a licence issued in this behalf by the licensing authority. Dealer is defined in Section 2(a). Dealer means a person engaged in the business of purchase, sale or storage for sale of any one of the foodgrains in quantity of two quintals or more at any one time, or in quantity of three quintals or more of all foodgrains taken together and includes commission agents engaged in such business on Government or Food Corporation of India or the Kerala State Civil Supplies Corporation account or a person who sells or stores for sale any foodgrains produced by him by personal cultivation or by cultivation on land owned by him. When the plaintiff was examined, he deposed :

(...............)

From the depositions of plaintiff and defendant, it is seen that they did not say that the business would have been carried on only with a licence. As stated earlier, the defendant has not said that the partnership was a 'dealer' within the meaning of Section 2(a) of the Kerala Foodgrains Dealers' Licensing Order. The appellate court has not recorded a finding that the partnership was a dealer and so a licence was required for the partnership to conduct the business. It has to be remembered that a business in rice as such is not forbidden by law.

7. Every citizen has got the right to conduct a trade in rice. The Foodgrains Dealers' Licensing Order, 1967 imposed reasonable restrictions in the interest of general public on the exercise of the right to carry on a trade in rice by providing that if any one wanted to become a 'dealer', he should take out a licence under the said order. I am of the view that in a case where the defendant pleads that the contract under which the claim is made by the plaintiff is hit by Section 23 of the Contract Act as a contract forbidden by law, in so far as no licence has been taken for the business carried on under the agreement, the burden is on him to prove very satisfactorily that the said agreement is forbidden by law, and the business carried on under the agreement required a licence under a valid law. The defendant has not discharged this burden of proof satisfactorily.

8. The agreement in question is a partnership agreement. The object or the purport of this agreement is not forbidden by law. Section 23 of the Contract Act says only that the consideration or object of an agreement is lawful unless it is forbidden by law. The agreement of partnership was for a lawful object and for lawful consideration, as such the agreement is perfectly valid. The question is if under a valid agreement, some unlawful activities forbidden by law are carried on, whether Section 23 of the Contract Act is attracted.

9. The counsel for the respondent very strongly relied on the decision reported in Varadarajulu v. Thavasi Nadar, AIR 1963 Mad 413. This was a case of contravention of the provisions of the Motor Vehicles Act. The court held a partnership between A and B for the purchase of a lorry and to use it for carrying on the business of transport service with a permit obtained in B's name only is illegal and opposed to public policy as it involves contravention of the provisions of Sections 42(1) and 59(1) of the M. V. Act. The partnership firm being the owner of the vehicle cannot use the permit obtained in B's name unless the permit is transferred in the name of the partnership with the permission of the Transport Authority under Section 59(1) of the M. V. Act. The court held that any claim arising out of the settlement of accounts of the partnership is also illegal and cannot be enforced. In arriving at this conclusion, the court relied on Velu Padayachi v. Sivasooriam Pillai, AIR 1950 Mad 444 (FB); Viswanathan v. Nanakchand Gupta, AIR 1955 Mad 536; Govindaraj v. Kandaswami Gounder, AIR 1957 Mad 186 and Kanniappa Nadar v. Koruppiah Nadar AIR 1962 Mad 240 (FB) in this case, the partnership agreement was found to be illegal on the ground that the partnership business of plying buses, was intended to be carried on, on the strength of permit obtained by one of the partners even when the partnership was entered into. The reason is that the bus after the formation of the partnership is owned by the partnership and that partnership has no permit to run the bus owned by the partnership even though one of the partners had the required permit for plying buses. With due respect I venture to doubt the correctness of the reasoning in this case.

10. In Dayabhai & Co. v. I. T. Commr. : [1966]59ITR364(MP) a Division Bench of the Madhya Pradesh High Court did not agree with the reasoning of the Madras case. The Madhya Pradesh High Court observed that a partnership business in transport can be carried on, on the strength of a permit obtained by a partner and with a vehicle belonging to him. The partnership business can also be carried on with vehicles belonging to the partnership firm on the basis of permits obtained by a partner in respect of those vehicles, because a partner though not owner of those vehicles is clearly in possession of those vehicles. There is nothing in the M. V. Act laying down that transport business in partnership can only be done on permits issued and obtained by the firm itself and with vehicles of which the firm is the owner. The court said that it cannot, therefore, be said that when transport business is carried on with vehicles belonging to a partner or to the firm on the authorisation of permits held by a partner that Ss. 31, 42 and 59 of the M. V. Act are transgressed. The court further held that there being no violation of any provision of the M. V. Act, the partnership agreement cannot be regarded as illegal in such a case. Such a partnership agreement is not also void as it is not opposed to public policy. The court observed that it does not fall under the well settled classes of contracts which have been held as contrary to public policy and it cannot be declared to be a contract opposed to public policy by inventing a new head of public policy. The Madhya Pradesh High Court relied on : [1959]37ITR271(SC) . The Madhya Pradesh High Court considered almost all Madras decisions including AIR 1963 Mad 413: AIR 1957 Mad 620 and the Full Bench decision, AIR 1950 Mad 444.

