China Cotton Exporters vs Beharilal Ramcharan Cottonmills Ltd

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 331 of 1956

Decision Date: 17 February, 1961

Coram: K.C. Das Gupta, P.B. Gajendragadkar

In this case the parties were China Cotton Exporters, who were the petitioner, and Beharilal Ramcharan Cottonmills Ltd, who were the respondent. The judgment was delivered on 17 February 1961 by a bench consisting of Justice K. C. Das Gupta and Justice P. B. Gajendragadkar. The case was reported in the 1961 volume of the All India Reporter at page 1295 and in the Supreme Court Reports (Third Series) at page 845. The dispute concerned a breach of contract for the sale of cotton fibre where the contract required supply subject to an import licence and a guaranteed shipping date.

The factual background was that the appellant had contracted with its Italian suppliers for two separate shipments of cotton fibre. The first supply contract covered two hundred thousand pounds to be shipped in August 1950, and the second covered three hundred thousand pounds to be shipped in the period of November‑December 1950. Subsequently, on 22 July 1950 the appellant entered into a contract with the respondent for the sale of forty thousand pounds of fibre to be shipped in August 1950. On 9 August 1950 the appellant concluded a second contract with the respondent for the sale of fifty thousand pounds of fibre, the shipment to be made in October‑November 1950. The second contract contained a remark stating that the contract was subject to the import licence and that the shipment date was therefore not guaranteed.

In October 1950 the appellant received fifty thousand pounds of fibre from its first Italian supplier. Of this quantity, forty thousand pounds were delivered to the respondent under the first contract and the remaining ten thousand pounds were applied to the second contract. The balance of forty thousand pounds that the respondent expected under the second contract was never supplied. The respondent instituted suit for damages alleging breach of contract. The appellant contended that it was not liable because the shipping date was expressly stated to be non‑guaranteed and because it claimed to have adequate contracts with overseas suppliers, although those suppliers failed to deliver.

The Court held that the appellant was liable for breach of contract. It observed that in commercial agreements time is ordinarily of the essence and that the remark in the contract column only qualified the guarantee to the extent that a delay in obtaining the import licence might affect the shipment date. Because there was no delay in securing the licence, the October‑November 1950 shipment date was effectively guaranteed, a conclusion supported by other terms of the contract. The appellant was required to show that on the date of breach, 15 December 1950, it possessed a valid contract that would enable it to obtain the required goods, assuming the contract itself was not broken. The Court found that the first supplier contract had been cancelled at the end of September 1950, leaving the appellant without any entitlement to goods on the relevant date. Moreover, the second supplier contract did not obligate the supplier to deliver by instalments or to supply at least forty thousand pounds before 15 December, and the appellant failed to produce that contract before the Court. Consequently, the appellant could not demonstrate an adequate contractual source to fulfill its obligations to the respondent. The Court emphasized that it was insufficient for the appellant merely to show a possibility of performance; a concrete and enforceable supply contract was required. The Court referred to the authorities Bilasiram Thakurdas v. Gubbay (1915) I.L.R. 43 Cal. 305 and Phoenix Mills Ltd. v. Madhavdas Rupchand (1916) 24 Bow. L.R. 142 in support of its decision.

It was observed that the suppliers were not shown to be bound to deliver the goods either by instalments or to supply a minimum of forty thousand pounds before the fifteenth day of December, because the agreement with the suppliers had not been produced before the Court. Consequently, the appellant was held to have failed to demonstrate that it possessed an adequate contract that would cover the contract that was the subject of the suit. The Court noted that it was insufficient for the appellant merely to indicate that there existed a possibility of fulfilling its obligation to the respondent. The judgments in Bilasiram Thakurdas v. Gubbay (1915) I.L.R. 43 Cal. 305 and Phoenix Mills Ltd. v. Madhavdas Rupchand (1916) 24 Bow. L.R. 142 were cited in support of this position.

