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The New Bank of India Ltd. Vs. Union of India and ors. - Court Judgment

LegalCrystal Citation
SubjectContract
CourtDelhi High Court
Decided On
Case NumberRegular First Appeal No. 159D of 1964
Judge
Reported in[1979]49CompCas226(Delhi); ILR1977Delhi672
ActsIndian Contract Act - Sections 2 and 202
AppellantThe New Bank of India Ltd.
RespondentUnion of India and ors.
Advocates: Ved Vyas,; A.N. Khanna,; K.N. Kataria and;
Cases ReferredLoonkaran Sethiya v. State Bank of Jaipur
Excerpt:
equitable assignment--nature of--not an absolute assignment--difference between assignment and equitable assignment--legal assignment cannot co-exist with agency--power of attorney in this case has to be read with clause 9-a of the contract.; the facts:; a firm of construction contractors (respondents 3 to 5) entered into a contract with the union of india (respondents 1 and 2). the contractors were to present bills to the government who, after measurement of the work, could pay the contractor. clause 9-a of the contract was as follows :--; 'payment due to the contractor may, if so desired by him, be made to his bank instead of direct to hem, 'provided that the contractor furnished to the engineer-in-charge (1) an authorisation in the form of a legally valid document such as a power of.....v.s. deshpande, j.(1) contract, maitland has said, is the greediest of legal categories. the reason is that the concept of contract symbolising the satisfaction of reasonable expectations is often regarded as a criterion of justice which is or ought to be. the aim of all law. the extension of the concept of contract with which we are concerned in the present appeal is to the relationship between a third party and debtor arising out of two contracts, one between the debtor and the creditor and the other between the creditor and the third party. the question is whether a contract (called a 'collateral agreement' by treitel in 'the law of contract' fourth edition, chapter 15) can be spelt out between the third party and the debtor.(2) the debtor is the union of india, respondent 1. the.....
Judgment:

V.S. Deshpande, J.

(1) Contract, Maitland has said, is the greediest of legal categories. The reason is that the concept of contract symbolising the satisfaction of reasonable expectations is often regarded as a criterion of justice which is or ought to be. the aim of all law. The extension of the concept of contract with which we are concerned in the present appeal is to the relationship between a third party and debtor arising out of two contracts, one between the debtor and the creditor and the other between the creditor and the third party. The question is whether a contract (called a 'collateral agreement' by Treitel in 'The law of contract' Fourth Edition, Chapter 15) can be spelt out between the third party and the debtor.

(2) The debtor is the Union of India, Respondent 1. The creditor is a partnership firm Messrs. Harbhajan Singh Roshan Singh, Respondent 3. The third party is the New Bank of India, the appellant. On 19th August, 1958 a contract (Exhibit D-l) was concluded between the Union of India and Mrs. Harbhajan Singh Roshan Singh for the execution of the construction of a runway. Clause 21 of the contract prohibited the contractor from assigning or splitting the contract to anyone else without the written approval of the officer authorised by the Union of India. As the work progressed, the contractor was to submit a bill each month under clause 8 of the contract. The Engineer- in-charge was then to measure the work done and then to prepare a bill in terms of the measurement so taken. Underclause 9 the contractor was to submit all bills on the prescribed printed forms. Clause 9-A is crucial and is reproduced below :-

'PAYMENTSdue to the contractor may, if so desired by him, be made to his bank instead of direct to him, 'Provided that the contractor furnishes to the Engineer-in-chargp (1) and authorisation in the form of a legally valid document such as a power of attorney conferring authority on the bank to receive payment, and (2) his own acceptance of the correctness of the account made out as being due to him by Government or his signature on the bill or other claim preferred against Government, before settlement by the Engineer-in-charge of the account or claim by payment to the bank- While the receipt given by such bank shall constitute a full and sufficient discharge for the payment the contractor should wherever possible, present his bills duly receipted and discharged through his bankers. Nothing herein contained shall operate to create in favor of the bank any rights or equities vis-a-vis the President of India-'

