IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED:11.04.2011 Coram: THE HONOURABLE MR.JUSTICE G.RAJASURIA S.A.No.1602 of 2010 and M.P.No.1 of 2010 Elof Hansson (I) Pvt. Ltd. Represented by its Chairman Mr.V.Rajagopalan having its registered office at 5F, Court Chambers 35, New Marine Lines Mumbai 400 020 and having branch office at Old.No.11 (New No.23) 2nd Main Road,R.A.Puram, Chennai 600 028. .. Appellant/1st respondent vs. 1. Prithivi Softech Ltd (formerly Octagon Technology Limited Amalgamated with M/s Prithivi Securities Ltd) represented by its Managing Director Mr.Ashok Kavat Office at 33, Montieth Road Egmore, Chennai 600 008. 2. L.N.Krishnan .. Respondents/Appellant 2nd defendant This second appeal is focussed as against the judgment and decree of the Additional District Judge, Second Fast Track Court, Chennai in A.S.No.628 of 2007 dated 22.01.2010 reversing the judgment and decree of the XVIII Assistant Judge, City Civil Court, Chennai dated 21.06.2007 in O.S.No.107 of 2006. For Appellant : Mr.S.Vasudevan For R1 : Mr.A.Palaniappan https://hcservices.ecourts.gov.in/hcservices/ J U D G M E N T This second appeal is focussed by the original first defendant, animadverting upon the judgement and decree dated 22.01.2010 passed in A.S.No.628 of 2007 by the Additional District Judge, Second Fast Track Court, Chennai, reversing the judgment and decree of the XVIII Assistant Judge, i.c. of XII Assistant Judge, City Civil Court, Chennai in O.S.No.107 of 2006. The parties are referred to hereunder according to their litigative status and ranking before the trial Court. 2. Compendiously and concisely, the relevant facts absolutely necessary and germane for the disposal of this Second Appeal would run thus: (a) The plaintiff filed the suit seeking the following reliefs: (i) To grant Rs.4,37,860/- along with interest at 12% per annum from the date of filing of this suit till decree and thereafter till payment; and (ii) for costs. (Extracted as such) (b) The first defendant filed the written statement resisting the suit. (c) Whereupon the trial Court framed the issues. (d) During trial, on the side of the plaintiff, P.Ws.1 to 3 were examined and Exs.A1 to A28 were marked. On the side of the defendants, one Mr.Mahesh Pralhad Joshi was examined as D.W.1 and Exs.B1 to B4 were marked. (e) Ultimately the trial Court dismissed the suit as against D1, but decreed the suit as against D2 who remained ex parte, as against which appeal was filed by the plaintiff. Whereupon, the first appellate Court reversed the judgment and decree of the trial Court and decreed the original suit as prayed for as against D1 also. 3. Being aggrieved by and dissatisfied with the judgment of the first appellate Court, the first defendant filed this appeal on various grounds and also suggesting the following substantial questions of law. "(1) Whether the First respondent is entitled to a decree for the recovery of money based on a illegal transaction admitted by PW1 to be illegal and in violation of the foreign exchange laws of India and Reserve Bank of India regulations? https://hcservices.ecourts.gov.in/hcservices/ (2) Whether there is any vicarious liability of the appellant company for the illegal transactions fraudulently entered into between the first respondent/plaintiff and the employee of the appellant viz. the second respondent entered into by them with full knowledge in violation of the reserve bank of India regulations and the foreign exchange laws? (3) Whether there is any vicarious liability of the appellant for the unauthorised acts of the second respondent acting beyond the scope of his authority and employment? (4) Whether the judgment of the appellate court is not perverse in reversing the judgment and findings of the trial Court?" 4. After hearing both sides, I thought fit to frame the following substantial questions of law: (1) Whether the first appellate Court was justified in decreeing the suit, reversing the judgment and decree of the trial Court in dismissing the suit, on the ground that even though as per P.W.1, the plaintiff did not adhere to the legal procedures in issuing the foreign exchange, the plaintiff was entitled to file the suit and recover the dues from D1 also? (2) Whether the first appellate Court properly appreciated the concept vicarious liability? and whether in the absence of any correspondence between D1 the Corporate personality and the plaintiff, another Corporate personality relating to purchase of foreign exchange and also in the absence of production of evidence on plaintiff's side as pointed out by the trial Court in its judgment, was justified in decreeing the suit? (3) Whether there is any perversity or illegality or non-adherence to Order 41, Rule 31 of CPC in the judgment and decree passed by the first appellate Court in decreeing the original suit after reversing the judgment and decree of dismissal, passed by the trial Court? 