Union of India vs Chaman Lal Loona

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

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 30 April 1957

Coram: A.K. Sarkar, S.K. Das

The appeal arose from a certificate that had been issued by the High Court of Punjab at Simla. The appellant was the Union of India, while the respondents were Messrs Chaman Lal Loona and Company, who operated as military contractors at Mukstar in the district of Ferozepur, now part of the Indian State of Punjab. The matter was placed before a Bench consisting of Justices A K Sarkar and S K Das, and the judgment was authored by Justice S K Das. The suit originated as an application filed in the court of the senior Subordinate Judge at Ferozepur in August 1948. In that application the respondents claimed that they had, in 1945, entered into a contract for the supply of “bhoosa” (fodder) to the military department of the then undivided India, the contract having been concluded through the Manager of Military Farms at Lahore Cantonment. According to the respondents, the contract had been signed by the Assistant Director of Military Farms on behalf of the Government of India. The agreement provided that the Manager would also supply wire coils, at a price, to be used for tying the bundles of fodder, and that upon delivery of the fodder and return of the wire coils the military department would grant credit for the price of the coils already paid by the respondents. In November 1945 the respondents supplied the fodder and returned one hundred and fifty‑two bundles of wire coils. The Manager subsequently informed them that twenty‑four of those bundles had not been received, although no contemporaneous note of such non‑delivery had been made at the time of receipt. The respondents had also deposited a sum of Rs 11,026 as security with the military department in connection with the contract. An arbitration clause was included in the agreement, providing that any dispute should be decided by the arbitrator named therein, namely the District Commander concerned. The respondents claimed a loss of Rs 720 for the price of the twenty‑four missing bundles of wire coils (calculated at Rs 30 per bundle) and also sought the return of the Rs 11,026 security deposit. They prayed, invoking section 20 of the Arbitration Act, that the appellant be directed to produce the agreement and other relevant documents and that the dispute be referred to the named arbitrator for the purpose of rendering an award.

In compliance with sub‑section (2) of section 20 of the Arbitration Act, the application was formally entered as a suit and a notice to show cause was served upon the appellant. The appellant responded to the notice by filing a written statement on 4 November 1948. In that statement the appellant advanced two principal pleas. The first plea asserted that, by virtue of the provisions of the Indian Independence (Rights, Property and Liabilities) Order, 1947—hereinafter referred to as the Independence Order—the Dominion of India, and subsequently the Union of India, bore no liability under the contract in question because, from 15 August 1947 onward, the purposes of the contract were exclusively for the Dominion of Pakistan. The second plea contended that the Subordinate Court at Ferozepur lacked jurisdiction to try the suit because the cause of action had not arisen within its territorial jurisdiction. The two issues that the Subordinate Judge was asked to determine were therefore the appellant’s liability and the court’s jurisdiction. On the jurisdictional question the judge ruled in favour of the respondents, holding that the respondents were displaced persons residing in Muktsar, which lay within the jurisdiction of the Ferozepur court, and consequently the court was competent to entertain the suit. The High Court subsequently affirmed the judge’s finding on jurisdiction, and because that point was no longer in dispute, the Supreme Court indicated that it would not revisit that issue. The remaining issue for determination was the liability of the appellant under the contract, a question that formed the basis of the present appeal.

