RAMBARAN PROSAD versus RAM MOHIT HAZRA & ORS.

RAMBARAN PROSAD

RAM MOHIT HAZRA & ORS.

September 6, 1966

[V. RAMAsWAMJ, V. BHARGAVA AND RAGHT.JBAR DAYAL, JJ;]

Pre-emption-Agreement between parties to give to each other righl of pre-emption-Whether binds successors-in-interest-Rule against perpe-tuities whether offended.

There was partition suit between two brothers T and K. The matter was referred to arbitration. Under the award the properties were divided into four blocks A, B, and D. Blocks and went to T, and and to K. Further according to the award, the parties had aiireed that 'any party in case of disposing or transferring any portion of bis share, shall offer preference to the other party, that is each party i;hall have the right of pre-emption between each other'. Thereafter ~lock ·A to one 0 after obtaining K0s refusal to pre-empt the same. Next T wld year K sold blocks and to certain parties who in turn sold diem to the plaintiffs. Some years later 0 sold block to defendant No. 1. The plaintiffs !hereupon filed suit against defendant No. 1 for pre-emptmg his aforesaid purchase. While the suit was pending in the trial court, defendant No. 1 sold block to defendant No. 2 who was alao impleaded to the suit. The trial Judge held that the covenant of pre-emption was ·binding upon the defendants who had notice of that clauoc and the plaintiffs were entitled to the right of pre.emption. He further held that the covenant of pre-emption was not hit by the rule against perpetuities and was enforceable against the assignoos of the original parties to the contract. The defendants took the matter ill appeal lo the High Court which dismiued the appeal. 'Ibo defendants came to this Court by way of special leave to appeal.

HELD : (i) It is true that the pre-emption clause does not expressly state that it is binding upon the assignees or successors-in-interest, but, having regard to the context and the circumstances .in which the award was made it was manifest that the pre-emption clause '1!USt be construed as binding upon the assignees, or successors-in-interest of the original con-tractmg parties. [295 OJ

Section 23, 27(b) and 37 of the Specific Relief Act lay down that sub-ject to certain exceptions contract in the absence of contrary intention express or implied will be enforceable by and against the parties and their legal heirs and legal represent-alive including assignees and transferees. In tbe present case there was nothing in . the language of the pre-<!mption clause or the other clauses of the award to suggest that the parties bad any contrary intention. On the other hand reference to the other clauses qt the award showed that the parties intended that the obligations and benefit of the contract should g0 to the assignees and successon-in-interest. [296-H]

The pre.empfon clause was based on the ground of vicinage 11nd this circumstance also suggested that the intention of the parties was that the pre-emption clause should be binding upon the heirs and successors-in-llllerest and the assignees of the original parties to the contract. (298 Al

(ii) The rule against perpetuities does not apply to personal contrac11s which do not create interest in property. [298 F]

Reading s. 14 along with s. 54 of the Transfer of Property Act it is mainfesl that mere contract for sale of immovable property does not create any interest in the immovable property and ii therefore follows that the rule of perpetuity cannot be applied to covenant of pre-empllOn even though there is no time limit within which the option has to be e>ercised. [301 HJ

Accordingly the covenant for pre-emption in the pr~ent case did n?t offend the rule againc;t perpetuities and could not be considered 10 be void in law. [302 DJ .Case-Jaw referred to.

English Jaw distinguished.

av1L APPEi.i.ATE JURISD!CATION '.Civil Appeal No. 609 of 1964.

Appeal by special leave from the judgment and decree dated November 11, 1959 of the Calcutta High Court in Appeal from Original Decree No. 109 of 1954.

Bishan Narain and B. P. M11ltesliwari, for the appellant.

N. C. Chatteriee and S11k11111ar Ghosh, for respondents No~

and 2.

The Judgment of the Court was delivered by

Ramaswami, J. This appeal is brought, by special leave, from the judgment of the Calcutta High Court dated November 18, 1959 in First Appeal ~o. 104 of 1954 affirming the judgment and decree dated February 27, 1954 of the Subordinate Judge, Fifih Court, at Alipore District 24 Parganas in Title Suit No. 100 of 1952 decreeing the suit for pre-emption in favour of the plaintiffs-rcspondents Nos. 1 and 2.

