CIVIL APPELLATE JURISDICTION v. THE JHARKHAND STATE CO-OPERATIVE LAC MARKETING AND PROCUREMENT FEDERATION LIMITED

Judgment

1. The appeal is arising out of the judgement and decree dated 11th December, 2023 passed by the learned Single Judge in a suit for recovery of damages due to breach of contract.

2. The suit was dismissed on a finding that the contract between the parties stands frustrated. - 2 -

3. The plaintiff/appellant carries on the business, inter alia, as an exporter and trader in Shellac. The defendant/respondent is a co-operative society having its office at Ranchi, Jharkhand.

4. The parties have a long-standing business relationship.

5. The case of the plaintiff in a nutshell is that pursuant to the negotiations between the parties, the plaintiff agreed to purchase and the defendant agreed to sell 24 metric ton shellac of specified grade confirmed by the latter in terms of a letter dated 15th April 2000.

6. In terms of agreement, the plaintiff deposited 10 percent of the contract value as the earnest money by a demand draft dated 17th April 2000, drawn on Indian Overseas Bank, amounting to Rs.2,73,600/-. The acknowledgement for the same was made on 18th April 2000 by the defendant.

7. On 17th April 2000 the plaintiff inquired regarding supply of the first lot of 12 metric ton shellac so that the plaintiff’s representative may collect the same and deposit the balance consideration money.

8. The plaintiff entered into contract to purchase shellac for supplying the same to Egyptian buyers.

9. There was a contractual obligation on the defendant to supply the shellac within 20th May 2000 and since the stipulated supply was not made, the plaintiff by a letter dated 16th May 2000 inquired as to when the goods would be ready for delivery.

10. The defendant by a communication dated 26th July, 2000 terminated the contract on the pretext of labour problem and also returned the earnest money, previously deposited by the plaintiff. - 3 -

11. It is the contention of the plaintiff that in spite of extension of delivery date till 1st September 2000, the defendant neglected, failed and refused to deliver the said shellac and the plaintiff had made known to the defendant that the former is an exporter and needed goods for export. To meet his contractual obligations, the plaintiff had to purchase shellac at an enhanced rate and suffered loss and loss of profit to the tune of Rs.14,23,920/- being the difference between the market price and contract price as on 1st September 2000.

12. The suit is essentially for recovery of damages claimed to have been suffered by the plaintiff by reason of failure on the part of the defendant to supply 24 MT shellac of specified quality.

13. The defendant in the written statement has denied any concluded contract entered into between the parties. The defendant further alleged that proposal of the plaintiff for purchase of T.N. Shellac from the defendant did not materialise inasmuch as immediately after such proposal was given and the same was “provisionally accepted” by the defendant; the chimney of the defendant’s factory was damaged which “physically affected” the production of T.N. Shellac. At an about the same time, there was some labour trouble in the defendant’s factory. Tender was invited for repairing of the chimney. In view of such development, namely, labour trouble and the defect in chimney beyond the control of the defendant, the ‘Force Majeure’ clause is applicable and in view thereof, the defendant expressed its inability to give effect to the proposal which was purchase of T.N. Shellac by the plaintiff. - 4 -

14. On the basis of the pleadings, the learned Single Judge has framed the following issues: 1) Is the suit barred under the provision of section 57 read with bye-law of Jharkhand Co-operative Societies Act 1935 and therefore, not maintainable? 2) Did the plaintiff and the defendant entered into any agreement on 15th April 2000? 3) Did the defendant commit any breach of agreement for sale with regard to claim a sum of Rs.14,23,920/-? 4) Is the plaintiff entitled to claim a sum of Rs.14,23,920/-? 5) Has the plaintiff suffered any loss or damage? 6) To what further or other relief is the plaintiff entitled?

15. On the basis of oral and documentary evidence, the learned Single Judge answered issue nos. 1 and 2 in favour of the plaintiff. However, issue no. 3 was decided against the plaintiff with the following observation: “Break down of machineries are included in force majeure. It is neither alleged nor in evidence that break down of machineries was a ploy of the defendant to avoid contractual obligation. Therefore, from the facts and circumstances of the case and material evidences, it is clear that the defendants were prevented from supplying stipulated T.N. Shellac by supervening circumstances beyond control. This is a case of frustration of contract, as contemplated in section 56 of the Indian Contract Act, 1872 and not a case of breach of contract”. As a corollary to the aforesaid finding, the issue nos. 4,5 and 6 were decided against the plaintiff.

