Union of India vs Chaman Lal Loona

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

Court: supreme-court

Case Number: Civil Appeal No. 24 of 1954

Decision Date: 30 April 1957

Coram: S.K. Das, Syed Jaffer Imam, P. Govinda Menon, A.K. Sarkar

In the matter titled Union of India versus Chaman Lal Loona, the Supreme Court of India delivered its judgment on 30 April 1957. The opinion was authored by Justice S.K. Das and was rendered by a bench consisting of Justices S.K. Das, Syed Jaffer Imam, P. Govinda Menon and A.K. Sarkar. The citation of the decision appears in the All India Reporter at 1957 AIR 652 and in the Supreme Court Reports at 1957 SCR 1039. The case concerned the legal consequences of a contract entered into before the Partition of India on behalf of the Governor‑General in Council, particularly whether such a contract fell within clause (a) of article 8(1) of the Indian Independence (Rights, Property and Liabilities) Order, 1947, and thus could be treated as a contract made on behalf of the Dominion of Pakistan.

The Court articulated the correct test for determining the applicability of article 8(1). The test required either that the contract have been made on 15 August 1947, in which event it would be a contract for the purposes of Pakistan, or that Pakistan have existed on the date the contract was made, which would likewise render it a contract for Pakistan’s purposes. The Court noted that the purpose of a contract must not be conflated with the ultimate disposal of the goods supplied under it, because the disposal does not alter or define the contract’s purpose. Moreover, the powers of control over military stores vested in the Joint Defence Council by article 8(c) of the Joint Defence Council Order, 1947, and preserved by article 3(2) of the Indian Independence Order, do not affect the determination of rights and liabilities arising from such contracts; these rights and liabilities are to be adjudicated solely under the provisions of the Indian Independence Order, not under the Joint Defence Council Order.

The Court further observed that the concluding part of article 8(1) makes clear that the provision does not distinguish between contracts where the consideration is executed or executory; the same rule applies to both categories. The decisions in Elahi Bux v. Union of India (AIR 952 Cal. 471) and Krishna Ranjait v. Union of India (AIR 1954 Cal. 623) were approved, whereas Union of India v. Loke Nath (AIR 1952 Cal. 140) was disapproved. Consequently, the Court held that in the present case, where the Union of India was sought to be held liable on the basis of a contract entered into on behalf of the Governor‑General of India in Council for the supply of fodder to the Manager, Military Farms, Lahore Cantonment—a location that was in Pakistan on 15 August 1947—the trial Court’s finding in favor of the Union could not stand. The contract, even if considered a military store under the exclusive control of the Joint Defence Council, must be regarded as a contract exclusively for the purposes of Pakistan from that date, and therefore the Union of India could not be held liable under it.

In the earlier decision the trial court had held that the Union of India was liable under the contract. The High Court, however, adopted a different view. It considered that the fodder supplied under the contract constituted military stores that were under the exclusive control of the joint Defence Council on 15 August 1947. The High Court therefore treated the stores as property that could be transferred anywhere in India. On that basis it reversed the trial court’s finding. Even assuming that the High Court’s view of exclusive control was correct, the High Court concluded that the contract must be regarded as a contract exclusively for the purposes of Pakistan from the date of partition, and consequently the Union of India could not be held liable under it.

The present appeal arose under Civil Appeal No. 24 of 1954. The appeal was filed under Article 132 read with Article 147 and Article 133(1)(c) of the Constitution of India. It challenged the judgment and order dated 17 July 1952 of the Punjab High Court, which was a first appeal from Order No. 9 of 1949. That order had been passed against the judgment and decree of the Sub‑Judge 1st Class, Ferozepur, dated 9 February 1949, in Civil Suit No. 134 of 1949. Counsel for the appellant, the Union of India, consisted of Porus A. Mehta, R. Gopalakrishnan and R. H. Dhebar. Counsel for the respondents, Messrs Chaman Lal Loona and Company, was Hardayal Hardy. The judgment of the Supreme Court was delivered on 30 April 1957 by Justice S. K. Das.

