Delhi Cloth and General Mills Co. v. Harnam Singh (AIR 1955 SC 590)

Facts of the Case

The case involves a contractual dispute arising from the aftermath of the Partition of India.

• The plaintiffs were partners of a firm (Harnam Singh Jagat Singh), cotton cloth dealers operating in Lyallpur (now in Pakistan).

• The defendant was the Delhi Cloth and General Mills Co. Ltd., doing business in Delhi and Lyallpur.

• Before 1947, the plaintiffs made substantial deposits and payments to the defendant for cloth purchases.

• On 28-7-1947, the plaintiffs' balance in their favour stood at Rs. 56,079-6-6. After cloth worth Rs. 43,583-0-0 was delivered, a balance of Rs. 11,496-6-6 remained, which became the subject of the suit.

• The plaintiffs sued to recover this balance plus interest after they fled to India.

• The trial court and the High Court decreed the claim in favour of the plaintiffs.

• The defendant appealed, arguing that since the plaintiffs were considered evacuees by the Pakistan Government, their assets were frozen. The defendant was compelled to hand over the assets (the debt) to the Custodian of Evacuee Property in Pakistan.

• The defendant maintained that this payment discharged its liability and that it was not liable to pay the plaintiffs in India until the Pakistan Government released the funds.

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 law that governs the obligations, interpretation, effect, and discharge of a contract is the law of the country with which the contract is most closely connected. This law is generally used to resolve contractual disputes.

• Lex Situs: While the English law of lex situs (the location of the property) is relevant to debt, it is not the sole determinant. The proper law of the contract—as a living and changing body of law—should be considered, especially for changes that affect performance before it is due.

Held

The Supreme Court:

• Noted that the contract did not expressly specify the governing law or the situs of the debt.

• Reaffirmed the principle (as stated in Bank of Travancore v. Dhrit Ram) that when no intention is expressed, courts impute an intention by referring to the place of the contract, the place of performance, and the nature of the transaction.

• Cited the established banking rule from Joachimson v. Swiss Bank Corporation: a customer must make a demand for payment at the branch where the current account is kept before a cause of action against the bank arises, which affects the situs (or proper place of performance) of the debt.

• Concluded that the proper law governing the contract was the law of the place where the transaction was centered and was to be performed: Lyallpur/Pakistan.

• Held that the payment made by the defendant to the Custodian of Evacuee Property in Pakistan operated as a good discharge of the debt.

• The decision was based on applying the proper law of the contract, which included the Pakistan Ordinance. This Ordinance mandated the surrender of evacuee property to the Custodian and expressly stated that payment to the Custodian would release the debtor from further liability.

• The defendant's compliance with the Ordinance effectively freed it from any additional obligation to the plaintiffs.

• The appeal was allowed, the decrees of the lower courts were set aside, and the plaintiffs’ claims were dismissed.

Commentary

The Proper Law Doctrine

This case is a classic example of applying the Proper Law of the Contract doctrine to resolve a conflict of laws, particularly regarding the discharge of debt across international borders (which the India-Pakistan border had become).

• The Proper Law of the Contract determines (subject to exceptions) all aspects of the contract, namely its interpretation, effect, and discharge.

• As established in National Thermal Power Corporation v. Singer Company (AIR 1993 SC 998): The expression “proper law of a contract” refers to the legal system by which the parties intended their contract to be governed. If not expressly stated, the Court identifies the legal system with which the transaction has its closest and most real connection.

The advantage of the proper law doctrine is that the same law is applied consistently to all obligations under the contract, ensuring predictability, even when that law changes (as the Pakistan Ordinance did).