Case: Chennuru Gavararaju Chetty Vs. Chennuru Silaramamurty Chetty And Others

2. The relevant facts of this case, upon which the appeal depends, may shortly be stated as follows : The contesting parties used to carry on the business of salt manufacture in accordance with the rules laid down by the Government under the Madras Salt Act (Mad. 4 of 1889) (which will, hereinafter, be referred to as the Act). It is not permissible to manufacture salt otherwise than under the provisions of the Act. The land and the factory where salt used to be manufactured by the parties, are Government property. It appears that the first plaintiff, the father of plaintiffs 2 to 4, plaintiff 5, the first defendant and the deceased father of defendants 2 to 7, had made bids for the lease of the land and the factory, and the highest bid of the defendants aforesaid, was accepted; and in pursuance thereof, a lease for 17 years from January 1926, to December 1942, was granted by the Government in favour of the first defendant and the father of defendants 2 to 7. By a deed of partnership dated March 18, 1926, the first plaintiff with a two-anna share, the father of plaintiffs 2 to 4, having a similar share, and plaintiff 5 with another two-anna share, on the one hand, and the first defendant, having a five-anna share and the father of defendants 2 to 7, with the remaining five-anna share, entered into a partnership for running the salt factory. The terms of the partnership will have to be discussed in detail hereinafter. They contributed a sum of Rs. 30,000 for paying the premium for the lease and for other incidental expenses in running the factory, in proportion to the shares just indicated. The father of defendants 2 to 7, who had a five-anna share in the business, died in August 1935, and defendants 2 to 7 were admitted as partners in place of their father. In accordance with the rules of the salt department, the requisite licence for the manufacture of salt, was granted to the first defendant and the father of the defendants 2 to 7, in whose name, the lease also stood. In or about the year 1939, differences arose between the parties, but the business continued to be earned on by the defendants 1 to 7. In August 1941, in accordance with the changed policy of the Government, which substituted the practice of settling salt leases by renewal of the lease in favour of those lease- holders whose conduct had been satisfactory in the opinion of the Department, for the old practice of settling salt leases to highest bidders, the Collector enquired from the old lease-holders whose record had been satisfactory from the point of view of the salt department, whether they would take renewal for a period of 25 years. The appellant as also the other defendants aforesaid, their conduct having been satisfactory, were amongst those lessees who had been invited to make applications for the renewal of their leases. Accordingly, they made their application in July, 1942, and a fresh lease for 25 years, was granted to them on April 15, 1943, for the period January 1943 to December 1967, in pursuance of the Collectors order passed in November 1942 (Ex. P-15 (a) ). The terms of the new lease will have to be discussed later in the course of this judgment. As the term of the previous lease and of the licence to manufacture and sell salt which was the partnership business - was to expire at the end of December 1942, one of the contesting defendants served a notice upon one of the plaintiffs to the effect that as the partnership was expiring at the end of the month, the partners should settle their accounts, and make arrangements for the disposal of the unsold stock of 82102 maunds of salt. The reply to the notice was given on December 28,1942, through an advocate, alleging inter alia that the application for the renewal of the lease for a period of 25 years, had been made on behalf and with the consent of all the partners, and that, thus, the partnership business was agreed to be continued even after the expiry of the term of the previous partnership. The answer further attributed fraud and "evil intention" to the other party. The answer also called upon the defendants to pay a penalty of Rs. 2,500 per head, and to hand over the entire partnership lease property to the plaintiffs party. Thus, the exchange of the notices aforesaid, was a prelude to the institution of the suit on January 5, 1943, that is to say, even before the fresh lease had been executed by the Government in favour of the contesting defendants 1 to 73. The suit was instituted on the footing that the original partnership continued even after December 1942, inasmuch as the fresh lease had been obtained in pursuance of a unanimous resolution of all the partners to obtain the new lease for the partnership business. But an alternative case also was sought to be made out that even if the partnership did not continue after December 1942, as a result of the acts of the defendants, the benefit of the fresh lease for 25 years, should be treated as an asset of the dissolved partnership business, and should be taken in account in the process of dissolution of the partnership. The plaint as framed, contained large number of reliefs to which, the plaintiffs claimed, they were entitled, for example, a declaration that the partnership was continuing, and that the defendants 1 to 7 had forfeited their rights in the partnership as a