Naihati Jute Mills Ltd. v. Hyaliram Jagannath

A jute mill agreed to supply an import licence for 2,000 bales of Pakistan jute and could not get one. It said a change in Government of India policy had made the contract impossible. The Supreme Court held that the mill had taken the risk of getting the licence, so it had to pay damages.

Quick Revision

Read the full judgment: Supreme Court of India (sci.gov.in)

Parties

The Naihati Jute Mills Ltd. — appellant (the party who appealed); the buyer of jute under the contract and the applicant to set aside the award.

Hyaliram Jagannath — respondent; the seller of jute under the contract and the winner of the arbitration award.

Procedural History

1. The dispute arose out of the contract of 7 July 1958. It was referred to the Arbitration Tribunal constituted by the Bengal Chamber of Commerce.
2. The Tribunal passed its award in Award Case No. 70 of 1959. It held that the appellants failed to carry out their part of the contract. It assessed damages at Rs. 34,000 and interest.
3. The appellants applied to the High Court at Calcutta to set aside the award.
4. The learned Single Judge found three things. The contract was not discharged by frustration. The arbitration clause was wide enough to cover the question whether there was frustration. The arbitrators could decide that dispute.
5. The Single Judge also found that the appellants had failed to prove legal misconduct by the arbitrators.
6. The Division Bench heard the appeal (Appeal No. 35 of 1960). It agreed with the Single Judge and dismissed it by judgment and order dated 22 August 1962.
7. The appellants appealed to the Supreme Court by special leave (the Supreme Court's permission to appeal). The Civil Appeal is No. 44 of 1965.
8. Judgment was delivered on 19 October 1967.

Facts

1. On 7 July 1958 the appellants agreed to purchase, and the respondents agreed to sell, two thousand bales of Saidpur N.C. Cuttings.
2. The contract was in the standard form prescribed by the India Jute Mills Association. Shipment or rail despatch was to be made during August, September, October and/or November 1958.
3. Import of Pakistan jute needed an import licence. The contract said the buyers were to provide letters of authority, and the sellers were to open letters of credit.
4. If the buyers failed to provide the import licence within November 1958, the shipment period would run up to December 1958. The contract price would rise by 50 nP.
5. If the buyers failed to provide the licence by December 1958, the contract would be settled at the market price prevailing on 2 January 1959. That price was for goods of January and February 1959 shipment.
6. A printed term said the buyers would not be responsible for delay in delivering letters of authority or opening letters of credit. This applied to delay caused by an act of God, war, mobilisation or demobilisation. It also applied to breaking off of trade relations between Governments, and to requisition by or interference from government. The contract also named force majeure (an event beyond the parties' control) as a ground.
7. In those cases, if the buyers were prevented from delivering letters of authority or opening letters of credit within one month, time could be extended by mutual agreement. Otherwise the contract would be deemed cancelled, and the sellers would have no claim against the buyers.
8. The contract had an arbitration clause (an agreement to refer disputes to arbitration). All disputes and claims arising out of or connected with the contract were to go to the Bengal Chamber of Commerce under its rules. This covered cases where the contract had been terminated, purportedly terminated or completed.
9. On 8 August 1958 the appellants applied to the Jute Commissioner, Calcutta, for an import licence. The application was for 14,900 maunds.
10. On 19 August 1958 the Administrative Officer refused to certify the licence. His reason was that the appellants had sufficient stock to carry on their factory for some months more.
11. On 26 August 1958 the Licensing Authority refused to issue the licence.
12. On 29 November 1958 the appellants asked the Jute Commissioner to certify the issue of a licence. They said their stock had by then been considerably reduced.
13. On 11 December 1958 the Jute Commissioner refused to issue the licence. He asked the appellants to meet their requirements by buying Indian jute.
14. The respondents then claimed damages through their attorney's letter. They said the appellants had failed to furnish the licence provided by the contract.
15. The appellants denied any liability. The dispute was referred to the Tribunal.
16. The Tribunal held that the appellants failed to carry out their part of the contract. It awarded damages of Rs. 34,000 and interest.
17. Government circulars produced at the trial showed that by March 1958 the Government of India had warned that Pakistan jute imports would be kept to the absolute minimum. The jute mills were told to meet their needs from Indian jute.
18. When the contract was made, the policy was to grant licences in the ratio of 5 : 1. An importer who had bought 500 maunds of Indian jute could get a licence for 100 maunds of Pakistan jute.
19. The Indian Jute Mills Association's circular of 17 July 1958 to its members showed this policy. Licences were issued to mills whose stock was less than two months' consumption.
20. The arbitrators fixed damages at the market rate of Rs. 51 per maund. The export price fixed by the Government of Pakistan was Rs. 65.

