M/S. Murlidhar Chiranjilal vs M/S. Harishchandra Dwarkadas

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

Court: Supreme Court of India

Case Number: Civil Appeal No.193 of 1958

Decision Date: 29 March 1961

Coram: K.N. Wanchoo, P.B. Gajendragadkar

M/S. Murlidhar Chiranjilal brought a petition against M/S. Harishchandra Dwarkadas and another party, and the matter was decided on 29 March 1961 by the Supreme Court of India. The judgment was authored by Justice K.N. Wanchoo, who was joined by Justice P.B. Gajendragadkar. The citation of the decision was reported as 1962 AIR 366 and 1962 SCR (1) 653. The dispute concerned damages for breach of contract under the Indian Contract Act of 1872, specifically section 73, which deals with compensation for loss caused by a breach of contract.

The appellant had entered into a contract with the respondent to sell certain canvas at a price of Re. 1 per yard. The agreement provided that delivery would be made by railway receipt destined for Calcutta, with the goods to be shipped from Kanpur. The respondent was responsible for the cost of transport from Kanpur to Calcutta and for any labour charges associated with that transportation. Both parties agreed that the railway receipt would be delivered on 5 August 1947. When the appellant discovered that the railway booking from Kanpur to Calcutta was closed, it was unable to deliver the receipt by the stipulated date and consequently cancelled the contract. The respondent then instituted a suit seeking damages for the breach and argued that, because the seller knew the goods were to be sent to Calcutta, the seller must be presumed to know that the goods would be sold there. Accordingly, the respondent claimed that the appropriate measure of damages should be the loss of profit arising from the difference between the market rate in Calcutta on the date of breach and the contract price.

The Court held that the principles of compensation under section 73, read with its Explanation, were well settled. First, a party who proved that the other party had breached a bargain was to be placed, as far as money could achieve, in the position he would have occupied had the contract been performed. Second, the injured party was required to take all reasonable steps to mitigate the loss and could not recover damages resulting from his own failure to mitigate. The Court relied on the authority of British Westinghouse Electric and Manufacturing Company, Limited v. Underground Electric Railway Company of London, [1912] A.C. 673, for this proposition.

Further, the Court observed that the contract in the present case was for delivery to Kanpur, and the buyer retained the freedom to sell the goods wherever it chose. The fact that the goods were to be booked for shipment to Calcutta did not create a presumption that the seller knew the goods were intended solely for resale in Calcutta. Consequently, the contract was not of the special type contemplated by the words “which the parties knew, when they made the contract, to be likely to result from the breach of it” in section 73. Instead, it was an ordinary contract, and the appropriate measure of damages would be the loss that naturally arose in the usual course of things from the breach. The Court concluded that damages should be assessed as the difference between the market price in Kanpur on the date of breach and the contract price. However, because the respondent failed to prove the market rate for comparable canvas in Kanpur on that date, the Court held that the respondent could not recover any damages as there was no basis for calculating a quantum. The decision also cited Chao and others v. British Traders and Shippers Ltd., [1954] 1 All E.R. 779, as supporting authority, while distinguishing the cases of Re R and H Hall Ltd. and W.P. Pim (junior) & Co.’s Arbitration, [1928] All E.R. 769, and Victoria Laundry (Winsdor) Ltd. v. Newman Industries Ltd., [1949] 1 All E.R. 997.

In this case, the Court observed that the special provision of section 73 of the Indian Contract Act, 1872, which deals with damages “likely to result from the breach,” applied only to contracts of a particular nature. For an ordinary contract, the appropriate measure of damages was the amount that “naturally arose in the usual course of things from such breach” as described in the same section. Accordingly, the Court held that the proper quantum of compensation would be the difference between the prevailing market price of the canvas in Kanpur on the date of breach and the price fixed in the contract. However, the respondent failed to produce evidence showing the market rate for comparable canvas in Kanpur on that specific date. Because no reliable rate was established, the Court concluded that the respondent could not be awarded any damages, since there was no basis for calculating a sum. In reaching this conclusion, the Court relied on the authority of Chao and Others v. British Traders and Shippers Ltd., [1954] 1 All E.R. 779. The Court distinguished the earlier cases of R and H. Hall Ltd. and W.P. Pim (Junior) & Co.’s Arbitration, [1928] All E.R. 769, and Victoria Laundry (Windsor) Ltd. v. Newman Industries Ltd., [1949] 1 All E.R. 997, stating that those decisions did not control the present circumstances.

