A in Delhi contracts with B in Mumbai to supply jute material "as supplied by Jute Mills Calcutta". Mills shut down due to losses. B sues for damages. Decide

A in Delhi, B in Mumbai, and the Mills of Calcutta

The problem presents one of the most instructive situations in the law of contractual impossibility — a situation where A does not personally fail, but where the source from which he was to procure his goods fails. The question is whether the shutdown of Jute Mills, Calcutta, due to financial losses, excuses A from his obligation to supply jute material to B. The answer calls for a careful analysis of Section 56 of the Indian Contract Act, 1872, and the crucial distinction between a contract that is contingent on a third party's performance and one that merely uses a third party as the source of supply.

The Nature of the Obligation

To understand the legal position, the first task is to correctly construe the contract. A agreed to supply jute material "as supplied by Jute Mills Calcutta." The critical question is whether this description means that the very existence of A's obligation is contingent upon the mills supplying the goods — in other words, whether the mills' supply was a condition precedent to performance — or whether the phrase "as supplied by Jute Mills Calcutta" was merely descriptive of the quality or type of jute material to be delivered, leaving A absolutely bound to supply it from any available source.

This distinction is not merely technical. It determines whether A's obligation is conditional or absolute. If the phrase is merely descriptive — indicating the type or specification of jute, not the exclusive source — then A remains obligated to supply jute of that specification, even if he must obtain it elsewhere. The shutdown of the mill in that case would be his problem, not a supervening impossibility entitling him to walk free.

The Authority of Harnandrai Fulchand v. Pragdas

The foundational authority on this very question is the Privy Council decision in Harnandrai Fulchand v. Pragdas (AIR 1923 PC 54). There, the plaintiffs had contracted to buy a number of dhotis to be manufactured by specified mills, to be delivered "as and when the same may be received from the mills." The mills failed to supply the goods as they were preoccupied with fulfilling government contracts, and the sellers pleaded frustration. The Privy Council held that the bargain was not frustrated. The stipulation as to delivery did not make delivery by the mills a condition precedent. It was, the Privy Council said, a simple case of breach. The agreement to supply could not be read as meaning "if and when" — the words described the process of delivery, not a condition on which the very obligation to deliver rested.

The reasoning is compelling. When a contract requires supply "as manufactured by" or "as received from" a particular source, the natural construction in commercial dealings is that the named source indicates the description or specification of the goods, not a condition absolving the seller if the source fails. The seller remains bound to deliver goods answering that description, regardless of where he procures them.

The Supreme Court Reinforces the Rule: Ganga Saran v. Ram Charan Ram Gopal

The principle of Harnandrai Fulchand was expressly and emphatically followed by the Supreme Court of India in Ganga Saran v. Firm Ram Charan Ram Gopal (AIR 1952 SC 9). There, the parties had entered into contracts for the supply of certain bales of cloth manufactured by the New Victoria Mills, Kanpur. The contract provided: "We shall go on supplying goods to you of the Victoria Mills as soon as they are supplied to us by the said mills." The mill failed to supply the goods, and the sellers pleaded frustration under Section 56. The Supreme Court firmly rejected this plea and held the sellers liable. The court held that the contract was not contingent upon the happening of an uncertain future event, namely the goods being supplied by the mills. The words "as soon as they are supplied to us by the said mills" were only indicative of the process of delivery, and the contract did not fall within the second paragraph of Section 56.

This decision is of direct and decisive application to our problem. A's contract to supply jute "as supplied by Jute Mills Calcutta" is, by all reasonable construction, language descriptive of the nature of the goods, not language creating a condition precedent tied exclusively to the mills' performance. The mills' shutdown, however regrettable, does not relieve A of his contractual promise.

The Principle Against Third Party Default as Frustration

The law has consistently maintained that the doctrine of frustration does not extend to cases where a third person, on whose work or supply the promisor relied, fails to perform. This is one of the clearest limitations of the doctrine. A party who undertakes to deliver goods cannot excuse non-performance by pointing to the failure of his own supplier — that is a commercial risk he assumed when he entered into the contract. As the doctrine is stated in settled law: the doctrine of frustration does not extend to the case of a third person, on whose work the defendant relied, preferring to work for someone else during the material time, or failing to supply.

Furthermore, the shutdown of the mills due to financial losses — a commercially foreseeable risk in any industrial enterprise — is precisely the kind of ordinary commercial hardship that the law refuses to treat as supervening impossibility. Section 56 requires that the impossibility must arise from some event which the promisor could not prevent and which was not within his reasonable contemplation. A mill shutting down due to financial losses is not an act of God, nor a legal prohibition imposed by an external sovereign — it is the ordinary hazard of commercial life. The promisor who ties his supply to a particular mill takes the commercial risk of that mill's performance. If he wanted protection from such a contingency, he should have expressly provided for it in the contract itself. He did not, and the law will not imply it for him.

Could A Argue Frustration at All?

One might ask whether A could argue that the mills' shutdown was itself a supervening event striking at the foundation of the contract, akin to the destruction of the subject matter as in Taylor v. Caldwell (1863) 122 ER 309. The answer is clearly no. In Taylor v. Caldwell, the very subject matter — the music hall itself — ceased to exist, making performance literally impossible by anyone. In our problem, jute continues to exist; the Calcutta mills may have shut down, but jute material of the kind described remains available in the market. Other mills produce it, and A can procure it. The impossibility is not of the act itself but of procuring goods from one particular source. This falls squarely within the category of cases where the contract becomes more difficult or expensive to perform, not impossible — and the law is clear that commercial difficulty or increased cost does not amount to frustration.

Decision: B Can Succeed

Applying the law to the facts, B can certainly succeed in his suit for damages against A. The mills' shutdown due to losses does not relieve A of his contractual obligation. The words "as supplied by Jute Mills Calcutta" constitute a description of the type of material contracted for, not a condition precedent making the contract dependent on the mills' continued operation. A is bound to supply jute of that specification from whatever source is available. His failure to do so is a breach of contract, not a case of supervening impossibility.

B is entitled to compensation under Section 73 of the Contract Act for the loss naturally arising from A's breach — which would include the difference between the contract price and the market price of equivalent jute material at the time of breach, as well as any other foreseeable losses flowing from the non-supply. The measure of damages follows the well-established principles of Hadley v. Baxendale (1854), as applied in India under Section 73, compensating B for what he lost in the usual course of things by reason of A's failure to perform.

The only circumstance that might alter this conclusion would be if, on a true and careful reading of the contract, the parties had expressly agreed that supply was absolutely conditional on Jute Mills Calcutta being the exclusive and indispensable source — making the mills' continued existence the very foundation of the contract. If such was the clear and unambiguous intention of both parties, a different result might follow. But absent such an express provision, the settled law from the Privy Council and the Supreme Court leaves no doubt: A is liable, and B can recover damages.