PETITIONER:
CHENNURU GAVARARAJU CHETTY
Vs.
RESPONDENT:
CHENNURU SILARAMAMURTY CHETTY AND OTHERS
DATE OF JUDGMENT:
06/10/1958
BENCH:
SINHA, BHUVNESHWAR P.
BENCH:
SINHA, BHUVNESHWAR P.
IMAM, SYED JAFFER
KAPUR, J.L.
CITATION:
1959 AIR 190 1959 SCR Supl. (1) 73
ACT:
Lease, Renewal of-Manufacture of salt-Lessees, if
fiduciaries of quondam partners-Constructive trust-Test-
Presumption--Indian Trusts Act, 1882 (II of 1882), ss. 88,
90--Madras Salt Act, 1889 (Mad. 4 of 1889).
HEADNOTE:
The appellant, defendant No. 1 in the suit, from which the
appeal arises, and the father of defendants 2 to 7, as the
highest bidders, obtained a seventeen years' lease of a salt
factory from the Government and the license to manufacture
and sell salt under the Madras Salt Act, 1889. They entered
into a partnership with the plaintiffs to carry on their
business for the period of the lease. On the death of their
father, defendants 2 to 7 were admitted into the
partnership. The partnership agreement made no provision
for the continuation of the partnership on expiry of the
lease or for the acquisition of a fresh lease on behalf of
the partnership. The lease expired, the license came to an
end and the partnership stood automatically dissolved. The
Government changed its old policy of granting leases to the
highest bidders and adopted one of renewing them in favour
of previous lessees in whom they had confidence. The
appellant
10
74
and defendants 2 to 7 applied for the renewal of the lease
that stood in their names. The plaintiffs also applied for
a grant of it to them. No premium was called for and none
had to be paid. The Revenue Authorities chose to renew the
lease in favour of the appellant and the said defendants f
or a further period of 25 years. The plaintiffs filed the
suit claiming that the renewal of the lease was an asset of
the dissolved partnership. The trial Court found against
them but the High Court on appeal reversed that finding.
The suit was instituted months before the renewal of the
lease and years before the renewal of the license, which
alone could enable the licensee to manufacture and sell
salt. The Courts below found that the allegation of the
plaintiffs that the goodwill and assets of the firm had been
utilised for obtaining the renewal of the lease was
unfounded, as they had failed to prove that a partnership
firmatall existed. It was also found that during the last
three years of the existence of the partnership, the parties
had fallen apart and lost mutual confidence. The question
for decision was whether s. 88 of the Indian Trusts Act
applied and the renewal of the lease in favour of the
appellant and the said defendants for running the salt
factory could be treated as an asset of the dissolved
partnership between the contesting parties.
Held, that in order that a case might be brought within the
purview of s. 88 of the Indian Trusts Act, it must be shown
either that (1) a person had a fiduciary character and was
thus in duty bound to protect the interests of others or
that (2) he had placed himself in such a position as to
render his interest adverse to those of the others and had
thereby obtained a pecuniary interest which he must hold for
their benefit as well. As in the instant case the fiduciary
character of the partners came to an end with the
termination of the original lease and of the partnership
business along with it, there could no longer be any
subsisting interest in a partner which another was bound to
protect nor could one partner be said to have availed of his
character as a partner when he obtained the fresh lease.
Section 88 of the Indian Trusts Act or the illustrations (d)
or (e) thereto could, therefore, have no application, nor
could s. go of the Act, which in terms had no application
even if applied, improve the position of the plaintiffs.
No question of a constructive trust could also arise under
the general law apart from the statute. There is no
absolute rule of law or equity in England that renewal of a
lease by one partner must necessarily enure to the benefit
of all the partners. There is, however, a presumption of
fact that there is an equity in favour of the renewal of the
lease enuring to the benefit of all the partners. Such a
presumption may be rebutted by the facts of a particular
case. The Indian law as enacted in the Indian Trusts Act,
and particularly ss. 88 and go of that Act, is substantially
the same. In the instant case, the facts and circumstances
amply rebut that presumption.
75
Featherstonhaugh v. Fenwick, (1810) 34 E.R. 115, Clegg v.
Fishwick, (1849) 41 E.R. 1278, Clements v. Hall, (1857) 44
E.R. 954, Clegg v. Edmondson, (1857) 44 E.R. 593, In Ye
Biss, Biss v. Biss, [1903] 2 Ch. 40 and Griffith v. Owen,
[1907] I Ch. 195, G considered.