The matter arose on appeal by special leave from a decree dated 3 October 1955 issued by the High Court of Judicature at Indore, Madhya Bharat, in Civil First Appeal No. 58 of 1952. The appeal, numbered Civil Appeal No. 193 of 1958, was heard on 29 March 1961, and the judgment was delivered by Justice Wanchoo. The appellant was the firm Messrs. Murlidhar Chiranjilal, while the respondent was the firm Messrs. Harishchandra Dwarkadas. The dispute centered on a contract, negotiated through an individual named Babulal, for the sale of canvas at the rate of one rupee per yard. Under the terms, the canvas was to be delivered to Calcutta on the basis of a railway receipt that would be issued in Kanpur, and the respondent agreed to bear the costs of transportation from Kanpur to Calcutta together with any related labour charges. Both parties had stipulated that the railway receipt would be delivered on 5 August 1947. The appellant failed to produce the receipt and, on 8 August 1947, informed the respondent that the booking of goods from Kanpur to Calcutta had been closed, rendering performance impossible; consequently, the appellant cancelled the contract and returned the advance received. The respondent rejected the claim of impossibility, asserted that the appellant had breached the contract, and demanded damages. After a series of further notices, the respondent instituted suit in November 1947. Both the appellant and Babulal filed written statements. Babulal contended that the contract had become incapable of performance and therefore was properly rescinded, and he denied any liability for damages. The appellant, on the other hand, denied any knowledge of the contract.

In this matter the appellant denied that it was bound by the contract and refused to admit any liability for damages. The appellant also raised several additional pleas, but those pleas were not considered in the present appeal. The pleadings of the parties gave rise to three principal questions. First, whether Babulal had acted as the agent of the appellant in relation to the contract. Second, whether the contract had become impossible of performance because the booking of goods from Kanpur to Calcutta had been stopped. Third, whether the respondent was entitled to the damages it claimed at the rate it specified. The trial court concluded that Babulal was indeed the appellant’s agent for the purpose of the contract and therefore held the appellant bound by the agreement. The trial court further held that the contract had become impossible of performance. Finally, the trial court found that the respondent, having failed to prove the market rate prevailing in Kanpur on the date of the alleged breach, namely 5 August 1947, could not recover any damages, and consequently dismissed the suit. The respondent appealed to the High Court, where the two questions before that court were the impossibility of performance and the appellant’s liability for damages. The High Court held that the contract had not become impossible of performance because the party seeking to rely on that defence had not produced evidence that the booking between Kanpur and Calcutta was closed at the relevant time. The High Court also held that the respondent was entitled to damages based on the rate prevailing in Calcutta on the date of breach, and after allowing certain deductions ordered the decree in the sum of Rs 16,946. The appellant then applied for a certificate to appeal to this Court, but the application was rejected. Subsequently the appellant filed an application for special leave to appeal, which was granted, and the matter therefore came before this Court. The same two questions that were decided by the High Court were again raised on behalf of the appellant. The Court considered it unnecessary to decide the question of impossibility of performance, because the appeal could be decided on the alternative ground raised by the appellant. The essential facts relevant to that point were that the contract required the appellant to deliver a railway receipt for Kanpur to the respondent on 5 August 1947. The appellant failed to deliver that receipt, resulting in an unequivocal breach of the contract on that date. The remaining issue, therefore, was whether the respondent had proved the extent of damages it claimed. The respondent’s evidence consisted of proof of the price of coloured canvas in Calcutta on or about the date of breach.

The respondent argued that at the time of the breach the prevailing rate for coloured canvas in Calcutta was Rs 1‑8‑3 per yard. Since the contract price that the parties had agreed upon was Rs 1 per yard, the respondent claimed that it was entitled to recover damages measured at Rs 0‑8‑3 per yard. The Court noted that the quantum of damages in a case of this nature must be assessed in accordance with section 73 of the Indian Contract Act, No. IX of 1872. The relevant portion of that provision reads as follows: “When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it......” The accompanying Explanation adds: “In estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by the non‑performance of the contract must be taken into account.”

