The Delhi Cloth and General Mills Co. Ltd. vs Harnam Singh and Others

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 200 of 1954

Decision Date: 21 April 1955

Coram: Vivian Bose, B. Jagannadhadas, Bhuvneshwar P. Sinha

The Supreme Court of India delivered its judgment on 21 April 1955 in the matter of The Delhi Cloth and General Mills Co., Ltd. versus Harnam Singh and others. The case was heard by a bench comprising Justice Vivian Bose, Justice B. Jagannadhadas and Justice Bhuvneshwar P. Sinha. The official citation for the decision is reported as 1955 AIR 590 and 1955 SCR (2) 502. The issues that the Court considered fell within the scope of private international law, particularly the law applicable to contractual obligations, the contrasting English and Continental approaches to lex situs and the “proper law” of a contract, the consequences of the Partition of India on debts, the appropriate forum for recovery actions, analogies with banking and insurance claims, the location of the primary obligation, the characterization of debt as a form of property, the relevance of Sections 3 and 130 of the Transfer of Property Act, provisions of the Pakistan (Protection of Evacuee Property) Ordinance, 1948 (XVIII of 1948), and the Pakistan (Administration of Evacuee Property) Ordinance, 1949 (XV), and whether those statutes operated in a confiscatory manner.

During the period in question, cloth was subject to rationing in Lyallpur, which at that time formed part of the undivided Punjab. Sales of the rationed cloth could be made only to government nominees and other persons authorised by the government. The plaintiffs, who were residents of Lyallpur, acted as such government nominees. The defendant company, whose head office was situated in Delhi, maintained a branch and a mill in Lyallpur and, through its branch manager there, supplied cloth to the plaintiffs in accordance with the government-issued quota. This commercial relationship continued for four to five years prior to the Partition of 1947. Under the terms of their contract, the plaintiffs deposited a security sum of Rs 1,000 with the branch manager in Lyallpur and subsequently made additional deposits from time to time at the same location. In exchange, the defendant delivered to the plaintiffs their allotted cloth quota against those deposits. Consequently, a running account was maintained between the parties, with the balance periodically favoring the plaintiffs and at other times favoring the defendant, the latter circumstance giving rise to interest charges on the “overdraft”. All supplies of goods were effected at Lyallpur, and all monetary payments were made there. Although copies of the accounts were forwarded to the defendant’s head office in Delhi, the principal accounts were kept at Lyallpur.

In 1947, the Partition of India resulted in Lyallpur being placed within the boundaries of Pakistan. The plaintiffs consequently fled to India, entered as refugees, and settled in Delhi, thereby acquiring the status of “evacuees” under the relevant Pakistan ordinance. At the moment of their departure, the plaintiffs’ account showed a credit balance of Rs 11,496-6-6 in their favour. Seeking to recover this amount as well as their original security deposit, the plaintiffs made a demand for payment in Delhi. Meanwhile, the Government of Pakistan promulgated an ordinance that (1) vested all evacuee property in the Custodian of Evacuee Property in Pakistan, (2) prohibited the direct payment of money to evacuees, and (3) required that any monies payable to or claimable by evacuees be paid to the Deputy Custodian of Evacuee Property in Pakistan. Payments made to the Deputy Custodian were intended to operate as a discharge of further liability to the extent of the amount transferred.

The Court explained that under the Pakistan ordinance the failure to comply with its provisions constituted a criminal offence. The Deputy Custodian of Evacuee Property therefore demanded that the defendant pay the amounts owed to the plaintiff. After an exchange of letters and a formal objection, the defendant made the payment as the ordinance required, and it later raised this payment as a defence in the present suit. The Court held that the principal place of obligation under the contract was Lyallpur, because the contract specified that any balance remaining at termination was to be paid at that location and not elsewhere; consequently a demand for payment made in Delhi before a demand and refusal had been issued in Lyallpur was ineffective. The Court further observed that the essential components of the contract were most closely assembled in Lyallpur, making that city the natural seat of the contract and the place with which the agreement had its strongest connection, and therefore the “proper law of the contract” was the law of Lyallpur. Under the English rule, the situs of the debt was also Lyallpur, and in either analysis the law of Lyallpur applied. The Court noted that the law of Lyallpur in force at the time performance was due governed the contract, because a proper law is a living, evolving body of law and any changes occurring before performance must be given effect. The Court identified that a debt, being a chose in action, qualified as “property” within the meaning of the Pakistan ordinance. Accordingly, the money paid to the Deputy Custodian constituted a valid discharge and released the defendant from any further liability. The Court then posed a question as to whether a different result would arise where no payment was made and the defendant possessed no attachable assets in Pakistan from which the West Punjab Government could realize the debt. It concluded that the relevant provisions of the Pakistan ordinance did not conflict with Indian public policy and could therefore be relied upon as a defence in such actions. The appeal was allowed. The judgment cited several authorities, including Mount Albert Borough Council v. Australasian Temperance (1938 A.C. 224), Bonython v. Commonwealth of Australia (1951 A.C. 201 at 219), Bank of Travancore v. Dhirt Ram (69 I.A. 1 at 8), New York Life Insurance v. Public Trustee ([1924] 2 Ch. 101 at 119), Rex v. Lovitt (1912 A.C. 212), Joachinsons v. Swiss Bank Corporation ([1921] 3 K.B. 110), Arab Bank v. Barclays Bank (1954 A.C. 495 at 531), Fouad Bishara v. State of Israel ([1954] 1 A.E.R. 145), Re Chesterman’s Trusts ([1923] 2 Ch. 466 at 478), Banque des Marchands de Moscou ([1954] 2 A.E.R. 746), Odwin v. Forbes (1817 Buck 57) and Re Munster ([1920] 1 Ch. 268). The judgment was rendered in the Civil Appellate Jurisdiction of Civil Appeal No. 200 of 1954, pursuant to Article 133 of the Constitution and section 109 of the Code of Civil Procedure, and referenced the judgment and decree dated 6 December 1952 of the Circuit Bench of the Punjab High Court at Delhi.