16. Hence, this appeal. - 5 -

17. The defendant however has not filed any cross appeal against the finding in issue no. 1 and 2. Submissions on behalf of the plaintiff/appellant

18. Mr. Suvasish Sengupta, the Learned Counsel appearing on behalf of the appellant submits with regard to issue no 3 framed in trial relating to the breach of contract, that in spite of there being an agreement,

the defendant delayed the delivery and on 23rd June, 2000 purportedly raised two grounds being lack of productivity and rise in price by the Board and thereafter on 26th July, 2000 terminated the agreement on the plea of acute labour problem and strike and returned the 10% earnest money deposited by plaintiff. Hence, it was argued that the defendant had breached the contract.

19. The learned counsel submits that the defendant claimed that the failure in performance was due to circumstances beyond its control, primarily the damage to a chimney, citing documents marked as Exhibits- J, K and N. However, this claim of frustration due to chimney damage was raised for the first time only in paragraph 8 of the Written Statement. Mr. Sengupta argued that even if the chimney was damaged or there was a strike, the defendant had a duty to inform the plaintiff, which they failed to do. The plaintiff was only informed by a letter dated 26th June 2000 and along with the letter the defendant refunded the earnest money. The defendant's prolonged silence of over three months was presented as indicative of suspicious conduct and malafide intent.

20. The learned counsel draws our attention to the petition of Employees/Workers dated 17th April, 2000, in respect of damage to the - 6 - chimney. It is argued that the above petition was generated as an afterthought by the management of the Defendant despite having full knowledge of the damaged chimney by issuing a so-called Tender Notice for repair of the chimney by an Advertisement in a Ranchi Newspaper on 17th February, 2000.

21. Mr. Sengupta while arguing has referred to the evidence of the defendant’s witness, Mr. Rabindra Kumar to show that the oral evidence of Rabindra is contrary to the documentary evidence and the relevant portions on which reliance is placed is set out below:- Examination-in-chief of Rabindra Kumar “Q21. Please see Ext. K (26th July,2000) and tell Milord what is this document about. Why was this document issued? Ans. In this letter it was stated that due to break down of the chimney and the boiler in the factory, production work came to a standstill and, therefore, negotiations could not take place and 10 per cent of the earnest money deposited by the plaintiff would be refunded. Q31. Do you accept the plaintiff's contention as contained in this letter that the reason for cancellation is rise in market price of contracted goods as appearing from your letter no. 86 dated 23rd June, 2000 to the Chairman of Shellac Export Promotion Council? Ans. I do not accept the contention of the plaintiff as mentioned in this letter. Q35. Did the plaintiff ever inform you before refund of the earnest money that they had already entered into a contract with a foreign - 7 - buyer for sale of the shellac on the basis of the defendant's letter of 15th April, 2000? Ans. No. Till then the samples were yet to be approved. Due to break down of the chimney and the boiler as I have already stated earlier, the production in the factory had stopped.”

22. Mr. Sengupta while setting out the relevant portions submits that analysis of the letter dated 26th July, 2000 (Exhibit-K) shows that the issue of breakdown of the chimney was never mentioned; in the letter dated 23rd June, 2000 (Exhibit.-J) issued by Bihar State Co-operative Lac Marketing Federation Ltd., the subject was "sudden rise in lac market price" and in the letter dated 26th July, 2000 (Exhibit. K), the defendant mentioned that the production work of shellac has been stopped due to acute labour problem and strike. The reason has been reiterated in the reply dated 22nd September, 2000. Hence, the oral evidence is contrary to the documentary evidence.

23. With regards to issue nos. 4, 5 and 6, the Learned Counsel of the plaintiff has submitted that the plaintiff has suffered loss and damage due to non-delivery of the aforesaid goods. During 23rd May 2000 and 1st August 2000, the plaintiff exported goods but could not get the said machine-made T.N. Shellac at the rate of Rs.114/- per kg as agreed between the plaintiff and the defendant thereto.

24. Mr. Sengupta has drawn our attention to the letters dated 16th August, 2000 and 12th September, 2000 respectively, wherein the plaintiff demanded a sum of Rs.14, 23,920/- as damages being the difference in market price and the contract price. In reply, the defendant, by letter dated - 8 - 22nd September, 2000 disputed the existence of a concluded contract. The plaintiff vide letter dated 26th September, 2000, reiterated his stand.

