Full Judgment Text
#F-14
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ CS(OS) 788A/1996 & I.A. 6204/1997
M/S. CONTINENTAL
ENTERPRISES LTD. ..... Petitioner
Through Mr. Arijit Majumdar, Advocate
versus
STATE TRADING CORPORATION OF
INDIA LTD. ..... Respondent
Through Ms. Sumati Anand, Advocate
% Date of Decision : DECEMBER 16, 2009
CORAM:
HON'BLE MR. JUSTICE MANMOHAN
1. Whether the Reporters of local papers may be allowed to see the judgment?
2. To be referred to the Reporter or not? Yes.
3. Whether the judgment should be reported in the Digest? Yes.
J U D G M E N T
MANMOHAN , J (ORAL)
1. I.A. 6204/1997 has been filed by petitioner-objector under
Sections 5, 11, 12, 30 and 33 of the Arbitration Act, 1940 (hereinafter
st
referred to as “Act, 1940”) challenging the Award dated 31 January,
1996 passed by an Arbitral Tribunal (in short “AT”) constituted by
the Indian Council of Arbitration.
2. Briefly stated the material facts relevant for this case are that on
th
10 September, 1991 respondent-STC agreed to supply to petitioner-
CS(OS) 788A/1996 Page 1 of 29
objector 40,000 MT of Indian wheat. An addendum was executed
rd
between the parties on 23 September, 1991whereby quantity of
Indian wheat was increased from 40,000 MT to 50,000 MT.
th
3. On 14 November, 1991, petitioner-objector and respondent-
STC entered into a second Agreement for supply of another 60,000
MT of Indian wheat. Consequently, under the two Agreements dated
th th
10 September, 1991 and 14 November, 1991, respondent-STC had
to supply to petitioner-objector 1,10,000 MT of Indian wheat.
4. However, by the end of March, 1992 respondent-STC supplied
only 82,409 MT of Indian wheat to petitioner-objector, leaving a
balance of 27,591 MT of unsupplied Indian wheat.
th
5. On 24 April, 1992, the Government of India prohibited further
export of wheat from public stock. Thereafter both the parties tried to
persuade the Government of India to grant permission to export the
balance quantity of 27,591 MT of Indian wheat. However, the
Government did not grant any relaxation.
th
6. On 5 August, 1992 petitioner-objector sought a final
confirmation from respondent-STC about shipment of balance
contracted quantity failing which petitioner manifested its intention to
declare respondent-STC to be in default. Along with the said
communication, petitioner-contractor enclosed a debit note of US$
th
9,70,000/-. On 7 August, 1992 respondent-STC informed the
CS(OS) 788A/1996 Page 2 of 29
petitioner-objector that their contract be treated as terminated in
accordance with the force majeure clause as Government of India had
refused to release wheat from public stock.
7. As disputes arose between the parties, arbitration clause was
invoked by petitioner-objector and Indian Council of Arbitration
constituted the AT comprising three Arbitrators, namely, Chief Justice
of India (Retd.) R.S. Pathak, Justice (Retd.) H.L. Anand and Justice
(Retd.) R.P. Bhatt.
8. Chief Justice (Retd.) R.S. Pathak and Justice (Retd.) H.L.
Anand by a majority Award upheld the respondent-STC’s decision to
terminate the contract on the ground of force majeure within the
meaning of Clause 12 of the Agreements. Justice (Retd.) R.P. Bhatt
constituting the minority, held that as the source of supply was not
mentioned in the Agreements, the defence of lack of supplies from a
given source was not available to respondent-STC. The relevant
portion of the three Awards rendered by three members of the AT is
reproduced hereinbelow :-
i) Chief Justice (Retd.) R.S. Pathak
“I agree that the contracts between the parties were not of a
contingent nature. It was presumed from the outset that
sufficient stocks of wheat would be available for supplying
under the contracts to the Claimant. The question however
remains whether the balance of supplies could be effected
upon the refusal of the Central Government to allow stocks to
be drawn from the Food Corporation of India. Apparently
release by the Food Corporation of India from its stocks is
dependent on instructions from the Central Government. It
CS(OS) 788A/1996 Page 3 of 29
was in that context that the allocation orders allowing release
of wheat from public stocks of the Food Corporation of India
were issued by the Government in the Ministry of Commerce
to the Respondent to enable it to make supplies of wheat to
the claimant. Some quantities of wheat were supplied
pursuant to those allocation orders. However, upon
circumstances which in the view of the Government called for
a refusal of further supplies, the Respondent was unable to
procure further quantities of wheat from the Food
Corporation of India. It is not for us to sit in judgment on the
Government‟s decision to decline further supplies. The
Government took the view, apparently, that the situation of
wheat stocks in the country during that period did not permit
exports of wheat at the time. This was clearly conveyed to the
Respondent by the letter dated April 24, 1992 by the
Government of India in the Ministry of Food. The Claimant
also became aware of the situation because, as the records
show, the Respondent communicated with the Claimant
pointing out the reasons for its inability to make further
supplies of wheat. It seems also that both parties made an
effort to persuade the Government to relax its decision. The
Government continued to maintain its position that it would
not allow export of wheat at that time. As I have said earlier,
it is not for us to decide whether the Government was right or
wrong in the exercise of its discretion I have considered
carefully the terms of Clause 12 of the contracts, and it seems
to me that the decision of the Government refusing to allow
further supplies of wheat from the public stocks maintained
by the Food Corporation of India constitutes “an act of
Government” within the meaning of Clause 12. The
provisions of the Clause are sufficiently wide to encompass
such a decision. It was an act of Government constituting a
“force majeure”.
The next question is whether the Respondent could have
recourse to any other stocks of wheat for making the
contracted supplies. Our attention has been drawn to the
circumstance that wheat was available in the mandies of the
major wheat producing States and that therefore the
Respondent could not claim the benefit of Clause 12 of the
contract between the parties. It appears that the supplies of
wheat in the internal markets in the wheat producing States of
Haryana, Punjab and Uttar Pradesh were controlled during
the relevant period by statutory control orders. I have
perused the provisions of the Control Orders and it seems to
me that the restricted quantities permitted to be sold under
those Control Orders were far too limited to enable the
Respondent to collect 27591 MT of wheat of a uniform variety
CS(OS) 788A/1996 Page 4 of 29
of the contracted quality. It is not possible to assume that the
Respondent acting reasonably and with prudence could have
procured 27591 MT for supply to the Claimant from the open
market. The quantities which could be obtained under those
Control Orders would have been extremely small. It is true
that the restrictions incorporated in the Control Orders
exempted the Food Corporation of India and the Government
from their provisions, but the exemption was not available to
the Respondent. The Respondent may have been a
Government controlled undertaking, but nonetheless it was
an incorporated undertaking governed by its own
Memorandum of Association an Articles of Association, and
not identifiable as a Department of the Government. As
regards supplying wheat from the world market, that would
not have been consistent with the condition of the contracts,
which stipulated the supply of Indian wheat.
I am not satisfied having regard to the material before me
that it was reasonably possible for the Respondent to effect
the remaining supply of wheat in fulfillment of the contracts
between the parties. On that ground the substantive claim
made by the Claimant in this case must fail.”
ii) Justice (Retd.) H.L. Anand
“43. An act of Government would be beyond the control of
a natural or juristic person, including a Joint Stock Company,
irrespective of its composition, and Government Company
would be as much bound by executive action, irrespective of
the source of power in exercise of which it has been taken, as
an ordinary Joint Stock Company, and if such an act would
constitute an instance of “Force Majeure”, in relation to a
natural person or a corporate body, it would not cease to be
so merely because the corporate body may have been
established or controlled by Government, or, if a Joint Stock
Company, its entire equity is held by Government or its
nominees.
44. On a parity of reasoning such an act of Government
being beyond the control of the parties to a contract, would
be an event which the promisor could not possibly prevent,
thereby rendering the contract impossible of performance,
within the meaning of Section 56 of the Contract Act.
xxxx xxxx xxxx xxxx
50. I have held above that, having regard to its
constitution, as a Government Company, and the constraints
CS(OS) 788A/1996 Page 5 of 29
built into its Memorandum and Articles, the allocation
orders, and all the surrounding circumstances, Respondent
was disabled from carrying out its contractual obligation to
the Claimant and the Contracts, therefore, became impossible
of performance. I have further held that the Government
decision to withhold further release of supplies from public
stock for export by the Respondent, notwithstanding
Government‟s earlier commitment to the contrary, constituted
a Force Majeure within the meaning of Article (12) of the
Contracts. This disability of the Respondent is further
reinforced by the terms of the clearance granted to the
Respondent by the Chief Controller of Imports and Exports
to export wheat out of India, by its communication dated May
17, 1991, a copy of which is at page 3 of the documents filed
by the Respondent with its list dated March 30, 1994. While
considering this document, we have pointed out above that
this was issued pursuant to Government allocation order
dated April 24, 1991, and the Respondent‟s letter of May 10,
1991, pursuant thereto. The context in which this clearance
was issued by the Chief Controller of Imports and Exports,
leaves no manner of doubt that this clearance has reference
to export out of Government stock, and from no other source.
However, if there was any doubt, with regard to this, it is
resolved by the “subject” of this letter, which clearly
mentions “export of wheat and/or wheat products of GECA
by STC and MMTC on Government account during 1991-
92”. This is repeated in the body of this communication. It
follows, therefore, that this clearance is confined in terms to
export on “Government account”, and clearly disabled the
Respondent to export wheat out of India on the basis of this
clearance, if it was procured from other sources, or was
otherwise than on Government account. If this, therefore, be
the true position of the impossibility of performance of the
Contracts by the Respondent, it would be wholly immaterial
if, as contended by the Claimant, and with some justification,
there was not such scarcity of wheat in the country, generally,
as would have made it impossible for the Respondent to
procure wheat from the open market to meet its contractual
commitment to the Claimant.
xxxx xxxx xxxx xxxx
52. It is a common case of the parties that the production
of wheat in the country during 1991-92 was sufficient but
below the target, and this is borne out by the Government
Statistics, published in the “Economic Survey 1992-93”
incorporated by the Ministry of Finance, Government of
India, an extract of which has been annexed by the Claimant
as Annexure CA-1 to its Statement of Claim. This shows that
CS(OS) 788A/1996 Page 6 of 29
the production in India in the year 1988-89 was 54.1 which
came down in 1989-90 to 49.8, increasing to 55.1 in 1990-91.
The production of wheat during 1991-92 was 55.1 and fell
short of target of 56.1. It is also not disputed that the
procurement of wheat from the open market in the major
wheat producing areas of Punjab, Haryana and Uttar
Pradesh was restricted, but these restrictions were not
applicable to Government Agencies for procurement on
Government account. It is also not in dispute that wheat is
available in Delhi markets, also because of its proximity to
the major wheat producing areas, even though Delhi is not a
wheat producing area itself. It is well-known that the
availability of wheat in the open market is subject to the
unfortunate feature of large scale hoarding of wheat by the
wheat trade, for release during comparatively lean period or
otherwise when the market price shows a rise. It is on record
that the wheat position in India, during the material period,
was not very happy necessitating large scale import of wheat
by Government, and that it is the situation which led to this
Government refusal to release further stock for export.
Claimant itself has relied on the statement made by the then
Minister of Food that Government had made heavy import of
wheat during the period, even while assuring Parliament that
Government would honour outstanding export commitments,
if based on firm orders. This statement is quoted by the
Claimant, in its communication of August 10, 1992, Ex.C-43.
