Duni Chand Rataria vs Bhuwalka Brothers Ltd

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 61 of 1953

Decision Date: 03/12/1954

Coram: Natwarlal H. Bhagwati, Mehar Chand Mahajan, B. Jagannadhadas

The case of Duni Chand Rataria versus Bhuwalka Brothers Ltd was decided by the Supreme Court of India on 3 December 1954. The judgment was authored by Justice Natwarlal H. Bhagwati, who sat on a bench together with Justice Mehar Chand Mahajan and Justice B. Jagannadhadas. The parties were identified as petitioner Duni Chand Rataria and respondent Bhuwalka Brothers Ltd. The decision is reported in the 1955 AIR 182 and also in the 1955 SCR (1) 1071. The principal statutory provision under consideration was section 2(1)(b)(i) of the West Bengal Jute Goods Future Ordinance, 1949, which concerned the meaning of “actual delivery of possession”. For interpreting this provision the Court referred to section 2(2) of the Indian Sale of Goods Act, 1930, which defines delivery as the voluntary transfer of possession from one person to another and expressly includes both actual and symbolic or constructive delivery. In the headnote the Court explained that the term “actual delivery of possession” in the Ordinance must be understood as covering not only physical hand-over of the goods but also any form of delivery that is symbolic or constructive, provided it results in the transfer of possession in the ultimate analysis. The word “involving” in the phrase “involving the actual delivery of possession thereof” was held to mean “resulting in”, so that the condition was satisfied where a chain of contracts, as in the present matter, led to the ultimate delivery of the goods. The Court further observed that the Ordinance fell within Head 27 of List 2 of the Seventh Schedule of the Government of India Act, 1935, which empowers the Provincial Legislature to legislate on “trade and commerce within the Province; markets and fairs; money-lending and money-lenders”. Accordingly, the Provincial Legislature was competent to enact the Ordinance. The judgment also cited the earlier decision of Nippon Yussen Kaisha v. Ramjiban ([1938] L.R. 65 I.A. 263) in support of its reasoning.

This matter came before the Court in Civil Appeal No. 61 of 1953, arising from an appeal against the judgment and decree dated 16 May 1952 of the High Court of Judicature at Calcutta. The appeal challenged Original Decree No. 124 of 1951, which itself arose from a decree dated 25 May 1951 of the same High Court in its ordinary original civil jurisdiction in Suit No. 3614 of 1950. For the appellant, the Attorney-General for India, M. C. Setalvad, appeared with counsel P. Mandal and S. P. Varma. For the respondent, counsel N. C. Chatterjee was assisted by A. N. Sinha and P. C. Dutta. The judgment of the Supreme Court was delivered by Justice Bhagwati on 3 December 1954. The appeal, which carried a certificate from the High Court, concerned a suit originally filed by the appellant against the respondent for the recovery of a sum of Rs. 1,25,962-2-0 together with interest and costs. The factual background disclosed that the appellant had entered into three contracts with the respondent, two of which were dated 8 August 1949 and the third dated later, the terms of which formed the basis of the dispute before this Court.

The appellant had entered into three separate contracts with the respondent. The first contract, dated 8 August 1949, required the respondent to purchase 180,000 bags of ‘B’ twill at a price of Rs 134 4⁄4 per 100 bags for delivery in October 1949. The second contract, also dated 8 August 1949, required the purchase of another 180,000 bags at the rate of Rs 135 4⁄4 per 100 bags for delivery in November 1949. The third contract, dated 17 August 1949, required the purchase of 90,000 bags at the rate of Rs 138 per 100 bags for delivery in December 1949. All three contracts stipulated that the deliveries were to be made in equal monthly instalments and that the terms and conditions would follow the standard forms prescribed by the Indian Jute Mills Association.