The appellant contended that the contract required delivery of canvas for Kanpur, and consequently the respondent should have proven the market rate for plain (uncoloured) canvas in Kanpur on or about the date of the breach in order to justify any claim for damages. The Court observed that the respondent had admittedly failed to produce evidence of the prevailing price of such canvas in Kanpur at the relevant time, and therefore there was no basis on which to calculate a quantum of damages. The Court explained that where the goods are obtainable in the market, the appropriate measure of damages is the difference between the market price on the date of breach and the contract price. The appellant further argued that, had similar canvas been available in Kanpur at the time of breach, the respondent would have been obligated to purchase the canvas in Kanpur and transport it to Calcutta; any loss resulting from a price increase above the contract price would then have been recoverable. However, because the respondent could not establish the price of comparable canvas in Kanpur on the pertinent date, the Court found no evidence of any loss suffered by the respondent due to the breach. The Court reiterated the two well‑settled principles governing the award of damages in such circumstances. The first principle is that, as far as practicable, a party who proves a breach should be placed, as far as monetary compensation can achieve, in the position he would have occupied had the contract been performed. The second principle imposes on the plaintiff a duty to take reasonable steps to mitigate the loss caused by the breach, thereby precluding a claim for any portion of the damage that resulted from a failure to mitigate.

In explaining the duty to mitigate loss, the Court referred to the principle that a party must take all reasonable steps to lessen the damage that follows a breach, and that the party is prevented from recovering any part of the loss that results from his own failure to act, citing British Westinghouse Electric and Manufacturing Company Limited v. Underground Electric Railways Company of London. The Court observed that these two principles are also embodied in section 73 together with its explanatory note. Accordingly, if the contract required performance at Kanpur, the respondent was obliged to purchase the canvas in Kanpur and arrange its railway transport to Calcutta on the date of breach. Should the respondent have incurred a loss because the market price in Kanpur on that date rose above the contract price, the respondent would have been entitled to compensation for that loss. The Court added that even if the respondent had not actually bought canvas in Kanpur on the breach date, the respondent could still claim damages by proving the prevailing market rate for similar canvas in Kanpur on that date, provided that rate exceeded the contracted rate and caused a loss. The respondent, however, failed to produce any evidence of the market rate for comparable canvas in Kanpur at the relevant time. Consequently, on the basis of the evidence, the Court held that the respondent could not claim any damages, because no loss could be shown to have arisen in the normal course of events. The respondent’s counsel nonetheless relied on a portion of section 73 that permits damages to be measured by what the parties contemplated at the time of contract formation as likely to follow from a breach. It was argued that the contract expressly indicated that the goods would be transported to, and sold in, Calcutta, and therefore the price in Calcutta should be the basis for assessing damages, since the parties knew the goods were intended for sale there. The counsel relied on two authorities: first, Re R. and H. Hall Ltd. and W. H. Pim (Junior) & Co.’s Arbitration, reported in [1912] A.C. 673, where it was held that buyers’ recoverable damages should not be limited to the difference between contract price and market price on the date of breach. The decision further stated that damages must also encompass the buyer’s loss of profit on resale and any liability arising from breach of the resale contract, because such losses were reasonably presumed to be within the parties’ contemplation when they entered into the contract, especially since the contract expressly provided for a resale before delivery and the parties understood that such a resale was not unlikely to occur.