The statement attributed to the Union Minister for Food runs
thus:
“Even as the Government was importing one
million tons of wheat to check soaring prices
previous commitments for export of the commodity
would be honoured, but only that quantity for which
firm orders had been received and contractual
obligations taken and that the balance would be
staggered after March”.
In the course of the said communication, Claimant described
the “reported short term food supply situation”, in India, as
“unfortunate”, but maintained that it did not ipso facto
excuse the Respondent from the consequences of its failure to
honour its contractual commitment. In examining the
question as to the availability of wheat in the open market in
spite of the restrictions referred to above, it is difficult to
ignore Government assessment of the situation, as
exemplified not only the Hon‟ble Minister‟s statement, but
also the repeated assertion of Government, in the various
communications, referred to above, including Government
letter of April 24, 1992, and the related correspondence, that
in view of the “tight” position within the country,
CS(OS) 788A/1996 Page 7 of 29
Government was compelled to import wheat and suspended
further release of wheat from public stock, which brought
about the precipitate situating leading to the Respondent‟s
disability. It is not possible for me to brush aside the
Government perception of the availability of the product
within the country. I am also not unaware of the disability
from which the Respondent suffers in the matter of procuring
wheat from the open market, including the segment of the
market, which is-not-so open, and is described in India by
expressions, which I do not like to repeat by virtue of its
constitution and the constraints built into its functioning,
apart from the effect of Government orders. What made it
worse for the Respondent, was the difficulty it would face in
exporting wheat even if it was able to procure sufficient
quantity of it by dispatch of a task force to procure small
quantities from the major wheat growing areas, and large
number of markets outside those areas. I have already
referred in this connection to the restrictions built into the
Government clearance of May 17, 1991. I am, therefore,
unable to accept the contention of the Claimant that sufficient
stock of wheat was available within the country and the
Respondent could have procured it to meet its contractual
obligations, even if Government refused to release supplies
from public stock.
xxxx xxxx xxxx xxxx
55. In the result I have no option but to hold that the
refusal of Government to release wheat from public stock,
held by FCI, to meet the export commitment of Respondent
was an act of Government constituting Force Majeure within
the meaning of Clause (12) of the Contracts, and had the
unfortunate effect of frustrating the contracts so as to entitle
the Respondent to terminate the same, even though
Government at no stage imposed any statutory or non-
statutory ban on the export of wheat, as such, during the
material period. This would not, however, prejudice any
claim that the Claimant may have against the Government for
its decision to withhold the stock from the Respondent, in
spite of a clear allocation order made earlier, should the
Claimant be able to justify such a claim in any proceedings
that the Claimant may be advised to initiate for such relief to
which the Claimant may be entitled.”
iii) Justice (Retd.) R.P. Bhatt
“11. Insofar as the Letter dated 24.4.1992 is concerned, it
is a letter from the Ministry of Food (not the Ministry of
Commerce, which is the controlling Ministry of the
Respondent) to the Respondent advising the Respondent that
“…..in view of the tight stock position of wheat
with FCI, it would not be possible to commit export
CS(OS) 788A/1996 Page 8 of 29
of wheat from FCI procured stocks against
outstanding contracts of STC……”
The contention of the Respondent was that their liability to
supply wheat under the contracts was conditioned upon such
supply being made available from public stock held by FCI.
In accordance with the abovesaid letter dated 24.4.1992, the
Respondent had argued that FCI had declined to supply
wheat to them, whereby the Government had gone back on its
commitment made by it earlier. It is pertinent to note that
whereas the said Allocation Orders of 1991 were issued by
the Ministry of Commerce, the Order putting those Orders
ineffective was issued by the Ministry of Food. It is the
admitted case of the Respondent that it made no effort to
check with or sought the guidance from the Ministry of
Commerce as to its further course of action particularly
because the Ministry of Commerce was not against the supply
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of balance quantities under the contract, at lease, upto 29
June, 1992. According to the Respondent, the Government
may have had good reasons for resiling from its earlier
commitment. It will deal with the effect of Government
decision on the contracts at a later stage.
12. For deciding whether supply of wheat by the
Respondent was subject to wheat being made available to it
by the Government, what one has to look into are provisions
of the contract to see whether the contract is a conditional
contract with regard to the source of supply. If a Seller
wants to protect himself form possible action by the Buyer,
the former should ensure that a suitable clause is inserted in
the contract identifying the source of supply and further that
his (seller‟s) liability to supply is conditional upon the
availability of continued supply from such source. As the
contract is a principal-to-principal contract, a reference to
the source of supply should have been mentioned in the
contract as a condition precedent for performance by
Respondent, if indeed it was so intended. These contracts do
not provide for the source of supply. On the other hand,
clause 17 of the contracts specifically provides that it is the
clear understanding between the parties that the Government
of India is expressly excluded from the obligations under this
contract and that the Respondent was entering into the
contract solely on its own behalf. As the source of supply is
not mentioned in the contracts coupled with the fact of
unambiguous and categorical assertion of both the parties to
the contract that the Government of India has nothing to do
whatsoever with the contracts, I am of the opinion that the
defence of lack of supply from a given source is not available
to the Respondent; it logically follows that the orders dated
24.4.1991 and 17.5.91 have no impact on the contracts; the
question as to whether the letter dated 24.4.92 has the effect
of cancelling the Allocation Orders dated 24.4.91 does not,
therefore, arise.
xxxx xxxx xxxx xxxx
CS(OS) 788A/1996 Page 9 of 29
15. In the result, I hold that these contracts are not
contingent contracts depending on the Government of India
supplying from public stocks and the orders dated 24.4.1991,
17.5.1991 and 24.4.1992 have no bearing or legal effect on
the subject contracts.
xxxx xxxx xxxx xxxx
36. During the course of arguments, the Respondent had
set up a defence to the effect that even if they wanted to
purchase wheat from the open markets of major Wheat
producing states of Punjab, Haryana and U.P., there were
some restrictions for such a purchase in the shape of Grain
Control Orders. I have examined this argument. Firstly,
these orders are not restrictions on trade but merely
regulations to oversee the conduct of Grain Dealers by
bringing them under a licensing system. The Orders stipulate
that those who want to purchase wheat are required to obtain
a licence for which a simple procedure is prescribed.
Secondly, even according to the Respondent, Government
institutions are exempt from these Orders. These restrictions
are of no consequence whatsoever, simply because there are
a number of wholesale Wheat markets in India (at least 21 of
them excluding those in Punjab, Haryana and U.P.) from
where wheat could have been procured by the Respondent
for supply to the Claimant. Admittedly, Delhi (which is in
close proximity to the major wholesale Wheat producing
States in India) has big Wholesale Wheat Markets. There is
nothing on record to show that there is any regulation for
purchase and transport of Wheat from Delhi or other
Wholesale Wheat markets. I am, therefore, of opinion that
there is no legal impediment for the purchase of Wheat from
the open market.”
9. Mr. Arijit Majumdar, learned counsel for petitioner-objector
submitted that the majority arbitral Award was vitiated as two learned
Arbitrators had misconstrued the agreements as being dependent upon
supply of wheat from public stock held by Food Corporation of India
(hereinafter referred to as “FCI”). He submitted that there was no
stipulation in the contract that wheat to be supplied to petitioner-
objector had to be procured by public stock held by FCI.
CS(OS) 788A/1996 Page 10 of 29
10. In the alternative, Mr. Majumdar submitted that even if
respondent-STC could not have procured wheat from FCI nothing
prohibited respondent-STC from procuring it from open market. He
contended that there was nothing on record to show that respondent-
STC could not make arrangement from other sources for procurement
of wheat.
11. Mr. Majumdar submitted that the doctrine of Frustration of
Contract could only be invoked if a subsequent supervening event
rendered the performance of the contract impossible. He stated that in
the present case there was no subsequent supervening event inasmuch
as Control Orders relied upon by respondent-STC were in existence
even on the date when the Agreements was executed between the
parties. In this context, he relied upon a judgment of the Supreme
Court in Naihati Jute Mills Ltd. Vs. Khyaliram Jagannath reported
in AIR 1968 SC 522 wherein the Supreme Court has held as under :-
“ 5. 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
promisor 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 promisor must make compensation to such
promisee for any loss which such promisee sustains through
the non-performance. As envisaged by Section 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. 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
CS(OS) 788A/1996 Page 11 of 29
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 had no control.
One of such theories is what has been called the theory of
implied term as illustrated in F.A. Tamplin Steamship Co.
Ltd. v. Anglo Mexican Petroleum Products Co. Ltd. where
Lord Loreburn stated:
“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. in the
following words:
“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 in 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
CS(OS) 788A/1996 Page 12 of 29
to the contract by the law. 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. 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 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.
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. formulated it in the
following words:
“Frustration occurs whenever the law recognises 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.
CS(OS) 788A/1996 Page 13 of 29
xxxx xxxx xxxx xxxx
8. 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 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 maunds of Indian jute he would be allowed a licence to
import 100 maunds of Pakistani 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.
xxxx xxxx xxxx xxxx
10. 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 Pakistani 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. 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.J. in
Anglo-Russian Merchants-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. It was
CS(OS) 788A/1996 Page 14 of 29
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
and Peter Cassidy Seed Co. v. Osuustickaanppa 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. 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 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.”
12. Mr. Majumdar also submitted that reasoning given by the
majority of the AT was contrary to the express stipulation of the
Agreements. He submitted that entire edifice of majority Award
rested on the finding that Government of India was carrying on
business of exporting of wheat through respondent-STC. According
to him, this reasoning was in conflict with the express stipulation of
Clause 17 of the contract which reads as under :-
“Clause (17). It is expressly understood and agreed by and
between the buyer and the seller that seller is entering into
this agreement solely on its own behalf and not on behalf of
any other person or entity. In particular, it is expressly
understood and agreed that the Government of India is not a
party to this agreement and has no liability, obligations or
rights hereunder. It is expressly understood and agreed that
seller is an independent legal entity with power and authority
to enter into contracts solely in its own behalf under the
applicable laws of India and general principles of contract
law. The second party expressly agrees, acknowledges and
understands that seller is not an agent, representative or
delegate of the Government of India. It is further understood
and agreed that the Government of India is not and shall not
be liable for any acts, omissions, commissions, breaches or
other wrongs arising out of the contract. Accordingly, the
CS(OS) 788A/1996 Page 15 of 29
buyer hereby expressly waives, releases and forgoes any and
all actions or claims against the Government of India, arising
out of this contract and covenants not to sue the Government
of India as to any manner, claim cause of action or thing
whatsoever arising of or under this agreement.”
13. On the other hand, Ms. Sumati Anand, learned counsel for
respondent-STC drew my attention to the written submissions filed by
respondent-STC before the AT. The relevant portion of the written
submissions referred to by Ms. Sumati Anand is reproduced
hereinbelow :-
“III. The facts relevant to the application 12 of the contract
as also invocation of section 56 of the Contract Act, are:-
(i) In August, 1990 and April, 1991 Government of
India, in order to generate Foreign Exchange
resources, for meeting the critical balance of
payments situation of India, decided to export
wheat and wheat products to general currency
areas.
(ii) In April, 1991, STC was assigned the task of
exporting 4.5 lac MTs of wheat and wheat
products to GCA. The wheat for export was to
be supplied to STC, by FCI, at fixed prices at
Port-towns.