JUDGMENT:
CIVIL APPELLATE, JURISDICTION: Civil Appeal No. 91 of 1954.
Appeal from the judgment and decree dated December 10, 1948,
of the Madras High Court in Regular First Appeal No. 609 of
1946, arising out of the judgment and decree dated March 30,
1946, of the Court of the Subordinate Judge of Chicacole in
Original Suit No. 1 of 1943.
A. V. Viswanatha Sastri and R. Ganapathy Iyer, for the
appellant.
K. M. Rajagopala Sastri and S. K. Sastri, for respondents
Nos. 1, 2, 3, 5-7, 13 and 24-27.
1958. October 6. The Judgment of the Court was delivered by
SINHA J.-The only question for determination in this appeal
by the first defendant, on a certificate granted by the High
Court of Madras, is whether the renewal of a lease for
running a salt factory, granted by the Government in favour
of the appellant and others (defendants 1 to 7), could be
treated as an asset of the dissolved partnership between the
contesting parties. The trial court decided this question
in favour of the contesting defendants. On appeal by the
plaintiffs and some defendants on the side of the
plaintiffs, the High Court of Madras determined this
controversy in favour of those appellants. Hence, this
appeal by the first defendant whose interest is identical
with that of defendants 2 to 7. The reference in this
judgment to I appellant’ will, thus, include the interest of
the other non-appealing defendants also.
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
76
(Mad. 4 of 1889) (which will, hereinafter, be referred to as
the Act). It is not permissible to manufacture salt
otherwise than tinder 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 the 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 carried 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
77
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
2invited 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 Collector’s 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 judg-
ment. 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 7.
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
78
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 into
account in the process of dissolution of the partnership.
The plaint as framed contained a 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 defendants 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 for 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 partnership.
The trial court-passed a preliminary decree, declaring that
the partnership stood dissolved on December 31, 1942, and
for taking accounts. As regards the
79
benefit of the renewed lease for 25 years, the trial court
negatived the plaintiffs’ claim that the dissolved
partnership carried any firm or trade name, which(, could be
said to have any tangible goodwill, 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 goodwill of a
particular firm name, the court directed that “the
Commissioner is authorized to sell the goodwill 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.
On appeal to the High Court, the learned Chief Justice,
delivering the judgment of the Division Bench, came to the
conclusion that the plaintiffs’ case that the fresh lease
had been obtained as a result of the resolution of the
partners to carry on the business after the lapse of the
specific period of the partnership which came to an end in
December 1942, had not been made out. But on the
alternative plea of the plaintiffs, the Court, after an
elaborate discussion of English and Indian Law on the
subject, held that the plaintiffs were entitled to treat the
new lease as an asset of the dissolved partnership. The
conclusion of the High Court may better be stated in its own
words, as follows:-
“In conclusion, we hold that the new lease obtained by
Defendants 1 to 7 in -renewal of the old lease which formed
the subject matter of the partnership, must be held by them
for the benefit of the other members of the partnership, who
are entitled to share in the advantage gained by Defendants
1 to 7. As the lease itself was executed after the
termination of the partnership and as it is not the case of
the Appellants that any one other than defendants 1 to 7 had
furnished the consideration for the new lease, the benefit
of the renewal alone ‘will be treated as an asset of the
partnership which terminated on 31st December,- 1942, and a
value placed on it. The Commissioner appointed
80
by the lower Court may, after taking such evidence as may be
necessary, be directed to fix the value in the first
instance. In arriving at a value, the liability of
defendants 1 to 7 to furnish capital and incur the necessary
expenses for carrying on the new business with its attendant
risks and also possibilities of profits, are factors to be
taken into account.”
In those words, the High Court set aside the judgment and
decree of the trial court, and allowed the appeal in terms
which the Commissioner appointed to take accounts of the
dissolved partnership, may not find it easy to implement.
