THE NAIHATI JUTE MILLS V/S HYALIRAM JAGANNATH

 THE NAIHATI JUTE MILLS LTD Vs DATE OF JUDGMENT SHELAT J.M SHELAT J.M SHAH J.C SIKRI S.M 1968 AIR 522 1968 SCR 821 Contract frustration impossibility of performance due to intervening circumstances Whether contract discharged on an implied term or on Court deciding performance impossible Contract Act ss. 32 and 56 Scope of Whether damages could be awarded on the basis of public policy of Pakistan The appellant entered into a contract on July 7 1958 with the respondent to purchase from him 2000 bales of jute to be imported from Pakistan. The contract inter alia. provided that shipment of the consignment would be made during August November 1958 that the buyers would obtain the necessary import licence that if they failed to obtain the licence by November 1958 the period of shipment would be extended upto December 1958 and that if it was not obtained by. December 1958 the contract would be settled at the market price prevailing on January 24 1959. The contract also contained an arbitration clause hereunder all disputes under the con tract including the question whether the contract had been terminated or completed were to be referred to the arbitration of an Arbitration Tribunal The appellants applied to the Jute Commissioner on August 8 for an import licence but this was refused on the ground that the appellants had sufficient stock to carry on for some months more. ’They applied again on Nov ember 29 1958 when their stock was reduced but the Jute Commissioner refused to issue the licence and asked them to meet their requirements from purchases of Indian jute. The respondents thereafter claimed damages from the appellants on the ground that the appellants had failed to furnish the import licence as provided in the contract. The appellants disclaimed their ’liability and thereupon the ’disputes between the parties were referred to the Arbitration Tribunal. The Tribunal passed an award holding that the appellants had failed to carry out their part ’of the contract and Were liable to pay damages to the respondent assessed at Rs. 34 000 and interest The appellants thereafter applied the High Court to set aside the award and contendedthat 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 that owing to the intervening causes i.e. a 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 ought to have been treated as void under s. 56 of the Contract Act and c) that the arbitrators had no jurisdiction as the arbitration clause in the said contract perished along with the contract. A Single Bench of the High Court dismissed the application and an appeal to a Division. Bench was also On appeal to this Court Held dismissing the appeal i) 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 in December1958 clearly meant that the appellants had taken upon themselvesthe absolute burden of furnishing the licence latest by the end of December 1958 and had stipulated that in default theywould pay damages on the basis of price prevailing on January 2 1959. That being the position the defence of impossibility of performance or of the contract being void for that reason or that the court should spell out an implied term in the contract to that effect was not. available to the appellants.Union of India v. Kishorilal 1 S.C.R. 514 ii) If the arbitrators awarded damages on the basis of the market price prevalent in Calcutta on January 2. 1959 there Could be no objection to their adopting that Irate for adjudicating the quantum of damages on the ground that such a basis was contrary to the public policy laid down by the Government of Pakistan.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 buyers The 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 month 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 attorney’s letter claimed damages from the appellants on the ground that the appellants had failed to furnish the licence pro vided 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 thereon Thereupon the appellants filed the said application to set aside the award In their said application the appellants raised the following contentions 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 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 whetherthere was frustration and 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 hat 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 frustration 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 Section 56 of the Contract Act inter alia provides that a contract to ’do an act which after the contract is made becomes impossible or by reason of some event which the promiser could not prevent unlawful becomes void when the act becomes impossible or unlawful. It also provides that where one person has promised to do something which he knew or with reasonable diligence might have known and which the promisee did not know to be impossible or unlawful such a promiser must make compensation to such promisee for any loss which such promisee sustains through the non performance. As envisaged by s. 56 impossibility of performance would be inferred by the courts from the nature of the contract and the surrounding circumstances in which it was made that the parties must have made their bargain upon the basis that a Particular thing or state of things would continue to exist and because of the altered circum stances the bargain should nolonger be held binding. The courts would also infer that the foundation of the contract had