Jugal Kishore Rameshwardas vs Mrs. Goolbai Hormusji

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 95 of 1953

Decision Date: 4 October 1955

Coram: Natwarlal H. Bhagwati, Bhuvneshwar P. Sinha, T.L. Venkatram Ayyar

In this matter, the Supreme Court of India considered an appeal filed by Jugal Kishore Rameshwardas against Mrs. Goolbai Hormusji. The case was heard on 4 October 1955 and the judgment was delivered on the same date. The bench that heard the appeal was composed of Justice Natwarlal H. Bhagwati and Justice Bhuvneshwar P. Sinha. The parties are identified in the record as the petitioner, Jugal Kishore Rameshwardas, and the respondent, Mrs. Goolbai Hormusji. The decision is reported in the 1955 volume of the All India Reporter at page 812 and in the 1955 Supplementary Court Reports at page 857. The statutory framework involved the Bombay Securities Contracts Control Act, 1925, specifically sections 3(4) and 6 of that Act. The core dispute concerned whether the appellant, acting as a broker, had exercised his authority in purchasing shares on behalf of the respondent. The relationship between the two parties was characterised by the Court as one of principal and agent rather than that of seller and purchaser. Accordingly, the Court examined whether the transactions fell within the scope of section 6 of the Act. The Court also considered the nature of the contract notes that brokers send to their constituents, determining that such notes are merely intimations that a contract has been entered into and not contracts of sale themselves. Issues of whether an arbitration agreement existed, the essential elements of such an agreement, and the rules framed by the Native Share and Stock Brokers’ Association, including Rule 167, were also addressed. Finally, the Court evaluated whether the contract notes were void under the provisions of the Act.

The factual background, as set out in the headnote, describes the appellant as a share-broker who conducted business in the city of Bombay and was a member of the Native Share and Stock Brokers’ Association. He was employed by the respondent to effect sales and purchases of shares on her behalf. In the course of his employment, the appellant purchased twenty-five shares of Tata Deferred and three hundred and fifty shares of Swadeshi Mills in order to offset outstanding sales of an equal number of shares that were standing in the respondent’s name. He then transmitted the corresponding contract notes to the respondent. The respondent subsequently repudiated those contracts, asserting that the appellant had not been authorised to close the transactions on the dates indicated in the notes and requesting that the transactions be settled at a later time. The appellant contended that he had acted in accordance with the respondent’s instructions and that the transactions were properly closed. The dispute was referred to arbitration before the Native Share and Stock Brokers’ Association pursuant to an arbitration clause contained in the contract notes. The respondent refused to submit to that arbitration, arguing that the contract notes were void and therefore no arbitration could be instituted under them. The arbitrators proceeded in the respondent’s absence, issued an award in favour of the appellant, and the respondent applied to set aside the award. The Bombay High Court held that the contracts were not “ready delivery” contracts as defined by section 3(4) of the Bombay Securities Contracts Control Act, 1925, and consequently were void under section 6 of the same Act. As a result, the arbitration clause and the arbitration proceedings, including the award, were also held to be void. The High Court further observed that, irrespective of the question of readiness of delivery, the contracts fell outside the ambit of section 6 because they were not contracts for the sale and purchase of securities. The remaining issue before the Supreme Court was whether the appellant had acted within the scope of his authority when he purchased the shares; if he had, the respondent would be liable to him, and if he had not, the appellant would be liable to the respondent for damages. The Court noted that the dispute arose out of the employment contract between the broker and the principal and not from any contract of sale or purchase of securities, reaffirming that the relationship was that of principal and agent and that contract notes are merely notifications rather than contracts within the meaning of section 6 of the Act.

