[Raghav Bhatia is an advocate, practising at the Supreme Court and Delhi High Court, and Mahima Tahiliani is a third-year law student at UPES Dehradun]
Recently, in Food Corporation of India v. Abhijit Paul, the Supreme Court of India [‘SC’] has observed that the expression “charges” does not include demurrage ipso facto and the same has to be determined in light of the terms of contract between the parties. The authors believe that this decision is not only in the right direction but will also provide much needed clarity to commercial parties going forward.
Factual Background
Food Corporation of India [‘FCI’] had entered into a contract with Abhijit Paul [‘contractor’] for transportation of food grains from the railway siding of Churaibari, Assam to the food security depot of Chandrapur, Tripura “on a regular basis for a period of two years”. A sum of Rs. 44,95,000/- was deposited by the contractor as security deposit. The contract between the parties stood discharged by performance in July 2014.
By a letter dated December 22, 2015, followed by a notice, FCI “called upon the contractor to reimburse the amount of demurrages imposed on it by the Railways”. Demurrage is an amount payable when goods from the port are not cleared within the agreed time period. Thus, demurrage is levied for ensuring timely clearance of the cargo from the port. The reason for claiming such reimbursement in this case, as explained in the letter dated June 27, 2017, was that due to the contractor’s inability to readily provide trucks at the Railway sidings, FCI was prevented from unloading the food grains within the time period allotted by the Railways. Therefore, FCI sought to recover demurrage from the contractor by withholding the security deposit provided by him. The contractor objected to the same on the ground that FCI had no right under the contract to recover demurrage.
Accordingly, the contractor filed a writ petition before the High Court of Tripura [‘HC’]. The Single Judge allowed the writ petition, observing that FCI was only entitled to recover losses that it faced “due to the contractor’s dereliction of duties under the contract, as permissible under Section 73 of the Indian Contract Act, 1872” and losses that had no relationship with the contractor’s actions could not have been recovered. It was also observed that since FCI could not have unilaterally determined and imposed demurrage on the contractor, it was directed to file a civil suit to recover its claims. Aggrieved, both FCI and the contractor preferred appeals before the division bench of the HC, which were dismissed. Aggrieved, both the parties approached the SC.
Issue before the SC
The issue was “whether the contractual clause enabling the Corporation to recover “charges” includes the recovery of demurrage”?
Proceedings before the SC
At the outset, the SC noted that FCI sought to recover demurrage as a part of “charges” under clause XII(a) of the contract. Clause XII of the contract pertains to recovery of losses suffered by the FCI. It reads as: “The Corporationshall be at liberty to reimburse themselves for any damages, losses, charges, costs or expenses suffered or incurred by them, or any amount payable by the Contractor as Liquidated Damages as provided in Clauses X above. The total sum claimed shall be deducted from any sum then due, or which at any time thereafter may become due, to the Contractors under this, or any other, Contract with the Corporation. In the event of the sum which may be due from the Contractor as aforesaid being insufficient, the balance of the total sum claimed and recoverable from the Contractors as aforesaid shall be deducted from the Security Deposit, furnished by the contractor as specified in Clause IX…” (emphasis added).
Clause XII(a) has to be read with clauses X and XIII. While clause X provides for the contractor’s liability for losses suffered by the FCI, clause XIII provides for the contractor’s responsibilities. Clause X(a) reads as: “The Contractor shall be liable for all costs, damages, registration fees, charges and expenses suffered or incurred by the Corporation due to the Contractor’s negligence and unworkmanlike performance of any services under this Contract, or breach of any terms of the Contract, or failure to carry out the work under the Contract, and for all damages or losses occasioned to the Corporation, or in particular to any property or plant belonging to the Corporation, due to any act whether negligent or otherwise, of the Contractor or his employees…” (emphasis added).
Clause XIII reads as: (a) The Contractor shall be responsible to supply adequate and sufficient number of trucks for transportation of food grains and carrying out any other services under the Contract in accordance with the instructions issued by the General Manager or an officer acting on his behalf.
…
(f) The Contractor shall be responsible for the safety of the goods from the time they are loaded on their truck from godowns/mandis/rail heads until they have been unloaded from the trucks at godowns or at other destinations as specified in the Contract or as directed by the General Manager/Area Manager or any other officer acting on his behalf…”.
