Raghubar Dayal Jai Prakash vs Union of India and Others

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

Court: supreme-court

Case Number: Petitions Nos. 22 to 26 and 42 of 1959

Decision Date: 12 September 1961

Coram: N. Rajagopala Ayyangar, P.B. Gajendragadkar, A.K. Sarkar, K.N. Wanchoo, K.C. Das Gupta

In the matter titled Raghubar Dayal Jai Prakash versus the Union of India and others, the Supreme Court delivered its judgment on the twelfth day of September, 1961. The opinion was authored by Justice N. Rajagopala Ayyangar, who sat on a bench together with Justices P. B. Gajendragadkar, A. K. Sarkar, K. N. Wanchoo, K. C. Das Gupta, and K. C. Das Gupta. The petitioner, identified as Raghubar Dayal Jai Prakash, challenged the actions of the respondent, namely the Union of India together with other parties, under the provisions of the Forward Contracts (Regulation) Act of 1952. The case is reported in the 1962 All India Reporter at page 263, in the 1962 Supreme Court Reports (Third Series) at page 547, and is also cited in several subsequent reports including the 1963 Supreme Court Reporter at page 90 and the 1970 and 1971 Supreme Court Reports under the respective citations noted.

The factual backdrop involved a group of traders, including the petitioner, who organized themselves into an association whose purpose was to regulate forward transactions involving the sale and purchase of gur and other commodities among its members. The association also sought to determine the rates at which such contracts would be settled on the agreed delivery dates. The petitioner entered into forward purchase contracts for gur at specified rates and, in compliance with the association’s bye‑laws, deposited both the purchase price and the special margin required of buyers. These contracts remained outstanding as of the eleventh day of February, 1959, when the Central Government issued a notification under section 15 of the Forward Contracts (Regulation) Act, 1952. The notification declared that any forward contract for the sale or purchase of goods listed therein, entered into in the specified area, and not concluded between members of a recognised association or through such a member, would be illegal.

At the time of the government’s notification, the petitioner’s association had not been recognised by the Central Government under section 6 of the Act. Consequently, the forward contracts entered into by the petitioner were deemed illegal and void. Moreover, section 16 of the Act provided that contracts still to be performed after the notification date would be considered closed out on that date, and any differences arising would be payable not at the rates originally agreed by the parties but at the rates fixed by the notification. The petitioner therefore challenged the constitutionality of several provisions of the Act, specifically sections 5 and 6 concerning the recognition of associations by the Central Government, section 10 which empowered the Government to prescribe rules, section 15 which prohibited certain forward contracts, and section 16 which allowed the Government to fix settlement rates without clear guiding principles.

In the petitions the petitioner argued that several provisions of the Forward Contracts (Regulation) Act, 1952, infringed fundamental rights guaranteed by the Constitution. The petitioner claimed that the power given to the recognised association to make rules in the event that it failed to act violated the freedom of trade and commerce protected by article 19(1)(c). The petitioner further asserted that section 15 of the Act infringed articles 14, 19(1)(f) and 19(1)(g) because it authorized the government to fix rates for settlement of differences without any clear guiding principles, thereby amounting to an arbitrary delegation of power that offended the guarantee of equality before the law. Finally, the petitioner contended that section 16, which permitted the government to determine the rates at which one party should pay the other, constituted an unguided exercise of authority and therefore violated article 14. The Court held that sections 5, 6 and 10, together with the other provisions in Chapter III of the Act, were based on the reasonable premise that trade organisations could be entrusted with regulating forward transactions to promote legitimate trade and curb undesirable speculation, and therefore these provisions did not contravene article 19(1)(c). On proper construction, the Court found that recognition of an association under the Act was not a prerequisite for issuing a notification under section 15, and such a notification did not impose an unreasonable restriction on the petitioners’ right to conduct business within the meaning of article 19(6). The Court further held that the selection of commodities for regulation and the power to prohibit such trading were matters left to the Government, and the purposes and investigative machinery provided sufficient guidance, so section 15 did not confer arbitrary power and did not offend article 14. Moreover, the restrictions imposed by section 15 were held to be reasonable within article 19(5) and 19(6) and did not violate articles 19(1)(f) and 19(1)(g). Finally, section 16 was not found to be an excessive delegation of authority nor a violation of article 14.

The petitions, numbered 22 to 26 and 42 of 1959, were filed under article 32 of the Constitution for enforcement of fundamental rights. Counsel for the petitioners represented the various petition numbers, while counsel for respondent No. 1 and counsel for respondent No. 2 also appeared. Additionally, counsel for the interveners were present. The Court delivered its judgment on September 12, 1961, addressing three principal issues: the constitutional validity of the operative provisions of the Forward Contracts (Regulation) Act, the validity of a notification dated February 11, 1959 issued under section 15 that brought the commodity “gur” within the scope of the Act, and the validity of a simultaneous central government notification fixing the settlement price for forward contracts existing on that date. For the purpose of understanding the questions raised and the effect of the impugned notifications on the petitioners’ rights, the Court referred extensively to the facts of petition number 23 of 1959.

