Case: Naihati Jute Mills Limited Vs. Hyaliram Jagannath

2. The said arbitration arose out of a contract dated July 7, 1958 whereunder the appellants agreed to purchase and the respondents agreed to sell two thousand bales of Saidpur N. C. Cuttings. The contract was in the standard form prescribed by the Indian Jute Mills Association. It provided that shipment or rail despatch from agencies was to be made during August and/or September and/or October and/or November, 1958. As the import of Pakistan jute required an import licence the contract provided :-"Buyers to provide the sellers with the letters of authority and sellers to open letters of credit. If buyers fail to provide the sel1ers with import licence within November 1958 then the period of shipment would be upto December, 1958 and the price mentioned in the contract would be increased by 50 nP. If buyers fail to provide licence by December 1958 then the contract would be settled at the market price prevailing on January 2, 1959 for goods of January and February 1959 shipment."One of the printed terms provided :-"Buyers shall not however be held responsible for delay in. delivering letters if authority or opening letters of credit where such delay is directly or indirectly caused by or due to act of God, war, mobilisation, de-mobilisation, breaking off trade relations between Governments, requisition by or interference from Government or force majeure. In any of the aforesaid circumstances whereby buyers are prevented from delivering letters of authority or opening letters of credit within one month from the date of the contract, there may be a further extension of time (the delivery period to be extended accordingly) by mutual agreement between the buyers and the sellers otherwise the contract shall be deemed to be cancelled and sellers shall have no claim whatsoever against the buyersThe contract also contained an arbitration clause whereunder all disputes and differences and/or claims arising out of and/or concerning and/or in connection with and/ or in consequence of or relating to the contract whether the contract has been terminated or purported to be terminated or completed were to be referred to the arbitration of the Bengal Chamber of Commerce under their rules for the time being in force. On August 8, 1958 the appellants applied to the Jute Commissioner Calcutta, for an import licence. On August 19, 1958 the Administrative Officer refused to certify the licence on the ground that the appellants had sufficient stock to carry on their factory for some months more. On August 26, 1958 the Licensing Authority refused to issue the licence. On November 29, 1958 the appellants requested the Jute Commissioner to certify the issue of a licence stating that by that time their stock had been considerably reduced. On December 11, 1958 the Jute Commissioner refused to issue the licence and asked the appellants to meet their requirements from purchase of Indian jute. The respondents thereafter by their attorneys letter claimed damages from the appellants on the ground that the appellants had failed to furnish the licence provided by the contract. The appellants disclaimed any liability under the said contract and thereupon the disputes between the parties were referred to the said Tribunal. The Tribunal passed an award holding that the appellants failed to carry out their part of the contract and were liable to pay damages assessed at Rs. 34,000 and interest therein. Thereupon the appellants filed the said application to set aside the award3. In their said application, the appellants raised the following contentions; (a) that they could not be held to have committed breach of the contract as they had done all that could be expected of them to obtain the licence; (b) that owing to the intervening causes, in the present case change in the policy of the Government, which the parties could not foresee when they entered into the contract, the contract became impossible of performance and that therefore under Section 56 of the Contract Act the contract ought to have been treated as void and (c) that the arbitrators had no jurisdiction as the arbitration clause in the said contract perished along with the contract. The respondents, on the other hand, denied that the performance of the contract became Impossible, and asserted that in any event the appellants had taken upon themselves the absolute obligation to procure the licence and lastly that even if the contract was discharged by frustration, the arbitration clause would still survive as there would be disputes and differences between the parties as to whether (i) there was frustration and (ii) even if so, the consequences thereof. They pleaded that the contract could not be construed to mean that an unilateral allegation by one of the parties that there was frustration would put an end to the contract. It would be for the arbitrators to decide whether the said contract was discharged by frustration4. The learned Single Judge who heard the application found that the contract could not be said to have been discharged by frustration, that the arbitration clause was wide enough to include the dispute whether there was frustration or not, and that the arbitrators were competent to adjudicate such a dispute. He also found in answer to the appellants allegation that the arbitrators were guilty of legal misconduct, that the appellants had failed to prove any such legal misconduct. The Division Bench who heard the appeal from the said order agreed with the learned Single Judge and dismissed the appeal. Hence this appeal.