The appeal was based on a certificate granted by the Punjab High Court at Simla. The appellant was the Union of India and the respondents were the firm Chaman Lal Loona and Company, which operated as military contractors at Muktsar in the district of Ferozepur, now within the Indian state of Punjab. The material facts began with an application filed in the court of the senior Subordinate Judge at Ferozepur in August 1948. The respondent company filed the application as if it were made under section 8(2) and section 20 of the Arbitration Act, 1940. In that application the respondents claimed that in 1945 they had entered into a contract to supply “bhoosa” (fodder) to the military department of the undivided India through the Manager of Military Farms located in Lahore Cantonment.

The respondents asserted that the contract had been signed by the Assistant Director of Military Farms on behalf of the Government of India then in existence. According to the agreement, the Manager was also to supply wire coils, for a price, to be used for tying the bundles of fodder. The contract stipulated that after the fodder was supplied and the wire coils were returned, the military department would credit the respondent for the price already paid for the coils. In November 1945 the respondents delivered the fodder and returned 152 bundles of wire coils. Subsequently the Manager at Military Farms, Lahore, informed the respondents that, of the 152 bundles reported as returned, 24 bundles had not actually been received, although no contemporaneous note of the missing bundles had been made at the time of receipt.

The respondents also deposited a security amount of Rs 11,026 with the military department in connection with the contract. The contract contained an arbitration clause specifying that any dispute arising between the parties should be decided by the arbitrator named in the agreement, namely the District Commander.

In this matter, the respondent asserted a monetary claim against the appellant amounting to Rs 720 for the price of twenty‑four bundles of wire coils calculated at Rs 30 per bundle, and also sought the refund of Rs 11,026 that had been deposited as security. The respondent invoked section 20 of the Arbitration Act and prayed that the appellant be ordered to produce the agreement and all other relevant documents, and that the dispute be referred to the arbitrator named in the contract for the purpose of rendering an award. Pursuant to sub‑section (2) of section 20, the application was entered as a suit and a notice to show cause was issued to the appellant. The appellant responded by filing a written statement on 4 November 1948, in which two principal pleas were advanced. The first plea contended that, by virtue of the provisions of the Indian Independence (Rights, Property and Liabilities) Order, 1947 (referred to as the Independence Order), the Dominion of India, subsequently the Union of India, bore no liability under the contract because, from 15 August 1947, the contract’s purpose was deemed to be solely for the Dominion of Pakistan. The second plea asserted that the Court at Ferozepore lacked jurisdiction to try the suit because the cause of action did not arise within its territorial jurisdiction. The learned Subordinate Judge considered both the liability issue and the jurisdictional issue. Regarding jurisdiction, the judge held in favour of the respondent, reasoning that the respondent, though a displaced person, was residing in Muktsar, which fell within the jurisdiction of the Ferozepore Court; consequently, the court was competent to hear the suit. The High Court affirmed this finding, and, since the jurisdictional question was therefore settled, no further pronouncement on it was required.

The question of the appellant’s liability under the contract remained open and was vigorously contested. The Subordinate Judge initially found in favour of the appellant on the liability issue and dismissed the respondent’s application. However, the High Court reversed that decision, allowing the appeal and holding the appellant liable. In reaching this conclusion, the High Court relied upon the Joint Defence Council Order, 1947 (referred to as the Defence Order). The leading judgment was delivered by Justice Khosla, who explained that although the Lahore Military Farm was situated in Lahore and, prima facie, any supply of fodder after 15 August 1947 might be considered to serve the Dominion of Pakistan because of Lahore’s territorial status, the fodder in question constituted military stores. Such stores were held jointly and under the exclusive control of the Joint Defence Council, which possessed the authority to allocate them between the two Dominions and to transfer them from one location to another. Consequently, the fodder located at the Lahore Military Farm on 15 August 1947 was not the exclusive property of the Dominion of Pakistan but remained under the exclusive control of the Joint Defence Council and could be transferred to a farm in India, thereby becoming property of the Dominion of India. In these circumstances, the contract for the supply of fodder to the Lahore Military Farm could not be characterised as a contract exclusively for the purposes of the Dominion of Pakistan when viewed as of 15 August 1947. Therefore, the contract was not exclusively for Pakistan’s purposes, and the trial judge’s decision on this point had to be set aside.