Two brothers, Tulshidas Chatterjee and Kishorilal Chatterjee owned certain properties (land and building) on Paharpur Road within Mouza Garden Reach, Khidderpore, in the suburbs of Calcutta. In the year 1938 Kishorilal sued for partition of the properties and eventually the matter was referred to arbitration. On December 16, 1940, the arbitrators filed their award on which final decree was passed on March 15, 1941 in the partition suit. Under the award, two of the four blocks, A, B, & D, into which the properties were divided by the arbitrators, namely, blocks and C, were allotted to Tulshidas and the remaining two blocks, and were allotted to Kishorilal. Two common pas-sages marked as X and Y and common drain Z were kept joint between.the parties for their use. In the award there was clause to the following effect :

"We further find and report with the consent of and approval of the parties that any party in case of dis-posing or transferring any portion of his share, shall offer preference to the ·other party, that is each party shall have the right of pre-emption between each other."

Thereafter, on August 20, 1941 Tulshidas sold his block to one Nagendra Nath Ghosh. This was done after Kishorilal's refusal to pre-empt the same in spite of Tulshidas's offer to him in terms of the pre-emption clause. On April 22, 1942, Kishorilal sold, by the Kobala (Ex. I), his two blocks, and to Rati Raman Mukherjee and others. On June 21, 1946, the Mukherjees in their turn sold the two blocks & to the plaintiffs by the Kobala [Ex. I(a)]. On September 20, 1952 Nagendra Nath Ghosh sold block to defendant No. 1 and on December 2, 1952, the present suit was filed by the plaintiffs against the said purchaser-defendant No. I for pre-empting his ·aforesaid purchase. On April 7, 1953 while the suit was pending in the trial court, dtfendant No. 1 sold the disputed property (block A) to defendant No. 2. The pla;ntiffs there-after made an application for amendment of the plaint praying for decree for pre-emption against defendants Nos. 1 & 2 and calling upon them to execute conveyance in favour of the plaintiffs on payment of the actual consideration paid for the property in suit. On the conclusion of the trial the Subordinate Judge held that the covenant of pre-emption was binding upon the defendants who had notice of that clause and plaintiffs were entitled to enforce the right of pre-emption. He further held that the covenant of pre-emption was not hit by the rule against perpetuities and was enfor-ceable against the assignees of the original parties to the contract. Accordingly decree was granted to the plaintiffs asking them to deposit within one month sum of Rs. 14,000 for the purpose of pre-empting the suit property and both the defendants were direc-ted to execute and register Kobala in plaintiffs' favour within lS days of the deposit by the plaintiffs. The defendants took the matter in appeal to the Calcutta High Court which dismissed the appeal and affirmed the judgment and decree of the Subordinate Judge.

On behalf of the appellant learned Counsel put forward the

argument that the covenant for pre-emption was_ merely personal covenant between the contracting parties and was not binding again-st successors-in-interest or the assignees of the original parties to the contract. We are unable to accept this submission as correct. It is true that the pre-emption clause does rtot expressly state that it is binding upon the assignees or successors-in-interest, but, hav-ing regard to the context and the circumstances in which the ward was made, it is manifest that the pre-emption clause must be con-strued as binding upon the assignees or successors-in-interest of the original cm1tracting parties.

Prima Facie rights of the parties to contract are assignable. Section 23(b) of the Specific Relief Act states :

"23. Except as otherwise provided by this Chapter, the specific performance of contract may be obtained by-

(a) ..................................... .

(b) the representative in interest, or the principal, of any party thereto : provided that, where the learning, skill, solvency or any personal quality of such party is material ingredient in the contract, or where the con-tract provides that his interest shall not be assigned, his representative in interest or his principal shall not be en-titled to specific performance of the contract, unless where his part thereof has already been performed";"

Section 27(b) of the Act is to the following effect :

"27. Except as otherwise provided by this Chapter, specific performance of contract may be enforced against:..._

(a) ..................................... .

(b) any other person claiming under him by title arising subsequently to the contract, except transferee for value who has paid his money in good faith and with-out notice of the original" contract ;"

Reference should also be made to ss. 37 and 40 of the Indian Con-tract Act which are to the following effect :

"37. The parties to contract must either perform, or offer to perform, their respective promises, unless such performance is dispensed with or excused under the provisions of this Act, or of any other law.

Promises bind the representatives of the promisors in case of the death of such promisors before performance, unless contrary intention appears from the contract."

