Shree Digvijay Cement Co. Ltd. vs The State Trading Corporation Of ...
2006 Latest Caselaw 503 Del

JUDGMENT

Sanjay Kishan Kaul, J.

CS (OS) No. 561/1980

1. The plaintiff has filed a suit for recovery of the amounts spent on unutilised craft paper bags along with interest and legal expenses thereon amounting to Rs. 29,87,092/-. The plaintiff has also claimed future interest and costs.

2. The plaintiff is an existing company within the meaning of the Companies Act, 1956 engaged in the business of manufacture and sale of cement of various qualities and specifications. At the relevant period of time in 1976-77 the export of cement from India was made exclusively by the defendant which was the canalising agency appointed by the Government of India under the Export Control Order. The defendant Corporation used to enter into Contract with foreign purchasers for sale and export of the Indian cement and to meet its commitment used to enter into Contracts for purchase of cement from entities like the plaintiff. The cement which used to be exported was required to be packed in six ply craft paper bags, which were to bear the markings of 'export through STC of India Ltd.' or such other markings as may be prescribed by the defendant. The craft paper required for packaging was imported under the Import License of the defendant and the imported paper used to be converted into craft paper bags by the converters appointed by the defendant. Such bags were thereafter delivered to the plaintiff to be kept in stock for and/or on behalf of the defendant for the purposes of packing of cement to be exported to overseas buyers of the defendant.

3. The plaintiff requested the defendant to issue the letter of authority in its favor for importing 1,000 ton of craft paper as per letter dated 17.9.1976 (Exhibit D-4) in order to maximize exports and to enable the plaintiff to keep the required stocks of paper bag so that the export of cement may not suffer at any time. This paper was stated to cover the supply for the period from January to March 1976 and the plaintiff also appointed an approved converter to convert the imported paper into bags. The request of the plaintiff was accepted by the defendant vide letter dated 21.9.1976 (Exhibit D-5). There were, however, certain conditions imposed on the defendant in terms of the said letter, which has been reproduced hereunder, as it has the most material bearing on the controversy in the present suit.

General Products.

No. STC/GP/SKP/76-77

September 21, 1976.

M/s. Shree Digvijay Cement Company Ltd.

Bombay.

Sub: Import of sack kraft paper for Jan/March, 77    cement export requirements.
 

Kind Attention: Mr. M.L. Rathi
 

Dear Sirs,
 

Please refer to your letter No. DA/133/549 dated 17.9.76 requesting for issue of LA in your favor for importing 1000 tonnes of sack kraft paper in order to cover your Jan/March, 77 export requirements of cement. We confirm having since applied to JCCI&E for issue of necessary license and will send you the same as soon as received. As usual you will be required to pay service margin of 0.25 % on the value of the license.

2. Regarding your import proposal for 1,000 tonnes of Scandinavian origin @ US $ 452 C.I.F. net. from Elof Hansson, we hereby convey our approval to this import. Please ensure that the shipments are made positively between October/December, 76. In case the shipments during this period are not arranged for any reason, our this approval may be treated as cancelled and our fresh approval will be required for shipments beyond December.

3. As you are aware, for the present OPI and Wardens are the only two converters on our approved list. Hence this import is being allowed on the condition that the paper bags will be got manufactured from either of these two converters. However, in case, any further converters are approved by us subsequently, these can also be included in this list later.

4. As per Import Trade Control Regulations the paper imported against the LA prepared to be issued to you will be used for manufacture of bags for export of cement only and no portion thereof will, is any case, be diverted for any other use whatsoever. You will be required to give an undertaking to this effect on stamped paper (as per form attached) for being lodged with the office of the JCCI&E to enable clearance of the goods from the Customs on arrival. The details of arrangements concluded with the respective paper converters for manufacture of bags should also be advised to us as soon as finalised and we should be kept fully posted of any further correspondence with them on the subject. Of course this will also include the details of conversion charges payable to the converters. Please note that if any paper imported against the LA in question is not utilised for the above mentioned purpose due to any reason whatsoever including but not restricted to stoppage of exports of cement D &C will undertake to dispose of such remaining stock of kraft paper in the manner as may be directed and specified by the STC. In such a case, any unutilised portion of the import license/LA shall be surrendered to STC for being surrendered back to the office of JCCI&E.

5. Please acknowledge receipt and confirm the above.

Thanking you,

Yours faithfully,

for S.T.C. of India Limited, Sd/-

(N.C. Dembla) Dy. Marketing Manager

4. A reading of the aforesaid letter shows that the important conditions imposed on the plaintiff while getting the license issued for the import of the craft paper were as under:

i. The paper to be utilized only for manufacture of paper bags for packing of cement exported by STC.

ii. The conversion of paper into bags to take place only through a converter appointed and approved by STC.

iii. In case of there being any unutilized stock the same to be disposed of in the manner directed or specified by the STC.

iv. Plaintiff did not have the right to sell or dispose off any unutilized paper bags.