In the matter before the Court, the seller had agreed to sell an unspecified cargo of Australian wheat at a fixed price, and the contract expressly required that notice of appropriation of a particular cargo on a particular vessel be given within a prescribed time. The agreement also contained detailed provisions governing the actions to be taken in various situations should the cargo be resold one or more times before delivery. Consequently, both the buyer and the seller were aware at the time the contract was concluded that there existed an even chance that the buyer might choose to resell the wheat before taking possession of it themselves. The first authority relied upon by the parties was the case of Victoria Laundry (Windsor) Ltd. v. Newman Industries Ltd., wherein a boiler was sold to a laundry and the Court held that damages for loss of profit were recoverable when it was reasonably apparent to the defendant that a delay in delivery would inevitably cause such loss to the plaintiff. These two authorities serve to illustrate the principle embodied in section 73 of the Contract Act, which allows the measure of damages to be based on what the parties contemplated at the moment of contracting to be the likely consequence of a breach. Both authorities represent a special category of cases: in the first, the parties expressly anticipated that the goods would probably be resold before delivery, so the buyer’s loss could include the loss incurred from the failure to honour an intermediate resale contract; in the second, the goods were purchased for the buyer’s own business purpose, a purpose the seller was expected to know, and consequently the seller would be liable for any loss arising from a delay if it was known that such loss was likely. The Court was therefore invited to consider whether the present dispute fell within the same category as those precedents. Counsel for the respondent argued that the seller knew the wheat was to be sent to Calcutta and, therefore, it must be presumed that the seller also knew the wheat would be sold there, making the difference between the Calcutta market rate on the date of breach and the contractual rate the appropriate measure of damages. While it is undisputed that the buyer had bought canvas for resale, the Court could not draw a conclusion that the mere fact that the goods were booked for shipment to Calcutta meant the seller knew they were intended solely for resale in that market. In fact, the buyer retained the freedom to sell the railway receipt immediately upon its arrival in Kanpur, and no inference could be drawn that the goods were meant exclusively for sale in Calcutta. Accordingly, the Court observed that the present case does not constitute a situation where the parties, at the time of contracting, knew that the goods were intended only for sale in Calcutta, and thus the difference between the Calcutta price at the breach date and the contract price could not be taken as the measure of damages. The contract in question was for delivery to Kanpur and represented an ordinary sale, permitting the buyer to market the goods wherever he chose. The Court further referred to the observations in Chao and Others v. British Traders and Shippers Ltd., which are pertinent to the facts of the present case.

It was noted that the canvas had been received in Kanpur and that no inference could be drawn merely from the fact that the goods were to be sent to Calcutta that they were intended exclusively for sale there. The Court observed that the buyer retained the freedom to sell the canvas at any location of its choosing. Consequently, the transaction could not be characterized as one in which both parties, at the time of contracting, knew that the goods were to be sold only in Calcutta and that the difference between the Calcutta market price on the date of breach and the contract price would constitute the appropriate measure of damages. The contract in question provided for delivery in Kanpur and was an ordinary contract of sale, permitting the buyer to dispose of the goods wherever it deemed appropriate. In support of this view, the Court referred to the observations made in Chao and others v. British Traders and Shippers Ltd. (1) [1954] 1 All E.R. 779, 797, which stated: “It is true that the defendants knew that the plaintiffs were merchants and, therefore, had bought for resale, but every one who sells to a merchant knows that he has bought for resale, and it does not, as I understand it, make any difference to the ordinary measure of damages where there is a market. What is contemplated is that the merchant buys for resale, but, if the goods are not delivered to him, he will go out into the market and buy similar goods and honour his contract in that way. If the market has fallen he has not suffered any damage, if the market has risen the measure of damages is the difference in the market price.” Applying this principle, the Court concluded that the parties did not contract with the knowledge that a breach would specifically prevent the buyer from making a profit in Calcutta. The case was therefore a straightforward purchase of goods for resale at any place, and the measure of damages should be determined in the manner that naturally follows from such a breach.

The Court further held that, in this ordinary commercial context, the appropriate provision of the Contract Act was the portion of section 73 that refers to damages “which naturally arise in the usual course of things from such breach,” rather than the special language “which the parties knew, when they made the contract, to be likely to result from the breach of it.” Accordingly, the respondent bore the burden of establishing the prevailing market rate for comparable canvas in Kanpur on the date of breach, because that rate would fix the amount of damages if it exceeded the contract price. Since the respondent failed to produce evidence of the Kanpur market rate at the relevant time, the Court found that the respondent could not recover any damages. On this basis, the Court concluded that the appeal should be allowed, the decree of the High Court set aside, and the trial court’s judgment restored, with costs awarded to the appellant throughout.

The Court observed that the respondent had failed to produce evidence showing the market rate for canvas of the same kind in Kanpur on the date the contract was breached. Because such proof was lacking, the Court concluded that the respondent could not establish any entitlement to compensation under the circumstances. Accordingly, the appellate Court allowed the appeal filed by the appellant. In doing so, it set aside the decree that had been passed by the High Court and restored the judgment of the trial Court. The restoration of the trial Court’s order was accompanied by an award of costs to the appellant for the entire litigation. The Court therefore pronounced that the appeal was allowed, the High Court’s decree was vacated, and the trial Court’s decree reinstated, with costs awarded throughout to the appellant.