In the regular first appeal numbered 72 of 1952, the Court heard an appeal that arose from a judgment and decree dated 14 April 1952, issued by the Court of the Subordinate Judge in Delhi in suit number 657 of 1950. The appellant was represented by counsel N C Chatterjee together with Tarachand Brijmohanlal and B P Maheshwari, while the respondent was represented by counsel R S Narula. The judgment was delivered on 21 April 1955 by Justice Bose. The appellant in the original suit was a partnership known as Harnam Singh Jagat Singh. Prior to the Partition of India, the partners operated as cotton-cloth dealers at Lyallpur, a city that after Partition became part of Pakistan. The respondent was the Delhi Cloth and General Mills Co. Ltd., a company incorporated and having its head office in Delhi, which also conducted business at various locations, including Lyallpur before Partition.

The partnership claimed that it had conducted business with the Delhi Cloth and General Mills Company for three to four years before 1947, purchasing cloth intermittently and making lump-sum payments against those purchases. Some payments were made in advance, while others were made to offset outstanding balances, and whenever a balance was owed to the company the partnership paid interest, as testified by plaintiff Sardari Lal, who appeared as plaintiff-witness 3. On 28 July 1947, the account was in the partnership’s favour, showing a credit of Rs 79-6-6 together with a security deposit of Rs 1,000. On the same day the partnership deposited an additional Rs 55,000, raising the credit balance to Rs 56,079-6-6. The company subsequently delivered cloth valued at Rs 43,583-0-0 against this balance, leaving a remaining credit of Rs 11,496-6-6. The partnership instituted suit to recover this balance together with interest. The trial court decreed a sum of Rs 12,496-6-6, a decree that was affirmed by the High Court on appeal. The Delhi Cloth and General Mills Company appealed the decree. While the company admitted the factual background as set out, it raised a defence that after the Partition on 15 August 1947, Lyallpur fell within the territory of Pakistan, and the plaintiffs, having fled to India, became evacuees. The Government of Pakistan, according to the company, froze all evacuee assets and later compelled the company to surrender those assets to the Custodian of Evacuee Property in Pakistan. The company asserted that it was prepared to pay the amount if the Pakistani Government released the funds, but until such release it was unable to satisfy the decree and therefore claimed it was not liable. The central issue before the Court therefore concerned the rights and liabilities of the parties under these circumstances, considering that the amount in dispute, although considerable, was modest relative to the many similar claims arising from the same historic upheaval.

Many similar transactions were carried out by the defendant, and a list of those transactions is set out in Exhibit D-11. The first deponent, identified as Mohd Bashir Khan, states that the aggregate value of those transactions amounts to Rs 1,46,209-1-9. The defendant has therefore chosen to present this suit as a test case. The factual background further explains that, during the period preceding the Partition, cloth was subject to a rationing system and its distribution was controlled in several areas, including the Punjab region where Lyallpur is located. Under this scheme, quotas were assigned to various districts and the manufacturers and suppliers of cloth were permitted to supply their product to retailers only in accordance with the quotas allotted to each district. Dealers operating in those districts could import cloth only up to the quantity specified in the quota that pertained to them. When a supplier also operated a retail outlet or business in a particular district, the quota for that district was divided between the supplier and one or more government quota-holders, referred to as the nominated importer or importers. The local agency of the supplier was allowed to import a portion of the quota that was allocated to it in that district, while the supplier was required to surrender the remaining portion of the quota to the government quota-holder or holders. In this case, the plaintiffs were the government quota-holders for Lyallpur, and the defendant company also conducted business in Lyallpur through its General Manager at Lyallpur Mills. Although the defendant admits that it owns the Lyallpur mills, it is disputed before the Court whether those mills constitute a branch of the defendant company. Regardless of the precise legal status of the mills, the evidence and the documents demonstrate that the General Manager of the mills carried out the defendant’s cotton business at Lyallpur. The details of the Punjab cloth distribution scheme, insofar as they affected the defendant, were contained in a letter dated 24 October 1945 from the Secretary of the Civil Supplies Department, Punjab. That letter has not been produced, so its exact contents are unknown, but it is referred to in a series of letters written by the defendant’s Delhi office to the District Magistrate of Lyallpur. Those letters are dated from 3 January 1946 to 19 April 1947 and are reproduced as Exhibits P-5 to P-12. All of the letters follow a similar format, varying only in the figures and dates. For the purpose of illustration, the Court will quote the first of those letters, Exhibit P-5.

The letter dated 3 January 1946 originates from the Central Marketing Organisation of the Delhi Cloth and General Mills Co. Ltd., and is addressed to the District Magistrate of Lyallpur. The letter begins with a reference to the earlier correspondence, stating: “Letter No. 15841-CL-(D)-45/8342 of 24 October 1945 from the Secretary, Civil Supplies Department, Punjab Government, Lahore.” It then informs the magistrate that the defendant has allotted twenty-eight bales of cloth for the district for the month of January 1946. The letter further explains that of those twenty-eight bales, eighteen bales will be dispatched to the defendant’s own retail stores in the district or state, and the remaining ten bales will be made available for delivery to the nominated importer. The correspondence requests that the District Magistrate issue instructions to the nominated importer to collect the goods from the defendant within fifteen days of the two specified delivery dates, namely by the 20th of January and the 5th of February 1946 respectively. The letter also notes that the first half of the quota will lapse if delivery is not taken by the earlier date, and the second half will lapse if delivery is not taken by the later date. The letter concludes with a courteous closing and indicates that a copy of the letter has been sent to the plaintiffs, identified as the nominated importer Jagat Singh Harnam Singh, cloth merchants of Lyallpur.

