Kishan Lal and Another vs Bhanwar Lal

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

Court: supreme-court

Case Number: Civil Appeal No. 88 of 1953

Decision Date: 12 May 1954

Coram: B.K. Mukherjea, Mehar Chand Mahajan, Vivian Bose, Natwarlal H. Bhagwati

In this case the parties were Kishan Lal and another as petitioners and Bhanwar Lal as respondent. The judgment was pronounced on 12 May 1954 by the Supreme Court of India. The bench that heard the matter was composed of Justice B.K. Mukherjea, Justice Mehar Chand Mahajan, Justice Vivian Bose and Justice Natwarlal H. Bhagwati. The official citation of the decision is reported in 1954 AIR 500 and is also referenced as R 1955 SC 812. The dispute centred on the Indian Contract Act of 1872, specifically the provisions relating to agency and the agent’s right to indemnity against the principal, and on whether the contractual arrangements fell within a statutory prohibition on forward contracts for the purchase and sale of bullion.

The factual background, as set out in the headnote, indicated that the respondent, in his capacity as principal, entered into a series of forward contracts for the purchase and sale of bullion through the petitioners’ firm located at Indore. The petitioners acted as commission agents for the respondent in these transactions. The forward dealings ultimately proved unprofitable for the respondent; the agents were required to discharge the loss incurred on behalf of the respondent by paying the third-party counterparties. Consequently, the agents instituted a suit in the court at Jodhpur, the place of residence of the respondent, seeking recovery of the sums they had paid. The respondent contended that, under the notification issued by the Marwar Government on 3 June 1943, any forward business contract in bullion where the delivery date exceeded twelve days was illegal, and therefore the suit could not be maintained.

The Court held that the suit was not intended to enforce any contract for the purchase or sale of bullion that fell within the ambit of the notification, but rather to enforce the agent’s claim for indemnity against the principal for the loss suffered while executing the principal’s directions. The right to such indemnity was founded upon section 222 of the Indian Contract Act, which provides that an agent who makes payments on behalf of the principal is entitled to be indemnified. The Court further observed that the payments made by the plaintiffs on behalf of the defendant were lawful because the transactions and the subsequent payments were effected outside the territory of Marwar, and therefore the notification prohibiting forward bullion contracts did not apply to the present suit.

The matter before the Supreme Court was Civil Appeal No. 88 of 1953, filed under article 132(1) of the Constitution of India. The appeal challenged the judgment and order dated 11 September 1951 rendered by the High Court of Judicature at Jodhpur, State of Rajasthan, in Civil Appeal (Ijlas-i-Kbas) No. 6 of 1950. Counsel for the appellants included H. J. Umrigar, Narain Andley and Rajinder Narain, while the respondent was represented by counsel Radhey Lal Aggarwal and B. P. Maheswari. The judgment of the Supreme Court was delivered by Justice Mukherjea, who noted that the appeal had been granted a certificate by the High Court of Rajasthan under article 132(1) on the ground that the issues raised involved a substantial question of law concerning the interpretation of the Constitution.

The appellant also filed a petition seeking permission to raise additional substantive grounds in support of the case. The original suit that gave rise to this appeal was instituted by the appellants, in their capacity as plaintiffs, on 16 August 1946 before the District Court I at Jodhpur, Rajasthan. The plaintiffs sued the defendant-respondent for the recovery of a sum of Rs 10,342 and a small fraction of annas, together with interest and costs. At all relevant times the plaintiffs operated as commission agents at both Indore and Jodhpur under the trade names “Kanmal Kishenmal” and “Kanmal Surajmal”. They alleged that between September and December 1945 the defendant entered into a series of forward contracts for the purchase and sale of bullion through the plaintiffs’ Indore office. Those contracts turned out to be unprofitable for the defendant; apart from a modest profit of Rs 103 and a few annas obtained from one transaction, every other transaction resulted in a loss, the aggregate loss amounting to Rs 21,423 and 1 pie and 6 pies. According to the plaint, the plaintiffs paid the entire loss to third parties in Indore on behalf of the defendant. In return, the defendant made intermittent payments to the plaintiffs’ Jodhpur firm totaling Rs 11,457 and 8 pies. Consequently the plaintiffs claimed that the balance due to them was Rs 9,861, and with interest this total rose to the claimed amount of Rs 10,342.

Subsequently the suit was transferred from the District Court to the Original Side of the High Court of Jodhpur, where the defendant filed his written statement on 27 October 1947. In his defence the defendant wholly denied the plaintiffs’ claim and contended, inter alia, that the transactions in dispute were wagering contracts. He further relied on the notification issued by the Marwar Government on 3 June 1943, which declared that all forward bullion contracts requiring delivery beyond twelve days were illegal and punishable as criminal offences under the law then applicable in Marwar. On that basis the defendant argued that no suit could be maintained concerning those transactions. The pleadings gave rise to several issues, of which Issue 5 was framed as follows: “Whether the transactions in dispute are illegal and whether the present suit is non-maintainable because of the notification dated 3 June 1943?” The matter was heard before a single judge of the Jodhpur High Court sitting on the Original Side. No evidence was presented by either party, and the court considered the matter solely on Issue 5 as a pure question of law. The learned judge observed that, as the plaintiffs had admitted, the contracts covered a period exceeding twelve days, and therefore fell within the prohibition stipulated by the notification.