The Joint Defence Council possessed the authority to allocate military stores between the two Dominions and to move those stores from one location to another. Consequently, the fodder that lay in the Military Farm at Lahore on 15 August 1947 was not the exclusive property of the Dominion of Pakistan; instead, it remained under the exclusive control of the Joint Defence Council. Because the Council could transfer that fodder to a farm situated in India, the fodder could subsequently become the property of the Dominion of India. In these circumstances, it could not be said that the contract for supplying fodder to the Lahore Military Farm was a contract solely for the purposes of the Dominion of Pakistan when viewed as of 15 August 1947. Accordingly, the contract was not exclusively for the purposes of Pakistan, and the decision of the learned trial judge on this point had to be set aside. The principal issue on appeal is whether the High Court correctly construed the true scope and effect of the relevant provisions of the Independence Order, 1947, and the Defence Order, 1947. Counsel for the appellant challenged the High Court’s view and submitted three contentions. First, a proper construction of Article 8 of the Independence Order, 1947, makes the contract in question, from the appointed day of 15 August 1947, a contract exclusively for the purposes of the Dominion of Pakistan, deemed to have been made on behalf of that Dominion, with all rights and liabilities accruing thereafter belonging to Pakistan. Second, the Defence Order, 1947, which established the Joint Defence Council and confers certain powers of control under its Article 8, does not affect the rights and liabilities arising from the contract, which remain governed solely by the provisions of the Independence Order, 1947. Third, the claim in the present case does not relate to military stores as the High Court assumed, and therefore the Defence Order, 1947, has no application to the facts. Counsel for the respondent vigorously contested each of these submissions, maintaining that the High Court’s interpretation of the Independence Order and the Defence Order is correct. The respondent’s counsel also raised a preliminary objection, arguing that under section 20 of the Arbitration Act, the only issue for determination was whether an arbitration agreement existed, and that questions of liability were matters for the arbitrator, not for the Court. While ordinarily that principle would apply, the Court pointed out that, in the present circumstances, further analysis was required.