Issues Raised

1. Did the appellants commit a breach of the contract, or had they done all that could be expected of them to obtain the licence?
2. Did a change in Government policy, which the parties could not foresee, make the contract impossible of performance? Was it then void under section 56 of the Contract Act?
3. Was the contract discharged because of an implied term that the Court should spell out?
4. Did the arbitrators have jurisdiction, or did the arbitration clause perish along with the contract?
5. Was there legal misconduct by the arbitrators, and was interest on damages properly awarded?
6. Was the award of damages at the market rate of Rs. 51 per maund open to attack because it was contrary to the public policy of the Government of Pakistan?

Arguments Contended

For the appellants (B. Sen, B. P. Maheshwari and R. K. Chaudhuri):

• They could not be held to have committed breach of the contract, because they had done all that could be expected of them to obtain the licence.
• A change in the policy of the Government, which the parties could not foresee when they made the contract, made it impossible of performance. Under section 56 of the Contract Act the contract ought to have been treated as void.
• The arbitrators had no jurisdiction, because the arbitration clause perished along with the contract.
• Mr. B. Sen also raised legal misconduct by the arbitrators and interest on the damages. He did not press these two questions.
• The arbitrators awarded damages on the basis of the market rate at Rs. 51 per maund instead of Rs. 65, the export price fixed by the Government of Pakistan. They said this was contrary to the public policy laid down by that Government, and the Court should not give its imprimatur (approval) to the infringement.

For the respondents (Niren De, Additional Solicitor-General, and D. N. Mukherjee):

• Performance of the contract did not become impossible.
• In any event, the appellants had taken upon themselves the absolute obligation to procure the licence.
• Even if the contract was discharged by frustration, the arbitration clause would still survive. There would be disputes about whether there was frustration, and what the consequences were.
• The contract could not be read to mean that one party's unilateral allegation of frustration would put an end to it. It was for the arbitrators to decide whether the contract was discharged by frustration.

Court's Reasoning

Opinion of Shelat, J. (for the Court)

The judgment has no numbered paragraphs, so no paragraph numbers are cited.

