Case: Union Of India Vs. Chaman Lal Loona

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, Lahorecontract, 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, the military department would give credit for the price of the coils already paid by theNovember, 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.11, 026 by way of security with the military department in connection with theagreement contained an 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. Arbitration Act that the appellant be directed to file 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, 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 4th November 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 15th August 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 pronouncementissue 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 Court relied on the provisions of the Joint Defence Council Order, 1947, to be referred to hereinafter as Defence Order,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.,the present case the Lahore Military farm is situated at Lahore and whether the fodder was supplied in 1945 or after 15th 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 tofodder lying in the Military Farm, Lahore was not, on 15th August 1947, the exclusive property of the Dominions 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 contracts were viewed on 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

Court's reasoning:
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,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 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 futurean 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 theis 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 maythe 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 bothtalking of "all rights and liabilities which have accrued or may accrue" under the contract, the Article clearly contemplates both classes ofthis question, we approve of the view taken in Elahi Bux v. Union of India, AIR 1952 Cal 471  (A) and Krishna Ranjan v. Union of India, AIR 1954 Cal 623  (B) and disapprove of the view expressed by Roxburgh J. in Union of India v. Loke Nath AIR 1952 Cal 140 is further clear that the first part of Art.8 (1) creates a legal fiction. The contract is actually made before 15th August 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 ofassent to the view expressed by Chagla C.J. in the Union of India v. Chinu Bhai Jeshingbhai, I L R (1953) Bom 117   at p.130: (AIR 1953 Bom 13  at p.17) (D). Said the learned Chiefis 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 15th August, 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), 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, exclusively for the purposes of the Dominion of Pakistan as from the appointedsay 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 thethe 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 inallotment 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 provisions of the Defence Order, 1947, the contract in question came within cl. (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 thea 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 storeHigh Court assumed that bhoosa was military store. Without deciding whether bhoosa is military store or not we have also proceeded on the 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 Cl. (c) of Art. 8 of the Defence Order, 1947, relates inter alia to stores held by the Governor-General in Council immediately before 15th August 1947, for the purpose of the Indianwas 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 15th August 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 evidences 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 15th August 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.