(3) The contractor had a cash and credit account with the appellant bank which was supplying the money to the contractor for the expenditure which the contractor had to incur on the construction work. The loans advanced by the bank had to be repaid by the contractor from the money which became payable to the contractor by the Union of India from time to time according to the progress of the wort. As the money was payable by the Union of India to the contractor on bills presented by the contractor from time to time after the measurement of the work was verified by the Government, the contractor was in a position to make repayments towards the debits against him by the bank for loans advanced to him. Such repayment by the contractor could bemade from time to time as and when the contractor received each of the payments from the Government. Since the contractors can usually do business only when money is so advanced by the banks, a practice has arisen by which the contractors execute irrevocable powers of attorney in favor of the financing banks authorising the banks to receive the money due to the contractors from the Union of India or such other persons whose work is done by the contractors and from whom money becomes due to the contractors from time to time. The irrevocable power of attorney executed by Messrs. Harbhajan Singh Rosban Singh in favor of the bank is Exhibit P. 2. It gives the bank the exclusive right to realise and receive the payment of all pending current and future bills and cheques from the Government and the power to give valid discharge for such payments to the Government. The contractors agreed that they shall have no right to receive such payments from the Government so long as they maintain a current over- draft account with the bank. The contractors also agreed that they had no right to give a valid receipt, i.e., discharge to the Government for such realisation. The bank was authorised to debit the-said realisations from the Government towards the current overdraft account of the contractors with the bank.

(4) In terms of clause 9-A of the contract between the Union of India and the contractors, the irrevocable power of attorney executed by the contractors in favor of the bank was deposited with the Government. The bills in the prescribed forms were submitted by the contractors to the Government and on verification of the measurements oi the work done by the contractors payments were made by the Government to the bank. The power of attorney was deposited with the office of the Central Public Works Department, Delhi Aviation Division, New Delhi on 22nd July 1959. During the first week of February 1961 the Delhi Aviation Division No. 2 was converted into P & T Division and all the aviation work which was being executed by the said Division were transferred to Delhi Aviation Division No. 1, Central Public Works Department, New Delhi. This included the work contracted by the Government with Messrs. Harbhajan Singh Roshan Singh. During the transfer of the records of the said work from Division No. 2 to the new division, the copy of the power of attorney deposited by the bank with Division No. 2 was not sent. The new division, not being aware of the power of attorney executed by the contractors in favor of the bank and the contractors having themselves claimed direct payment of their bills from the Government, two sums of money being payments for work done, namely. Rs. 14,590.94 by cheque dated 3-3-1961 and Rs. 33,134.98 by cheque dated 31-3-1961 totalling Rs. 47,725.92 were paid by the Government to the contractors directly.

(5) The plaintiff-bank thereupon filed a suit against.theUnion,of India claiming from it the payment of these Rs. 47,725.92 with interest at Rs. 6 percent per annum amounting to Rs. 2928.00 . The total claim in the plaint was thus Rs. 50,653.92. The basis of the claim was the irrevocable power of attorney executed by the contractors in favor of the bank which was deposited by the bank with the Government and the fact that the Government had acted upon this arrangement and made payments to the bank except these two payments which the Government made to the contractors directly in contravention of the above arrangement. The plaintiff alleged that these payments were unauthorised, illegal and inoperative against the bank in view of the said power of attorney. The plaintiff also averred that the contractors could not give a valid discharge to the Government with respect to these two payments during the subsistance of the loan account of the contractors with the bank. The relief was claimed only against the Government. No relief was claimed against the contractors.