(iii) STC entered into 2 contracts – with the
st
claimant. 1 was contract dated 10.9.91 with
addendum dated 23.9.91 – for a total quantity
nd
of 50,000 MTs + 10% - and the 2 was
contract dated 14.11.91 for a quantity of 60,000
MTs + 10%.
st
The Shipment period for the 1 contract was
nd
November, 1991 to January, 1992 an for the 2 contract it
was January 1992 to March, ’92. A quantity of 20,000 MTs
th
approximately was lifted during November, 1991 to 8
January, 1992. The shipment period was, however, during
the currency of the 2 contracts, mutually agreed upon as
January to March, 1992 ending with 31.3.92, for the entire
balance quantity.
(iv) Subsequently, it was found that the production
of food grains during the year 1991-92 had
dropped compared to 1990-91. Procurement of
wheat during April to June, 1991 also declined
sharply and was causing imbalance in demand
and supply. Consequently, need for building up
stocks in the central pool for maintaining
CS(OS) 788A/1996 Page 16 of 29
supplies to PDS (Public Distribution System), in
the States and Union Territories, and achieving
food security arose. This led to the decision of
the Govt. of India, in January, 1992 itself, to
import food grains, after a number of years,
and despite the then precarious balance of
payments position of India. (Paras 7 & 8 of the
affidavit of Shri Dembla and Annexures A & B
thereto).
(v) The procurement of wheat, by FCI, during the
prime procurement season of 1991-92, had also
declined sharply and it was finding its stock
position unsatisfactory.
By 17.1.92, in the aforestated circumstances,
the FCI, declined to make further supplies of
wheat to STC, in pursuance of the Govt. order
of April, 1991. The claimant was advised
telephonically, on 17.1.92 itself not to nominate
any vessel for loading wheat till the claimant
hears from STC. The message was confirmed
vide message dated 20.1.92 (Ex. C-29) and it
was made clear that STC cannot accept the
nominated vessels for the present. Similarly,
messages were repeated on 12.2.92 (Ex. C-31),
18.2.92 (Ex. C-32) and 26.2.92 (Ex.C-33).
(vi) The claimants were apprised of the reason for
these messages as being that FCI was declining
to make any further supplies to STC for export,
despite the Govt. order of 24.4.91, in view of its
stock position and in view of the shortage in
India. (paras 10 and 11 – affidavit of Shri
Dembla).
(vii) However, STC was able to persuade the
Ministry of Food to direct FCI to continue to
make supplies to STC to fulfill its contractual
commitments. As a result of this persistent
persuasion STC was able to supply 57,213.280
MTs to the claimants in February and March,
1992 upto 31.3.92.
(viii) The balance of contract cargo was not supplied
before 31.3.92 and after 31.3.92, FCI totally
declined to make any supply and Ministry of
Food also refused to issue directions to FCI in
this regard.
This was followed by letter dated 24.4.92, from
the Ministry of Food, referring to the
outstanding contracts of STC and declining to
make any further supplies from FCI stocks
taking into account the tight stock position of
wheat with FCI. The claimant was informed
and in fact shown the said order dated 24.4.92,
on 5.5.92, during the meeting of the claimants
CS(OS) 788A/1996 Page 17 of 29
Kim Kubler, the Vice President and Shri S.K.
Minocha, the then General Manager, with the
Respondents Executive Director Shri Swarup
and Shri Rastogi and Shri Dembla, in the
Respondents office.
(ix) STC tried its level best to persuade the Govt. to
direct FCI to supply the goods, for export to
STC, and to modify its order dated 24.4.92 for
almost more than 3 months, but did not
succeed.
(x) By this order/refusal to direct FCI to make
supplies to STC, STC was disabled to make
shipment of the balance contract quantity.
Disabled is defined in Stroud’s judicial
th
Dictionary (10 Edition) Vol.2 “made
incapable of doing” and this is precisely what
was the result of the refusal of the Government.
(xi) Assuming refusal of FCI to supply the contract wheat
or the Ministry of Food to issue directions to FCI to make
the supply was for any reason, not conclusive and STC had
to show that they could not procure it from anywhere else,
the following two points are to be appreciated:-
a) The contract was for supply of Indian wheat of
1991-92 Crop. STC could not procure this
commodity from outside India (Contract clause 2
and Annexure I thereto).
b) It has been admitted by the claimants against item
(v) at page 59 of their arguments that PJ. Haryana
and UP are the only surplus wheat producing
States. In fact in India it was Punjab and Haryana
only wherefrom substantial quantities of wheat
could be procured, being surplus wheat producing
States but there was control and ceiling on holding
and acquisition of wheat under the Essential
Commodities Act of 1955, even by licensed dealers
and a person who was not a licensed dealer could
not acquire and hold more than 25 Quintals of
wheat in the State of Haryana and 10 Quintals in
the State of Punjab.
xxx xxx xxx
Therefore, the position even in 1992 was that a licensed
dealer could not sell in excess of 25 quintals of wheat to a
non-licensee at any one time, nor could a non-licensee hold
stock of more than 25 quintals of wheat. The Govt.
departments and Food Corporation of India were exceptions.
xxx xxx xxx
CS(OS) 788A/1996 Page 18 of 29
The position in 1992, therefore, was that a wholesale licensed
dealer could not stock wheat exceeding 250 quintals and no
licensed dealer could sell more than 10 quintals of wheat to a
person other than a licensed dealer nor could a non-licensee
hold in stock more than 10 quintals of wheat. Government
departments and Food Corporation of India were exempt
from this order.
xxx xxx xxx
The net effect of this latest order of 1989 as amended upto
1992 was that no licensee could sell even 10 quintals or more
of wheat to a person other than a licensed retailer at any one
time and that therefore STC could not obtain even one quintal
of wheat in the State of UP from the year 1989 till the year
1992 (including August’ 92).
The Food Corporation of India was, however, exempted.
(xv) The net effect of these orders, therefore, was that at no
time, in the year 1992, STC could obtain more than 10 and 25
quintals :respectively, from a licensed dealer, in wheat, in
Punjab & Haryana” at any one time, nor could store more
than the said 10 and 25 quintals in Punjab & Haryana
respectively”. In the state of Uttar Pradesh, however, STC
could not obtain even one quintal of wheat at the relevant
time.
It would have firstly been a well high impossible task
for STC to collect 27,591 MTs of wheat of a uniform variety,
of the contract quality, in such small parcels from various
dealers and secondly to collect it, STC would have to store it
at one or more places in either of the 2 States before it could
finally transport it to port towns, but STC could not do so
because of the aforestated control orders in the two states of
Punjab and Haryana.
The said orders, however, exempted departments or
Institutions of the Government, their organizations and the
Food Corporation of India, established under the Food
Corporation of India Act, 1964 from the operation of the said
orders.
(xvi) Therefore, STC could not procure 27,591 MTs of
wheat for export, from any source other that FCI, because of
the aforestated Control Orders. Even if STC went all the
way along to achieve the impossible and to procure the same
in lots of 10 to 25 quintals, STC could not stock the same to
be able to transport it to the Port towns and export the same,
FCI was exempt from this limitation and was, therefore, the
only feasible source of supply of the huge quantities for
export.
(xvii) STC, therefore, continued to make earnest efforts with
Ministry of Food directly and through the Ministry of
CS(OS) 788A/1996 Page 19 of 29
Commerce, STC’s administrative Ministry to direct FCI to
make supply to STC for export of the balance of the quantity
unshipped and after issue of the order of 24.4.92 to relax the
same but did not succeed and the refusal of FCI and Ministry
of Food remained firm.
(xviii) As a result the contracts for the balance quantity
became at all events, impossible of performance and Section
56 of the Contract Act became applicable and the Respondent
stood discharged of its obligations in respect of the balance
quantity of 27,591 MTs. “
14. Ms. Anand also pointed out that respondent-STC’s witnesses
Shri N.C. Dembla and Shri D. Sudhakaran had proved the Ministry of
th
Food’s directive issued vide letter dated 24 April, 1992 advising
respondent-STC that it would not be possible to commit FCI procured
stocks against STC’s outstanding contracts of wheat. These witnesses
also stated that respondent-STC did its best, directly and through
th
Ministry of Commerce to seek relaxation of the order dated 24
April,1992, but did not succeed. Thus, she submitted that by the act
th
of the Government dated 24 April, 1992, STC was barred from
supplying the remaining quantity of wheat to the petitioner.
th
15. Ms. Anand contended that from 24 April, 1992 it became
impracticable and, in fact, impossible for respondent-STC to perform
its obligation under the Agreements executed with the petitioner-
objector. She submitted that respondent-STC stood relieved from the
performance under the said Agreements by virtue of Section 56 of the
Indian Contract Act, 1872 (hereinafter referred to as “Contract Act”).
16. In this context, Ms. Anand also relied upon the Supreme
Court’s judgment in the case of Smita Conductors Ltd. v. Euro Alloys
CS(OS) 788A/1996 Page 20 of 29
Ltd. reported in (2001) 7 SCC 728 wherein the Apex Court has held
as under :-
“ 14. Further, the arbitrators had held that having considered
the March 1991 Reserve Bank of India‟s circular imposing
restrictions on the imports of certain categories of goods due
to difficult balance of payments position prevailing at the
relevant time and letter of credit of Rs.25 lakhs and above
should be referred by the local bank branch to the head office
for prior approval and in excess of Rs 50 lakhs and above
should be referred by the banks to the Controller, Exchange
Control Department, Central Office, Reserve Bank of India,
for clearance, and there is no time-limit so far as these
restrictions are concerned. The arbitrators noticed that the
restrictions set by Reserve Bank of India had created a
situation in which the appellant had difficulty in arranging
the opening of letters of credit so as to conform to the terms
of the contract although it could be noted that many
applications were submitted by the appellant to Bank of
Baroda after the contractual deadline; that several shipments
were made against the letter of credit opened after the
contractual deadline; that thus it has been established by the
documentary evidence to both Contracts Nos. S-142 and S-
336 that declaration of force majeure clause was present,
though belatedly. The arbitrators ultimately concluded that
Reserve Bank of India‟s directives interfered with Contracts
Nos. S-142 and S-336 which would have the effect of delaying
the opening of the letters of credit by the buyer under the
specified contracts. The arbitrators were of the opinion that
the force majeure clause had no limitation on the period of
suspension of the contract while the execution was affected by
a valid force majeure; that it had been accepted by both the
parties and that the restriction and requirements imposed by
Reserve Bank of India‟s directives must be construed as
having caused interference in and/or hindrance to the
execution of the contract timewise; that though time had been
considered to be of the essence condition, the inclusion of the
force majeure clause which provided no time-limit to the
suspension of the contract caused by conditions envisaged
herein, though unusual, it was accepted that the earlier
contracts would be negotiated and executed successfully by
the parties to the dispute.”
17. The Supreme Court in Markfed Vanaspati & Allied Industries
Vs. Union of India reported in (2007) 7 SCC 679 has outlined the
approach to be adopted by Courts while dealing with challenges to an
Arbitral Award. The Supreme Court in the said judgment has held as
CS(OS) 788A/1996 Page 21 of 29
under :-
“17 . Arbitration is a mechanism or a method of resolution of
disputes that unlike court takes place in private, pursuant to
agreement between the parties. The parties agree to be bound
by the decision rendered by a chosen arbitrator after giving
hearing. The endeavour of the court should be to honour and
support the award as far as possible.”