In September 1949 the respondent informed the appellant that it could not fulfil the delivery obligations under the three contracts. The respondent proposed that the appellant should settle the contracts by selling back the goods to the respondent at a price of Rs 161 8⁄0 per 100 bags. Consequently, on 28 September 1949 the parties executed three settlement agreements in which the appellant agreed to sell the goods covered by the original contracts to the respondent at the price of Rs 161 8⁄0 per 100 bags, again subject to the Indian Jute Mills Association’s contract forms. The appellant subsequently forwarded to the respondent the bills reflecting the aggregate amount due under the settlement agreements, amounting to Rs 1,15,650. The respondent accepted the bills but, despite repeated demands, failed to make any payment.

Because of the respondent’s non-payment, the appellant instituted a suit seeking recovery of the outstanding sum together with interest and costs. In its written statement, the respondent contested the appellant’s claim on the primary ground that the three settlement agreements were illegal and barred by the West Bengal Jute Goods Future Ordinance, 1949. The respondent further argued that it never engaged in the sale or purchase of jute goods involving actual delivery, nor did it own or control any godown or other storage and supply equipment for jute. Accordingly, the respondent maintained that the settlement agreements were void, not binding, and that the appellant was not entitled to any relief.

The trial court rejected the respondent’s contention and decreed in favour of the appellant. On appeal, the appellate judges concluded that the settlement agreements were contracts for the purchase of jute goods on a forward basis entered into by a party that did not habitually deal in such transactions and therefore were void and unenforceable. The appellate court held that the appellant’s only right was to have the original contracts settled at the last notified market closing rate of Rs 146 14⁄ per 100 bags, a claim the appellant had not made. The appellant’s additional argument that the Ordinance was ultra vires was dismissed. Based on its finding on the main issue, the appellate court dismissed the appellant’s suit with costs.

In this case the Court reproduced the operative provisions of the West Bengal Jute Goods Future Ordinance, 1949 to determine the legal status of the contracts in dispute. Section 2 of the Ordinance stated that, unless there was any repugnancy in the subject or context, the expression “contract relating to jute goods futures” meant a contract concerning the sale or purchase of jute goods made on a forward basis. Such a contract was understood to include either (a) a provision for the payment or receipt of margin in the manner and on the dates specified in the contract, or (b) an arrangement made by or with any person who was not habitually engaged in the sale or purchase of jute goods involving actual delivery of possession, and who did not possess or control a godown or the other means and equipment necessary for the storage and supply of jute goods. Section 3(1) authorized the Provincial Government, from time to time, to issue a notification in the Official Gazette prohibiting the making of contracts relating to jute goods futures and to withdraw such prohibition by a similar notification. Section 3(2) provided that when a prohibition was in force, no person was to make any such contract or to pay or receive any margin, except that any contract made prior to the date of the notification could continue only to the extent that margin payment or receipt was permissible on the basis of the last closing rate in a notified market. Sub-section (2)(c) declared that, notwithstanding any other law, every contract made and every claim for margin in contravention of clause (a) would be void and unenforceable, and that every contract made before the date of publication of the prohibition would be varied and settled on the basis of the last closing rate in a notified market. The Explanation to this sub-section defined “last closing rate” as the rate fixed by the Directors of a notified market as the closing rate immediately preceding the date of publication of the prohibition, and defined “notified market” as a jute goods futures market recognised by the Provincial Government through a notification in the Official Gazette. The Ordinance had come into force on 22 September 1949. Pursuant to the power conferred by section 3(1), the Government of West Bengal issued notification No 4665 Com dated 23 September 1949, which prohibited the making of contracts relating to jute goods futures from the date of its publication in the Official Gazette. On the same day the Government issued notification No 4666 Com, which recognised certain jute goods futures markets as “notified markets” for the purposes of paragraph (b) of the Explanation to section 3(2). Both notifications were published in the Calcutta Gazette on 23 September 1949.

