Naihati Jute Mills Ltd v Khyaliram Jagannath (1967)

This is the case to cite for two distinct propositions that examiners keep separate and students often merge.

The first is the relation between s. 32 and s. 56. Where the contract itself, expressly or impliedly, contains a term under which it stands discharged on the happening of certain circumstances, the dissolution takes place under the terms of the contract and the case falls outside s. 56; what English law would treat as frustration is in India dealt with under s. 32. Section 56 is a rule of positive law, not a search for the parties' intention.

The second is the effect of a party's own undertaking to obtain a licence. A party who takes on an absolute obligation to procure a licence takes the risk of failing to get it, and cannot plead impossibility when the authorities refuse him. It is also a good illustration of the rule that a contract is not frustrated merely because performance has become harder or the surrounding circumstances have altered.

By a contract dated 7 July 1958, in the standard form prescribed by the India Jute Mills Association, the appellant mills agreed to purchase and the respondents to sell two thousand bales of Saidpur N.C. Cuttings, jute to be imported from Pakistan. Shipment or rail despatch was to be made during August to November 1958.

As the import of Pakistan jute required an import licence, the contract provided that the buyers were to provide the sellers with the letters of authority; that if the buyers failed to provide the import licence within November 1958 the period of shipment would run up to December 1958 and the contract price would be increased by 50 nP; and that if the buyers failed to provide the licence by December 1958 the contract was to be settled at the market price prevailing on 2 January 1959 for goods of January and February 1959 shipment.

A separate printed term excused the buyers for delay in delivering letters of authority or opening letters of credit where the delay was caused by act of God, war, mobilisation, demobilisation, breaking off of trade relations between Governments, requisition by or interference from government, or force majeure.

The appellants applied to the Jute Commissioner on 8 August 1958 for an import licence for 14,900 maunds. The application was declined on the ground that they held stock sufficient to last them some months. They applied again on 29 November 1958, stating that their stock had been reduced; in December 1958 the Jute Commissioner refused the licence and asked them to meet their requirements by purchasing Indian jute.

The sellers claimed damages. The dispute went to the Arbitration Tribunal of the Bengal Chamber of Commerce under the contract's arbitration clause, and the Tribunal awarded the respondents Rs. 34,000 and interest. The appellants' application to set aside the award failed before a Single Judge of the Calcutta High Court and on appeal to a Division Bench. They appealed to the Supreme Court by special leave.

Three grounds were pressed: that they had done all that could be expected of them to obtain the licence and so could not be in breach; that owing to an unforeseen change in Government policy the contract had become impossible of performance and was void under s. 56; and that, the contract having perished, the arbitration clause perished with it, so that the arbitrators had no jurisdiction.

Shelat J set out s. 56 and then described how impossibility is inferred: from the nature of the contract and the surrounding circumstances, that the parties must have made their bargain on the basis that a particular thing or state of things would continue to exist, and that because of the altered circumstances the bargain should no longer be held binding; or that the foundation of the contract had disappeared by destruction of the subject matter or by such long interruption or delay that performance would really be that of a different contract. Impossibility may also arise where, without default of either party, the obligation has become incapable of being performed because the circumstances in which performance is called for are radically different from that undertaken by the contract.

The Court reviewed the English theories — the implied term theory of Lord Loreburn in F.A. Tamplin Steamship Co. Ltd. v Anglo-Mexican Petroleum Products Co. Ltd., Lord Watson in Dahl v Nelson, Donkin & Co., and the "radically different" formulation — and made the limits plain: "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, such that the thing undertaken would, if performed, be a different thing from that which was contracted for.

Indian courts, the Court said, are not driven to those theories. Following Ganga Saran v Ram Charan and Satyabrata Ghose v Mugneeram Bangur & Co., courts in India must look primarily to ss. 32 and 56 of the Contract Act, s. 56 laying down a rule of positive law and not leaving the matter to be determined according to the intention of the parties. Where the contract itself contains a term of discharge, "the dissolution of the contract would take place under the terms of the contract itself", and such cases fall outside the purview of s. 56; what English law would treat as frustration is in India dealt with under s. 32.

No embargo, and no force majeure. The circulars showed that as early as March 1958 the Government had warned that imports of Pakistan jute would be permitted to the absolute minimum and that mills should buy Indian jute; licences were being granted on a ratio basis to mills holding less than two months' consumption. The Government had not placed a total embargo, and no embargo was proved; the policy was that the licensing authorities would scrutinise each application on its own merits. The appellants' first application was refused because they held stock for more than two months. The Court's conclusion is the key sentence for a licence problem: "It is therefore manifest that their application was refused because of a personal disqualification and not by reason of any force majeure."

The printed force majeure term did not help, because delay was excused only for such reasons as act of God, war and mobilisation, and it was nobody's case that performance had become impossible by any such cause.

The obligation was absolute. The Court asked the decisive question: was the promise to make best endeavours to get the licence, or to obtain it or else be liable? On the former footing, Lord Reading C.J. in Anglo-Russian Merchant Traders v John Batt & Co. observed that there was no reason why the law should imply an absolute obligation to do that which the law forbids, the contract there having been construed to mean only that the sellers were to make their best efforts to obtain the requisite permits. By way of contrast, the Court noted a line of cases in which it has been observed that there is nothing improper or illegal for a party to take upon himself an absolute obligation to obtain a permit or a licence, and in such a case, if he took the risk, he must be held bound to his stipulation.

Here the parties had themselves provided for the very contingency: delay to November was excused at an enhanced price, and failure by December 1958 was to be settled at the January 1959 market rate. Those clauses showed that the appellants were conscious of the difficulty of getting the licence in time. Lord Sumner's rule was applied: "Where the contract makes provision (that is, full and complete provision, so intended) for a given contingency it is not for the court to import into the contract some other different provisions for the same contingency called by different name." In such a case neither discharge by frustration nor an implied term is available, "The reason is that where there is an express term the court cannot find on construction of the contract an implied term inconsistent with such express term."

Even assuming a change of policy amounting to an embargo, the appellants would still have been liable, because "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 the performance of his part of the contract merely because its performance has become onerous on account of an unforeseen turn of events."

The jurisdiction point was answered on principle. Even if frustration had been established, the contract would not be void ab initio: "In cases of frustration it is the performance of the contract which comes to an end but the contract would still be in existence for purposes such as the resolution of disputes arising under or in connection with it." The very question whether the contract had been discharged by frustration therefore had to be decided under the arbitration clause.

The appeal was dismissed with costs. The appellants had taken upon themselves absolutely the burden of furnishing the licence by the end of December 1958 and had stipulated that in default they would pay damages on the basis of the price prevailing on 2 January 1959; the defences of impossibility, of the contract being void, and of an implied term were therefore not available to them. The arbitration clause survived in any event. The further argument that the damages ought to have been assessed at the export price fixed by the Government of Pakistan rather than the Calcutta market rate was rejected: the Government of Pakistan cannot lay down any public or economic policy for this country.