The letter indicated that the remaining bales would be made available for delivery to the plaintiff’s nominated importer and requested that the District Magistrate issue instructions for the importer to collect the goods within fifteen days of each of the two delivery dates, which were fixed as the twentieth day of January 1946 and the fifth day of February 1946. The correspondence further explained that if the first half of the quota was not taken by the earlier date, that portion would lapse, and similarly the second half would lapse if not taken by the later date. The letter was signed “Yours faithfully, D.C. & Gen. Mills Co., Ltd.” and a copy of the letter was also dispatched to the plaintiffs with the notation “Copy to nominated importer – Jagat Singh Harnam Singh, Cloth Merchants, Lyallpur.” The Indian Independence Act, 1947 was enacted on 18-7-1947, after which the district of Lyallpur was allotted to Pakistan pending the award of the Boundary Commission. The subsequent partition on 15-8-1947 caused the plaintiffs to flee to India, rendering them evacuees under a later ordinance. Prior to the promulgation of that ordinance, the Assistant Director of Civil Supplies, who also held the position of Under-Secretary to the West Punjab Government, sent a letter on 17-2-1948 to the defendant’s General Manager at Lyallpur (the General Manager of the Lyallpur Cloth Mills) stating that “The amount deposited by the non-Muslim dealers should not be refunded to them till further orders” (Exhibit D-1). The defendant, without resorting to litigation, endeavoured to protest this directive and to have it set aside. Accordingly, the General Manager at Lyallpur wrote to the Assistant Director of Civil Supplies on 14-4-1948, 9-8-1948 (Exhibits D-2 and D-4), 23-4-1949 (Exhibit D-7) and 6-6-1949 (Exhibit D-8), but each reply was unfavourable. On 30-4-1948 the Assistant Director emphatically declared that “in no case” should the sums be refunded (Exhibit D-3), and on 1-1-1948 directed that the amounts be deposited with the Custodian of Evacuee Property (Exhibit D-5), in accordance with the ordinance then in force.

Subsequently, on 8-11-1948 the General Manager received orders from the Deputy Custodian that the monies should be deposited with the Deputy Custodian (Exhibit D-6), and these instructions were reiterated by the Custodian on 23-6-1949 (Exhibit D-9). During this period the plaintiffs, having relocated to Delhi, issued a series of demands for payment dated 3-1-1949 (Exhibit P.W. 4/4), 27-1-1949 (Exhibit P.W. 4/1), 11-3-1949 (Exhibit P.W. 4/3) and 26-3-1949 (Exhibit P.W. 4/2). The defendant’s position was summarised in its reply dated 12-2-1949 (Exhibit P-3), in which it reiterated that it had received orders from the West Punjab Government, conveyed through the Assistant Director of Civil Supplies, prohibiting any refunds without further direction from that Government. On 15-10-1949 the Ordinance of 1948 was replaced by Ordinance No. XV of 1949 (Exhibit D-26), but this substitution did not alter the legal regime governing evacuee funds and properties. Finally, on 4-7-1950 the plaintiffs served the defendant with a notice of suit (Exhibit P-14).

The plaintiffs served a notice of suit on the defendant, which was recorded as Exhibit P-14. That notice was transmitted by the defendant’s Managing Director in Delhi to the General Manager at Lyallpur, urging the General Manager to seek approval from the West Punjab Government for the payment of the sums claimed by the plaintiffs. Subsequently, on 27 July 1950, the defendant wrote to the plaintiffs confirming that an amount of Rs 11,496-6-6 together with Rs 1,000 was due to them on account of an advance deposit and a security deposit held by the Lyallpur Cotton Mills, Lyallpur. The defendant further stated that the monies would be refunded as soon as the order of prohibition issued by the West Punjab Government, which prevented the refund of such deposits, was withdrawn or cancelled, and that the plaintiffs’ claim would not be adversely affected by the lapse of the ordinary three-year limitation period (Exhibit P-4). The plaintiffs were not satisfied with this response and consequently filed the present suit on 16 December 1950.

Following the filing of the suit, the defendant’s Managing Director wrote personally to the Joint Secretary to the Government of Pakistan on 2 April 1951 requesting guidance. On 21 April 1951, a reply was received indicating that the matter had been carefully examined and that the money in question required deposit with the Custodian (Exhibit D-25). A second request was made on 30 April 1951 (Exhibit D-24), and the Joint Secretary was approached again. Shortly thereafter, an extra-ordinance dated 9 May 1951 (Exhibit D-27) was promulgated, which excluded “cash deposits of individuals in banks” from the operation of the principal ordinance. Nevertheless, on 2 June 1951 the Joint Secretary wrote that this exemption did not extend to private debts and deposits, and again instructed the defendant to deposit the money with the Custodian (Exhibit D-23). Ultimately, the Custodian issued an order on 6 November 1951 directing that the deposits be made by the 15th day of that month, warning that failure to comply would result in legal action (Exhibit D-10). The defendant complied and deposited the money on 15 November 1951, the final day of the grace period (Exhibit D-12).

The primary question before the Court was to ascertain the exact nature of the contract that gave rise to the obligation the plaintiffs now sought to enforce. The sum claimed in the suit, exclusive of interest, comprised three distinct components: (1) Rs 79-6-6 that remained outstanding from a previous account; (2) Rs 11,496-6-6 representing the balance of an original deposit of Rs 55,000 made on 28 July 1947; and (3) Rs 1,000 described as a security deposit. Although these three items appeared to be interrelated, the Court chose to focus initially on the largest component, the Rs 55,000 deposit. Both parties consistently referred to this amount as a “deposit” throughout the proceedings; however, the Court recognized that deposits can take various legal forms and that it was essential to determine the specific category applicable to this transaction before applying the relevant legal principles. The evidentiary material on this point was limited and fragmented, compelling the Court to assemble disparate pieces of information in order to construct a coherent factual pattern. It was established that the distribution of cloth in the relevant area had been regulated by the Government of Punjab, which at the relevant times governed the undivided region, thereby providing a contextual backdrop for understanding the parties’ relationship and the nature of the alleged deposit.

