Supreme Court Clarifies Scope of “Charges” in FCI Contracts: Food Corporation of India vs. Abhijit Paul (2022)

Date of the Judgment: 18 November 2022

Citation: 2022 INSC 540

Judges: A.S. Bopanna, J., Pamidighantam Sri Narasimha, J.

Can a government body recover demurrage charges from its transport contractors under the umbrella term “charges” in their contract? The Supreme Court of India recently addressed this question in a dispute between the Food Corporation of India (FCI) and its transport contractors. The core issue revolved around whether the term “charges” in the contract included demurrages imposed by the Railways. The Supreme Court, in this judgment, clarified that the term “charges” does not include demurrages in the specific context of the contracts under consideration. The judgment was delivered by a two-judge bench comprising Justice A.S. Bopanna and Justice Pamidighantam Sri Narasimha, with the opinion authored by Justice Pamidighantam Sri Narasimha.

Case Background

The Food Corporation of India (FCI) is responsible for procuring and distributing food grains across India. As part of its operations, FCI enters into contracts with transport contractors. In this case, FCI had a contract with Mr. Abhijit Paul (and other contractors) for transporting food grains from railway sidings to FCI depots. The contract included a clause (XII (a)) allowing FCI to recover “damages, losses, charges, costs and other expenses” from the contractors’ payments if losses were incurred due to the contractor’s negligence. After the contract was completed, FCI sought to recover demurrage charges imposed on them by the Railways, claiming that these charges fell under the term “charges” in the contract, due to the contractor’s failure to provide trucks on time, which led to delays in unloading the foodgrains from the railway wagons. The contractors objected, arguing that the contract did not explicitly include demurrage charges.

Timeline:

Course of Proceedings

The contractor filed a writ petition before the High Court of Tripura challenging FCI’s demand for demurrage charges. The Single Judge of the High Court allowed the writ petition, stating that FCI could only recover losses directly related to the contractor’s breach of contract under Section 73 of the Indian Contract Act, 1872, and not consequential losses like demurrage. The High Court also noted that FCI had unilaterally imposed the charges and directed the corporation to file a civil suit for recovery. FCI then filed a writ appeal, which was dismissed by the Division Bench of the High Court due to delay. A review petition by FCI was also dismissed. Similar writ appeals filed by FCI in other cases were also dismissed by the High Court. The contractors also filed writ appeals which were dismissed by the High Court directing them to avail alternative remedies. These orders of the High Court were then challenged before the Supreme Court.

Legal Framework

The primary legal framework in this case revolves around the interpretation of contractual terms, specifically clause XII (a) of the Work Order, which states:

“The Corporation shall 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…”

The Supreme Court also considered Section 73 of the Indian Contract Act, 1872, which deals with compensation for losses or damages caused by a breach of contract. The Court also examined the principle of contractual interpretation, emphasizing that the intention of the parties should be the primary guide in interpreting contractual terms.

Arguments

Arguments by the Food Corporation of India (FCI):

• FCI argued that the term “charges” in clause XII (a) of the contract should be interpreted broadly to include demurrage charges.
• They relied on the decisions in Raichand Amulakh Shah and Anr. v. Union of India [ (1964) 5 SCR 148] and Trustees of the Port of Madras v. Aminchand Pyarelal & Ors [(1976) 3 SCC 167] to support their claim that demurrage constitutes a charge.
• FCI also referred to its internal handbook, the “Movement Operations in Food Corporation of India (FCI Handbook 2020)”, to show that “charges” include “demurrage”.
• FCI contended that the interpretation proposed by the author of the tender document should be relied upon, citing Agmatel India Pvt Ltd v Resoursys Telecom & Ors [(2022) 5 SCC 362].
• They argued that they followed due process by issuing notices to the contractors before making recoveries.