11. The Madhya Pradesh High Court observed that the decision of the Supreme Court in Umacharan Shaw & Bros. v. Commr. of Income-tax, West Bengal : [1959]37ITR271(SC) gives a conclusive answer to the reasoning adopted in Madras cases and held that the views expressed by the Madras High Court are not correct.

12. In AIR 1950 Mad 444, the Full Bench of the Madras High Court declared that a partnership entered into for the purpose of conducting business of arrack or toddy on a licence granted or to be granted only to one of them would be void ab initio and there would be no difference in the application of this principle whether the contract of partnership was entered into before the licence was granted or afterwards.

13. I may also refer to certain other decisions cited by the counsel for the respondent. AIR 1957 A P 837 (M. Narayanam & Bros. v. K. Subbaraju); : AIR1959AP647 (Virayya v. Subba Rao), : AIR1962Ker21 (Appu Menon v. Narayana Ayyar), : [1965]1SCR861 (Surasaibalini v. Phanindra Mohan), : [1968]1SCR805 (Sita Ram v. Radha Bai) and (N. Bhaironbux & Co. v. Kasi Ram). In , the Rajasthan High Court was considering the question of purchase of export licence contravening the export control order. The court held that money spent in fulfilment of such object cannot be recovered.

14. In : AIR1962Ker21 , a Full Bench of this court held that courts do not decree money claimed as due under agreements which have permitted persons to do business in contravention of the Abkari Rules. AIR 1957 AP 837 is a case of a partnership. It was found that the business was carried on by the Firm with the licence of one of the partners firm. It was in violation of Clause 3 of the Foodgrains Control Order. The court held that the partnership is illegal. This decision has relied on AIR 1950 Mad 444. As stated earlier, the correctness of the decision reported in AIR 1950 Mad 444 was also doubted in : [1966]59ITR364(MP) also doubt the correctness of this Madras decision. : AIR1959AP647 was a direct case where a party to an illegal contract invoked the aid of the court to have such a contract carried into effect. The court said that the law will not tolerate any party to violate any moral or legal duties.

15. The counsel invited my attention to the observation of Balakrishna Menon, J. in Abdulkhader v. Plantation Corporation of Kerala : AIR1983Ker1 which is quoted below (at p. 4 of AIR) : -

'The total length of the road to be constructed as per the agreement is 4560 metres out of which an extent of 600 metres at the entrance to the site of the work belongs to third parties and the same had not been acquired even on the date of the suit. Ext. A1 agreement between the parties is therefore for the construction of the road not merely on the land of the plaintiff but also on lands belonging to third parties in respect of which the plaintiff had no right of entry. An agreement which involves injury to the properties of other persons is void under Section 23 of the Contract Act and cannot be enforced in law. No claim for damages is sustainable for the breach of such an unlawful agreement.'

16. The agreement of partnership in the case I am considering did not at all indicate that the partners wanted to conduct the trade without a licence. The defendant has no case that in the partnership agreement the partners wanted to conduct themselves in an unlawful manner. The agreement entered into by the parties is perfectly legal in the sense that it was not for any unlawful object or for any unlawful consideration. The partners never intended or contemplated that the partnership business should be carried on in a manner prohibited by the statute. The question of illegality of a partnership must be distinguished from illegality of any acts done in the course of its business by the firm or some or all of its members. Here I am concerned with a case where the partnership as such is not alleged but its activities are said to be tainted with illegality. The fact that one partner has been guilty of certain illegal acts in the conduct of the partnership business is no defence to an action for account by the other partner, where the object of the partnership was not illegal and the innocent partner at the time of entering into the partnership intended that it should be carried on lawfully. I should quote the observations in Thwaites v. Coulthwaite (1896) 1 Ch. 496.

