DELHI CLOTH AND GENERAL MILLS CO. V. HARNAM SINGH AIR 1955 SC 590
FACTS
- The plaintiffs were partners of a firm known as Harnam Singh Jagat Singh, operating as cotton cloth dealers in Lyallpur, which is now in Pakistan.
- The defendant, Delhi Cloth and General Mills Co. Ltd., conducted business in Delhi and other locations, including Lyallpur.
- The plaintiffs and the defendant engaged in transactions involving the purchase of cloth over several years before 1947. Payments were made by the plaintiffs, including lump sum payments against purchases, with occasional interest payments when balances were adverse.
- On 28-7-1947, a substantial sum was deposited by the plaintiffs with the defendant, bringing their balance in favour to Rs. 56,079-6-6. Cloth worth Rs. 43,583-0-0 was delivered to the plaintiffs, leaving a balance of Rs. 11,496-6-6, which is the subject of the suit.
- Against this amount, the defendant delivered cloth worth Rs. 43,583-0-0, leaving a balance of Rs. 11,496-6-6. The plaintiffs sued to recover this balance plus interest.
- The trial court decreed the claim, which was upheld by the High Court.
- The defendant argued that the plaintiffs fled to India and were considered evacuees, causing the Pakistan Government to freeze all evacuee assets. Subsequently, the defendant was compelled to hand over the assets to the Custodian of Evacuee Property in Pakistan. The defendant is willing to pay the money once the Pakistan Government releases it. Until then, the defendant maintains that it is unable to pay and is not liable.
- Hence the present appeal before the SC.
ISSUE
- Whether the payment made by the defendant to the Custodian of Evacuee Property in Pakistan discharged its liability to the plaintiffs in India.
RULE
- Proper Law of the Contract: The court emphasized the application of the "proper law of the contract," which is the law of the country with which the contract is most closely connected. This law governs the obligations and performance under the contract.
- Lex Situs: While the English law of situs (the location of the property) is relevant, it is not the sole determinant. The proper law, as a living and changing body of law, should be considered for resolving contractual disputes, including changes that occur before performance is due.
HELD:
- Cheshire’s view that the proper law of the contract governs the assignment of debts avoids conflicts of laws, particularly when assignments occur in different countries.
- The contract in question did not specify the governing law or the situs of the debt.
- Courts impute an intention to the parties based on the facts, the place of performance, and the nature of the transaction.
- In the Bank of Travancore v. Dhrit Ram, 69 I.A. 1, Lord Atkin said that when no intention is expressed in the contract the Courts are left to infer one by reference to considerations where the contract was made and how and where it was to be performed and by the nature of the business or transaction to which it refers
- A customer must make a demand for payment at the branch where his current account is kept before he has a cause of action against the bank: Joachimson v. Swiss Bank Corporation, (1921) 3 K.B, Established the rule that a demand must be made at the branch where the account is kept before the bank is obligated to pay, affecting the situs of the debt.
- The payment made by the defendant to the Custodian of Evacuee Property in Pakistan operated as a good discharge of the debt.
- The court held that the payment made by the defendant to the Custodian of Evacuee Property in Pakistan discharged the defendant's liability to the plaintiffs in India.
- The decision was based on applying the proper law of the contract, which included the legal changes brought about by the Pakistan Ordinance. The Ordinance mandated the surrender of evacuee property to the Custodian and stated that payment to the Custodian would release the debtor from further liability. Therefore, the defendant's compliance with the Ordinance effectively freed it from any additional obligation to the plaintiffs.
- The appeal was allowed, setting aside the decrees of the lower courts, and dismissing the plaintiffs’ claims. However, the parties were directed to bear their own costs throughout the proceedings.
COMMENTARY
[s 1.8] Proper Law of Contract
- The proper law of the contract determines (subject to exceptions) all aspects of the contract, namely its interpretation, effect and discharge. This is stated to be the advantage of the proper law doctrine.The same law also applies to all obligations under the contract. The expression “proper law of a contract” refers to the legal system by which the parties to the contract intended their contract to be governed. If their intention is expressly stated or if it can be clearly inferred from the contract itself or its surrounding circumstances, such intention determines the proper law of the contract. Where, however, the intention of the parties is not expressly stated and no inference about it can be drawn, the Court would endeavour to impute an intention by identifying the legal system with which the transaction has its closest and most real connection (National Thermal Power Corporation v Singer Company, AIR 1993 SC 998 ).
- While determining the applicable law, the following questions have to be addressed:
- (i)should contracts with a foreign element be governed by the place of contracting or by the law chosen or intended by the parties;
- (ii)if the contract is to be governed by the law chosen by the parties, should there be, and if so, what limits on the scope of their choice; and
- (iii)if the parties have not chosen the law, should the contract be governed by the law of the place of contracting, or must be identified by reference to their actual or presumed intention, or by reference to objective localising factors.