Scindia Steam Navigation Co. Ltd vs Union Of India

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 10 of 1959

Decision Date: 31 August 1961

Coram: P. B. Gajendragadkar, Hidayatuallah

In the matter titled Scindia Steam Navigation Co. Ltd versus Union of India, the Supreme Court of India delivered its judgment on 31 August 1961. The petitioner, Scindia Steam Navigation Co. Ltd, a shipping company, sought a sum of forty‑four thousand four hundred forty‑nine rupees as freight from the respondent, the Union of India. The claim was based on a contract to transport teak‑wood logs from the forests of North Kanara to Karachi for the use of the North Western Railway. The contract had been entered into with the Conservator of Forests, North Kanara, who acted on behalf of the North Western Railway.

Before the cargo could be delivered, the political partition of India occurred on 15 August 1947. As a result of that partition, the North Western Railway was split into two separate entities: the Pakistan section retained the original name, while the Indian segment was renamed the Eastern Punjab Railway. The petitioner based its claim against the Union of India on article eight, clause one of the Indian Independence (Rights, Property and Liabilities) Order, 1947, and alternatively relied upon a press communique issued by the respondent on 22 May 1948. The respondent denied liability.

The trial court held that the contract could not be characterised as one made exclusively for the purposes of Pakistan under article eight, clause one, sub‑clause (a) of the Order. Consequently, the court concluded that the Union of India could be held liable under sub‑clause (b) of the same provision, but it also found that the press communique did not provide a legal basis for the claim and therefore dismissed the suit.

On appeal, the Court of Appeal affirmed the dismissal of the claim on the ground of the press communique, but it differed on the contractual analysis. The appellate court held that the contract fell within article eight, clause one, sub‑clause (a) of the Order and consequently dismissed the suit on that ground as well. The Supreme Court, speaking through Justices Gajendragadkar and Hidayatullah, affirmed the view of the appellate court that the contract was covered by article eight, clause one, sub‑clause (a) of the Order. The Court applied the two tests previously approved in Union of India v. Chaman Lal Loona for determining the applicability of article eight, clauses (a) and (b). The first test asked whether the contract, if made on 15 August 1947, would have been a contract for the Dominion of Pakistan. The second test considered whether, had the Dominion of Pakistan existed at the time the contract was entered into, the contract would have been intended for the purposes of Pakistan. By examining the substantive nature of the agreement rather than its form, the Court concluded that the contract was indeed exclusively for the purposes of Pakistan.

The Court further observed that the alternative tests were consistent with the consideration of ownership under article six of the Order, and that such consideration was both relevant and material in applying the tests. Accordingly, the Supreme Court affirmed the decision of the appellate court, holding that the petitioner's claim could not succeed.

The Court observed that the decisions in Chinubhai Jeshingbhai (1952) 54 B.L.R. 561 and Krishna Rajan Basu Ray v. Union of India (1954) AIR 623 were approved, while the decision in Union of India v. Loke Nath Saha (1952) AIR 140A was disapproved. The Court further held that the lower courts were correct in their view that the Communique issued by the respondent could not be said to embody a specific agreement between the two Dominions capable of bringing Art. 3(1) of the Order into operation. The pleas of estoppel and novatio, being matters of fact, could be raised only where the relevant facts were pleaded, a principle reiterated by Subba Rao J. The Court explained that the word “purposes” occurring in Art. 8(1) of the Order must be given its natural meaning, that is, the purpose for which the contract was made, and that purpose must be ascertained from the terms of the contract itself and not from any extraneous statutory or other considerations. The Order, the Court noted, made a clear distinction between the purpose of the contract under Art. 8(1) and any subsequent vesting of the goods in either Dominion under Art. 6, and therefore the rights and liabilities of the Dominions under the contract had to be dealt with separately. In the present case, the purpose of the contract was to convey the goods to the North‑Western Railway, which was then operating in both Dominions; consequently, the purposes of the contract were not exclusively for the Dominion of Pakistan. The Court concluded that the contract fell within Art. 8(1)(b) of the Order and must be deemed to have been made on behalf of the Dominion of India. The Court referred to the decision in Union of India v. Chaman Lal Loona (1957) SCR and considered Union of India v. Chimanbhai Jeshingbhai (1953) ILR 117.

The appeal, numbered Civil Appeal No. 10 of 1959, was filed under a certificate issued by the Bombay High Court pursuant to Art. 133(1)(a) of the Constitution. It arose from an original suit (Suit No. 232 of 1951) filed in the Bombay High Court by the Bombay Steam Navigation Co. Ltd. (referred to as B.S.N.) and the Eastern Steam Navigation Co. Ltd. (referred to as E.S.N.) against the Union of India. The suit sought recovery of a sum of Rs. 64,699‑6‑0 as charges for the carriage of teakwood logs from the forests of Kanara to Karachi, and additionally claimed Rs. 445‑4‑0 for storage of the logs at Marmagoa. The claim for storage charges was withdrawn at the hearing of the suit. Counsel for the appellants comprised Purshottam Trikamdas, S. N. Andley, J. B. Dadachanji, Ravinder Narain and O. C. Mathur, while the Union of India was represented by M. C. Setalvad, Attorney‑General for India, assisted by Nanak Chand and T. M. Sen. The judgment was delivered on 31 August 1961 by Justice P. B. Gajendragadkar, following the Court’s consideration of the arguments and the applicable provisions of the Order.