The record shows that counsel G. C. Mathur appeared for respondent No. 2 in petitions numbered 26 and 42 of 1959, while counsel R. L. Agarwala and P. C. Agarwala represented the interveners. The judgment was delivered on 12 September 1961 by Justice Ayyangar. The Court observed that the six petitions filed under Article 32 of the Constitution sought review of three matters: first, the constitutional validity of the operative provisions of the Forward Contracts (Regulation) Act, cited as Act LXXIV of 1952; second, the validity of a notification dated 11 February 1959 issued under section 15 of that Act which brought gur within the scope of the legislation with immediate effect; and third, the validity of a simultaneous Central Government notification that fixed the price at which forward contracts existing on 11 February 1959 were to be settled. To illustrate the issues raised and to assess the impact of the contested notifications on the petitioners’ rights, the Court referred to the facts of Petition No. 23 of 1959, which it considered typical of the cases before it. The petitioner, identified as Raghubar Dayal Jai Prakash, operated a firm engaged in the purchase and sale of gur and other commodities, with its business based in Meerut. Traders of a similar nature had jointly formed a company under the Indian Companies Act, named Kaisergunj Beopar Co. (P) Ltd., also located in Meerut. The purpose of this incorporated entity was, among other things, to regulate forward transactions concerning the sale and purchase of gur and other commodities among the members of the society, and to determine the rates at which such contracts would be settled on the agreed delivery dates. This company was impleaded as a second respondent to the petition. However, on the date of the impugned notification, the Central Government had not recognised the association or the company under the provisions of the Act with respect to dealings in gur, which were the subject of the petitions. The petitioner had entered into forward contracts for the purchase of gur at specified rates and had deposited both the purchase price and the special margin required under the society’s bye‑laws. At the time of the notification, the contracts still outstanding amounted to 29,600 maunds of gur. Subsequently, the Government issued a notification under section 15 of the Act on 11 February 1959, extending the application of that section to gur. As a result, the forward contracts entered into by the petitioner in gur became illegal and void. The notification also stipulated that the transactions of the petitioner and similarly situated parties were to be deemed closed on the date of the notification, and that any differences arising from the contracts were to be payable not at the rates originally agreed by the parties but at the rates specified in the notification.

The Court noted that, under the notification, the petitioner would have been compelled to settle his outstanding forward contracts at the rates fixed by the Central Government rather than at the rates originally agreed by the contracting parties. The Court observed that if the petitioner were required to settle at the government‑determined rate, he would incur a loss of approximately Rs 48,000. Accordingly, the petitioner contested the validity of the statutory provisions that empowered the issuance of the notifications, and also challenged the notifications themselves, on the grounds that will be set out later. Before addressing those grounds, the Court considered it useful to set out briefly the economic background of forward trading in commodities, the reasons for regulating such trading, and the historical measures that had been taken to control forward trading in gur before the disputed notifications were issued in February 1959. The expert committee that examined the Bill which later became Act 74 of 1952 explained the function of forward trading as follows: “Forward trading involves speculation about the future, but not all forms of forward trading could be considered as either unnecessary or undesirable for the efficient functioning of anything but the most primitive economy………… To the extent to which forward trading enables producers, manufacturers and traders to protect themselves against the uncertainties of the future, and enables all the relevant factors, whether actual or anticipated, local or international, to exercise their due influence on prices, it confers a definite boon on the community, because, to that extent, it minimises the risks of production and distribution and makes for greater stability of prices and supplies. It thus plays a useful role in modern business. At the same time, it must be admitted that this is an activity in which a great many individuals with small means and inadequate knowledge of the market often participate, in the hope of quick or easy gains and consequently, forward trading often assumes unhealthy dimensions, thereby increasing, instead of minimising, the risks of business. There are forms of forward trading for example, options, which facilitate participation by persons with small means and inadequate knowledge………… It is, therefore, necessary to eliminate certain forms of forward trading, and permit others under carefully regulated conditions, in order to ensure that, while producers, manufacturers and traders will have the facilities they need for the satisfactory conduct of their business, the wider interests of the community, and particularly the interests of consumers, will be adequately safeguarded against any abuse of such facilities by others.” The Court further observed that the Essential Supplies (Temporary Powers) Act, 1946, does not give the Central Government authority to regulate forward trading in any commodity that is not classified as an essential commodity under that Act. Consequently, the Court recognized that action might be required not only to prohibit forward trading in commodities where it continued unchecked, but also to reopen forward trading under regulated conditions where circumstances permitted such a course.

The provisions required that any arrangements be capable of allowing rapid and effective action in emergencies while simultaneously providing adequate safeguards against arbitrary or uninformed actions. It was with these purposes and with specific provisions designed to achieve them that the Act was enacted. The judgment then provided a brief summary of the historical development of the rules relating to forward trading in gur that preceded the notifications under challenge. After the conclusion of the war, a prohibition on forward trading in gur was introduced through the Sugar & Gur (Future Trading) Prohibition Order, 1951, which was issued under the Essential Supplies (Temporary Powers) Act, 1946. This prohibition was later lifted by a notification dated 7 January 1954. The Forward Contracts (Regulation) Act, 1952, was not extended to cover gur, so that from January 1954 onward all contracts involving gur remained unrestricted and outside the regulatory framework of that Act. The Forward Markets Commission subsequently examined whether it was advisable to impose regulations on forward trading of this commodity. The Commission first examined whether gur was a suitable commodity for forward trading and whether there was any necessity to bring the then‑unregulated forward trading of gur within the scope of the Act.

The Commission concluded that the production of gur was sufficiently large to prevent any single group of traders from cornering the market, and that the forces of supply and demand for the commodity were uncertain, thereby requiring continual assessment of their changing relationship through a futures market. It further held that price fluctuations in gur were wide enough to attract speculators and that such fluctuations created risks for holders of ready stocks; consequently, bringing the trade in gur within the ambit of the Act was deemed necessary. In the report submitted to the Government in May 1957, the Commission recommended two measures: first, that the Government recognize certain associations after completing the necessary formalities; and second, that a notification be issued under section 15 of the Act to render illegal any forward trading in gur except through those recognised associations or their members, as specified in section 15. However, by a resolution dated 17 January 1958, the Government recorded that “the main recommendations of the Commission are that the regulatory provisions of the Forward Contracts (Regulation) Act, 1952, be applied to gur and that forward trading be conducted through associations to be recognised under the said Act.” After careful consideration of the Commission’s advice, the Government concluded that there was no strong justification or special need at that time to bring gur under the purview of the Forward Contracts (Regulation) Act, 1952. Subsequent actions followed after this resolution.

