1. The proprietors of the plaintiff firm described it as a firm of stock and share brokers. His place of business was Devakottah. In para 4 of his written statement the defendant contended that the plaintiff was both a broker and a dealer in shares. The defendant did not challenge the correctness of the plaintiff's description of the defendant as a dealer in shares. The defendant was also a resident of Devakottah. Both parties agreed that transactions between them in purchase and sale of shares commenced on 7-6-1945. The plaintiff claimed that the transactions between himself and the defendant formed the basis of an open, mutual and current account between them. The plaintiff's claim in the suit was for the amount due to him on an account stated to the defendant. The learned Subordinate Judge decreed the plaintiff's claim. The defendant appealed.
2. Though the appeal was against the decree as a whole, learned counsel for the appellant confined his arguments to four sets of transactions. He explained that the liability the plaintiff sought to enforce on the defendant under these four sets of transactions more than covered the amount decreed.
3. The genuineness of the contracts evidenced by Exs. B. 1 to B. 4 was not in dispute. Ex. B. 1 was on 7-11-1945 under which the defendant sold 200 steel Corporation shares at Rs. 36-11-0 a share. The contract number was 1031. Contract No. 1067 evidenced by Ex. B. 2 was on 13-11-1945, for sale by the defendant of 100 more Steel Corporation shares, at the same price Rs. 36-11-0 a share. Under contract number 1066, Ex. B. 3 dated 13-11-1945, the defendant sold 100 Indian Iron shares at Rs. 41-8-0 a share. The fourth contract, Ex. B. 4, No. 1094, was on 24-11-1945, for the sale by the defendant of 100 more Indian Irons at Rs. 42-9-0 a share. Ex. B. 1 recorded that the delivery of the shares was subject to the rules and usages of the Bombay Stock Exchange. The date of the contract was 7-11-1945 and the date of settlement was shown in Ex. B. 1 as 13-11-1945. The other three contracts, Ex. B. 2, B. 3 and B. 4 were for delivery under the rules etc of the Calcutta Stock exchange. Neither the plaintiff nor the defendant was a member of either of the Stock Exchanges at Bombay and at Calcutta.
4. It was common ground again that before September 1943, the rules of the Bombay stock Exchange provided for budla contracts, i.e., forward contracts in shares while the Calcutta Stock Exchange provided only for ready delivery contracts. But in 1945-46 neither the Bombay nor the Calcutta Stock Exchange rules provided for budla contracts. The rules of both the Stock Exchanges were in accordance with Rule 94-C, Defence of India Rules, which was in force between 24-9-1943 and 30-9-1946. The Bombay, Calcutta and Madras Stock Exchanges, which framed the rules consistent with Rule 94-C of the Defence of India Rules, provided only for ready delivery contracts.
5. The plaintiff's claim as formulated in paras 4, 5, and 6 of the plaint was as follows:
"4. It is the usual course of business of the plaintiff to be employed by his several constituents as broker to effect purchases and sales of shares on their behalf they agreeing and undertaking to indemnify the plaintiff against the liability to be incurred by him in the course of such sales and purchases on their behalf according to practices and usages incidental in the said line of business and to pay the plaintiff such amounts as he may employ in respect of the orders to him by the constituents or for which they may render themselves liable together with interest thereon and commission at the agreed rate and to open as directly flowing from such employment a running account of dealings with such constituents debiting and crediting the several amounts in the account against such constituents which may arise in the course of such employment ...... Inter alia it is necessarily incidental in the course of such business to credit or debit as the case may be, customary 'carry over' charges ...... as well as to buy or sell out shares on behalf of the constituents by way of covering their orders, at the discretion of the said broker after previous demand, to fulfil their orders according to their tenor and after carrying over in accordance with trade usage for such time at their discretion as may be thought necessary to enable the constituents to fulfil such orders.
"5 In accordance with the said usual course of business and subject to the incidents of trade usage and undertaking in the manner aforesaid, the defendant employed the plaintiff as broker to effect purchases and sales of shares on his behalf under his order on and from 7-6-45 at Devakottai. Consequently a mutual open and current account of dealings was opened for him in the ledger folio kept by the plaintiff ...... The defendant has been also dvised from time to time of the several transactions and entries regularly and promptly in the course of business made in accordance with the orders and requests of the defendant from time to time. Statements of account also have been furnished from time to time to him. "6 On 3-4-1946 the excess debit in dealings on account as on that date came to Rs. 7356-10-0. A letter of demand was communicated on that date to the defendant calling upon him to pay that amount & also to deliver the 200 Indian Irons and 300 steels which he had not delivered till then in spite of time being granted to him at his request. The defendant did not comply with the same. Consequently on 12-4-1946, 200 Indian Irons and 300 Steels were "bought in" in the usual course of business in the market and the accounts were closed......"
