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State Bank of India Versus Earnest Traders Exporters Importers and Commission Agents

1997 (67) DLT 218, 1997 (41) DRJ 659 - Suit No. 624 of 1977 - Dated:- 30-1-1997 - Anil Dev Singh, J. JUDGMENT Anil Dev Singh, J. This is a suit for recovery of ₹ 6,50,970.42 paise. The plaintiff is State Bank of India which is authorised to deal in foreign exchange under the Foreign Exchange Regulation Act, 1947. While the defendant No. 1 is Earnest Traders, a partnership firm dealing in the business of exports and imports, the defendant No. 2 is one of its partners. By letter dated June 6 .....

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000 kgs. The aggregate value of the same as per the following details was ₹ 40,38,500.00 :- 1.Century Rayon: 180,000 kgs. valued at ₹ 36,11,000. 2. Indian Rayon : 30,000 kgs. valued at ₹ 4,27,500. Along with the letter a copy of the letter dated June 4, 1973 received from M/s. Sharvan D. Sethi accepting the above arrangement and requesting the defendants to cover the foreign exchange in dollars through any bank was forwarded to the plaintiff. The defendants by means of the afor .....

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tter of the plaintiff, the defendants by their letter dated June 15, 1973 gave the necessary details and requested the plaintiff to book four forward purchase contracts on their behalf as per below:- Amount Period Rate $ 65,000 15.6.73 to 14.7.73 13.79 $ 50,000 15.7.73 to 14.8.73 13.79 $ 50,000 15.8.73 to 14.9.73 13.79 $ 91,909 15.9.73 to 14.10.73 13.79 Total $ 5,56,909 4. On the same date, viz., June 15, 1973, the plaintiff booked the four forward contracts and in this regard informed the defen .....

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aintiff for extending the delivery period from August 15, 1973 to September 14, 1973. This request was made as the situation in Afghanistan had changed. Subsequently, on August Ii, 1973 the defendants informed the plaintiff that as per the Export Order (Trade Control) dated July 27, 1973 (for short 'the banning order') the export of Rayon Filament Yarn had been banned by the Government of India. It was also stated in the said letter that the defendants were approaching the concerned auth .....

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fendants that it had been advised by its Foreign Department that as the forward purchase contracts ET/73/2 ET/73/3-and ET/73/4 were valid upto 14th September 1973, 14th September 1973 and 14th October 1973, respectively, they will consider the matter after a decision is taken by the Government of India regarding export of the banned item. The defendants were also asked to intimate the latest developments in the matter so that the plaintiff could approach its Foreign Department again. Again by th .....

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foreign purchase contracts No. ET/73/2 and ET/73/3 in absence of clearance from the Government of India. The plaintiff by the same letter advised the defendants that it will not be in the defendants' interest to allow the contracts to remain overdue until clearance is obtained from the Government of India as the contracts will attract overdue interest at the rate of 9-1/2% per annum in addition to the cancellation charges. The letter also indicated that the cancellation charges for the forwa .....

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ful of getting the permission (clearance) from the Government of India to export the goods, pertaining to the forward purchase contracts, to Kabul. In reply to the said letter, the plaintiff by its letter dated November 13, 1973 expressed its willingness to assist the defendants for achieving its export target but at the same time advised that the contracts be cancelled and in case the export materialised, fresh forward contracts be booked. By telegram dated April 14, 1974 the plaintiff drew the .....

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cancellation of the forward contracts. Pursuant to the letter of the plaintiff dated June 7, 1974 the defendants by their letter dated June 28, 1974 took up the stand that the contracts in question had ceased to exist in view of the ban imposed by the Government of India on export of Rayon Filament, the item covered by the aforesaid forward contracts. It was also pointed out that because of the ban imposed by the Government of India the contracts in question had been frustrated, and there was n .....

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e aforesaid amount. Thereupon on July Ii, 1977 the plaintiff Filed the instant suit against the defendants for recovery of ₹ 6,50,970.00 instead of ₹ 15,27,087.12. The defendants raised a number of pleas in their written statement, the main plea being that the contract had been rendered impossible of performance due to the ban imposed by the Government of India on the export of Rayon Filament. On January 9, 1980 the following issues were framed:- 1.What Shri M.L. Chandra duly authori .....

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lation charges to the plaintiff as mentioned in paras 28 and 30 o the plaint? Opp 6. What is the effect, if any, of the non-cancellation of the contracts by defendants in spite of the plaintiff bank requests in that respect? OPD. 7. Is the suit barred by limitation? OPD. 8. Relief. Now I proceed to deal with the issues :- Issue No. 1: The plaint has been signed and verified by Shri M.L. Chander, Manager of the plaintiff bank. PW-3, Shri D.C. Rai Chandani, Officer, State Bank of India deposed to .....