In this case the appellant relied on the Indian Independence (Rights, Property and Liabilities) Order, 1947—referred to in the judgment as the Independence Order, 1947—to contend that the Dominion of India, and later the Union of India, bore no liability for the contract that was the subject of the suit. The appellant argued that, from 15 August 1947 onward, the contract was intended solely for the purposes of the Dominion of Pakistan; consequently any rights or obligations that arose from the contract should be attributed to Pakistan and not to India. The appellant further submitted that the Court at Ferozepore lacked jurisdiction to try the suit because the cause of action did not arise within the territorial limits of that court. The learned Subordinate Judge was required to decide two questions: the question of liability under the contract and the question of jurisdiction of the Ferozepore court. On the jurisdictional question the Subordinate Judge held that the court did have jurisdiction, reasoning that the respondent was a “displaced person” residing in Muktsar, a locality that lies within the district of Ferozepore, and therefore the suit arose within the court’s territorial jurisdiction. The High Court affirmed this finding on jurisdiction, and because the present appeal does not depend on that issue, the Court said it was not called upon to revisit the jurisdictional determination. The remaining issue of whether the appellant was liable under the contract remained fully contested. The Subordinate Judge had decided in favour of the appellant on that point and dismissed the application. The High Court reversed the Subordinate Judge’s finding, allowed the appeal, and based its reasoning on the Joint Defence Council Order, 1947—referred to as the Defence Order, 1947. The High Court’s reasoning was expressed in the leading judgment of Justice Khosla, whose words can be quoted directly. Justice Khosla observed that the Lahore Military Farm, situated in Lahore, would ordinarily be regarded as part of the Dominion of Pakistan, and that any supply of fodder to that farm, whether made before or after 15 August 1947, would normally be viewed as serving a purpose of Pakistan because of Lahore’s territorial status. However, Justice Khosla explained that the fodder to be supplied was classified as military stores. Military stores were held jointly and placed under the exclusive control of the Joint Defence Council, which possessed the authority to allocate such stores between the two Dominions and to move them from one location to another. Accordingly, on 15 August 1947 the fodder located in the Lahore Military Farm was not the exclusive property of the Dominion of Pakistan; instead, it remained under the exclusive control of the Joint Defence Council. The Council retained the power to transfer the fodder to a farm in India, thereby potentially converting the fodder into property of the Dominion of India. In these circumstances, Justice Khosla concluded that the contract for the supply of fodder to the Lahore Military Farm could not be characterised as a contract solely for the purposes of the Dominion of Pakistan when assessed as of 15 August 1947, and that, therefore, the contract was not a contract exclusively for the purposes of the Dominion of Pakistan.

In this appeal the Court was asked to determine whether the High Court had correctly interpreted the true scope and effect of the relevant provisions of the Independence Order, 1947, and the Defence Order, 1947. The appellant argued that a proper construction of article 8 of the Independence Order required that, from the appointed day of 15 August 1947, the contract under dispute should be regarded as a contract exclusively for the purposes of the Dominion of Pakistan and, consequently, as having been made on behalf of that Dominion. Accordingly, the appellant submitted that all rights and liabilities, whether already accrued or which might accrue in the future, should be deemed the rights and liabilities of the Dominion of Pakistan. In the second submission the appellant contended that the Defence Order, 1947, which created a Joint Defence Council and allotted to that Council certain powers of control under article 8, did not affect the rights and liabilities arising out of the contract, which were governed solely by the provisions of the Independence Order, 1947. Finally, the appellant maintained that the claim in the present proceedings did not relate to military stores, contrary to the High Court’s assumption, and therefore the Defence Order, 1947, was wholly inapplicable to the facts of the case.

The respondent vigorously opposed each of the appellant’s submissions and affirmed that the High Court’s interpretation of the articles of the Independence Order, 1947, and the Defence Order, 1947, was correct. The respondent’s counsel also raised a preliminary objection concerning the jurisdiction of the Court under section 20 of the Arbitration Act. He argued that the only issue for determination on an arbitration application should be the existence of an arbitration agreement, with the question of liability reserved for the arbitrator and not for the Court. While this argument would ordinarily be valid, the Court pointed out that the Union of India was not a party to the arbitration agreement and could not be compelled to participate in arbitration unless it were deemed a party by operation of law. Upon receiving this clarification, the respondent’s counsel withdrew the preliminary objection and conceded that the question of liability must be decided in this case by reference to the provisions of the Independence Order, 1947, and the Defence Order, 1947. At this stage the Court found it appropriate to set out the relevant provisions of the two Orders for further consideration.