5. The learned counsel for the appellant/D1 would put forth and set forth his arguments, which could pithily and precisely be set out thus: https://hcservices.ecourts.gov.in/hcservices/ (a) D2 and the plaintiff colluded together and indulged in certain activities which are against the Foreign Exchange Management Act, 1999. (b) D2 was not at all authorised to purchase any foreign exchange or enter into any contract with the plaintiff, so as to make arrangements for purchase of foreign exchange so as to enable the employees of D1 to go to foreign countries for their training purpose. (c) The plaintiff ex facie and prima facie did not comply with the procedures contemplated in the Foreign Exchange Management Act, 1999 and also the Memorandum of Instructions to Authorised Money Changers issued by the Reserve Bank of India. (d) Though D2 happened to be the Manager of D1, yet D1 being a corporate body, so to say a Company, did not in any way authorise D2 to act on behalf of the Company. (e) The plaintiff who ventured even to extend some concessions to D2 on the alleged ground that D2 on behalf of D1 was transacting business, never choose to contact any one of the Directors or the Managing Director of the D1 Company before entering into such contract with D2 or extending such concession. (f) None of the 27 employees of D1, on behalf of whom D2 allegedly contacted the plaintiff for availing foreign exchange so as to enable them to go to foreign countries availed such facility, whereas, those 27 employees were provided with foreign exchange facilities at the instance of D1 by contacting other money changers and not the plaintiff, and that itself is indicative of the fact that D2 was not authorised to act on behalf of D1 with regard to the purchase of foreign exchange was concerned. (g) No application was received from the prospective travellers by the plaintiff in connection with the sale of foreign exchange. (h) The first appellate Court while holding that the plaintiff was not proper in processing the foreign exchange money contract, however, held as though D1 was liable to pay the suit claim amount in favour of the plaintiff. Accordingly, the learned counsel for the appellant/D1 would pray for setting aside the judgment and decree of the first appellate Court and for restoring the judgment and decree of the trial Court in dismissing the original suit as against D1. 6. In a bid to torpedo and pulverise and to take the edge off the arguments as put forth and set forth on the side of the appellant/D1, the learned counsel for the plaintiff would advance his arguments, the warp and woof of them would run thus: https://hcservices.ecourts.gov.in/hcservices/ (a) Absolutely there is no iota or shred, shard or miniscule extent of illegality involved in the plaintiff's transaction with D2, because D2 at the relevant point of time was the Manager Administration as well as the Manager Accounts of D1. As such, he was holding two responsibilities and in his capacity, he signed the Liberalised Exchange Management System (LEMS) letter. (b) The entire transaction took place only in the business premises of D1, while D2 was in that office. (c) Simply because as per the version of D1, his employees did not make use of the foreign exchange facility extended by the plaintiff, that it does not mean that D1 could wriggle out of its liability to pay the decree amount. (d) In view of D2 having been the prominent as well as important functionary in D1's office, D1 cannot wriggle out of its liability for the acts of D2 which had been performed in the course of transacting the business of D1. (e) By no stretch of imagination it could be stated that what D2 availed from the plaintiff was not in the course of the business of D1. (f) D2 might have indulged in some fraud and he might have even committed fraudulent acts as against some other money changers also, but that it does not mean that D1 could wash its hands and disown its liability. It is for D1 to discharge the dues towards the plaintiff and try to get reimbursed from D2 and the plaintiff cannot be driven to the extent of proceeding as against only D2, who is not at all traceable. (g) In letter and spirit the Memorandum of Instructions to Authorised Money Changers issued by the Reserve Bank of India was complied with. (h) No specific application from the individual proposed traveller, so to say, the employee of a business concern is required at all. (i) The bona fides of the plaintiff cannot be doubted for the reason that