In support of this appeal, the learned counsel for the
appellant, has contended that the High Court has misdirected
itself in construing the provisions of the Indian Trusts
Act, in holding that a constructive trust had been made out
in favour of the plaintiffs; that there is no absolute rule
that the renewal of a lease which was the subject-matter of
a partnership, must always enure to the benefit of the old
partners; and that the essential ingredients of s. 88 of the
Trusts Act, had not been made out in this case. He also
contended that the lease by itself, did not create a right
to manufacture salt and to sell it, and that a licence is a
necessary pre-requisite to carry on the business of
manufacture and sale of salt in accordance with the rules of
the Department, and that it is open to the Department not to
recognise any partners in the business. In this case, it
was further contended, the licence to sell salt had been
granted only in 1945. Under the English law, there may be a
presumption that the renewal of a lease which formed the
subject matter of a partnership, will enure for the benefit
of the partners, but he contended that in the circumstances
of this case, such a presumption could not arise, and even
if it did, it was rebutted by the following facts. The term
of the original partnership was a fixed one, terminating
with the term of the lease and of the licence to manufacture
salt, which came to an end with the year 1942; the
partnership-deed did not contemplate that this business
would be extended beyond the fixed term in the event of a
fresh lease
81
being obtained from the Government. It was highly
significant that the term of the partnership to carry on the
salt business was deliberately fixed as conterminous with
the terms of the lease and the licence. The plaintiffs
never took any steps to obtain a renewal of the lease, nor
was there any evidence that they asked the defendants to
take a renewal for the benefit of all the partners. On the
other hand, when the defendants applied on their own behalf
for a fresh lease for 25 years, the plaintiffs put in a
petition of protest, and prayed to the Government for being
included in the category of lessees in the lease to be
granted for 25 years, as co-lessees, but without any
success. There is no allegation in the plaint of any
attempt at concealment on the part of the appellants to the
effect that they were taking the lease for their own
benefit. Nor was there any evidence that the defendants had
taken any advantage of their position as partners, or had
utilized any funds of the partnership for obtaining the
fresh lease. Lastly, it was contended that differences
having cropped up between the parties during the years 1939
to 1942, it could not be said that the plaintiffs placed
such a confidence in the defendants -as to place them in the
position of constructive trustees within the meaning of s.
88 of the Trusts Act.
On the other hand, it was contended on behalf of the
respondents that the fresh lease for 25 years, was granted
to the appellants as a result of the changed policy of the
Government, by which they substituted the renewal to
approved parties in place of the old practice of settling
the terms of the lease by open competition and by holding
auction-sales. The contesting defendants obtained the lease
in their names because they were entered in the Government
records as the original lessees, and as the original lease
was admittedly for the benefit of all the partners, the new
lease also must be treated as being founded on the old
lease. It was also contended that s. 88 of the Trust Act,
was not exhaustive, and that even if the present case did
not come strictly within the terms of that
11
82
section, the rule of English law relating to constructive
trusts, applied to the case, and that, therefore, the High
Court was quite justified in coming to the conclusion that
the lessees were in the position of trustees when they
obtained the renewed lease. The plaintiffs failed in their
attempt to be included in the category of joint-lessees
along with those defendants because of the changed policy
and the rules of the Department. Hence, the plaintiffs were
in a position of disadvantage as compared to the defendants
in whose name, the original lease and the licence stood. In
view of those facts, it was further contended, the
plaintiffs could not either get the lease independently for
themselves, or succeed in getting their names included in
the category of joint-lessees. Lastly, it was contended
that in the circumstances of the present case, the
presumption of law that the defendants were constructive
trustees, had not been rebutted.
Before dealing with the arguments advanced on be. half of
the parties, it is convenient to set out, in brief outline,
the system of working salt factories under the Act (Mad. 4
of 1889), which was enacted to ” consolidate and amend the
law relating to the salt revenue in the Presidency “. Under
the Act, a ” salt factory ” includes any place used or
intended to be used for the manufacture of salt or for the
storage or keeping of the same, as defined from time to time
by the Collector of salt revenue. ” Licensee “, under the
Act, means a person to whom a licence to manufacture salt or
saltpeter, is issued, and includes any person registered as
the transferee of such licence under the provisions of the
Act. Under s. 8, only licensees or public servants under
the Central Government, are authorized to manufacture salt.
Section 9 of the Act, authorizes the Collector of salt-
revenue to grant licences for the manufacture of salt in
respect of specified salt works, containing such particulars
and conditions as the Central Government may prescribe from
time to time. Such a licence may be for the manufacture of
salt for sale to the Central Government or for general sale;
and may be transferred or relinquished in accordance with
the prescribed rules. Section 12 lays down that?