6. The history of the four sets of transactions-commencing with Ex. B. 1 to Ex, B. 4 was explained during the trial. The plaintiff's case was that the two contracts Ex. B. 1 and B. 2 were carried over on 15-12-45 under contract No. 1262, with the price of the 300 steels shares at Rs. 44 a share, as against the original price of Rs. 36-11-0 a share. The nest carry over was on 20-2-1946 under contract No. 1557, with the price Rs. 46-0-6 per share. This was again carried over on 11-3-46 under contract No. 1603 at Rs 54 a share. The final carry over was on 12-4-1946 under contract No. 26 with the price Rs. 52-12-0 a share. This was less than the contract price of Rs. 54 which was the market rate on 11-3-1946, and the defendant was credited with the difference. On the earlier occasions, he was debited with the differences. Virtually the plaintiffs claim was for the difference between the Rs. 36-11-0 and Rs. 52-12-0 a share.
7. Ex. B. 3 and B-4, the plaintiff claimed, were carried over on 15-12-1945 under contract No. 1265 at Rs. 50 for each of the 200 Indian Irons dealt, with under Exs. B. 3 and B. 4. This was carried over on 1-2-1946 under contract No. 1515 and again on 22-2-1946 under contract No. 1554. On 11-3-1946 it was again carried over under contract No. 1605 at Rs. 59 a share. On each of these dates, the defendant was debited with the differences between the rates of the previous contract and the next contract. The final carry over was on 12-4-1946 under contract No. 25. The price had fallen by then to Rs. 57-10-0 and the defendant was credited with the difference between Rs. 59 and Rs. 57-10-0 a share.
8. The defence, as reiterated by learned counsel for the appellant during his arguments before us, was (1) neither under any of the contracts. Exs. B. 1 to B. 4 nor at any time thereafter had the plaintiff a right to carry over, (2) even if such a contract could be spelled out, it was illegal and unenforceable in law, and (3) since the plaintiff's claim was that of a broker, based on a right to indemnity, in the absence of proof of loss sustained by the plaintiff, he was not entitled to recover anything.
9. In Halsbury's Laws of England (Hailsham Edn) Vol 31, page 581, Para 797 the learned author explained the scope of carry over. He observed:
" 'Carry over' or 'continuation' consists of two operations, namely: (1) a repurchase for the current account of securities sold for that account (or conversely a resale of securities bought) effected in order to close an existing bargain; and (2) a new sale or purchase, as the case may be, for the new account."
In para 840, it was further explained thus:
"Continuation or carrying over is in form and in law a sale and repurchase, or a purchase and resale, as the case may be. It is a new contract and not merely getting further time for the performance of the old contract." Much the same was said at greater length in the Laws of Stock Exchange, Schwabe and Branson, 2nd Edn. pages 66 and 67. Winding up the discussion, the learned authors pointed out: "The result of these two operations is that the bargain is closed and a new one is opened for the ensuing account at the price fixed."
In re: Overweg: Haas v. Durant, (1900-1 Ch 209) furnished the authority for the statement in para .316 at page 589 of Vol. 31 of Halsbury's Laws of England:
"In the absence of instructions to do so, a broker has no authority to carry over his client's bargains."
The learned authors proceed further:
"Such instructions will not be implied from the fact that a client who has purchased does not provide money by account day with which to take up the securities bought; but an authority to carry over may be implied from instructions to do so given in respect of a previous account and not revoked."
10. The right of carry over that the plaintiff claimed in this case was explained by him as P. W. 1:
"Delivery must be made to me in time .... In default carry over charge must be paid in addition to delivery. In default it will automatically be carried over to the next settlement. I will carry over so long as I find it convenient. Then I would give notice to say that if delivery is not made within a particular time, I would cover the transaction. In case of default I would buy in the market and fulfil the contract .....It was expressly agreed between us that the business should be done according to the trade usage as spoken to by me now."