The Court observed that the Union of India, in its capacity as a sovereign body, was not a signatory to the arbitration agreement and therefore could not be compelled to participate in an arbitration proceeding on the basis of an agreement to which it had not adhered, unless the law deemed it a party by operation of statute. Upon this clarification, counsel for the respondent withdrew his earlier preliminary objection and acknowledged that the issue of liability in the present dispute had to be examined in light of the provisions contained in the Independence Order, 1947, and the Defence Order, 1947. The Court then found it appropriate to detail the operative clauses of both Orders for the record. It noted that the Defence Order, 1947, had been promulgated pursuant to the authority conferred by sub‑section (1) of section 9 and sub‑section (1) of section II of the Indian Independence Act, 1947, and that it had been officially published on 11 August 1947. Likewise, the Independence Order, 1947, had been issued under the powers granted by section 9 of the Indian Independence Act, 1947, and had been published on 14 August 1947; both Orders became effective simultaneously. Article 3 of the Defence Order, 1947, provided that from the fifteenth day of August 1947 a Joint Defence Council for India and Pakistan would be established. The Council was to comprise the Governor‑General of India, the Defence Minister of India, the Defence Minister of Pakistan, and the Supreme Commander of His Majesty’s forces in India and Pakistan, who was designated as the Supreme Commander. Article 8 of the same Order, as relevant to the present matter, stipulated that the Joint Defence Council would have exclusive authority over three matters: (a) the division of the Indian forces between the two Dominions and their reconstitution as separate Dominion forces; (b) the allocation, transfer and movement of officers and men of the Indian forces for the purpose of such reconstitution; and (c) the allocation, transfer and movement, for the purpose of reconstitution, of plant, machinery, equipment and stores that had been held by the Governor‑General in Council immediately before 15 August 1947 for use by the Indian forces. Turning to the Independence Order, 1947, the Court highlighted that Article 2 defined the “appointed day” as 15 August 1947. Article 3, insofar as it pertained to the case, declared that the Order’s provisions dealt with the initial distribution of rights, property and liabilities resulting from the creation of the Dominions of India and Pakistan, and that they would operate subject to any agreement between the two Dominions or the concerned provinces, as well as any award that might be rendered by an Arbitral Tribunal. Moreover, Article 3 clarified that nothing in the Order would diminish the powers of the Joint Defence Council over military plant, machinery, equipment and stores as conferred by the Joint Defence Council Order, 1947. Finally, Article 8(1) of the Independence Order, described by the Court as particularly significant, provided that any contract entered into on behalf of the Governor‑General in Council before the appointed day would, from that day forward, be deemed to have been made on behalf of the Dominion of Pakistan if the contract’s purpose was exclusively that of Pakistan, or on behalf of the Dominion of India in all other cases; consequently, all rights and liabilities arising from such contracts would be attributed to the respective Dominion as if they were the rights and liabilities of the Governor‑General in Council.

The Independence Order of 1947 stipulates that any contract entered into on behalf of the Governor‑General in Council prior to the appointed day shall, from that appointed day onward, be treated in a specific manner. If the contract afterwards relates exclusively to purposes of the Dominion of Pakistan, the contract shall be regarded as having been made on behalf of the Dominion of Pakistan rather than on behalf of the Governor‑General in Council. In every other circumstance, the contract shall be treated as having been made on behalf of the Dominion of India instead of the Governor‑General in Council. Furthermore, every right or liability that has already arisen or may arise under such a contract shall, to the extent that it would have been a right or liability of the Governor‑General in Council, become a right or liability of the Dominion of Pakistan or the Dominion of India, whichever is appropriate. The Court first sought to determine the true scope and effect of Article 8(1) of the Independence Order. It asked whether the provision applied to the contract that was the subject of the litigation and, if so, whether that contract fell within clause (a) – the Pakistan‑exclusive category – or clause (b) – the India‑category.

During the proceedings, counsel for the respondent argued that Article 8(1) should not be applied to contracts that are sometimes described as “executed contracts.” The same point was raised before the Punjab High Court when Kapur J. was presiding. Kapur J. indicated that he was inclined to refer the matter to a larger bench because of the difficulty he perceived in applying clause (a) of Article 8(1) to a contract that, in the respondent’s view, had been fully performed and executed long before 15 August 1947. The Court therefore needed to appreciate clearly the distinction between two different classes of contracts – those whose consideration is executed and those whose consideration is executory – in order to decide whether the provision of Article 8(1) could cover the contract in question.

The judgment explained that an executed consideration consists of an act performed in exchange for a promise. In such a situation the act itself forms the consideration, and no contract is deemed to exist until that act is carried out. For example, the payment of a railway ticket exhausts the consideration; any subsequent promise made without fresh consideration is merely a “nudum pactum.” In an executed consideration the liability remains outstanding only on one side; it is a present, not a future, consideration. By contrast, an executory consideration involves a promise for a promise, where each party’s liability is outstanding on both sides. The contract is concluded as soon as the promises are exchanged, a pattern most common in mercantile dealings. Consequently, a party may fulfil its promise immediately, performing its part of the contract, while the other party who provides the reciprocal consideration may still have a future obligation to perform. This distinction was crucial for determining whether the contract fell within clause (a) or clause (b) of Article 8(1) and whether the rights and liabilities would pass to the Dominion of Pakistan or the Dominion of India.