5. The plaintiff was also asked to give an Undertaking dated 4.10.1976 (Exhibit D-1/8) in the following terms:

UNDERTAKING Sub: Import of sack Kraft paper - Import license No. 4T/2405688 dt. 4.10.1976 Value Rs. 42,94,000/-

We, Shree Digvijay Cement Co. Ltd., Bombay hereby undertake that the entire stock of sack kraft paper imported against the above license will be exclusively used for the manufacture of paper bags required for packing of the cement to be exported against the export contracts negotiated by S.T.C. and no portion thereof will be used or disposed of otherwise by us.

We further agree that any non-application or misutilisation of the imported sack kraft paper will make us liable to penal action under the Import Trade Control Rules.

IN WITNESS WHEREOF, we Shree Digvijay Cement Co. Ltd., Bombay have signed these presents on 4th October 1976 at Bombay.

For SHREE DIGVIJAY CEMENT CO. LTD.

Sd/-

CONSTITUTED ATtorNEY

6. In view of plaintiff having accepted the terms and conditions, the defendant gave a split license along with letter of authority to the plaintiff under the cover of the letter dated 5.10.1976 (Exhibit D-7). This Import License bore No. GT.2405688 dated 4.10.1976 and the plaintiff even paid service charges to the defendant for the same and cleared the goods under the License. The letter of credit was opened by the plaintiff in favor of the foreign supplier and the payment arranged by the plaintiff.

7. The plaintiff cleared a total quantity of about 992.855 metric tonnes, which was handed over to the approved converters and 26,84,200 bags were made from the said paper. A substantive part of the bags were utilized and 6,61,714 bags remained unutilized of a total value of Rs. 31,86,087/-.

8. The dispute arose on account of a ban imposed by the Government of India in July 1977 on export of cement. The result of the ban was that the defendant could not export cement and the plaintiff did not have to supply the cement. The craft paper bags were to be utilized for packaging the cement for export and thus these bags remained unutilized.

9. The Purchase Agreements executed between the parties have also been placed on record. There are two such documents pointed out, dated 22.2.1977 (Exhibit D-24) and dated 18.5.1977 (Exhibit D-25). These agreements are in standard form and only the quantity is varying. The terms and conditions of packing set out therein in Clause 3 are as under:

3. PACKING:

(a) The Cement shall be packed in six play stitched kraft paper bags of 50 kgs. nett capacity to internationally acceptable standard of quality.

(b) 3% empty bags shall be supplied by the sellers free of cost with each shipment.

(c) Contractual tolerance per bag of plus/minus 2% is permissible but no tolerance in the overall weight of each shipment is allowed.

10. The plaintiff thus owed the contractual duty to pack the cement in the aforesaid craft paper bags.

11. In view of the unexpected ban imposed by the Government of India the STC informed the Government that some of the cement manufacturing units had unutilized stocks of craft paper bags, which were originally intended for packaging cement meant for export and that the Government may grant permission to exempt such craft paper bags from import levies. This permission was, however, declined vide letter dated 21/22.3.1978 (Exhibit PW-1/1). The said letter is as under:

G. Ramanathan

Deputy Secretary Government of India Deptt. of Industrial Development New Delhi.

D.O. No. 12-8/77-Cem.

March 21/22, 1978.

Dear Shri Bhupendra Singh,

Please refer to your D.O. letter No. STC/Cement/SKP/78 dated the 20th February 1978, to Shri S.M. Chakravarty, Director, regarding utilisation of imported sack kraft paper for internal distribution of cement.

I am to draw your attention, in this connection, to the minutes of the meeting held on 7-11-1977 in the room of Shri P.K. Kaul, Additional Secretary, Ministry of Commerce, wherein it was decided that question of kraft paper being exempted from import levies might not be possible, that STC being a commercial organisation had to conduct a large number of transactions during the course of the year and that they should be prepared to suffer losses in some of them and profits in others.

In view of the above, it is now for the STC to settle the claims of paper converters/producers in this regard and treat the expenses incurred on import of paper as a business loss.

Yours sincerely,

Sd/-

(G. RAMANATHAN)

Shri Bhupendra Singh, Chief Marketing Manager State Trading Corporation of India Chandralok, 36, Janpath New Delhi-110001.

Copy for information and necessary action to:

1. Overseas Packaging Industries Private Limited, 49, Bajaj Bhawan, Nariman Point, Bombay-400021.

2. Shree Digvijay Cement Company Limited, 97, Sunder Nagar, New Delhi-110003.

Sd/-

(G. RAMANATHAN) Deputy Secretary to the Govt. of India.

12. A reading of the aforesaid letter shows that the Government was of the view that STC being a commercial organization should be willing to bear both the profits and losses and thus it was for the defendant/STC to settle the claim of the paper converters/purchasers in this regard and treat expenses incurred on import of paper as a business loss.

13. The STC thereafter followed up the matter with the Government of India seeking permission to use the bags for packaging cement in the internal market and such permission was granted vide letter dated 26.10.1978 (Exhibit P-4). The said letter is as under:

No.12-8/77-Cem.