In this case, the trial judge observed that the contracts that were the subject of the suit stipulated delivery periods that exceeded twelve days, and therefore fell within the prohibition contained in the notification of 3 June 1943. Consequently, the judge held that a suit based on those contracts could not be maintained under the law. The plaintiffs advanced an argument that the notification was limited only to contracts that were made in Marwar or were intended to be performed there, and because all the disputed contracts had been executed at Indore, the notification should not apply. The trial judge rejected this contention on two grounds. First, he stated that since the suit had been filed in the Jodhpur Court, the plaintiffs could not avoid the operation of the notification, and the Jodhpur Court could not grant relief that conflicted with its own statutes. Second, relying on section 13 of the Civil Procedure Code, he explained that even if the plaintiffs obtained a decree in the Indore Court and sought to enforce it as a foreign judgment in Jodhpur, the Jodhpur Court would be justified in refusing to give effect to it under section 13 of the Marwar Civil Procedure Code because the judgment would be founded on a breach of the law in force in Marwar. Accordingly, by his judgment dated 2 March 1948, the trial judge dismissed the suit. The plaintiffs appealed this decision to the Jodhpur High Court, where a Division Bench comprising Nawal Kishore C. J. and Kanwar Amar Singh J. heard the matter. The appellate judges accepted the plaintiffs’ view that the contracts could be declared void only if they were entered into in Marwar or intended to be performed wholly or partly in Marwar. Although the contracts were entered into at Indore, the judges inferred from the fact that certain payments were made by the defendant and accepted by the plaintiffs in Marwar that the contracts contained a term requiring performance in Marwar. The plaintiffs also argued that the notification of 3 June 1943 had ceased to operate on 30 September 1946, and therefore there should be no obstacle to obtaining a decree after that date. The appellate bench rejected this argument, holding that the contracts were illegal at the time they were executed because they violated the notification, and the later termination of the notification could not render those contracts lawful. By its judgment dated 24 September 1948, the High Court Division Bench dismissed the appeal. Following that dismissal, the plaintiffs, with the leave of the Court, proceeded to file an appeal before the Ijlas-i-Khas of the State of Jodhpur.

The plaintiffs obtained leave of the Court to appeal the earlier decision to the Ijlas-i-Khas of the State of Jodhpur as it then existed. While the appeal was pending before that body, the political reorganisation of the region took place. The various princely States of Rajasthan were integrated and the United States of Rajasthan was formed on 7 April 1949. Subsequently, the Rajpramukh of Rajasthan promulgated the Rajasthan High Court Ordinance on 21 June 1949, and the High Court of Rajasthan was formally constituted on 29 August of the same year. In addition, the Rajasthan Appeals and Petitions (Discontinuance) Ordinance, 1949, by its section 4, provided that any appeal pending before an Ijlas-i-Khas of any covenanting State, where the matter was judicial in nature, should be heard by a special Court to be constituted by the Rajpramukh. This provision was amended by an Ordinance dated 24 January 1950, which directed that all such pending appeals were to be heard and disposed of by the Rajasthan High Court established under the 1949 High Court Ordinance. Accordingly, the plaintiffs’ appeal was transferred to the Rajasthan High Court for determination.

The Constitution of India came into force on 26 January 1950. When the appeal was scheduled for hearing before the Rajasthan High Court, a preliminary question was raised as to whether, under article 374(4) of the Constitution, the appeal should be transferred to the Supreme Court for disposal. The issue was referred to a Full Bench of the Rajasthan High Court, which held that article 374(4) did not apply to the present matter and that the appeal should remain before the Rajasthan High Court. The appeal was then heard by a Division Bench, and by its judgment dated 11 September 1951, the learned judges dismissed the appeal and affirmed the decision of the lower courts. The plaintiffs subsequently obtained leave to appeal to this Court under article 132(1) of the Constitution, bringing the matter before the present Court. The sole constitutional question raised by the appeal concerned the applicability of article 374(4) and whether, on that basis, the appeal ought to have been transferred to this Court instead of being heard by the Rajasthan High Court. Because the Court had already granted leave to argue other substantive grounds, the constitutional point became purely academic and was not pressed by the appellants. The Court therefore proceeded to examine the merits of the Rajasthan High Court’s decision as assailed by the appellants’ counsel.