The SC observed that the expression “charges” on its own does not have a single definition. It is an expression which is open to interpretation and thus its meaning must be understood “as intended by the parties to the contract”.
After a perusal of the contract’s preamble, as per which the contractor was engaged for “transportation of foodgrains from depots, mandis, rail heads of Churaibari to various destinations as per appendix 1” and clauses X, XII and XIII, the SC observed that there is “no contractual provision requiring the contractors to undertake the task of loading and unloading of foodgains from the railway wagons”. Even in its written submissions, FCI had admitted that it sought to impose demurrage only because the contractor failed to “provide adequate number of trucks near the railway sidings, to enable the Corporation to promptly hand over the foodgrains to them to commence transportation”. Thus, the task of loading or unloading of foodgrains from the railway wagons was not a part of the contract.
In light of the above, the SC concluded that the expression “charges” in the present case did not include demurrage.
Further, the SC pressed into service the concept of latent ambiguity. As per latent ambiguity, expressions used in a contract might appear to be free from ambiguity. However, when they are to be interpreted in light of a specific question, such as in the present case, the expressions are amenable to multiple outcomes.
In light of the aforesaid concept, the SC observed that in a contract entered into by FCI in 2010 and in another contract entered into by FCI in 2018, there were specific clauses which provided for imposition of demurrage. Accordingly, the SC held that the present contract between the parties is distinct as FCI has not included any clause to collect demurrage from the contractor.
Earlier judgments of the SC, such as Raichand Amulakh Shah v. Union of India and Trustees of the Port of Madras v. Aminchand Pyarelal, holding that demurrage is a charge, were rightly distinguished by the SC in the instant case by observing that textual understanding of a concept cannot be of any help while deciphering “the true and correct intention of the parties to the present case”.
Analysis
The authors’ submit that the instant judgment is in the right direction. A perusal of different clauses of the contract clearly delineated the scope of the contractor’s duties under the contract. The charge was payable by the contractor only upon dereliction of his duties, which was not the scenario in the instant case as per the SC. The fact that FCI expressly included power to recover demurrage in some of the other contracts further helped in arriving at the aforesaid conclusion.
Having said that, the SC missed an opportunity to discuss in detail the two judgments that were cited by FCI to argue that “charges” include demurrage. In Raichand, the SC was interpreting Section 46-C(d) of the Indian Railways Act, 1890 which defined demurrage as “charge levied after the expiry of the free time allowed for loading or unloading a wagon”. Thus, in Raichand, it was in the context of a statutory definition that the SC had observed that demurrage is a type of a charge. Similarly, in Aminchand, the SC, in the context of Section 42 of the Madras Port Trust Act, 1905 (‘MPT Act’), observed that demurrage is a charge and not a service and also placed reliance on the bye-laws framed under the MPT Act to explain the context in which demurrage was defined under Section 42 of the MPT Act. Thus, both in Raichand and Aminchand, the SC was not discussing the ambit of the expression “charges” used in a commercial contract between the parties, and therefore, both the decisions were rightly distinguished.
In the instant case, as rightly pointed out by the SC, the expression “charges” was required to be understood in light of the contractually agreed obligations of the parties.
This judgment is another illustration in recent times of the SC refusing to interfere with the contractually agreed terms between the parties. In Indian Oil Corporation v. Shree Ganesh Petroleum (discussed, here), the SC had explained its limited jurisdiction in interfering with the contractually agreed terms.
Interestingly, the SC in the instant case did not discuss the issue of availability of trucks and merely observed that there was a dispute “about the availability of trucks”. In Hadley v. Baxendale, the first limb of damages rule was explained as where “two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it”. Only a trial between the parties could have revealed whether trucks were indeed available or not. The authors believe that if the trucks were not available, FCI could have successfully invoked the first limb of Hadley v. Baxendale to claim damages. Failure to provide trucks would naturally result in FCI being liable for demurrage as it would be unable to unload the food grains in time from the Railway sidings.
Conclusion
With this judgment, the SC has rightly given pre-eminence to the contractually agreed terms between the parties. It will be interesting to see if commercial entities, including government authorities, are more careful about the specific terms of the contract in future after the recent trend of the SC refusing to interfere with express terms of the contract.
– Raghav Bhatia & Mahima Tahiliani