M/S. Continental Enterprises Ltd. vs State Trading Corporation Of India Ltd. on 16 December, 2009

[Cites 16, Cited by 1]

Delhi High Court

M/S. Continental Enterprises Ltd. vs State Trading Corporation Of India Ltd. on 16 December, 2009

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 referred to as "Act, 1940") challenging the Award dated 31 st 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 10th September, 1991 respondent-STC agreed to supply to petitioner-

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objector 40,000 MT of Indian wheat. An addendum was executed between the parties on 23rd September, 1991whereby quantity of Indian wheat was increased from 40,000 MT to 50,000 MT.

3. On 14th 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 10th September, 1991 and 14th 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.

5. On 24th 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.

6. On 5th 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$ 9,70,000/-. On 7th 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.

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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.

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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.

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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 of balance quantities under the contract, at lease, upto 29th 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.

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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.

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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.

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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.

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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.

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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 claimant. 1st was contract dated 10.9.91 with addendum dated 23.9.91 - for a total quantity of 50,000 MTs + 10% - and the 2nd was contract dated 14.11.91 for a quantity of 60,000 MTs + 10%.

The Shipment period for the 1st contract was November, 1991 to January, 1992 an for the 2nd contract it was January 1992 to March, '92. A quantity of 20,000 MTs approximately was lifted during November, 1991 to 8th 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 Dictionary (10th 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 Food's directive issued vide letter dated 24th 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 Ministry of Commerce to seek relaxation of the order dated 24th April,1992, but did not succeed. Thus, she submitted that by the act of the Government dated 24th April, 1992, STC was barred from supplying the remaining quantity of wheat to the petitioner.

15. Ms. Anand contended that from 24th 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 dated 10th September, 1991 and 14th 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 clearly apparent from the letters dated 11th April, 1991, 24th April, 1991 and 17th 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

        i)     Letter dated 11th April, 1991


              No. 4/1/9-EP (Agri-II)                         11th 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 number dated 21st 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 S.T.C. of India respectively for shipments by 30th June, 1991.

Sd/-

                                                   (RAVINDER SINGH)
                                               DEPUTY SECRETARY TO
                                           THE GOVERNMENT OF INDIA



       ii)    Letter dated 24th 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

iii) Letter dated 17th 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

24. However, on 24th 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 STC......" On 26th November, 1992, Government of India again wrote to respondent-STC confirming that "as from 24th 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 that the letters dated 24th April, 1992 and 26th 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 Government of India's directive/letters dated 24th April, 1992 and 26th 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

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