The matter arose on appeal in Civil Appeal No. 331 of 1956, which was taken by special leave from the judgment and decree dated the eleventh day of March, 1955, rendered by the Bombay High Court in Appeal No. 97 of 1954. Counsel for the appellants included the Attorney‑General for India and another senior practitioner, while counsel for the respondents comprised a team of advocates representing the cotton mill. The appeal was decided in February 1961, and the judgment was delivered by Justice Das Gupta. This appeal challenged a decision of the Court of Appeal of the Bombay High Court that had affirmed a decree of a single judge in a suit for damages for breach of a contract of sale. The underlying contract, dated the ninth day of August, 1950, had been executed in Bombay between the appellants, who carried on import and export business, and the respondent, a cotton spinning and weaving mill also based in Bombay. Under that contract the appellants agreed to sell fifty thousand pounds of Italian staple fibre cotton of the quality specified, at a price of one thousand three hundred fifty rupees per candy ex‑docks, with shipment scheduled for October–November 1950. Ten thousand pounds of the cotton had been delivered to and accepted by the respondent on the thirty‑first day of October, 1950. The remaining forty thousand pounds had not been delivered, prompting the respondent to file the present suit for damages, alleging that the appellant had wrongfully failed and neglected to deliver the balance of the contracted quantity.

The appellant admitted that it had not delivered the remaining forty thousand pounds, but pleaded that the failure was not wrongful. In its written statement the appellant asserted that the non‑supply resulted from the “intermediary parties” – that is, the suppliers – failing to provide the goods to the defendant, and also from circumstances beyond the appellant’s control. The appellant further contended that it was exempt from liability under the printed term sixteen of the contract. Additionally, the appellant argued that the shipment date specified in the contract was not guaranteed and that the time of shipment was not of the essence of the agreement. The Trial Judge, however, held that the shipment time was indeed guaranteed, except for any delay that might arise from obtaining an import licence, a condition which, in the present case, had been satisfied in good time. The trial judge consequently concluded that the time of shipment was of the essence of the contract.

The Court observed that the contract did not involve any “intermediary parties” failing to supply or deliver the goods, and that the defendant firm had not entered into any adequate agreement that would have permitted it to obtain the necessary supply of goods; consequently, it could not have delivered the forty‑thousand pounds of cotton. The additional defence that the non‑supply was caused by “circumstances beyond their control” was also rejected. Accordingly, the Trial Judge concluded that the appellant firm had wrongfully breached the contract and that the plaintiff‑respondent was therefore entitled to damages. The assessment of those damages was directed to the Commissioner. On appeal, the Court of Appeal agreed with the Trial Judge, holding that because there was no delay in obtaining the import licence, the obligation to deliver the goods for the October–November shipment remained in force. The appellate judges further noted that the failure to deliver arose principally because the defendants were never ready and willing to perform, having made no arrangements to obtain cotton from Italy that could have been delivered at the contractual time. Consequently, the Court of Appeal held that the defendant could not rely on any contractual clauses that purported to condone delay or excuse non‑delivery, and it dismissed the appeal. The defendant subsequently obtained special leave from this Court and filed the present appeal against that dismissal. Three contentions were raised. The first contention was that the shipment date was not guaranteed; the second, which was inseparably linked to the first, asserted that the shipment time was not of the essence of the contract; and the third contended that the contracts the defendant had executed with its Italian suppliers were sufficient to obtain supplies in time, provided those contracts had not been broken, thereby enabling proper delivery to the plaintiff. The contract was a printed document containing terms relating to quantity, quality, price, shipment, payment, and a remarks column completed in manuscript. In the shipment field the document recorded “October/November, 1950.” In the remarks column the following was written: “1. Invoice weight to be accepted; 2. This contract is subject to import licence and therefore the shipment date is not guaranteed.” The Court therefore found that, notwithstanding the earlier printed terms, the parties deliberately added a definitive condition in the remarks column concerning whether the shipment date was guaranteed and to what extent. The precise wording added was: “This contract is subject to import licence, and therefore the shipment date is.”

The Court observed that, in commercial agreements, the passage of time is normally treated as essential, and that the word “therefore” must be given its ordinary grammatical meaning. Accordingly, the Court concluded that the parties intended that the shipment date of October‑November 1950 would be guaranteed except to the extent that a delay arose because the import licence was not obtained. In other words, the parties made the shipment date conditional on the import licence; if the licence caused a delay, the date was not guaranteed, but otherwise the date was to be honoured.

The counsel for the Attorney‑General argued vigorously that the parties were merely citing one of many possible reasons for delay and that the use of “therefore” was intended only to illustrate a single example, not to limit the non‑guarantee to the import licence situation. The Court rejected this explanation. It held that if the parties had meant that the shipment date was not guaranteed for reasons other than the import licence, they would have expressed that intention in a straightforward manner, such as: “This contract is subject to import licence and the shipment date is not guaranteed.” While other formulations might convey a similar meaning, it was unreasonable to expect a grammatically correct party to use “therefore” in a context that did not link the non‑guarantee specifically to the import licence delay. Therefore, the Court found the counsel’s construction untenable.