The Court observed that the central issue was whether the appellant had acted within the authority granted to him when he purchased the shares on behalf of the respondent. If the appellant had acted within such authority, the respondent would be liable to him for the amounts due; conversely, if the purchases had been unauthorized, the appellant would be liable to the respondent for damages. In either circumstance, the dispute originated from the employment relationship between the appellant, a broker, and the respondent, who had engaged him, rather than from any contract for the sale or purchase of securities. Accordingly, the Court characterised the parties’ relationship as that of principal and agent, not as seller and purchaser. The Court further explained that contract notes transmitted by brokers to their clients did not constitute contracts for the sale or purchase of securities within the meaning of section 6 of the Bombay Securities Contracts Control Act VIII of 1925; they were merely notifications that the broker had entered into such contracts on the client’s behalf. The Court noted established jurisprudence that a written arbitration agreement need not be signed by the parties; it is sufficient that the terms are reduced to writing and that the parties’ assent to those terms is shown. The Rules framed by the Native Share and Stock Brokers’ Association, Bombay, were described as a self-contained code, and any question concerning those Rules had to be resolved by interpreting the Rules themselves. It would therefore be erroneous to import the statutory provisions of the Bombay Act VIII of 1925 into the construction of the Rules, and consequently the contract notes could not be declared void under Rule 167 of the Association’s Rules. The judgment was issued in Civil Appeal No. 95 of 1953, appealing the Bombay High Court’s decree dated 29 June 1951 in Appeal No. 93 of 1949, which stemmed from the order of the Bombay City Civil Court dated 16 September 1949 in Award No. 45 of 1949. Counsel for the appellant included the Attorney-General of India and his team, while counsel for the respondent were also noted. The judgment was delivered on 4 October 1955 by Justice Venkatarama Ayyar. The factual background disclosed that the appellant was a share broker operating in Bombay and a member of the Native Share and Stock Brokers’ Association. The respondent, Mrs Goolbai Hormusji, had employed the appellant to effect sales and purchases of shares on her behalf. On 6 August 1947, the respondent owed the appellant a sum of Rs 6,321-12-0 for those transactions, and at that time she had pending sales of twenty-five Tata Deferred shares and three hundred and fifty Swadeshi Mills shares awaiting clearance. On 11 August 1947, the appellant bought the specified Tata Deferred and Swadeshi Mills shares to settle the respondent’s outstanding sales and dispatched the corresponding contract notes numbered 2438 and 2439 (Exhibit A) to her. The respondent replied by repudiating those contracts, asserting that the appellant had not been authorized to close the transactions on that date.

In this case the respondent, Mrs. Goolbai Hormusji, asserted that the appellant, a share broker, had not been authorised to close the share transactions on 11-August-1947 and that she had instructed him to settle the transactions only on 14-August-1947. The appellant rejected that instruction and maintained that he had acted on the respondent’s directions on 11-August-1947, thereby closing the deals on that date. After an exchange of letters, whose contents the Court deemed unnecessary to reproduce, the appellant filed an application on 21-August-1947 with the Native Share and Stock Brokers’ Association of Bombay seeking arbitration in accordance with the arbitration clause printed on the contract notes. The clause read: “In event of any dispute arising between you and me/us of this transaction the matter shall be referred to arbitration as provided by the Rules and Regulations of the Native Share and Stock Brokers’ Association.” The Association issued a notice of arbitration to the respondent and invited her to nominate an arbitrator. The respondent replied that the contract notes were void and, consequently, no arbitration could be instituted under them. Notwithstanding her refusal, the arbitrators scheduled a hearing, gave notice of the hearing date to the respondent, and proceeded with the arbitration. The respondent chose not to participate in the proceedings. On 10-October-1947 the arbitrators issued an award. Relying on the purchases the appellant had made on 11-August-1947, which the arbitrators accepted, they credited the respondent with Rs 1,847 and ordered her to pay the appellant the balance of Rs 4,474-12-0. Dissatisfied with this award, the respondent filed the present application which gave rise to the appeal, seeking to have the award set aside. Her grounds included the contention that the contracts in question were forward contracts that fell within section 6 of the Bombay Securities Contracts Control Act VIII of 1925, rendering them void. She further argued that, because the contracts were void, the arbitration clause was also void and ineffective, the arbitrators therefore lacked jurisdiction, and the award was a nullity. Section 6 of the Act provides: “Every contract for the purchase or sale of securities, other than a ready delivery contract, entered into after a date to be notified in this behalf by the Provincial Government shall be void, unless the same is made subject to and in accordance with the rules duly sanctioned under section 5 and every such contract shall be void unless the same is made between members or through a member of a recognised stock-exchange; and 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.” Section 3(1) of the Act defines “securities” to include shares, so that any contract for the purchase or sale of shares would be void under section 6 unless it complies with the rules sanctioned by the Provincial Government under section 5. The appellant attempted to escape the operation of section 6 by characterising the contracts as “ready delivery contracts,” which he claimed were excluded from the void-ness provision. Section 3(4) of the Act defines a “ready delivery contract” as “a contract for the purchase or sale of securities … for performance of which no time is specified and which is to be performed immediately or within a reasonable time,” and includes an explanatory note that the question of what constitutes a reasonable time is a factual enquiry in each case. The appellant therefore contended that contracts numbered 2438 and 2439 were ready delivery contracts because they did not specify a time for performance.