The judges of the Rajasthan High Court held, and it appeared to them to be correct, that the lower courts had erred in treating issue number five as a pure question of law that required no factual investigation. They observed that the defendant, while pleading the illegality of the contracts in his written statement, had never alleged that the contracts were concluded in Marwar or that they were intended to be performed there. In contrast, the plaintiffs had expressly claimed that the contracts were made at Indore. The appeal bench of the Jodhpur High Court had inferred, based on a single fact, that the contracts were at least partly intended to be performed in Marwar because the defendant had made certain payments toward the losses arising from the transactions to the plaintiffs’ firm located in Marwar. The Rajasthan High Court pointed out that this inference was not mandatory; the payments could have been made merely for convenience, following explicit instructions from the Indore firm, and did not necessarily constitute a term of the original agreement that performance should occur in Marwar. The court also emphasized the general legal principle that the debtor must seek the creditor. Since the defendant was the debtor because of the losses suffered in his business, it was his responsibility to approach the plaintiffs at Indore, not the plaintiffs’ duty to chase him in Jodhpur. Moreover, the suit had been instituted in Jodhpur solely on the ground that the defendant resided within the court’s jurisdiction; the plaint did not allege that any part of the cause of action arose within that jurisdiction. On all these grounds, the Rajasthan High Court concluded that the lower courts should either have framed a specific issue that required factual determination, or, if they considered issue number five sufficiently broad to encompass factual questions, they should have permitted the parties to adduce evidence to decide whether the contracts were to be performed wholly or partially in Marwar. The learned judges were inclined to remit the case for a remand so that evidence could be presented on this point, but they refrained from doing so after being informed that the contracts had been concluded by telegrams, without any settled terms, and that the business was understood to be conducted according to the customary practices of the market. The judges further examined a question of private international law, apparently raised for the defendant, that even if the contract had been made outside Marwar and was not intended to be performed there, the court of Marwar should refuse to enforce the contract as illegal according to the law of the forum where the suit was filed.

In this case, the Court observed that the argument that the contract was illegal according to the lex fori, that is, the law of the place where the suit was brought, was not accepted. The Court held that if a contract is enforceable by the law of the place where it was made or where it was to be performed, it could not be declared unenforceable in Jodhpur on the ground that it opposed public policy. The prohibition contained in the notification was not general in nature, and the contract in question could not be said to be opposed to any basic ideas of morality or public policy. Nevertheless, the learned Judges of the Rajasthan High Court dismissed the suit on the short ground that even if the sale or purchase under the contracts might have taken place outside Marwar, the notification not only affected the contracts of sale and purchase but also the agency contract relating to those transactions. It was then submitted that, according to the case of Pakki Adat, the place of payment of profit is normally the place where the constituent resides, and in the present case the plaintiffs had claimed to be Pakka Adatias. Consequently, the agency contract would fall within the notification because it was to be performed at Jodhpur, where the defendant resides. The Court expressed the view that the approach of the learned Judges was not proper and that their reasoning could not be accepted as sound. By the notice of 3 June 1943, an additional rule, namely rule No 90(c), was added to the Defence of India Rules as applied to Marwar. Sub-rule (2) of rule 90(c) provided that no person shall enter into a forward contract or option in bullion. Sub-rule (1) defined “forward contract” as a contract for delivery of bullion at a future date, such date being later than twelve days from the date of the contract, and defined “contract” as a contract made or to be made or to be performed in whole or in part in Marwar relating to the sale or purchase of bullion. The Court noted that the present suit was not an action to enforce any contract relating to the purchase or sale of bullion that fell within the prohibition of the notification. Rather, it was a suit by an agent claiming indemnity against the principal for the loss the agent suffered in carrying out the principal’s directions. The right to such indemnity was founded on section 222 of the Indian Contract Act, which provides that the employer of an agent is bound to indemnify the agent against the consequences of all lawful acts done by the agent in the exercise of the authority conferred upon him. Here, the plaintiffs had paid the losses resulting from the transactions to third parties on behalf of the defendant, acting in the exercise of that authority.

In this case, the Court observed that the authority to make the payments had been conferred on the agents by the principal. Assuming, as the Court required, that all of the transactions had actually occurred and that the payments were made outside the territory of Marwar, those payments were unquestionably lawful acts. The plaintiffs sought to enforce the statutory right that arises from the agency contract, a right that obliges the principal to indemnify the agent for lawful acts performed in the course of the agency. The suit had been filed in the Jodhpur Court because the defendant resided within that jurisdiction. The Court held that the usual rule in a “Pakki Adat” situation, whereby the place of payment is normally the residence of the party making the payment, was irrelevant to the present dispute. Whether a contract for the sale or purchase of bullion is concluded directly between the parties or through agents, the determining factor was the location of the contract and its performance. If the contract was neither made in Marwar nor agreed to be performed wholly or partly in Marwar, it fell outside the scope of the notification that prohibited certain bullion transactions and therefore could not be deemed illegal. The Court found a flaw in the reasoning of the lower judges, who had treated the contract between principal and agent as falling within the prohibition merely because the agent’s payment of the transaction’s profits could be made or demanded at the principal’s residence. In the Court’s view, the right to indemnity is an incident of the agency relationship and is entirely separate from the forward contract of bullion purchase or sale that the notification intended to prohibit. Consequently, the Court concluded that the lower courts were incorrect in dismissing the plaintiffs’ suit on the ground that the underlying contracts were illegal under the notification. The Court therefore set aside the earlier judgments, remitted the matter to the Original Court of Jodhpur to be tried on all remaining issues, and directed that the plaintiffs be awarded costs incurred up to that stage, with further costs to follow the final outcome.