they believed that D2 had full authority to transact business on behalf of D1. (h) D1 having been negligent in supervising D2, cannot try to put the plaintiff into any monetary loss. (i) The vicarious liability of D1 for the acts of its agent, so to say D2's acts is writ large and D1 should necessarily pay the suit claim. https://hcservices.ecourts.gov.in/hcservices/ (j) D.W.1, who deposed on behalf of D1, as a successor of D2 in the office, clearly and categorically admitted that it was D.W.1 as a single individual transacting on behalf of D1 business with other foreign money changers. (k) The question of two persons signing the cheques of D1 would not arise in this case because, the cheques issued by D2 were not returned on the ground that they were not properly signed by two persons, but they were returned on the ground of insufficient funds. By citing several decisions, the learned counsel for the plaintiff would submit that there is nothing wrong in the judgment of the first appellate Court, warranting interference in the Second Appeal. 7. All the aforesaid substantial questions of law are taken together for discussion as they are inter linked and inter woven with one another. 8. Admittedly or atleast undeniably, the following are the facts. The plaintiff and the D1, are the companies registered under the Companies Act. At the first instance, I would like to discuss the normal permissible activities of a Company. The corporate body no doubt, is sui juris, it is having no physical existence but is having only legal personality, which is a legal person. However, it could act only through its officials. The core question arises as to how a corporate body could act and how a third party could fasten it with liability. The memorandum of association and the articles of association are the vital documents displaying its characteristics and capabilities. Pithily and precisely, it could be stated that within the vires of the memorandum and articles of association only a Company could act. Furthermore, the Company could be made liable only under certain circumstances legally. Here it is the case of the plaintiff, that D2 contacted the plaintiff for and on behalf of D1 projecting himself as the integral part of D1 and he wanted foreign exchange money facilities so as to enable as many as 27 employees of D1 to go to foreign countries in connection with their business trips at different periods of time. Believing the same, the letters similar to that of Exs.A1 to A8 were received from D2 by the plaintiff and agreed for the consideration being paid by D2 in the form of cheques or Demand Drafts at a latter point of time, because D2 projected as though D1 was having no immediate liquid cash to pay for the same. 9. At this juncture, I hark back to the following maxims: (i) Rerum suarum quilibet est moderator et arbiter - Every one is the regulator and disposer of his own property; https://hcservices.ecourts.gov.in/hcservices/ (ii) Vigilantibus et non dormientibus jura subveniunt - The laws aid those who are vigilant, not those who sleep upon their rights. 10. Here it is to be seen as to whether the plaintiff took the precautions before transacting business with D2. No doubt, D2 was admittedly the Manager of D1's Company. It is not the case of any one that prior to the transaction involved in this suit, there were other transactions between D1 and the plaintiff. As such, what was expected from the plaintiff was that before entering into foreign exchange transaction with D2, the responsible official of the plaintiff should have met atleast the Managing Director or one of the Directors of the D1 Company and after preliminary correspondences, the plaintiff should have started doing business with D1 through D2. But in this case, except for the letters like Exs.A1 to A8 signed by D2, there is nothing to demonstrate and evidence that there were correspondences between the plaintiff Company and D1 Company. It is also clearly and categorically highlighted and spotlighted by the first defendant that none of the 27 employees of D1 availed the foreign exchange facility from the plaintiff at the instance of D2. It is therefore a clear case of D2 having meddled with the foreign exchange illegally, and some how or other D2 managed to obtain foreign exchange from the plaintiff and misappropriated and misused it virtually. There is no iota or miniscule, molecular or pint of evidence that the foreign exchange paid by the plaintiff was entered into the account books of D1. In order to understand that D1 impliedly availed the plaintiff's service, there is nothing to indicate that in response to the foreign exchange money given by the plaintiff to D2, D1's money flowed into the plaintiff's account. 