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other documents connected with legal proceedings whether contentious or non-contentious may be made and completed on behalf of the State Bank by the Chairman or by any officer or employee empowered by or under regulation 76 to sign documents for and on behalf of the State Bank." From a perusal of Regulation 77 it is clear that the plaints and written statements, petitions and applications can be singed and verified by any officer or employee empowered by or under Regulation 76 to sign docu .....

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hed in the Government of India Gazette, Part Iii, Section 4, dated September 26, 1959 by virtue of which it authorised "agents" and other persons to sign the documents mentioned in regulation 76. A conjoint reading of Regulations 76 and 77 and the above said notification leaves no manner of doubt that an "agent" would be entitled to sing and verify the pleadings, etc. It may be noted that the "agents" have been redesignated as Branch Managers by virtue of notificati .....

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thers, (1983) 54 Comp Cos 56. Therefore, I hold that shri M.L. Chandra, Manager of the plaintiff bank, was duly authorised to sing and verify the plaint and institute the suit. Accordingly, issue No. 1 is decided in favour of the plaintiff. Issue No. 2: Defendants produced number of witnesses in their endeavour to show that they had entered into forward contracts with the Bank as agents of Indian Rayon and Century Rayon. It will not be necessary to examine the same as the defendant No. 2, who is .....

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#39; contracts not as agents of the Indian Rayon or Century Rayon but on their own account. Accordingly, this issue is decided in favour of the plaintiff. Issues No. 3 to 6; Issues No. 3 to 6 are inter connected and it will be convenient to take them together. In order to determine the basic question as to whether the forward contracts between the parties came to an end due to the ban it will be necessary to examine the relevant evidence led by the parties on the point. The plaintiff produced Mr .....

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, examined several persons including defendant No. 2 in support of their stand that they were acting as agents of Century Rayon Corporation Limited and Indian Rayon Corporation Limited in respect of the contracts in question. Except the statement of defendant No. 2, who also stated about the banning order and its ramifications, reference to statements of these persons will not be necessary as I have already held that the defendants did not sign the forward contracts as agents of Century, Rayon a .....

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o secure the interest of the bank they used to enter into cover sale contracts with other banks. Explaining the reasons for entering into such transactions, he stated that this was done to secure against the fluctuations in foreign currency rates. He-also asserted that he dealing banks and the customers arc bound by the Exchange Control Manual and Foreign Exchange Dealers' Association of India Rules (for short 'FEDA' Rules) issued by the Reserve Bank of India. He alluded to the fact .....

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etting the cover contracts entered into with other banks cancelled and this could be done only if defendants first got their forward contracts with the plaintiff cancelled; threat where the exporter does not deliver dollars within the stipulated period fixed by a forward contract, the plaintiffs obligation to the covering banks no letheless subsists and in that event, it purchases the dollars from the open market for handing them over to the covering banks; that the forward contract rate agreed .....

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delivery periods for the unperformed contracts were: (i) From 15.7.73 to 14.8.73 (ii) From 15.8.73 to 14.9.73, and (iii) From 15.9.73 to 14.10.73 Witness testified to the fact that the first contract was extended by one month while there was no such extension in regard to the other two. As regard the inability of defendants to deliver dollars to the plaintiff under the forward contracts the witness stated as follows :- "It is correct that the defendants could not effect delivery of dollars .....

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ntiff for discharging its liability towards the covering banks. As per the statement, July 11, 1977 was the date for determining the damages since on that date the contracts were cancelled and the suit was filed. He stated that dollars must have been purchased on that date. He further added that the purchase is entered in the plaintiffs books of accounts against the contract in question. In the next breath, he stated that "this specific purchase with regard to the contracts in dispute, howe .....

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anistan; that they approached the plaintiff bank for executing forward contracts in order to secure against fluctuations in foreign exchange; that four such contracts were entered into between the plaintiff and defendants; that one of them materialised fully while the other three could not materialise; that foreign exchange dealings are governed by the Feda Rules; that the defendants were apprised of the fact that the contracts will be governed by those Rules; that when the ban came in August 19 .....

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it P-19 the defendants for the first time took the stand that there was no need for them to cancel the contracts because the contracts stood frustrated due to the ban. In cross-examination, the witness admitted that before entering into forward contracts the defendants gave the supporting documents relating to their contracts with Century Rayon, Bombay, and Indian Rayon Corporation, Bombay, and the Afghanistan party who was to import the Rayon. He denied the suggestion that the defendants were n .....

