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PETITIONER: UNION OF INDIA

       Vs.

RESPONDENT: CHAMAN LAL LOONA

DATE OF JUDGMENT: 30/04/1957

BENCH: DAS, S.K. BENCH: DAS, S.K. DAS, SUDHI RANJAN (CJ) IMAM, SYED JAFFER MENON, P. GOVINDA SARKAR, A.K.

CITATION:  1957 AIR  652            1957 SCR 1039

ACT: Partition  of India-Distribution of rights and  liabilities- Contract by Governor-General in Council, if and when for the Purposes of Pakistan -Test-Such Purpose, if can be  modified by  Powers  of  control vested  in  Joint  Defence  Council- Adjudication of rights and liabilities under such  contract- Indian  Independence  (Rights,  Property  and   Liabilities) Order, 1947, Arts. 8(1), 3(2)--joint Defence Council  Order, 1947, Art. 8(c).

HEADNOTE: The correct test to determine whether a contract made before the partition of India on behalf of the Governor-General  in Council comes within the purview of cl. (a) of Art. 8(1)  of the  Indian Independence (Rights, Property and  Liabilities) Order, 1040 1947, so as to be deemed to have been made on behalf of  the Dominion of Pakistan, is-either (1) if the contract was made on  August 15, 1947, it would have been a contract  for  the purposes  of the Dominion of Pakistan ; or (2)  if  Pakistan had existed on the day the contract was made, it would be  a contract for the purposes of Pakistan. Union of India v. Chinu Bhai jeshing bhai, I.L.R. 1953  Bom. 117, approved. The  purpose  of a contract is not to be confused  with  the ultimate  disposal  of the goods supplied  thereunder  since such disposal can in no way determine or modify it.  Nor  do the  powers  of control over military stores vested  in  the joint  Defence  Council by Art. 8(c) of  the  joint  Defence Council  Order, 1947, and saved by Art. 3(2) of  the  Indian Independence (Rights, Property and Liabilities) Order, 1947, whereby  the goods might be transferred anywhere  in  India, make any difference and the rights and liabilities  accruing from  such  contracts fall entirely to be  adjudged  by  the provisions  of the Indian Independence Order and not by  the joint Defence Council Order. The  concluding part of Art. 8(1) makes it quite clear  that the Article makes no distinction between contracts where the

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consideration is either executed or executory in nature  and applies equally to both. Elahi Bux v. Union of India, A.I.R. 952 Cal. 471 and Krishna Ranjait v. Union of India, A.I.R. 1954 Cal. 623, approved. Union  of  India  v.  Loke  Nath,  A.I.R.  1952  Cal.   140, disapproved. Consequently, in a case where the Union of India was  sought to be made liable an 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,  which was in Pakistan on August 15,  1947,  and the  trial Court found for the Union of India but  the  High Court, taking the view that the fodder constituted  military stores  under  the exclusive control of  the  joint  Defence Council  on  August  15,  1947,  liable  to  be  transferred anywhere  in  ’India, reversed that finding,  the  contract, even assumig that view to be correct, must be held to be one exclusively for the purposes of Pakistan as from the at date and the Union of India could not be made liable thereunder.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 24 of 1954. Appeal  under Article 132 read with Article 147 and  Article 133(1)(c) of the Constitution of India from the judgment and order dated July 17, 1952, of the Punjab High Court in First Appeal  from  Order No. 9 of 1949 against the  judgment  and decree of the Sub-Judge 1st 104 Class,  Ferozepur dated February 9, 1949, in Civil  Sui  No. 134 of 1949. Porus  A. Mehta, R. Gopalakrishnan and R.H. Dhebar, for  the appellant. Hardayal Hardy, for the respondents. 1957.   April 30.  The Judgment of the Court was,  delivered by S.   K.  DAS  J.-This  is an appeal on  the  strength  of  a certificate  granted by the High Court of Punjab  at  Simla. The  appellant  is  the Union-of India  and  the  respondent Messrs.   Chaman Lal Loona and Company military  contractors at  Muktsar in the district of Ferozepur, now in the  Indian State of Punjab. The  relevant facts are these.  In the Court of the’  senior Subordinate  Judge  at  Ferozepur,  in  August,  1948,   the respondent Company made an application, purporting to be  an application under s. 8(2) and s. 20 of the Arbitration  Act, 10 of 1940, wherein the respondent alleged that in 1945  the respondent  had entered into a contract for the supply of  " bhoosa  "  (fodder) to the military department of  the  then undivided India through the Manager, Military Farms,  Lahore Cantonment.  The contract, it was alleged, was signed by the Assistant  Director, Military Farms, on behalf of  the  then Government of India.  The agreement between the parties  was that  the  said  Manager would also supply,  on  payment  of price,  wire coils in connection with the supply  of  bhoosa presumably  for the purpose of tying the bundles of  fodder, and  on  the  supply being made and on return  of  the  wire coils,  the  military department would give credit  for  the price  of  the  coils already paid by  the  respondent.   In November, 1945, the respondent supplied fodder and  returned 152  bundles  of wire coils.  The Manager,  Military  Farms, Lahore,  informed the respondent, however, that out  of  152 bundles  of wire coils, said to have been sent,  24  bundles had  not been received, though no note of such  non-delivery