The Court further noted that the remarks column of the contract had been filled in by hand, and that this handwritten addition should prevail over the printed terms when a conflict existed. Nevertheless, the Court examined the printed clause 2 to determine whether it supported a broader denial of guarantee. Clause 2 consisted of two paragraphs. The first paragraph, subject to clauses 7 and 9, stipulated that if the goods or any part thereof were not shipped for any reason, or for reasons other than those listed in clause 9, within the shipment period plus a fifteen‑day latitude provided in clause 7, the sellers would not be liable. Instead, the sellers were required to give notice of non‑shipment to the buyers, after which the buyers could either cancel the overdue portion without any claim for allowance or compensation, or accept an extension of time for shipment as granted by the sellers.

The second paragraph of clause 2 set out a graduated scale of allowances for delayed shipment. The allowance rates were: two and a half percent for a delay of up to one month; two and a half percent for a delay from one month to two months; three and a half percent for a delay of two to three months; and seven and a half percent for a delay exceeding three months. These rates applied specifically to the woollen goods covered by the contract.

Having considered the language of the handwritten remarks, the grammatical significance of “therefore,” and the detailed terms of clause 2, the Court concluded that the parties' intention was to guarantee the October‑November 1950 shipment date, subject only to delay caused by the failure to obtain the required import licence. The Court therefore rejected the counsel for the Attorney‑General’s broader interpretation that the shipment date was entirely non‑guaranteed.

In the contract the parties stipulated that the allowance for delay would vary according to the length of the postponement. The schedule provided that a delay of up to one month would attract an allowance of two and one‑half per cent; a delay from one month to two months would also attract two and one‑half per cent; a delay of two to three months would attract three and one‑half per cent; and a delay of more than three months would attract seven and one‑half per cent. Separate rates were laid down for woollen goods. Clause seven of the contract allowed a latitude of sixteen days after the shipment date, while clause nine contained a special exemption covering force majeure, war or war‑like operations, strikes, lock‑outs and similar events. The learned Attorney‑General argued that the wording of term two demonstrated that the parties had agreed that time was not of the essence and that the shipment date was not guaranteed. The Court found that the opposite was true. The first paragraph of term two gave the seller the right to notify the buyer of any non‑shipment and to offer the buyer, on receipt of that notice, either the option to cancel the unshipped portion or the option to accept an extension of time together with the allowances specified in the second paragraph. Such provisions would be unnecessary if time were not of the essence or if the shipment date were not guaranteed; therefore the language indicated that the shipment time was indeed guaranteed and that time was of the essence. The Court held that clauses seven and nine did not change this conclusion and affirmed the view of the lower courts that the shipment deadline was a guaranteed condition of the contract. The discussion then turned to whether the defendant firm possessed a satisfactory contract with its Italian suppliers that, if performed, would have placed it in a position to supply the goods in question. It was not contested that a satisfactory upstream contract would relieve the defendant of liability for damages, while the absence of such a contract would leave the defendant liable. The Attorney‑General contended that even a mere possibility of obtaining the supplies in good time should exonerate the defendant. The Court rejected this argument, holding that a plaintiff could not rely on a chance of supply to escape responsibility. Before the seller could claim that non‑supply resulted from the default of his own suppliers or from causes beyond his control, he was required to demonstrate that he had taken every step within his power to secure timely delivery. This meant showing that he had entered into a contract that actually entitled him to obtain the supplies in the required time. If his contract with the suppliers merely gave a possibility, rather than a definite right, to receive the goods promptly, the failure to deliver would be attributable to the seller’s own default in not securing a sufficient upstream contract, not to the supplier’s breach or to an external event beyond his control. The Court therefore concluded that the existence of a definitive, reliable contract with the Italian suppliers was essential to determine liability.