In the standard form contract used by the Indian Jute Mills Association, the parties agreed to a number of specific terms. The buyer was required to give a clear notice of seven working days before any goods could be placed alongside a vessel. Payment was to be made in cash and was to be evidenced by one of several types of documents: a delivery order issued by the seller, a railway receipt, a dock receipt, or a mate’s receipt. The latter documents were to be handed to the seller’s representatives by officers of the ship or dock. The contract further stipulated that the buyer recognised that, for as long as any of these receipts—whether they bore the name of the seller or the buyer—remained in the seller’s possession, the seller retained a lien as an unpaid vendor. This lien attached both to the receipts themselves and to the goods represented by those receipts until full payment was received. In addition to these core provisions, the contract contained usual clauses relating to the inspection of goods, the procurement of insurance, the process of tender, and other matters concerning the delivery of the jute. The settlement contracts that were later used were essentially the same in form, but they included an additional paragraph stating that each settlement contract represented the settlement of an original contract that the parties had already entered into. Under the settlement contract, the buyer agreed to pay the seller the price difference at a specified rate on the due date, thereby finalising the earlier agreement.

The practical operation of these contracts involved the handling of documents that stood for the physical jute goods. When a mill dispatched goods alongside a vessel in accordance with instructions from a shipper, the mill would obtain a mate’s receipt for the shipment. The mill then handed that receipt to its immediate buyer, who in turn passed it on to the next buyer in the chain, and so forth, until the receipt reached the ultimate shipper. If, instead, the mill retained the goods in its own godown, the mill would issue a delivery order on the agreed due date. Such delivery orders were treated in the same way as mate’s receipts, serving as evidence of the goods and being transferred from seller to buyer against cash payment. Evidence presented before the trial judge showed that, in the Calcutta jute trade, mills customarily issued delivery orders only after receiving cash, and these orders were transferred from one party to another by endorsement. The orders thereby authorised the holder to receive the underlying goods and were generally accepted in the market as a representation of those goods. The appellate court affirmed the trial judge’s findings and further observed that, in the present case, the goods moved through a series of transactions: the mill sold the goods to a party identified as A, A sold them to B, B sold them to the defendant, the defendant sold them to the plaintiff, the plaintiff sold them to C, and C ultimately delivered them to the shipper. This sequence constituted a “chain contract,” a fact that the plaintiff admitted, noting that the mill initially gave a delivery order to A, which A endorsed to B, and B thereafter endorsed it further down the chain.

The Court considered whether the series of settlement contracts described in the record could be treated as contracts between the appellant and the respondent that involved the actual delivery of possession of the jute goods. Both parties agreed that the contracts did not contain provisions for the payment or receipt of a margin. Both parties also agreed that the respondent neither owned nor controlled a godown or any other facilities required for storing and supplying jute goods. Consequently, the sole dispute was whether the respondent was a person who regularly engaged in the sale or purchase of jute goods in a manner that involved the actual delivery of possession of those goods. The respondent, through counsel, vigorously argued before the lower courts that the transactions were purely speculative. The respondent maintained that only delivery orders were passed between the parties, that such delivery orders did not represent the goods themselves, and that the transfer of those orders did not entail any actual delivery of possession of the goods among the intermediate parties; instead, the parties merely paid or received differences in rates. The appellant, on the other hand, contended that the delivery orders did represent the goods, that each successive buyer paid the full cash price to his immediate seller for the goods represented by the delivery order before that order was endorsed in his favour, and that by doing so each buyer obtained not only title to the goods but also actual delivery of possession. The appellant further asserted that when the goods were delivered alongside the vessel, or when the ultimate buyer actually took delivery, there was a simultaneous giving and taking of actual possession of the goods throughout the entire chain. The Trial Court accepted the appellant’s position that delivery orders are treated in the market as representations of the goods and that they pass from hand to hand by endorsement, with each successive buyer receiving the endorsed order against cash payment, and that they are used in the ordinary course of business to authorize the endorsee to receive the goods they represent. The learned Trial Judge then explained: “Now visualize the long chain of contracts in which the defendant’s contract is one of the connecting links. The defendant buys from its immediate seller and sells to its immediate buyer. As seller it is liable to give delivery and as buyer it is entitled to take delivery. As seller it receives payment and as buyer it gives shipping instructions. Similar shipping instructions are given by each link until the chain reaches the mills. The mills deliver the goods alongside the steamer. Such delivery implements the contract between the mills and their immediate buyer, but at the same instant it also implements each of the chain contracts, including the contract between the defendant and its immediate buyer and the contract between the defendant and its immediate seller. Not only does the mill give and its immediate buyer take actual delivery, but each middleman also gives and takes actual delivery. Simultaneously the defendant takes actual delivery of possession of the jute goods from its immediate seller and gives actual delivery of possession of the jute goods to its immediate buyer. At the moment the goods are delivered alongside the steamer, there is an appropriation, the passing of property in the goods, and the giving and taking of actual delivery of possession throughout the chain at the same moment.”

