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  • Madhavan Nair, J.
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Smart Summary

Structured Summary of the Opinion — Second Appeal Relating to a Promissory Note

Factual and Procedural Background

This second appeal arises from a suit by the plaintiff (appellant) to recover Rs. 3,740 on a promissory note allegedly executed by defendant 1 and his son defendant 2 in favour of defendant 3. Defendant 3 endorsed the note in favour of the plaintiff (who is defendant 3's son-in-law). The contesting defendants pleaded want of consideration both for the promissory note and for the transfer to the plaintiff.

The trial framed two issues: (1) whether the suit promissory note was unsupported by consideration; and (2) whether the endorsement/transfer was genuine and supported by consideration. Both the Subordinate Judge and the District Judge found that the promissory note was supported by consideration (the withdrawal of a sale deed, Ex. E, from registration), but that the transfer to the plaintiff was not for consideration.

The Subordinate Judge granted a decree to the plaintiff treating him as a transferee for collection. The District Judge, while accepting that the promissory note had consideration as alleged by the plaintiff, declined to decree in his favour because he concluded that the history of the transaction showed the real consideration to be immoral; he therefore set aside the Subordinate Judge's decree and dismissed the plaintiff's suit.

The plaintiff appealed. In the second appeal the appellate court considered whether the District Judge was right to refuse relief on the ground that the promissory note's real consideration was immoral/illegal. The appellate court directed the lower court to make a specific finding on whether the consideration for the suit note was tainted with immorality; the lower court found that the consideration was illegal and a contract based on it could not be enforced. The appellate court accepted that finding and dismissed the second appeal with costs.

Legal Issues Presented

  1. Whether the promissory note (the suit pronote, Ex. A) was supported by lawful consideration or was tainted by immorality/illegality such that it could not be enforced.
  2. Whether the endorsement/transfer of the promissory note in favour of the plaintiff was supported by consideration (the District Judge and lower courts found it was not).
  3. Whether a court may, of its own motion or without a specific issue having been raised by the parties, examine and refuse to enforce a contract that on the evidence appears to be based on an immoral or illegal consideration.

Arguments of the Parties

Appellant's Arguments (Mr. G. Lakshmanna)

  • The principal question decided by the District Judge was whether the promissory note lacked consideration; the District Judge's finding on consideration should have led to a decree in favour of the plaintiff (as the Subordinate Judge had done).
  • Because the compromise leading to the promissory note and the consideration for the prior sale deed (Ex. E) were not impeached before the District Judge and there were no specific issues on immorality, the District Judge should not have dismissed the plaintiff's suit on grounds of immorality which were not specifically raised.
  • Implicitly, the appellant urged that it was inappropriate to deny relief to the plaintiff on a point not pleaded as an issue and not specially raised by the defendants.

Respondents' Position

  • The respondents supported the District Judge's conclusion that the consideration for the transactions was immoral and that the pronote was therefore unenforceable; they argued that the judge's conclusion should be accepted.
  • They relied on the evidence and the history of the transactions to show the real consideration was immoral and that the Court should not assist the plaintiff to enforce such a transaction.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Connolly v. Consumers' Cordage (1904) 89 LT 347 (Privy Council) It is the right and duty of the Court at any stage to consider and, if sufficiently proved, act upon an illegality fatal to a party's claim; Courts should not be used to establish claims that ought not to be enforced. The appellate court invoked this principle to justify examining whether the consideration was illegal or immoral and to require a specific finding from the lower court on that question; the court directed that the issue be determined before final disposal.
Atikulla v. Habibulla, AIR 1920 Cal 704 If the illegality of a transaction is brought to the Court's notice, the Court should not assist the party seeking enforcement even though the defendant has not pleaded the illegality; grounded on public policy. The court relied on this decision to support its view that it may refuse assistance to a litigant when the transaction appears to be based on illegal or immoral circumstances, even if the point was not specifically pleaded.
D. Lakshmiayya v. O. Murakari, AIR 1930 Mad 547 Followed Atikulla: the Court should be alert to illegality or immorality in transactions before it and not assist enforcement. Referred to as authority that the principle in Atikulla has been applied in this Court and supports the appellate court's approach to the issue of immorality.
Hyams v. Stuart King (1908) 2 KB 696 Case dealing with wagering contracts which are void by statute under English law (distinguished from immoral consideration principles). The court distinguished these wagering-contract cases as inapposite: they were not helpful to the appellant because wagering contracts are void by statute, whereas here the concern was immorality/illegality of the underlying consideration.
North Western Salt Co. Ltd. v. Electrolytic Alkali Co. Ltd. (1914) AC 461 Another English case dealing with wagering/void-by-statute contracts; cited for comparison and distinction. The court treated this precedent as not directly supportive of the appellant's position and distinguished it on the basis that statutory voidness for wagering differs from contracts founded on immoral consideration.

