Appeal No 97 of 1966
Appeal from the judgment and decree dated January 11 1962 of the Madhya Pradesh High Court in First Appeal No I 1 5 of 1958
M section Gupta for the appellants
I N Shroff for respondent No1 
The Judgment of the Court was delivered by P Jaganmohan Reddy J
This appeal is by certificate granted by the High Court of Madhya Pradesh under Article 133 i a of the Constitution of India against its judgment and decree by which it reversed the judgment and decree of the Addl
209 District Judge Ambikapur
The High Court held that the claim of the appellant on the promisory note executed by the Maharaja of Surguja an erstwhile Ruler whose state was merged in Madhya Pradesh could not be enforced against the Ist Respondent the State of Madhya Pradesh because after the cession of the erstwhile State the new State had not expressly or impliedly undertaken to meet that liability
In other words the plea of an act of State  raised by the 1st respondent was accepted
The circumstances in which the suit was filed by the appellants and the array of parties may now be stated
Appellants 1 2 3 and deceased Hira Lal were brothers and members of a Joint Hindu family
Appellant 4 is the wife of Hira Lal appellants 5 to 7 are his sons and appellant 8 is the grand son
All these appellants along with appellants I to 3 constitute a Joint Hindu family which was carrying on business of construction of buildings under the name and style of Hira Lal  Bros at Ambikapur in the erstwhile State of Surguja
The allegations in the suit filed by the appellant against the respondent State was that they had constructed buildings of the District Court and the Secretariat at Ambikapur in 1936
The work was completed but in so far as payment was concerned there was a difference of opinion about the measurements etc
but ultimately it was decided to pay to the appellants Rs 80000 on account of the said construction and accordingly the Maharaja of Surguja 2nd respondent executed a promisory note in favour of the appellants on 27 9 1947 for Rs 80000 with interest  Rs 3 per annum
Thereafter the Madhya Pradesh Government took over the administration of the State of Surguja on 1 1 48 after the merger of the Chattisgarh State and consequently the Court building as well as Secretariat buildingwere taken possession of by the Government
When the appellants claimed the money from the State of Madhya Pradesh it neither accepted the claim nor paid them
The appellants after giving a notice us 80 of the Code of Civil Procedure filed a suit
On the pleadings the Trial Court had framed several issues but it is unnecessary to notice them in any great detail except to say that the claim of Rs 80000 was held to be valid that this amount was payable on account of the construction of the build  things known as Court and Secretariat buildings that the promote was not without consideration that the first defendant was the successor in interest of Surguja State and is liable to pay the claim with interest and that the amount was not due to the plaintiffs on account of the personal obligation and liability of the 2nd respondent
The Court also found against the first respondent on the issue relating to jurisdiction and negatived the defence that it is not liable because of an act of State
In so far as the defendant the Maharaja of Surguja was concerned it held that the suit was 210 not maintainable against him without the consent of the Central Govt
as required under section 86 of the Civil Procedure Code and that the liability was not a personal obligation of the Maharaja but an obligation incurred on account of his State
In the result as we said earlier the Court awarded a decree for Rs 87200 with full cost against the first defendant and discharged the second defendant
In appeal the High Court noticing that it is the admitted case of the parties that the District Court and the Secretariat building were public property and were in the possession of the first defendant as such and that that the liability in respect thereof was incurred by the Maharaja was not merely his personal liability but was a liability incurred on behalf of the State of Surguja however reversed the judgment of the Trial Court by holding the the liability of the State of Surguja under the pronote was at best a contractual liability and this liability could only be enforced against the State of Madhya Pradesh if after the cession of the erstwhile State of Surguja the new State had expressly or impliedly undertaken to meet that liability which it had not done
When this appeal came up on an earlier occasion a Civil Miscellaneous Petition 429 of 1969 was filed by the appellant that inasmuch as the petitioners had been advised to approach the State Govt
again for making proper representation and to canvass their claim before the appropriate authority on the basis of the concurrent findings of the Courts below and or any other appropriate orders permission may be accorded to them to pursue this course
The Respondents advocate did not oppose this petition and accordingly the matter was adjourned
But it would appear that no concrete results could be achieved
In this appeal what we have to consider is whether the plea of an act of State is sustainable having regard to the concurrent findings of the Court namely that the Court and Secretariat buildings were constructed by the appellants that the erstwhile Maharaja the second respondent had admitted the claim and executed a promisory note that the liability was incurred in respect of public buildings for which the State of Surguja was liable