25. Mr. Sengupta has relied on the Calcutta Shellac Market Report published by the Shellac Export Promotion Council dated 26th July, 2000 [Exhibit-U & U/l] and 6th September, 2000 (Exhibit-Q] to justify the claim towards damages. He submitted that the market price of machine-made T.N. Shellac increased from Rs.148/- per Kg. to Rs.173.33/- per Kg. during this period. The said report of 6th September, 2000 is binding between the parties. The Shellac Export Promotion Council is the Registering Authority for all export sales of Lac Products as per the Exim Policy of the Govt. of India.

26. Mr. Sengupta has claimed a sum of Rs.14, 23,920/- as damages by way of loss of profit. The breakup of such claim being the difference between the market price and contract price being (Rs.173.33 - Rs.114.00) = Rs.59.33 per Kg. Therefore, in terms of the contract for 24MT equivalent to 24,000 Kg, the plaintiff would be entitled to Rs.14,23,920/- (Rs.59.33 X 24,000kg).

27. The learned counsel has referred to section 57 of the Sales of Goods Act which deals with justification of damages due to non-delivery. It is submitted that the said section recognises that where the seller wrongfully neglects or refuses to deliver the goods to the buyer, the buyer may sue the seller for damages for non-delivery.

28. The learned counsel goes on to place reliance on the case of Firm H. Sham Sunder and Sons -vs. - Ram Chand Spinning and - 9 - Weaving Mills1 wherein the Hon'ble High Court held that the contract was governed by Section 57 of the Sales of Goods Act, 1930 and that the difference in the market price is the measure of damages for the purpose of determining the amount of compensation payable to the buyer.

29. In furtherance of the aforesaid proposition reliance has been placed on Vishwanath vs. Amarlal2. In this case, reference was made to Erroll Mackay vs. Kameshwar Singh3, and Ismail Sait and Sons vs. Wilson & Co.,4 wherein it was held that it is not necessary for the plaintiff to prove that he purchased the item from other sources at a price exceeding the contract price and sustained a loss. According to these decisions, the fact that the buyer sustained no actual loss from the seller’s failure to deliver the goods is no ground for awarding nominal damages to the buyer. The illustration (a) to Section 73 of the Contract Act indicates that the buyer is entitled to receive from the seller by way of compensation the sum by which the contract price falls short of the price for which the buyer might have obtained goods of like quality at the time when they ought to have been delivered.

30. Reliance is also placed by the learned counsel on the case of The Standard Chemicals Company (P) Ltd, Fort Bombay vs. The Palakol Co-Operative Sugars Ltd.5 The relevant paragraphs have been reproduced below:- “8. In view of this correspondence, the legal position urged by the learned counsel relying on Ramayya v. Firm of Gulfarosh 1 AIR 1957 P&H 90 2 AIR 1957 MB 190:1956 SCC Online MP 76 3 AIR 1932 PC 196 4 AIR 1919 Mad 1053 5 (1988) 2 ALT 405: 1987 SCC Online AP 380 - 10 - Mohideen [(1958) 2 An. W.R. 384.] that there is a fundamental change in the position since the contract was entered into and the doctrine of frustration can be invoked cannot be accepted and hence I am of the opinion that the trial Court is right in holding that the defendant-Company agreed to supply the contractual quantity of sulphur making the plaintiff to believe that they would supply from the existing stock and that the agreement has not become impossible of the performance by virtue of the events that took place subsequent to entering into the contract and the frustration did not take place in view of the change in the import policy of the Government and accordingly I confirm the finding on issues 3, 4 and 6.

10. Let me examine the legal position on this question. Section 57 of the Sale of Goods Act, (Act III of 30) simply declare. “Where the seller wrongfully neglects or refuses to deliver the goods to the buyer, the buyer may sue the seller for damage for non-delivery.”