18. Before I analyse the facts, it would be appropriate to appreciate
the concepts of impossible Agreement, frustration and force majeure.
Section 56 of Contract Act reads as under :-
“ 56. Agreement to do impossible act. -- An agreement to do
an act impossible in itself is void.
Contract to do act afterwards becoming impossible or
unlawful.-- A contract to do an act which, after the contract
is made, becomes impossible, or, by reason of some event
which the promisor could not prevent, unlawful, becomes
void when the act becomes impossible or unlawful.
Compensation for loss through non-performance of act
known to be impossible or unlawful.-- 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 promisor must make
compensation to such promisee for any loss which such
promisee sustains through the non-performance of the
promise.”
19. In fact, Clause 12 of the Agreements which incorporate the
force majeure clause reads as under :-
“Clause – 12 Force Majeure :
(a) This contract is subject to force majeure. If at any
time during the continuance of this contract either party is
disabled to perform in whole or in part any obligations under
the contract because of any hostility, military operations of
any character, acts of public enemy, civil commotion,
sabotage, strikes, lock-out, blockade, fire, floods, explosions,
epidemics, quarantine restrictions, war whether declared do
not, acts of God and Acts of Government (including but not
restricted to prohibition of exports and exports), then the date
of fulfillment of any engagement shall be postponed during
the time when such circumstances operate and any
waiver/extension of time in respect of delivery of the whole or
part of the contracted goods shall not be deemed to be a
waiver/extension of time in respect of remaining deliveries
CS(OS) 788A/1996 Page 22 of 29
and if operation of such circumstances exceeds three (3)
months, each party shall have the right to refuse further
performance of the contract which case neither party shall
have the right to claim eventual damages.
(b) The party which is unable to fulfil its engagement
under this contract owing to force majeure must immediately
inform the other party of the existence and/or determination
of the circumstances preventing the performance of the
contract. Certificate issued by a recognised Chamber of
Commerce in the country of such party shall be sufficient
proof of existence of the above circumstances and their
duration.”
20. As far as the concept of force majeure is concerned, I find that
Supreme Court in M/s. Dhanrajamal Gobindram Vs. M/s. Shamji
Kalidas and Co. reported in AIR 1961 SC 1285 has held that the
intent of such a clause is to save the performing party from the
consequences of anything over which he has no control.
21. The Apex Court in Satyabrata Ghose Vs. Mugneeram Bangur
and Co. & Anr. reported in AIR 1954 SC 44, para 9 , has further held
that the word “impossible” in Section 56 of Contract Act has not been
used in the sense of physical or literal impossibility. The Supreme
Court held that performance of an act may not be literally impossible
but it may be impracticable and useless from the point of view of the
object and purpose which the parties had in view; and if an untoward
event or change of circumstances totally upsets the very foundation
upon which the parties rested their bargain, it can very well be said
that the party finds it impossible to do the act which he promised to
do.
22. The Supreme Court in Smt. Sushila Devi & Anr. Vs. Hari
CS(OS) 788A/1996 Page 23 of 29
Singh & Ors. reported in AIR 1971 SC 1756 has held as under :-
“ 11. ……Section 56 of the Indian Contract Act. The view that
Section 56 applies only to cases of physical impossibility and
that where this section is not applicable recourse can be had
to the principles of English law on the subject of frustration is
not correct. Section 56 of the Indian Contract Act lays down a
rule of positive law and does not leave the matter to be
determined according to the intention of the parties. The
impossibility contemplated by Section 56 of the Contract Act is
not confined to something which is not humanly possible. If the
performance of a contract becomes impracticable or useless
having regard to the object and purpose the parties had in
view then it must be held that the performance of the contract
has become impossible. But the supervening events should
take away the basis of the contract and it should be of such a
character that it strikes at the root of the contract.
12. ……That object became impossible because of the
supervening events. Further the terms of the agreement
between the parties relating to taking possession of the
properties also became impossible of performance. Therefore
we agree with the trial court as well as the appellate court that
the contract had become impossible of performance.”
23. The admitted position on facts is that the respondent-STC could
procure wheat for export only from two sources, namely, the grain
markets and from the FCI. In fact, at the time when Agreements
th th
dated 10 September, 1991 and 14 November, 1991 were executed
between petitioner and respondent-STC, admittedly Control Orders
issued by the major grain producing States were in existence which
rendered it impossible for anyone including respondent-STC to
procure uniform variety of contracted quantity from open grain
markets. However, respondent-STC was confident of procuring the
contracted quantity from public stock of wheat held by FCI. This is
th th
clearly apparent from the letters dated 11 April, 1991, 24 April,
th
1991 and 17 May, 1991 issued by Government of India to the
respondent-STC. The three letters are reproduced hereinbelow :-
CS(OS) 788A/1996 Page 24 of 29
th
i) Letter dated 11 April, 1991
th
No. 4/1/9-EP (Agri-II) 11 April, 1991
To ,
1. The Chairman,
S.T.C. of India,
New Delhi.
2. The Chariman,
M.M.T.C. of India,
New Delhi
Sub : Export of wheat.
Sir,
In partial modification of this Ministry‟s letter of even
st
number dated 21 March, 1991 on the subject cited above,
the undersigned is directed to convey that it has been decided
to allow export of 5.5 lakh MTs and 4.5 MTs of wheat and/or
wheat Atta on Government account by the M.M.T.C. and the
th
S.T.C. of India respectively for shipments by 30 June, 1991.
Sd/-
(RAVINDER SINGH)
DEPUTY SECRETARY TO
THE GOVERNMENT OF INDIA
th
ii) Letter dated 24 April, 1991
No. 4/1/91-EP (Agri.II) the 24th April, 1991
To,
1. The Chariman,
State Trading Corpn. of India,
New Delhi.
2. The Chairman,
Minerals and Metals Trading Corpn. of India
New Delhi.
Subject : Export of wheat.
Sir,
Government have decided to allow export of ten lakh
MTs of wheat and /or wheat products to GCA countries for
1991-92 on Government account, out of which 5.5 lakh MTs
and 4.5 lakh MTs of wheat and /or wheat products is to be
CS(OS) 788A/1996 Page 25 of 29
exported by MMTC and STC respectively. Government
liability in respect of loss on exports of both wheat and wheat
products would continue to be restricted to a maximum of
30% of FOB sales realization. The above quota for exports
would be in addition to the quota allocated to STC and
MMTC vide this Ministry‟s letter number 4/1/91-EP(Agri-II
dated 11.4.91.
2. FCI would also continue to make wheat available to
STC/MMTC at the rate of Rs.2150 per MT at ex-godown-port
towns to keep up exports.
Yours faithfully,
Sd/-
(Ravindra Singh)
Deputy Secretary
th
iii) Letter dated 17 May, 1991
No. 40/28/91/E-II/245 Dated 17th May, 1991
1. The State Trading Corporation
of India Ltd.
Jawahar Vyapar Bhawan,
Tolstoy Marg,
New Delhi – 110001
2. The Minerals and Metals Trading
Corporation of India Limited,
Scope Building,
Core No.-1 Lodhi Road,
New Delhi-110003
Subject: Export of wheat and /or Wheat Products to
GCA by STC and MMTC on Government
account during 1991-92.
…
Sirs,
Please refer to Ministry of Commerce‟s letter No.
4/1/91 EP Agri.II) dated 24.4.1991 and STC‟s letter dated
10.5.1991 on the above subject.
2. It has been decided to allow export of 10,00,000 (Ten
lakh) MTs of Wheat and/or Wheat products to GCA by the
State Trading Corporation of India Ltd., New Delhi and the
Mineral and Metals Trading Corporation of India ltd., New
Delhi on Government account during 1991-92. Out of
10,00,000/- (Ten lakh) MTs of wheat and/or wheat products,
5,50,000/- (Five lakh and fifty thousand) and 4,50,000/-
(Four lakh and fifty thousand) MTs will be exported by
MMTC and STC respectively. Government liability in respect
CS(OS) 788A/1996 Page 26 of 29
of loss on export of both wheat and wheat products would
continue to be restricted to a maximum of 30% of FOB sales
realisation. Ministry of Commerce have issued instructions
separately that FCI would also continue to make wheat
available to STC/MMTC at the rate of Rs.2,150/- per MT at
ex-godown-port towns to keep up exports.
3. You are, therefore, advised to approach Jt. Chief
Controller of Imports & Exports, CLA., New Delhi to whom
suitable instructions have been issued in the matter.
Yours faithfully,
Sd/-
(V.K. LUTHRA)
Controller of Imports & Exports
for Chief Controller of Imports & Exports
th
24. However, on 24 April, 1992, Government of India issued a
directive to respondent-STC stating, “…. in view of the tight stock
position of wheat with FCI, it would not be possible to commit export
of wheat from FCI procured stocks against outstanding contracts of
th
STC ……” On 26 November, 1992, Government of India again
th
wrote to respondent-STC confirming that “ as from 24 April, 1992
the Government of India prohibited further export of wheat from
Public Stocks until further notice. All outstanding quantities/
shipments stand cancelled. ”
25. In my opinion, the majority view of the AT rightly concluded
th th
that the letters dated 24 April, 1992 and 26 November, 1992
constituted a supervening event of such a character that it struck at the
root of the Agreements and rendered the performance of the said
Agreements impossible. In fact, the agreements executed between the
parties stood frustrated owing to the refusal of the Government of
India to release wheat from public stock held by FCI.
CS(OS) 788A/1996 Page 27 of 29
26. In my opinion, Clause 17 referred to by learned counsel for
petitioner-objector has no relevance to the present proceedings as the
said clause only absolves Government of India of any liability under
the agreements executed between the parties.
27. As far as the petitioner-objector’s contention that respondent-
STC could have procured the wheat from open grain markets is
concerned, I am of the opinion that in view of the Control Orders that
were in existence in the major grain producing States at the relevant
time, respondent-STC could not have procured uniform variety of
huge balance quantity, that is, 27,591 MT of Indian wheat from open
grain markets. In fact, even if respondent-STC had tried to procure
the same in small lots of 10 to 25 quintals, respondent-STC would not
have been able to transfer it to port and export the same. In fact, as
stated hereinabove, only FCI which was exempt from this limitation
was the only practical source of supply of such a huge quantity of
Indian wheat – which admittedly was prohibited by virtue of
th th
Government of India’s directive/letters dated 24 April, 1992 and 26
November, 1992 from procuring the same and handing over to
respondent-STC for export purposes. I also find that though
respondent-STC had led evidence that not enough grain of uniform
quantity was available in all the grain markets, petitioner-objector had
not led any evidence that sufficient quantity of wheat was available in
the open market to enable the respondent-STC to meet its export
obligation. Consequently, force majeure was clearly attracted to the
facts of the present case.
CS(OS) 788A/1996 Page 28 of 29
28. In any event, the view taken by majority of AT with regard to
the interpretation of the force majeure clause in the light of
Government of India’s letters is a plausible view and cannot be called
as impossible of acceptance and, therefore, the question of
substituting my view with that of the Arbitrators does not arise.
29. Consequently, present objections being devoid of merits are
dismissed and the Award is made rule of the Court by virtue of which
the claim of the petitioner-objector was disallowed and respondent-
STC’s counter claim to the extent of US$ 9,730.59/- was allowed but
without interest. Registry is directed to prepare a decree in terms
thereof. With the aforesaid observations, present application and suit
stand disposed of.
MANMOHAN, J.