In this proceeding the company that had originally been Bombay Steam Navigation Co. Ltd. merged into Scindia Steam Navigation Co. Ltd., and consequently Scindia Steam Navigation appeared in the record in place of the former Bombay Steam Navigation. Scindia therefore became the first appellant before the Court. The second original plaintiff, Eastern Steam Navigation Co. Ltd., was undergoing liquidation; its liquidators entered the litigation as plaintiff 2 and thus were designated appellant 2. Eastern Steam Navigation owned a vessel named Azadi. The evidence indicated that Bombay Steam Navigation had been managing the affairs of Eastern Steam Navigation and had arranged, on behalf of Eastern Steam Navigation, the carriage of freight by that vessel. In 1947 the two parties entered into an agreement: Bombay Steam Navigation, acting as representative of Eastern Steam Navigation, contracted with the Conservator of Forests, North Kanara, who represented the North‑Western Railway, for the transport of teak‑wood logs harvested from the forests of Kanara. Under the terms of the agreement the logs were to be moved first by rail to the port of Marmagoa and thereafter by the steamer Azadi, belonging to Eastern Steam Navigation, from Marmagoa to Karachi. Pursuant to that agreement a total of 636 tons of timber were loaded on the Azadi, which departed Marmagoa on 23 July 1947. It was undisputed that the bill of lading contained a clause granting the appellants the right to have the timber re‑measured upon arrival at Karachi, and that the parties had agreed that freight would be calculated at a rate 70 per cent higher than the measurements recorded by the South Kanara forest department. When the suit was originally filed the freight claim was made on that basis; however, before the learned trial judge the claim was withdrawn, and the amount claimed was consequently reduced from Rs 64,699‑6‑0 to Rs 44,449‑0. It was on the reduced claim that the appellant proceeded to trial against the Union of India.

Shortly after the Azadi reached Karachi, the political partition of British India into the two Dominions of India and Pakistan occurred on 15 August 1947. The partition precipitated an extensive exchange of correspondence between the parties, which demonstrated that the appellants were repeatedly referred from one authority to another without obtaining a satisfactory resolution. Ultimately, their attempts to recover the amount due under the transport contract proved unsuccessful, prompting them to institute the present suit against the Union of India. Their claim was principally founded on article 8(1)(b) of the Indian Independence (Rights, Property and Liabilities) Order, 1947 (hereinafter “the Order”). In an alternative, the appellants sought the same sum on the basis of a press communiqué that they alleged had been issued by the Union on 22 May 1948. The Union denied the liability asserted by the appellants. It contended that the suit, as framed, was not maintainable because the plaint did not disclose a cause of action, and further argued that the suit was barred by the limitation period. On the merits, the Union maintained that the appellants’ claim was not covered by the press communiqué and that the communiqué could not furnish a valid cause of action. The appellants, for their part, insisted that the relevant clause of the Order justified their claim, a contention that the Union rejected.

In the trial proceedings the judge identified eleven substantive issues that required determination. The foremost issue concerned whether Article 8(1)(b) of the Indian Independence (Rights, Property and Liabilities) Order, 1947 applied to the claim asserted by the appellants. After examining the material, the judge concluded that the appellants’ claim fell within the ambit of that provision. In reaching this conclusion the judge considered the historical fact that on 15 August 1947 the North‑Western Railway, which had originally traversed provinces that later became part of Pakistan as well as provinces that remained in India, was split between the Dominion of India and the Dominion of Pakistan. The portion allotted to Pakistan retained the name North‑Western Railway, while the extension of the line situated in Indian territory was redesignated as the Eastern Punjab Railway. The judge explained that if timber was carried to Karanchi for the purposes of the North‑Western Railway as a whole, the appointed date of 15 August 1947 applied equally to the segment that became part of Pakistan and to the segment that became the Eastern Punjab Railway in India. Accordingly, the judge held that the contract on which the claim was based could not be described as being exclusively for the purposes of the Dominion of Pakistan, as required by Article 8(1)(a). Consequently, the contract was deemed to fall under Article 8(1)(b) of the Order.

The judge then turned to the appellants’ alternative claim that a Press Communique issued on 22 May 1948 gave them a valid basis for recovery. The judge found that the Communique did not constitute an agreement between the two Dominions and therefore could not invoke the provisions of Article 3(1) of the Order. While the appellants contended that the Communique represented a bilateral agreement and thus rendered the respondents liable under Article 3(1), the judge rejected this contention. The respondent’s plea that the claim was barred by limitation was also dismissed because the claimant’s right had been preserved by an acknowledgment made by the respondent. Findings on the remaining issues recorded by the trial judge were not addressed in the present appeal. As a result, the trial court ordered that the appellants’ claim for Rs 42,449 be referred to the Commissioner for taking accounts so that the amount due could be ascertained in accordance with the terms of the contract. The decree was subsequently challenged by the respondent before the High Court, and the appellate court affirmed the trial judge’s decision.