disappeared either by the destruction of the subject matter or by reason of such long interruption or delay that the performance would really in effect be that of a different contract for which the parties had not agreed Impossibility of performance may also arise where without any default of either party the contractual obligation had become incapable of being performed because the cir cumstances in which performance was called for was radically different from that undertaken by the contract. But the common law rule of contract is that a man is bound to perform the obligation which he has undertaken and cannot claim to be excused by the mere fact that performance has subsequently become impossible. Courts in England have however evolved from time to time various theories to soften the harshness of the aforesaid rule and for that purpose have tried to formulate the true basis of the doctrine of discharge of contract when its performance is made impossible by intervening causes over which the parties to it had no control. One of such theories is what has been called the theory of implied term as illustrated in F.A Tomplin Steamship Co. Ltd. v. Anglo Mexican Petroleum Products Co. Ltd.(1) where Lord Lorebum stated 1)2 A.C. 397 "A court can and ought to examine the contract and the circumstances in which it was made not of course to vary but only to explain it in order to see whether or not from the nature of it the parties must have made their bargain on the footing that a particular thing or a state of things would continue to exist. And if they must have done so then a term to that effect would be implied though it be not expressed in the contract He further observed "It is in my opinion the true principle for no court has an absolving power but it can infer from the nature of the contract and the surrounding circumstances that a condition which was not expressed was a foundation on which the parties contracted Were the altered conditions such that had they thought of them they would have taken their chance of them or such that as sensible men they would have said "if that happens of course it is all over between us The same theory in a slightly different form was expressed by Lord Watson in Dahl v Nelson Donkin & Co.(1) in the following words "The meaning of the contract must be taken to be not what the parties did intendbut that which the parties as fair and sensible men would presumably have agreed upon if having such possibility view they had made. express provision as to their several rights and liabilities in the event of its occurrence 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.(2) It appears that the theory of implied term was not found to be quite satisfactory as it contained elements of contradiction For if the parties foresaw the circumstances which existed at the date of performance they would provide for them in the contract if they did not that meant that they deli berately took the risk and therefore ’no question of an implied term could really arise. In Russkoe V. John Strik Sons Ltd.(3) Lord Atkin propounded the theory of disappearance of the foundation of contract stating that he could see no reason why if certain circumstances which the court would find must have been contemplated by the parties as being of the essence of the contract and the continuance of which must have been deemed to be essential to the performance of the contract the court cannot say 1) 6 A.C. 38 2) Anson Principles of the English Law of Contract 22nd 3) 10 LI.L.R. 214discarded the theory. In more recent times the theory of a change in the obligation has come to be more and more generally accepted. Lord Radcliffe the author of this theory in Davis Contractors v. Fareham U.D.C.(2) formulated it in the following words: "Frustration ocours whenever the law reoognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would Tender it a thing radically different from that which was undertaken by the contract 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 for 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 court construed the contracts coming before them applying one or the other of them as appearing to be more rational than the other the conclusions arrived at were the same. The necessity of evolving one 1951] 1 K.B. 190 1956] A.C. 166 or the other theory was due to the common law rule that court& 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 were beyond the control of parties Such a difficulty has however not to be faced by the courts in this country. In Ganga Saran v. Ram Charan(1 this Court emphasized that so far as the courts in this country are concerned they must look primarily to the law as embodied in secs. 32 and 56 of the Contract Act. In Satyabrata Ghose v. Mugneeram(2) also Mukherjee J.stated that sec. 56 laid down a rule of positive law and did not leave the matter to be determined according to the intention of the parties. Since under the Contract Act a promise may be expressed or implied in cases where the court gathers as a matter of construction that the con tract itself contains impliedly or expressly a term according to which it would stand discharged on the happening of certain circumstances the dissolution of the contract would take place under the terms of the contract itself and such cases would be outside the purview of sec 56. Although in English law such cases would be treated as cases of frustration in India they would be dealt with under sec. 32. In a majority of cases however