Arguments by the Contractors:

• The contractors argued that FCI acted arbitrarily and failed to follow due process in determining their liability, despite previous High Court instructions.
• They contended that they were not responsible for loading and unloading food grains from railway wagons, and therefore, the delay leading to demurrage was not their responsibility.
• They highlighted that contracts from 2010 and 2018 explicitly included “demurrages” in the liability clauses because those contracts included loading and unloading of foodgrains, unlike the present contract.
• The contractors further argued that FCI could not be a judge in its own cause and unilaterally determine liability for demurrage, relying on State of Karnataka v. Shree Rameshwara Rice Mills [(1987) 2 SCC 160], BSNL and Anr. v. Motorola India (P) Ltd [(2009) 2 SCC 337], and J.G. Engineers (P) Ltd v. Union of India [(2011) 5 SCC 758].

Submissions of Parties

Issues Framed by the Supreme Court

The core issue framed by the Supreme Court was:

1. Whether the contractual clause enabling the Corporation to recover “charges” includes the recovery of demurrages.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

The Court distinguished the cases of Raichand Amulakh Shah [(1964) 5 SCR 148] and Trustees of the Port of Madras [(1976) 3 SCC 167], stating that they merely describe demurrage as a charge, but do not help in interpreting the present contract. The Court followed the principles of contractual interpretation laid down in Bihar State Electricity Board [(1990) 1 SCC 731], Union of India v. Raman Iron Foundry [(1974) 2 SCC 231], Provash Chandra Dalui [(1989) Supp (1) SCC 487], and BESCOM [(2021) 6 SCC 718], emphasizing the importance of context and the intention of the parties. The Court also relied on State of Maharashtra v. Digambar [(1995) 4 SCC 683] to clarify that the dismissal of a Special Leave Petition at the admission stage does not operate as res judicata. The Court also relied on State of Karnataka v. Shree Rameshwara Rice Mills [(1987) 2 SCC 160], BSNL and Anr. v. Motorola India (P) Ltd [(2009) 2 SCC 337], and J.G. Engineers (P) Ltd v. Union of India [(2011) 5 SCC 758] to support the argument that the Corporation cannot be a judge in its own cause and unilaterally determine the liability. The Court also relied on Halsbury’s Laws of England to explain the concept of latent ambiguity in contracts.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• Contextual Interpretation: The Court emphasized that the term “charges” must be interpreted in the context of the entire contract and not in isolation. The court observed that the scope of the expression “charges” must be understood as intended by the parties to the contract.
• Responsibilities of the Contractors: The Court noted that the contractors’ responsibilities were limited to transporting food grains, and they were not responsible for loading and unloading from railway wagons.
• Comparison with Other Contracts: The Court compared the present contract with other contracts entered by FCI in 2010 and 2018, which explicitly included “demurrages” in the liability clauses because those contracts included loading and unloading of foodgrains. This comparison highlighted that the present contract was different in scope and did not intend to include demurrage under “charges.”
• Latent Ambiguity: The Court found a latent ambiguity in the term “charges” as it could be interpreted in multiple ways. The Court used extrinsic evidence by comparing other contracts to understand the intention of the parties.
• Intention of the Parties: The Court aimed to discern the true intention of the parties, concluding that they did not intend to include liability for demurrage under the term “charges.”

Sentiment Analysis of Reasons Given by the Supreme Court

Fact:Law Ratio

Logical Reasoning Flowchart:

The Court considered an alternative interpretation that “charges” could include demurrages based on a textual reading and dictionary meaning. However, this interpretation was rejected because it did not align with the overall context of the contract, the responsibilities of the contractors, and the intention of the parties. The Court concluded that the term “charges” should be interpreted in a way that is consistent with the purpose of the contract and the responsibilities assigned to the contractors.

The Supreme Court held that the term “charges” in the contract did not include liability for demurrages. The Court reasoned that the contractors were only responsible for transporting food grains and not for loading and unloading them from railway wagons. Therefore, the demurrage charges, which arose from delays in unloading, could not be recovered from the contractors under the term “charges.”

The Court also emphasized that the intention of the parties, as understood from the context of the contract, should be the primary guide in interpreting contractual terms. The Court noted that the present contract was different from other contracts entered by FCI, which explicitly included demurrage charges when the contractors were responsible for loading and unloading.

The Court also noted that the Corporation cannot be a judge in its own cause and unilaterally determine the liability.

“Every contract is to be considered with reference to its object and the whole of its terms and accordingly the whole context must be considered in endeavouring to collect the intention of the parties, even though the immediate object of enquiry is the meaning of an isolated clause.”