DECEMBER 16, 2009
rn
CS(OS) 788A/1996 Page 29 of 29
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ CS(OS) 788A/1996 & I.A. 6204/1997
M/S. CONTINENTAL
ENTERPRISES LTD. ..... Petitioner
Through Mr. Arijit Majumdar, Advocate
versus
STATE TRADING CORPORATION OF
INDIA LTD. ..... Respondent
Through Ms. Sumati Anand, Advocate
% Date of Decision : DECEMBER 16, 2009
CORAM:
HON'BLE MR. JUSTICE MANMOHAN
1. Whether the Reporters of local papers may be allowed to see the judgment?
2. To be referred to the Reporter or not? Yes.
3. Whether the judgment should be reported in the Digest? Yes.
J U D G M E N T
MANMOHAN , J (ORAL)
1. I.A. 6204/1997 has been filed by petitioner-objector under
Sections 5, 11, 12, 30 and 33 of the Arbitration Act, 1940 (hereinafter
st
referred to as “Act, 1940”) challenging the Award dated 31 January,
1996 passed by an Arbitral Tribunal (in short “AT”) constituted by
the Indian Council of Arbitration.
2. Briefly stated the material facts relevant for this case are that on
th
10 September, 1991 respondent-STC agreed to supply to petitioner-
CS(OS) 788A/1996 Page 1 of 29
objector 40,000 MT of Indian wheat. An addendum was executed
rd
between the parties on 23 September, 1991whereby quantity of
Indian wheat was increased from 40,000 MT to 50,000 MT.
th
3. On 14 November, 1991, petitioner-objector and respondent-
STC entered into a second Agreement for supply of another 60,000
MT of Indian wheat. Consequently, under the two Agreements dated
th th
10 September, 1991 and 14 November, 1991, respondent-STC had
to supply to petitioner-objector 1,10,000 MT of Indian wheat.
4. However, by the end of March, 1992 respondent-STC supplied
only 82,409 MT of Indian wheat to petitioner-objector, leaving a
balance of 27,591 MT of unsupplied Indian wheat.
th
5. On 24 April, 1992, the Government of India prohibited further
export of wheat from public stock. Thereafter both the parties tried to
persuade the Government of India to grant permission to export the
balance quantity of 27,591 MT of Indian wheat. However, the
Government did not grant any relaxation.
th
6. On 5 August, 1992 petitioner-objector sought a final
confirmation from respondent-STC about shipment of balance
contracted quantity failing which petitioner manifested its intention to
declare respondent-STC to be in default. Along with the said
communication, petitioner-contractor enclosed a debit note of US$
th
9,70,000/-. On 7 August, 1992 respondent-STC informed the
CS(OS) 788A/1996 Page 2 of 29
petitioner-objector that their contract be treated as terminated in
accordance with the force majeure clause as Government of India had
refused to release wheat from public stock.
7. As disputes arose between the parties, arbitration clause was
invoked by petitioner-objector and Indian Council of Arbitration
constituted the AT comprising three Arbitrators, namely, Chief Justice
of India (Retd.) R.S. Pathak, Justice (Retd.) H.L. Anand and Justice
(Retd.) R.P. Bhatt.
8. Chief Justice (Retd.) R.S. Pathak and Justice (Retd.) H.L.
Anand by a majority Award upheld the respondent-STC’s decision to
terminate the contract on the ground of force majeure within the
meaning of Clause 12 of the Agreements. Justice (Retd.) R.P. Bhatt
constituting the minority, held that as the source of supply was not
mentioned in the Agreements, the defence of lack of supplies from a
given source was not available to respondent-STC. The relevant
portion of the three Awards rendered by three members of the AT is
reproduced hereinbelow :-
i) Chief Justice (Retd.) R.S. Pathak
“I agree that the contracts between the parties were not of a
contingent nature. It was presumed from the outset that
sufficient stocks of wheat would be available for supplying
under the contracts to the Claimant. The question however
remains whether the balance of supplies could be effected
upon the refusal of the Central Government to allow stocks to
be drawn from the Food Corporation of India. Apparently
release by the Food Corporation of India from its stocks is
dependent on instructions from the Central Government. It
CS(OS) 788A/1996 Page 3 of 29
was in that context that the allocation orders allowing release
of wheat from public stocks of the Food Corporation of India
were issued by the Government in the Ministry of Commerce
to the Respondent to enable it to make supplies of wheat to
the claimant. Some quantities of wheat were supplied
pursuant to those allocation orders. However, upon
circumstances which in the view of the Government called for
a refusal of further supplies, the Respondent was unable to
procure further quantities of wheat from the Food
Corporation of India. It is not for us to sit in judgment on the
Government‟s decision to decline further supplies. The
Government took the view, apparently, that the situation of
wheat stocks in the country during that period did not permit
exports of wheat at the time. This was clearly conveyed to the
Respondent by the letter dated April 24, 1992 by the
Government of India in the Ministry of Food. The Claimant
also became aware of the situation because, as the records
show, the Respondent communicated with the Claimant
pointing out the reasons for its inability to make further
supplies of wheat. It seems also that both parties made an
effort to persuade the Government to relax its decision. The
Government continued to maintain its position that it would
not allow export of wheat at that time. As I have said earlier,
it is not for us to decide whether the Government was right or
wrong in the exercise of its discretion I have considered
carefully the terms of Clause 12 of the contracts, and it seems
to me that the decision of the Government refusing to allow
further supplies of wheat from the public stocks maintained
by the Food Corporation of India constitutes “an act of
Government” within the meaning of Clause 12. The
provisions of the Clause are sufficiently wide to encompass
such a decision. It was an act of Government constituting a
“force majeure”.
The next question is whether the Respondent could have
recourse to any other stocks of wheat for making the
contracted supplies. Our attention has been drawn to the
circumstance that wheat was available in the mandies of the
major wheat producing States and that therefore the
Respondent could not claim the benefit of Clause 12 of the
contract between the parties. It appears that the supplies of
wheat in the internal markets in the wheat producing States of
Haryana, Punjab and Uttar Pradesh were controlled during
the relevant period by statutory control orders. I have
perused the provisions of the Control Orders and it seems to
me that the restricted quantities permitted to be sold under
those Control Orders were far too limited to enable the
Respondent to collect 27591 MT of wheat of a uniform variety
CS(OS) 788A/1996 Page 4 of 29
of the contracted quality. It is not possible to assume that the
Respondent acting reasonably and with prudence could have
procured 27591 MT for supply to the Claimant from the open
market. The quantities which could be obtained under those
Control Orders would have been extremely small. It is true
that the restrictions incorporated in the Control Orders
exempted the Food Corporation of India and the Government
from their provisions, but the exemption was not available to
the Respondent. The Respondent may have been a
Government controlled undertaking, but nonetheless it was
an incorporated undertaking governed by its own
Memorandum of Association an Articles of Association, and
not identifiable as a Department of the Government. As
regards supplying wheat from the world market, that would
not have been consistent with the condition of the contracts,
which stipulated the supply of Indian wheat.
I am not satisfied having regard to the material before me
that it was reasonably possible for the Respondent to effect
the remaining supply of wheat in fulfillment of the contracts
between the parties. On that ground the substantive claim
made by the Claimant in this case must fail.”
ii) Justice (Retd.) H.L. Anand
“43. An act of Government would be beyond the control of
a natural or juristic person, including a Joint Stock Company,
irrespective of its composition, and Government Company
would be as much bound by executive action, irrespective of
the source of power in exercise of which it has been taken, as
an ordinary Joint Stock Company, and if such an act would
constitute an instance of “Force Majeure”, in relation to a
natural person or a corporate body, it would not cease to be
so merely because the corporate body may have been
established or controlled by Government, or, if a Joint Stock
Company, its entire equity is held by Government or its
nominees.
44. On a parity of reasoning such an act of Government
being beyond the control of the parties to a contract, would
be an event which the promisor could not possibly prevent,
thereby rendering the contract impossible of performance,
within the meaning of Section 56 of the Contract Act.
xxxx xxxx xxxx xxxx
50. I have held above that, having regard to its
constitution, as a Government Company, and the constraints
CS(OS) 788A/1996 Page 5 of 29
built into its Memorandum and Articles, the allocation
orders, and all the surrounding circumstances, Respondent
was disabled from carrying out its contractual obligation to
the Claimant and the Contracts, therefore, became impossible
of performance. I have further held that the Government
decision to withhold further release of supplies from public
stock for export by the Respondent, notwithstanding
Government‟s earlier commitment to the contrary, constituted
a Force Majeure within the meaning of Article (12) of the
Contracts. This disability of the Respondent is further
reinforced by the terms of the clearance granted to the
Respondent by the Chief Controller of Imports and Exports
to export wheat out of India, by its communication dated May
17, 1991, a copy of which is at page 3 of the documents filed
by the Respondent with its list dated March 30, 1994. While
considering this document, we have pointed out above that
this was issued pursuant to Government allocation order
dated April 24, 1991, and the Respondent‟s letter of May 10,
1991, pursuant thereto. The context in which this clearance
was issued by the Chief Controller of Imports and Exports,
leaves no manner of doubt that this clearance has reference
to export out of Government stock, and from no other source.
However, if there was any doubt, with regard to this, it is
resolved by the “subject” of this letter, which clearly
mentions “export of wheat and/or wheat products of GECA
by STC and MMTC on Government account during 1991-
92”. This is repeated in the body of this communication. It
follows, therefore, that this clearance is confined in terms to
export on “Government account”, and clearly disabled the
Respondent to export wheat out of India on the basis of this
clearance, if it was procured from other sources, or was
otherwise than on Government account. If this, therefore, be
the true position of the impossibility of performance of the
Contracts by the Respondent, it would be wholly immaterial
if, as contended by the Claimant, and with some justification,
there was not such scarcity of wheat in the country, generally,
as would have made it impossible for the Respondent to
procure wheat from the open market to meet its contractual
commitment to the Claimant.
xxxx xxxx xxxx xxxx
52. It is a common case of the parties that the production
of wheat in the country during 1991-92 was sufficient but
below the target, and this is borne out by the Government
Statistics, published in the “Economic Survey 1992-93”
incorporated by the Ministry of Finance, Government of
India, an extract of which has been annexed by the Claimant
as Annexure CA-1 to its Statement of Claim. This shows that
CS(OS) 788A/1996 Page 6 of 29
the production in India in the year 1988-89 was 54.1 which
came down in 1989-90 to 49.8, increasing to 55.1 in 1990-91.
The production of wheat during 1991-92 was 55.1 and fell
short of target of 56.1. It is also not disputed that the
procurement of wheat from the open market in the major
wheat producing areas of Punjab, Haryana and Uttar
Pradesh was restricted, but these restrictions were not
applicable to Government Agencies for procurement on
Government account. It is also not in dispute that wheat is
available in Delhi markets, also because of its proximity to
the major wheat producing areas, even though Delhi is not a
wheat producing area itself. It is well-known that the
availability of wheat in the open market is subject to the
unfortunate feature of large scale hoarding of wheat by the
wheat trade, for release during comparatively lean period or
otherwise when the market price shows a rise. It is on record
that the wheat position in India, during the material period,
was not very happy necessitating large scale import of wheat
by Government, and that it is the situation which led to this
Government refusal to release further stock for export.
Claimant itself has relied on the statement made by the then
Minister of Food that Government had made heavy import of
wheat during the period, even while assuring Parliament that
Government would honour outstanding export commitments,
if based on firm orders. This statement is quoted by the
Claimant, in its communication of August 10, 1992, Ex.C-43.