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was  made  at the time the consignment  was  received.   The respondent had also deposited Rs. 11,026 by way of  security with   the  military  department  in  connection  with   the contract.  The agreement contained an 134 1042 arbitration  clause  to the effect that if a  dispute  arose between the parties, it should be decided by the  arbitrator named therein, viz., the District Commander concerned.   The respondent  said that he had a claim against  the  appellant for Rs. 720, the price of 24 bundles of wire coils at Rs. 30 per  bundle,  and for refund of Rs. 11,026,  and  prayed  in terms of s. 20 of the Arbitration Act that the appellant  be directed to ’ale the agreement and other relevant documents, and  that the Court do refer the dispute to  the  arbitrator named for the purpose of filing an award. As  required by sub-s. (2) of s. 20 of the Arbitration  Act, the  application was registered as a suit, and a notice  was issued to the appellant to show cause.  The appellant showed cause  by a written statement filed on November 4, 1948,  in which  the  two  substantial pleas taken  were-(1)  that  by reason of the provisions of the Indian Independence (Rights, Property and Liabilities) Order, 1947, hereinafter  referred to  as the Independence Order, 1947, the Dominion of  India, and later the Union of India, had no liability in respect of the contract in question, the purposes of which contract  as from  August  15, 1947, were purposes  exclusively  for  the Dominion of Pakistan; and (2) the Court at Ferozepore had no jurisdiction to try the suit, as the cause of action did not arise within its territorial jurisdiction. The  two issues which were tried by the learned  Subordinate Judge   were   the  aforesaid  issues   of   liability   and jurisdiction.   On jurisdiction, he found in favour  of  the respondent,  on  the  ground  that  the  respondent  was   a displaced  person’ living in Muktsar which is in  Ferozepore and  therefore the Court at Ferozepore had  jurisdiction  to try the suit.  The High Court affirmed this finding, and  as nothing now turns upon this issue, we are not called upon to make  any  pronouncement  thereon.   The  issue  as  to  the liability  of the appellant on the basis of the contract  in question  is, however, very much a live issue.  The  learned Subordinate  Judge found in favour of the appellant on  this issue,  and  dismissed  the  application.   The  High  Court reversed that finding, and allowed the appeal.  In reversing the finding of the learned Subordinate Judge, the High 1043 Court relied on the provisions of the Joint Defence  Council Order,  1947, to be referred to hereinafter as  the  Defence Order,  1947.   The precise ground on which the  High  Court proceeded may best be put in the words of Khosla J. who gave the leading judgment.  Khosla J. said: "  In the present case the Lahore Military farm is  situated at  Lahore  and whether the fodder was supplied in  1945  or after  the 15th of August 1947, the purpose will be  deemed. to  be a purpose of the Dominion of Pakistan on  account  of the  territorial  situation of Lahore.  But in  the  present case,  the fodder was to be supplied to a Military Farm  and the   fodder,   therefore,  constituted   Military   stores. Military  Stores  were kept joint and  under  the  exclusive control  of the Joint Defence Council who had the  power  of allocating  these  stores among the two  Dominions  and  for transferring  them  from one place to  another.   Therefore, fodder lying in the Military Farm, Lahore, was not, on  15th August  1947,  the  exclusive property of  the  Dominion  of Pakistan  but was under the exclusive control of  the  Joint