(6) The defense of the Government was that the mere deposit of the power of attorney by the bank with the Government did not bind the Government or made it obligatory to make payments of the bills of the contractors to the bank. It is only because the contractors had written to the Government that had no objection if the Government forwarded all their cheques in payment of the work done by the contractors to the plaintiff bank that previous payments were made by the Government on the basis of the authority given to the Government by the contractors. Since the contractors claimed these two payments directly from the Government, the payments were made to them by the Government, in accordance with the terms and conditions of the contract between them and the Government. The Government denied that it was under any obligation to make payments to the plaintiff bank to the exclusion of the contractors. The suit of the plaintiff bank was dismissed by the trial court mainly because the proviso to clause 9-A of the contract expressly stated that 'nothing herein contained shall operate to create in favor of the bank any rights or equities vis-a-vis the President of India'. The learned trial Court observed that clause 9-A and the proviso to it could have been overridden only if a new contract could have been concluded between the plaintiff bank and the Union of India. 'There was no such contract between the two. No question of any implied contract or estoppel by representation making the Government liable to the plaintiff bank could arise so long as clause 9-A .and its proviso stand.

(7) In this appeal by the bank against the Government against the dismissal of the suit, learned counsel for the appellant bank was allowed by us during his oral argument to raise a new plea of law based on the undisputed facts. Shri Ved Vyas for the appellant bank argued that the irrevocable power of attorney amounted to an equitable assignment by the contractors to the bank of the right to recover the debt due to the contractors from the Government. For, the power of attorney was irrevocable till the contractors continued to be indebted to the bank, It also gave the bank the exclusive right to receive the money from the Government and disabled the contractors from giving adischarge of the debt to the Government on receipt of such money. The notice of the assignment was given to the Government when a copy of the said power of attorney was deposited by the bank with the Government. The bank, thereforee, established aprivity of contract with the Government and the Government became obliged to pay the money due on the contract only to the bank to the exclusion of the contractors.

(8) Two questions arise for decision, namely :-

(1)What is the true nature and effect of the irrevocable power of attorney ?

and (2)whether a privity of contract was established between the plaintiff and the Government