In this case the Court observed that the distribution of cloth in the area had been controlled by the Government of Punjab throughout the relevant period. It was also admitted that the plaintiffs were designated as “Government nominees” for Lyallpur and that in the plaint they referred to themselves as the “reserve dealer.” Although the term “reserve dealer” was not defined, its use together with the expression “nominated importer” indicated that the plaintiffs occupied a privileged position in the cloth-distribution system. The letters produced as Exhibits P-5 to P-12, which the plaintiffs relied upon strongly, reinforced this impression. For instance, Exhibit P-5 demonstrated that, under orders of the Punjab Government, the defendant was required to allocate ten bales out of a quota of twenty-eight to the plaintiffs for the Lyallpur area, retaining only eighteen bales for its own retail stores in January 1946. In April the defendant was permitted to retain the entire quota of twenty-eight bales, but in July the distribution was altered to thirty-five bales, with twenty-five allotted to the plaintiffs. In the months of September, November 1946 and April 1947 the allocation was divided equally between the parties. During February and March 1947 the split was ten bales to the plaintiffs and twenty-six to the defendant, while in the same period the ratio of twenty-nine to twenty-six favored the defendant’s stores. These varying allocations illustrated the special status granted to the plaintiffs in the distribution scheme.

The Court further held that a privilege of this nature would ordinarily require consideration, and it inferred that the price of the privilege consisted of two components: the payment of a security deposit of one thousand rupees and the payment of a second deposit against which cloth was issued from time to time, analogous to a banker dispensing money to a customer against deposits in a current account, except that the transactions involved cloth rather than cash. This inference was drawn from several factual observations. Both parties described the payment as a “deposit” in their pleadings, and the plaintiffs spoke of receiving goods “against this deposit” while the first witness, Mohammed Bashir Khan, described delivery as being made “against this advance.” The plaintiff Sardari Lal testified that the parties had been conducting business for three or four years and that “advances used to be made to the mills from time to time” and that sometimes their balance stood at credit. He further explained that when their balance was on the debit side they paid interest to the defendant, whereas the defendant paid no interest when the balance was in the plaintiffs’ favour, mirroring the operation of an overdraft in a bank. At the time the fifty-five thousand rupee deposit was made, there existed a balance of seventy-nine rupees and six annas and six paisas in the plaintiffs’ favour. The plaintiffs also wrote to the defendant, indicating that they maintained a “current account” in which a sum of eleven thousand four hundred ninety-six rupees six annas and six paisas was recorded as a “reserve account,” a figure that incorporated the earlier balance of seventy-nine rupees six annas and six paisas. In another letter they stated that they had “deposited” money in the plaintiff’s account at Lyallpur as reserve dealers and, in return, received goods. These facts collectively demonstrated that the payment of fifty-five thousand rupees functioned not merely as an advance for a specific quantity of goods but operated as a running current-account arrangement, similar to a customer’s account with a bank.

In the records the amount of Rs 11,496-6-6 is shown, and this sum incorporates the earlier balance of Rs 79-6-6. The Court observed that this accounting demonstrates that the deposit of Rs 55,000 was not a mere advance for a particular quantity of cloth, but rather functioned as a running account comparable to a customer’s current account maintained by a bank. Although the defendant recorded the same money in Exhibit D-11 under the heading “Purchaser’s advance,” the Court noted that the label alone does not alter the true character of the transactions, just as the word “deposit” does not by itself determine the nature of a payment. The parties’ choice of terminology is relevant, but it is not decisive; the substance of a transaction must be assessed by viewing the entire relationship and by considering all surrounding circumstances. In this case, speculation was unnecessary because the plaintiffs themselves described the usage of the term “Purchaser’s advance account.” Their statement of case declared that the defendants maintained such an account in their Delhi books, that the plaintiffs regularly paid advances against which cloth was supplied, and that the outstanding balance was periodically adjusted. While the banking analogy helped illustrate the running-account feature, the Court cautioned that it should not be extended beyond its usefulness.

The Court further explained that the repeated emphasis by both parties on the expressions “Government nominee,” “nominated importer,” and “Reserve dealer,” throughout the correspondence, pleadings, and evidence, indicated that the defendant dealt with the plaintiffs in their capacity as government-appointed agents. Consequently, the defendant’s right to import cloth was conditioned upon the plaintiffs’ continued status as such nominees, and the transactions were to cease if that status were withdrawn. The import of cloth was regulated by the Punjab Government at all relevant times, which meant the defendant could not sell to any party other than the government nominees. Thus, a withdrawal of government recognition would have prevented the defendant from selling to the plaintiffs, and the parties likely did not intend to maintain their commercial relationship beyond that possibility. Because the arrangement was not a fixed contract for a specified quantity of goods to be delivered in instalments, but rather a series of dealings operating on a running account, either party could terminate the relationship at any time by giving appropriate notice, after which any outstanding amounts would be payable. In any event, the Court held that the place of performance was Lyallpur, since all material factors—such as the plaintiffs’ role as government nominees for Lyallpur, their residence there, the defendant’s business operations, and the location where the goods had to be delivered—were situated in Lyallpur.

