1. These appeals arise out of suits instituted by the appellants who are a firm of Stock Brokers called the Central Brokers, for recovery of certain amounts claimed as balance due on account of several purchases and sales of shares effected by them on behalf of the respective defendants. The suits were contested on the ground 'inter alia' that the contracts sued on were void as being in contravention of Section 94-C of the Defence of India Rules, and that the claims based thereon were in consequence unenforceable under Section 23, Contract Act. There were a number of other suits in which the same defence had been raised and Mack J. directed that the question should be argued as a preliminary issue in all of them. After hearing counsel in all the suits, he held that the contracts were illegal and accordingly dismissed the suits 'in limine'.
Against this judgment the plaintiffs have preferred the above appeals and the only point that arises for consideration therein is whether the contracts sued on were void and unenforceable on the ground that they were in contravention of Section 94-C of the Defence of India Rules. That section which came into force on 11-9-1943 runs as follows:
"94-C(1). In this rule-
(a) "Budla" includes a contango and a backwardation and any other arrangement whereby the performance of any obligation under a contract to take or give delivery of securities within a stipulated period is postponed to some future date in consideration of the payment of receipt of interest or other charges;
(b) "Contract" means a contract made or to be performed in whole or in part, in British India relating to the sale or purchase of securities;
(c) "Ready delivery contract" means a contract which must be performed by the actual delivery of, or payment for, the securities specified therein on a date not later than the seventh day (or if the seventh day happens to be a holiday, the business day next following); from the date of the contract.
(d) "Securities" include stocks, shares, bonds, debentures and debenture stock and any other instrument of a like nature,
(e) "Stock exchange" means any association, organisation, or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling business in buying, selling and dealing in securities.
(2) No Stock Exchange shall, after 24-9-1943 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 budla transaction or any contract other than a, ready delivery contract.
(3) Any Director, Manager, Secretary or other officer of a stock Exchange who contravenes any of the provisions of this rule shall be punishable with imprisonment for a term which may extend to five years or with flue or with both.
(4) The Central Government, may, by order, authorise subject to such condition, if any, as it may impose, any Director, Manager, Secretary or other officer of a Stock Exchange to extend, in any particular case, for reasons to be recorded in writing, the time for the performance of a 'ready delivery contract' specified in Clause (c) of Sub-rule (1)."
2. By a notification dated 4-5-1946 "fifteenth day" was substituted for the word "seventh" in Section 94-C(1)(c) and the entire section was repealed on 1-10-1946. The position, therefore, is that transactions of the character mentioned in the section and entered into between 24-9-1943 and 1-10-1946 would be hit by it. As the suit contracts were concluded during this period the only point for decision is whether, otherwise, they fall within the purview of the section. The contention on behalf of the appellants is that the section prohibits only Stock Exchanges from permitting or affording facilities for Budla transactions, that the contracts entered into outside the floor of the Stock Exchange are not within the prohibition enacted in the section; and that contracts made by Stock Brokers in their own office with persons who are not even members of the Stock Exchange are wholly unaffected by the prohibition.
The decision in -- 'Nagappa v. Veerappa & Co.', (A), was cited in support of this contention. There, the dealings in question were between persons who were not members of a Stock Exchange and it was held that Section 94-C of the Defence of India Rules applied only to transactions in the stock Exchange and not to any settlement between the parties so long as that settlement was without recourse to the Stock Exchange and that the section did "not bar the enforcement of rights and liabilities under such contracts by a court". This conclusion is supported by the plain language of the section and we agree with it.
3. It was suggested for the respondents that the definition of "Stock Exchange" in Section 94-C(1) was wide enough to include all associations which deal in shares and that on that construction the appellants would be within the mischief of that section. This argument did not find favour with Mack J. who considered that the definition was intended to apply only to recognised Stock Exchange and not to firms doing business as Share brokers and he referred to Section 94-C Sub-clause (3) which was complementary to Section 84-C(2) and observed that the partners of a share brokers' firm could not be convicted under that clause as "officers of a self-constituted Stock Exchange".
We are in complete agreement with Mack J., that the definition of "Stock Exchange" in Section 94-C(1)(e) cannot apply to a firm of Stock Brokers and that the words "Permit or afford facilities for Budla transactions "are not appropriate to describe contracts entered into by them with their clients. Mr. R. Vaidhyanathan, the learned counsel who argued the case for the respondents, apart from throwing a suggestion that the appellants were "stock exchanges" as defined in the Act did not pursue it further and, indeed conceded and quite correctly, that the transactions in question could not be brought within the express prohibition of the section.