In this case, the Court explained that the Defence Order of 1947 was promulgated under subsection (1) of section 11 of the Indian Independence Act, 1947, and that it was published on 11 August 1947. The Independence Order of 1947 was enacted under the authority of section 9 of the Indian Independence Act, 1947, and it was published on 14 August 1947. Both orders were brought into operation simultaneously. Article 3 of the Defence Order, 1947, provides that, from the fifteenth day of August 1947, a body called the Joint Defence Council for India and Pakistan shall be established. The same article further specifies that the Joint Defence Council shall consist of the Governor‑General of India, the Defence Minister of India, the Defence Minister of Pakistan, and the Supreme Commander of His Majesty’s forces in India and Pakistan, who is hereinafter referred to as the Supreme Commander. Article 8 of the Defence Order, to the extent that it is relevant, states that the Joint Defence Council shall have exclusive control over (a) the division of the Indian forces between the two Dominions and the reconstitution of those forces as two separate Dominion forces; (b) the allocation, transfer and movement of officers and men belonging to the Indian forces for the purpose of such reconstitution; and (c) the allocation, transfer and movement, for the purpose of that reconstitution, of plant, machinery, equipment and stores that were held by the Governor‑General in Council immediately before 15 August 1947 for use by the Indian forces, among other matters. The Independence Order, 1947, defines the “appointed day” in Article 2 as 15 August 1947. Article 3 of the Independence Order, as it relates to the present matter, provides that the provisions of the Order concern the initial distribution of rights, property and liabilities that arise from the creation of the Dominions of India and Pakistan, and that these provisions shall operate subject to any agreement between the two Dominions or the concerned provinces and to any award that may be made by an Arbitral Tribunal. The same article also clarifies that nothing in the Order affects the powers of control over military plant, machinery, equipment and stores that are conferred on the Joint Defence Council by the Defence Order, 1947. Finally, Article 8(1) of the Independence Order, which is particularly important for the Court’s analysis, provides that any contract entered into on behalf of the Governor‑General in Council before the appointed day shall, as of that day, be deemed to have been made on behalf of the Dominion of Pakistan if the contract’s purpose, as of that day, is exclusively the purpose of the Dominion of Pakistan; otherwise, such a contract shall be deemed to have been made on behalf of the Dominion of India. Moreover, all rights and liabilities that have accrued or may accrue under such a contract shall, to the extent that they would have been rights or liabilities of the Governor‑General in Council, become the rights or liabilities of the respective Dominion.

The Court began by asking what the genuine scope and effect of Article 8(1) of the Independence Order, 1947, were. It considered whether that provision applied to the contract that was the subject of the present dispute and, if it did, whether the contract fell within the ambit of sub‑clause (a) or sub‑clause (b). At one stage of the pleadings, counsel for the respondent argued that Article 8(1) was not intended to apply to contracts that are sometimes described as executed contracts. The same argument had been raised before Kapur J, then a judge of the Punjab High Court, and one of the reasons he gave for referring the matter to a larger bench was the difficulty he perceived in applying sub‑clause (a) of Article 8(1) to a contract that had been performed and executed long before 15 August 1947, as far as the respondent was concerned.

To resolve the issue, the Court found it necessary to distinguish clearly between two categories of contracts: those whose consideration is executed and those whose consideration is executory. An executed consideration, the Court explained, consists of an act performed in return for a promise; the act itself exhausts the consideration, and no contract is formed until that act is performed, such as the payment for a railway ticket. In such cases the liability remains outstanding on only one side and the consideration is present rather than future. By contrast, an executory consideration involves a promise for a promise, creating liability on both sides. The contract is concluded when the promises are exchanged, a situation common in mercantile dealings. Accordingly, one party may fulfil his promise immediately, while the other party, who provides the consideration, may not be able to perform his part at the same time.

On a plain reading of Article 8(1), the Court observed that the provision applies to both classes of contracts because it expressly states that “all rights and liabilities which have accrued or may accrue under any such contract shall… be rights or liabilities of the Dominion of Pakistan or the Dominion of India, as the case may be.” If a contract has been fully performed by both parties, no further rights or liabilities are likely to arise. However, where the consideration is executed on one side, a right will remain on that side and a liability will remain on the other. Where the consideration is executory on both sides, rights and liabilities will remain outstanding for both parties. By referring to “all rights and liabilities which have accrued or may accrue,” the Article clearly contemplates both executed and executory situations. The Court therefore concluded that Article 8(1) creates a legal fiction whereby a contract made before the appointed day of 15 August 1947 is, from that date, deemed to have been made on behalf of the Dominion of Pakistan if its purpose is exclusively that of the Dominion, or on behalf of the Dominion of India in any other case.