In the matter before the Court, it was established that the defendant entered into two separate contracts with its Italian suppliers. The first contract concerned a quantity of two hundred thousand pounds of cotton intended for shipment in August 1950, a shipment which was later extended to September 1950. The second contract, dated 4 August 1950, provided for three hundred thousand pounds of cotton to be supplied for the period of November and December 1950. In addition, the defendant had executed a contract with the plaintiff on 22 July 1950 for the sale of forty thousand pounds of cotton originally scheduled for an August shipment, a contract that was subsequently altered so that the delivery would take place in the November‑December period. In October 1950, fifty thousand pounds of cotton arrived under the first Italian contract; of this amount, forty thousand pounds were delivered to the plaintiff, thereby satisfying the earlier agreement, while the remaining ten thousand pounds were applied to the performance of the second contract that is the subject of the present suit. Under the three hundred thousand pound contract, the defendant received a total of seventy thousand pounds of cotton, none of which was passed on to the plaintiff, leaving forty thousand pounds still undelivered.

The core issue before the Court was whether the defendant possessed a contract that, assuming it fulfilled its own obligations, would enable it to obtain the cotton in time to honor its promise to sell the October‑November shipment. The Attorney‑General argued that the lower courts had completely disregarded the defendant’s earlier contract with the Italian suppliers and asserted that this earlier contract should be regarded as sufficient. Such an argument would have merit only if, at the moment of breach—that is, on the last date by which the shipment covered by the suit could be made—the defendant was still entitled to receive cotton under the earlier agreement. This was not the case, because the earlier contract had been cancelled at the end of September, and consequently the defendant had no right to obtain goods from it at the time of breach. Turning to the later contract for the November‑December shipment, the lower courts observed that the Italian suppliers were contractually permitted to defer delivery until the final day of December. If this observation is correct, the defendant would have had no entitlement to receive the cotton by the required delivery date of 15 December 1950, even after accounting for the fifteen‑day period prescribed in clause 7. The Attorney‑General nevertheless maintained that the defendant’s contract with the Italian suppliers obliged the suppliers to spread the delivery over November and December, thereby requiring the shipment of at least forty thousand pounds well before 15 December. A significant obstacle to this contention is that the defendant’s contract with the Italian suppliers has not been produced, and its terms remain unknown. For comparative purposes, counsel cited Bilasiram Thakurdas v. Gubbay, wherein the contract stipulated shipments to be made by steamers during July‑December 1914, allowing the buyer to demand delivery in instalments throughout that period.

In the earlier cases the Court examined contracts that required shipment over a series of months and described them as instalment contracts. In Bilasiram Thakurdas v. Gubbay the Court noted that the contract provided for “shipments in any month by one or more steamers” during the period from July to December 1914, and it held that such a provision clearly created an instalment contract in which the buyer could demand delivery of the goods by separate shipments spread over those months. Similarly, in Phoenix Mills Ltd. v. Madhavdas Rupchand the dispute turned on whether the sellers had breached the contract by failing to give delivery when the delivery terms were stated as “200 bales No. 20s and 20‑1/2s Ring October‑November 1913 and 50 bales No. 6‑1/2s Mule yarn as manufactured”. The contract also recorded that the buyers had agreed to take delivery of the bales from time to time as they were ready. Relying on these terms, Mr Justice Macleod observed that “the Court can only consider the parties to have in‑tended, when they signed that contract, that delivery should be asked for and given during October‑November of two hundred bales, delivery being asked for of reasonable quantities at a time during the period of delivery.” These decisions echo the English authority expressed in Benjamin on Sale, eighth edition, page 724, which states that “where the amount of instalments is not specified, the prima facie rule would seem to be that the deliveries should be rateably distributed over the contract period.” The same author added that “if it can be gathered from the terms of the contract or the circumstances that rateable deliveries were not intended, it then becomes a question for the jury whether the tender of or demand for delivery is a reasonable one.” The Court therefore noted that the question of spreading delivery over time arises only where the contract is an instalment contract. In the present matter there was no evidence that the defendant’s agreement with its Italian suppliers was an instalment contract. Even when the proprietor of the Italian supplier was examined, he offered no statements that would indicate such a contractual arrangement. Because the contract itself had not been produced and no surrounding circumstances suggested that it was an instalment contract, the learned Attorney‑General’s contention that the Italian suppliers were bound to spread supply over October and November 1950 could not be accepted. Consequently, the defendant failed to establish that it possessed a valid contract with its Italian suppliers that would have placed forty thousand pounds of cotton fibre in its possession before 15 December 1950. The Court therefore held that the defendant could not escape liability for breach of its contract with the plaintiff, and the appeal was dismissed with costs.