The trial judge dismissed the alternative basis on which the appellants had relied for their claim. Regarding the applicability of Article 8(1)(b) of the Order, the Appeal Court reached a different conclusion than the trial judge and held that the suit contract fell within Article 8(1)(a) of the Order. According to the finding of the Appeal Court, the contract was intended exclusively, from the relevant date, for the purposes of the Dominion of Pakistan; consequently, the respondent could not be held liable under that contract. Because the contract was classified under Article 8(1)(a), the Appeal Court considered it unnecessary to examine the question of limitation. The appellants attempted to raise two additional grounds before the Appeal Court in support of the decree passed by the trial court. They contended that, by its conduct, the respondent was estopped from disputing the validity of the appellants’ claim and that a novatio had occurred which made the respondent liable. The Appeal Court held that both of these pleas were factual in nature and therefore could not be introduced for the first time in an appeal. As a result of the conclusion that the suit contract fell under Article 8(1)(a) of the Order, the decree issued by the trial court was set aside and the appellants’ suit was dismissed with costs. The appellants had also filed certain cross‑objections seeking additional relief against the respondent; however, because the appellants failed on the principal issue, those cross‑objections were likewise dismissed with costs. Following the dismissal, the appellants obtained a certificate from the High Court and, relying on that certificate, brought the present appeal before this Court. Before addressing the merits of the contentions raised on behalf of the appellants, it was necessary to read the relevant provisions of the Order. The Order had been issued on 14 August 1947 by the Governor‑General, who exercised the powers conferred by section 9 of the Indian Independence Act and any other powers enabling him to do so. The appointed day under the Order was 15 August 1947. Article 3(1) of the Order provided that its provisions related to the initial distribution of rights, property and liabilities arising from the establishment of the Dominions of India and Pakistan, and that the Order would have effect, inter alia, subject to any agreement between the two Dominions. Articles 4 and 5 dealt with land and its vesting in the two Dominions as prescribed therein. Article 6 extended the provisions of Articles 4 and 5 to all goods, coins, bank notes and currency notes that, immediately before the appointed day, vested in His Majesty for the purposes of the Governor‑General in Council or of a Province, applying to them in the same manner as to land that had vested. Article 8(1), which is the provision under consideration in the present appeal, reads as follows: “8 (1) (a) if the contract is for purposes which, as from that day, are exclusively the purposes of the Dominion of Pakistan, it shall be deemed to have been made on behalf of the Dominion of Pakistan instead of the Governor‑General in Council; and (b) in any other case, it shall be deemed to have been made on behalf of the Dominion of India instead of the Governor‑General in Council; and all rights and liabilities which have accrued or may accrue under any such contract shall, to the extent to which they would have been rights or liabilities of the Governor‑General in Council, be rights or liabilities of the Dominion of Pakistan or the Dominion of India, as the case may be.” It is unnecessary to set out the remainder of the Order’s provisions.

Article 8 (1) of the Order provides that any contract entered into on behalf of the Governor‑General in Council before the appointed day shall, from that day onward, be treated in two possible ways. If the contract, as of that day, is for purposes that are exclusively those of the Dominion of Pakistan, the contract is deemed to have been made on behalf of the Dominion of Pakistan rather than on behalf of the Governor‑General in Council. In any other circumstance, the contract is deemed to have been made on behalf of the Dominion of India instead of on behalf of the Governor‑General in Council. Moreover, all rights and liabilities that have accrued or may accrue under such a contract shall, to the same extent that they would have been rights or liabilities of the Governor‑General in Council, become the rights or liabilities of the Dominion of Pakistan or the Dominion of India, as the case may be. The remainder of the provisions of the Order is not reproduced because it is unnecessary for the present discussion. The scope and effect of the provisions of Article 8 (1)(a) and (b) have previously been examined by this Court in Union of India v. Chaman Lal Loona. In that case the Court expressly approved two earlier decisions of High Courts, and it is useful to set out those two decisions before proceeding further.

The first decision approved by this Court is the judgment of the Bombay High Court in The Union of India v. Chinubhai Jeshingbai. In that case the firm of Chinubhai Jeshingbai, which carried on business at Baroda, executed three sale notes on March 10, 1947. Under those notes the firm purchased from the Government of India certain quantities of long‑cloth that were stored at the Ordinance Parachute Factory in Lahore. The plaintiff firm paid a little over Rs. 37,000 under the sale notes. One of the conditions of the contract required that the goods, which formed the subject‑matter of the contract, be stamped. Because of serious communal riots in Lahore in August 1947, the goods could not be stamped and remained unstamped even after the partition of India. Consequently, the plaintiff could not obtain performance of the contract or a refund of the money paid, either from the Government of India or from the Government of Pakistan, and therefore instituted a suit for recovery of the amount. Justice Coyajee, hearing the suit, decreed in favour of the plaintiff. On appeal, however, the decree was set aside and the case was remanded for trial of an issue framed by the Court of Appeal. The issue referred back for trial was whether the goods covered by the three sale notes were situated in the territory that, by virtue of the Independence Act of August 15, 1947, constituted the Dominion of Pakistan. While considering Article 8 (1)(a) and (b), the High Court observed that an artificial test had been prescribed for giving effect to the article, and proceeded to apply that test to the facts of the case.

In applying Article 8 the Court explained that the appropriate test could be approached in two ways. First, it could be asked whether a contract that had been concluded on August 15, 1917 would, if the Dominion of Pakistan had existed at that time, have been a contract for the purposes of that Dominion. Second, it could be asked whether, assuming that the Dominion of Pakistan was already in existence when the contract was made, the contract would have been a contract for the purposes of Pakistan. The Court then observed that it was difficult to accept the argument that “when a State or a Dominion enters into a contract in respect of property or goods belonging to it, it is not a contract for the purposes of that State or Dominion.” In other words, the decision indicated that, in applying the tests prescribed by Article 8, the enquiry must focus on to whom the property or goods forming the subject‑matter of the contract belonged on the appointed day. In the case before the trial court no finding had been recorded as to the location of the goods on the relevant date, and consequently the appellate court framed an issue on that point and remitted the matter for a factual determination. The appellate court therefore held that if the goods were situated in Pakistan and consequently became the property of Pakistan, the contract would inevitably fall within the scope of Article 8(1)(a) and not within Article 8(1)(b).