the doctrine of frustration is applied not on the ground that the parties themselves agreed to an implied term which operated to release them from performance of the contract The Court can grant relief on the ground of subsequent impossibility when it finds that the whole purpose or the basis of the contract was frustrated by the intrusion or occurrence of an unexpected event or change of circumstances which was not contemplated by the parties at the date of the contract. There would in such a case be no question of finding out an implied term %greed to by the parties embodying a provision for discharge because the parties did not think about the matter at all nor could possibly have any intention regarding it. When such an event or change of circumstances which is so fundamental as to be regarded by law as striking at the root of the contract as a whole occur$ it is the court which can pronounce the contract to be frustrated and at an end. This is really a positive rule enacted in sec. 56 which governs such situations The question then is was there a change in the policy of the Government of India of a total prohibition of import of Pakistan jute as contended by the appellants which was not foreseen by the parties and which intervened at the time of performance and which made the performance of their stipulation to obtain a 1)S.C.R. 36 2)S.C.R. 310 licence impossible It 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 mounds of Indian jute he would be allowed a licence to import 100 mounds 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 Commis sioner 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 appellants. It appears on the contrary from the documents on record that the policy of the Government was that the licensing authorities would scrutinize the case of each applicant on its own merit What is however important in cases such as the one before us is to ascertain what the parties themselves contemplated at the time of entering the contract. That’ the appellants were aware that licences were not issued freely is evident by the provisions of the contract themselves which provide that if the appellants failed to furnish to the respondents the import licence in November 1958 the period of shipment was to be extended upto December 1958 and the price in that event would be enhanced by 50 nP. The contract further provided that if the appellants were not able to furnish the licence by December 1958 they would pay damages at the market rate prevailing on January 2 1959 for January February shipment goods. These clauses clearly indicate that the appellants were conscious of the difficulty of getting the licence in time and had therefore provided In the contract for excusing delay from November to December 1958 and for the appellants’ liability to pay damages if they failed to procure it even in December 1958. The 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 mobilization etc. and other force majeure. It is nobody’s 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. It 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 contract Assuming however that there was a change of policy and that the Government in the intervening period had decided to place an embargo on import of Pakistan jute the question would still be whether the appellants were relieved from liability for their failure to deliver the licence. 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.(1) The question would depend upon whether the contract which the appellants entered into was that they would make their best endeavors to get the licence or whether the contract was that they would obtain it or else be liable for breach of that stipulation. In a case falling under the former category Lord Reading C.I. in Anglo Russian Merchants Traders v. John Batt & Co.(2) observed that there was no reason why the law should imply an absolute obligation to do that which the law forbids. It was so said because the Court construed the contract to mean only that the sellers there were to make their best efforts to obtain the requisite permits. As a contrast to ’such a case there are the cases of Pattahmull Rajeshwar v. K. C Sethia(3) and Peter Cassidy Seed Co. v. Osuustickaanppa(4 where ’the courts have 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. As Lord Sumner in Bank Lime Ltd. v. Capel said: "Where the contract makes provisionfor 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 the doctrine of discharge by frustration cannot be available nor that of an implied term that the existing state of 1) M s Alopi Parshad & Sons v. Union of India 2 1) S.C.R. 2 0.6 793 at p. 808 2)2 K.B. 679 4)W.L.R. 273 3) 2 All. E.R..352 5)A.C. 435 at p 455 affairs would continue at the date of performance. 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 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 in 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 on January 2 1959. That being the position the defence of impossibility of performance or of the contract being void for that reason or that the court should spell out an implied term in the contract would not be available to them 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 then 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 purposes.1 S.C.R. 514 A 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 The appeal fails and is dismissed with costs R.K.P.S. Appeal dismissed