'The next question is whether the parties intended or contemplated that this partnership business should be carried on in a manner prohibited by the statute. If they did, the partnership was illegal even though nothing definite might have been said at the time the partnership contract was entered into as to the mode of carrying on the business.'

The court finally held :--

'On the evidence I hold that it has not been made out that the plaintiff did intend that this business should be carried on illegally, and consequently, 1 decide that this second defence fails.'

Chitty on Contract 20th Edition, page 1084 says : --

'Upon the dissolution of such a partnership an account may be ordered. Each partner has a right to recover his share of the capital subscribed so far as it has not been spent; but he cannot claim account of profits.'

(Keen v. Price (1914) 2 Ch 98: Brookman v. Mather (1913) 29 TLR 276).

17. In the Madras cases, from the agreement itself it is possible to discern an intention on the part of the partners to conduct their business in a manner in violation of certain statutory provisions. This distinction is significant particularly in view of the decision reported in (1896) 1 Ch 496. Where this question is considerd, courts always used to quote that celebrated passage form the judgment of Lord Mansfield in Holman v. Johnson (1775) 1 Cowp 341. If I may say so with the utmost respect, the said passage very succinctly and eloquently sets out the correct principles which should govern the decisions of these cases. Lord Mansfield CJ. said : --

'............. the objection that a contract is immoral or illegal as between plaintiff and defendant sounds at all times very ill in the mouth of the defendant. It is not for this sake, however, that the objection is ever allowed; but it is founded in general principles of policy which the defendant has the advantage of, contrary to the real justice, as between him and the plaintiff, by accident, if I may say so. The principle of public policy is this : ex dolo male non noritur actio. No Court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act. If, from the plaintiffs own stating or otherwise the cause of action appears to arise ex turpi causa or the transgression of a positive law of this country, there the court says he has no right to be assisted. It is upon that ground the Court goes; not for the sake of the defendant, but because they will not lend their aid to such a plaintiff.'

It is settled law that where the parties are not in pari delicto, the less guilty party may be able to recover money paid or property transferred under the contract. This possibility may arise in three situations : First, the contract may be of a kind made illegal by statute in the interests of a particular class of persons of whom the plaintiff is one. Secondly, the plaintiff must have been induced to enter into the contract by fraud or strong pressure. Thirdly, there is some authority for the view that a person who is under a fiduciary duty to the plaintiff will not be allowed to retain property or to refuse to account for moneys received, on the ground that the property or the moneys have come into his hands as the proceeds of an illegal transaction. (Vide -- Anson's Principles of the English Law of Contract --Page 3461. The Supreme Court in : [1968]1SCR805 has quoted with approval the above passages from Anson's Principles of English Law of Contract.

18. The case of the defendant is that both parties are in pari delicto. It is true both are in delicto, but it is not par delictum, since the defendant had more control in the conduct of the business. Though it cannot be said precisely that the plaintiff is less guilty than the defendant, the overall circumstances proved in the case would show that the defendant had more responsibility in conducting the trade.

19. The appellate Court has not recorded a finding that the business carried on by the partnership in this case required a licence. The provisions dealing with licence, viz. Sections 2 and 3 of the Kerala Foodgrains Dealers' Licensing Order, 1967 have not been adverted to. The defendant only contended that the plaintiff is not entitled to claim his share from the partnership impliedly meaning that the plaintiff is not entitled to claim share of profits. The plaintiffs case was that there was settlement of accounts and the defendant promised to pay the amount claimed in the suit. Both the courts have found that the plaintiff has established his case. The trial court has granted only a decree for the amount invested by the plaintiff.

20. When dealing a question of public policy. Mathew, J. said : --

'In conducting an enquiry Judges are not hide bond by precedent. Judges must look beyond the narrow field of past precedents, though this still leaves open the question in which direction he must cast his gaze.'

(Vide Murlidhar v. State of U. P., : [1975]1SCR575 ).

In describing the ideal function of the Judge, Jerome Frank gives a clearly commendatory exposition of a similar idea.

'The Judge, at his best, is an arbitrator, a 'sound man' who strives to do justice to the parties by exercising a wise discretion with reference to the peculiar circumstances of the case. He does not merely 'find' or invent some generalized rule which he 'applies' to the facts presented to him. He does 'equity' in the sense in which Aristotle -- when thinking most clearly -- Described it -- The arbitral function is the central fact in the adminstration of justice.'

I feel that I should not confirm the judgment and decree of the appellate court. I set aside the judgment and decree of the appellate court and restore the judgment and decree of the trial Court. No order as to costs.


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