result of their fraudulent acts, an injunction restraining defendants 1 to 7 from carrying on the salt works independently of the partnership and on their own account, and the declaration that the renewal of the lease in the name of the defendant 1 to 7, for a further period of 25 years, was for the benefit of the partnership. But at the trial, the plaintiffs, perhaps, realizing the weakness of their position, elected to put in a memorandum in the trial court on February 8, 1946, confining their prayers to reliefs on the basis of a dissolved partnership, and giving up other reliefs, which they claimed on the footing of the partnership still continuing. Thus, at the trial, the reliefs claimed were confined to taking accounts between the parties of the dissolved partnership, and treating the fresh lease for 25 years, as part of the assets of the dissolved firm. It is, therefore, not necessary to refer to the defendants written statement, except with reference to the plaintiffs claim to have the renewed lease for 25 years treated as an asset of the dissolved partnership. The contesting defendants 1 to 7 stoutly denied that the plaintiffs claim in respect of the fresh lease or 25 years, was well- founded. They asserted that they only were entitled to run the business on the fresh lease and licence meant only for their benefit and not for the benefit of the dissolved partnership4. The trial court passed a preliminary decree, declaring that e partnership stood dissolved on December 31, 1942, and for taking accounts. As regards the benefit of the renewed lease for 25 years, the trial court negatived the paintiffs claim that the dissolved partnership carried any firm or trade name, which could be said to have any tangible good-will and that the defendants could not be restrained from carrying on the business in their own names as they had been doing in the past. After expressing a doubt as to whether there was any good-will of a particular firm name, the court directed that "the Commissioner is authorized to sell the good-will of the old firm for what it is worth by way of realization of the assets of the dissolved firm as amongst the partners." In effect, therefore, the trial court decided that the plaintiffs were not entitled to the benefit of the new lease.

Court's reasoning:
14. We shall now examine the position whether the plaintiffs have made out a case in terms of the second part of the section. In order to do so, it had to be shown that the contesting defendants while obtaining renewal of the lease, had placed themselves in such a position as to render their interests adverse to those of the other partners, and had thereby obtained a pecuniary advantage, which they must hold for the benefit of the other partners as well. In this connection; illustrations (d) and (e) under the section, are instructive. If the plaintiffs had succeeded in proving, as they had attempted to do, that any funds or any goodwill of the alleged firm name, had been utilised for obtaining the renewal of the lease, the case would have directly come under illustration (d). Illustration (e), on the face of it, does not apply, because on the findings, the defendants were not negotiating for the renewal of the lease on behalf of the entire body of partners, nor is there any allegation that they had clandestinely stipulated for themselves a benefit to the detriment of the partnership business or funds. In this connection, it as to be noted that the suit was instituted months before the renewed lease was actually granted, and years before a permanent licence for the manufacture and sale of salt, was issued to the contesting defendants. It has also to be noted that the grant of the lease by itself does (not?) confer on the grantee the right to manufacture and sell salt. The lease has to be followed by a permanent licence in order to enable the grantee to carry on the business of manufacturing, storing and selling salt. Hence, the lease by itself has no value unless it is followed by a licence to manufacture and sell salt, which was granted only on April 17, 1945, about two years and four months after the expiry of the previous lease and licence, which, as already indicated, were conterminous with the term of the partnership. That is the reason why the High Court granted the decree in favour of the plaintiffs in terms which are rather amorphous and which do not easily lend themselves to conversion in terms of money. This is a business in which the personal factor of the persons in charge of managing the business, is more important than anything else. Another important matter which has a bearing on the case, has also to be adverted to. Between the years 1939 and 1942, that is to say, during the last three years of the term of the partnership, the partners were not on cordial terms, and there does not appear to have been much of confidence between them. They had already started quarrelling and attributing unworthy motives. There is, therefore, hardly any room for importing the idea of such confidence amongst partners as would render the contesting defendants occupying a fiduciary position, apart from the fact that they were partners15. As already indicated, the partnership stood automatically terminated at the end of the year 1942. The actual grant of the lease in question was made in April 1943, and the permanent licence to manufacture and sell salt, was granted only in 