The Court subsequently referred to a second authority, namely the judgment of the Calcutta High Court in Krishna Ranjan Basu Ray v. Union of India representing Eastern Railway & Ors. In that case the High Court held that a suit for compensation for non‑delivery of goods consigned to the Bengal and Assam Railway before August 15, 1947, for delivery at a destination that had become part of Pakistan could not be maintained against the Union of India. The High Court explained that it was erroneous to deem the pursuit of profit as the purpose of the contract; rather, the purpose was the carriage of goods. Where the destination lay within the territory that became Pakistan, the purpose of the contract was accordingly the purpose of the Dominion of Pakistan. Conversely, where the destination remained within the Indian Dominion, the purpose was that of the Dominion of India. The High Court’s contrary view expressed in Union of India v. Loke Nath Saha was dissented‑from. The Court then turned to its own earlier decision in Chaman Lal Loona’s case, where Justice S.K. Das, speaking for the Court, framed the question “what is the proper meaning of the expression ‘contract for the exclusive purposes of the Dominion of Pakistan’” and answered by endorsing the view expressed by Justice Chagla.

C. J. in Union of India v. Chinubhai Jeshingbhai (1) quoted, with approval, the tests previously referred to by this Court. The learned judge also expressly approved the decision in Krishna Ranjan Balu’s case (2) and disapproved the contrary view expressed in Union of India v. Loke Nath Saha (3). In the earlier case of Chaman Lal Loona (4), this Court examined a contract that had been entered into on behalf of the Governor‑General in Council for the supply of fodder to the Manager of Military Farms at Lahore Cantonment, a location that lay in Pakistan on 15 August 1947. The trial court held that the contract could not be enforced against the Union of India; however, the High Court reversed that finding, reasoning that the fodder constituted military stores under the exclusive control of the joint Defence Council on the appointed day and therefore could be transferred anywhere in India. This Court observed that even if the High Court’s view that the fodder could be transferred throughout India were accepted, the contract must still be regarded as one exclusively for the purposes of Pakistan, and consequently the Union of India could not be held liable under it. The Court’s conclusion rested on the principle that the purpose of a contract should not be confused with the ultimate disposal of the goods supplied under that contract, because such disposal does not determine or alter the nature of the contract itself. Accordingly, when evaluating the nature of the contract in the present appeal, one of the two artificial tests that have been approved by this Court must be applied. The question before us, therefore, is whether the application of either of those tests justifies the answer given by the appellate court. It is clear that the fact that the contract in question was made by the Conservator of Forests, Kanara, is immaterial for determining its character under Article 8(1), and it is likewise irrelevant that the contract was executed on behalf of the North‑Western Railway. All contracts concluded before the appointed day were entered into by officers of the Government of India or on its behalf, and both lower courts correctly agreed that the identity of the party who originally made the contract with the appellants is of no consequence. Likewise, the respondent cannot rely on the fact that the contract was made on behalf of the North‑Western Railway, which has since been divided into two sections—the Pakistan section now called North‑Western Railway and the Indian section now called Eastern Punjab Railway—because that division does not affect the character of the contract.

In this matter the Court observed that the North‑Western Railway, on whose behalf the contract had been executed, now operates solely within Pakistan, but that circumstance was not decisive for determining the nature of the contract. The Court emphasized that the analysis must focus on the substantive terms of the agreement rather than on its formal labels. While it was admitted that the timber conveyed to Karachi under the contract was intended for the North‑Western Railway as an entity, the record contained no evidence indicating that the timber was earmarked for the portion of the railway that later became situated in Sind or Western Punjab, which subsequently formed part of Pakistan. The Court noted that the Appeal Court had found that the timber remained in Karachi from 15 August 1947 until December 1947 and that, on the relevant date, the goods were physically present in the Dominion of Pakistan and had, in fact, been employed for the purposes of the North‑Western Railway that lay within that Dominion. The Court reiterated that the purpose of a contract should not be conflated with the ultimate user or disposer of the goods. It appeared that the learned trial judge had been somewhat swayed by the original intention that the timber would serve the North‑Western Railway as a whole; because the railway as a whole was not confined to Pakistan, the trial judge concluded that the contract was not exclusively for Pakistan. In confirming the Appeal Court’s finding, the Court stated that there was no doubt that the timber stored in Karachi during the period from August to December 1947 had been utilized by the segment of the North‑Western Railway that fell under Pakistani jurisdiction. The Court then applied the tests previously endorsed by this Court, asking whether, had the contract been concluded on 15 August 1947, it would have been a contract for the Dominion of Pakistan. The Court examined the nature of the agreement, which involved the carriage of teak logs from the Kanara forests to Karachi for use by the railway. The designated place of delivery was Karachi, and the objective was to secure the logs for railway purposes. Given these facts, the Court found it difficult to accept that a contract made on the appointed date would have been exclusively for the purposes of Pakistan. It was deemed inconceivable that, on the appointed day, a contract for shipping goods to Karachi could have been concluded unless the contract was intended for the Dominion of Pakistan. Even if the contract had been only partially for Pakistan, the reasoning would have led to the same conclusion.

In considering the effect of the contract on the appointed day, the Court noted that it could not be said that the shipment of all the goods to Karachi was intended to serve the purposes of India. Whether the primary test or the alternative test was applied, the result was the same. The Court held that if Pakistan had been in existence on the date the contract was concluded, the contract as it stood would unmistakably have been for the purposes of Pakistan. This conclusion accorded with the view expressed by the Appeal Court, and the Court found no reason to depart from that view. In reaching this conclusion, the Appeal Court regarded the fact that, by operation of Article 6 of the Order, the goods had become the property of Pakistan. Consequently, on the appointed day, the goods whose shipment formed the subject‑matter of the contract were already owned by Pakistan. Accepting this premise, the Court could see no way of avoiding the inevitable conclusion that the application of either of the two artificial tests prescribed by Article 8(1) would lead to the determination that the contract had been made exclusively for the purposes of Pakistan.