1. Noted: Section 56 of the Contract Act says that a contract to do an act which becomes impossible after the contract is made is void when the act becomes impossible. The same applies if the act becomes unlawful by an event the promisor could not prevent.
2. Noted: Section 56 also covers a promisor who knew the act was impossible or unlawful. The same applies if the promisor could have known by reasonable diligence. Then the promisor must compensate a promisee who did not know.
3. Noted: Under section 56, the courts infer impossibility from the nature of the contract and the surrounding circumstances. They infer that the parties made their bargain on the basis that a particular thing or state of things would continue to exist.
4. Noted: The courts also infer that the foundation of the contract has disappeared. This happens by destruction of the subject matter, or by such long interruption or delay that performance would be a different contract.
5. Noted: Impossibility may also arise without any default of either party. The obligation becomes incapable of being performed because the circumstances in which performance is called for are radically different from those undertaken by the contract.
6. Noted: The common law rule is that a man must perform the obligation he undertook. He cannot claim to be excused merely because performance later becomes impossible.
7. Noted: English courts evolved various theories to soften this rule. The first is the implied term theory, as stated by Lord Loreburn in F.A. Tamplin Steamship Co. v. Anglo-Mexican Petroleum Products Co.
8. Noted: In Lord Loreburn's view, a court examines the contract and its circumstances, not to vary but to explain it. It asks whether the parties must have made their bargain on the footing that a particular thing or state of things would continue.
9. Noted: Lord Loreburn added that no court has an absolving power. A court can infer from the nature of the contract that an unexpressed condition was the foundation on which the parties contracted.
10. Noted: He asked whether the altered conditions were such that the parties would have taken their chance, or would have treated the contract as over, as sensible men.
11. Noted: Lord Watson, in Dahl v. Nelson, Donkin & Co., expressed the same theory in a different form. The meaning of the contract is what the parties as fair and sensible men would presumably have agreed, if they had made express provision for the event.
12. Noted: In the first case the term is a genuine term, implied though not expressed. In the second it is a fiction, something added to the contract by the law. The Court cites Anson, Principles of the English Law of Contract, 22nd ed., p. 464, for this.
13. Noted: The implied term theory was not found quite satisfactory, because it contains elements of contradiction.
14. Why: If the parties foresaw the circumstances at the date of performance, they would provide for them in the contract. If they did not, they deliberately took the risk, so no question of an implied term could arise.
15. Noted: Lord Atkin then propounded the theory of the disappearance of the foundation of the contract in Russkoe v. John Strik & Sons Ltd. If circumstances which were of the essence of the contract cease to exist, the contract ceases to operate.
16. Noted: The third theory is that the court may qualify the absolutely binding nature of the contract, to do what is just and reasonable in the new situation. Denning, L.J., expounded it in British Movietones Ltd. v. London and District Cinemas Ltd.
17. Noted: Denning, L.J., said that even if a contract is absolute in its terms, it will not be held absolute in effect if it is not absolute in intent. He said courts no longer credit a party with the foresight of a prophet.
18. Held: This theory would mean that the Court has inherent jurisdiction to go behind the express words of the contract. That would give the Court an absolving power, which has consistently been held not to be inherent in it.
19. Noted: The House of Lords, in the appeal from that decision, discarded the theory ([1952] A.C. 166).
20. Noted: In more recent times the theory of a change in the obligation has been more and more accepted. Lord Radcliffe is its author, in Davis Contractors v. Fareham U.D.C.
21. Noted: Lord Radcliffe's formulation is that frustration occurs whenever the law recognises that, without default of either party, a contractual obligation has become incapable of being performed. The circumstances would make performance a thing radically different from what the contract undertook.
22. Held: "It is not hardship or inconvenience or material loss which brings about the principle of frustration into play." There must be a change in the significance of the obligation, so that the thing undertaken would be a different thing from what was contracted for.
23. Noted: These theories were evolved to take a realistic approach. Causes unforeseen and beyond the parties' control may intervene between the date of the contract and its performance. Exacting performance in the changed circumstances would then be unreasonable and unjust.
24. Noted: None of the theories was fully accepted. Courts applied one or the other as appeared more rational, and the conclusions reached were the same.
25. Why: The need for these theories came from the common law rule that courts have no power to absolve a party from his obligation. Courts wanted to preserve the sanctity of contract. They also could not shut their eyes to the harshness of cases where performance became impossible.
26. Held: Courts in India do not face this difficulty. They must look primarily to the law embodied in sections 32 and 56 of the Contract Act, as this Court emphasised in Ganga Saran v. Ram Charan.
27. Noted: In Satyabrata Ghose v. Mugneeram, Mukherjee, J., said section 56 laid down a rule of positive law. It did not leave the matter to be determined by the intention of the parties.
28. Held: A promise under the Contract Act may be express or implied. Sometimes the court gathers, by construction, that the contract has an implied or express term for discharge on certain events. Then the contract dissolves under its own terms.
29. Held: Such cases fall outside section 56. English law would treat them as cases of frustration, but in India they are dealt with under section 32.
30. Held: In a majority of cases, the doctrine of frustration is applied not on the ground that the parties agreed to an implied term releasing them.
31. Held: The Court can grant relief on the ground of subsequent impossibility when the whole purpose or basis of the contract was frustrated. This happens by the intrusion or occurrence of an unexpected event or change of circumstances not contemplated by the parties at the date of the contract.