By a notification dated 11 February 1959, the Central Government declared that section 15 of the Forward Contracts (Regulation) Act would apply throughout the territories to which the Act extended. The change in governmental view is explained in sections 195 to 197 of the Forward Markets Commission’s annual report for the year 1959. The report states that the Commission, in its May 1957 report on the recognition of associations for forward contracts in gur, had recommended that gur be brought under the regulatory provisions of the Act and that recognised futures markets be established at Hapur, Meerut, Agra, Muzaffarnagar and Delhi. Although the Government initially decided not to include gur within the Act’s scope, forward trading in gur therefore remained unregulated. By the end of 1958, however, speculative activity caused a sharp increase in gur prices, with prices at Hapur rising 37 percent between mid‑November 1958 and mid‑February 1959, compared with a mere 0.15 percent rise in sugar, a controlled commodity, and a 1.5 percent rise in khandsari, for which forward trading had been prohibited. These developments compelled the Government, on the Commission’s advice, to reconsider its earlier position and to apply section 15 of the Act to gur nationwide on 11 February 1959. The application of section 15 also required the fixation of a rate under section 16 at which all forward contracts outstanding as of that date could be closed. After considering all relevant factors, the Government closed the outstanding contracts at the average of the closing rates during the three months preceding the notification.

The notifications that brought about these measures read, in part, “In exercise of the powers conferred by clause (a) of section 16 of the said Act, the average of the closing rates prevailing in the respective forward markets during the period of three months immediately preceding the date of this notification shall be the rate at which any forward contract for the sale or purchase of gur entered into on or before the said date and remaining to be performed after the said date shall be deemed to be closed.” No association had been granted recognition before the 11 February 1959 notification. On the same date, however, another notification announced that the Government had also decided that regulated futures markets for gur should be established in due course at Hapur, Meerut, Agra, Muzaffarnagar and Delhi, and that recognition should be granted to the relevant associations.

Under section 6 of the said Act, the Government granted recognition to the existing associations in the places that had been mentioned, but only after conducting an enquiry to determine whether each association satisfied the requirements laid down in the Act. In the same manner, associations that were formed after those initial bodies were also recognised, but each of them underwent a similar enquiry before recognition was accorded. The petitioners who appeared before the Court were members of those recognised associations. Specifically, the petitioners in Petitions 22, 23 and 25 were members of the three associations that were named in the notification cited earlier, while the petitioners in Petitions 24, 26 and 42 belonged to associations that had been created later and subsequently recognised. The procedural steps that had to be completed before recognition could be granted required a short period of time, and the final recognition of all of these associations was recorded as having been issued in June 1959 or thereabouts. In order to understand the arguments that were advanced before the Court, it was necessary to set out briefly the substantive provisions of the Act whose constitutionality was being challenged. The preamble to the Act stated that the purpose of the legislation was to provide for the regulation of certain matters relating to forward contracts, to prohibit options in goods, and to address other matters connected therewith. The Court indicated that it would not consider the second limb of the objective, namely the prohibition of options in goods, and would limit its examination to those provisions that dealt with the regulation of forward‑contract matters.

The Court then explained the relevant definitions contained in Section 2 of the Act. Section 2 defined “an association” as “a body of individuals, whether incorporated or not, constituted for the purpose of regulating and controlling the business of the sale or purchase of any goods,” and sub‑clause (j) defined “a recognised association” as “an association which is for the time being recognised by the Central Government under s. 6.” Chapter II, titled “The Forward Markets Commission,” contained two sections. Section 3 provided for the establishment and constitution of a Forward Markets Commission, describing it as a body of independent experts. Section 4 set out the functions of the Commission, which included advising the Central Government on the recognition of associations, dealing with any other matter arising out of the administration of the Act, keeping forward markets under observation, informing the Government of developments in those markets, and making recommendations aimed at improving the organisation and working of forward markets. Chapter III, headed “Recognised associations,” comprised the provisions that were subject to attack in the petitions. According to Section 5, an association that sought recognition had to make an application to the Central Government, providing the details and particulars specified in Section 5(2). The Government was empowered to conduct any enquiry it deemed necessary and, after obtaining any further information that might be required, to grant recognition under Section 6. Such recognition was required to specify the goods or classes of goods with respect to which forward contracts could be entered into by the members of the recognised association, either directly between members or through any member.

Section 6 (2) laid down conditions that an association had to satisfy before the Central Government could grant it recognition. Section 6 (3) further required that any amendment to the rules of a recognised association could be made only with the prior approval of the Central Government. Complementing these provisions, Section 10 gave the Central Government the authority to issue directions for the making of rules. Moreover, if a recognised association failed to act in accordance with a government order, the Central Government was empowered to formulate the rules itself in the form specified by that order. Recognition of an association was not complete until it was published both in the Gazette of India and in the official Gazette of the State where the association’s principal office was located, as mandated by Section 6 (4).

Among the various provisions in Chapter III that dealt with “recognised associations,” Sections 6 and 10 were the primary subjects of challenge in the petitions before the Court. After identifying these provisions, the Court proceeded to consider the other sections of the Act that were also contested. The impugned notifications were based on Sections 15 and 16, which the petitioners argued were unconstitutional. Section 15 read as follows: “Forward contracts in notified goods illegal or void in certain circumstances.” Sub‑section (1) authorized the Central Government, by notification in the Official Gazette, to declare that the provision applied to specified goods or classes of goods and to specified areas. Once such a notification was made, and subject to the provisions of Section 18, every forward contract for the sale or purchase of any goods named in the notification that was entered into in the notified area, except where the contract was between members of a recognised association or through or with any such member, was declared illegal. Sub‑section (2) stipulated that any forward contract entered into pursuant to sub‑section (1) which contravened any bye‑law specified under clause (a) of sub‑section (3) of Section 11 would be void as to (i) the rights of any member of the recognised association who had entered into such a contract in violation of the bye‑law, and (ii) the rights of any other person who knowingly participated in the prohibited transaction. Sub‑section (3) provided that nothing in sub‑section (2) would affect the right of any person who was not a member of a recognised association to enforce the contract or to recover any sum thereunder, provided that such person had no knowledge that the transaction violated any of the bye‑laws referred to in clause (a) of sub‑section (3) of Section 11. Finally, sub‑section (4) prohibited any member of a recognised association, with respect to any goods specified in the notification under sub‑section (1), from entering into a contract on his own account with any person other than a member of the recognised association unless he had obtained the consent or authority of that person and disclosed such consent in the note, memorandum, or agreement of sale or purchase.