14. The principle embodied in Section 51(3) of the English Sale of Goods Act is also deduced from the Illustration given in Sec. 73 of the Contract Act. It is well known that the market price rule was celebrated in Hadley v. Baxendale [156 E.R. 156.] . See Union of India v. Commercial Metal Copn. [A.I.R. 1982 Delhi, 267.] . It is also approved by the Privy Council in India Jamal v. Moola Dawood & Sons [A.I.R. 1915 P.C. 47.] . Whether this rule of market price should depend upon the actual loss sustained by the buyer was examined in detail by the earliest judgment of the Madras High Court in Ismail Sait & Sons v. Wilson & Co. [A.I.R. 1919 Madras, 1053.]- The Division Bench consisting of Wallis, C.J., and Sadasiva Aiyar, J., allowed the appeal where the trial Court awarded only nominal damages for the breach of damages to deliver goods when the plaintiff could not - 11 - show the actual loss. It was ruled that the fact that the buyer sustained no actual loss when the seller failed to deliver the goods is no ground for awarding nominal damages to the buyer. The buyer is entitled, as indicated in the Illustration (a) to the section, to receive from the seller by way of compensation the sum by which the contract price falls short of the price for which the buyer might have obtained goods of like quality at the time when they ought to have been delivered. Even though the learned Judges delivered separate judgments, they made it clear that the question is clearly governed by the illustration (a) to Section 73 when there is breach of contract due to non- delivery. This case is followed by a Division Bench of Madhya Bharat High Court in Vishwanath v. Amarlal [A.I.R. 1957 Madhya Bharath, 190.] holding that it is not necessary for the plaintiff to prove that he purchased the goods from other sources at a price exceeding the contract price and sustained a loss. Further, the Privy Council in Erroll Mackay v. Maharaja Dhiraj Kameshwar Singh [A.I.R. 1932 Privy Council, 196.] indicated clearly the difference in price between the contract price and the market price is the sole test for claiming damages. However, a dissenting note was struck in Union of India v. Tribhuwan Das Lalji Patel [A.I.R. 1971 Delhi, 120.] by a single Judge with the Madras High Court and Madhya Bharath High Court holding that the Government who sustained loss for the non-supply of goods can succeed only by proving the actual loss of non-supply. This view was again dissented twice by the same High Court in All India Institute of Medical Sciences v. American Refrigeration Co. Ltd. [A.I.R. 1982 Delhi,

275.] and Saraya Distillery v. Union of India [A.I.R. 1984 Delhi,

360.] . On this question we have got the pronouncement of the Supreme Court in Muralidhar Chiranjilal v. Harishchandra Dwarakadas [A.I.R. 1962 S.C., 366.] . K.N. Wanchoo, J., while reiterating the principle of rule of market price in the case of non-delivery held: - 12 - “Even if the respondent did not actually buy them in the market at Kanpur on the date of breach it would be entitled to damages on proof of the rate for similar canvse prevalent in Kanpur on the date of breach if that rate was above the contracted rate resulting in loss to it.”

16. Mc Gregor on Damages, Fourteenth Edition, states at Page 424 at Paragraph 583 that the buyer is entitled to such damages even if he does not choose to rebuy them in the market, his loss will remain the same.

17. Thus, these judicial pronouncements make clear that on a reading of Section 73 read with the Illustration the crucial test is the market price on the date of breach. The damages shall be the difference of market rate and the contract rate. Once the breach of non-delivery is established, it is not essential for the purchaser to prove that he actually repurchased the goods and sustained loss. The law does not penalise the purchaser's inaction in not making the repurchase. The object of damage is only to place the purchaser in the same situation with respect to damages as if the contract has been performed.” (emphasis supplied)

31. Mr. Sengupta while submitting that the plaintiff is entitled to 18% interest on the awarded sum on and from May, 2000 till its actual realization argues that as per Section 34 of the Code of Civil Procedure, 1908, the interest should not exceed 6% per annum but proviso to Section 34 is clear that where the liability in relation to sum so adjudged had arisen out of a commercial transaction, the rate of such interest may exceed 6% per annum but shall not exceed the contractual rate of interest or where there is no contractual rate, the rate at which the monies are lent - 13 - and advanced by a nationalized bank in relation to a commercial transaction. Submissions on behalf of the defendant/respondent

32. Per contra, Mr. Sakya Sen, the learned Senior Counsel appearing on behalf of the defendant submits that there was no concluded or binding contract existing between the parties, as essential terms such as the specification of goods, delivery schedule, and payment terms had not been finalized as would be evident from Exhibits- A, B, C, D and E. The said exhibit would show that there is only a provisional confirmation of the offer and is dependent upon the finalisation of the terms and conditions offer deposit of the earnest money. Moreover Exhibit-F would show that the essential terms and conditions of the contract were yet to be finalised.

33. There was no agreement with regard to mode and manner of delivery vis-à-vis whether delivery would be in one go or in batches. Exact specifications of Shellac were not settled. Plaintiff for the first time suggested a new condition, namely, sending of samples by the defendant so that suggestions can be given for improving quality.

34. The learned Senior Counsel has also referred to Exhibits-I and H to show that essentials were not finalised and that the contract between the plaintiff /appellant and the defendant was not concluded.