The Court further observed that the tests set out by the Bombay High Court in the case of Chinubhai Jeshinghbai (1) had been expressly approved by this Court in the case of Chaman Lal Loona (2). It was true that the significance of the vesting of title in the goods under Article 6 of the Order, which the Bombay High Court had attached great importance to in Chinubhai Jeshinghbai, had not been specifically noted by this Court. In that narrow sense it might be permissible to argue that that portion of the earlier judgment had not been expressly endorsed. However, the Court regarded such an argument as purely technical. It was of the opinion that the alternative tests, which have been expressly approved by this Court, are fully consistent with the consideration of ownership that the Bombay High Court emphasized, and that ownership is both relevant and material in applying those tests. If the goods that constitute the subject‑matter of the contract have become the property of Pakistan, that fact is a relevant and material consideration in deciding whether, had the contract been made on the appointed day, it would have been entered into by Pakistan, or whether Pakistan would have entered into the contract if it had existed at that time. (1) (1952) 54 B.L.R. 561. (2) [1957] S.C.R. 1039. Accordingly, the Court affirmed that the Appeal Court was correct in holding that the contract fell within the scope of Article 8(1)(a) and that the appellants’ assumption that Article 8(1)(b) could be invoked against the respondent was not well founded. The Court then turned to the next issue, namely whether the appellant’s claim on the alternative ground of the Press Communique was well founded. The Court began by reading the Press Communique: “The Government of India has been considering for some time the question of arranging for”.

In the Press Communique the Government of India explained that it intended to effect the speedy payment of all outstanding claims for supplies and services that had been rendered to the undivided Government of India before the date of partition. The Communique further recorded that at the moment of partition the two Dominions had agreed that each Dominion would discharge the claims arising in its own territory, subject however to later adjustment, particularly with respect to claims relating to areas that had become part of Pakistan. It was noted that many of those claims remained unpaid because of disturbances in the Punjab, the large‑scale movement of population, and because the Pakistan Government had discontinued payments around the middle of December of the previous year owing to a difference of opinion between the two Governments as to liability for the sums. To avoid hardship to the suppliers and contractors, the Government of India, after careful consideration, decided that it would assume the initial liability for those payments and would later recover Pakistan’s share through a debts‑settlement arrangement. Mr. Purshottam argued that the Communique therefore amounted to an agreement between the two Dominions and that, under article 3(1) of the Order, the appellants could rely on that agreement to sustain their claim even if the claim failed under article 8(1)(b). The lower courts, however, held that the appellants had not demonstrated that the Communique constituted an agreement between the Dominions. The courts construed the Communique as merely a unilateral declaration by the Union, to which article 3(1) could not be applied. Mr. Purshottam disputed that conclusion. In support of his position he placed before the Court the entire relevant correspondence. A brief overview of that correspondence is as follows. On 10 July 1918 the Director‑General of the Railway Department of the Government of Pakistan, based in Karachi, wrote to the General Manager of the North‑Western Railway at Lahore concerning the disposal of pre‑partition claims that were still outstanding against the undivided Government of India. In that letter he reproduced the contents of the Press Communique that the appellants later relied upon. Subsequently, on 19 July 1948 the Collector of Stores in Karachi drew the appellants’ attention to the same Communique in a letter addressed to them. In their subsequent correspondence with the railway authorities the appellants sometimes described the Communique as a joint press notification. Likewise, letters sent by the railway authorities in Pakistan to appellant I characterized the Communique as a joint notification “said to have been issued by the Dominions of India and Pakistan”. Further correspondence from the railway authorities in India indicated that the appellants’ claim was being considered. For example, a letter from the Headquarters Office in Delhi to the Stores Accounts Officer of the Eastern Punjab Railway in Delhi listed the appellants’ claim under serial numbers 4 and 5 and instructed the officer to deal with it. Moreover, the Administrative Officer of the Eastern Punjab Railway in Delhi wrote to the appellant stating that the claim had been entered in the register and that further action would follow.

The Administrative Officer of the Eastern Punjab Railway in Delhi wrote to the appellant informing him that the claim had been entered in the records and that further action would be taken only after the Railway Board issued its orders. After receiving this letter, the appellants continued to remind the railway officials of their pending claim. On 5 August 1950 the appellants’ lawyers were told that the claim was still being examined by the North Western Railway and that it could not be finalised until it had been verified by the Financial Accounting and Control Authority of the North Western Railway located in Lahore. The lawyers then asked the railway authorities how long the verification process might require, but no satisfactory answer was provided. Because of this lack of a clear timetable, the appellants instituted the present suit. It is evident, however, that the Indian railway authorities did make some efforts to obtain verification of the claim, although those efforts ultimately proved unsuccessful. The learned Attorney‑General, on behalf of the respondent, submitted an affidavit executed by Mr. R. L. Takyar, Legal Assistant of the Northern Railway, Baroda House, New Delhi. That affidavit states that, following an assurance given by the learned Advocate‑General before the Bombay High Court, the respondent attempted to have the claim verified, but those attempts failed. The affidavit further explains that, in the absence of verification of the claim and without authorisation from the Government of Pakistan, the Union of India was not in a position to make any ex gratia payment to the appellants.