32. Held: In such a case there is no question of finding an implied term for discharge, because the parties did not think about the matter at all. The court pronounces the contract frustrated and at an end when the event strikes at the root of the contract as a whole.
33. Held: "This is really a positive rule enacted in sec. 56 which governs such situations."
34. Noted: The Court then asks whether the Government of India changed its policy to a total prohibition of import of Pakistan jute. It asks whether the parties did not foresee this. It asks whether this made the stipulation to obtain a licence impossible.
35. Noted: Circulars produced during the trial showed that as early as March 1958 the Government had warned that imports of Pakistan jute would be permitted to the absolute minimum. Jute mills were told to buy Indian jute.
36. Noted: When the parties made the contract, licences were granted in the ratio of 5 : 1. The circular of 17 July 1958 of the Indian Jute Mills Association shows this. Licences went to mills with a stock of less than two months' consumption.
37. Noted: The appellants applied on 8 August 1958 for a licence for 14,900 maunds. The Jute Commissioner declined to certify the application because they held stock for some months. In November 1958 they applied again, and in December 1958 they were told to buy Indian jute.
38. Held: The circular appears to show that the Government had not placed a total embargo on import of Pakistan jute. At any rate, the appellants did not prove such an embargo.
39. Noted: On the contrary, the documents on record show that the licensing authorities would scrutinise each applicant's case on its own merit.
40. Held: What is important in such cases is to ascertain what the parties themselves contemplated when they entered the contract.
41. Held: The contract itself shows the appellants knew that licences were not issued freely. It extended the shipment period to December 1958 if the licence was not furnished in November 1958, with the price up by 50 nP.
42. Held: The contract further provided that if the licence was not furnished by December 1958, the appellants would pay damages at the market rate of 2 January 1959. These clauses show the appellants were conscious of the difficulty of getting the licence in time.
43. Held: The appellants therefore provided for excusing delay from November to December 1958. They also provided for their liability to pay damages if they failed to procure the licence even in December 1958.
44. Noted: The printed term excused delay in delivering letters of authority only for reasons such as act of God, war, mobilisation and other force majeure.
45. Held: It is nobody's case that performance became impossible by reason of such force majeure.
46. Why: When the appellants applied for the licence, the authorities refused to certify the application because the appellants held stock for more than two months. The application was refused because of a personal disqualification and not by reason of any force majeure.
47. Held: There is therefore no question of performance becoming impossible by a change in Government policy that the parties could not foresee. No question of importing an implied term into the contract arises.
48. Noted: The Court assumes there was a change of policy and an embargo on import of Pakistan jute. The question would still be whether the appellants were relieved of liability for failing to deliver the licence.
49. Held: A contract is not frustrated merely because the circumstances in which it was made are altered. The courts have no general power to absolve a party from performance merely because performance has become onerous on account of an unforeseen turn of events. The Court cites M/s Alopi Parshad & Sons v. Union of India for this.
50. Noted: The question depends on what the appellants promised. Either they promised best endeavours to get the licence, or they promised to obtain it or else be liable for breach.
51. Noted: In the first kind of case, Lord Reading, C.J., observed in Anglo-Russian Merchants Traders v. John Batt & Co. that there was no reason why the law should imply an absolute obligation to do what the law forbids. The court there construed the contract to mean only that the sellers would make their best efforts to obtain the permits.
52. Noted: By contrast are Pattahmull Rajeshwar v. K. C. Sethia and Peter Cassidy Seed Co. v. Osuustickaanppa. There the courts observed that a party may properly take upon himself an absolute obligation to obtain a permit or licence. If he took the risk, he is bound to his stipulation.
53. Noted: Lord Sumner said in Bank Line Ltd. v. Capel & Co. Ltd. that where the contract makes full and complete provision for a given contingency, it is not for the court to import different provisions for the same contingency under another name.
54. Held: In such a case discharge by frustration is not available. Nor is an implied term that the existing state of affairs would continue to the date of performance.
55. Why: Where there is an express term, the court cannot find on construction an implied term inconsistent with it.
56. Held: "clearly meant that the appellants had taken upon themselves absolutely the burden of furnishing the licence". The Court read the provision that the contract was to be settled at the 2 January 1959 market rate, if no licence was delivered in December 1958, in this way. Default would make the appellants pay damages on the basis of that price.
57. Held: So three defences were not available to the appellants. These were impossibility of performance, voidness of the contract for that reason, and an implied term spelled out by the Court.
58. Held: Since the contract was not void and the stipulation to obtain the import licence was absolute, the question whether the arbitration clause perished with the contract does not arise.
59. Held (obiter, assuming frustration): Even if the appellants had established frustration, the contract would not be void ab initio (from the beginning) and so not in existence. In frustration, only the performance of the contract comes to an end.
60. Held (obiter): The contract would still exist for purposes such as resolving disputes arising under or in connection with it. The question whether the contract was discharged by frustration would still be decided under the arbitration clause, which operates for those purposes. The Court cites Union of India v. Kishorilal.
61. Noted: Two other questions, legal misconduct by the arbitrators and interest on damages, were not pressed. The Court need not say anything about them.
62. Held: There is no merit in the argument about Pakistan's public policy. "The Government of Pakistan cannot lay down any public or economic policy for this country."
63. Held: If the arbitrators found the prevalent rate on 2 January 1959 in Calcutta to be Rs. 51 a maund, there can be no objection to their adopting that rate to decide the amount of damages.