Section 3(4) of the 1925 Act defines a “ready delivery contract” as a contract for the purchase or sale of securities for which no time for performance is specified and which must be performed immediately or within a reasonable time, and an Explanation adds that the determination of a reasonable time is a question of fact in each case. The appellant argued that contracts numbered 2438 and 2439 fell within this definition because the contracts did not specify any time for performance. The learned City Civil Judge who heard the application accepted this argument, held that the contracts were not void under section 6 of Act VIII of 1925, and consequently dismissed the application. The respondent appealed the decision to the High Court of Bombay, where Chief Justice Chagla and Justice Tendolkar sat. The High Court majority held that the contracts were not “ready delivery contracts” within the meaning of section 3(4), reasoning that although the contracts omitted a specific time for performance, they were required to be performed within the period prescribed by the Rules and Regulations of the Association, which were incorporated by reference. Because the required performance was not “immediate or within a reasonable time,” the Court concluded that the contracts were void under section 6, that the arbitration clause and the arbitration proceedings were therefore void, and that the award was without jurisdiction and should be set aside. The appellant filed the present appeal on a certificate under article 133(1)(c). The learned Attorney-General, supporting the appeal, contended that irrespective of whether the contracts were “ready delivery contracts,” they fell outside the ambit of section 6 because they were not contracts for the sale and purchase of securities. This argument had not been raised before the lower courts, and counsel for the respondent objected to its consideration for the first time, stating that it would require a factual inquiry that had not been conducted. Nonetheless, on the basis of the contract notes and the respondent’s admission in her petition, the Court found the issue open to argument and, after hearing counsel for both sides, decided that the appeal should succeed on this point. The substantive dispute between the parties concerned whether the appellant acted within his authority when he purchased twenty-five shares of Tata Deferred and three hundred and fifty shares of Swadeshi Mills on 11 August 1947. If the appellant acted within his authority, the respondent would be entitled only to a credit of Rs 1,847 based on those purchases; if the purchases were unauthorised, the appellant would be liable for damages. In either scenario, the dispute arose from the appellant’s employment contract as a broker for the respondent, not from any contract of sale or purchase of securities.