83
a licensee shall be taken to be the owner of the licence and
of the salt works specified therein. It is open to the
Central Board of Revenue to establish a new salt, factory,
and, subject to the payment of compensation, to close any
salt factory or a portion thereof, and thus, cancel or amend
the licence. A provision has also been made by s. 17 for
the grant of a temporary licence for the manufacture of salt
in certain contingencies. Section 25 authorizes the
Collector of salt revenue to impose upon a licensee a fine
according to the prescribed scale, or to suspend a licence
or even to cancel a licence for want of due diligence or
default by a licensee. Section 43 contains a prohibition
against the removal of salt from a salt factory otherwise
than on account of the Central Government or for transport
to a place of storage authorized by the Collector of salt
revenue, except under a permit and upon payment of duty at
the fixed rate. The Central Government is authorized to
make rules generally for carrying out the provisions of the
Act, and specially for regulating certain matters set out in
s. 85. Such rules, on publication in the official gazette,
have the force of law, and have to be read as part of the
Act. It is common ground that elaborate rules have been
laid down by the Government, for regulating the manufacture
and sale of salt, so as to safeguard public revenue and to
prevent the manufacture of contraband salt. It is, thus,
clear that the business of manufacture of salt, which the
parties to the agreement of partnership carried on, was not
an ordinary occupation, which, is free from such strict
rules and regulation as have been laid down by and under the
Act. The licensee owes a special responsibility to the
Government, and, therefore, the transfer or relinquishment
of licences under the Act, has to be regulated according to
the rules laid down by the Government. It is true that
there is no absolute prohibition against such transfer or
relinquishment, but the Government through its public
officers, has the determining voice in such matters.
It is in the background of the law laid down by or under the
Act, that we have to discuss the rights and
84
lease. The first lease, a draft copy of which is on the
record as ex. P-16 at pp. 101 to 105, is an indenture
between the Secretary of State for India in Council as the
lessor, and the first defendant and the father of defendants
2 to 7, as the lessees. The consideration for -the lease is
the sum of Rs. 25,000/-. The lease is for a period of 17
years from January 1, 1926, subject to either party having
the right to determine the lease by a notice in writing at
the close of the salt manufacturing season. It provides
that on the expiry of the lease or its sooner determination
as aforesaid by notice on either side, the lessees shall
leave the demised premises which had been leased out
exclusively for the manufacture, storage and sale of salt
and for the works connected therewith, without any right to
erect any dwelling houses, etc. It also provides that the
lessees shall be granted a modified excise licence in Form
E-1(d). It also contains the condition that the lessees
shall not, except with the written consent of the lessor,
first had and obtained, assign, underlet, or part with the
possession of the leased land or any portion thereof. The
lessees may take a partner or partners, who may be approved
by the Collector in the business. The lease also contains
detailed provisions as to how the business of manufacture
has to be carried on under the supervision of the public
authorities like the Collector.
The renewed lease, exh. D-18, dated April 15, 1943, is
between His Excellency the Governor-General in Council, as
the lessor and the contesting defendants as the lessees, for
a period of 25 years commencing from January 1, 1943. There
is no payment of any premium for the lease. The other terms
and conditions of the lease are similar to the previous one.
Though temporary licences were granted from time to time, it
was only on April 17, 1945, that a ” revised permanent
licence ” was granted, and the temporary licence granted for
1945, was cancelled.
The ” co-partnership deed ” as it is called, which is dated
March 18, 1926, is between five individuals, and provides
that those five persons should enjoy the profit
85
or bear the loss thereof, according to the shares indicated
above; ” that as the licence in the salt stands in the names
of Chennuru Appala Narasayya Chetty and Guruswamy Chetty out
of us, the said individuals only shall be responsible
thereto “; and that ” In case the said Appala Narasayya
Chetty and Guruswamy Chetty or their heirs fail to render
proper accounts whenever demanded according to the aforesaid
terms to the remaining three sharers or their heirs during
the salt lease period of seventeen years and commit defaults
or any kind of frauds, Appala Narasayya Chetty Garu and
Guruswamy Chetty Garu shall pay by way of penalty to the
said three sharers at the rate of Rs. 2,500/- (two thousand
five hundred) per share for the year when fraud is
committed, without having anything to do with the other
profits and losses.” It is, thus, clear that the partnership
was for the fixed term of 17 years, ending with the -period
of the lease, and the parties did not, in terms, contemplate
the continuance of the partnership after the expiry of that
period. Their rights and liabilities are entirely with
reference to the said period of 17 years, there being no
provision for the continuance of the business by the
partnership after the expiry of the said term.