It was held that the goods had to be delivered at Lyallpur and could not be delivered elsewhere, so the performance of the contract was to occur there. The accounts were maintained at Lyallpur, and although copies were occasionally forwarded to Delhi, the original books were situated in Lyallpur and that office alone could determine the up-to-date state of the accounts. In those circumstances, the Court reasoned that, analogous to banking and insurance relationships, the balance due on termination of the contract would be payable at Lyallpur and not at any other place, thereby fixing the location of the primary obligation at Lyallpur. The Court further observed that the defendant’s head office in Delhi would not necessarily be aware of any change in recognition by the Lyallpur authorities. Correspondence with the Collector showed that the Government nominee cleared the goods from the defendant’s Lyallpur godowns under orders of the District Magistrate. Consequently, if the nominee were suddenly changed, notice of that change would have to be sent to the defendant in Lyallpur and not to Delhi; otherwise a delay could occur during which the Lyallpur office might continue to deliver the goods to the plaintiffs despite the withdrawal of recognition. All these factors led the Court to conclude that the notice of termination had to be given at Lyallpur and that the obligation to return the balance would arise only after such notice had been received, meaning that the obligation necessarily arose at Lyallpur. The plaintiffs’ counsel argued forcefully that the defendant’s business in Lyallpur was administered from Delhi, that the accounts were kept in Delhi, that there was no branch office at Lyallpur and that Lyallpur had no independent local control of the business. He relied on letters written by the defendant to the District Magistrate of Lyallpur concerning quota allocations (exhibits P-5 to P-12) and on exhibit D-7, a letter from the defendant’s General Manager at Lyallpur to the Deputy Custodian of Evacuee Property at Lyallpur, in which the General Manager stated that a “complete list showing the list of all non-Muslims falling under item (3) with the amount to be paid has been asked for from our Head Office and will be submitted as soon as received.” Counsel contended that the Lyallpur personnel had so little to do with the accounts that they could not even supply a list of the persons who dealt with them and that such information had to be obtained from Delhi. He argued that these matters should have been put to the defendant’s witnesses. Exhibit D-7 was written in reply to a letter from the Deputy Custodian of Evacuee Property (exhibit D-6), which in turn referred to earlier correspondence with the Under-Secretary to the West Punjab Government, Lahore, that had not been filed. When the Court examined the list eventually supplied from Delhi (exhibit D-11), it found that it …

The Court observed that the list supplied by the defendant covered accounts from the whole of Pakistan, including cities such as Multan, Peshawar, Lahore, Sialkot, Rawalpindi, Karachi and Sukkar. Consequently, a small branch like the Lyallpur office could not have produced that kind of aggregate information. The defendant’s accountant at Lyallpur, Sewa Ram (PW 4), testified that deposits received from purchasers in Lyallpur were not entered in the Delhi books; instead, statements were sent from Lyallpur to Delhi and an account was compiled in Delhi from those statements. This compilation was known as the “Reference Book”. The Court inferred that the same procedure was probably followed by the other branch offices, making the head office the only place where a complete overall picture—precisely what had been requested—could be obtained. The plaintiffs had lived in Lyallpur throughout the relevant period and the defendant conducted its business there through a local General Manager. While the precise place where the contract was concluded was not established, the Court noted that the plaintiffs acted in a special capacity as government nominees for Lyallpur, that the goods were to be delivered at Lyallpur and could not be delivered elsewhere, and that a running account was maintained at Lyallpur. The Court had previously held that the debt became payable only when the defendant received notice at Lyallpur that the business relationship had been terminated. That termination resulted from events occurring in Lyallpur, namely the transfer of Lyallpur to the newly created State of Pakistan and the flight of the plaintiffs, which rendered further performance of the original contract impossible. Factors unrelated to Lyallpur, such as the defendant’s residence in India and the demands for payment made in Delhi, were deemed irrelevant. The Court further stated that the mere fact of a demand was not material because the obligation to pay arose at the date of termination, which occurred at Lyallpur; if a demand were essential, it would have to be made at Lyallpur, and a demand made elsewhere would be ineffective, following the reasoning in banking and insurance cases cited later. On these facts, the Court concluded that the essential elements of the contract were most densely gathered at Lyallpur, making Lyallpur the natural seat of the contract and the place with the closest and most real connection to the transaction. Accordingly, the “proper law of the contract,” to the extent that it mattered, was the law of Lyallpur. The Court then turned to the question of when notice to close the account and a demand for return of the balance were made and where they were made. Plaintiff Jagat Singh (PW 5) asserted that he issued a written demand in October 1947, but the earliest demand on record was Exhibit PW 4/4 dated 3-1-1949.

It was understandable that the plaintiffs, having been forced to flee for their lives, were unable to retain copies of any of their correspondence. Nevertheless, it is noteworthy that the demand filed as Exhibit P.W. 4/4 makes no reference to any earlier demand or demands. The defendants were instructed to produce all relevant correspondence because the plaintiffs had lost their own files in the course of the litigation. The defendants produced every document that was in their possession, and no suggestion was made that any material had been suppressed. Accordingly, the court declined to accept the plaintiffs’ assertion and concluded that no demand existed prior to 3-1-1949. Moreover, even if an earlier demand had been made, it could not have been directed at Lyallpur as the location of the parties. The plaintiff Jagat Singh stated that he sent the demand to the defendant’s Managing Director, while he himself resided in Delhi after fleeing Pakistan. Consequently, the demand could not have been made at Lyallpur, and no other notice of termination was produced. On that basis, the defendant could have rightfully refused to pay based on a demand issued in Delhi. The same defect applies to Exhibit P.W. 4/4, yet the court is relieved of the need to rely on such a technical ground. At the time the demand was made, the Pakistan Ordinance identified as Exhibit D-26 was in force and barred payment to evacuees. That ordinance required the defendant to deposit the owed money with the Deputy Custodian of Evacuee Property instead of paying the plaintiffs directly. The defendant complied on 15-11-1951, as shown in Exhibit D-12, and the deposit was made together with other similar deposits. The court must now ascertain the legal liabilities that arise from these facts, a task that involves intricate questions of private international law. Two principal approaches emerge: the English courts’ lex situs doctrine and the “proper law of the contract” theory advocated by Cheshire. The English method treats the debt as property, determines its situs, and generally applies the law prevailing at that location when payment is due. However, this approach faces difficulty because various rules for ascertaining situs cause the situs to shift for different purposes, and intention also influences the determination. Consequently, the debt may be situated in one place for jurisdictional matters but in another for banking, insurance, death duties, probate, or for simple contract debts versus specialty obligations. The court recognizes that a debt constitutes property, being a chose in action that is heritable, assignable, and regarded as an “actionable claim” under Sections 3 and 130 of the Transfer of Property Act.