The provision stipulated that a member who had obtained the consent or authority of a non‑member in any manner other than in writing must secure a written confirmation of such consent or authority within three days from the date of the contract. It further provided that when a member had entered into an outstanding contract with a person who was not a member of the recognised association, the member was not required to obtain any consent or authority from that person for the purpose of closing out the contract in accordance with the bye‑laws. This exemption applied only on the condition that the member disclosed, in the note, memorandum or agreement of sale or purchase relating to the closing out, that he had bought or sold the goods, as the case might be, on his own account.

Under section 16, the Court explained the consequences of a notification issued under section 15. The provision declared that, notwithstanding any other law then in force, any custom, usage or practice of the trade, any contractual term or any bye‑law of an association, every forward contract for the sale or purchase of goods specified in the notification that had been entered into before the date of the notification and that remained to be performed after that date, and that was not in conformity with the provisions of section 15, would be deemed to be closed out at a rate fixed by the Central Government for that purpose. The Central Government was empowered to fix different rates for different classes of such contracts. All differences arising out of any contract so deemed to be closed out were required to be payable based on the rate fixed under clause (a). Moreover, the seller was not bound to deliver the goods and the buyer was not bound to take delivery of the goods under such deemed‑closed contracts.

Section 17, which was enacted because mere regulation of the trade was considered insufficient, gave the Central Government the power to prohibit forward contracts in certain cases. Sub‑section (1) allowed the Central Government, by a notification in the Official Gazette, to declare that no person shall, except with the permission of the Central Government, enter into any forward contract for the sale or purchase of any goods or class of goods specified in the notification and to which the provisions of section 15 have not been made applicable, except to the extent and in the manner, if any, specified in the notification. Sub‑section (2) stated that any forward contract entered into after the date of publication of such a notification, and in contravention of sub‑section (1), would be illegal. Sub‑section (3) provided that, where a notification had been issued under sub‑section (1), the provisions of section 16 would, unless the notification itself provided otherwise, apply to all forward contracts for the sale or purchase of any goods specified in the notification.

The judgment noted that in addition to the provisions already discussed, sections twenty and twenty‑one of the statute also merit attention. Section twenty prescribes penalties for any breach of the provisions of Chapter IV of the Act. Section twenty‑one contains two sub‑clauses, namely clauses (e) and (f), which read as follows: “21. Penalty for owning or keeping place used for entering into forward contracts in goods – Any person who (e) not being a member of a recognised association or his agent authorised as such under the rules or bye‑laws of such association; canvasses, advertises or touts in any manner, either for himself or on behalf of any other person, for any business connected with forward contract and in contravention of any of the provisions of this Act, or (f) joins, gathers, or assists in gathering at any place, other than the place of business specified in the bye‑laws of a recognised association, any person or persons for making bids or offers or for entering into or making or performing, whether wholly or in part, any forward contracts in contravention of any of the provisions of this Act, or”. The Court observed that these two clauses are intended to give effect to the object and purpose of the Act and to make operative the powers conferred by the other sections to which reference has already been made. Having explained their purpose, the Court then turned to the question of whether any of the statutory provisions, specifically sections five, six and ten, could be attacked on constitutional grounds, and set out to examine the arguments raised by counsel on that point.

The learned counsel for the petitioner, Mr Nambiar, supported by the other counsel appearing in the matter, particularly Mr S. T. Desai, contended that sections five, six and ten infringed the freedom guaranteed by sub‑clause (c) of clause (1) of Article 19 of the Constitution. Sub‑clause (c) of clause (1) of Article 19 reads: “(1) All citizens shall have the rights—(e) to form associations or unions;”. The counsel emphasized that this freedom is not absolute and is subject to the limitation expressed in clause (4) of Article 19, which provides: “(4) Nothing in sub‑clause (c) of the said clause shall affect the operation of any existing law in so far as it imposes, or prevents the State from making any law imposing, in the interests of public order or morality, reasonable restrictions on the exercise of the right conferred by the said sub‑clause.” The argument advanced was that the Constitution guarantees every citizen the right to form an association, and that the only permissible restriction on that right is one based on public order or morality as contemplated by clause (4). Accordingly, where the object of an association is lawful, the citizen, through that association and the association itself, is entitled to freedom from legislative interference except where the restriction is germane to public order or morality. The counsel submitted that the guaranteed freedom should be interpreted to include not only the formation of an association but also its effective functioning so that it may achieve its lawful objectives; otherwise, the freedom would be illusory. Furthermore, the counsel argued that the freedom guaranteed by sub‑clause (c) of clause (1) of Article 19 also confers upon an association the right to determine its internal arrangements in matters relating to its constitution and operation.

The Court explained that when the purpose for which an association is formed is lawful, both the individual citizen who acts through that association and the association itself are entitled, by virtue of the constitutional guarantee, to be free from legislative interference in the pursuit of that lawful purpose, except where such interference is justified on grounds that relate to public order or morality. In effect, the protection afforded by the Constitution should be understood not merely as a protection for the act of forming an association, but also as a protection for the association’s ability to function effectively so that it can achieve the lawful objectives for which it was created. The Court observed that if sub‑clause (c) of clause (1) of Article 19 were read narrowly, limiting the right to the mere act of formation, the constitutional freedom would become an empty promise. Consequently, the Court held that the provision must be read broadly so as to grant the citizen an effective right that can be used in the manner intended by the framers of the Constitution, enabling the association to pursue its legitimate aims without undue restriction.