11. The learned counsel for the plaintiff would invite the attention of this Court to the fact, that initially D2 was in the habit of issuing some cheques with the instructions that the cheques might not be presented for the reason that within a short span of time he would pay the amount due towards plaintiff in the form of Demand Draft. Accordingly, he also except for these 8 transactions paid in the form of Demand Drafts. There is nothing to show that those Demand Drafts were obtained by using the funds of D1. I could see that the plaintiff being a business Company, cannot look into the fact as to how the Demand Drafts were taken, so to say whether from out of the money of D1 or from out of the money of D2. But the whole fact hinges on one crucial aspect, so to say, the plaintiff before extending their concession as demanded by D2 should have discussed the matter with the Managing Director or any one of the Directors of the D1 Company, but the plaintiff miserably for reasons best known to themselves did not choose to do so. 12. The learned counsel for the plaintiff would try to project that D1 cannot capitalise his own fault or negligence. I recollect the maxims: https://hcservices.ecourts.gov.in/hcservices/ (i) Nullus commodum capere potest de injuria sua propria: No one can gain advantage by his own wrong. (ii) Nul prendra advantage de son tort demesne : No one shall take advantage of his own wrong. 13. Here what the learned counsel for the plaintiff would try to stress upon is that D1 should have been cautious enough in supervising D2 and after allowing him to commit fraud, they cannot now try to disown their liability. The same principle would be applicable to the plaintiff. Physician cure thyself - Doctor cure yourself. The plaintiff being a corporate body should not have extended such concession or should not have transacted business with D2 without ascertaining or corresponding with D1. It is not the case of any one that D1 Company is not having a Managing Director of its own or Directors of its own. Had one of the Directors of D1 Company been contacted by the plaintiff earlier to such business dealings, then without any hesitation it could be stated that D1 is squarely liable for the act of its Director, but the status of D2 being the Manager cannot be equated to the one that of a Director or that of the Managing Director of D1. The plaintiff, was expected to ascertain about the status and the capacity of D2 to enter into contract on behalf of D1, with the plaintiff. As such, I am of the considered view that the plaintiff was not careful enough in transacting business with D2 without ascertaining the powers and locus standi of D2. The claim of the plaintiff that D2 projected himself as a Manager in Exs.A1 to A8 by itself, would not legally fasten D1 with vicarious liability. 14. I would like to refer to the following Sections in the Indian Contract Act: "227. Principal how far bound, when agent exceeds authority – When an agent does more than he is authorized to do, and when the part of what he does, which is within his authority, can be separated from the part which is beyond his authority, so much only of what he does as is within his authority, is binding as between him and his principal. 238. Effect, on agreement, of misrepresentation or fraud by agent. - Misrepresentations made, or frauds committed, by agents acting in the course of their business for their principals, have the same effect on agreements made by such agents as if such misrepresentations or frauds had been made, or committed by the principals; but misrepresentations made, or frauds committed, by agents, in matters which https://hcservices.ecourts.gov.in/hcservices/ do not fall within their authority, do not affect their principals." 15. At this juncture, it is just and necessary to refer to the decisions cited on the side of the plaintiff: (i) The decision of the Hon'ble Apex Court reported in AIR 1978 SC 1263 [State Bank of India v. Smt.Shyama Devi] (ii) The decision of this Court reported in 1898 (IX) MLJ 57 [Ramaswami Aiyar v. Kanthayyan and others] (iii) The decision of the Calcutta High Court reported in AIR 1923 Calcutta 157 [Dina Bandhu Saha v. Abdul Latif Molla] (iv) The decision of the Nagpur High Court reported in AIR (32) 1945 Nagpur 121 [Raja Sir Bissessardas v. Kabulchand and another] (v) The decision of the Lahore Court reported in AIR 1929 Lahore 822 [Darbari Lal and another v. Sharif Hussain] 16. A mere reading of those decisions in the light of those two Sections would unambiguously and unequivocally highlight and spotlight the fact that if a principal empowers his agent to act, whereupon if the agent act in the course of the business of his Principal, then the Principal is liable for the act of his agent. However, the illustration appended to Section 227 of the Indian Contract Act would clearly show that if an agent exceeds his power even though he might be acting in the course of his business, then his activities would not bind the principal. Over and above that, fraud vitiates everything. 