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2006 Supreme(Del) 553
High Court Of Delhi
SHREE DIGVIJAY CEMENT CO.LTD. - Appellant
Versus
STATE TRADING CORPORATION OF INDIA LTD. - Respondent
Decided On : 03/17/2006
Headnote:Contract Act, 1872 Section 222 - Duty of principal to indemnify the loss suffered by the agent - Agency to sell the goods on behalf of the principal - Loss suffered by the agent - Held that the principal/defendant is liable to compensate the loss suffered by the plaintiff.
[Para 53]
Introducing Material Fact: The material fact in this case involves the contractual relationship between Shree Digvijay Cement Co. Ltd. (the plaintiff) and the State Trading Corporation of India Ltd. (the defendant), specifically regarding the import of craft paper for manufacturing cement bags intended for export, and the subsequent unutilized stock following a government ban on cement export. The key issue is whether the plaintiff acted as an agent of the defendant in importing and converting the paper into bags, and whether the defendant is liable to compensate the plaintiff for the loss of unutilized craft paper bags.
Issue Raised: The primary issue is whether the relationship between the plaintiff and the defendant was of principal and agent, thereby making the defendant liable for the loss incurred due to unutilized craft paper bags, or whether the relationship was merely that of buyer and seller, in which case the defendant would not be liable.
Legal Provision (Section): The relevant legal provisions include Sections 182, 185, 186, 187, 188, and 222 of the Indian Contract Act, 1872. These sections govern the definition of agency, the creation of agency, the scope of an agent’s authority, and the obligation of the employer to indemnify the agent for lawful acts performed within the scope of authority.
Argument: The argument in favor of the plaintiff is that the conditions imposed at the time of import—namely, that the craft paper was to be used exclusively for manufacturing cement bags for export, only through approved converters, and that any unutilized stock was to be disposed of as directed by the defendant—demonstrate a relationship of principal and agent (!) (!) . The plaintiff also furnished undertakings and adhered to the conditions, indicating control and supervision by the defendant over the import and utilization process (!) (!) . Under Section 222 of the Contract Act, since the plaintiff acted as an agent, the defendant is liable to indemnify the plaintiff for losses suffered in lawful acts within the scope of the agency (!) (!) .
The defendant, however, contends that the relationship was of principal and principal (buyer and seller), emphasizing that the import was on a principal-to-principal basis and that the defendant merely facilitated the import without exercising control over the utilization of the craft paper (!) (!) .
Judgement: The court examined the circumstances and the conduct of the parties, concluding that the relationship was indeed of principal and agent based on the control exercised by the defendant over the import, conversion, and disposal of the craft paper bags, as well as the stipulations and undertakings provided by the plaintiff (!) (!) . The court held that the defendant was liable to compensate the plaintiff for the loss of unutilized craft paper bags, as the relationship of agency was established.
Ratio Decidendi: The ratio decidendi is that the relationship of principal and agent can be inferred from the conduct of the parties and the conditions imposed, even in the absence of explicit contractual stipulations. When the defendant exercised control over the import, conversion, and disposal process, and the plaintiff acted under these directions, the relationship of agency was established, making the defendant liable for losses incurred due to unutilized stock.
Conclusion (My Opinion): In my view, the court’s reasoning aligns with the principles of agency law, emphasizing that the actual conduct and control exercised by the defendant over the import and utilization process are decisive in establishing the relationship. The conditions imposed and the undertaking given by the plaintiff further support this conclusion. Therefore, the defendant is rightly held liable to indemnify the plaintiff for the loss of unutilized craft paper bags, as the relationship was of principal and agent, and the defendant’s liability to compensate for lawful acts performed within the scope of agency is well-founded.
( 1 ) CS (OS) No. 561/1980 the plaintiff has filed a suit for recovery of the amounts spent on unutilised craft paper bags along with interest and legal expenses thereon amounting to rs. 29,87,092/ -. The plaintiff has also claimed future interest and costs.
( 2 ) THE plaintiff is an existing company within the meaning of the Companies Act, 1956 engaged in the business of manufacture and sale of cement of various qualities and specifications. At the relevant period of time in 1976-77 the export of cement from India was made exclusively by the defendant which was the canalising agency appointed by the Government of India under the Export Control order. The defendant Corporation used to enter into Contract with foreign purchasers for sale and export of the Indian cement and to meet its commitment used to enter into Contracts for purchase of cement from entities like the plaintiff. The cement which used to be exported was required to be packed in six ply craft paper bags, which were to bear the markings of export through STC of India Ltd. or such other markings as may be prescribed by the defendant. The craft paper required for packaging was imported under the Import License of the defendant and the imported paper used to be converted into craft paper bags by the converters appointed by the defendant. Such bags were thereafter delivered to the plaintiff to be kept in stock for and/or on behalf of the defendant for the purposes of packing of cement to be exported to overseas buyers of the defendant.
( 3 ) THE plaintiff requested the defendant to issue the letter of authority in its favour for importing 1,000 ton of craft paper as per letter dated 17. 9. 1976 (Exhibit D-4) in order to maximize exports and to enable the plaintiff to keep the required stocks of paper bag so that the export of cement may not suffer at any time. This paper was stated to cover the supply for the period from January to March 1976 and the plaintiff also appointed an approved converter to convert the imported paper into bags. The request of the plaintiff was accepted by the defendant vide letter dated 21. 9. 1976 (Exhibit D-5 ). There were, however, certain conditions imposed on the defendant in terms of the said letter, which has been reproduced hereunder, as it has the most material bearing on the controversy in the present suit. "general Products. No. STC/gp/skp/76-77 september 21, 1976. M/s. Shree Digvijay Cement Company Ltd. Bombay. Sub: Import of sack kraft paper for Jan/march, 77 cement export requirements. Kind Attention: Mr. M. L. Rathi dear Sirs, please refer to your letter No. DA/133/549 dated 17. 9. 76 requesting for issue of LA in your favour for importing 1000 tonnes of sack kraft paper in order to cover your Jan/march, 77 export requirements of cement. We confirm having since applied to JCCIande for issue of necessary licence and will send you the same as soon as received. As usual you will be required to pay service margin of 0. 25 % on the value of the license. 2. Regarding your import proposal for 1,000 tonnes of Scandinavian origin @ US $ 452 C. I. F. net. from Elof Hansson, we hereby convey our approval to this import. Please ensure that the shipments are made positively between october/december, 76. In case the shipments during this period are not arranged for any reason, our this approval may be treated as cancelled and our fresh approval will be required for shipments beyond December. 3. As you are aware, for the present OPI and Wardens are the only two converters on our approved list. Hence this import is being allowed on the condition that the paper bags will be got manufactured from either of these two converters. However, in case, any further converters are approved by us subsequently, these can also be included in this list later. 4. As per Import Trade Control Regulations the paper imported against the la prepared to be issued to you will be used for manufacture of bags for export of cement only and no