From the history of the transactions furnished in the earlier paragraphs, it should be clear that the carry over was not on each of the settlement dates following the original contracts Ex. B. 1 to B. 4, but on dates chosen by the plaintiff. Such a usage or a right based on such a usage has to be negatived even on the basis of the evidence of P. W. 4, who represented a firm of stock brokers at Madras, and who was examined as an expert witness. P. W. 4, stated
"The business with our clients is adjusted either by giving delivery or taking delivery as the case may be, or otherwise carrying over the outstanding transactions to the next weekly settlements or delivery dates. I mean by carrying over the following: If there is a sale by a particular client the sale is bought back for the same settlement at the board rate fixed for that settlement and a sale note given for the next settlement leaving a difference between the bought and sale rates representing the carry over charges. We are carrying forward the same transactions. The carry over charges represent the difference between the purchase or :sale or the current settlement and the corresponding sale or purchase for the next settlement. The carry over charge may be either a debit or a credit. In adopting the carry over charges we adopt the procedure followed by the Bombay brokers."
Even P. W. 1's evidence extracted above would support the claim of P. W. 4, that the right to carry over must be exercised on the ensuing settlement date.
11. It should be remembered that only the rules of the Bombay stock Exchange permitted carry over, and that too was before September 1943. Between 1945 and 1916, neither Bombay nor Calcutta Stock Exchange permitted carry over in the rules framed by them.
12. It is not really necessary in this case to refer to the rules and usages of the Calcutta or Bombay stock Exchange to determine the real nature of the transactions between the plaintiff and the defendant, the real basis of the liability which the plaintiff seeks to enforce in this suit. Whether the plaintiff had an automatic right to carry over at his convenience need not arise for decision at all in this case. Whether on each of the occasions subsequent to Exs. B. 1 to B. 4. i.e., when, according to the plaintiff, the contracts bearing Nos. 1262, 1557, 1603 and 26 (with reference to Ex. B. 1 and B. 2) and the contract Nos. 1263, 1515, 1554, 1605 and 25 (i.e., with reference to Exs. B. 3 and B. 4) were entered into there was a fresh contract between the plaintiff and the defendant, and whether each of those contracts was enforceable would be the real points for determination at this stage. To illustrate: the plaintiff's case was that Exs. B. 1 and B. 2 were carried over to contract No. 1262 on 15-12-1945. The effect of contract No. 1262 was that the defendant's liability under Exs. B. 1 and B. 2 was ascertained on 15-12-1945; he had to pay the difference between Rs. 36-11-0 and Rs. 44 a share, which latter figure represented the market price of the shares on 15-12-1945. There was a fresh sale on 15-12-1945. If that was the scope of contract No. 1262, was such a contract accepted by both the plaintiff and the defendant, and was such a contract enforceable are the questions. In other words, was the basis of the defendant's liability a unilateral act of the plaintiff or a bilateral contract between the plaintiff and the defendant? If contract No. 1262 evidenced a bilateral agreement which both the plaintiff and the defendant accepted, the question whether Ex. B. 1 or Ex. B. 2 or both provided for a carry over exercised by the plaintiff by his unilateral act need not be considered at all.
13. It was common ground that Exs. B. 1 to B. 4 represented contracts concluded between the plaintiff and the defendant. Exs. B. 1 to B. 4 were styled memoranda of confirmation. They were sent by the plaintiff to the defendant. It was the acceptance of each of these memoranda of confirmation that marked the conclusion of each of those contracts.
14. The procedure adopted by the plaintiff and the defendant in the course of their dealings can be gathered from the evidence on record. We have already pointed out that, though before September 1943 the Bombay Stock Exchange rules permitted carry over, in 1945-46 neither of the Stock Exchanges permitted carry over transactions by their rules. Ex. A. 4 showed that even prior to 7-11-1945, i.e., even before the date of Ex. B. 1, there were carry over transactions between the plaintiff and the defendant. No doubt, the receipt of Ex. A. 4 was denied by the defendant, taut we agree with the learned Subordinate Judge in rejecting that denial as untrue. Apart from these transactions being consistent with the procedure followed with reference to EXS. B. 1 to B. 4 also, nothing very much really turns on the transactions prior to the date of Ex. B. 1.
15. Either on the basis of standing or specific instructions, the plaintiff bought or sold shares for the defendant. That was followed up by the despatch of confirmation memoranda by this plaintiff which also gave the number of the contract for each transaction. (After tracing the procedure adopted by the parties and weighing the evidence His Lordship agreed with the Subordinate Judge who held that no credence could be attached to the testimony of the defendant and concluded:) There was this ample evidence to prove the plaintiff's case, that each of the contracts that followed Exs. B. 1 to B. 4 was accepted then and there by the defendant. He never repudiated any of them till after the receipt of the plaintiff's notice.