The Court expressed sympathy for the grievance of the appellants, noting that they had been displaced from Pillax to Post and had yet to obtain any satisfaction of their claim either from the Government of Pakistan or from the respondent. Nevertheless, the Court observed that the correspondence cited by the appellants does not substantiate the contention that the Press Communique constituted an agreement between the two Dominions. First, the appellants should have taken appropriate steps to prove the existence and contents of the Communique and should have called upon the respondent to produce all documents relevant to the alleged agreement on which the appellants relied. Moreover, the wording of the Communique itself undermines the theory that it represents a bilateral agreement. The Communique expressly mentions that the Government of Pakistan discontinued its payments around the middle of December owing to a difference of opinion between the two Governments concerning liability for those payments. It then records the decision of the respondent that, to avoid hardship to suppliers and contractors, the respondent would assume initial liability for the payments and would later recover Pakistan’s share through a debt‑settlement arrangement. Although on occasion the Pakistani authorities referred to the Press Communique as a joint Communique, such references do not assist the appellants in establishing that the Communique was the product of an agreement between the two Dominions. It is conceivable that some form of understanding existed between the Dominions, as the conduct of the Indian railway authorities can be explained only on the basis of some agreement or arrangement; however, the appellants have failed to produce sufficient or satisfactory evidence to demonstrate the existence of a specific agreement that would invoke the provisions of Article 3(1) of the Order.

The Court observed that the appellants had failed to produce any material that was either sufficient or satisfactory to demonstrate the existence of a specific agreement between the two Dominions which would activate the provisions of Article 3(1) of the Order. On the basis of the evidence presented, the courts below reached a unanimous conclusion that no such agreement had been established. After examining the correspondence highlighted by the Court, it was found that the appellants were unable to challenge either the validity or the correctness of that shared finding. Consequently, the Court held that if the proposition of an agreement between the two Dominions cannot be sustained, the Press Communique cannot be relied upon to uphold the appellants’ claim against the respondent. Moreover, the appellants did not argue that the unilateral statement contained in the Press Communique, by itself and without any additional support, could bolster their claim.

The Court then turned to the contentions raised by counsel for the appellants, who sought to invoke the doctrines of estoppel and novatio. Counsel argued that the necessary factual foundation for pleading estoppel and novatio was already present in the record and that, in the interests of justice, the appellants should not be barred from raising these points merely because they had not been pleaded before the trial court. The Court was not persuaded by this line of argument. It noted that both estoppel and novatio can be properly raised only after the pleading of the relevant and material facts on which they depend. Since no such material facts were alleged in the plaint, and no issues pertaining to either defence were framed by the trial court, the Court of Appeal was justified in refusing permission to the appellants to introduce these pleas for the first time on appeal. The Court further observed that the trial plaint was a detailed document, on which eleven issues had already been framed by the learned trial judge. Accordingly, the appellants could not complain that their failure to make adequate pleadings barred them from raising new defences at the appellate stage. In view of these considerations, the Court concluded that the appellate court had acted correctly in denying leave to raise the pleas of estoppel and novatio. Accordingly, the appeal was dismissed with costs, and Subba Rao, J. expressed his disagreement with the application of Article 8(1) of the Indian Independence (Rights, Property and Liabilities) Order, 1947 to the facts of the case, referring to the fuller factual findings recorded by his brother, Justice Gajendragadkar.

The facts that are relevant to the question posed under Article 8(1) of the Indian Independence (Rights, Property and Liabilities) Order, 1947, were set out as follows. The Eastern Steam Navigation Company owned a vessel named “Azadi”. In the year 1947 the Bombay Steam Navigation Company Limited, acting on behalf of the Eastern Steam Navigation Company, entered into an agreement with the Conservator of Forests for North Kanara, who was acting on behalf of the North‑Western Railway. The agreement provided for the carriage of teakwood from the forests of Kanara by rail and for the onward shipment of that timber from Marmagoa by the steam ship “Azadi”, which also belonged to the Eastern Steam Navigation Company, to Karachi.

According to the record, on 23 July 1947 a consignment of 636 tons of timber was loaded on the steamer “Azadi”. The ship arrived at Karachi on 27 July 1947. On 15 August 1947 the political map of the sub‑continent changed with the partition of India into two Dominions, India and Pakistan. Before the partition the North‑Western Railway, although its head office was situated at Lahore, operated its train services over a territory that later became divided between the two new Dominions. After the partition the railway was split, the portion remaining in India was renamed the Eastern Punjab Railway, while the portion that lay in Pakistan continued to be known as the North‑Western Railway.

Subsequently the Eastern Steam Navigation Company entered liquidation, and the Bombay Steam Navigation Company merged with the Scindia Steam Navigation Company. The two successor companies instituted O.S. No. 232 of 1951 in the High Court of Judicature at Bombay, exercising its ordinary original civil jurisdiction, against the Union of India. They claimed the freight amount of Rs 64,699‑6‑0 but later reduced the claim to Rs 44,449/‑. The trial judge, Justice Tendolkar, held that the contract was made for the purposes of the North‑Western Railway considered as a whole, and therefore, on the appointed day, the contract was not exclusively for the purposes of the Dominion of Pakistan as defined in Article 8(1) of the Order. On that basis he concluded that the suit was maintainable against the Union of India.

On appeal, Chief Justice Chagla and Justice S. T. Desai reversed that view. They held that, because on the appointed day the goods were in Pakistan, the contract was exclusively for the purposes of the Dominion of Pakistan, and consequently the suit could not be maintained against the Union of India. The present appeal therefore arose. Counsel for the appellants argued that the term “purposes” in Article 8(1) should be interpreted as referring to the purpose of the contract itself, namely the purpose of the North‑Western Railway, and that the Bombay High Court’s finding that ownership of the goods on the appointed day affected the purpose of the contract was erroneous. In other words, the appellant’s position was that the contract’s purpose was to supply timber to the North‑Western Railway, and since on the appointed day the entire North‑Western Railway did not fall exclusively within the Dominion of Pakistan, the contract’s purposes could not be said to be exclusively for that Dominion.