The petitioners further argued, as a logical extension of the foregoing position, that the freedom guaranteed by sub‑clause (c) of clause (1) of Article 19 also includes within it a right for the association to decide its internal matters. Those internal matters, they said, encompass the selection of the individuals who will manage the association, the formulation of bye‑laws and regulations that will govern the relationship between the association and its members, as well as the relationship among the members themselves. According to this argument, the State should not interfere in those internal arrangements unless a law imposing such interference is based on considerations of morality or public order. In other words, the petitioners contended that the constitutional right was not limited to the mere formation of an association, but extended to the association’s day‑to‑day functioning without restraints that are not justified by the need to preserve order or morality. On this footing, they maintained that although the Constitution guarantees the freedom to form an association, including one that might regulate forward trading, the Central Government had nevertheless assumed the authority to prescribe the rules and bye‑laws governing that association. They submitted that Chapter III of the Act, by interfering in the internal management of the association, violated the right guaranteed by sub‑clause (c) of clause (1) of Article 19 because the restrictions imposed were not based on public order or morality. The Court found this argument unpersuasive. First, it observed that the restriction imposed by section 6 of the Act serves only the purpose of recognition, and no association is compelled to apply for such recognition. The application for recognition under the Act is a voluntary step taken by the association, and if the statute attaches conditions to the grant or continuation of recognition, the Court saw little basis for claiming that the freedom to form an association is thereby infringed.

In considering whether the freedom guaranteed by clause (c) of article 19 (1) of the Constitution includes a guaranteed right to obtain statutory recognition, the Court observed that the liberty to form an association would not be impaired unless that liberty itself required a constitutional entitlement to recognition. The Court dismissed the suggestion that the Constitution confers on an association a mandatory right to be recognized by law. The matter of forward trading was not contested before the Court; it was acknowledged that such trading can sometimes take on undesirable characteristics, resembling gambling, and that these practices may have harmful effects on legitimate commerce and on the public at large by producing sharp and violent price fluctuations. Consequently, the Court held that the regulation and control of forward trading constitute a legitimate field for legislative intervention, a view that was not disputed by the parties. The Court further explained that the particular manner in which such regulation is carried out, and the institutional mechanisms employed to achieve it, are matters of legislative policy. These policy choices must take into account factors such as the organization of the market, the methods of trading adopted, and other relevant considerations. Chapter III of the impugned enactment is based on the premise that associations of tradesmen may be entrusted with the responsibility of regulating these transactions, thereby promoting legitimate trade while preventing the adverse consequences of speculative activity. Accordingly, it was necessary that the instrument chosen for this purpose be subject to appropriate control so as to give effect to the regulatory scheme, and this rationale underlies the provisions of section 6 of the Act and the subsequent provisions contained in Chapter III. The Court noted that the restrictions contested as unconstitutional were imposed only on “recognised” associations; Parliament could have opted to implement the regulation directly through an official agency rather than through voluntary trade associations. Had it done so, neither traders nor their associations would have been able to claim a breach of constitutional rights. The mere decision by Parliament to employ the machinery of voluntary trade associations for regulatory enforcement does not, in the Court’s view, invalidate the provisions designed to ensure effective control over forward trading. Having examined the argument relating to clause (c) of article 19 (1) in the context of trade associations, the Court turned to the broader issue concerning the scope of that clause. The Court referenced its earlier decision in All India Bank Employees’ Association v. National Industrial Tribunal, wherein it had already explored the content of the “freedom of association” in relation to the other freedoms guaranteed by the remaining clauses of article 19 (1). Since that judgment had been rendered recently, the Court found it unnecessary to revisit those principles. Accordingly, the Court expressed no hesitation in rejecting the contention that Chapter III of the impugned Act, particularly the provisions previously discussed, infringes in any manner upon the freedom guaranteed by clause (c) of article 19 (1). The next provision of the Act whose validity was challenged was section .

Before setting out the specific grounds on which the present challenge was made, the Court found it appropriate to address a submission raised by counsel for the petitioners in Writ Petitions 24 and 25. That submission concerned the proper interpretation of section 15 of the Act. The counsel argued that section 15 operated on the premise that a “recognised association” must exist through which trading in the notified commodity could be carried out before any prohibition under clause 15(1) could be effected. The argument drew its support from the language appearing toward the end of clause 15(1), which stated that trading could not occur “otherwise than between members of a recognised association or through or with any such member.” According to the counsel, the statutory scheme required the Central Government first to recognise an association of traders dealing in the particular commodity, whose forward trading was to be regulated, and that only after such recognition, as provided in section 6, could the Government, invoking clause 15(1), forbid trading that did not take place through that recognised association or its members.

The counsel further pointed out that the expert committee on gur had itself indicated that this procedural sequence should be followed. He also referred to the experience of other commodities, such as pepper and castor‑seed, which had been notified under section 15; in those instances, the recognition of associations through which forward trading was permitted either preceded or occurred simultaneously with the issuance of the notification. While the counsel was correct in highlighting the recommendations of the Forward Markets Commission in its report on gur and in the other examples he cited, the Court noted that the remaining issue for consideration was whether a proper construction of Chapter III, read together with section 15, made the existence of a recognised association a legal prerequisite for the issuance of a notification under clause 15(1). It was evident that the counsel had not claimed that section 15(1) explicitly stipulated the existence of a recognised association as a condition precedent to a notification; rather, the question was whether such a condition could be inferred implicitly from the wording of the provision. The Court observed that any implication could not be based merely on the hardship that might otherwise arise, but had to rest on a more secure and legally satisfactory foundation. The Court also recognised that, under section 17, the Central Government possessed the power to prohibit all forward contracts in a particular commodity if mere regulation was insufficient to protect public interests. The counsel was right in stating that a notification issued under clause 15(1) did not amount to a complete ban and therefore could not be justified by reference to the broader prohibitory power under section 17. However, the scheme of Chapter III envisaged only the formation of voluntary