The Irrevocable Power Of Attorney No heresy is involved in making a power of attorney irrevocable. Section 202 of the Contract Act enables the agency to be irrevocable if the agent has an interest in the property which is the subject-matter of the agency. Section 205 of the Contract Act also makes it legal for the principal to agree that the agency shall not be terminated during a particular period of time. The contractors had agreed in the power of attorney that so long as the contractors continued to be indebted to the bank, the power or attorney would be irrevocable. They also granted to the bank the sole right to recover the moneys due to them from the Government for the express reason that the contractors had borrowed money from the bank which they had to repay by diverting the money due to them from the Government to the bank. This is the legitimate ambit of an irrevocable power of attorney. Further, it is also recognised that the grant of right to the agent to recover money directly for his own benefit from the debtor of the contractors really amounts to an assignment of the debt due to the creditor- contractors from the debtor-Government to the third party bank. This is the substance of the irrevocable power of attorney. Its form is still that of an agency. The concept of the agency, however, is that an agent acts firstly on behalf of the principal and secondly for the benefit of the principal. When the power of attorney is made irrevocable, one of these two elements of agency is abrogated. The agent acts thereafter not for the benefit of the principal but for his own benefit. The reason is that he has an interest of his own in the property which is the subject-matter of the contract. The interest of the principal is abrogated in the satisfaction of the dues which the agent has to recover from the principal. In this respect the substance prevails over the form. What about the other element of agency, namely, that the agent acts on behalf of the principal If this element of the agency is also abrogated then the irrevocable power of attorney would amount to an assignment to the bank: of the debt due to the contractors from the Government. The distinction between the form and the substance of the irrevocable power of attorney becomes here material to know if the said power amounted to an assignment. An outright assignment or transfer would have obliterated the contractors and would have given the right to the assignee or the transferee to make a claim on the Government of India in its own right. This did not happen. The claim had to be made by the bank on the Government of India in the name of and on behalf of the contractors. The bank did not act in its own right but as an agent of the contractors. The form of the power of attorney was not, thereforee, meaningless. It had to be observed. So long as the form continued, the assignment could not be said to be absolute. Such an assignment was regarded as an equitable assignment by the Supreme Court in Loonkaran Sethiya v. State Bank of Jaipur, : [1969]1SCR122 . It is significant that the equitable assignee in the case decided by the Supreme Court was allowed to execute the decree as an agent of the equitable assignor and not in his own right. The assignee would have been entitled to execute the decree in his own right only if the assignment had been absolute. On the other hand, in the present case, the equitable assignee is claiming a right to recover payment from the Government in its own right and not as an agent of the contractors. In fact, the contractors have been already paid off by the Government. What is the effect of the recital in the power of attorney that it is the bank and not the contractors who would have the power to receive money from the Government and give a valid discharge for it It does not however amount to an absolute assignment because the bank cannot, in terms of the power of attorney, make a direct claim against the Government. First, the contractors have to present the bill. Second, the Government has to measure the amount of work done. Both these things could be done only at the instance of the contractors and not by the bank. The bank does not know how much work the contractors have done and no question of measuring the work by the Government would arise between the Government and the bank. Third, the bill could not be in favor of the bank. It had to be in favor of the contractors and could be presented only through the bank. Fourth, the Government would make payment to the bank only if so desired by the contractors and not otherwise. The conduct of the bank was entiely in accordance with these requirements of clause 9-A and the, power of attorney. Clause 9-A of the contract contemplated an authorization such as by way of a power of attorney of the bank by the contractors. It did not contemplate an absolute assignment by the contractors in favor of the bank. The power of attorney is an authorization of the bank by the contractors. It goes beyond a mere authorization when it confers a right on the bank to appropriate the money paid by the Government towards the discharge of the debt due to the bank from the contractors but docs not authorise the bank to receive the money from the Government beyond the amount of contractors' indebtedness to the bank. The power of attorney is only an equitable and not an absolute assignment for the above reasons, namely, that the bank had to act as an agent of the contractors and it was to receive the money from the Government only to the extent of the contractors' indebtedness and not beyond. Neither the contract nor the power of attorney at all contemplates that the bank was ever to make an independent claim against the Government even though the Government had already paid the principal of the bank, namely, the contractors, the money due on the very claims which are made by the bank. Nor does the question of waiver or estoppel arise against the Government. The Government has acted strictly in accordance with the contract. It has not accepted the recital in the power of attorney that it is the bank and not the contractors who has the right to give a valid discharge of 'the payment made by the Government. There is neither any representation nor any conduct on the part of the Government which requires the Government to pay the money to the bank directly in its own right and not as an agent of the contractors and which prevents the Government from paying, the money directly to the contractors. The Privity Of Contract

(9) The claim of the plaintiff against the Government is based on contract. The basic concept of acontract is that it can confer rights or impose obligations only on persons who are parties to it. This statement can be further analysed into two parts, namely, (a) who are the parties to a contract? and (b) since every contract has to be for consideration, is a person claiming under a contract a party also to the consideration for the contract Fortunately for us in India, section 2(d) of the Contract Act makes it clear that the consideration for a promise may proceed either from the promise or from any other person. In the present case, the consideration for the contract between the Government and the contractors is admitted. The Government has agreed to pay for the work done by the contractors, that is to say, for the consideration proceeding from the contractors. If the Government were to enter into a contract with the bank for paying to the bank the amounts due under the contract, no fresh consideration need proceed from the bank. The consideration provided by the contractors can also serve as a consideration for the promise, if any, which the Government may make to the bank. The basic question, however, remains whether the bank is a party to any contract with the Government.

(10) Under section 2 of the Contract Act, a contract consists of a proposal and its acceptance. What is the proposal and acceptance between the bank and the Government The proposal may consist of the Government agreeing with the contractors under clause 9-A of the contract to make payment to the bank if the following conditions arc satisfied, namey, (1) if the contractors desire that the payment be made to the bank instead of the contractors; (2) a power of attorney executed by the contractors in favor of the bank ; (3) the acceptance by the contractors of the correctness of the account made out as being due to them by Government before settlement by the Engineer-in charge of the account or claim by payment to the bank ; and (4) this arrangement was not to create in favor of the bank any rights or equities as against the Government. It is this proposal of the Government which was accepted by the bank when the bank requested the Government to make the payment to it instead of to the contractors and deposited the power of attorney with the Government. The power of attorney could be construed as an assignment in favor of the bank in writing and the letter accompanying the copy of the power of attorney deposited with the Government of India read with the power of attorney could be construed as notice to the debtor Government of India. The terms of section 130 of the Transfer of Property Act may, thereforee, be said to have been satisfied.

