• Ratification of illegal contract

My stock broker was restrained from Trading on my behalf through a STOP instruction. But, he executed a Trade after a week and informed about the Trade at the end of the day. Some material facts like closing rate, settlement date etc were not revealed and day end call ended by me saying "acchha". Next day, questions were raised about the debits to my account from this Trade. After 3 days, the Broker called to inform about the mounting loss from this Trade and advised for more trades with deposit of more cash margin to manage the loss from the original Trade and stop sale of investments. The original Trade was disputed after 14 days from the date of execution. NSE rejected the claim on the ground that calls on various occasions were not specifically Disputed. Pay-ins were made indicating acceptance of debit balance, thus the original trade was properly authorized.

I understand that a Trade despite an effective restraint order is blatantly illegal. An illegal contract can't be ratified. Although the Trader attempted to ratify, but a ratification of the Contract verbally communicated with deficiency of material information won't sustain in the court of law. In that case, the pay-in, timing of dispute etc should matter ?
Asked 4 years ago in Civil Law

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8 Answers


Please share the order of the NSE by means of which your claim has been rejected.

It is necessary to peruse the same in order to give you a concrete advise.

It is true that illegal contract can not be ratified.


Anilesh Tewari
Advocate, New Delhi
17940 Answers
377 Consultations

5.0 on 5.0

1. If you indeed have documentary proof of ' restraint direction' n further trading then indeed the acts of the broker is uncalled for and hence not binding on you.

2. The stock exchange in most of such cases goes very technically and hence the remedies are very few.

3. Check whether any arbitration clause in the agreement between you and the broker is there or not.

4. if not then file a case before the consumer forum. You have a good case and you are likely to be compensated for the loss sustained by the act of agent which is beyond his power.

Devajyoti Barman
Advocate, Kolkata
22515 Answers
402 Consultations

5.0 on 5.0

Dear Client,

Act conducted under the restrain order is violation and same will be dealt with penalty provision given in law concern.

Contract cannot be illegal unless was made for an illegal purpose and, consequently, violates the law. Contracts are illegal if the performance or formation of the agreement will cause the parties to engage in activity that is illegal.

Yogendra Singh Rajawat
Advocate, Jaipur
21481 Answers
31 Consultations

4.4 on 5.0

in your case you had restrained your broker from trading on your behalf

2) if you have subsequently deposited cash to settle mounting losses it would weaken your case

3) further if you disputed trade after 14 days it appear to be an after thought

4) NSE is correct that if you had made pay in indicating acceptance of debit balance trade was authorised by you

Ajay Sethi
Advocate, Mumbai
87955 Answers
6207 Consultations

5.0 on 5.0

If you are able to prove pay in was not for disputed trade invoke arbitration clause in contract

2) dispute would be referred to arbitration in arbitartorappointed by arbitrator

Ajay Sethi
Advocate, Mumbai
87955 Answers
6207 Consultations

5.0 on 5.0

The ratification by NSE was done at your request or a request made on your behalf by the stockbroker.

It appears that NSE has ratified on the basis of payment made from your end over the deficit margin.

You say that you have given instruction to stop trading, whereas when the broker resumed trading on your behalf after a week you silently were watching it without any objection from your side in this regard.

This clearly indicates that you have approved the trading activities.

To curb 'unauthorised trades,' the Securities and Exchange Board of India (Sebi) has directed brokers to maintain evidence of clients placing orders with them.

Such trades are defined as buy or sell orders placed by a broker on behalf of a client without the latter's directive or authorisation. The markets regulator said the evidence may be a physical record from the client, a telephone recording, e-mail from a registered mail address, a log for internet transactions, record of mobile messages or any other "legally verifiable record".

"When a dispute arises, the burden of proof will be on the broker to produce the above records for the disputed trades," goes a Sebi circular.

T Kalaiselvan
Advocate, Vellore
78113 Answers
1543 Consultations

5.0 on 5.0

Current settlement regulations disallow violations such as insider trading, fraudulent and unfair trade practices such as front running, and the failure to make an open offer in case of a takeover to be settled through the consent window. Further, violations such as failure to redress investor grievances, failure to make material disclosure in offer documents and non-compliance of Sebi notices are also excluded from the scope of settling with a fee.

Under consent mechanism norms, someone who anticipates penal actions by Sebi can settle the matter in question by offering Sebi a fee.

Thus your case has been settled based on the payment made by you.

This can be clarified from the broking office.

Brokers say they are not always at fault. "Often clients allow us to operate their accounts. However, if they incur losses, they try to dispute the trade and file a complaint with Sebi. The latest directive will help both the broking community and investors. However, the time and cost of compliance will increase,"

T Kalaiselvan
Advocate, Vellore
78113 Answers
1543 Consultations

5.0 on 5.0

1. if there was a restraint or stop order operating against your stock broker when he executed the trade on your behalf, then even if you may have ratified the same by depositing money for maintaining the margin, the trade will still be illegal.

2. any consequent act by the trader pursuant to the trade executed by the broker when a stop order against the broker was operational, will also be of no consequence and cannot amount to ratification

3. how can a trader ratify a contract which in the first place itself is illegal due to the restraint order on the broker?

4. you will have to challenge the finding of NSE and SEBI further up, till the high court, by filing a writ petition

5. lets take an analogy:

weak building foundation = restraint order on the trader not to execute any trade

upper floors collapse = all consequent acts done by the trader have no force

meaning: if the foundation itself is weak, the upper floors would not stand their ground

thus if the broker is himself restrained by a stop order, then no subsequent act by any trader can lift that restraint order and thus such acts would also be of no consequence and cannot be equated to ratification.

the only authority which can vacate or lift the restraint order is the same authority which passed the restraint order or its higher authority

if what the NSE or SEBI has reasoned is taken to be correct, then any trader can vacate a restraint order just by doing some consequent act amounting to a purported ratification

Yusuf Rampurawala
Advocate, Mumbai
6882 Answers
79 Consultations

5.0 on 5.0

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