In this case, the Court observed that the Act provides for the formation of traders’ associations and for the Government to grant them recognition once they satisfy the conditions laid down in Chapter III. Accordingly, the legislation does not envisage that the Central Government itself would create an association to serve as the “recognised association” contemplated by the statute. Consequently, there may be situations in which traders either do not organise themselves into an association or decline to do so, thereby precluding any application for recognition under Chapter III. The Court noted that such a refusal cannot defeat the provisions of the Act, nor can it nullify the Government’s regulatory authority merely because the traders in a particular commodity have not formed a recognised association. Likewise, the power conferred on the Government by section 15(1) of the Act cannot be conditioned on the existence of voluntary associations that satisfy the statutory requirements for recognition; the power remains effective even if the associations refuse to obtain recognition. The Court did acknowledge that when associations exist whose bye‑laws and regulations are in conformity with the Act, the recognition of such bodies—whether obtained before or simultaneously with the issuance of a notification under section 15—allows forward trading to continue without interruption. However, this situation does not equate to the argument that, on a proper construction of section 15, the recognition of an association is a mandatory pre‑condition before a notification may be issued. The Court then addressed the contention that, even if the proper construction of section 15 does not make the existence of a recognised association a prerequisite for a notification, the issuance of a notification in the absence of any recognised association would nevertheless be constitutionally invalid as an unreasonable restriction on the petitioners’ right to trade and carry on business. The Court was unable to uphold this submission. It reiterated that the necessity of regulating forward trading was not disputed before it. While the Court indicated that it would later examine the broader challenge that section 15 itself might be invalid for infringing the freedom to trade guaranteed under Article 19(1)(g), the immediate question before it was narrowly confined. Assuming, for the sake of argument, that forward trading requires regulation and that such regulation through recognised associations—subject to governmental control and guidance—is justified by the circumstances, and further assuming that the statute does not impose a legal duty on the Government to recognise an association before forward trading in the commodity can fall within the Act’s scope, the Court considered whether the action taken under section 15(1) in the present proceedings would have to be held invalid as an unreasonable restriction under clause (6) of Article 19. The Court concluded that the reasonableness of the restriction must be evaluated in light of the degree of urgency that justified governmental intervention, a matter that would be examined on the facts of the case.

The Court observed that the need for Government intervention was a factual matter. It referred to paragraphs 195 to 197 of the Annual Report of the Forward Markets Commission for 1959, which explained the circumstances that gave rise to the notifications being challenged. The Report showed that enquiries required before recognizing associations under Chapter III inevitably took time. In the present case, the recognitions were granted only in June 1959. The Court noted that if a rapidly deteriorating situation demanded urgent action, the Government’s decision to act even before the associations were formally recognised could not be described as unreasonable. The Court explained that the assessment involved balancing the individual rights and the profits that traders could earn under the existing legal framework against the public benefit that could be achieved through regulatory control. When the Government believed that immediate action under a valid statutory provision would best serve the public interest, and when the facts supported that belief, the Court held that, in the absence of any evidence of bad faith, the Government’s action did not breach the constitutional limitation imposed by clause (6) of Article 19.

Having dealt with the reasonableness of the Government’s intervention, the Court turned to the challenge to the constitutional validity of Section 15 itself. The challenge was grounded on the claim that Section 15 violated Articles 14, 19(1)(f) and 19(1)(g) of the Constitution and that the latter two rights were not protected by clauses (5) and (6) of Article 19. Regarding Article 14, the petitioners argued that Section 15 gave the Central Government an unchecked and arbitrary power to select any commodity and to bring the Act into force for that commodity by notification, thereby rendering contracts that were lawful at the time of their execution illegal. The Court found this submission untenable. It referred to excerpts from the report of the expert committee that had examined the bill, which highlighted the economic implications of forward trading and the necessity of regulating contracts in specific goods. The Court emphasized that the Act did not seek to regulate forward trading in every commodity. Instead, the suitability of a commodity for forward trading depended on factors that were not static, and the need for regulation varied over time. The nature of the commodity, the magnitude of its production, the scale of demand relative to supply, and the fluctuating demand itself all required continuous assessment through the futures market. Consequently, the Court concluded that the power conferred by Section 15 was neither arbitrary nor unconstitutional.

The Court observed that the factors which call for regulation of forward trading are not fixed; they vary according to the circumstances surrounding each commodity. It clarified that while it had not attempted to list every possible factor, several characteristics had been identified that both necessitate and enable effective regulation. Accordingly, the Court held that the determination of which commodities satisfy these criteria could only be made after a fresh inquiry and investigation, and that such commodities could not be exhaustively enumerated in a statute. Because of this variability and the need for specialised advice, Chapter II of the Act creates a Forward Markets Commission, tasking it with advising the Government about the prevailing situation and making recommendations from time to time. In the Court’s view, the decision to include a particular commodity within the regulatory regime, or to prohibit forward trading in it, must rest with the Government. The purposes for which the power is to be exercised, together with the investigative machinery established, provide sufficient guidance to thwart any challenge on the ground of a violation of Article 14. This reasoning, the Court said, also addresses the argument concerning the timing of a notification issued under section 15(1). The Court reiterated that, although the Forward Markets Commission, in its May 1957 report, had suggested that the commodity “gur” should be brought immediately within the Act’s regulatory ambit, the Government did not act on that recommendation. Later, when the Government observed a critical price situation in the gur forward market—where powerful operators’ speculative activities had driven prices to unreasonable levels—it issued the impugned notification. The Court then turned to the next contention raised by counsel, namely that section 15 was unconstitutional because it infringed the freedoms protected by clauses (f) and (g) of Article 19(1). Regarding clause (f), it was argued that the right to enjoy benefits under a contract that was lawful when formed constituted a property right, and that section 15, by allowing a notification that rendered such a contract illegal, imposed an unreasonable restriction on the holding or enjoyment of that property. Further, it was submitted that even if the contractual benefit did not fall within the definition of property under Article 19(1)(f), it was closely linked to the right to carry on a trade or business under clause (g) of the same article, and that any retrospective invalidation of the contract would not qualify as a reasonable restriction under clause (6) of Article 19. In view of the nature of