18. We have already referred to the implications of the acceptance by the defendant of each of the contracts subsequent to Exs. B. 1 to B. 4. On each occasion there was a fresh contract for the delivery of shares. It should be remembered that the fresh contract was not for the delivery of the identical shares of the previous contract but a fresh contract for the delivery of a similar number of shares.
17. Learned counsel for the appellant contended that the confirmation memoranda did not constitute evidence of fresh contracts, but that they evidenced only an exercise of the right to carry over, which right was not conferred by any of the original contracts, Exs. B. 1 to B. 4 under their terms: We are unable to accept this contention. The course of transactions between the parties, to which we have referred in detail above, even independent of the very essence of a carry over, clearly indicated that on each occasion when a confirmation memorandum was sent by the plaintiff to the defendant, acceptance of that memorandum marked the conclusion of a fresh contract.
18. Were any of these contracts unenforceable in law is the next point for consideration.
19. Learned counsel for the appellant urged that budla contracts were illegal and unenforceable. 'Ex facie' the documents even Exs. B. 1 to B. 4 did not profess to be budla contracts. No doubt, Ex. B. 1 showed that the contract was governed by the rules of the Bombay Stock exchange, and the date of settlement was shown as 13-11-1945; but by then even the Bombay Stock exchange did not allow for budla contracts. Thus each of the contracts, Exs. B. 1 to B. 4 were 'ex facie' only ready delivery contracts. That the settlements were not effected between the plaintiff and the defendant on the due settlement dates fixed by the rules of the Bombay or Calcutta Stock Exchange but were effected long after does not make the contracts themselves, Exs. B. 1 to B. 4 any the less ready delivery contracts. So the question, whether budla contracts were illegal and unenforceable, does not really arise for determination in this case. Each of the contracts between the plaintiff and the defendant was for ready delivery.
20. Even if we assume that despite the tenor of the memoranda of confirmation evidencing the contracts, in substance, each of the contracts was not for ready delivery but for budla, we should hold that none of the contracts was unenforceable in law. Section 23 of the Indian Contract Act runs:
"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."
21. The contention, that budla contracts were illegal and, therefore, came within the scope of Section 23, Contract Act, was based on Rule 84-C, Defence of India Rules. Rule 94(C)(1) contained the definitions including the definition of budla. Rule 94-C(2) ran:
"No stock exchange shall, after the 24th September 1943, permit or afford facilities for-
(a) the transaction of budla;
(b) the making of any contract other than a ready delivery contract; or
(c) the carrying out or settlement of any bulda transaction or any contract other than a ready delivery contract."
Sub-section (3) of Rule 94-C ran:
"Any director, Manager, secretary or other officer of a stock Exchange who contravenes any of the provisions of this rule shall be punishable......."
22. The provisions of Rule 94-C, Defence of India Rules, did not specifically prohibit budla contracts as such. The rule prohibited the authorities of the Stock Exchange from affording facilities to its members for entering into budla contracts or for settling such contracts. The prohibition & the penal clauses applied only to the stock exchanges. Penal provisions of any statutory rule must of course be construed strictly. Possibly, it was not considered necessary by those who enacted Rule 94-C, Defence of India Rules, to penalise gambling in shares by forward or budla contracts so long as facilities for such gambling were penalised. It is not however necessary to consider what prompted such legislation. What we have to consider is the effect of the statutory rule Rule 94-C, as it stands. As we have said before, Rule 94-C in terms did not prohibit budla contracts, not did it penalise the parties themselves who entered into such budla contracts. Rule 94-C in our opinion, does not furnish any basis for an argument, that a budla contract was itself illegal.
23. The next question is, in view of Rule 94-C, Defence of India Rules, were budla contracts opposed to public policy, and as such did they come within the scope of Section 23, Contract Act. It should be remembered that Rule 94-C, Defence of India Rules, was in force only for a period of three years between September 1943 and September 1946. Budla contracts with a right to carry over were known and accepted by many Stock Exchanges including the Bombay Stock exchange. No instance has been brought to our notice where before 1943, a right to enforce a budla contract, i.e., a right to carry over, was negatived on the ground that such a contract was opposed to public policy. If, as we have already pointed out, Rule 94-C, Defence of India Rules, did not make the contract itself illegal, but only made it illegal for the Stock Exchange to afford facilities for entering into such a contract or settling the claims on the basis of such a contract, we fail to see any real basis in Rule 94-C for an argument that such a contract was opposed to public policy.