In this case the Court noted that a quotation from Chitty on Contracts (Vol. I, 21st Edn., pp. 43‑44) explained the principle that consideration must be executed simultaneously with the first party. Turning to the statutory provision, the Court read Article 8(1) of the Independence Order, 1947, and held that a plain reading showed the article applied to both categories of contracts. The provision concludes by stating that “all rights and liabilities which have accrued or may accrue under any such contract shall be rights or liabilities of the Dominion of Pakistan or the Dominion of India, as the case may be.” The Court explained that where a contract has been fully performed by both parties, no further rights or liabilities can arise. Conversely, if the consideration has been executed on only one side, a right exists on that side while a liability remains outstanding on the other. Where the consideration is executory on both sides, rights and liabilities remain outstanding for both parties. By referring to “all rights and liabilities which have accrued or may accrue,” the Article clearly contemplated both situations. On this point the Court approved the view expressed in Elahi Bux v. Union of India (1) and Krishna Ranjan v. Union of India (1) A.I.R. 1952 Cal. 471, and rejected the view articulated by Roxburgh J in Union of India v. Loke Nath (2). The Court further observed that the first part of Article 8(1) creates a legal fiction: although the contract was actually concluded before the appointed day of 15 August 1947, from that date it is deemed to have been made on behalf of the Dominion of Pakistan if, as of that date, it serves exclusively the purposes of Pakistan; otherwise it is deemed to have been made on behalf of the Dominion of India. Addressing the meaning of “a contract for the exclusive purposes of the Dominion of Pakistan,” the Court accepted the reasoning of Chief Justice Chagla in Union of India v. Chinu Bhai Jeshingbhai (3). The Chief Justice had observed that the language of Article 8 does not require examining whether the contract served Pakistan’s purposes at the time it was made; such a hypothetical test is inapplicable. All contracts within Article 8 must have been entered into by undivided India through the Governor‑General in Council. The appropriate test is artificial: one must consider whether, had the contract been entered into on 15 August 1947, it would have been for Pakistan’s exclusive purposes, or whether, had Pakistan existed at the time of the contract, it would have been for Pakistan’s purposes. This was the test the Court affirmed.

The Court held that the appropriate test for ascertaining the true scope and effect of Article 8 (1) of the Independence Order, 1947, was the one previously articulated, and that applying this test left no doubt that the contract in dispute fell within clause (a) of that article. The contract’s purpose was to supply fodder to the Manager of the Military Farms in the Lahore Cantonment, those farms being situated in Pakistan on the appointed day. Accordingly, the contract was, as reflected in the authorities cited—(1) A.T.R. 1954 Cal. 623; (2) A.I.R. 1952 Cal. 140; (3) I.L.R. 1953 Bom. 117, 130—exclusively for the purposes of the Dominion of Pakistan from that appointed day onward.

The second issue concerned whether the provisions of the Defence Order, 1947, altered the legal position. The Court observed that the High Court had erroneously concluded that they did. While it is correct that clause (2) of Article 3 of the Independence Order, 1947, provides that nothing in that Order impairs the powers of control over military plant, machinery, equipment and stores vested in the Joint Defence Council by the Defence Order, 1947, clause (3) of the same article further states that the powers of control over property conferred on each Dominion include all powers of use, consumption, management and similar functions. However, such powers are subject to the control powers granted to the Joint Defence Council. Those control powers are enumerated in Article 8 of the Defence Order, 1947, element (c), which concerns “the allocation, transfer and movement for the purposes of such reconstitution of plant, machinery, equipment and stores held by the Governor‑General in Council immediately before the 15th day of August, 1947, for the purposes of the Indian forces.” The Court emphasised that clause (2) of Article 3 of the Independence Order merely preserves the Joint Defence Council’s “powers of control” over certain essential military equipment and stores. No provision in the Defence Order, 1947, modifies the rights and liabilities of either Dominion arising from a contract; those rights and liabilities are governed exclusively by the Independence Order, 1947. The High Court judges had believed that the Defence Order affected the legal position regarding the contract’s purpose. They acknowledged that, ordinarily, supplying fodder to the Military Farms at Lahore represented a purpose solely for the Dominion of Pakistan, but they argued that, assuming “bhoosa” was a military store, the Joint Defence Council’s control powers could redirect it elsewhere, thereby negating an exclusive purpose for Pakistan. The Court respectfully disagreed, attributing this conclusion to an insufficient appreciation of the distinction between the contract’s purpose and the subsequent disposition of the goods.

