The Naihati Jute Mills Ltd. Vs.
Hyaliram Jagannath  Insc 235 (19 October 1967)
19/10/1967 SHELAT, J.M.
CITATION: 1968 AIR 522 1968 SCR (1) 821
Contract-frustration impossibility of
performance due to intervening circumstances-Whether contract discharged on an
implied term or on Court deciding performance impossibleContract Act ss. 32 and
56-Scope of-Whether damages could be awarded on the basis of public policy of
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
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. Bench was also dismissed.
On appeal to this Court.
822 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 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 to that effect was not.
available to the appellants. [832 B-C].
Since under the Contract Act a promise may be
express 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 s. 56
Although in English law such cases might be treated as cases of frustration, in
India they would be dealt with under s. 32. In a majority of cases, however,
the doctrine of frustration is not applied on the ground that the parties had
agreed to an implied term; the court grants relief under the positive rule
enacted in s. 56 by pronouncing the contract to be frustrated and at an end if
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. In such
cases there would be no question of finding an implied term embodying, a
provision for discharge because the parties did not think about the matter at
all nor could possibly halve an intention, regarding it..
Case law reviewed. [829 C-G].
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: and the question whether the
contract was discharged under the doctrine of frustration would still have to
be decided under the arbitration clause which operates in respect of such
purposes. [832 E], Union of India v. Kishorilal,  1 S.C.R. 514, referred
(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. [832 H]
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 44 of 1965.
Appeal by special leave from the judgment and
order dated' August 22..1962 of the Calcutta High Court in Appeal No. 35 of
823 B. Sen, B. P. Maheshwari and R. K.
Chaudhuri, for the appellant.
Niren De, Addl. Solicitor-General and D. N.
Mukherjee, for the respondent.
The Judgment of the Court was delivered by
Shelat, J.-This appeal by special leave is directed against the judgment and
order of the High Court of Calcutta rejecting the application by the appellants
for setting aside the award in Award Case No. 70 of 1959 passed by the
Arbitration Tribunal constituted by the Bengal Chamber of Commerce.
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 India 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 %A credit. If buyers fail to
provide the sellers 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 of authority or opening letters of credit where
such delay is directly or indirectly caused by sod by I or due to act of God,
war mobilisation demobilization 'breaking off trade relations between
Governments, requisition by or interference from government or force majeure.
In any of the aforesaid circumstances
where-by 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 buyers." 824 The contract also contained an arbitration clause
where under 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 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 thereon.
Thereupon the appellants filed the said
application to set aside the award.
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 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 that therefore under S. 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
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.
825 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 nonperformance.
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 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 circumstances 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.
826 "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
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
"The meaning of the contract must be
taken to be, not what the parties did intend (for they had neither thought nor
intention regarding it), but 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 deliberately 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 ed. 464.
(3)  10 LI.L.R. 214 (quoted at p. 466
in Anson's Law of Contract, 22nd ed.) 827 that when these circumstances cease
to exist, the contract ceases to operate. The third theory is, that the court
would exercise power to qualify the absolutely binding nature of the contract
in order to do what is just and reasonable in the new situation. Denning L. J.
in British Movietones Ltd. v. London and District ,Cinemas Ltd.(1) expounded
this theory as follows:"Even if the contract is absolute in its term,
nevertheless, if it is not absolute in intent, it will not be held absolute in
effect. The day is done when we can excuse an unforeseen injustice by saying to
the sufferer. "It is your own folly. You ought not to have passed that
form of words. You ought to have put in a clause to protect yourself." We
no longer credit a party with the foresight of a prophet or his lawyers with
the draftsmanship of a Chalmers." This theory would mean that the Court
has inherent jurisdiction to go behind the express words of 'the contract and
attribute to the Court the absolving power, a power consistently held not to be
inherent in it. The House of Lords in the appeal from that decision [reported
in 1952 A.C. 166] discarded 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
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  1 K.B. 190.
 A.C. 166.
828 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
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. (as he then was) 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
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.
829 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 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 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 JanuaryFebruary 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 830 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
AngloRussian 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 (A)
Co. Ltd.(5) said:"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 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.
831 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
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
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. (Union of India v. Kishorilal(1).
Mr. B. Sen for the appellants also raised two
other questions, as to the legal misconduct on the part of the arbitrators and
as regards interest on damages awarded by them. We need not however say
anything about these two questions as ultimately they were not pressed by him.
The last contention raised by him was that
the arbitrators awarded damages on the basis of the market rate at Rs. 51 per
maund instead of Rs. 65 which was the export price fixed by the Government of
Pakistan. The argument was that such a basis was contrary to the public policy
laid down by the Government of Pakistan and it would not be expedient on our
part to give our imprimatur to an infringement by the arbitrators of such a
policy. There 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 prevalent rate  1 S.C.R. 514.
832 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.