“The exact colour and shape of the meaning of any word or expression should not be ascertained by reading it in isolation, but it should be read structurally and in its context, for its meaning may vary with its contractual setting.”

“In construing a contract the court must look at the words used in the contract unless they are such that one may suspect that they do not convey the intention correctly.”

There were no dissenting opinions in this case. The judgment was delivered by a two-judge bench comprising Justice A.S. Bopanna and Justice Pamidighantam Sri Narasimha, with the opinion authored by Justice Pamidighantam Sri Narasimha.

Key Takeaways

• The term “charges” in a contract must be interpreted in its specific context and not in isolation.
• The responsibilities assigned to each party in a contract are crucial in determining their liability.
• Government bodies cannot unilaterally determine liability and must follow due process.
• Comparison with similar contracts can help in understanding the intention of the parties.
• Demurrage charges cannot be recovered under the term “charges” in contracts where the contractors are not responsible for loading and unloading of goods.

Directions

The Supreme Court set aside the judgments of the High Court of Tripura in Writ Appeal Nos. 186 of 2020 and 187 of 2020, which had directed the contractors to avail alternative remedies. The Court clarified that its decision does not preclude FCI from pursuing other remedies, such as filing a suit for recovery, if the law allows.

Development of Law

The ratio decidendi of this case is that the term “charges” in a contract must be interpreted contextually, and it does not automatically include demurrage charges if the contractor is not responsible for the activities that lead to demurrage. The Supreme Court clarified that contractual terms should not be interpreted in isolation, and the intention of the parties should be the primary guide. This judgment reinforces the principle that contractual interpretations should be based on the specific context and responsibilities outlined in the contract, rather than a broad or generalized understanding of terms. This judgment did not change any previous positions of law, it only clarified the interpretation of the term “charges” in a specific context.

Conclusion

The Supreme Court’s judgment in Food Corporation of India vs. Abhijit Paul clarifies that the term “charges” in a contract does not automatically include demurrage charges, especially when the contractor is not responsible for the activities that lead to demurrage. The Court emphasized the importance of contextual interpretation, the specific responsibilities outlined in the contract, and the intention of the parties. This decision provides a significant guideline for interpreting contracts, particularly those involving government bodies and transport contractors, ensuring that liability is assigned based on the actual scope of work and responsibilities.

Category

Parent Category: Contract Law

Child Category: Interpretation of Contracts

Child Category: Government Contracts

Child Category: Section 73, Indian Contract Act, 1872

Parent Category: Indian Contract Act, 1872

Child Category: Section 73, Indian Contract Act, 1872

FAQ

Q: What was the main issue in the Food Corporation of India vs. Abhijit Paul case?

A: The main issue was whether the term “charges” in a contract between the Food Corporation of India (FCI) and its transport contractors included demurrage charges imposed by the Railways.

Q: What did the Supreme Court decide about the term “charges”?

A: The Supreme Court decided that the term “charges” in the contract did not include demurrage charges in this specific context. The Court emphasized that the term should be interpreted based on the context of the contract and the responsibilities of the contractor.

Q: Why did the Supreme Court rule against FCI?

A: The Supreme Court ruled against FCI because the transport contractors were not responsible for loading and unloading food grains from railway wagons, which was the reason for the demurrage charges. The Court also found that the contract did not explicitly include demurrage as a recoverable charge under the term “charges”.

Q: What is demurrage?

A: Demurrage is a charge imposed by the Railways for delays in unloading goods from railway wagons beyond a specified free time.

Q: Can government bodies unilaterally determine liability?

A: No, the Supreme Court emphasized that government bodies cannot unilaterally determine liability and must follow due process. They cannot be a judge in their own cause.

Q: What is the key takeaway from this judgment?

A: The key takeaway is that contractual terms must be interpreted contextually, considering the specific responsibilities of each party and the overall purpose of the contract. The intention of the parties is paramount.

Q: Does this judgment mean FCI cannot recover demurrage charges at all?

A: No, the Supreme Court clarified that its decision does not preclude FCI from pursuing other legal remedies, such as filing a suit for recovery, if the law allows.