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Defence Council.  This fodder could be transferred to a farm in India and thus could become the property of the  Dominion of India.  In the circumstances, it cannot be said that  the contract for supply of fodder to the Military Farm,  Lahore, was a contract exclusively for the purposes of the  Dominion of  Pakistan  if  the contract were viewed on  the  15th  of August  1947, and, that being so, it must be held  that  the contract was not a contract exclusively for the purposes  of the Dominion of Pakistan.  The decision of the learned trial Judge on this point must, therefore, be set aside." The  principal question in this appeal is whether  the  High Court  is right in its view as to the true scope and  effect of the relevant provisions of the Independence Order,  1947, and  the  Defence  Order, 1947.   Learned  counsel  for  the appellant  has challenged the correctness of that view,  and has  submitted-(1) that on a true construction of Art. 8  of the   Independence   Order,   1947,   the   contract   under consideration  in  this case was as from the  appointed  day (i.e.,  August  15, 1947), a contract  exclusively  for  the purposes of the Dominion of 1044 Pakistan and shall be deemed to have been made on behalf  of that  Dominion,  and all rights and liabilities  which  have accrued  or  may  accrue under such contract  shall  be  the rights and liabilities of the Dominion of Pakistan; (2) that the  Defence  Order,  1947, which set  up  a  Joint  Defence Council  and provides for the exercise of certain powers  of control  by the said Council under Art. 8 of that Order  did not in any way affect the rights and liabilities arising out of the contract, which rights and liabilities were  governed by the relevant provisions of the Independence Order,  1947; and (3) that, in any view, the claim in the present case did not  relate  to military stores as the  High  Court  wrongly assumed, and the Defence Order, 1947, had no application  at all to the facts of this case. On behalf of the respondent, the correctness of each of  the above submissions has been seriously contested, and  learned counsel  for the respondent has strongly contended that  the view  of the High Court as to the relevant articles  of  the Independence  Order, 1947, and the Defence Order,  1947,  is correct.  Learned counsel also raised a preliminary point of objection to the effect that on an application under s.  20, Arbitration  Act, the only point for decision was  if  there was  an arbitration agreement and the question of  liability was one for the arbitrator and not for the Court to  decide. Ordinarily, that would be so.  When, however, we pointed out to  learned  counsel  that the Union of India  as  such  was admittedly  not  a party to the  arbitration  agreement  and could   not  be  dragged,  therefore,  to   an   arbitration proceeding  on the strength of an agreement to which it  was not a party unless by operation of law it was deemed to be a party  to  the  agreement,  learned  counsel  gave  up   his preliminary  objection  and conceded that  the  question  of liability must be decided in this case with reference to the provisions of the Independence Order, 1947, and the  Defence Order, 1947. It  is  convenient  at this stage to set  out  the  relevant provisions of the two Orders.  The Defence Order, 1947,  was made in exercise of the powers conferred by.. sub-s. (1)  of s.  9 and in pursuance of sub-s. (1) of s. II of the  Indian Independence Act, 1947, and was published 1045 on August 11, 1947.  The Independence Order, 1947, was  made in  exercise of the powers conferred by s. 9 of  the  Indian Independence  Act,  1947, and was published  on  August  14,