The statement attributed to the Union Minister for Food runs
thus:
“Even as the Government was importing one
million tons of wheat to check soaring prices
previous commitments for export of the commodity
would be honoured, but only that quantity for which
firm orders had been received and contractual
obligations taken and that the balance would be
staggered after March”.
In the course of the said communication, Claimant described
the “reported short term food supply situation”, in India, as
“unfortunate”, but maintained that it did not ipso facto
excuse the Respondent from the consequences of its failure to
honour its contractual commitment. In examining the
question as to the availability of wheat in the open market in
spite of the restrictions referred to above, it is difficult to
ignore Government assessment of the situation, as
exemplified not only the Hon‟ble Minister‟s statement, but
also the repeated assertion of Government, in the various
communications, referred to above, including Government
letter of April 24, 1992, and the related correspondence, that
in view of the “tight” position within the country,
CS(OS) 788A/1996 Page 7 of 29
Government was compelled to import wheat and suspended
further release of wheat from public stock, which brought
about the precipitate situating leading to the Respondent‟s
disability. It is not possible for me to brush aside the
Government perception of the availability of the product
within the country. I am also not unaware of the disability
from which the Respondent suffers in the matter of procuring
wheat from the open market, including the segment of the
market, which is-not-so open, and is described in India by
expressions, which I do not like to repeat by virtue of its
constitution and the constraints built into its functioning,
apart from the effect of Government orders. What made it
worse for the Respondent, was the difficulty it would face in
exporting wheat even if it was able to procure sufficient
quantity of it by dispatch of a task force to procure small
quantities from the major wheat growing areas, and large
number of markets outside those areas. I have already
referred in this connection to the restrictions built into the
Government clearance of May 17, 1991. I am, therefore,
unable to accept the contention of the Claimant that sufficient
stock of wheat was available within the country and the
Respondent could have procured it to meet its contractual
obligations, even if Government refused to release supplies
from public stock.
xxxx xxxx xxxx xxxx
55. In the result I have no option but to hold that the
refusal of Government to release wheat from public stock,
held by FCI, to meet the export commitment of Respondent
was an act of Government constituting Force Majeure within
the meaning of Clause (12) of the Contracts, and had the
unfortunate effect of frustrating the contracts so as to entitle
the Respondent to terminate the same, even though
Government at no stage imposed any statutory or non-
statutory ban on the export of wheat, as such, during the
material period. This would not, however, prejudice any
claim that the Claimant may have against the Government for
its decision to withhold the stock from the Respondent, in
spite of a clear allocation order made earlier, should the
Claimant be able to justify such a claim in any proceedings
that the Claimant may be advised to initiate for such relief to
which the Claimant may be entitled.”
iii) Justice (Retd.) R.P. Bhatt
“11. Insofar as the Letter dated 24.4.1992 is concerned, it
is a letter from the Ministry of Food (not the Ministry of
Commerce, which is the controlling Ministry of the
Respondent) to the Respondent advising the Respondent that
“…..in view of the tight stock position of wheat
with FCI, it would not be possible to commit export
CS(OS) 788A/1996 Page 8 of 29
of wheat from FCI procured stocks against
outstanding contracts of STC……”
The contention of the Respondent was that their liability to
supply wheat under the contracts was conditioned upon such
supply being made available from public stock held by FCI.
In accordance with the abovesaid letter dated 24.4.1992, the
Respondent had argued that FCI had declined to supply
wheat to them, whereby the Government had gone back on its
commitment made by it earlier. It is pertinent to note that
whereas the said Allocation Orders of 1991 were issued by
the Ministry of Commerce, the Order putting those Orders
ineffective was issued by the Ministry of Food. It is the
admitted case of the Respondent that it made no effort to
check with or sought the guidance from the Ministry of
Commerce as to its further course of action particularly
because the Ministry of Commerce was not against the supply
th
of balance quantities under the contract, at lease, upto 29
June, 1992. According to the Respondent, the Government
may have had good reasons for resiling from its earlier
commitment. It will deal with the effect of Government
decision on the contracts at a later stage.
12. For deciding whether supply of wheat by the
Respondent was subject to wheat being made available to it
by the Government, what one has to look into are provisions
of the contract to see whether the contract is a conditional
contract with regard to the source of supply. If a Seller
wants to protect himself form possible action by the Buyer,
the former should ensure that a suitable clause is inserted in
the contract identifying the source of supply and further that
his (seller‟s) liability to supply is conditional upon the
availability of continued supply from such source. As the
contract is a principal-to-principal contract, a reference to
the source of supply should have been mentioned in the
contract as a condition precedent for performance by
Respondent, if indeed it was so intended. These contracts do
not provide for the source of supply. On the other hand,
clause 17 of the contracts specifically provides that it is the
clear understanding between the parties that the Government
of India is expressly excluded from the obligations under this
contract and that the Respondent was entering into the
contract solely on its own behalf. As the source of supply is
not mentioned in the contracts coupled with the fact of
unambiguous and categorical assertion of both the parties to
the contract that the Government of India has nothing to do
whatsoever with the contracts, I am of the opinion that the
defence of lack of supply from a given source is not available
to the Respondent; it logically follows that the orders dated
24.4.1991 and 17.5.91 have no impact on the contracts; the
question as to whether the letter dated 24.4.92 has the effect
of cancelling the Allocation Orders dated 24.4.91 does not,
therefore, arise.
xxxx xxxx xxxx xxxx
CS(OS) 788A/1996 Page 9 of 29
15. In the result, I hold that these contracts are not
contingent contracts depending on the Government of India
supplying from public stocks and the orders dated 24.4.1991,
17.5.1991 and 24.4.1992 have no bearing or legal effect on
the subject contracts.
xxxx xxxx xxxx xxxx
36. During the course of arguments, the Respondent had
set up a defence to the effect that even if they wanted to
purchase wheat from the open markets of major Wheat
producing states of Punjab, Haryana and U.P., there were
some restrictions for such a purchase in the shape of Grain
Control Orders. I have examined this argument. Firstly,
these orders are not restrictions on trade but merely
regulations to oversee the conduct of Grain Dealers by
bringing them under a licensing system. The Orders stipulate
that those who want to purchase wheat are required to obtain
a licence for which a simple procedure is prescribed.
Secondly, even according to the Respondent, Government
institutions are exempt from these Orders. These restrictions
are of no consequence whatsoever, simply because there are
a number of wholesale Wheat markets in India (at least 21 of
them excluding those in Punjab, Haryana and U.P.) from
where wheat could have been procured by the Respondent
for supply to the Claimant. Admittedly, Delhi (which is in
close proximity to the major wholesale Wheat producing
States in India) has big Wholesale Wheat Markets. There is
nothing on record to show that there is any regulation for
purchase and transport of Wheat from Delhi or other
Wholesale Wheat markets. I am, therefore, of opinion that
there is no legal impediment for the purchase of Wheat from
the open market.”
9. Mr. Arijit Majumdar, learned counsel for petitioner-objector
submitted that the majority arbitral Award was vitiated as two learned
Arbitrators had misconstrued the agreements as being dependent upon
supply of wheat from public stock held by Food Corporation of India
(hereinafter referred to as “FCI”). He submitted that there was no
stipulation in the contract that wheat to be supplied to petitioner-
objector had to be procured by public stock held by FCI.
CS(OS) 788A/1996 Page 10 of 29
10. In the alternative, Mr. Majumdar submitted that even if
respondent-STC could not have procured wheat from FCI nothing
prohibited respondent-STC from procuring it from open market. He
contended that there was nothing on record to show that respondent-
STC could not make arrangement from other sources for procurement
of wheat.
11. Mr. Majumdar submitted that the doctrine of Frustration of
Contract could only be invoked if a subsequent supervening event
rendered the performance of the contract impossible. He stated that in
the present case there was no subsequent supervening event inasmuch
as Control Orders relied upon by respondent-STC were in existence
even on the date when the Agreements was executed between the
parties. In this context, he relied upon a judgment of the Supreme
Court in Naihati Jute Mills Ltd. Vs. Khyaliram Jagannath reported
in AIR 1968 SC 522 wherein the Supreme Court has held as under :-
“ 5. 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
promisor 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 promisor must make compensation to such
promisee for any loss which such promisee sustains through
the non-performance. As envisaged by Section 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. 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
CS(OS) 788A/1996 Page 11 of 29
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 had no control.
One of such theories is what has been called the theory of
implied term as illustrated in F.A. Tamplin Steamship Co.
Ltd. v. Anglo Mexican Petroleum Products Co. Ltd. where
Lord Loreburn stated:
“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. in the
following words:
“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 in 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
CS(OS) 788A/1996 Page 12 of 29
to the contract by the law. 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. 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 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.
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. formulated it in the
following words:
“Frustration occurs whenever the law recognises 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.
CS(OS) 788A/1996 Page 13 of 29
xxxx xxxx xxxx xxxx
8. 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 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 maunds of Indian jute he would be allowed a licence to
import 100 maunds of Pakistani 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.
xxxx xxxx xxxx xxxx
10. 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 Pakistani 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. 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.J. in
Anglo-Russian Merchants-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. It was
CS(OS) 788A/1996 Page 14 of 29
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
and Peter Cassidy Seed Co. v. Osuustickaanppa 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. 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 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.”
12. Mr. Majumdar also submitted that reasoning given by the
majority of the AT was contrary to the express stipulation of the
Agreements. He submitted that entire edifice of majority Award
rested on the finding that Government of India was carrying on
business of exporting of wheat through respondent-STC. According
to him, this reasoning was in conflict with the express stipulation of
Clause 17 of the contract which reads as under :-
“Clause (17). It is expressly understood and agreed by and
between the buyer and the seller that seller is entering into
this agreement solely on its own behalf and not on behalf of
any other person or entity. In particular, it is expressly
understood and agreed that the Government of India is not a
party to this agreement and has no liability, obligations or
rights hereunder. It is expressly understood and agreed that
seller is an independent legal entity with power and authority
to enter into contracts solely in its own behalf under the
applicable laws of India and general principles of contract
law. The second party expressly agrees, acknowledges and
understands that seller is not an agent, representative or
delegate of the Government of India. It is further understood
and agreed that the Government of India is not and shall not
be liable for any acts, omissions, commissions, breaches or
other wrongs arising out of the contract. Accordingly, the
CS(OS) 788A/1996 Page 15 of 29
buyer hereby expressly waives, releases and forgoes any and
all actions or claims against the Government of India, arising
out of this contract and covenants not to sue the Government
of India as to any manner, claim cause of action or thing
whatsoever arising of or under this agreement.”
13. On the other hand, Ms. Sumati Anand, learned counsel for
respondent-STC drew my attention to the written submissions filed by
respondent-STC before the AT. The relevant portion of the written
submissions referred to by Ms. Sumati Anand is reproduced
hereinbelow :-
“III. The facts relevant to the application 12 of the contract
as also invocation of section 56 of the Contract Act, are:-
(i) In August, 1990 and April, 1991 Government of
India, in order to generate Foreign Exchange
resources, for meeting the critical balance of
payments situation of India, decided to export
wheat and wheat products to general currency
areas.
(ii) In April, 1991, STC was assigned the task of
exporting 4.5 lac MTs of wheat and wheat
products to GCA. The wheat for export was to
be supplied to STC, by FCI, at fixed prices at
Port-towns.