Court's Reasoning and Analysis

The court proceeded in the following analytical steps, relying strictly on the evidence and established authorities cited in the opinion:

  1. Fact assessment: The court recited the transaction history: a sale deed (Ex. E) purportedly for Rs. 9,000 was presented for registration; defendant 2 objected claiming undue influence and that Rs. 3,000 recited as paid had not been paid. The deed was returned unregistered. Inquiries and a compromise (through an intervening pleader) led to execution of the promissory note (Ex. A) for Rs. 2,750 in favour of defendant 3, and defendant 3 then withdrew the sale deed from registration.
  2. District Judge's view: From the history and surrounding circumstances, the District Judge concluded that the recitals of lawful payment were not trustworthy and that the real consideration for the transactions (including Ex. E and the pronote) was an immoral one — namely, procuration of women and drink for defendant 2 — which a court cannot recognize as lawful consideration.
  3. Appellate challenge and legal question: The appellant argued that because the District Judge had found consideration in his favour on the principal issue, the plaintiff should have been decreed payment; and that the District Judge should not have dismissed the suit on immorality when there was no specific issue on that point. The appellate court acknowledged the point but examined the unique factual matrix.
  4. Precedent-guided principle: The appellate court invoked Connolly v. Consumers' Cordage and the line of authority following Atikulla v. Habibulla (and D. Lakshmiayya) to state the legal principle that a court has both the right and the duty to consider illegality or immorality disclosed by the evidence and to refuse to enforce claims based on such considerations, even where the point was not formally pleaded.
  5. Procedural fairness: Although the court accepted that the District Judge should have given the plaintiff an opportunity to meet the objection once the point of immorality emerged (as done in Connolly), the appellate court considered that the evidence before the court sufficiently raised the point to require a specific finding from the lower court on whether the consideration was tainted by immorality.
  6. Remand for a specific finding: The appellate court therefore directed the lower court to determine “whether the consideration for the suit note is tainted with immorality.” The lower court was permitted to consider the entire evidence afresh and to allow the parties to adduce fresh evidence since the point was new.
  7. Acceptance of lower court's finding: The District Judge (on remand) submitted a finding that the consideration for the suit note was illegal and that a contract based on it could not be enforced. The appellate court accepted that finding and held that the pronote could not form the basis of the plaintiff's suit.

Holding and Implications

Holding: The court's final decision was to accept the lower court's finding that the promissory note was founded on an illegal/immoral consideration and therefore could not be enforced; accordingly, the second appeal was dismissed with costs. The core ruling is:

DISMISSED — The pronote was found to be tainted by illegality/immorality and could not support the plaintiff's suit; the second appeal is dismissed with costs.

Implications and consequences:

  • The immediate practical consequence is that the plaintiff's claim based on the promissory note fails and the appeal is dismissed with costs.
  • The court applied established principles that permit it to consider and act upon illegality or immorality disclosed by the evidence, even in the absence of a formal pleaded issue, though fairness requires that parties be given an opportunity to meet such objections (the appellate court therefore directed a specific finding by the lower court and allowed fresh evidence).
  • The opinion does not purport to set a new general precedent beyond applying existing authorities (Connolly; Atikulla; D. Lakshmiayya) and distinguishes older wagering-contract cases (Hyams; North Western Salt) as inapposite to the issue of immoral consideration in the present facts.

This summary is limited strictly to the material and conclusions contained in the provided opinion and does not add facts or infer matters not stated therein.

Show full summary ...