The Court observed that a debt does not have a physical location because it is an intangible right, and therefore it cannot be situated in space except in a notional sense. To give such a notional position to a debt, the law must devise rules that are necessarily arbitrary. The Court cited Cheshire’s discussion in the fourth edition of his book on Private International Law, pages 449-451, where Cheshire explains that the traditional situs rule is illogical and creates practical problems when a debt is successively assigned. According to Cheshire, it is impossible to fix the situation of a debt under the situs rule in a single, unique place.

Cheshire, quoting Foote, noted that the assignment of a chose-in-action arising from a contract is governed by the “proper law of the contract.” The Court paraphrased Foote’s passage on page 450, explaining that the appropriate law is not the “proper law” of the assignment itself, but the proper law of the original transaction out of which the chose-in-action originated. It is reasonable and logical to refer most questions concerning a debt to the transaction that gave rise to it and to the legal system that governs that transaction. One undeniable advantage of this approach is that, even when assignments occur in different countries, there is no confusion arising from a conflict of laws because all issues are referred to a single legal system.

The expression “proper law of the contract” has been examined carefully by Cheshire in Chapter VIII of his book. In the case of Mount Albert Borough Council v. Australasian Temperance and General Mutual Life Assurance Society, Lord Wright defined the term (page 240) as “that law which the English or other Court is to apply in determining the obligations under the contract,” distinguishing obligation from performance. Later, Lord Simonds described it as “the system of law by reference to which the contract was made or that with which the transaction has its closest and most real connexion” (Bonython v. Commonwealth of Australia).

Cheshire also reproduced a definition advanced by some American courts (page 203) and adopted it. He wrote that, regarding the question of valid creation, the proper law is the law of the country in which the contract is localized. The localization is indicated by the grouping of the contract’s elements as reflected in its formation and its terms. The country in which these elements are most densely grouped represents the contract’s natural seat, the nation with which the contract is most substantially associated and where its centre of gravity lies. The Court noted that this analysis raises two considerations. The first is whether the proper law should be determined objectively or whether the parties are free to choose it subjectively by surveying the world and selecting any law they wish to govern their agreement.

The Court observed that allowing parties to adopt a purely subjective approach—by selecting any law from anywhere in the world and agreeing that such law would govern their contract—could produce “strangely unrealistic results,” as noted on page 202 of Cheshire. It further recognised that problems would arise when a contract, though lawful under the law chosen by the parties, was illegal or contrary to public policy under the law of the country in which enforcement was sought; Lord Wright had remarked on this difficulty in Mount Albert Borough Council v. Australasian Temperance Society at page 240. Cheshire favoured the view expressed by an American judge, quoted on page 203, that “some law must impose the obligation, and the parties have nothing whatsoever to do with that, no more than with whether their acts are torts or crimes.” The agreement under consideration contained no express term designating the governing law or the situs, and therefore the Court needed to apply the rules that operate in such silent cases. Usually, the law is articulated by implying or imputing an intention of the parties. In Bank of Travancore v. Dhrit Ram, Lord Atkin stated that when a contract contains no expressed intention, the Courts must infer one by examining the circumstances of the contract’s formation, the place of performance, and the nature of the business or transaction involved. Similarly, in the Mount Albert Borough Council case, Lord Wright explained at page 240 that “the parties may not have thought of the matter at all. Then the Court has to impute an intention, or to determine for the parties what is the proper law which, as just and reasonable persons, they ought or would have intended if they had thought about the question when they made the contract.” However, the Court considered it unnecessarily artificial to impute an intention where none existed, particularly in a situation where the parties would never have entered into the contract had they contemplated the possibility of the events that later occurred. In the Court’s view, when a contract lacks an express provision, the judiciary actually applies an objective test, even though it may speak of intention in subjective terms. This conclusion aligns with Cheshire’s observation on page 201 that, after reviewing English decisions, “the truth may be that the judges, though emphasising in unrestricted terms the omnipotence of intention, in fact do nothing more than impute to the parties an intention to submit their contract to the law of the country with which factually it is most closely connected.” The Court stated that, if forced to choose a precise formulation, it would prefer this description of the law, although such a choice was unnecessary in the present matter because the result would be the same whether the proper law of the contract or the English rules concerning the lex situs were applied.

In the present matter, the Court observed that the result would be the same regardless of whether the proper law of the contract were applied or the English rules relating to the lex situs were applied. The Court acknowledged that a future dispute might compel it to choose between these two doctrinal approaches, but it also noted that the question is surrounded by considerable difficulty and that it was not necessary to make such a choice in the present case. Accordingly, the Court limited its analysis to indicating that it had considered both the proper-law approach and the lex situs rule, and it recognized that there may be circumstances in which a decision between the two would have to be made. The Court further explained that English judges traditionally fall back on the lex situs and have fashioned rules for locating a debt on historical grounds. It cited Atkin, L.J., in New York Life Insurance Company v. Public Trustee(1), observing that the English rules originated from the practice of ecclesiastical authorities who granted administrations within a limited territorial jurisdiction. The judge explained that the ordinary administrator possessed jurisdiction only over a defined territory and that the decision to issue letters of administration depended on whether assets lay within that jurisdiction. The test for simple contracts, according to that authority, was “Where was the debtor residing?” The Court reproduced the reasoning that the residence of the debtor was adopted as the determining factor for the location of the debt because the creditor could enforce payment only where the debtor actually lived. The Court also referred to Dicey’s Conflict of Laws, 6th edition, page 303, to support the view that these rules were selected for pragmatic convenience rather than strict logical necessity. Despite their practical origins, the Court noted that English courts have never treated the lex situs rules as inflexible; they have regarded them as prima facie presumptions applicable only in the absence of an express contractual provision, as indicated in Lord Wright’s speech in the Mount Albert Borough Council case(1) at page 240. The Court further pointed out that numerous exceptions have been introduced to adapt the rule to modern conditions. Atkin, L.J., for example, highlighted an exception in New York Life Insurance Company v. Public Trustee(2) at page 120, stating that “cases do arise where a debt may be enforced in one jurisdiction, and the debtor, being an ordinary living person, resides elsewhere.” Lord Wright, in the same Mount Albert Borough Council case, also qualified the general rule by noting that the law of the place of performance will prima facie govern the incidents or mode of performance, that is, the manner of performance as distinct from the underlying obligation (page 240). He further added that “different considerations may arise in particular cases, for instance where the stipulated performance is illegal by the law of the place of performance” (page 241). Finally, the Court referenced Lord Robson’s observation in Rex v. Lovitt(3) at page 220, emphasizing that the rule cannot be applied universally to determine every aspect of the property situation of a deceased owner.