Reasoning:
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 obligation that the thing undertaken would, if performed, be a different thing from that which was contracted for6. These theories have been evolved in the main to adopt a realistic approach to the problem of performance of contract when it is found that owing to causes unforeseen and beyond the control of the parties intervening between the date of the contract and the date of its performance it would be both unreasonable and unjust to exact its performance in the changed circumstances. Though none of them was fully accepted and the courts construed the contracts coming before them applying one or the other of them as appearing to tee more rational than the other, the conclusion arrived at were the same. The necessity of evolving one or the other theory was due to the common law rule that courts have no power to absolve a party to the contract from his obligation. On the one hand, they were anxious to preserve intact the sanctity of contract while on the other the courts could not shut their eyes to the harshness of the situation in cases where performance became impossible by causes which could not have been foreseen and which beyond the control of partiesIt is clear from the circulars produced during the trial that as early as March 1958 the Government of India had issued warnings that import of Pakistan jute would be permitted to the absolute minimum and that the jute Mills should satisfy their needs by purchasing Indian Jute. It appears that at the time when the parties entered into the contract the policy was to grant licences in the ratio of 5:1, that is, if an importer had bought 500 maunds of Indian Jute he would he allowed a licence to import 100 maunds of Pakistan jute. This policy is indicated by the Circular dated July 17, 1958 issued by the Indian Jute Mills Association to its members. Such licences would be issued to mills who had stock of less than two months consumption. As already stated, the appellants applied on August 8, 1958 for an import licence for 14,900 maunds and the Jute Commissioner declined to certify that application on the ground that they held stock sufficient to last them for some months. In November 1958, they applied again this time stating that their stock had been reduced and in December 1958 they were told to buy Indian jute. The said Circular appears to show that the Government had not placed a total embargo on import of Pakistan jute. At any rate, such an embargo was not proved by the appellant. It appears, on the contrary, from the documents on record that the policy of the Government was that the licensing authorities would scrutinise the case of each applicant on its own meritThe contract, no doubt contained the printed term that the buyers would not be responsible for delay in delivering the licence but such delay as therein provided was to be excused only if it occurred by such reasons as an act of God, war, mobilisation etc., and other force majeure. It is nobodys case that the performance became impossible by reason of such force majeure. As already stated when the appellants applied for the licence, the authorities refused to certify their application because they held at that time stock for more than 2 months. If is therefore manifest that their application was refused because of a personal disqualification and not by reason of any force majeure. Since this was the position there is no question of the performance becoming impossible by reason of any change in the Governments policy which could not be foreseen by the parties. No question also would arise of importing an implied term into the contractIn such a case the doctrine of discharge by frustration cannot be available, nor that of an implied terms that the existing state of affairs would continue at the date of performance. The reason is that where thee is an express term the court cannot find on construction of the contract an implied term inconsistent with such express term11. In our view, the provision in the contract that whereas the delay to provide a licence in November 1958 was to be excused but that the contract was to be settled at the market rate prevailing on January 2, 1959 if the appellants failed to deliver the licence the December 1958 clearly meant that the appellants had taken upon themselves absolutely the burden of furnishing the licence latest by the end of December 1958 and had stipulated that in default they would pay damages on the basis of price prevailing of January 2, 1959. That being the position the defence of impossiblity of performance or of the contract being void for that reason nor that the court should spell out an implied term in the contract would not be available to them12. In the view that we take that the said contract cannot be said to be or to have been void and that in any event the stipulation as to obtaining the import licence was absolute, the question that the arbitration clause perished along with the contract and consequently the arbitrators had no jurisdiction cannot arise. But assuming that the appellants had established frustration even them it would not be as if the contract was ab initio void and therefore not in existence.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 question as to whether the contract became impossible of performance and was discharged under the doctrine of frustration would still have to be decided under the arbitration clause which operates in respect of such purposesWe need not however say anything about these two questions as ultimately they were not pressed by himThere is, in our view, no merit in the argument. The Government of Pakistan cannot lay down any public or economic policy for this country. If the arbitrators found the prevelent rate on January 2, 1959 in Calcutta to be Rs. 51 a maund there can be no objection to their adopting that rate for adjudicating the quantum of damages.