If there bad been a specific stipulation in the partnership
deed, or even an indication that the partnership business
would continue even after the expiration of the 17 years,
which was the term of the partnership, different
considerations may have arisen. It could then have justly
been said that the managing partner owed a duty to the other
partners to obtain a renewal of the previous lease. It is,
therefore, not without significance that in para. 12 of the
plaint, the plaintiffs specifically alleged that it had been
unanimously resolved by the partners that a renewal of the
lease should be obtained for a further period for the
benefit of the partnership, and that as a matter of fact,
the renewal was obtained in pursuance of that resolution and
by using the goodwill of the partnership. This specific
case has failed in both the courts below, but the High
Court, in disagreement with the trial court, has accepted
the alternative case as made ‘out,
86
in para. 17 of the plaint, that the renewal of the lease
should be treated as an asset of the partnership in
,settling the accounts and dividing the assets of the
dissolved partnership. But even in para. 17, there is no
specific case made out under s. 88 of the Indian Trusts Act
(II of 1882). It is not alleged, in terms, that the
contesting defendants filled a fiduciary character, and
were, thus, bound to protect the interest.% of all the
partners in obtaining the renewal of the lease, or that, in
so doing, their interests were adverse to those of the other
partners, and they had, this gained a pecuniary advantage to
the detriment of the other partners. Though the plaintiffs
had suggested that the contesting defendants had large
funds, amounting to about Rs. 90,000, of the partnership,
portion of which had been set apart for Payment of premium
and for other expenses incidental to the renewal of the
lease, it had been found, and there cannot be the least
doubt about it, that no funds of the partnership had been
utilized for obtaining the new lease. As already indicated,
no premium had to be paid for the fresh lease obtained by
the contesting defendants.
Though no foundation was laid in the pleadings, strictly
construed, for a case tinder s. 88 of the Indian Trusts Act,
we have still to examine the question’ whether the High
Court was right in holding that either under that section or
under the general law, apart from the statutory law, the
contesting defendants bad placed themselves in such a
position as to render themselves accountable as constructive
trustees. Section 88 is in these terms:-
” 88. Where a trustee, executor, partner, agent, director
of a company, legal adviser or other person bound in a
fiduciary character to protect the interests of another
person, by availing himself of his character, gains for
himself any pecuniary advantage,’ or where any person so
bound enters into any dealings under circumstances in which
his own interests are, or may be, adverse to those of such
other persons and thereby gains for himself a pecuniary
advantage, he must hold for the benefit of such other person
the advantage so gained.”
87
The section is in two parts. In order to bring the case
within the first part, it has to be shown that the
contesting defendants had a fiduciary character, and were
thus, in duty bound to protect the interests of the other
partners in the matter of obtaining the lease; and that they
obtained the lease for themselves instead, by availing
themselves of that character. As already pointed out, it
was not within the scope of the partnership in accordance
with the terms of the deed, to obtain a renewal of the
lease. At the time of entering into the partnership, the
parties were fully cognizant of the rules of the Department
then in force, according to which a fresh lease could be
granted to the highest bidder irrespective of any other con-
siderations as to whether any one of the bidders war, a
previous lessee. The renewal of the lease without payment
of any premium, was the result of the changed policy of the
Government, according to which the personal conduct of the
lessees, and not the amount of premium, was the determining
factor in the grant of a fresh lease. Because the
contesting defendants bad managed the factory well and to
the satisfaction of the Revenue Authorities, they were able
to obtain the fresh lease, and it cannot be said that they
had availed themselves of their character as partners in
obtaining the renewal of the lease. The plaintiffs’
allegation that the goodwill of the firm had been utilized
for obtaining the renewal, has also not been found by the
courts below to be true, because the basic allegation that
there was a partnership firm with a goodwill, had not been
established as a fact. In our opinion, therefore, the
plaintiffs have failed to bring the case within the first
part of s. 88.
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 bad 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
88
of the other partners as well. In this connection,
illustrations (d) and (e) under the section, are instruc-
tive. 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 utilized 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 has 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 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. The” had already started
quarreling and attributing
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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
partners.
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 a little difficult to appre-
ciate 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-respondents.
12
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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 (1), Clegg v. Fishwick
(2), Clements v. Hall (3), Clegg v. Edmondson (4), In re
Biss, Biss v. Biss (5), Griffith v. Owen (6) . The law in
England has been summarized in Halsbury’s Laws of England,
2nd Ed., Vol. 24 (Lord Hailsham’s 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 above.
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
(1) (1810) 34 E. R. 115.
(3) (1857) 44 E. R. 954.
(5) [1903] 2 Ch. 40.
(2) (1849) 41 E. R. 1278.
(4) (1857) 44 E. R. 593-
(6) [1907] I. ch. 195.
91
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.
For the reasons given above, it must be held that the
judgment and decree passed by the High Court, in so far as
they reverse those of the trial court, are erroneous, and
must be set aside. The appeal is, accordingly, allowed with
costs throughout, which are attributable to the single issue
which has been decided in this Court.
Appeal allowed.
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