The Court observed that earlier authorities such as the decision reported in 1938 A.C. 224 and the case cited at [1924] 2 Ch. 101, 119, as well as the judgment at 1912 A.C. 212, had limited their analysis to the domicile of the testator. It was noted that executors, in order to obtain the estate, are required to initiate ancillary probate proceedings in the jurisdiction where the property can actually be recovered, and that no legal fiction allowing the property to be treated as if it follows the owner to another location would be of assistance. The Court further quoted the observation made on page 221 of the same source, stating that these rules apply only for certain limited purposes.

Turning to banking transactions, the Court set out the settled principles governing the obligations of banks. First, the duty of a bank to honour a customer’s cheques is deemed to arise principally at the branch where the customer maintains his account, and the bank is entitled to refuse to cash a cheque presented at any other branch. This principle was supported by the rulings in Rex v. Lovitt at page 219, Bank of Travancore v. Dhrit Ram, and New York Life Insurance Company v. Public Trustee at page 117. Second, a customer must address his demand for payment to the specific branch that holds his current account before acquiring a cause of action against the bank. This requirement was articulated in Joachimson v. Swiss Bank Corporation and endorsed by Lord Reid in Arab Bank Ltd. v. Barclays Bank. The Court emphasized that the rule applies equally to current accounts and to deposit accounts. Although the last two authorities concern current accounts, the Privy Council decision in Bank of Travancore v. Dhrit Ram dealt with a deposit account, illustrating that the same principle governs both types of accounts.

The Court explained that a demand must be made at the branch where the current account is maintained, or, in the case of a deposit, at the place where the deposit is kept. Consequently, English courts have consistently held that the situs of the debt is the location of the account and that the demand for payment must be made at that same place. This category of cases represents an exception to the general rule that a debtor must pursue his creditor, because while the general rule remains valid, the parties are free to agree otherwise. As Lord Reid explained in the Arab Bank case, page 531, a contract for a current account necessarily contains an implied agreement that the bank’s duty to pay does not require the debtor to approach a branch other than the one where the account is held; otherwise, the purpose of the contract would be defeated.

The Court stressed the use of the term “principally” because the rules discussed relate to the primary obligation of the bank. It further observed that if a bank incorrectly refuses to pay after a proper demand has been made at the appropriate branch and at the correct time, the bank may be sued not only at its head office but also at the branch concerned and potentially at any other location where it can be found, although the Court did not decide on that specific point. The reason, the Court noted, is that such an action would be based not on the existence of the debt itself but on the breach of the contract that required payment at the place specified in the agreement.

The Court observed that the claim was based on a breach of the contractual obligation to make payment at the place expressly stipulated in the agreement, referring to the authority of Warrington, L. J., page 116, and Atkin, L. J., page 121, in New York Life Insurance Co. v. Public Trustee (1). It then noted that the principles previously outlined were not limited to banking transactions; they extended to a broader range of commercial relationships and had been applied in insurance matters, citing Fouad Bishara Jabbour v. State of Israel (2) and New York Life Insurance Co. v. Public Trustee (1). The Court further explained that analogous considerations arise under English law when a debt is transferred involuntarily through garnishment. It referred to the compilation by Cheshire of English cases spanning pages 460-463 of his work Private International Law, from which the Court had already quoted, and reproduced Cheshire’s summary at page 461: “It is difficult to state the rule with exactitude but it is probably true to say that a debt is properly garnishable in the country where, according to the ordinary usages of business, it would normally be regarded as payable.”

After reviewing the authorities, the Court concluded that in each of the cited decisions the proper law of the contract had been applied. By “proper law” the Court meant the law of the jurisdiction in which the contract’s essential elements were most densely clustered and to which the contract was factually most closely connected. Although judges often expressed that they were applying the lex situs, the Court explained that in determining the lex situs they actually employed the same rules—namely those set out in [1924] 2 Ch. 101 and [1954] 1 A.E.R. 145—that are used in practice to ascertain the proper law of a contract. The English judges, the Court said, generally infer the parties’ intention when it is not expressly stated, treating reasonable persons as having intended that the proper law of the contract should govern. An alternative viewpoint holds that even when the parties’ intention is expressed, the proper law should be applied objectively, without regard to the expressed intention. In either approach, the Court observed, the outcome is identical where no explicit choice of law clause exists: the proper law is applied.

The Court then turned to the question of which law should be deemed the proper law. It considered whether the proper law is the law in force at the time the contract was formed and the obligation was created, or the law that governs at the moment performance becomes due. Relying on Cheshire’s discussion at page 210, and quoting Wolff’s Private International Law page 424 and Be. Chesterman’s Trusts (1), the Court affirmed that the proper law of a contract is a “living and changing body of law” that adapts to subsequent legal developments, and that any changes occurring after the contract’s formation are given effect for the purposes of determining the applicable law.

The Court observed that the principle of “ring in it before performance falls due” had been applied by the English courts in several earlier decisions. Those cases were New York Insurance Co. v. Public Trustee (2), Re. Banque Des Marchands De Moscou (3), Fouad Bishara Jabbour v. State of Israel (4) and Arab Bank Ltd. v. Barclays Bank (5). In each of those authorities the law applicable to the contract changed as a result of the outbreak of war, and the ensuing local legislation made performance impossible. In the two later cases the local statutes caused the debts to vest in a Custodian, and the Court held that a payment made by the debtor to the Custodian constituted a valid discharge of the debt. The factual situation in those two cases, according to the Court, was essentially the same as the situation before the present Court. The cited authorities are reported at (1) [1923] 2 Ch. 466, 478; (2) [1924] 2 Ch. 101; (3) [1954] 2 A.E.R. 746; (4) [1964] 1 A.E.R. 115; and (5) [1954] A.C. 495, 529.

