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2010 Supreme(P&H) 2606
PUNJAB & HARYANA HIGH COURT
Vinod K.Sharma, J.
Krishna & Co.
Versus
Union Of India And Others
RSA No. 2522 of 1985,
Decided On : SEPTEMBER 10, 2010
The main legal point established in this judgment is that a contract becomes void if it becomes impossible to perform, as stated in Section 56 of the Indian Contract Act.
Headnote:
Frustration of Contract - Indian Contract Act 1872, Section 56 - The court applied Section 56 of the Contract Act, which states that a contract becomes void if it becomes impossible to perform. The court held that the subsequent notification reducing the rate of sale made it impossible for the plaintiff to perform the contract. The defendants were not entitled to invoke the bank guarantees.
Fact of the Case:
The plaintiff filed a suit for permanent injunction to prevent the enforcement of bank guarantees. The plaintiff had entered into contracts for the sale of cotton, but due to circumstances beyond their control, they were unable to perform the contracts. The plaintiff requested to renegotiate the contract, but the defendants refused. The trial court held that the plaintiff was not wholly responsible for non-performance and granted partial injunction. The lower appellate court reversed the decision and dismissed the suit. The plaintiff appealed, arguing that the lower courts misread Section 56 of the Indian Contract Act, which deals with frustration of contracts.
Finding of the Court:
The court found that the subsequent notification reducing the rate of sale made it impossible for the plaintiff to perform the contract. The court applied Section 56 of the Contract Act, which states that a contract becomes void if it becomes impossible to perform. The court held that the contract was frustrated and the defendants were not entitled to invoke the bank guarantees. The court also noted that it would be inequitable to refuse the injunction. The appeal was allowed and the suit was decreed in favor of the plaintiff.
Ratio Decidendi: The court applied Section 56 of the Contract Act and held that the contract was frustrated due to the subsequent notification reducing the rate of sale. The defendants were not entitled to invoke the bank guarantees.
Result: The appeal was allowed, the impugned judgment was set aside, and the suit of the plaintiff was decreed with no order as to costs.
Vinod K.Sharma, J.
1. This order shall dispose of RSA Nos.2522, 2523 and 2524 of 1985, titled Ms Krishna & Co. v. The Union of India & Ors.; M/s Asha & Co. v. The Union of India & Ors.; and M/s Deen Dayal Purshotam Lal v. The Union of India & Ors., respectively, as common questions of law and facts, are involved in these appeals.
2. For the sake of brevity, facts are being taken from RSA No.2522 of 1985.
3. The appellant-plaintiff filed a suit for permanent injunction restraining defendants No. 1 and 2 from an enforcing/encashing four bank guarantees, two dated 28.8.1980 and two other dated 10.9.1980, given by the defendant No.3 on behalf of the plaintiff in respect of contracts dated 11.8.1980 and 22.8.1980 bearing No.3(l)79-80/Regd. BD/Cotton/23/5935 and No. 3(l)79-80/Regd. BD/Cotton/24/5936, respectively. The case set up by the plaintiff-appellant was that a press note dated 4.8.1980 was issued by the Textile Commissioner Cotton/defendant No.2, to the effect that Union of India permitted the intending vendors to export 14,000 bales of Bengal Desi Cotton to all permissible destinations subject to the conditions that the last date of shipment would be 31.12.1980 and that payment be made by cent percent irrevocable non-transferable letter of credit to be opened by the buyers on a prime bank in favour of the sellers prior to shipment. That the exporters would have to furnish along with their application a performance guarantee in the form of a bank guarantee at the rate of 150/- (Rupees one hundred fifty only) per bale for number of bales applied for and that the exporters for allocation of quota would have to furnish a further bank guarantee at the rate of 350/- (Rupees three hundred fifty only) per bale within seven days of the issue of allocation letter in their favour.
4. In pursuance to the press note the plaintiff entered into a contract on 11.8.1980 for sale of 250 bales of the said cotton at the rate of 121 U.S. Cents per Lbs. and sub-sequently on 22.9.1980 entered into another contract for the sale of 500 bales of cotton at the rate of 110 U.S. Cents per Lbs. C & F nett with Arkey Holdings Private Limited Singapore.
5. In terms of contract, cotton was to be shipped during September/October 1980.to Japan and payment in respect thereof was to be made by 100% irrevocable non-transferable letter of credit to be opened by the said purchasers in favour of the plaintiff company prior to the shipment.
6. The plaintiff-appellant applied to defendant No.2 to register their aforesaid contracts for sale and for allotment of quota in respect thereof. The applications were made on a standard proforma provided by the office of Textile Commissioner. Along with the application plaintiff-appellant also submitted performance bank guarantee to defendant No.2, at the rate of 150 (one hundred fifty only) per bale in the prescribed form and undertook to furnish a further bank guarantee for 350/- (rupees three hundred fifty only) per bale within seven days from the application being confirmed.
7. On 4.9.1980, Textile Commissioner informed the plaintiff company that it was decided to allow the export of 750 bales of Bengal Desi Cotton to be made on or before 31st October, 1980. The plaintiff was called upon to furnish further performance guarantee at the rate of 350 (Rupees three hundred and fifty only) per bale for the quantity allocated for export.
8. The plaintiff-appellant complied with the directions and furnished the requisite bank guarantee. As per the terms of the contract the cotton was to be shipped in September/October 1980 and the letters of credit in respect thereof were to be opened prior to the shipment.
9. The plaintiffs representatives visited Singapore in the last week of September 1980 to ensure that the letters of credit be opened and shipment made on schedule. The purchasers informed the plaintiffs representatives that in view of the outbreak of hostilities between Iran and Iraq their entire business and sched