(iii) STC entered into 2 contracts – with the
st
claimant. 1 was contract dated 10.9.91 with
addendum dated 23.9.91 – for a total quantity
nd
of 50,000 MTs + 10% - and the 2 was
contract dated 14.11.91 for a quantity of 60,000
MTs + 10%.
st
The Shipment period for the 1 contract was
nd
November, 1991 to January, 1992 an for the 2 contract it
was January 1992 to March, ’92. A quantity of 20,000 MTs
th
approximately was lifted during November, 1991 to 8
January, 1992. The shipment period was, however, during
the currency of the 2 contracts, mutually agreed upon as
January to March, 1992 ending with 31.3.92, for the entire
balance quantity.
(iv) Subsequently, it was found that the production
of food grains during the year 1991-92 had
dropped compared to 1990-91. Procurement of
wheat during April to June, 1991 also declined
sharply and was causing imbalance in demand
and supply. Consequently, need for building up
stocks in the central pool for maintaining
CS(OS) 788A/1996 Page 16 of 29
supplies to PDS (Public Distribution System), in
the States and Union Territories, and achieving
food security arose. This led to the decision of
the Govt. of India, in January, 1992 itself, to
import food grains, after a number of years,
and despite the then precarious balance of
payments position of India. (Paras 7 & 8 of the
affidavit of Shri Dembla and Annexures A & B
thereto).
(v) The procurement of wheat, by FCI, during the
prime procurement season of 1991-92, had also
declined sharply and it was finding its stock
position unsatisfactory.
By 17.1.92, in the aforestated circumstances,
the FCI, declined to make further supplies of
wheat to STC, in pursuance of the Govt. order
of April, 1991. The claimant was advised
telephonically, on 17.1.92 itself not to nominate
any vessel for loading wheat till the claimant
hears from STC. The message was confirmed
vide message dated 20.1.92 (Ex. C-29) and it
was made clear that STC cannot accept the
nominated vessels for the present. Similarly,
messages were repeated on 12.2.92 (Ex. C-31),
18.2.92 (Ex. C-32) and 26.2.92 (Ex.C-33).
(vi) The claimants were apprised of the reason for
these messages as being that FCI was declining
to make any further supplies to STC for export,
despite the Govt. order of 24.4.91, in view of its
stock position and in view of the shortage in
India. (paras 10 and 11 – affidavit of Shri
Dembla).
(vii) However, STC was able to persuade the
Ministry of Food to direct FCI to continue to
make supplies to STC to fulfill its contractual
commitments. As a result of this persistent
persuasion STC was able to supply 57,213.280
MTs to the claimants in February and March,
1992 upto 31.3.92.
(viii) The balance of contract cargo was not supplied
before 31.3.92 and after 31.3.92, FCI totally
declined to make any supply and Ministry of
Food also refused to issue directions to FCI in
this regard.
This was followed by letter dated 24.4.92, from
the Ministry of Food, referring to the
outstanding contracts of STC and declining to
make any further supplies from FCI stocks
taking into account the tight stock position of
wheat with FCI. The claimant was informed
and in fact shown the said order dated 24.4.92,
on 5.5.92, during the meeting of the claimants
CS(OS) 788A/1996 Page 17 of 29
Kim Kubler, the Vice President and Shri S.K.
Minocha, the then General Manager, with the
Respondents Executive Director Shri Swarup
and Shri Rastogi and Shri Dembla, in the
Respondents office.
(ix) STC tried its level best to persuade the Govt. to
direct FCI to supply the goods, for export to
STC, and to modify its order dated 24.4.92 for
almost more than 3 months, but did not
succeed.
(x) By this order/refusal to direct FCI to make
supplies to STC, STC was disabled to make
shipment of the balance contract quantity.
Disabled is defined in Stroud’s judicial
th
Dictionary (10 Edition) Vol.2 “made
incapable of doing” and this is precisely what
was the result of the refusal of the Government.
(xi) Assuming refusal of FCI to supply the contract wheat
or the Ministry of Food to issue directions to FCI to make
the supply was for any reason, not conclusive and STC had
to show that they could not procure it from anywhere else,
the following two points are to be appreciated:-
a) The contract was for supply of Indian wheat of
1991-92 Crop. STC could not procure this
commodity from outside India (Contract clause 2
and Annexure I thereto).
b) It has been admitted by the claimants against item
(v) at page 59 of their arguments that PJ. Haryana
and UP are the only surplus wheat producing
States. In fact in India it was Punjab and Haryana
only wherefrom substantial quantities of wheat
could be procured, being surplus wheat producing
States but there was control and ceiling on holding
and acquisition of wheat under the Essential
Commodities Act of 1955, even by licensed dealers
and a person who was not a licensed dealer could
not acquire and hold more than 25 Quintals of
wheat in the State of Haryana and 10 Quintals in
the State of Punjab.
xxx xxx xxx
Therefore, the position even in 1992 was that a licensed
dealer could not sell in excess of 25 quintals of wheat to a
non-licensee at any one time, nor could a non-licensee hold
stock of more than 25 quintals of wheat. The Govt.
departments and Food Corporation of India were exceptions.
xxx xxx xxx
CS(OS) 788A/1996 Page 18 of 29
The position in 1992, therefore, was that a wholesale licensed
dealer could not stock wheat exceeding 250 quintals and no
licensed dealer could sell more than 10 quintals of wheat to a
person other than a licensed dealer nor could a non-licensee
hold in stock more than 10 quintals of wheat. Government
departments and Food Corporation of India were exempt
from this order.
xxx xxx xxx
The net effect of this latest order of 1989 as amended upto
1992 was that no licensee could sell even 10 quintals or more
of wheat to a person other than a licensed retailer at any one
time and that therefore STC could not obtain even one quintal
of wheat in the State of UP from the year 1989 till the year
1992 (including August’ 92).
The Food Corporation of India was, however, exempted.
(xv) The net effect of these orders, therefore, was that at no
time, in the year 1992, STC could obtain more than 10 and 25
quintals :respectively, from a licensed dealer, in wheat, in
Punjab & Haryana” at any one time, nor could store more
than the said 10 and 25 quintals in Punjab & Haryana
respectively”. In the state of Uttar Pradesh, however, STC
could not obtain even one quintal of wheat at the relevant
time.
It would have firstly been a well high impossible task
for STC to collect 27,591 MTs of wheat of a uniform variety,
of the contract quality, in such small parcels from various
dealers and secondly to collect it, STC would have to store it
at one or more places in either of the 2 States before it could
finally transport it to port towns, but STC could not do so
because of the aforestated control orders in the two states of
Punjab and Haryana.
The said orders, however, exempted departments or
Institutions of the Government, their organizations and the
Food Corporation of India, established under the Food
Corporation of India Act, 1964 from the operation of the said
orders.
(xvi) Therefore, STC could not procure 27,591 MTs of
wheat for export, from any source other that FCI, because of
the aforestated Control Orders. Even if STC went all the
way along to achieve the impossible and to procure the same
in lots of 10 to 25 quintals, STC could not stock the same to
be able to transport it to the Port towns and export the same,
FCI was exempt from this limitation and was, therefore, the
only feasible source of supply of the huge quantities for
export.
(xvii) STC, therefore, continued to make earnest efforts with
Ministry of Food directly and through the Ministry of
CS(OS) 788A/1996 Page 19 of 29
Commerce, STC’s administrative Ministry to direct FCI to
make supply to STC for export of the balance of the quantity
unshipped and after issue of the order of 24.4.92 to relax the
same but did not succeed and the refusal of FCI and Ministry
of Food remained firm.
(xviii) As a result the contracts for the balance quantity
became at all events, impossible of performance and Section
56 of the Contract Act became applicable and the Respondent
stood discharged of its obligations in respect of the balance
quantity of 27,591 MTs. “
14. Ms. Anand also pointed out that respondent-STC’s witnesses
Shri N.C. Dembla and Shri D. Sudhakaran had proved the Ministry of
th
Food’s directive issued vide letter dated 24 April, 1992 advising
respondent-STC that it would not be possible to commit FCI procured
stocks against STC’s outstanding contracts of wheat. These witnesses
also stated that respondent-STC did its best, directly and through
th
Ministry of Commerce to seek relaxation of the order dated 24
April,1992, but did not succeed. Thus, she submitted that by the act
th
of the Government dated 24 April, 1992, STC was barred from
supplying the remaining quantity of wheat to the petitioner.
th
15. Ms. Anand contended that from 24 April, 1992 it became
impracticable and, in fact, impossible for respondent-STC to perform
its obligation under the Agreements executed with the petitioner-
objector. She submitted that respondent-STC stood relieved from the
performance under the said Agreements by virtue of Section 56 of the
Indian Contract Act, 1872 (hereinafter referred to as “Contract Act”).
16. In this context, Ms. Anand also relied upon the Supreme
Court’s judgment in the case of Smita Conductors Ltd. v. Euro Alloys
CS(OS) 788A/1996 Page 20 of 29
Ltd. reported in (2001) 7 SCC 728 wherein the Apex Court has held
as under :-
“ 14. Further, the arbitrators had held that having considered
the March 1991 Reserve Bank of India‟s circular imposing
restrictions on the imports of certain categories of goods due
to difficult balance of payments position prevailing at the
relevant time and letter of credit of Rs.25 lakhs and above
should be referred by the local bank branch to the head office
for prior approval and in excess of Rs 50 lakhs and above
should be referred by the banks to the Controller, Exchange
Control Department, Central Office, Reserve Bank of India,
for clearance, and there is no time-limit so far as these
restrictions are concerned. The arbitrators noticed that the
restrictions set by Reserve Bank of India had created a
situation in which the appellant had difficulty in arranging
the opening of letters of credit so as to conform to the terms
of the contract although it could be noted that many
applications were submitted by the appellant to Bank of
Baroda after the contractual deadline; that several shipments
were made against the letter of credit opened after the
contractual deadline; that thus it has been established by the
documentary evidence to both Contracts Nos. S-142 and S-
336 that declaration of force majeure clause was present,
though belatedly. The arbitrators ultimately concluded that
Reserve Bank of India‟s directives interfered with Contracts
Nos. S-142 and S-336 which would have the effect of delaying
the opening of the letters of credit by the buyer under the
specified contracts. The arbitrators were of the opinion that
the force majeure clause had no limitation on the period of
suspension of the contract while the execution was affected by
a valid force majeure; that it had been accepted by both the
parties and that the restriction and requirements imposed by
Reserve Bank of India‟s directives must be construed as
having caused interference in and/or hindrance to the
execution of the contract timewise; that though time had been
considered to be of the essence condition, the inclusion of the
force majeure clause which provided no time-limit to the
suspension of the contract caused by conditions envisaged
herein, though unusual, it was accepted that the earlier
contracts would be negotiated and executed successfully by
the parties to the dispute.”
17. The Supreme Court in Markfed Vanaspati & Allied Industries
Vs. Union of India reported in (2007) 7 SCC 679 has outlined the
approach to be adopted by Courts while dealing with challenges to an
Arbitral Award. The Supreme Court in the said judgment has held as
CS(OS) 788A/1996 Page 21 of 29
under :-
“17 . Arbitration is a mechanism or a method of resolution of
disputes that unlike court takes place in private, pursuant to
agreement between the parties. The parties agree to be bound
by the decision rendered by a chosen arbitrator after giving
hearing. The endeavour of the court should be to honour and
support the award as far as possible.”
18. Before I analyse the facts, it would be appropriate to appreciate
the concepts of impossible Agreement, frustration and force majeure.