    (Rachakonda) Narayanamurti v. Darmana Ramalingam

    1. The plaintiff is the appellant. This second appeal arises out of a suit to recover from defendant 1 and his son defendant 2 Rs. 3,740 due on a promissory note executed by them in favour of defendant 3. Defendants endorsed the note in favour of the plaintiff who is his son-in-law. The contesting defendants pleaded want of consideration for the promissory note and also for, the transfer in favour of the plaintiff. The two issues in the case were: (1) Whether the suit promissory note is not supported by consideration; and (2) Whether the endorsement of transfer is genuine and supported by consideration. On these issues both the Courts found that the consideration for the suit note was, as alleged by the plaintiff, the withdrawal of the sale deed, Ex. E, from registration and that the transfer of the suit promissory note was not for consideration. The learned Subordinate Judge on these findings gave a decree to the plaintiff treating him as a transferee for collection. Though the promissory note was found to be supported by consideration the learned, District Judge declined to pass a decree in favour of the plaintiff because he held having regard to the facts disclosed in the evidence, that:

    “the sole consideration for the suit pronote was an undertaking to forgo the fruits of systematic procuration, and this is not a form of consideration that any Court can take cognizance of.”

    2. In the last paragraph of the judgment he says:

    “I find that the consideration for the suit pronote was nil, and that it was obtained by a disgraceful kind of blackmail.”

    3. His opinion apparently was that the history of the transaction which led to the execution of the promissory note showed that the real consideration for the promissory note was immoral and therefore the suit was not enforceable. In this view he set aside the decree of the Sub-Judge and dismissed the plaintiff's suit. To understand the conclusions arrived at by the learned Judge a few facts have to be mentioned and they are referred to in detail in the third and succeeding paragraphs of the appellate, judgment. It would appear that defendant 1 is a rich raiyat and that defendant 2 is an young man addicted to drink, and women and that defendant 3 gaining control over him by pandering to him weakness, persuaded him, to execute a sale deed in his favour, Ex. E, for Rs. 9,000. The document recites that a sum of Rs. 3,000 had been paid in cash to defendant 2 and that the balance of Rs. 6,000 would be paid at the time of registration. Defendant 3 is a pleader. When the document was presented for registration, by his clerk, defendant 2 objected, alleging that it was executed by undue influence and while he was under the influence of drink and also that the consideration of Rs. 3,000 had not been paid. The document was therefore returned unregistered. During the inquiry before the Registrar a compromise was arranged between the parties at the intercession of one Venkateswarulu, a pleader, and defendants 1 and 2 executed the suit note, Ex. A, for Rs. 2,750 in favour of defendant 3 and he then withdrew the suit deed without pressing for its registration. It was in these circumstances, that the learned District Judge came to the conclusion that the suit note was unenforceable. His reasoning may be put in his own words:

    “What after all was the consideration for the suit pronote? Defendant 3 in Ex. E says that he paid defendant 2 Rs. 3,000 in cash. Defendant 2 denied this in Ex. 2. If it were true, then I do not see why defendant 3 was willing to accept a pronote for Rs. 2,750 and give up in return not only his own Rs. 3,000, but also the chance of buying valuable property. The fact that the property was valued and coveted is shown by the circumstances that Ex. E has not yet been returned.” I am not satisfied that there was any consideration for the first sale deed Ex. E, other than housing defendant 2 and procuring for him women and drink. If this is so, then the sole consideration for the suit pronote was an undertaking to forgo the fruits of systematic procuration, and this is not a form of consideration that any Court can take cognizance of. From the history of the transactions between defendants 3 and 2, I have no hesitation in believing the evidence of D.W 1, viz., that the only consideration for Ex. E was an immoral one and in disbelieving the recital in Ex. 3 that it was a cash transaction. Defendant S. has not given any evidence in this case and he was at pains to avoid doing so.”

    4. In second appeal Mr. G. Lakshmanna argues, that the main question for decision being whether the promissory note was not supported by consideration and that point having been found in his favour by the District Judge he should have given the plaintiff a decree for the amount claimed as was dona by the Sub-Judge; he also argues that the compromise which led to the execution of the promissory note, and the consideration for the first sale deed Ex. E not being impeached before him, it was not open to the District Judge in the absence of specific issues on those points to arrive at the conclusion that the consideration for the promissory note was immoral and to dismiss the plaintiff's suit on a point which was not raised and on which there was no issue. In an ordinary case I should have accepted this contention; but having regard to the special facts appearing in the evidence in this case on which the learned Judge has relied for his conclusions, I cannot accept the appellant's contention. It is true that no issue was raised regarding the immoral nature of the consideration, but an indication of the point is distinctly given in the beginning of para. 3 of the written statement of defendants 1 and 2 and the evidence on the facts relating to it has also been given. When it comes to the notice of the Court that the real consideration for the suit transaction is not the consideration alleged and proved but is one which is distinctly immoral and illegal, is it to shut its eyes to the true state of affairs disclosed by the evidence and give a decree to the plaintiff as if the transaction between the parties was one which could not be impeached? Mr. Lakshmanna would unhesitatingly say “yes”; but his contention appears to be untenable from the decisions which have been brought to my notice. What should be the duty of a Court in a case like this was pointed out by the Privy Council in Connolly v. Consumers' Cordage . 1904 89 LT 347.. In that case Lord Halsbury observed:

    “that it is the right and duty of the Court at any stage of the cause to consider, and, if it is sufficiently proved, to act upon, an illegality which may turn out to be fatal to the claims of either of the parties to the litigation.”

    5. He adds further that:

    “their Lordships however do not doubt that the learned Judges had a right and that it was their duty, if they thought the facts were established, to take care that the process of the Court should not be used for the purpose of establishing a claim that ought not to be permitted to be enforced in a Court of Justice.”

    6. In that case as no evidence was offered on the question of illegality, and as the Supreme Court of Canada assumed the existence of an illegality from the circumstances fraught with suspicion, the case was remanded for a new trial to decide the issue as to illegality after taking evidence. The principle enunciated by the Judicial Committee has been followed in many cases in England and America and in this country also. The English and American cases are referred to in the judgment of Mukerjee, J., in Atikulla v. Habibulla . AIR 1920 Cal 704. As pointed out in that judgment, it may be taken to be well settled that if the illegality of a transaction is brought to the notice of the Court, the Court should not assist the person who invokes its aid even though the defendant has not pleaded the illegality and does not wish to raise the objection. This is based on grounds of public policy. A transaction submitted for adjudication may appear prima facie to be harmless; but if it appears to the Court that it has grown out of illegal or immoral circumstances it is the duty of the Court to take notice of such circumstances and give adjudication accordingly. The decision in Atikulla v. Habibulla was followed in this Court by Curgenven, J., in D. Lakshmiayya v. O. Murakari . AIR 1930 Mad 547. The decisions relied on Mr. Lakshmanna, viz. Hyams v. Stuart King . 1908 2 KB 696 and North Western Salt Co., Ltd. v. Electrolytic Alkali Co. Ltd. . 1914 AC 461, dealing with transactions arising out of wagering contracts under the English law, do not really help him as wagering contracts are not immoral or illegal but have only been declared to be void by statute. I do not think the considerations applicable to those cases can be successfully urged in support of the contention that if a contract, ostensibly good, is really based upon an immoral consideration and this is clearly brought to the notice of the Court, the Court should ignore it and proceed to give a decree to the plaintiff who desires to enforce the contract. It is argued on behalf of the respondents that the conclusion arrived at by the Judge as regards the immoral consideration should be accepted, and that his decree should be upheld. As the point under consideration was not specifically raised in the case, I think the learned Judge should have given an opportunity to the plaintiff to meet the objection when it came to his notice that the suit transaction was of a questionable character, as was done in Connolly v. Consumers' Cordage Co.. I would therefore call upon the lower Court to submit a finding on the question “whether the consideration for the suit note is tainted with immorality.”

    7. In deciding this point the Court will have to consider the validity of the sale transaction Ex. E and of the compromise which immediately preceded the execution of the suit promissory note. Before I conclude I must point out that I have not expressed any opinion as regards the evidence relating to the alleged immoral nature of the transactions brought to light in this suit, nor do I desire to express any opinion lest any opinion of mine might embarrass the lower Court in arriving at its own conclusion. The lower Court is at liberty to consider the entire evidence afresh and arrive at its own conclusion. As the point is a new one it is open to the parties to adduce fresh evidence. The finding is to be submitted within three months after the receipt of this order and ten days for objections. (In pursuance of the order contained in the above judgment, the District Judge of Ganjam submitted the following) Finding.—I find therefore that the consideration for the suit note was illegal, and of such a character that a contract based on it could not be enforced. (This second appeal coming on for final hearing after the return of the above finding, the Court delivered the following)

    JUDGMENT

    8. The finding that is now submitted is covered by my order calling “for a finding.” The pronote now being found to be illegal cannot be made the basis of the suit. The finding is accepted and the second appeal is dismissed with costs.

    P.R.S/B.V

    9. Appeal dismissed.

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    Comments

    (Rachakonda) Narayanamurti v. Darmana Ramalingam
    (Aug 17, 1931)