The trial judge explained that, in the commercial chain, each intermediary both receives and gives actual delivery of the jute goods. At the moment the goods are brought alongside the steamer, the defendant simultaneously takes possession of the goods from its immediate seller and delivers possession to its immediate buyer. Consequently, the judge observed that the appropriation of the goods and the transfer of property occur at the same instant, and that the act of giving and taking actual delivery of possession happens throughout the entire chain at that very moment.

Referring to Lord Wright’s observations in Nippon Yusen Kaisha v. Ramjiban, the judge noted that the standard form contract used by the Indian Jute Mills Association governs the whole export business in gunnies in Calcutta. The judge stated that, because the sale is effected free alongside the vessel, ownership of the goods passes prima facie when the goods are appropriated by delivery alongside the ship in performance of the contracts. The judge further emphasized that when the defendant’s sales and purchases involve actual shipment and delivery of possession alongside the vessel, this constitutes a physical delivery that necessarily changes the actual custody of the goods.

The judge rejected the argument that the dealer must personally make the physical delivery. He pointed out that the ordinance does not contain language requiring the dealer himself to give delivery, and therefore the statute cannot be read to impose such a requirement. The legislation merely insists that the dealer’s sales and purchases involve actual delivery of possession of the jute goods. Accordingly, the judge held that the definition in sub-section 2(1)(b)(i) of the ordinance is satisfied even when the delivery is performed by a third party on behalf of the dealer. He observed that, in practice, over-the-counter transactions rarely involve manual hand-over of the goods by the buyer and seller; instead, employees and agents of the parties commonly give and take delivery. There is therefore no reason to exclude deliveries made by such representatives from the meaning of “actual delivery of possession.”

The appellate court, however, did not adopt the trial judge’s view. The appellate judges were said to have misdirected themselves both on the factual record and on the legal position. They concluded that none of the parties in the chain of contracts paid the actual price for the goods except the shipper, who took delivery from the mills against payment. This conclusion was based on an assumption that the delivery order was simply endorsed from one intermediary to the next, each taking a profit, and that only the shipper actually paid the price and took possession. The appellate court’s reasoning was described as unwarranted because the evidence demonstrated that each successive buyer paid the full price to his immediate seller in cash in exchange for the endorsed delivery order. Moreover, the appellate court placed undue emphasis on the phrase “actual delivery of possession,” contrasting it with symbolic or constructive delivery, and held that only physical or manual delivery fell within the ordinance’s intent.

The Court observed that the shipper alone had taken the goods from the mills and paid the mills for them. The lower court had incorrectly presumed that the first purchaser, identified as A, had merely endorsed the delivery order to the next purchaser, B, kept the price difference, and that B had in turn endorsed the delivery order to the defendant, kept his own price difference, and so on, ultimately concluding that no party besides the shipper had ever paid the true price of the goods or taken actual delivery. The Court held that this presumption was wholly unfounded. The evidence on record demonstrated that each successive buyer paid his immediate seller the full cash price for the goods represented by the delivery order, and the seller endorsed a corresponding delivery order in favour of the buyer. The Court further noted that the appellate judges had placed improper emphasis on the expression “actual delivery of possession,” contrasting it with symbolic or constructive delivery, and had ruled that only physical or manual delivery fell within the intention of the Ordinance. The Court reminded that section 2(2) of the Indian Sale of Goods Act defines delivery as the voluntary transfer of possession from one person to another, and that, without further qualification, the definition embraces both actual (physical) delivery and symbolic or constructive delivery. The appellate court’s interpretation of the word “actual” in section 2(1)(b)(i) of the Ordinance as limiting the exemption to only physical delivery, thereby excluding symbolic or constructive delivery, was described as overly narrow. Even assuming the mischief the Ordinance sought to prevent, the Court explained that the legislative purpose was to bar individuals who traded solely in price differentials without any intention of taking delivery, from entering the market. A person who habitually dealt in the sale or purchase of jute goods involving actual delivery of those goods, however, was not intended to be covered by the ban. This reading, the Court argued, is the only reasonable construction; otherwise, the ordinary practice in the jute trade would become impossible. Typically, the manufacturer of jute goods does not deal directly with the shipper; the shipper obtains the goods through a chain of contracting parties. If the Ordinance were read to require only physical delivery, the business of jute trading could not function. Accepting the appellate court’s narrow construction of “actual delivery of possession” would obligate every intermediate party to take physical possession of the goods from its seller and then deliver the goods physically to its own buyer, a scenario that could never be realized in the normal course of trade.