24. Rule 94-C, Defence of India Rules, in our opinion, is not enough to bring within the scope of Section 23, Contract Act, any contract for budia or carry over Rule 94-C, Detente of India Rules does not bar the enforcement of rights and liabilities under such contracts by a court. No doubt it was common ground that the stock exchanges all over India framed rules to accord with Rule 94-C, Defence of India Rules. The rules of the Madras Stock Exchange during the relevant period, and the rules of the other stock Exchanges were similar to these, ran:
"Read the Defence of India rule No. 94-C published by the Government of India coming into force from the 24th September 1943.
1. Resolved, that notwithstanding the existing rules of the Association to the contrary:
(a) all transactions shall be done by Members for Ready Delivery and the terms 'Ready delivery' be mentioned in all contracts passed by the Members of the Association; on no other terms shall Members be allowed to do business;
(c) Members shall not accept havalas between themselves or from non-members in respect of deliveries to be made under 'ready delivery' contracts mentioned in para (a) above; this however shall not preclude members from accepting delivery instructions from clients." The rules of the Stock Exchanges subsequent to September 1943 no doubt prohibited anything but ready delivery contracts. But it was not these rules that made budla contracts providing for carry over illegal; nor could it be urged on the basis of the rules of the Stock Exchange that a budla contract was opposed to public policy. As we have already pointed out, if Rule 94-C. Defence of India Rules, itself did not make a budla contract as such illegal or opposed to public policy, Rules of the Stock Exchange framed to conform to Rule 94-C, Defence of India Rules, could not be opposed to public policy. Besides, it should be fairly obvious that the rules of the Stock Exchanges were modified subsequent to 24-9-194-3 only to give effect to Rule 94-C, Defence of India Rules, which laid certain obligations on the stock Exchanges and their officers. No doubt the plaintiff was not a member of any Stock Exchange, but then the contracts he entered into with the defendant were made subject to the rules ol the Bombay or Calcutta Stock Exchange.
25. Though the rules of the Stock Exchange prohibited anything but ready delivery contracts, thereby prohibiting budla contracts and carry over, we are unable to construe the rules as prohibiting any settlement between the two contracting parties so long as that settlement was without recourse to the Stock Exchange itself. Nor are we able to see anything in the rules of the stock Exchange or in Rule 94-C, Defence of India Rules, prohibiting a fresh contract between the parties, a contract not prohibited either by law or by the rules of the stock Exchange.
26. Learned counsel for the appellant invited our attention to an unreported decision of Mack J. in 'C. S. No. 226 of 1945 (Mad)' etc. With all respect to that learned Judge we find ourselves unable to follow his reasoning. The decision, we are informed, is the subject-matter of an Original Side Appeal, and we have therefore refrained from considering in detail the reasons given by that learned Judge for holding that a budla contract fell within scope of Section 23, Contract Act, and was unenforceable, if the contract was entered into during the period B. 94-C, Defence of India Rules was in force. The unreported decision of Rajamannar c. J. and Panchapakesa Aiyar J. in 'O.S. A. No. 4 of 1948 (Mad) was also referred to during the course of the arguments before us. But that dealt with a case of an extension of time & it afforded no direct authority for a decision of the question, whether a contract to carry over entered into between 1945 and 1946 was unenforceable.
27. Our finding is that each of the contracts subsequent to Exs. B. 1 to B. 4, i.e,, contracts Nos. 1262, 1557, 1603, and 26, and 1266, 1515, 1554, 1605 and 25 was true and that each of the contracts was enforceable.
28. The only other contention of the learned counsel for the appellant that remains to be disposed of is that in the absence of proof of any claim in the suit was really based on a right to loss sustained by the plaintiff he was not entitled to any damages; he was only a broker, and the indemnity. In analysing the transactions between the parties we have already pointed out that at the date of each contract, there was a determination of the liability under the previous contract and a fresh contract to sell i.e., to sell for ready delivery. After the last of those contracts, 25 and 26, the plaintiff proved he bought in shares to cover the contracts that had been entered into by the defendant. Though there was reference to a right to indemnity in the plaint, the real nature of the transactions between the parties, in our view, was to ascertain the liability of the parties at each stage. That itself was accepted by both the parties and that led to a fresh contract at each stage. The appeal fails and is dismissed with costs.