Naihati Jute Mills Ltd. v. Hyaliram Jagannath
Supreme Court of India, 19 October 1967, 3 judges, 1968 AIR 522, 1968 SCR (1) 821
The Court held that a buyer who had absolutely undertaken to obtain an import licence could not plead frustration under Section 56 when the licence was refused, and upheld the arbitral award of damages against it.
Facts
By a contract of July 7, 1958 the appellants agreed to buy 2,000 bales of Pakistan jute from the respondents. The buyers were to provide the import licence; if not provided within November 1958 shipment would extend to December 1958 at a higher price, and if not provided by December 1958 the contract would be settled at the market price of January 2, 1959. It had a wide arbitration clause. The appellants' licence applications were refused, first because they held sufficient stock, later with advice to buy Indian jute. The Bengal Chamber of Commerce tribunal held the appellants in breach and awarded Rs. 34,000 with interest. The appellants sought to set aside the award, pleading frustration under Section 56 and that the arbitration clause perished with the contract. A Single Judge and a Division Bench of the Calcutta High Court rejected the application; the appellants appealed by special leave.
Questions before the Court
- Was the contract discharged by frustration under Section 56 of the Contract Act because the import licence could not be obtained?
- Where a contract is alleged to be frustrated, does the arbitration clause perish so that the arbitrators lack jurisdiction?
- Could damages be assessed on the Calcutta market rate when it was below the export price fixed by the Government of Pakistan?
What the Court held
- Indian courts must look primarily to Sections 32 and 56 of the Contract Act. Where the contract itself, expressly or impliedly, provides for discharge on certain events, the case falls under Section 32; otherwise Section 56 is a positive rule under which the court pronounces the contract frustrated when an unforeseen event strikes at its root.
- No total embargo on Pakistan jute was proved; the licence was refused because of the appellants' own stock position, a personal disqualification and not force majeure or an unforeseeable change of policy.
- A contract is not frustrated merely because circumstances change or performance becomes onerous. Since the contract provided for the event of the licence not being obtained, the appellants had absolutely undertaken to furnish it by December 1958, and neither impossibility nor an implied term was available to them.
- Even if frustration were established, the contract is not void ab initio; only performance ends, and the contract survives for resolving disputes, so whether it was frustrated is itself a question for the arbitrators.
- The Government of Pakistan cannot lay down public policy for India, so the arbitrators could assess damages at the Calcutta market rate. The appeal was dismissed with costs.
Why it matters
The judgment explains the relation between Sections 32 and 56 of the Contract Act, treating Section 56 as a positive rule rather than a matter of implied terms. It holds that a party who absolutely undertakes to obtain a licence bears the risk of its refusal, and that frustration ends performance but not the arbitration clause, which survives to decide whether frustration occurred.
In the Court's words
Copied from the official judgment; each passage links to its page.
“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. Although in English law such cases would be treated as cases of frustration, in India they would be dealt with under sec. 32.”
“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.”
“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.”
“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.”
Provisions interpreted
Case and bench
- Parties
- The Naihati Jute Mills Ltd. v. Hyaliram Jagannath
- Case
- Civil Appeal No. 44 of 1965
- Decided
- 19 October 1967
- Bench
- Shelat, J.M., Shah, J.C., Sikri, S.M.
- Opinions
- Unanimous. The judgment of the Court was delivered by Shelat, J.
Questions on this case
2 questions in live Law Maker papers mention this case. Practise them with the landmark judgments questions.