Appeal No 24 of 1954
Appeal under Article 132 read with Article 147 and Article 1331c 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 RH Dhebar for the appellant
Hardayal Hardy for the respondents
April 30
The Judgment of the Court was delivered by section 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 section 82 and section 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 was made at the time the consignment was received
The respondent had also deposited Rs 11026 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 11026 and prayed in terms of section 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 section
2 of section 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 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 article 8 of the Independence Order 1947 the contract under consideration in this case was as from the appointed day ie 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 article 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 section 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 section
1 of section 9 and in pursuance of sub section
1 of section 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 section 9 of the Indian Independence Act 1947 and was published on August 14 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
2The said Council hereinafter referred to as the Joint Defence Council shall consist of ithe 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 athe division of the Indian forces between the Dominions and their reconstitution as two separate Dominion forces bthe allocation transfer and movement of officers and men belonging to the Indian forces for the purposes of such re constitution cthe 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 article 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
2Nothing 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 81 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 aif 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 bin 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 article 81 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 article 81 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 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 article 81
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 eg 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 ie 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
43 44
On a plain reading of article 81 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 vs Union of India 1 and Krishna Ranjan vs 1 AIR 1952 Cal
1048 Union of India 1 and disapprove of the view expressed by Roxburgh J in Union of India vs Loke Nath 2
It is further clear that the first part of article 81 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 CJ in Union of India vs Chinu Bhai Jeshingbhai 3
Said the learned Chief Justice  It is clear from the language used in article 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 article 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 article 81 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 ATR 2 AIR 1952 Cal 140
3 ILR  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 article 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 article 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 article 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 article 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 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 article 81 and not cl
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 article 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 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


Summary:
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 article 81 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 vs Chinu Bhai jeshing bhai ILR 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 article 8c of the joint Defence Council Order 1947 and saved by article 32 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 article 81 makes it quite clear that the Article makes no distinction between contracts where the consideration is either executed or executory in nature and applies equally to both
Elahi Bux vs Union of India AIR 952 Cal
471 and Krishna Ranjait vs Union of India AIR 1954 Cal
623 approved
Union of India vs Loke Nath AIR 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