Considering the submissions that had been advanced, the Court noted that the challenge based on both clause (f) and clause (g) of Article 19 could be examined together. Before undertaking that combined analysis, the Court first decided to address a subsidiary contention that arose from the wording highlighted in section 15(1), which read in part, “and thereupon … every forward contract for the sale or purchase of any goods specified in the notification which is entered into in the area specified therein ….” It was submitted that, because of those words, the Government possessed authority to issue a notification whose operation would be limited to contracts entered into after the date of the notification, and that consequently the impugned notification, which declared invalid contracts that had been entered into earlier but were still subsisting on the date the notification was issued, was beyond the Government’s power. The Court held this submission to be without merit. The phrase “is entered into” was deemed, at worst, ambiguous and capable of being interpreted either as referring solely to contracts entered into after the date of the notification or as meaning “is or has been entered into,” thereby encompassing contracts that had been concluded before the notification but were still existing on that date. The Court observed that the latter meaning was clarified by the language of section 16(a), which provided that “every forward contract for the sale or purchase of any goods specified in the notification, entered into before the date of the notification and remaining to be performed after the said date …” must be read in conjunction with section 15. The two sections were therefore regarded as intimately connected, with the later provision describing the consequences of the action taken under the earlier one. On that basis, the Court concluded that there was no room for the argument presented. Returning to the principal attack on the provision on the ground that it violated Article 19(1)(f) and (g), the Court considered whether the retrospective operation of a law affecting contracts—by altering their terms or terminating contracts that were already in existence—was per se unreasonable and thus amounted to an infringement of the guarantees under those clauses. The Court assumed, without passing judgment, that counsel was correct in characterising the right to the benefits of a contract as being of a proprietary nature. In support of this position, counsel relied on observations made by this Court in State of West Bengal v. Subodh Gopal Bose and Others, where it was held that the retrospective operation of a statute could be a relevant factor in assessing the reasonableness of a restriction imposed. That observation had previously been cited in Express Newspapers Private Ltd. v. Union of India. The Court emphasized that the authorities cited, and similar decisions, were relevant only to the proposition that the retrospective effect of legislation constitutes one element to be considered when determining whether a restriction is reasonable.

The Court noted that the earlier observations did not altogether carry the learned counsel’s argument to the extent required to sustain the proposition he sought to establish, namely that the retrospective invalidation of a contract could not be treated as a permissible restriction under clause (6) of Article 19. The counsel had referred the Court to several decisions of the United States Supreme Court, but the Court considered it unnecessary to analyse those authorities in detail. The Court observed that Article 1, Section 10(1) of the United States Constitution expressly forbids the States from enacting, inter alia, any ex post‑facto law or regulation that impairs the obligation of contracts, or from granting any title of nobility. In contrast, the makers of the Indian Constitution, while providing a ban on ex post‑facto laws in Article 20(1) and a prohibition on titles in Article 18(1), deliberately omitted any guarantee protecting the enforcement of contractual obligations. Consequently, the Court held that no argument could be advanced that a statute which affects or alters rights arising under a contract is, by reason of that effect alone, constitutionally invalid as an unreasonable restriction on the right to property or on the right to carry on trade or business. The Court further pointed out that even in the United States recent jurisprudence has eroded the doctrine of contractual protection, as Professor Corwin observed that the protection afforded by the contract clause no longer extends beyond that provided by Section 1 of the Fourteenth Amendment, which limits deprivation of life, liberty, or property without due process of law. The Court also cited the decision in Atlantic, Coast Line Co. v. Goldsboro, where it was affirmed that neither the contract clause nor the due‑process clause overrides the State’s power to enact regulations that are reasonably necessary to protect health, safety, public order, comfort, or the general welfare—that is, the State’s police power. The Court explained that the determination of what is reasonably necessary is now a question for the United States Supreme Court, which places the burden of proof on any party challenging State action as unreasonable or unnecessary. Moreover, the Court noted that after the Civil War the principal source of challenges to State legislation based on the “obligation of contracts” clause became of negligible importance and might well be removed from the Constitution for practical purposes. The Court reasoned that if the United States, whose Constitution expressly guarantees protection against impairment of contractual obligations, has taken such a limited view, then the position under the Indian Constitution must be at least as strong. Accordingly, the Court concluded that altering the terms of a subsisting contract cannot ipso‑juris be regarded as falling outside the permissible limits imposed by clause (5) or clause (b) of Article 19, and that the “reasonableness” of a statutory provision must be assessed in light of these principles.

The Court explained that the test of reasonableness could not be judged by a priori standards that were unrelated to the facts and circumstances of the situation which had occasioned the legislation. It cited the American case (1) (1941) 232 U.S. 548; 58 L. Ed. 721 to illustrate that a standard detached from the factual context was inappropriate. In an oft‑quoted passage, Chief Justice Patanjali Sastri, speaking in State of Madras v. V. G. Row, observed that “it is important in this context to bear in mind that the test of reasonableness, wherever prescribed, should be applied to each individual statute impugned, and no abstract standard or general pattern of reasonableness can be laid down as applicable to all cases.” He enumerated the factors that must influence the judicial verdict: the nature of the right alleged to have been infringed, the underlying purpose of the restrictions imposed, the extent and urgency of the evil sought to be remedied, the disproportion of the imposition, and the prevailing conditions at the time. Consequently, the Court held that it could not be predicated off‑hand, as a matter of law, that every restriction operating retrospectively and affecting rights obtained under a pre‑existing law was unconstitutional as an affront to the freedom guaranteed by sub‑clauses (f) or (g) of clause (1) of Article 19. While in some cases it might be necessary to completely efface a subsisting contract, the present case involved only a variation of its terms so that settlement would occur at the prices determined by another notification. Counsel had challenged the validity of the price‑fixation provision under section 16 and the actual prices fixed by the notification issued under that section, but the Court indicated that those issues would be considered later. The Court held that section 15 was constitutionally valid. It added that the restriction on trading served the general public interest because the public had a vital interest in the availability of an essential commodity such as gur at reasonable and relatively stable prices. The only question for the application of clauses (5) or (6) of Article 19 was the reasonableness of the measures contemplated by the law. Taking into account the machinery created in Chapter II of the Act, which provided an expert body to advise the Government on this complex problem and the functions of the committee, the Court was of the view that the restrictions imposed by section 15 of the Act were reasonable and satisfied the tests for a valid law under clauses (5) and (6) of Article 19. Counsel’s next submission related to the validity of section 16, which dealt with the consequences of a notification. The Court listed three such consequences: (1) all forward contracts subsisting on the date of the notification under section 15 that were not entered into by or through a recognised association were deemed to be closed out; (2) the rates at which the contracts had to be settled were to be fixed by the Central Government; and (3) in respect of the forward contracts so closed out, the buyer was not entitled to demand delivery of the goods and the seller was not entitled to insist on delivery being taken. The Court noted that the first consequence had already been considered while examining the validity of section 15. (1) [1952] S.C.R. 597, 607.