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1947.   Both  came  into force at once.  Article  3  of  the Defence Order, 1947, states: "  (1) As from the 15th day of August, 1947, there shall  be set  up a Council to be known as the Joint  Defence  Council for India and Pakistan. (2)The  said Council, hereinafter referred to as  the  Joint Defence Council, shall consist of- (i)the Governor-General of India, (ii) the Defence  Minister of  India, (iii) the Defence Minister of Pakistan, and  (iv) the  Supreme Commander of His Majesty’s forces in India  and Pakistan (hereinafter referred to as the Supreme Commander). " Article 8, so far as it is relevant, is in these terms: "  The Joint Defence Council shall be in  exclusive  control of- (a)the  division of the Indian forces between the  Dominions and their reconstitution as two separate Dominion forces (b)the allocation, transfer and movement of officers and men belonging to the Indian forces for the purposes of such  re- constitution; (c)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 etc." The  Independence  Order, 1947, states in Art.  2  that  the ’appointed day’ means the fifteenth August, 1947.  Article 3 so far as it is relevant for our purpose, states: "  (1)  The provisions of this Order relate to  the  initial distribution    of   rights,   property   and    liabilities consequential  on the setting up of the Dominions  of  India and Pakistan, and shall have effect subject to any agreement between the two Dominions or the Provinces concerned and  to any award that may be made by the Arbitral Tribunal. (2)Nothing in this Order affects the powers of control  over military plant, machinery, equipment 1046 and  stores  conferred on the Joint Defence Council  by  the Joint Defence Council Order, 1947.    Article 8(1), which is very important for our purpose, is in these terms: " (1) 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 first question is, what is the true scope and effect  of Art. 8(1) of the Independence Order, 1947?  Does it apply to the contract in question, and, if so, does the contract fall within  the purview of cl. (a) or cl. (b) ? At one stage  of the  argument, learned counsel for the respondent  contended that Art. 8(1) did not apply to what is sometimes  described as  executed  contracts; this point was  also  urged  before Kapur  J. of the Punjab High Court (as he then was) and  one of the reasons given by him for a reference of the case to a larger  bench was the difficulty he felt if the contract  in

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question  which has been performed and executed long  before August  15,  1947, so far as the respondent  was  concerned, attracted  the  operation of cl. (a) of Art.  8(1).   It  is necessary to appreciate clearly the distinction between  the two  classes of contracts where the consideration is  either executed or executory.  " An executed consideration consists of  an  act for a promise.  It is the act  which  forms  the consideration.........  No  contract is  formed  unless  and until the act 1047 is  performed, e.g., the payment for a railway  ticket,  but the  act stipulated for exhausts the consideration, so  that any  subsequent promise, without further  consideration,  is merely  a  nudum  pactum In an  executed  consideration  the liability  is outstanding on one side only; it is a  present as  opposed  to  a future consideration.   In  an  executory consideration  the liability is outstanding on  both  sides. It is in fact a promise for a promise; one promise is bought by  the  other  The contract is concluded  as  soon  as  the promises are exchanged.  In mercantile contracts this is  by far  the  most common variety.  In other words,  a  contract becomes binding on the exchange of valid promises, one being the  consideration for the other.  It is  clear,  therefore, that  there  is nothing to prevent one of the  parties  from carrying out his promise at once, i.e., performing his  part of  the contract; whereas the other party who  provides  the consideration  for the act of or detriment to the first  may not  carry out his part of the bargain  simultaneously  with the first party.  " (Chitty on Contracts, Vol.  I, 21st Edn. pp.  43-44).   On  a  plain reading  of  Art.  8(1)  of  the Independence  Order,  1947, it is clear that it  applies  to both classes of cases; it says, in its concluding part, that "  all  rights  and liabilities which have  accrued  or  may accrue   under  any  such  contract,  shall  be  rights   or liabilities  of the Dominion of Pakistan or the Dominion  of India,  as the case may be." If the contract has been  fully and  completely performed on both sides, no question of  any further rights and liabilities under the contract is  likely to  arise.   If, however, the contract is one in  which  the consideration is executed on one side, there will be a right on  one side and an outstanding liability on the other.   If the consideration is executory on both sides, there will  be outstanding  rights  and  liabilities  on  both  sides.   In talking  of " all rights and liabilities which have  accrued or  may  accrue"  under the contract,  the  Article  clearly contemplates  both classes of cases.  On this  question,  we approve of the view taken in Elahi Bux v. Union of India (1) and Krishna Ranjan v. (1)  A.I.R. 1952 Cal. 471. 1048 Union  of India (1) and disapprove of the view expressed  by Roxburgh  J.  in  Union of India v. Loke  Nath  (2).       It  is further clear that the first part of  Art.  8(1) creates  a  legal fiction.  The contract  is  actually  made before  August  15, 1947, (the appointed day); but  as  from that date, the contract shall be deemed to have been made on behalf  of the Dominion of Pakistan, if the contract is  for purposes which as from that day are exclusively purposes  of the Dominion of Pakistan, and in any other case it shall  be deemed to have been made on behalf of the Dominion of India. What  is the proper meaning of the expression "  a  contract for the exclusive purposes of the Dominion of Pakistan"?  We assent  to  the view expressed by Chagla C.J.  in  Union  of India v. Chinu Bhai Jeshingbhai (3).  Said the learned Chief Justice-