It was observed that a dispute concerning a sale or purchase could arise only between the respondent and the actual seller or purchaser, as the situation required, and such a dispute would be linked to the contract that had been effected by the appellant. Nevertheless, the Court emphasized that the legal relationship existing between the respondent and the appellant was that of principal and agent, and not that of seller and purchaser. Although the employment contract connecting the appellant to the respondent was undoubtedly related to, and closely intertwined with, the buying and selling of securities, the Court clarified that the employment contract itself was not a contract of sale or purchase. The employment contract was merely collateral to the sale-purchase contracts and did not become automatically void merely because the associated sale-purchase contract might be void. The Court referred to its earlier judgment in Kishan Lal and another v. Bhanwar Lal (1) for support of this principle. The legislature could, in theory, enact a provision that would render not only the primary sale-purchase contracts but also any collateral agreements void, which would consequently invalidate related employment contracts. However, the Court noted that Act VIII of 1925 did not adopt such an approach. Section 6 of that Act expressly stipulates that no civil suit may be instituted for the recovery of any commission, brokerage, fee or reward in respect of any contract for the purchase or sale of securities. This provision therefore bars a broker from claiming any form of remuneration for having facilitated a contract, but it does not declare the underlying employment contract itself void, and consequently a claim for indemnity under the employment contract is not barred by Section 6.

The question of whether contract notes sent by brokers to their clients constitute contracts for the sale and purchase of securities within the meaning of Section 6 of Act VIII of 1925 was previously examined by the Bombay High Court in Promatha Nath v. Batliwalla & Karani (1). The High Court held that such contract notes are not themselves contracts of sale or purchase; rather, they are merely notifications by the broker to the client that a sale or purchase has been effected on the client’s behalf. The present Court agreed with that determination. It was argued that if a contract note is only a notification of a sale or purchase on behalf of the client, then it cannot be characterised as a contract of employment, and consequently there would be no written arbitration agreement as required by the Arbitration Act. The Court, however, reiterated settled law that a written arbitration agreement does not need to be signed by the parties; it is sufficient that the terms are recorded in writing and that the parties’ assent to those terms is established.

The respondent, in her petition, claimed that she had not accepted the contract notes contained in Exhibit A. The Court noted that she had not raised this contention before the City Civil Judge, nor before the High Court. Moreover, even in the present proceedings, her counsel argued that Exhibit A represented the sole repository of the contracts and, because those contracts were alleged to be void, there was no arbitration clause. The Court observed that this argument was not pursued in the lower courts and thus could not form the basis of a fresh objection at this stage.

In this case, the Court observed that the contract notes that were produced by the appellant contained a clear written agreement to refer any disputes that might arise out of the appellant’s employment as a broker to arbitration. The Court therefore concluded that the arbitration clause was valid and enforceable. Because the arbitration clause was outside the reach of section 6 of Act VIII of 1925, the Court held that the arbitration proceedings were competent to hear the matter. Consequently, the award that was issued in those proceedings could not be set aside on the ground that Exhibit A, the collection of contract notes, was void.

The respondent then argued that the contract notes were void under Rule 167 of the Native Share and Stock Brokers’ Association and that, on that basis, both the arbitration proceedings and the award should be regarded as invalid. Rule 167, as it is relevant to this dispute, provides that members must give contract notes to non-members for every bargain made on the non-member’s account, specifying the price of the bargain and charging brokerage at rates not lower than those prescribed in Appendix G, or as modified by rules 168 and 170(b). The rule further requires that the brokerage be shown separately and that the contract notes be in Form A prescribed in the Appendix. Moreover, paragraph (c) of the rule declares that any contract note not printed on one of the forms in Appendix H shall be deemed invalid, while paragraph (g) states that a contract note referred to in the rule or any other rule shall be considered a contract and shall have the same legal significance as a contract.

The contract notes that were sent to the respondent were not presented on the form required by Appendix H. Instead, they were prepared on the format known as Form A in Appendix A, which lists the price at which the securities were bought or sold but does not display the brokerage as a separate entry. At the bottom of each note there was a statement reading, “This is net contract. Brokerage is included in the price.” The respondent contended that, because the price and brokerage were not shown separately, the notes failed to comply with Form A in Appendix H and therefore were void pursuant to Rule 167(c).