"40. If it appears from the nature of the case that it was the intention of the parties to any contract that any promise contained in it should be· performed by the promi-sor himself, such promise must be performed by the pro-misor. In other <;ases, the promisor or his representatives may employ competent person ·to perform it."

In substance these statutory provisions lay down that, subject to certain exceptions which are not material in this case, contract in the absence of contrary intention express or implied will be enforceable by and against the parties and their legal heirs and legal representatives including assignees and transferees. In the present case, there is nothing in the language of the pre-emption clause or the other clauses of the award to suggest that the parties had any contrary intention. On the other hand reference to the other clauses of the award shows that the parties intended that the

obligations and benefit of the contract should go to the assignees or successors-in-interest. The following clauses of the award are important:

"We find and report that 6' six feet wide common passage marked 'X' measuring 12 ch. 36 sq. ft. in the plan and coloured with Burnt sienna shall ever remain as such to all the blocks the owners whereof shall have every right to take underground water pipes electric connections etc. and the parties shall have never any right either to obstruct or to close any part of the same.

The parties shall be at liberty to fill up the tank por-tion allotted in their respective shares at their own costs. The common walls and structures according to the above allotments shall have to be maintained and kept in proper condition by both parties.

We further find and report that the partition line in the inner courtyard shall be drawn east to west as shown in the plan just over the middle of the pit situated at the north west corner of the inner courtyard for the drainage of water. There must be an opening in the partition wall that may be raised thereon over the mouth of the pit in order to have free access for the drainage of water of both parties through the said pit whiQh shall have to be maintained as such for ever. ·

With the consent of the parties we· find and award that the parties shall complete CC!llStt:uction of new structures or demolition of any existing ~tructures, in terms of this award within one year from this date, that is 16th day of December, 1940. During this period of one year parties shall remain entitled to use and enjoy the entire property as allotted, but immediately after the expiry of the said period of one year plaintiff shall have every right to close or otherwise· obstruct- the defendant from enjoyment of that portion of·the structure privy or land exclusively allotted to him and the defendant shall have the same right as against the plaintiff in respect of his share of structures and land exclusively allotted to his share in terms of the award."

It is obvious that in these clauses the expression "parties" cannot be restricted to the original parties to the contract but must in-clude the legal representatives and assignees of the original parties. There is hence no reason why the same expression should be given restricted ,meaning in the pre-emption clause which is the subject-matter of .interpretation in the present appeal. On behalf of the respondents Mr. N. C. Chatterjee rightly argued that the pre-emp-

lion clause was based upon the ground of vicinagc and this circum-stance would also suggest that the intention of the parties was that the pre-emption clause should be binding upon the heirs and successors-in-interest and the assignees of the original parties to the contract. We accordingly hold that Mr. Bishen Narain on behalf of the appellant is unable to make good his submission on this aspect of the case.

We pass on to consider the next question which arises in this .appeal, namely, whether the covenant of pre-emption offends the rule against perpetuities and is therefore void and not enfor-ceable even against the original contracting parties.

"A perpetuity", as defined by Lewis in his well-known book on "Perpetuities" (p. 164), is 'a future limitation, whether executory or by way of remainder, and of either real or personal property which is not to vest until after the expiration of, or will not neces-sarily vest within, the period fixed and prescribed by law for the creation of future estates and interests'. The rule as formulated falls within the branch of the law of property and its true object is to restrain the creation of future conditional interest in property. The rule against perpetuities is not concerned with contracts as such or with contractual rights and obligations as such. Thus contract to pay money to person, his heirs or legal representa-tives upon future contingency, which may happen beyond the period prescribed would be perfectly valid (Walsh v. Secretary ·Of State for lndia')(I). It is therefore well-established that the rule of perpetuity concerns rights of property only and does not affect the making of contracts which do not create rights of property.

The rule docs not therefore apply to personal contracts which do not create interest in property (See the decision of the Court of Appeal in South Eastern Railway Company v. Associated Portland ·Cement Manufacturers Ltd.)(2), even though the contract may have reference to land. In Witham v. Vane,(') William Harry, Earl of Darlington sold in 1824 the manor of Hutton Henry and other heriditaments to George Silvertop. In the conveyance there was covenant that the said Earl, his heirs, executors, adminis-trators or assigns would pay six pence for each chaldron of coal which would be wrought or gotten out of the lands so sold and which would be shipped for sale, to George Silvertop, his heirs, executors, administrators or assigns. The covenant was en-forced in 1883 at the instance of an assignee from the legal repre-sentatives of George Silvertop against the executors of the Earl. The Lord Chancellor (Earl of Silbome) overruled the plea that ,the covenant offended the rule against perpetuities on the ground

(2) (19101 I Ch. 12.