The Attorney‑General argued that, because Article 6 of the Order provides that the goods which formed the subject‑matter of the contract vested in the Dominion of Pakistan on the appointed day, the contract must be regarded as having been made for the purposes of that Dominion. Since the dispute centred on Article 8(1) of the Order, it was appropriate to set out that provision at the beginning. Article 8(1) reads: “Any contract made on behalf of the Governor‑General in Council before the appointed day shall, as from that day, (a) if the contract is for purposes which as from that day are exclusively purposes of the Dominion of Pakistan, be deemed to have been made on behalf of the Dominion of Pakistan instead of the Governor‑General in Council; and (b) in any other case, be deemed to have been made on behalf of the Dominion of India instead of the Governor‑General in Council; and all rights and liabilities which have accrued or may accrue under any such contract shall, to the extent to which they would have been rights or liabilities of the Governor‑General in Council, be rights or liabilities of the Dominion of Pakistan or the Dominion of India, as the case may be.” The Court previously explained the true scope and effect of this article in Union of India v. Chaman Lal Loon (1957) SCR 1039. In that decision the Court endorsed the observations of Chief Justice Chagla made in Union of India v. Chinubhai Jeshinhai (1953) ILR Bombay 117 130, namely: “The test that must be applied is an artificial test and the test may be either if the contract has been entered into on August 15, 1947, whether it would have been a contract for the purposes of the Dominion of Pakistan, or if the Dominion of Pakistan had been in existence when the contract was entered into, whether it would have been a contract for the purposes of Pakistan.” In the Chinubhai case the purpose of the contract was to supply fodder to the Manager, Military Farms, Lahore Cantonment, and those farms were situated in Pakistan on the appointed day. Accordingly, the Court held that the contract was exclusively for the purposes of the Dominion of Pakistan as of that day. The present dispute raises a different question: whether, irrespective of the original purpose of the contract, the statutory vesting of the goods in the Dominion of Pakistan on the appointed day makes the purposes of the contract to be deemed exclusively those of Pakistan. That issue was not considered in the Chinubhai decision and therefore remains to be determined here. The test articulated in Article 8(1), as interpreted by this Court, requires an inquiry into whether, had the contract been entered into on August 15, 1947, it would have been a contract exclusively for the purposes of Pakistan. Although, by legal fiction, the date of the contract is shifted to that day, the substantive terms and the purposes for which the contract was originally entered cannot be altered by that fiction.

In determining the effect of moving the contractual date to 15 August 1947, the Court observed that such a shift does not alter any statutory term of the contract, including the purpose for which the parties entered into it. Accordingly, the purpose must be ascertained solely from the language of the contract itself and not from any extraneous statutory or other considerations. The Court warned that the fictional relocation of the date cannot be stretched beyond the limits prescribed by Article 8 of the Order, which applies not only to contracts that have been fully executed but also to those that are merely executory or that have been broken. The term “purposes” must therefore be given the same meaning in all three situations. If the test of statutory vesting of goods situated on the appointed day in the Dominion of Pakistan were applied uniformly, it would produce a manifest inconsistency. For example, with the present contract, if the contract had never been performed and the plaintiffs had to sue for specific performance, the suit would have to be filed in India; similarly, if the contract were broken and the plaintiffs sued for damages, the suit would also lie in India. Yet, if the contract were performed and all the goods arrived in Pakistan on the appointed day, the suit would have to be filed in Pakistan, and if only part of the goods reached Pakistan while the remainder remained within Indian borders, the suit would again be appropriate in India. The Court explained that this paradox disappears if “the purposes of the contract” is understood in its ordinary sense, namely, the purpose for which the contract was concluded – in this case, to supply goods to the North Western Railway. The Court further held that the argument advanced on behalf of the Union rested on a fallacy, because there is a crucial distinction between the purpose of the contract and the statutory vesting of the goods in one Dominion or the other. The purpose of the contract was neither determined nor altered by the subsequent statutory vesting of the goods in the Dominion of Pakistan; that statutory vesting formed part of a different scheme than that embodied in Article 8. The Court then quoted the relevant provisions: Article 6 of the Order states, “The provisions of Articles 4 and 5 of this Order shall apply, in relation to all goods, coins, bank notes and currency notes which immediately before the appointed day are vested in His Majesty for the purposes of the Governor‑General in Council or of a Province as they apply in relation to land so vested.” Article 5(2) provides, “All land which immediately before the appointed day is vested in His Majesty for the purposes of the Province of Bengal shall on that day in the case of land situated, in the Province of East Bengal, vest in His Majesty for the purposes of that Province; in the case of land situated in the Province of West Bengal, vest in His Majesty for the purposes of that Province; and in any other case, vest in His Majesty for the joint purposes of those two Provinces.”

The provision states that property situated in West Bengal vests in His Majesty for the purposes of that Province, and in any other case it vests in His Majesty for the joint purposes of the two Provinces. The Court observed that these provisions are unrelated to the rights and liabilities of the respective Dominions under contracts that were entered into on behalf of the United India with its citizens; such rights are dealt with separately by Article 8, and the Court must look to that article to determine its effect. Articles 5 and 6 were enacted as a provisional method to avoid disputes among the various Provinces concerning movable and immovable property situated on the appointed day. They formed only a part of a broader scheme for allocating assets among the Provinces. The Court noted that accepting the respondent’s argument would generate several inconsistencies. For example, if the head office of the railway were located in Lahore while most of the railway lines lay in the portion of United India that is now India, the goods, although intended for the railway, would, under the vesting theory, be regarded as belonging exclusively to Pakistan. Similarly, if the entire railway lay in India and the goods were shipped via Karachi but were situated in Pakistan on the appointed day while en route to India, the argument would render the purposes of the contract, which were in reality for India, as exclusively those of Pakistan. Conversely, if the contract’s purpose was the operation of a railway wholly within the area that is now the Dominion of Pakistan, yet the goods were in the Dominion of India on the appointed day, the goods would be deemed for the purposes of India, notwithstanding that under the contract they were intended for the railway now wholly in Pakistan. In each of these scenarios the original contractual purpose—whether for India or for Pakistan—would be overridden by a legal fiction that changes the purpose based on the accidental location of the goods on the appointed day and the exigencies of transit.