4. But he contended that the contracts sued on would, if enforced, have the effect of defeating the provisions of Section 94-C and should, therefore, be declared void under Section 23, Contract Act. That section enacts that an agreement is unlawful and void if its object is of such a nature that if permitted it would defeat the provisions of any law. Before such transactions could be held to be void under that section it must be shown that they would, if carried into effect, defeat Section 94-C (2). But if that section in terms prohibits only transactions under the coverage of Stock Exchange it is difficult to see how contracts which are entered into outside that coverage and with persons who are not even members of the Stock Exchange can be said to defeat or contravene that section in any manner.
It is argued that the real purpose underlying Section 94-C(2) is much wider than prohibiting transactions on the floor of the Stock Exchange; that its true intention was to prohibit all speculations in shares and that the contracts in question were calculated to defeat that intention. But no such intention is manifest in Section 94-C and it is not permissible to travel outside the words used in statute to discover a secret intention not expressed therein. If, as is contended for the respondents, the object of the Legislature was to strike down all transactions of sale or purchase of shares where delivery was not to be effected within 7 or 15 days that could have been quite easily expressed by enacting a general prohibition to that effect and not one limited as under Section 94-C(2). On the other hand, there are among the Defence of India Rules provisions which forbid absolutely certain classes of transactions. Thus Section 90(2)(a) enacts:
"No person shall buy or sell, or offer to buy or sell, for an amount other than its face value, any coin or note."
Section 91(3) provides that:
"No person shall buy or borrow from or sell or lend to any person not authorised by the Reserve Bank of India in this behalf, any foreign exchange (other than gold sovereign)."
Section 92-A(2)(a) enacts:
"that no person resident in British India shall, except with the permission of the Reserve Bank of India, draw, issue or negotiate any Bill of exchange or promissory note -- in favour of a person who is resident outside the Sterling area." Control orders have also been issued under the Essential Supplies (Temporary Powers) Act, 24 of 1946 absolutely prohibiting certain transactions; such for example as the Vegetable Oils and Oil Cakes (forward contracts) Prohibition Order, 1944, which was considered in -- 'Sadasivayya v. T. V. Narayana and Co.', (B). Section 94-C (2) is in sharp contrast to the above in that it studiedly avoids a general and total prohibition of forward contracts in shares where delivery is not to be given within a week but merely prohibits Stock Exchanges from permitting or affording facilities for such transactions. It was argued by Mr. R. Vaidyanathan, that the contracts sued on should be held to be void even though they are not in contravention of the specific provisions of Section 94-C if in fact they are opposed to the policy underlying it and relied on the following passage in Craies on Statute law (5th Edn.) p. 235; "Not only is a contract invalidated which involves in its performance the direct contravention of the statute but it is also a well recognised principle of law that any contract will be held void although not in contravention of the specific directions of the statute if it is opposed to the general policy and interest thereof."
But the learned Author proceeds to observe:
"Questions of policy are difficult to solve and it is safer to keep to the manifest intention express or implied without turning aside to vague and delusive generalities as to the policy of the general law or any particular Act."
On the language of Section 94-C it is not possible to read any intention express or implied prohibiting transactions which take place outside the Stock Exchange.
5. It is argued for the respondent that there is no reason why Budla transactions should be prohibited on the floor of the Stock Exchange but permitted outside. When the language of the section is clear no useful purpose will be served by speculating on the why and wherefore of this distinction. But it is understandable that while |members of an association should agree to be bound by certain rules in their dealings 'inter se' their' relations with outsiders should be governed wholly by the terms of their contracts with them. There is considerable authority in England that the rules of Stock Exchange have effect only on the members in their mutual dealings and do not affect the rights and obligations of an outsider towards a member.
6. In -- 'Ponsolla v. Webber', (1908) 1 Ch 254 (C) certain brokers called Cancellor and White acting on behalf of the plaintiff pledged his shares with the defendant as security for a loan to be repaid on the next instalment day. The Brokers and the defendant were members of a stock exchange but not the plaintiff. The Brokers having made default in the repayment of the loan on the settlement day, the shares were taken over by the defendant at a price fixed in accordance with the rules of the Stock Exchange. The shares having subsequently risen in value, the plaintiff sued for redeeming them on payment of the amounts due. The defendant contested the suit on the ground that under the rules the title to the shares had become vested in him absolutely by purchase and that as the contract between plaintiff and his brokers contained a term incorporating all the rules of the Stock Exchange into it tie was bound by the sale effected in accordance with those rules. In rejecting this contention, Neville J. observed:
"Now it has been decided that where the outside principal has performed his duty, these rules regulate the relations of the members of the Stock Exchange 'inter se' and have no effect on the principal who stands behind the Stock Exchange transaction...... The question really is whether the contract impliedly incorporates these particular rules or whether it does not? I think the decisions which have been cited show that these rules were not intended to affect anybody but the members of the Stock Exchange."