In this case, the Court emphasized the need to distinguish between the purpose for which a contract was entered into and the later ultimate disposal of the goods that were supplied under that contract. It held that the purpose of a contract is not determined, nor can it be altered, by the eventual destination of the goods or by any powers of control that might be exercised over the goods after the respondent had performed its contractual obligations. Consequently, regardless of where the goods might ultimately be sent, the purpose of the contract remained unchanged: it was to supply fodder to the Manager of the Military Farms at Lahore, and, applying the test previously laid down by the Court, that purpose was unequivocally a purpose that was exclusively for the Dominion of Pakistan. The Court further observed that the Independence Order of 1947 is the instrument that determines the respective rights and liabilities of the parties under contracts. Accordingly, if, under the Defence Order of 1947, certain goods for which the price liability under the Independence Order falls on India are subsequently allotted to Pakistan, the monetary value of those goods must be adjusted in the respective accounts, but such an allotment does not modify the rights or liabilities that were originally determined by the Independence Order. On this basis, the Court concluded that the High Court of Punjab was mistaken in inferring, on the strength of certain provisions of the Defence Order, that the contract in question fell within paragraph (b) of Article 8(1) rather than paragraph (a). The Court agreed with the learned Subordinate Judge that paragraph (a) applied and that the Union of India therefore bore no liability under the contract. Regarding the third contention raised before the Court, it noted that the claim in the present proceedings was a claim for the refund of the price paid for twenty‑four bundles of wire coils together with the security deposit. Such a claim did not relate to military stores, and consequently the Defence Order of 1947 had no direct bearing on it. The issue of whether “bhoosa” was a military store arose only in the context of examining the purpose of the contract; the High Court had assumed that “bhoosa” was a military store. Though the Court did not decide the correctness of that assumption, it proceeded on the same premise and found that, even if “bhoosa” were a military store, the legal position would remain unchanged because the purpose of the contract continued to be one that, from the appointed day, was exclusively for the Dominion of Pakistan. The Court also noted that paragraph (c) of Article 8 of the Defence Order, 1947, concerns, inter alia, stores that were in the possession of the Governor‑General in Council immediately before 15 August 1947 for the use of the Indian forces. No record showed that the “bhoosa” supplied by the respondent in 1945 was held by the Governor‑General in Council immediately before that date, and therefore there was no basis to vest any power of control in the Joint Defence Council that could affect the contract’s purpose, even assuming that such a power of control might have such an effect. The original contract therefore remained unaffected.

The original contract was not produced in this case because it could not be located in the appropriate office in India. The respondent failed to provide a written copy of the contract and instead relied solely on oral testimony to explain the purpose of the agreement. The lower courts accepted that oral testimony and based their findings on it; consequently, the appeal before this Court was also framed on the basis of that oral evidence. After reviewing the material that had been placed before it, the Court determined the purpose of the contract as it stood on 15 August 1947, relying on the oral statements that had been given, while expressly refraining from deciding whether such oral evidence was admissible for the purpose of ascertaining the contract’s objective. In view of the foregoing reasoning, the Court allowed the appeal, set aside both the judgment and decree of the High Court, and restored the judgment and decree of the learned Subordinate Judge. The Court also ordered that the appellant be awarded costs throughout the proceedings, and marked the appeal as allowed.