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"  It  is clear from the language used in art. 8  that  the test  to  be  applied with regard to this  contract  is  not whether the contract was for the purposes of the Dominion of Pakistan  at  the date when it was made. Ex  hypothesi  that test is clearly inapplicable.  All contracts contemplated by art.  8  must  be contracts which when  made  were  made  by undivided  India  by the Governor-General in  Council.   The test that must be applied is an artificial test and the test may  be  either  if the contract had 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." This, we think, is the correct test to apply for determining the  true scope and effect of Art. 8(1) of the  Independence Order, 1947, and applying this test, there is no doubt  that the  contract  in question comes under cl. (a) of  the  said Article.   The purpose of the contract was to supply  fodder to  the  Manager, Military Farms, Lahore  Cantonment,  which farms  were in Pakistan on the appointed day.  The  contract was, therefore (1)  A.T.R. 1954 Cal. 623. (2)  A.I.R. 1952 Cal. 140. (3) I.L.R. 1953 Bom. 117, 130. 1049 exclusively for the purposes of the Dominion of Pakistan  as from the appointed day. The  second  question is-do the provisions  of  the  Defence Order, 1947, make any difference in the legal position ? The High  Court thought, erroneously in our opinion,  that  they did.  It is true that cl. (2) of Art. 3 of the  Independence Order,  1947,  says that nothing in that Order  affects  the powers of control over military plant, machinery,  equipment and  stores  conferred on the Joint Defence Council  by  the Defence   Order’  1947.   Clause  (3)  of  Art.  3  of   the Independence Order, 1947, states that the powers of  control over  property  conferred upon each Dominion  by  the  Order shall  include  all powers of use,  consumption,  management etc.  This, however, is subject to such powers of control as are  given  to the Joint Defence Council.  Those  powers  of control are laid down in Art. 8 of the Defence Order,  1947, el.  (c) of which relates to "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 point which is to be emphasised is that what is saved by cl. (2) of Art. 3 of the Independence Order, 1947, is ’Powers of control’ of the Joint Defence Council with regard to certain essential military equipment etc. includingstores.  There is no  provision in the Defence Order, 1947, which affects  the rights and liabilities of any of the two Dominions aris. ing out  of  a contract, and those rights  and  liabilities  are dealt  with  by the Independence Order, 1947.   The  learned Judges  of  the High Court thought that the  Defence  Order, 1947,  made a difference in the legal position in so far  as the  purpose of the contract was concerned.   They  realised and said that ordinarily the purpose of supplying fodder  to the  Military Farms at Lahore was a purpose exclusively  for the  Dominion  of  Pakistan; but they thought  that  on  the assumption  that  ’bhoosa’  was military  store,  the  Joint Defence Council had powers of control over it and could send it wherever they wanted it to be sent; therefore, they 135