The Court observed that once forward contracts were declared closed, the buyer could no longer demand delivery of the goods and the seller could no longer insist that delivery be taken. In examining the validity of section 15 and the arguments presented on that point, the Court noted that it had already addressed the first consequence, namely that all forward contracts existing at the time of the notification were deemed to be closed on the date of that notification. The counsel for the petitioner did not challenge the validity of clause (b) of section 16, which imposes the obligation not to demand delivery or to insist on delivery. The challenge to section 16 was limited to the provision that vested the Central Government with the power to fix the rates at which the monetary differences payable by one party to the other would be calculated when a contract was closed by operation of a notification. It was contended that giving the Government the authority to fix prices without specifying any basis for doing so granted it an arbitrary power to set any price it chose, that the statute failed to indicate any principles underlying the price fixation, and that, as a result, the relevant portion of section 16 amounted either to an excessive delegation of power or violated article 14 of the Constitution by conferring an unguided power on the Government. Before confronting this constitutional objection, which the petitioner sought to support by contrasting the provision with analogous Indian legislation where the price payable was fixed by the Act itself, the Court thought it useful to recount the factual circumstances under which the Central Government fixed the price for closing out contracts in the impugned notification. Those circumstances were set out in the counter‑affidavit filed on behalf of the State in response to the petitions. According to that affidavit, on 17 July 1958 the Government of India issued a notification under section 17 of the Act prohibiting forward contracts of minor wood‑grains, and on the following day issued a similar notification banning forward contracts in khandsari sugar. The closure of those markets, the affidavit stated, caused speculative activity to shift to the forward market for gur. By the last week of December 1958 the price situation in gur had become critical, as operators acting in concert began to drive prices upward. Contracts were entered into at these inflated prices on the belief that, even if the Government intervened and closed the contracts by a notification under section 15, the benefits of the high prices on the outstanding contracts would, as had happened in the past, still be available to the operators. Upon reviewing the situation, the Government found that at Hapur, identified as a representative market, the rate for gur futures had risen from Rs 11.98 per maund on 17 January 1958 to Rs 16.27 per maund on 11 February 1959, and the Government considered that these developments...

In the circumstances described, the Court observed that forward prices were having a very unhealthy influence on the spot‑prices of the commodity in question. It noted that, because of this situation, the impugned notification had fixed the price at which a forward contract could be closed out by taking the average of the closing rates that had prevailed in the forward markets during the three‑month period immediately preceding the date of the notification. The Court then framed the issue for determination, asking whether, when the Act was read together with the policy that underlies it and the purposes for which it was enacted, any guidance could be found as to the principles that the Government might use to fix the settlement price of such contracts.

In order to answer that question, the Court referred to the Essential Commodities Act of 1955, which vested the Government with the power to determine the prices at which essential commodities could be bought or sold. Under section 3(2) of that Act, the Central Government was authorised, by an order made under the statute, to control the price at which any essential commodity might be bought and sold. The Court explained that the purpose of such control, as with the power presently under consideration, was to ensure that the price fixed by the Government was reasonable, having regard to the cost of production and to the general level of prices prevailing for other similar commodities that were being traded in a legitimate and proper manner.

The Court further observed that it was inherently impossible for the legislature to predetermine the exact price at which a commodity could be sold or at which contracts relating to that commodity could be entered into. Prices, the Court said, depended on factors that varied from time to time, and therefore could not always be a proper subject of legislative determination. Any method of fixing prices that relied on naming a specific figure or on referencing the market price on a particular date would, the Court held, create hardship because such a mechanical approach would be out of step with the changing circumstances and would also be vulnerable to manipulation by unscrupulous traders, as had been demonstrated in the Government’s description of the gur futures market.

The Court stressed that the absence of a detailed prescription in the Act for how the settlement price should be fixed was not a defect in the legislation. It reasoned that the only guidance Parliament could have given was to require that any price fixed be reasonable, taking into account the relevant factors previously enumerated. The Court considered that this requirement was implicit in the provision of section 16 of the Act, just as it was implicit in section 3 of the Essential Commodities Act. Finally, the Court acknowledged that counsel had drawn the Court’s attention to the provisions of the West Bengal Raw Jute Act (Act XXV of 1948), the Jute Goods Act (Act V of 1950) and the Bombay Forward Markets Contracts Act (Act LXIV of 1945), without drawing any further conclusion from those references.

The court observed that, regarding the closure of contracts that became illegal upon the commencement of the enactment, the price at which those contracts could be settled was fixed to the spot price on the day of closure. Under ordinary circumstances such a rule might be considered fair. However, the court noted that from the cited precedents no legal principle emerges that a price fixation on any other basis would be improper, unjust, or unconstitutional. The court stated that it is evident that when prices are artificially manipulated and inflated due to excessive speculation and unhealthy trading practices, the spot price prevailing on the closing day does not necessarily reflect a reasonable price for closing the contracts. The court further observed that this situation precisely described the circumstances of the respondent State, which was compelled to deviate from the principle of fixing the price based on the spot price on the closing day. Consequently, the court found no sufficient ground to hold that the authority granted to the Central Government to determine the price at which contracts may be closed is either beyond legislative competence or unconstitutional. The court reiterated that its earlier observations demonstrate that the price fixed in the impugned notification satisfied the requirement of reasonableness under Article 19(6) and conformed to the relevant provisions of the statute. Accordingly, the petitions were dismissed with costs, including one set of hearing fees.