Authorities

• F.A. Tamplin Steamship Co. Ltd. v. Anglo-Mexican Petroleum Products Co. Ltd., [1916] 2 A.C. 397: Lord Loreburn's implied term theory, set out as the first English theory.
• Dahl v. Nelson, Donkin & Co., [1881] 6 A.C. 38: Lord Watson's statement that the term is what fair and sensible men would presumably have agreed. Described as a fiction added by law.
• Russkoe v. John Strik & Sons Ltd., [1922] 10 Ll.L.R. 214: Lord Atkin's theory of disappearance of the foundation of the contract.
• British Movietones Ltd. v. London and District Cinemas Ltd., [1951] 1 K.B. 190: Denning, L.J.'s theory of what is just and reasonable. The House of Lords discarded it ([1952] A.C. 166).
• Davis Contractors v. Fareham U.D.C., [1956] A.C. 166: Lord Radcliffe's theory of a change in the obligation, as more recently accepted.
• Ganga Saran v. Ram Charan, [1952] S.C.R. 36: this Court said Indian courts must look primarily to sections 32 and 56 of the Contract Act.
• Satyabrata Ghose v. Mugneeram, [1954] S.C.R. 310: Mukherjee, J., said section 56 is a rule of positive law, not left to the parties' intention.
• M/s Alopi Parshad & Sons v. Union of India, [1960] 2 S.C.R. 793, at p. 808: a contract is not frustrated because performance has become onerous through an unforeseen turn of events.
• Anglo-Russian Merchants Traders v. John Batt & Co., [1917] 2 K.B. 679: Lord Reading, C.J.; the contract there meant only best efforts to obtain permits.
• Pattahmull Rajeshwar v. K. C. Sethia, [1951] 2 All E.R. 352: a party may take on an absolute obligation to obtain a permit.
• Peter Cassidy Seed Co. v. Osuustickaanppa, [1957] W.L.R. 273: same point; a party who took the risk is bound.
• Bank Line Ltd. v. Capel & Co. Ltd., [1919] A.C. 435, at p. 455: Lord Sumner; where the contract fully provides for a contingency, the court does not import other provisions.
• Union of India v. Kishorilal, [1960] 1 S.C.R. 514: the contract survives frustration for resolving disputes under the arbitration clause.
• Anson, Principles of the English Law of Contract, 22nd ed., pp. 464 and 466: cited for the implied term as fiction and for Lord Atkin's statement.

Provisions

• Section 32, Indian Contract Act: where a contract expressly or impliedly provides for discharge on certain events, the contract ends under its own terms. The Court treats such cases as outside section 56.
• Section 56, Indian Contract Act: an act that becomes impossible or unlawful after the contract is made becomes void. A promisor who knew, or could have known, of the impossibility must compensate the promisee.

Judgement

1. The appeal is dismissed.
2. The appellants, The Naihati Jute Mills Ltd., must pay the costs of the appeal.
3. The award of the Arbitration Tribunal of the Bengal Chamber of Commerce stands: damages of Rs. 34,000 with interest.

Legal Principle / Ratio

Where a contract itself says what happens if a licence is not furnished by a date, that clause fixes the parties' risk. The defences of impossibility under section 56 and of an implied term are then not available. The Court held that the appellants had "taken upon themselves absolutely the burden of furnishing the licence".

Key holding: "It is not hardship or inconvenience or material loss which brings about the principle of frustration into play."

Critical Analysis

Analysis based on the judgment text.

• The Court decided the case on the contract's express terms. It did not decide whether a total embargo on imports would have frustrated a contract without those terms.
• The Court notes that none of the English theories was fully accepted and all reached the same result. It does not choose one of them for India.
• The judgment says the Court's remarks on the arbitration clause apply only on the assumption of frustration, which it did not find.
• The headnote gives 24 January 1959 as the market-price date, but the body of the judgment says 2 January 1959. The body is used on this page.

Significance

• The case restates that in India frustration is governed by section 56, a positive rule of law, and not by an implied term.
• It separates two situations: discharge by a term of the contract (section 32), and discharge by the court pronouncing the contract frustrated (section 56).
• It holds that a party may take on an absolute obligation, such as getting a licence. If that party takes the risk, the contract binds it.
• It holds that the arbitration clause can survive the discharge of a contract's performance by frustration.

Exam-Important Points

• Rule: hardship, inconvenience or material loss alone does not frustrate a contract. Trap: onerous performance is not impossible performance.
• Rule: where the contract fully provides for a contingency, the court will not imply a term inconsistent with it.
• Rule: a promise to obtain a licence may be a best-endeavours promise or an absolute one. The Court read this one as absolute.
• Rule: contracts that discharge by their own terms fall under section 32. Frustration by an unexpected event falls under section 56.
• Rule: frustration ends the performance, not the contract's existence. Disputes still go to the arbitration clause.
• Trap: the refusal of the licence was due to the appellants' own stock, which the Court called a personal disqualification and not force majeure.
• Trap: the Government of Pakistan cannot lay down public or economic policy for India. Damages at the Calcutta market rate of Rs. 51 per maund were upheld.
• Result: appeal dismissed with costs. Award of Rs. 34,000 and interest stands.

Prepared from the full text of the judgment. The judgment text has no numbered paragraphs, so no paragraph numbers are cited. The citation printed in the judgment text is 1968 AIR 522; 1968 SCR (1) 821.