17. As such, the fraudulent act of the agent would not bind the Principal. Here the facts are to the effect that the plaintiff herein who entered into transaction with D2 did not take sufficient care to verify as to whether D2 had the authority to act on behalf of D1. In the cited decisions supra, I could come across instances, where a clerk in the Bank misappropriated the customer's amount, whereupon the Bank was made liable and there could no quarrel over such a proposition. Further more, if an agent to whom goods entrusted by the customers misappropriates the same, then it is quite axiomatic and obvious that the Principal would be made liable. There are also catena of decisions, where for the acts of the clerks, the Principals were fastened with vicarious liability. But here the case is entirely different. For the first time the plaintiff started doing business with D1, but not directly with D1, but believing that D2 was transacting business on behalf of D1. It is not the case of the plaintiff that before entering into such transaction there were some preliminary correspondences which normally one Company will have with another Company before commencing business. https://hcservices.ecourts.gov.in/hcservices/ 18. This is a case where D2 sought for certain concessions and the plaintiff also responded to it positively, and in such a case, before that there should have been some exchange of correspondences between the plaintiff and D1 Company directly, but in this case that was not undertaken by the plaintiff. 19. The learned counsel for D1 would cite the following English decision: [1965] 1 All E.R. 639 [Shaw v. Shaw]; an excerpt from it would run thus: "The claim was based on nothing but the payment, which by virtue of S.7 of the Exchange Control Act, 1947, was an illegal payment, and the statement of claim would be struck out." The above excerpts would support the view taken by this Court. 20. The learned counsel also cited the following decisions: (i) [1963] 3 All E.R.50 [Snell v. Unity Finance Ltd.]; an excerpt from it would run thus: "Once the facts which made the hire-purchase agreement illegal had become apparent to the country court it was the court's duty, whether illegality was or was not raised by the parties, to refuse to enforce the hire-purchase agreement; the Court of Appeal would not allow any limitation on appeals from county courts by reason of the point of illegality not having been taken below to prevent the court's giving effect to this principle, and accordingly the appeal would be allowed and the action would be dismissed." (ii) [2009] EWHC 3218 (QB) [Romy Nayyar and others v. Denton Wilde Sapte and another]; an excerpt from it would run thus: "80. I accept that in considering whether the ex turpi causa principle applies the degree of connection between the wrongful conduct and the claim made is an important consideration. As Bingham LJ stated in Saunders v. Edwards [1987] 2 All ER 651 at 665-666: "Where issues of illegality are raised, the courts have (as it seems to me) to steer a middle course between two unacceptable positions. On the one hand it is unacceptable that any court of law should aid or lend its authority to a party seeking to pursue or enforce an object or agreement which the law prohibits. On the other hand, it is unacceptable that the court should, on the first indication of unlawfulness affecting any https://hcservices.ecourts.gov.in/hcservices/ aspect of a transaction, draw up its skirts and refuse all assistance to the plaintiff, no matter how serious his loss nor how disproportionate his loss to the unlawfulness of his conduct." (ii) The decision of the Honb'le Apex Court reported in AIR 1962 SC 370 [Imani Appa Rao and others v. Gollapalli Ramalingamurthi and others]; certain excerpts from it would run thus: "15. There can be no question of estoppel in such a case for the obvious reason that the fraud in question was agreed by both the parties and both parties have assisted each other in carrying out the fraud. When it is said that a person cannot plead his own fraud it really means that a person cannot be permitted to go to a court of law to seek for its assistance and yet base his claim for the Court’s assistance on the ground of his fraud. In this connection it would be relevant to remember that Respondent 1 can be said to be guilty of