.(I) (1863) IO H.L.C. 367; II E.R. 1068.

.(3) (188~ Challis's Law of Real Property, 3rd. Ed., App. V., p. 440.

that, though the covenant had relation to land, it did not amount. to reservation of any interest in land.

In English Jaw contract for purchase of real property is re-garded as creating an equitable interest, and if, in the absence of time limit, it is possible that the option for repurchase might be exercised beyond the prescribed period fixed by the perpetuity rule, the covenant is regarded as altogether void. It has therefore been held that covenant for pre-emption unlimited in point· of time is bad as being obnoxious to the rule against perpetuities. The point was settled by the Court of appeal in London and South Western Railway Company v. Gomm(') which is the leading English authority on the point. In that case, the plaintiff company con-c veyed certain lands to Powell in 1865, and Powell covenanted with the company that he, his heirs, and assigns, would. at any time, on receipt of £100, reconvey the lands to the company. In 1879, the defendant Gomm purchased the land from Powell's heirs with notice of the above covenant, and in 1880 the company gave the defendant notice to reconvey the land, and on his refusal brought the suit for specific performance. Kay J. gave the plaintiff decree, being of the opinion that, as the covenant did not create any estate or interest in the land, it was not obnoxious to the rule against perpetuities. This decision was reversed by the Court of appeal, and it was held that the option to purchase created an equi-table interest in the land which attracted the operation of the· per-petuity rule. Sir George Jessel M. R. observed, in his judgment, that the right to call for conveyance of land was an equitable in-terest or equitable estate. There was no doubt about it in an ordinary case of contract for purchase, and an option for repurchase--did not stand on different footing. In the course of his judg-ment the learned Master of Rolls observed as follows :

"Whether the rule applies or not depends upon this as it appears to me, does or does not the covenant give an interest in the land ? If it is bare or more personat contract it is of course not obnoxious to the rule, but in that case it is impossible to see how the present appellant can be bound. He· did not enter into the contract, but is only purchaser from Powell who did. If it is mere personal contract it cannot be enforced against the assignee. Therefore the company must admit that it somehow binds the land. The right to call for conveyance of the land is an equitable interest or equitable e5tate. In the ordinary case of contract for purchase there is no doubt about this, and an option of purchase is not different in its nature. person exercising the option has to do two things; he has to give notice of his intention to

purchase, and to pay the purchase money; but as far as the man who is liable to convey is concerned, his estate or interest is taken away from him without his consent, and the right to take it away being vested in another, the covenant giving the option must give ihe other an interest in land."

In the case of an agreement for sale entered into prior to the passing of the Transfer of Property Act, it was the accepted doc-trine in India that the agreement created an interest in the land itself in favour of the purchaser. For instance, in Fati Chand Sahu v. Li/ambar Sing Das(') suit for specific performance of con-tract for sale was dismissed on the ground that the agreement, which was held to create an interest in the land, was not regis-tered under s. 17, cl. (2) of the Indian Registration Act of 1866. Following this principle, Markby J. in Tripoota Soonduree v. Juggur Nath Dutt(2) expressed the opinion that covenant for pre-emp-tion contained in deed of partition, which was unlimited in point of time, was not enforceable in law. The same view was taken by Baker J. in Allihhai Mahomed Akuji v. Dada Alli /sap(') where the option of purchase was contained in contract entered into before the passing of the Tranfer of Property Act. The deci-sion of the Judicial Committee in Maharaj Bahadur Singh v. Bal Chanad(•) was also decision relating to contract of the year 1872. In that case, the proprietor of hill entered into an agree-ment with society of Jains that, if the latter would require site thereon for the erection of temple, he and his heirs would grant the site free of cost. The proprietor afterwards alienated the hill. The society, through their representatives, sued the alienees for possession of site defined by boundaries, alleging notice to the proprietor requiring that site and that they had taken posses-sion, but been dispossessed. It was held by the Judicial Committee that the suit must fail. The Judicial Committee was of the opinion that the agreement conferred on the society no present estate or interest in the site, and was unenforceable as covenant, since it did not run with the land, and infringed the rule against perpetuity. Lord Buckmaster who pronounced the opinion of the Judicial Com-mittee observed as follows :

"Further, if the case be regarded in another ligbt-namely, an agreement to grant in the future whatever land might be selected as site for temple-as the only interest created would be one to take effect by entry at later date, and as this date is uncertain, the provision is obviously bad as offending the rule against perpetui-ties, for the interest would not then vest in presenti, but

(I) (1S71) 9 B.L.R. 433.