Summary: 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. [Case Brief] The Naihati Jute Mills Ltd. Vs. Hyaliram Jagannath  The appellant entered into a contract on July 7, 1958 with the respondent to purchase from him 2000 bales of jute to be imported from Pakistan. The contract, inter alia. Provided that shipment of the consignment would be made; during August-November, 1958, that the buyers would obtain the necessary import licence, that if they failed to obtain the licence by November 1958, the period of shipment would be extended upto December 1958 and that if it was not obtained by December 1958, the contract would be settled at the market price prevailing on January 24, 1959. The contract also contained an arbitration clause hereunder all disputes under the con-tract including the question whether the contract had been terminated or completed were to be referred to the arbitration of an Arbitration Tribunal. The appellants applied to the Jute Commissioner on August 8 for an import licence but this was refused on the ground that the appellants had sufficient stock to carry on for some months more. ’They applied again on November 29, 1958 when their stock was reduced but the Jute Commissioner refused to issue the licence and asked them to meet their requirements from purchases of Indian jute.The respondents thereafter claimed damages from the appellants on the ground that the appellants had failed to furnish, the import licence as provided in the contract. The appellants disclaimed their ’liability and thereupon the ’disputes between the parties were referred to the Arbitration Tribunal. The Tribunal passed an award holding that the appellants had failed to carry out their part ’of the contract and Were liable to pay damages to the respondent assessed at Rs. 34,000 and interest.The appellants thereafter applied the High Court to set aside the award and contended (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, i.e., a 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 ought to have been treated as void under s. 56 of the Contract Act; and (c) that the arbitrators had no jurisdiction as the arbitration clause in the said contract perished along with the contract. A Single Bench of the High Court-dismissed the application and an appeal to a Division. Hence the present appeal. ISSUE BEFORE THE COURT: Whether contract discharged on an implied term or on Court deciding performance impossible within the scope of section 32 and 56 of the contract act?Was there a change in the policy of the Government of India of a total prohibition of import of Pakistan jute which was not foreseen by the parties and which intervened at the time of, performance and which made the performance of their stipulation to obtain a, licence impossible? RATIO OF THE COURT As envisaged by s. 56, impossibility of performance would be inferred by the courts from the nature of the contract and the surrounding circumstances in which it was made that the parties must have made their bargain upon the basis that a Particular thing or state of things would continue to exist and because of the altered circumstances the bargain should no longer be held binding.In Satyabrata Ghose v. Mugneeram [1954] S.C.R. 310 the court  stated that sec. 56 laid down a rule of positive law and did not leave the matter to be determined according to the intention of the parties. Since under the Contract Act a promise may be expressed or implied, in cases where the court gathers as a matter of construction that the contract itself contains impliedly or expressly a term according to which it would stand discharged on the, happening of certain circumstances the dissolution of the contract would take place under the terms of the contract itself and such cases would be outside the purview of sec. 56.The court observed Even if the appellants had established frustration, it would not be as if, the contract was ab initio void. 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 doctrine of frustration is applied not on the ground that the parties themselves agreed to an implied term which operated to release them from performance of the contract. The Court can grant relief on the ground of subsequent impossibility when it finds that the whole purpose or the basis of the contract was frustrated by the intrusion or occurrence of an unexpected event or change of circumstances which, was not contemplated by the parties at the date of the contract. There would in such a case be no question of finding out an implied term ; percentage of greed to by the parties embodying a provision for discharge because the parties did not think about the matter at all nor could possibly have any intention regarding it. When such an event or change of circumstances which is so fundamental as to be regarded by law as striking at the root of the contract as a whole occurs it is the court which can pronounce the contract to be frustrated and at an end. This is really a positive rule enacted in sec. 56 which governs such situations.As for the given circumstances 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. The 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, mobilization etc., and other force majeure. It is nobody’s case that the performance became impossible by reason of such force majeure. The 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 contract.The court held 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. 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 purposes. DECISION HELD BY COURT: The appeal fails and is dismissed with costs.