35. The learned counsel has argued that the plaintiff’s reliance on money receipt (Exhibit-G) as a final acceptance is erroneous. Plaintiff’s claim that it assumed there was a concluded contract on the basis of use of the word “advance” is not tenable because the said amount was admittedly - 14 - an earnest money deposit. The term “advance” written in receipt was a mere typographical mistake and does not conclude contract.

36. Mr. Sen submits that since there was no concluded contract, there is no question of termination. The proposal of the plaintiff was not materialized because chimney of defendant’s factory was damaged and there was labour strike which affected the production from 17th April 2000.

37. Mr. Sen further submits that the alleged export contracts entered into by the plaintiff with foreign buyers are irrelevant and not binding on the defendant, as they were made without a final concluded contract between the parties. He also pointed out that the plaintiff has himself deposed that the defendant was not the sole source of supply for fulfilling those export obligations and being a trader engaged in continuous business, the plaintiff covers his business requirements from various suppliers from the market. Therefore, the plaintiff’s claim that he has suffered damages by way of loss of profit due to failure of defendant to supply the Shellac is untenable as the plaintiff has failed to prove exclusive reliance on the defendant’s supply for meeting its foreign obligations. Even assuming the existence of a binding contract, the alleged damages are merely indirect and remote consequences, not legally attributable to the defendant. Furthermore, it was argued that the earnest money was deposited on 18th April 2000 and the contracts with the foreign buyers were entered on 18th April 2000 and 19th April 2000 indicating that the plaintiff had not depended upon the defendant’s supplies for fulfilling those obligations. - 15 -

38. The learned counsel further submits that the plaintiff had not informed the defendant that the purchase was intended for export purposes. The first proforma invoice dated 18th April 2000 is before receipt of money received by plaintiff. Thus, in the absence of a final and concluded contract prior to 18th and 19th April 2000, the plaintiff alone is responsible for its commitments under those proforma invoices.

39. The Learned Counsel submits that due to supervening impossibilities, namely, a labour strike and boiler breakdown, the performance of the contract became impossible, rendering it void under Section 56 of the Indian Contract Act, 1872. The defendant, by letter dated 26th July 2000, expressed its inability to perform the contract and returned the earnest money. As these events occurred after the date of the alleged contract and were not foreseeable with reasonable diligence, requirements of the 3rd paragraph of Section 56 are not satisfied, and thus, the defendant bears no liability to pay compensation.

40. To buttress his submissions, Mr. Sen places reliance on Satyabrata Ghose v. Mugneeram Bangur & Co6 (Para-9, 10 & 15) for the proposition that supervening impossibility discharges the contract and Markapur Municipality vs. Dodda Raraireddy7 (Para 4) to argue that in case of the sale of future goods and frustration of contract, no damage can be awarded if contract is not concluded.

41. He further submits that the plaintiff’s claim is erroneous because plaintiff’s claim is on account of loss of profits which does not arise naturally in the course of things in view of Sec.73 of Indian Contract Act, 6 AIR 1954 SC 44 7 AIR 1972 AP 299 - 16 -

1872. The plaintiff has not suffered any actual loss. The plaintiff has not proved that he delivered the goods to purchaser at the price prevailing on 6th September 2000 or that he has been monetarily penalised by purchaser as consequence of cancellation under Section 73. To strengthen his submission Mr. Sen has placed reliance on Karsandas H. Thacker v. M/s The Saran Engineering Co. Ltd.8 (Paragraphs 13 & 14) for the proposition that loss of profit does not arise naturally in course of things.

42. Mr. Sen submits that the three situations as contemplated under Section 73 has not been established by the plaintiff as they have not shown any fax message wherein the foreign contract was cancelled and deposed that defendant was one of the various suppliers.

43. The Learned Counsel has placed reliance on the case of Murlidhar Chiranjilal vs. Harishchandra Dwarkadas and Anr.9 wherein the Hon’ble Supreme Court has stated that the quantum of damages for a breach of contract has to be determined under Section 73 of the Contract Act, 1872. It has also stated the following two principles upon which the damages in such cases are calculated: “9. The two principles on which damages in such cases are calculated are well-settled. The first is that, as far as possible, he who has proved a breach of a bargain to supply what he contracted to get is to be placed, as far as money can do it, in as good a situation as if the contract had been performed; but this principle is qualified by a second, which imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach, and debars him from claiming any part of the damage is due to his neglect to take such steps : (British