(11) The question may, thereforee, be looked at from two points of view, namely, (a) was there any privity of contract at all between the bank and the Government, or (b) assuming that there was some kind of privity between them, what was precisely agreed to between them.

(12) A contract has no meaning for a party if the party is prohibited from legally enforcing, it against the other party. The proviso to clause 9-A of the contract says that the bank shall not have any rights or equities against the Government in terms of clause 9-A of the contract. When the Government and the contractors concluded a contract between themselves, a collateral contract between the Government and the bank could be implied if the original contract between the Government and the contractors indicated such an intention. Various instances of collateral contract may be taken as analogies for drawing such an inference of a collateral contract between the Government and the bank. When the shop-keeper sells goods to the consumer and hands over to him the guarantee given by the nanufacturer in respect of the goods, the buyer of the goods can ciaim that a collateral contract between him and the manufacturer may be implied if and only if the guarantee of the manufacturer ensures, for the benefit of the buyer of the goods. Since a guarantee will have no other meaning except for the benefit of the buyer such collateral contracts have been implied between the buyers and the manufacturers. Suppose, however, that the manufacturer says that he has tried to be as careful as possible in manufacturing the goods but he expressly stipulates that he will not be liable in any way to a buyer of the goods from the dealer. In that event, it would be difficult to argue that he has expressed an intention to have any contractual relation with the buyer of the goods.

(13) Alternatively, we may see what precisely is the relationship brought about between the third party bank and the debtor Government. Clause 9-A of the contract insists that while the contractors may confer on the bank the right to receive the money under the contract from the Government and the receipt given to the Government by the bank constitutes a full and sufficient discharge of the Government from the obligation of payment, the Government does not recognise any direct contractual relationship with the bank. This is secured by the other conditions of clause 9-A which required that the bill has to be presented by the contractors and the correctness of the account has to be settled between the Government and the contractors. The contractors have to express their desire to the Government that the payment be made to the bank and the contractors have to authorise the bank to receive the payment from the Government. The equitable assignment from the contractors to the bank of the debt due under the contract from the Government has, thereforee, to be viewed from two different sides. Such an assignment may be enforceable as between the contractors and the bank. The assignment, however, does not entitle the bank to any enforceable rights against the Government. The Government has agreed to pay to the bank only as an agent of the contractors and not otherwise. The Government has also said that the willingness of the Government to make such payment is only under the terms of the contract, that is to say, as a facility given to the contractor who alone is a party to the contract with the Government. The Government expressly stipulates that the agent of the contractors will not have any right of his own against the Government.

(14) An actionable claim has two elements, namely, (a) a sum due from the Government to the contractors and (b) the right of the contractors to claim the sum from the Government and to enforce the claim against the Government. What has been transferred by the contractors to the bank is the first element, namely, the sum due from the Government to the contractors. The second element has not been transferred by the contractors to the bank. The right given by the contractors to the bank to receive the dues from the Government does not confer on the bank any right in itself to make and enforce such a claim against the Government. What is not in the well will not come in the pail. The contract between the Government and the contractors is the well the power of attorney is the pail. What is not in the well cannot come in the pail. thereforee, when the contract itself says that the Government will not be liable to the bank, the power of attorney cannot be construed to mean that it makes the Government liable to the bank. The power of attorney cannot convey to the bank what is forbidden by the contract. While, thereforee, the bank may claim to have got an equitable assignment from the contractors, the content or the subjectmatter of the assignment cannot be more than what is allowed by clause 9-A of the contract. The power of attorney cannot go beyond clause 9-A of the contract. The bank has not, thereforee, got any right to enforce payment against the Government as the proviso to clause 9-A of the contract expressly denied such a right from being passed on to the bank by the contractors. This is in accordance with the principle that the authority given to the agent cannot exceed the powers of the principal himself. Article 23 of Bowstead on Agency, Fourteenth Edition, page 74, states the law as follows :-