In situations where the consideration under a contract is performed by only one party, that party acquires a right while the other party retains an outstanding liability. Conversely, where the consideration is executory on both sides, each party holds both a right and a liability that remain to be fulfilled. By referring to “all rights and liabilities which have accrued or may accrue” under the contract, Article 8(1) of the Independence Order, 1947 clearly contemplates both of these classes of cases. On this point the Court adopted the view expressed in Elahi Bux v. Union of India and Krishna Ranjan v. Union of India and disapproved the view expressed by Roxburgh J. in Union of India v. Loke Nath. Furthermore, the Court observed that the first part of Article 8(1) creates a legal fiction. Although the contract was actually made before 15 August 1947, from that appointed day the contract is deemed to have been made on behalf of the Dominion of Pakistan if, as of that day, its purpose is exclusively for the Dominion of Pakistan; otherwise it is deemed to have been made on behalf of the Dominion of India. The proper meaning of the expression “a contract for the exclusive purposes of the Dominion of Pakistan” was taken from the judgment of Chagla C.J. in Union of India v. Chiny Bhai Jeshingbhai. The learned Chief Justice explained that the test is not whether the contract served the purposes of the Dominion of Pakistan at the time it was entered into, because that test is inapplicable. All contracts contemplated by Article 8 must have been entered into by undivided India through the Governor‑General in Council. The appropriate test is an artificial one: either consider whether, had the contract been entered into on 15 August 1947, it would have been for the purposes of the Dominion of Pakistan, or, assuming the Dominion of Pakistan had existed when the contract was made, whether it would have been for Pakistan’s purposes. The Court held that this is the correct test for determining the true scope and effect of Article 8(1) of the Independence Order, 1947. Applying this test, there was no doubt that the contract in question falls within clause (a) of that Article. The contract’s purpose was to supply fodder to the Manager, Military Farms, Lahore Cantonment, whose farms were situated in Pakistan on the appointed day, making the contract exclusively for the purposes of the Dominion of Pakistan from that date. The second question concerned whether the provisions of the Defence Order, 1947, altered the legal position. The Court found that the High Court had erroneously thought they did. While it is true that clause (2) of

In this case, the Court explained that Article 3 of the Independence Order, 1947, stipulated that nothing in that Order altered the powers of control over military plant, machinery, equipment and stores which were granted to the Joint Defence Council by the Defence Order, 1947. The Court further noted that clause 3 of Article 3 of the Independence Order, 1947, clarified that the powers of control over property bestowed on each Dominion by the Independence Order included all powers of use, consumption, management and similar functions. However, this inclusion was conditioned upon the powers of control that were already vested in the Joint Defence Council. Those specific powers of control were enumerated in Article 8 of the Defence Order, 1947; clause c of that article dealt with “the allocation, transfer and movement for the purposes of such reconstitution of plant, machinery, equipment and stores held by the Governor‑General in Council immediately before the 15th day of August, 1947, for the purposes of the Indian forces.” The Court emphasized that what clause 2 of Article 3 of the Independence Order, 1947, preserved was the Joint Defence Council’s powers of control over certain essential military equipment and stores, including their allocation and movement. The Court observed that the Defence Order, 1947, contained no provision that affected the rights and liabilities of either Dominion arising out of a contract; those rights and liabilities were governed exclusively by the Independence Order, 1947. The High Court judges had held that the Defence Order, 1947, altered the legal position concerning the purpose of the contract. They recognized that the contract’s purpose – supplying fodder to the Military Farms at Lahore – was ordinarily a purpose solely for the Dominion of Pakistan, but they argued that if “bhoosa” (fodder) was treated as a military store, the Joint Defence Council could exercise control over it and direct its movement, thereby rendering the contract’s purpose not exclusive to Pakistan. The Court respectfully disagreed with that line of reasoning, stating that the judges had failed to appreciate the distinction between the “purpose of the contract” and the “ultimate disposal of the goods” supplied under it. The Court clarified that the purpose of a contract was fixed at the time of its formation and was not altered by the eventual disposal of the goods or by any subsequent powers of control exercised over the goods after performance. Consequently, regardless of where the goods might ultimately be sent, the contract’s purpose remained the supply of fodder to the Manager of the Military Farms, Lahore, a purpose that, under the Court’s test, was clearly exclusive to the Dominion of Pakistan. The Court reiterated that the Independence Order, 1947, determined the respective rights and liabilities under contracts, and that any allocation of goods under the Defence Order, 1947, which shifted liability for the price under the Independence Order, 1947, would merely require accounting adjustments without changing the rights or liabilities established by the Independence Order.