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ed the Rules even before and on the date of entering into contract. However, the witness admitted that the copy of these Rules was not given to defendants as the same was not demanded by them. In so far as the cancellation of contracts is concerned, the witness stated that the cancellation could take place only if the defendants asked for the cancellation of the same and since they never asked for it the bank treated July. 11, 1977, when the suit was instituted, as the date for computation of da .....

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nge rates prevalent in London market. On their basis I prepared document marked 'Q' as on 9th and 11th July 1977. In cross-examination, he admitted that the aforesaid documents were not initialled by him and they were prepared on the basis of the rates conveyed by Press Trust of India as prevalent in London Market. Coming to the evidence of the defendants, the statement of defendant No. 2, Shri Kewal Krishan Sethi, need be noticed. Shri Kewal Krishan Sethi stated that the earnest traders .....

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t thereof the goods, except relating to one contract, could not be exported. The witness admitted that he had been seeking extensions from the plaintiff bank so that he could secure exemption from the ban. In the cross-examination, he admitted that he was dealing with the State Bank of India on his own account and not on account of Indian Rayon or Century Rayon. This is all the evidence which parties led in regard to the aforesaid issues. I will first determine the implication of the 'bannin .....

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defendants entered into the afor;said forward contracts under which the defendants were to deliver dollars, and the plaintiff was to pay ₹ 100 for every Us $ 13.79 to the defendants received from the Afghanistan party. All the witnesses have stated that export was not possible in view of the 'banning order' Since the export were not possible in view of the 'banning order' the defendants were not able to deliver the dollars to the plaintiff agreed to under the three unperfo .....

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destroyed the very foundation of the forwarding contracts as bargain between the parties was made on the assumption that the export of rayon would remain open. After the ban fundamentally different situation emerged which was not due to the creation of the contracting parties but was due to the order of the Government of India in which the parties had to hand at all. Due to the 'banning order' the forward contracts dissolved automatically. It is well settled that the supervening frustrat .....

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export the goods as the export orders were prior to the coming into force of the 'banning order'. He further contended that the defendants are liable to pay interest to the. plaintiff in accordance with sub-rule 2 of Rule 9(III), and Rule 9(III) of the Feda Rules, which are statutory in nature. He also convassed that in order to secure the interest of the bank, the plaintiff had entered into cover contracts with other banks and had to purchase dollars at a loss from other sources in ord .....

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eserve Bank of India rate from the date of expiry to the date of cancellation with a minimum of 7% p.a. (2) In the case of Bank purchases, interest at not less than 1% p.a. over the ruling discount rate of the Central Banking institution of the country on which exchange was fixed, from the date of expiry to the date of cancellation with a minimum of 7% p.a. Rule 9(IV): (1) Interest for the period for which the contract has remained overdue, as laid down in Iii above, (2) exchange difference as l .....

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ue to a supervening event beyond the. control of the contracting parties making the contract impossible of performance. It relieves the parties from the obligations which they had undertaken once such a situation arises. However, in the case of cancellation of a contract, it is determined at the volition of the parties or one of them and the same does not come to an end automatically. At common law, a man was bound by the obligations which he had undertaken to perform and was not to be excused o .....

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mpossible inherently or by its very nature, and no one can obviously, be directed to perform such an act. The second paragraph enunciates the law relating to discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done. The wording of this paragraph is quite general, and though the illustrations attached to it are not at all happy, they cannot derogate from the general words used in the enactment. This much is clear that the word "impossible" .....

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ajority of cases however the doctrine of frustration in applied not on the ground that the parties themselves agreed to an implied term which operated to release them from the performance of the contract. The relief is given by the court on the ground of subsequent impossibility when it finds that the whole purpose or basis of a contract was frustrated by the intrusion or occurrence of an unexpected event or change of circumstances which was beyond what was contemplated by the parties at the tim .....

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and frustrated by reason of an intervening impossibility or illegality of the act agreed to be done. In a nutshell, in a case of frustration, the contract is discharged. Keeping in view the above said principles I am of the opinion that Rules 9(III)(2) and 9(IV) will not apply as they do not deal with a situation where a contract stands discharged due to frustration. Both the Rules deal with a situation where a contract is cancelled. The plea of the plaintiff that it had cancelled the contract a .....

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transactions with the covering banks will not be a good ground to fasten liability on the defendants. In view of the fact that the contract had been discharged due to frustration, the defendants would not be liable to pay interest under Rule 9(III)(2) or Rule 9(IV) of the Feda Rules. In any event, the witnesses produced by the plaintiff, as already indicated above, were not able to specify the bank or banks with which they had entered into 'cover transactions'. They were also not able to .....

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