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1050 said  that  the purpose of the contract was  not  a  purpose exclusively for the Dominion of Pakistan. We  say this with great respect, but this line of  reasoning appears to us to be due to a lack of proper appreciation  of the  distinction between the "purpose of the  contract"  and the  "ultimate  disposal of the goods"  supplied  under  the contract.  The purpose of the contract is not determined nor modified  by  the ultimate disposal of  the  goods  supplied under  the  contract,  nor even by  the  powers  of  control exercised  over  the  goods  after  the  contract  had  been performed  by the respondent.  Wherever the goods  might  be ultimately  sent, the purpose of the contract remained  what it  was, that is, to supply fodder to the Manager,  Military Farms,  Lahore,  which,  on the test laid down  by  us,  was clearly a purpose exclusively for the Dominion of  Pakistan. The  Independence  Order, 1947,  determines  the  respective rights  and  liabilities  under contracts.   If,  under  the Defence Order, 1947, some goods the liability for the  price of which under the Independence Order, 1947, falls on,  say, India, are allotted to Pakistan, then the value thereof will have  to be adjusted in accounts.  Such allotment  does  not alter  the  rights  or  liabilities  determined  under   the Independence  Order, 1947.  We are, therefore, of  the  view that the High Court of Punjab was in error in inferring that on  the strength of certain provisons of the Defence  Order, 1947,  the contract in question came within el. (b) of  Art. 8(1),   and  not  cl.  (a).   We  think  that  the   learned Subordinate  Judge correctly held that cl. (a)  applied  and the Union of India had no liability under the contract. Only  a  few  words are necessary to dispose  of  the  third contention  urged before us.  The claim in the present  case was a claim for a refund of the price paid for 24 bundles of wire  coils and of the security deposit.  Such a  claim  did not relate to military stores, and the Defence Order,  1947, had no direct application to such a claim.  It was only  for examining  the purpose of the contract that the question  of ’bhoosa’ being military store arose.  The High Court assumed that ’bhoosa’ was military store.  Without deciding  whether ’bhoosa’ is military store or not, we have also proceeded on the 1051 same  assumption; but even on that assumption, there  is  no difference  in  the  legal position.   The  purpose  of  the contract  was still a purpose which, as from  the  appointed day, was a purpose exclusively for the Dominion of Pakistan. It  is worthy of note that el. (c) of Art. 8 of the  Defence Order,  1947,  relates  inter alia to  stores  held  by  the Governor-General  in Council immediately before  August  15, 1947,  for  the purposes of the Indian  forces.   There  was nothing in the record to show that the ’bhoosa’ supplied  by the  respondent in 1945 was held by the Governor-General  in Council  immediately before August 15, 1947, so as  to  vest the  power  of  control in the  Joint  Defence  Council  and thereby affect the purpose of the contract, assuming, though we  do not so decide, that such power of control can  affect the purpose of the contract. The  original contract was not produced in this case, as  it was  not available in the appropriate office in India.   The respondent  did  not even produce a copy thereof,  but  gave oral evidence as to the purpose of the contract.  The Courts below  proceeded on that oral evidence, and the  appeal  was argued  before us on that footing.  We have  determined  the purpose of the contract as on August 15, 1947, on the  basis of  that evidence, without deciding the further question  if

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oral evidence was admissible in this case as to the  purpose of the contract. For the reasons given above, we allow this appeal, set aside the judgment and decree of the High Court, and restore those of  the learned Subordinate Judge.  The appellant  will  get costs throughout.                            Appeal allowed. 1052