'Levitt V. Hamblet', (1901) 2 KB 53 (D) was a converse case. There, the defendant, who was an outsider had engaged Edward Preston and Co., Brokers, to purchase shares for them and carry them over to the next settlement. The Brokers purchased the shares from the plaintiffs; both of them being members of a Stock Exchange. Before the account day the Brokers became defaulters and the plaintiffs had to take over the shares on the settlement day at a price fixed in accordance with the rules of the Stock Exchange. The plaintiffs subsequently sold the shares in the market and sued the defendant as an undisclosed principal for the balance. The defendant pleaded that under the rules, the contract became closed and no suit would lie thereon. It was held that the rules of the Stock Exchange applied only as between members and did not affect the rights and obligations of an outsider to a member. The term of the contract incorporating the rules of the association was construed as meaning that the
"dealings between them are to be carried on under the rules of the Stock Exchange so far as they are applicable to outsiders, and not under the rules that are applicable only to the domestic forum of the Stock Exchange."
On the same principle it was held in -- 'Martin v. Gibbon', (1876) 33 LT 561 (E), that
"Bargains in prospective dividends though prohibited and not enforceable in the domestic forum of the London Stock Exchange may be enforced in the Courts by non-members."
The position is thus stated in Halsbury's Laws of England, Vol. 31, p. 595 para. 828 thus:
"Rules or customs however which are applicable only to the domestic forum of the Stock Exchange do not bind outsiders."
Thus there being a well recognised distinction between rules governing the relationship of the members 'inter se' and enforceable in the domestic forum of Stock Exchange and contracts regulating the rights and obligations between a member and an outsider and enforceable in a Court of law, it is difficult to hold that Section 94-C (2) which prohibits transactions under the auspices of the Stock Exchange which can only be between members was intended to apply to contracts between a member and an outsider.
7. Mack J. was considerably influenced in his decision by the fact that Section 94-C had been adopted by the Stock Exchange of Calcutta, Bombay and Madras and that the contracts sued on expressly provided that they were subject to the rules of those Stock Exchanges. The observations in --'(1901) 2 KB 53 (D)' and -- '(1908)' 1 Ch 254 (C)' already quoted show that that would not affect the legal rights of the parties.
8. It was finally contended on behalf of the respondents that the suit contracts should be held to be void as opposed to public policy inasmuch as they were highly speculative and would if recognised engender a spirit of gambling. But mere speculation, where it does not amount to wager, has never been held, apart from special legislation, to be illegal and to do so now on the ground that it is opposed to public policy would be to extend that far beyond what has been established by decisions and that, the authorities have repeatedly laid down, Courts should refuse to do.
9. "I deny that any Court can invent a new head of public policy" observed Lord Halsbury in -- 'Jenson v. Driefontein Consolidated Mines Ltd.', 1902 AC 484 at p. 491 (F). In -- 'Fender v. St. Joyn Mildmay', 1938 AC 1 (G), Lord Thankerton said:
"In the first place, there can be little question as to the proper function of the Courts in questions of public policy. Their duty is to expound, and not to expand, such policy."
In the same case Lord Wright remarked:
"We have high authority for saying that the Court is not to establish new heads of law founded on new public policies...... What is I think, now clear is that public policy is not a branch of law to be extended,"
and quoted the observations of Cave J. in -- 'In re Mirams', (1891) 1 QB 594 (H) and Younger L. J. in -- 'In re Wallace', (1920) 2 Ch 274 at p. 304 (I) to the same effect. A classical statement of law on the subject is that of Jessel M. R. in -- 'Printing and Numerical Registering Co. v. Sampson', (1875) 19 Eq 462 at p. 465 (J), where he observed:
"It must not be forgotten that you are not to extend arbitrarily those rules which say that a given contract is void as being against public policy, because if there is one thing which more than another public policy requires it is that men of full age and competent understanding shall have the utmost liberty of contracting and that their contracts when entered into freely and voluntarily shall be held sacred and shall be enforced by Courts of justice."
The following observations of Lord Wright in -
'(1938) AC 1 at p. 37 (G)', may also be quoted:
"The onus is always on those who assert that the Court is not to enforce a contract which is 'ex facie' good save on grounds of law substantial enough to outweigh the paramount policy of the law that people should keep faith and fulfil their promises. 'Facta sunt servanda'."
The position, therefore, is that the contracts sued on must be held to be valid unless they fall under one or the other of categories which have been held to be bad as opposed to public policy and as the defendants are unable to point to any course of decision holding that speculation is opposed to public policy the plaintiff would be entitled to enforce the contracts, and recover the balance due on the dealing. We must accordingly hold, differing from Mack J., that the contracts sued on are not void as in contravention of Section 94-C of the Defence of India Rules or as opposed to public policy. This is in accordance with the decision of this Court in -- ' (A)'.
10. As the suits were dismissed 'in limine' on the ground that the contracts were illegal they must now be remanded for trial on the other issues. The appeals are accordingly allowed and the suits remanded for disposal on the merits. Costs of the appeals will abide and follow the result. The court-fee paid by the appellants will be refunded.