Counsel for the appellant argued that because Lyallpur was part of India at the time the contract was made, Indian law must govern the contract and no different intention could be ascribed to the parties. The Court rejected that submission, holding that the governing law is determined either by the “proper law” or by the situs rule, and that the proper law is the law of Lyallpur applied as a living and evolving system. The Court explained that this conclusion would remain valid even if India had not been partitioned, since each State within undivided India possessed the authority to enact distinct local statutes, as demonstrated by the varying money-lending laws and the cloth-and-grain-control orders that existed at the time. The present dispute itself illustrates this point because the regulatory controls that gave rise to the contract were not uniform across India. Moreover, the Court noted that the decisions of the Privy Council in Arab Bank Ltd. v. Barclays Bank (1) and of the Queen’s Bench Division in Fouad Bishara Jabbour v. State of Israel (2) disavow the contention that an intention can be imputed or a contractual clause implied contrary to the proper law. The Court further explained that, under contemporary law, a chose-in-action arising from a contract has two dimensions: one as property and the other as a contractual obligation of performance. The property dimension is pertinent to questions of assignment, administration and taxation, whereas the performance dimension concerns the actual fulfilment of the contract. In the present matter the Court was chiefly concerned with the property aspect because the Pakistan Ordinance treats debts as property, transfers all evacuee property to a Custodian, and obliges any person holding such property to surrender it to the Custodian under threat of penalty. Section 11(2) of that Ordinance provides that “Any person who makes a payment under subsection (!)-shall be discharged from further liability to pay to the extent of the payment made”. The Court found that the payment had been made and, accordingly, the defendant was discharged from any further liability. The Court affirmed that such payment also operates as a valid discharge under English law, referring to Fouad Bishara Jabbour v. State of Israel (1) at page 154, cited as (1) [1954] A.C. 495, 529 and (2) [1994] 1 A.E.R. 145.

In this case the Court referred to several English authorities, beginning with a Privy Council decision in Odwin v. Forbes (2). The Court noted that the same outcome had been reached in a series of English cases that are factually similar, although those decisions were based on the situs of the debt and the fact that the corporations involved had multiple residences. The cases mentioned were Fouad Bishara Jabbour v. State of Israel (1), Be Banque Des Marchands De Moscou (3) and Arab Bank Ltd. v. Barclays Bank (4). The Court further observed that the same result was endorsed by the Judicial Committee in Bank of Travancore Ltd. v. Dhrit Ram (5), quoting Lord Atkin’s remark that, when the question of which law governs a contract is considered, one must remember that the promisor was a bank incorporated under Travancore law, apparently connected with the State of Travancore, and that its business was governed by any Travancore law affecting banking. The Court added that the only distinction between that case and the present one was that, at the date of the deposit, the laws of Punjab and Delhi were identical on the point in issue, although they might have differed even if India had not been partitioned, as previously noted. The Court therefore concluded that the English cases were directly applicable and that there was little principle to set the present case apart. Counsel for the plaintiffs-respondents argued that, even assuming the Court’s view of the governing law, the Pakistan Ordinance should not apply because it excludes “a cash deposit in a bank.” That argument relied on the definition of “property” in section 2(5) of the Ordinance. The Court rejected this view, explaining that the matter before the Court was not a cash deposit in a bank between the parties, but a debt that the defendant owed or had owed to the plaintiffs. The same definition characterises “property” as, among other things, any debt or actionable claim. The portion of the definition referring to a “cash deposit in a bank” merely states that such a deposit is not to be treated as “property” for the purposes of the Ordinance between the bank and the customer who owns or controls the deposit. Accordingly, the Court held that whether the proper law of the contract or the English law of situs governs a case of this nature, the defendant is discharged because the debt qualifies as “property.” The Ordinance therefore divested the plaintiffs of ownership in the debt, vested the debt in the Custodian, and simultaneously altered the performance obligation by providing that payment to the Custodian operates as a full discharge. The Court emphasized that its decision rested on the fact that a payment had actually been made to the Custodian, and it expressed no view about a hypothetical situation in which no payment was made.

The Court observed that if a case arose in which no payment had been made, the defendant possessed no assets in Pakistan that could be subject to garnishment. In that situation, the West Punjab Government would be unable to realise the debt because it could not attach any of the defendant’s property. The Court noted that under those circumstances different legal conclusions could potentially be reached by the tribunal in future. It was further submitted that the Pakistan Ordinance should be characterised as a penal and confiscatory statute, and consequently that no domestic tribunal would be expected to recognise or enforce its provisions. The Court held that this proposition was overly broad; nevertheless the Court could not condemn the Ordinance as being contrary to the public policy of this country. The reason was that statutes of a similar nature exist in this jurisdiction and in other civilised nations that have faced comparable circumstances or the onset of war. The Court referred to the decisions in Arab Bank Ltd. v. Barclays Bank, Fouad Bishara Jabbour v. State of Israel, and Re Munster, where analogous arguments had been rejected. Accordingly, the Court concluded after review that the legislation is not confiscatory and does not amount to an unlawful taking. The same legal principles were applied to the amount of Rs. 79-6-6 and to the security deposit of Rs. 1,000. Consequently, the appeal was allowed and the decrees of the lower courts were set aside, reversing the earlier judgments. A decree will be issued to dismiss the plaintiffs’ claim, and, given the special circumstances of the case, each party was ordered to bear its own costs. The authorities cited were (1) 1954 A.C. 495; (2) [1954] 1 A.E.R. 145, 157; and (3) [1920] 1 ch.268.