The Court then referred to the decision of a full bench of the Bombay High Court in Union of India v. Chinubhai Jeshingbhai. Chief Justice Chagla, speaking at page 568, remarked that it is difficult to understand how one could argue that when a State or Dominion enters into a contract concerning property or goods belonging to it, the contract is not for the purposes of that State or Dominion. Sir Jamshedji, the Court noted, contended that “for the purposes” must be construed to mean “a contract which enures for the benefit of a particular Dominion.” The Court held that such an interpretation is not at all proper. Accordingly, the Court rejected the proposition that the purpose of a contract could be altered by the mere fact of where the goods happened to be situated on the appointed day, emphasizing that the original purpose of the contract must remain determinative.

The Court observed that once it is conceded that property belongs to a particular State or Dominion, and that State or Dominion enters into a contract with a third party concerning that property or goods, the contract by its very nature serves the purposes of that State or Dominion. It further noted that Article 8 creates a legal fiction which, by operation of that fiction, transforms a contract originally entered into by the Governor‑General in Council into a contract that serves the purposes of one Dominion or the other. In March 1947 the Government of India possessed certain quantities of long‑cloth intended for sale as surplus stock, and those goods were located at the Ordnance Parachute Factory in Lahore. The plaintiffs, who were residents of Baroda, purchased those goods through three sale notes executed on 10 March 1947. Consequently, the contract was for the purpose of purchasing goods situated in Lahore. After 15 August 1947 the said goods remained under the control of the Dominion of Pakistan. In those circumstances the High Court could possibly have been justified, though the Court does not express an opinion on that point, in holding that the contract was for the purposes of the Dominion of Pakistan, as reported in (1952) 54 Bombay Law Reports 562. One of the learned judges who participated in that decision did not accept the view that the statutory situs of the goods at the time the contract was made would automatically render the contract a purpose of the Dominion in which the goods were situated on the appointed day. In the present case he held that, although the goods were in Pakistan on the appointed day, the contract was not exclusively for the purposes of the Dominion of Pakistan. The Court further referred to observations made in Union of India v Chaman Lal Loona, although that question did not arise directly in that case. In that earlier matter, fodder had been supplied to the Military Farms at Lahore, but the Joint Defence Council retained powers to control the fodder and to direct it to any destination. On that basis it had been contended that the purpose of the contract was not exclusively for the Dominion of Pakistan. The Court rejected that contention, stating that the reasoning stemmed from a lack of proper appreciation of the distinction between the “purposes of the contract” and the ultimate disposal of the goods supplied under the contract. It emphasized that the purpose of a contract is not determined or altered by the ultimate disposal of the goods, nor by any control exercised over the goods after the contract had been performed.

The Court observed that the reasoning applied earlier, which distinguished between the purpose of a contract and the ultimate disposal of the goods supplied under that contract, also led to the conclusion that the purpose of a contract is distinct from the statutory vesting of the goods covered by the contract in a particular Dominion. In support of this view the Court referred to the earlier decision reported in volume one of the 1957 Supreme Court Reports at pages 1039 and 1050. The Court held that a proper reading of the provisions of Article 8 of the Order required that the purposes of a contract be understood as the purposes expressly mentioned in the contract itself. The Court further explained that, although either of the Dominions might be required to substitute for the Government of the United of India, this substitution must be guided by an enquiry into whether the purposes identified in the contract could be said to belong exclusively to the Dominion of Pakistan. Accordingly, the Court framed the essential question as follows: what were the purposes of the contract? Once those purposes were ascertained, the Court said, it became necessary to determine whether, on the appointed day, those purposes were attributable solely to the Dominion of Pakistan.

The Court then turned to the factual material. It noted that the correspondence between the Conservator of Forests, who was acting on behalf of the North Western Railway, and the appellants, together with the bill of lading, demonstrated that the Company had agreed to transport goods for the North Western Railway, Karachi, and that the freight charges were to be borne by that Railway. The Court pointed out that the original North Western Railway had, at the time of its formation, covered a geographical area that now lay partly in Pakistan and partly in India. The Court observed that the retention of the old name by the portion of the Railway now situated in Pakistan and the adoption of a new name by the portion now in India were accidental and did not affect the legal analysis. It emphasized that the substance of the arrangement, not the form of the name, was decisive. Consequently, the Court held that the purpose of the contract was to convey the goods to a Railway that existed in both Dominions, and therefore the contract’s purposes could not be said to be exclusively for the Dominion of Pakistan. In view of Article 8(1)(b) of the Order, the Court concluded that the contract should be considered as having been made on behalf of the Dominion of India rather than on behalf of the Governor‑General in Council, and that any liability arising under the contract therefore rested on the Dominion of India. As a result, the Court set aside the decree of the High Court and restored the decree of Tendolkar, J. The appeal was allowed with costs throughout. By the Court, in accordance with the judgment of the majority, the appeal was dismissed with costs and the final order reflected the dismissal of the appeal.