'THEauthority, express or implied, of every agent is confined within the limits of the powers of his principal-'

The powers of the principal in this case were derived from clause 9-A and was subject to its limits. The principal could not, thereforee, give to the agent an independent right to enforce payment against the Government.

(15) Shri Ved Vyas, thereforee, argued that the assignment by the contractors in favor of the bank should be construed to be independent of clause 9-A. He argued that while the contract prohibited the contractors from assigning or splitting the work to be done under the contract, there was no prohibition in the contract that the contractors should not assign the right to receive the debt due from the Government under the contract. Such an argument seems to be based on some confusion of thought. We in India are governed by the statutory provisions of the Transfer of Property Act. Section 3 defines an actionable claim and section 130 says that

' The Transfer of an actionable claim (whether with or without consideration) shall be effected only by the execution of an instrument in writing signed by the transfer or.'

This means that the only manner of transferring the claim to receive a debt has to be by execution of an instrument. This instrument is the power of attorney. There is no other instrument of assignment.

(16) It is true that in law a debt can be assigned unless the contract from which the debt arises prohibits such assignment. There is a difference, however, between an assignment and an equitable assignment. The latter is not an assignment at all because it falls short of a complete transfer. The very argument of Shri Ved Vyas that the bank is an equitable assignee means that it is not an assignee in law. An assignment cannot co-exist with agency. For, a transferee has an independent right while an agent has no independent right. In the present case, so long as the bank continues to be an agent it cannot become an assignee.

(17) If, thereforee, it is to be assumed that some kind of contractual relationship could be implied between the Government and the bank, then that relationship fell short of giving the right to the bank to enforce payment of the debt as against the Government. It is only if the proviso to clause 9-A were absent from the contract or by a separate contract the bank and the Government were to agree by which the Government would be liable to pay the money to the bank that the bank would free itself from the limitations contained in clause 9-A and the proviso to it. We find, thereforee, firstly that there was no privity of contract between the bank and the Government and alternatively that if there was such a privity then such a privity was subject to the limitation that while the bank was authorised to receive money from the Government and give a discharge to the Government, it was not authorised to enforce a claim to the money against the Government. That right remained only with the contractors because the power of attorney has to be read with clause 9-A.

(18) Shri Ved Vyas argued that such a system of obtaining irrevocable power of attorney is widely prevalent among the banks and the view expressed above would cause great hardship to the banks in recovering the debts due to their constituents in exercise of the powers obtained from such irrevocable powers of attorney. If that be so, the remedy is not to construe the powers of attorney de hors the contracts between the debtor and the creditor. For, the third party cannot get anything which the creditor himself was prohibited from transferring to the third parties and which was only a personal right of the creditor against the debtor because of the terms of the contract between the debtor and the creditor. The remedy is to have either a tripartite contract between the debtor, the creditor and the third party so that the privity of contract is established between the debtor and the third party and the creditor is thereby enabled to give to the third party all the rights that he has against the debtor or to ensure that the original contract between the debtor and the creditor does not disable the creditor from transferring the right to enforce the creditor's right under the contract to a third party. 'That is to say, to ensure that the contract is assignable.

(19) For the above reasons, the appeal is dismissed. While we do feel that the respondents 3 to 5 have acted contrary to the contract between them and the bank, namely, the power of attorney, we also take note of the fact that the bank has not made any claim against Respondents 3 to 5. The bank should have done so if it suspected that the Respondents 3 to 5 have played foul. It may also be that the concerned officers of the Government have not acted above board. In these circumstances, we order that the costs of this appeal should be borne by the parties as incurred.


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