The respondent further relied on the view taken by the High Court judges that the contract notes, identified as Exhibit A, were not “ready delivery contracts” under section 3(4) of Act VIII of 1925 but were instead forward contracts. On that basis, the respondent argued that the notes would be void under Rule 167(c) even if they escaped the operation of section 6 of the Act. Implicit in this argument was the assumption that any contract that does not meet the definition of a ready delivery contract under section 3(4) must automatically be treated as a forward contract for the purposes of Rule 167.

The Court rejected that assumption. It held that the definition of a ready delivery contract in section 3(4) of Act VIII of 1925 is confined to the context of the Act itself and is relevant only when deciding whether a contract is void under section 6 of that Act. When the question is whether a contract is void under Rule 167, the proper test is whether the contract qualifies as a forward contract as defined or contemplated by the Rules governing the Native Share and Stock Brokers’ Association. The Court therefore concluded that the definition in section 3(4) of the Act is wholly irrelevant for determining the status of the contract notes under Rule 167, and that the determination must be based entirely on the construction of Rules 359 to 363, which regulate the classification of contracts as ready delivery or forward contracts within the association’s framework.

The Court observed that the proposition that the contract must be a forward contract for the purposes of Rule 167 is incorrect. It explained that the definition of a ready delivery contract contained in section 3(4) of Act VIII of 1925 applies solely for purposes of that Act. Consequently, that definition is relevant only when the issue is whether a contract is void under section 6 of the same Act. When the question concerns the applicability of Rule 167, the inquiry must focus on whether the contract qualifies as a forward contract under the Rules themselves. The Court therefore held that the section 3(4) definition is wholly irrelevant to the determination of a forward contract for the purposes of Rule 167. The appropriate inquiry must be based entirely on the construction of the relevant Rules, namely Rules 359 to 363. Rule 359 states that “contracts other than ready delivery contracts shall not be made or transacted within or without the ring.” Rule 361 authorises the Board to specify which securities shall be settled by the system of Clearance Sheets and which shall be settled by the process of Tickets. Rules 362 and 363 set out the procedure to be followed in effecting settlement of the securities. The learned Judges had examined the contract notes against these Rules and concluded that the contracts were not ready delivery contracts as defined in section 3(4) of Act VIII of 1925.

However, when the Court reads Rules 359 to 363 together, it is clear that the contract notes identified as Exhibit A must be treated as ready delivery contracts for the purposes of the Rules. The form of Exhibit A matches the format prescribed by the Rules for ready delivery contracts, whereas Form A in Appendix H is prescribed for forward contracts. Accordingly, contracts governed by Rules 359 to 363 cannot be characterised as forward contracts contemplated by Rule 167, and they cannot be declared void under that Rule. The Court criticised the respondent’s argument as an improper mixing of two distinct provisions issued by two separate authorities and read into one another. It observed that the Rules framed by the Association constitute a self-contained code, and any issue arising under those Rules must be resolved by interpreting the Rules themselves. It would be a mistake to import the statutory definitions of Act VIII of 1925 into the construction of the Association’s Rules. On this basis, the Court concluded that Exhibit A cannot be held void under Rule 167. Consequently, the Court held, contrary to the lower court, that the arbitration proceedings were competent and the award was not void because the contract was not void. The respondent’s additional challenges to the validity of the award had been rejected by the City Civil Judge and were also dismissed by the High Court.

The Court observed that the lower tribunal had concluded that the contract notes were void pursuant to section 6 of Act VIII of 1925, yet the lower tribunal had not addressed those contract notes in its consideration. Having now determined that the contracts in question are not void, the Court found it necessary to examine the appeal on the issues that were previously left unresolved. Accordingly, the Court set aside the decision of the lower court and ordered that the appeal be reheard, taking into account the observations made in the present judgment. The Court noted that the appeal succeeded on a point that the lower courts had not taken up, and therefore each party was ordered to bear its own costs for the entire proceedings. The Court further directed that the costs associated with the subsequent hearing, after the case is remanded, would be determined by the High Court.