In the circumstances where property originally belonging to India was allotted to Pakistan, the value of such allocation had to be reflected in the accounts. However, this accounting adjustment did not modify the rights and liabilities that were fixed by the Independence Order of 1947. Accordingly, the Court concluded that the Punjab High Court had erred in interpreting certain provisions of the Defence Order of 1947. It held that the contract should be placed within clause (a) of Article 8(1) rather than within clause (b). The Court further held that the Subordinate Judge had correctly applied clause (a) and therefore determined that the Union of India bore no liability under the contract. Only a brief statement was required to resolve the third contention that had been raised before the Court. The plaintiff’s claim consisted of a request for repayment of the price paid for twenty‑four bundles of wire coils together with the security deposit that had been furnished. Because this claim did not concern any military stores, the Defence Order of 1947 had no direct relevance to the claim. The issue of whether the material termed ‘bhoosa’ qualified as a military store arose solely for the purpose of examining the nature of the contract. The Punjab High Court had proceeded on the assumption that the material known as ‘bhoosa’ was a military store. Although the present Court did not make a definitive determination as to the classification of ‘bhoosa’, it adopted the same assumption for analytical purposes and found that the legal outcome remained unchanged. The Court observed that, irrespective of the classification of ‘bhoosa’, the purpose of the contract continued to be a purpose exclusively for the Dominion of Pakistan from the appointed day onward. The Court noted that clause (c) of Article 8 of the Defence Order of 1947 deals, among other matters, with stores that were in the possession of the Governor‑General in Council before 15 August 1947. It further indicated that such stores were intended specifically for the use of the Indian forces during the period preceding independence. No evidence was found in the record to show that the ‘bhoosa’ supplied by the respondent in 1945 was held by the Governor‑General in Council at that critical date. Consequently, no power of control could be said to have been exercised by the Joint Defence Council that would alter the purpose of the contract.

The original contract was not produced during the proceedings because it was unavailable in the relevant office in India. The respondent also failed to provide a copy of the contract and instead relied solely on oral testimony concerning the contract’s purpose. The lower courts based their findings on that oral testimony, and the appeal before the Supreme Court was framed on the same evidentiary foundation. The Court determined the purpose of the contract as of 15 August 1947 by evaluating the oral evidence. It did so without reaching a decision on the separate question of whether such oral evidence was admissible for establishing the contract’s purpose. Having reached that determination, the Court concluded that the Union of India was not liable under the contract and therefore allowed the appeal. The Court set aside the judgment and decree of the Punjab High Court and restored the judgment of the Subordinate Judge. It also ordered that the appellant be awarded costs throughout the litigation. Consequently, the appeal was allowed and the judgment of the lower court was set aside, confirming the earlier finding of no liability. In reaching its conclusion, the Court reiterated that the purpose of the contract, as ascertained from the evidence, remained exclusively for the Dominion of Pakistan. This reaffirmed the earlier finding that no liability fell on the Union of India with respect to the contract in question. The order also affirmed that the earlier determination of the Subordinate Judge regarding the absence of any financial obligation on the part of the Union of India was to be given effect.