1945. Hence, strictly speaking, when the suit was instituted in January, 1943, legally, there was no lease in existence, nor could the business of manufacture and sale of salt be effectively carried on until the grant of the permanent licence. The plaintiffs could have a cause of action in respect of the renewed lease if their substantive case of continuing partnership had been established. But that case having failed, it is little difficult to appreciate how they could claim any interest in the renewed lease as an asset of the partnership business. The fiduciary character as between the partners had ceased on the termination of the original lease and of the partnership business. On such a termination, there was no interest of the partners, which the contesting defendants were bound to protect. For the same reasons, the defendants character as partners had ceased, and they could not, therefore, be said to have availed themselves of their character as partners in obtaining the fresh lease. For all these reasons, it must be held that the plaintiffs have failed to bring the case strictly within the terms of S. 88 of the Indian Trusts Act. A passing reference was made by the learned counsel for the respondents to the terms of S. 90 of the Trusts Act.But it will be noticed that whereas S. 88, quoted above, makes a specific reference to partners and agents, etc., S. 90, in terms, applies to a tenant for life, a co-owner, a mortgagee, or any other qualified owner of any property. Section 90, therefore, in terms, could not apply to the case.Even if it did, it does not carry the case any further in favour of the plaintiff- respondents16. It was further argued on behalf of the respondents that even though the provisions of the Trusts Act, did not, in terms, apply to the case, the general principles of law as applied in the English courts, support the plaintiffs case. In this connection, reliance was placed upon the cases of Featherstonhaugh v. Fenwick, (1810) 34 ER 115; Clegg v. Fishwick, (1849) 41 ER 1278; Clements v. Hall. (1858) 44 ER 954; Clegg v. Edmondson, (1857) 44 ER 593; In re Biss; Biss v. Hiss, (1903) 2 Ch 40; Griffith v. Owen, 1907-1 Ch 195. The law in England has been summarized in Halsburys Laws of England, 2nd Ed., Vol. 24 (Lord Hailshams Edition) in Art. 863 at p. 450, as follows:"The renewal of a lease of the partnership property by one or more of the partners without the privity of the others enures for the benefit of all. The rule is the same when the intention to renew is communicated to the others if the latter are prompt to assert their rights; and it is immaterial whether the term of the partnership is definite or indefinite, or whether the lessors would have refused to renew to the partners who are not privy to the renewal. The representatives of a deceased partner may have a right to share in the profits derived from a renewal of the lease by the surviving partner."Most of the cases relied upon on behalf of the respondents, form the basis of the statement of the law in England, quoted above17.On a close examination of the English precedents aforesaid, it will be found that there is no absolute rule of law or equity that a renewal of a lease by one partner, must necessarily enure for the benefit of all the partners.There is a presumption of fact, as distinguished from a presumption of law, that there is an equity in favour of the renewal of the lease enuring for the benefit of all the partners.But such a presumption being one of fact, is rebuttable, and must, therefore, depend upon the facts and circumstances of each case. The Indian Legislature has substantially adopted the English law quoted above, while enacting the rules laid down in the Indian Trusts Act, particularly, Ss. 88 and 90 of the Trusts Act. In the instant case, the facts that the parties deliberately, chose to fix the term of the partnership as conterminous with the term of the lease and licence ending with the year 1942; that they did not, in express terms, or by necessary implication, make any provision for extending the period of the partnership or for obtaining renewal of the lease and the necessary licence; that there was no averment or proof of any clandestine acts on the part of the contesting defendants in the matter of obtaining the renewal of the lease that the plaintiffs themselves made attempts though unsuccessful, to get themselves included in the category of grantees at the time of the renewal of the lease; that the special nature of the business required personal efficiency and good conduct on the part of the actual managing agents; that no funds of the expiring partnership or any goodwill of the partnership was utilized for obtaining the fresh lease; that the fresh lease and licence were granted to the contesting defendants in consideration of their personal qualities of good management and good conduct; that the parties were not on the best of terms during the last few years of the partnership, and finally, that the lease and the permanent licence were actually granted after the partnership stood automatically dissolved at the end of 1942, are all facts and circumstances which point to only one conclusion, namely, that the renewal of the lease was not intended to be for the benefit of all the quondam partners. Those facts and circumstances amply rebut any presumption of fact that the lease should enure to the benefit of all the parties.