Section 56 of Contract Act reads as under :-
“ 56. Agreement to do impossible act. -- An agreement to do
an act impossible in itself is void.
Contract to do act afterwards becoming impossible or
unlawful.-- A contract to do an act which, after the contract
is made, becomes impossible, or, by reason of some event
which the promisor could not prevent, unlawful, becomes
void when the act becomes impossible or unlawful.
Compensation for loss through non-performance of act
known to be impossible or unlawful.-- 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 promisor must make
compensation to such promisee for any loss which such
promisee sustains through the non-performance of the
promise.”
19. In fact, Clause 12 of the Agreements which incorporate the
force majeure clause reads as under :-
“Clause – 12 Force Majeure :
(a) This contract is subject to force majeure. If at any
time during the continuance of this contract either party is
disabled to perform in whole or in part any obligations under
the contract because of any hostility, military operations of
any character, acts of public enemy, civil commotion,
sabotage, strikes, lock-out, blockade, fire, floods, explosions,
epidemics, quarantine restrictions, war whether declared do
not, acts of God and Acts of Government (including but not
restricted to prohibition of exports and exports), then the date
of fulfillment of any engagement shall be postponed during
the time when such circumstances operate and any
waiver/extension of time in respect of delivery of the whole or
part of the contracted goods shall not be deemed to be a
waiver/extension of time in respect of remaining deliveries
CS(OS) 788A/1996 Page 22 of 29
and if operation of such circumstances exceeds three (3)
months, each party shall have the right to refuse further
performance of the contract which case neither party shall
have the right to claim eventual damages.
(b) The party which is unable to fulfil its engagement
under this contract owing to force majeure must immediately
inform the other party of the existence and/or determination
of the circumstances preventing the performance of the
contract. Certificate issued by a recognised Chamber of
Commerce in the country of such party shall be sufficient
proof of existence of the above circumstances and their
duration.”
20. As far as the concept of force majeure is concerned, I find that
Supreme Court in M/s. Dhanrajamal Gobindram Vs. M/s. Shamji
Kalidas and Co. reported in AIR 1961 SC 1285 has held that the
intent of such a clause is to save the performing party from the
consequences of anything over which he has no control.
21. The Apex Court in Satyabrata Ghose Vs. Mugneeram Bangur
and Co. & Anr. reported in AIR 1954 SC 44, para 9 , has further held
that the word “impossible” in Section 56 of Contract Act has not been
used in the sense of physical or literal impossibility. The Supreme
Court held that performance of an act may not be literally impossible
but it may be impracticable and useless from the point of view of the
object and purpose which the parties had in view; and if an untoward
event or change of circumstances totally upsets the very foundation
upon which the parties rested their bargain, it can very well be said
that the party finds it impossible to do the act which he promised to
do.
22. The Supreme Court in Smt. Sushila Devi & Anr. Vs. Hari
CS(OS) 788A/1996 Page 23 of 29
Singh & Ors. reported in AIR 1971 SC 1756 has held as under :-
“ 11. ……Section 56 of the Indian Contract Act. The view that
Section 56 applies only to cases of physical impossibility and
that where this section is not applicable recourse can be had
to the principles of English law on the subject of frustration is
not correct. Section 56 of the Indian Contract Act lays down a
rule of positive law and does not leave the matter to be
determined according to the intention of the parties. The
impossibility contemplated by Section 56 of the Contract Act is
not confined to something which is not humanly possible. If the
performance of a contract becomes impracticable or useless
having regard to the object and purpose the parties had in
view then it must be held that the performance of the contract
has become impossible. But the supervening events should
take away the basis of the contract and it should be of such a
character that it strikes at the root of the contract.
12. ……That object became impossible because of the
supervening events. Further the terms of the agreement
between the parties relating to taking possession of the
properties also became impossible of performance. Therefore
we agree with the trial court as well as the appellate court that
the contract had become impossible of performance.”
23. The admitted position on facts is that the respondent-STC could
procure wheat for export only from two sources, namely, the grain
markets and from the FCI. In fact, at the time when Agreements
th th
dated 10 September, 1991 and 14 November, 1991 were executed
between petitioner and respondent-STC, admittedly Control Orders
issued by the major grain producing States were in existence which
rendered it impossible for anyone including respondent-STC to
procure uniform variety of contracted quantity from open grain
markets. However, respondent-STC was confident of procuring the
contracted quantity from public stock of wheat held by FCI. This is
th th
clearly apparent from the letters dated 11 April, 1991, 24 April,
th
1991 and 17 May, 1991 issued by Government of India to the
respondent-STC. The three letters are reproduced hereinbelow :-
CS(OS) 788A/1996 Page 24 of 29
th
i) Letter dated 11 April, 1991
th
No. 4/1/9-EP (Agri-II) 11 April, 1991
To ,
1. The Chairman,
S.T.C. of India,
New Delhi.
2. The Chariman,
M.M.T.C. of India,
New Delhi
Sub : Export of wheat.
Sir,
In partial modification of this Ministry‟s letter of even
st
number dated 21 March, 1991 on the subject cited above,
the undersigned is directed to convey that it has been decided
to allow export of 5.5 lakh MTs and 4.5 MTs of wheat and/or
wheat Atta on Government account by the M.M.T.C. and the
th
S.T.C. of India respectively for shipments by 30 June, 1991.
Sd/-
(RAVINDER SINGH)
DEPUTY SECRETARY TO
THE GOVERNMENT OF INDIA
th
ii) Letter dated 24 April, 1991
No. 4/1/91-EP (Agri.II) the 24th April, 1991
To,
1. The Chariman,
State Trading Corpn. of India,
New Delhi.
2. The Chairman,
Minerals and Metals Trading Corpn. of India
New Delhi.
Subject : Export of wheat.
Sir,
Government have decided to allow export of ten lakh
MTs of wheat and /or wheat products to GCA countries for
1991-92 on Government account, out of which 5.5 lakh MTs
and 4.5 lakh MTs of wheat and /or wheat products is to be
CS(OS) 788A/1996 Page 25 of 29
exported by MMTC and STC respectively. Government
liability in respect of loss on exports of both wheat and wheat
products would continue to be restricted to a maximum of
30% of FOB sales realization. The above quota for exports
would be in addition to the quota allocated to STC and
MMTC vide this Ministry‟s letter number 4/1/91-EP(Agri-II
dated 11.4.91.
2. FCI would also continue to make wheat available to
STC/MMTC at the rate of Rs.2150 per MT at ex-godown-port
towns to keep up exports.
Yours faithfully,
Sd/-
(Ravindra Singh)
Deputy Secretary
th
iii) Letter dated 17 May, 1991
No. 40/28/91/E-II/245 Dated 17th May, 1991
1. The State Trading Corporation
of India Ltd.
Jawahar Vyapar Bhawan,
Tolstoy Marg,
New Delhi – 110001
2. The Minerals and Metals Trading
Corporation of India Limited,
Scope Building,
Core No.-1 Lodhi Road,
New Delhi-110003
Subject: Export of wheat and /or Wheat Products to
GCA by STC and MMTC on Government
account during 1991-92.
…
Sirs,
Please refer to Ministry of Commerce‟s letter No.
4/1/91 EP Agri.II) dated 24.4.1991 and STC‟s letter dated
10.5.1991 on the above subject.
2. It has been decided to allow export of 10,00,000 (Ten
lakh) MTs of Wheat and/or Wheat products to GCA by the
State Trading Corporation of India Ltd., New Delhi and the
Mineral and Metals Trading Corporation of India ltd., New
Delhi on Government account during 1991-92. Out of
10,00,000/- (Ten lakh) MTs of wheat and/or wheat products,
5,50,000/- (Five lakh and fifty thousand) and 4,50,000/-
(Four lakh and fifty thousand) MTs will be exported by
MMTC and STC respectively. Government liability in respect
CS(OS) 788A/1996 Page 26 of 29
of loss on export of both wheat and wheat products would
continue to be restricted to a maximum of 30% of FOB sales
realisation. Ministry of Commerce have issued instructions
separately that FCI would also continue to make wheat
available to STC/MMTC at the rate of Rs.2,150/- per MT at
ex-godown-port towns to keep up exports.
3. You are, therefore, advised to approach Jt. Chief
Controller of Imports & Exports, CLA., New Delhi to whom
suitable instructions have been issued in the matter.
Yours faithfully,
Sd/-
(V.K. LUTHRA)
Controller of Imports & Exports
for Chief Controller of Imports & Exports
th
24. However, on 24 April, 1992, Government of India issued a
directive to respondent-STC stating, “…. in view of the tight stock
position of wheat with FCI, it would not be possible to commit export
of wheat from FCI procured stocks against outstanding contracts of
th
STC ……” On 26 November, 1992, Government of India again
th
wrote to respondent-STC confirming that “ as from 24 April, 1992
the Government of India prohibited further export of wheat from
Public Stocks until further notice. All outstanding quantities/
shipments stand cancelled. ”
25. In my opinion, the majority view of the AT rightly concluded
th th
that the letters dated 24 April, 1992 and 26 November, 1992
constituted a supervening event of such a character that it struck at the
root of the Agreements and rendered the performance of the said
Agreements impossible. In fact, the agreements executed between the
parties stood frustrated owing to the refusal of the Government of
India to release wheat from public stock held by FCI.
CS(OS) 788A/1996 Page 27 of 29
26. In my opinion, Clause 17 referred to by learned counsel for
petitioner-objector has no relevance to the present proceedings as the
said clause only absolves Government of India of any liability under
the agreements executed between the parties.
27. As far as the petitioner-objector’s contention that respondent-
STC could have procured the wheat from open grain markets is
concerned, I am of the opinion that in view of the Control Orders that
were in existence in the major grain producing States at the relevant
time, respondent-STC could not have procured uniform variety of
huge balance quantity, that is, 27,591 MT of Indian wheat from open
grain markets. In fact, even if respondent-STC had tried to procure
the same in small lots of 10 to 25 quintals, respondent-STC would not
have been able to transfer it to port and export the same. In fact, as
stated hereinabove, only FCI which was exempt from this limitation
was the only practical source of supply of such a huge quantity of
Indian wheat – which admittedly was prohibited by virtue of
th th
Government of India’s directive/letters dated 24 April, 1992 and 26
November, 1992 from procuring the same and handing over to
respondent-STC for export purposes. I also find that though
respondent-STC had led evidence that not enough grain of uniform
quantity was available in all the grain markets, petitioner-objector had
not led any evidence that sufficient quantity of wheat was available in
the open market to enable the respondent-STC to meet its export
obligation. Consequently, force majeure was clearly attracted to the
facts of the present case.
CS(OS) 788A/1996 Page 28 of 29
28. In any event, the view taken by majority of AT with regard to
the interpretation of the force majeure clause in the light of
Government of India’s letters is a plausible view and cannot be called
as impossible of acceptance and, therefore, the question of
substituting my view with that of the Arbitrators does not arise.
29. Consequently, present objections being devoid of merits are
dismissed and the Award is made rule of the Court by virtue of which
the claim of the petitioner-objector was disallowed and respondent-
STC’s counter claim to the extent of US$ 9,730.59/- was allowed but
without interest. Registry is directed to prepare a decree in terms
thereof. With the aforesaid observations, present application and suit
stand disposed of.
MANMOHAN, J.
DECEMBER 16, 2009
rn
CS(OS) 788A/1996 Page 29 of 29