The fact that appellants were asked to supply details of their claim and the first respondent was prepared to consider it has been urged as being tantamount to the acceptance of the liability
In our view no such inference can be drawn
It is open to the State to examine and to satisfy itself whether it is going to honour the liability or not but that is not to say that it had waived its defence of an act of State if such a defence was open to it
What constitutes an act of State has been considered and the principles enunciated in numerous cases both of the Privy Council and of this Court have been stated
Many of these decisions were examined and discussed by the High Court in its judgment and it is unnecessary for 1 211 us to re examine them in any great detail
These decisions lay down clearly that when a territory is acquired by a sovereign state for the first time that is an act of State
As pointed out in Raja Rajender Chand vs Sukhi  other  that it matters not how the acquisition has been brought about
It may be by conquest it may be by cession following on treaty it may be by occupation of territory hitherto unoccupied by a recognised ruler
In all cases the result is the same
Any inhabitant of the territory can make good in the Municipal Courts established by the new sovereign only such rights as that sovereign has through his officers recognised
The principle upon which the liability of an erstwhile ruler is contested by the plea of an act of State is an exercise of sovereign power against an alien and neither intended nor purporting to be legally founded
A defence of this kind does not seek to justify the action with reference to the law but questions the very jurisdiction of the Courts to pronounce upon the legality or justice of the Action s vide State of Saurashtra vs Memon Haji Ismail 
In Vaje Singh Ji Joravar Singh and others vs Secretary of State for India in Council  it was observed  After a sovereign State has Acquired territory either by conquest or by cession under treaty or by the occupation of territory theretofore unoccupied by a recognized ruler or otherwise an inhabitant of the territory can enforce in the Municipal Courts only such proprietary rights as the sovereign has conferred or recognized
Even if a treaty of cession stipulates that certain inhabitants shall enjoy certain rights that gives them no right which they can so enforce
The meaning of a general statement in a proclamation that existing rights will be recognized is that the Government will recognize such rights as upon investigation it finds existed
The Government does not thereby renounce its right to recognize only such titles as it considers should be recognized nor confer upon the Municipal Courts any power to adjudicate in the matter
It is the acceptance of the claim which would have bound the new sovereign State and the act of State would then have come to an end
But short of an acceptance either express or implied the time for the exercise of the Sovereign right to reject a claim was still open 212 It appears to us that an act of State is an exercise of sovereign power over a territory which was not earlier subject to its sway
When such an event takes place and the territory is merged although sovereign might allow the inhabitants to retain their old laws and customs or undertake to honour the liabilities etc it could not be itself bound by them until it purported to act within the laws by bringing to an end the defence of act of State 
The learned advocate for the appellant was unable to refer us to any authority which will justify any variation of this rule in the case of liability incurred in respect of a public property of the erstwhile State which the successor State has taken over and retains as part of its public property
The judgment of the High Court is in accord with the well recognized principles of law declared from time to time by this Court
In our view the defence of Act of State  however unreasonable and unjust it may appear to be can be successfully pleaded and sustained by Ist respondent to non suit the appellants
The appeal is dismissed accordingly but without costs
RKPS Appeal dismissed


Summary:
The appellants constructed certain public buildings in a princely state and the Maharaja admitted the claim of the appellants and executed a promissory note for the amount claimed
The princely State was merged with State of Madhya Pradesh and the State Government respondent took over the possession of the public buildings
On the question of the liability of the respondent to pay the amount of the promissory note HELD 1 The fact that the appellants were asked by the respondent to supply details of their claim did not amount to an acceptance of the liability
It was open to the respondent to examine and satisfy itself whether it should honour the liability or not and it could not be said that the State had waived its defence
of Act of State
2 An Act of State is an exercise of sovereign power over a territory which was not earlier subject to its sway
When such an event takes place and territory is merged although the sovereign might allow the inhabitants to retain their old laws and customs or undertake to honour the liabilities it could not be itself bound by them until it purported to act within the laws by bringing to an end the defence of Act of State he rule applies even in case of a public property of the erstwhile State which the successor State takes over and retains as part of its public property
212 A Raja Rajender Chand vs Sukhi  Ors
State of Saurashtra vs Memon Haji Ismali A IR and Vaje Singh ji Joravar Singh  Ors
vs Secretary of State for India 51 IA 357 referred to