In this case the Court held that the Government could not have intended a narrow literal meaning of the phrase “actual delivery of possession” and that the only sensible construction was to understand “actual delivery” as encompassing both symbolic and constructive delivery of possession, as opposed to merely dealing in differences. Once that interpretation was accepted, the sequence of transactions in the market became clear. The mates’ receipts or delivery orders, whichever were used, functioned as documents that represented the underlying jute goods. Sellers transferred these documents to buyers in exchange for cash, and the buyers treated the receipt of the documents as evidence that they had obtained delivery of possession of the goods.

The buyers then passed the documents from one intermediate trader to another, each treating the document as a token of possession, until the documents finally reached the ultimate purchaser, who physically took possession of the goods. In this way, the constructive delivery of possession that the intermediate parties enjoyed was effectively converted into a physical or manual delivery of possession at the final stage, thereby avoiding the unrealistic requirement that every intermediate party actually hand over the goods in a physical sense. The Court emphasised that section 2(1)(b)(i) of the Ordinance uses the word “involving,” which in this context means “resulting in,” and that the condition of “involving the actual delivery of possession” was satisfied when the chain of contracts ultimately resulted in the goods being physically delivered to the final buyer.

Consequently, the Court found that the Appeal Court had erred by applying an unduly narrow construction to the expression “actual delivery of possession” and by declaring the transactions speculative and without any intention of actual delivery. The Court agreed with the trial judge that the factual situation and the legal principles had been correctly appreciated, and therefore the respondent’s contentions were rightly rejected. Because this conclusion was reached, the Court saw no need to address the argument based on the definition of “documents of title” in section 2(4) of the Sale of Goods Act, nor the provisions of sections 30, the proviso to section 36(3), and the proviso to section 53(1), which attempted to equate the transfer of such documents with a transfer of possession of the goods.

The Court also noted that the allegation that the Ordinance was ultra vires had not been seriously presented before it. However, the Court affirmed the Appeal Court’s finding that the Ordinance fell within Head 27 of List 2 of the Seventh Schedule of the Government of India Act, relating to “Trade and commerce within the Province; markets and fair; money lending and money lenders,” and therefore the Provincial Legislature had the competence to enact the Ordinance.

In the present case the Court concluded that the legal points raised by the appellant were correct and therefore the appeal was granted. The Court set aside the judgment of the Court of Appeal and ordered that the findings of that Court be nullified. The judgment that had been entered by the trial court, which awarded relief to the appellant, was consequently reinstated. The reinstatement of the trial-court decree meant that the relief originally granted to the appellant was to take effect once more. The Court further directed that the costs of the proceedings be imposed on the respondent for the entire course of the litigation. Accordingly, the appeal was allowed and the order previously issued by the higher court was reversed in its entirety. By setting aside the appellate judgment, the Court removed any legal effect that the appellate decision had previously conferred upon the parties. Consequently, any directions or orders issued by the appellate tribunal were rendered null and void, and the parties were returned to the position they occupied before that judgment. The restoration of the trial-court decree also reinstated the entitlement of the appellant to recover the costs incurred throughout the litigation. Thus, the final order of this Court affirmed the appellant’s original relief and placed the financial burden of the case on the respondent.