(2) (1875) 24 W.R. 321. (4) 48 I.A. 376.

13) A.L.R. 1931 Dom. 578.

would vest at the expiration of an indefinite time which might extend beyond the expiration of the proper period." ·

But there has been change in the legal position in India since the passing o( the Transfer of Property Act. Section 54 of the Act states that contract for sale of immovable property "does not, of itself, create any interest in or charge on such pro-perty". Section 40 of the Act is also important and reads as follows :

"40. Where, for the more beneficial enjoyment of his own immovable property, third person has, inde-pendently of any interest in the immovable property of another or of any easement thereon, right to res-train the enjoyment in particular manner of the latter property, or

where third person is entitled to the benefit of an obligation arising out of contract, and annexed to the ownership of immovable property, but not amounting to an interest therein or easement thereon,

such right or obligation may be enforced against transferee with notice thereof or gratuitous trans-feree of the property affected thereby, but not against transferee for consideration and without notice of the right or obligation nor against such property in his hands."

The second paragraph of s. 40 taken with the illustration establishes two propositions : (I) that contract for sale does not create any interest in the land, but is annexed to the ownership of the land and (2) that the obligation can be enforced against subse. quent gratuitous transferee from the vendor or transferee for -Yalue blit with notice. Section 14 of the Act states as follows :

"14. No transfer of property can operate to create an interest which is to take effect after the lifetime of one or more persons living at the date of such transfer, and the minority of some person who shall be in existence at the expiration of that period, and to whom, lf he attains full age, the interest created is to belong."

Reading s. 14 along with s. 54 of the Transfer of Property Act its manifest that mere contract for sale of immovable pro-perty does not create any interest in the immovable property and it therefore follows that the rule of perpetuity cannot be applied to covenant of pre-emption even though there is no time limit within which the option has to be exercised~ n is true that the second paragraph of s. 40 of the Transfer of Property Act make

substantial departure from the English law, for an obligation under contract which creates no interest in land but which con-cerns land is made enforceable against an assignee of the land who takes from the promisor either gratuitously or takes for value but with notice. contract of this nature does not stand on the same foNing as mere personal contract, for it can be enforced against an assignee with notice. There is superficial kind of resemblance between the personal obligation created by the contract of sale described under s. 40 of. the Act which arises out of the contract, and annexed to the ownership of immovable property, but not amounting to an interest therein or easement thereon and the equitable interest of the person purchasing under the English Law, in that both these rights are liable to be defeated by purchaser for value without notice. But the analogy cannot be carried further and the rule against perpetuity which applies to equitable estates in English law cannot be applied to covenant of pre-emption because s. 40 of the statute docs not make the covenant enforceable against the assignee on the footing that it creates an interest in the land.

We are accordingly of the opinion that the covenant for pre-emption in this case does not offend the rule against perpetuities and cannot be considered to be void in law. The view that we have expressed is borne out by the decisions of the Calcutta High Court in Ali Hossain Miya v. Raj Kumar Haldar('), of the Allahabad High Court in Au/ad Ali v. Ali Athar(i) and of the Madras High Court in Chinna Munuswami Nayudu v. Saga/aguna Nayudu.() Mr. Bishen Narain relied on the decision of the Calcutta High Court in Nobin Chandra Soot v. Nabab Ali Sarkar(•) and the judg-ment of the Allahabad High Court in Gopi Ram v. Jeot Ram([5]). For the reasons we have already stated we hold that the later deci-sions in Ali Hossain Miya v. Raj Kumar Ha/dar(') in Chinna Munu-swomi Nayudu v. Saga/aguna Nayudu,(') and in Au/ad Ali v. Ali Athar ,(2) correctly state the law on the point.

For the reasons expressed we hold that the decision of the High Court is correct and this appeal must be dismissed witb costs.

Appeal dismissed.