 

Government of India 
Ministry of Industry 
Department of Industrial Development 
NEW DELHI, the 26th October, 1978
 
1.  Shree Digvijay Cement      4. Associated Cement Companies,
    Co. Ltd., Bombay.             Bombay.

2.  India Cements Ltd.,        5. Tamilnadu Cement Corporation,
    Madras.                       Alangulam.

3.  Dalmia Cements Ltd.,       6. Saurashtra Cements,
    4, Scindia House,             Bombay.
    New Delhi.

 Sub: - Use of paper bags made out of imported sack kraft paper, originally intended for packing cement for exports, in the internal market for packing cement.
 

Sir,
 

The State Trading Corporation of India has represented to this Ministry that consequent on the ban imposed by the Government on the exports of cement outside the country, some of the cement manufacturing units which were exporting cement through them earlier have at present certain stocks of paper bags made out of imported sack kraft paper originally intended for packing cement for export and that these bags are lying with them unutilised. The Corporation approached this Ministry for permission to the manufacturing units to use the bags for packing cement in the internal market. The question of permitting such manufacturing units to utilise the stocks of paper bags made out of imported kraft paper and presently available with them for packing cement for use in the internal market has been considered in this Ministry. It has now been decided that such of the cement manufacturing units, which were exporting cement through the State Trading Corporation of India earlier and which have at present stocks of paper bags made out of imported sack kraft paper originally intended for packing cement for exports and imported into the country on the basis of licenses obtained through State Trading Corporation, may use such bags for packing cement in the internal market subject to the following conditions:-

i) There will be no increase in the packing charges i.e. packing charges for cement packed in paper bags will also be the same as announced by the Government for packing cement in new jute bags and serviceable second hand jute bags from quarter to quarter;

ii) The number of paper bags used will be counted against the limits allowed for use of serviceable second hand jute bags from time to time; and

iii) This permissions will not constitute as an approval of the Government for use of imported sack kraft paper under any other rules/regulations and it will be the responsibility of the State Trading Corporation or the producer concerned to obtain such clearance.

Yours faithfully,

Sd/-

(G. Ramanathan) Deputy Secretary to the Government of India

Copy for information and guidance to:-

1. Shri Mahesh Prasad, Joint Secretary, Ministry of Commerce, Civil Supplies & Co-operation, Deptt. of Commerce, New Delhi.

2. Shri B.C. Malhotra, Group Executive, State Trading Corporation of India, Chandralok, 36, Janpath, New Delhi.

3. Joint Cement Controller, New Delhi.

Sd/-

(G. Ramanathan) Deputy Secretary to the Government of India

14. The stand of the plaintiff was and is that they were acting as agents of the defendant insofar as the import of the paper bags were concerned and thus were liable to be compensated for the unutilized paper bags. A legal notice in this behalf was issued on behalf of the plaintiff dated 29.9.1978 setting out their claim and further stating that in case the bags were utilized for packaging cement for internal market then the differential cost be compensated to the plaintiff. This was followed up with another legal notice but the STC denied its liability.

15. It may be noted that the Cement Purchase Agreement contained an Arbitration Clause and the stand of the plaintiff is that the defendant on being asked to refer the matter to Arbitration with the stipulation that in the absence of reply it would be presumed that the defendant was not willing to refer the dispute to Arbitration, did not reply to the same.

16. The plaintiff utilized the cement paper bags for packing cement for internal market and in terms of the conditions imposed vide letter dated 26.10.1978 were able to recover cost of only Rs. 12,91,926.20, leaving a balance of Rs. 18,94,161/-. The suit has been filed for this principal amount along with interest, which has accrued till the filing of the suit and future interests and costs.

17. The suit has been resisted by the defendant whose principal contention is that there was no agency relationship with the plaintiff and the import of the craft paper by the plaintiff was on a principal to principal basis. The defendant has stated that prior to the import of 1,000 MT of craft paper, the defendant used to obtain licenses for import of craft paper from the licensing authorities with the Letter of Authority in favor of the bag converters nominated by the cement manufacturers. These cement manufacturers used to purchase their requirements of craft paper bags from the said bag converters of their choice on principal to principal basis and on terms and conditions settled between the said two parties. The cement manufacturers started representing to the defendant that this mode of purchase from the bag converters involved payment of sales tax on the price of the paper bags which included the cost of paper and thus if the licenses were made available directly to the manufacturers with the Letter of Authority in their favor the manufacturers would be able to save extra expenses incurred towards sales tax in purchase of said paper bags. It would also facilitate the manufacturers in keeping a stock of paper bags so that export of cement may not suffer. This request was made by the plaintiff vide letter dated 17.9.1976. The defendant also relies on the communication mentioned aforesaid.

18. The defendant states that it is paragraph 276 of the Import Trade Control and Book of Rules & Procedures for the period 1976-77 which would govern the licenses and not provisions of paragraph 275. This plea is taken as in terms of paragraph 275 the persons in whose favor the letter of authority is obtained/issued has only acted as the agent of the agency and the goods imported remained the property of the licensee.

19. The defendant has also denied that any bag converters were appointed by it but that the defendant had only conveyed the names of already approved bag converters and at the instance of the plaintiff had approved one additional bag converter.

20. An alternative plea taken by the defendant is that if it be assumed that the plaintiff is deemed to have imported the paper for which licenses were issued as agents of the defendant the paper was converted into paper bags by the plaintiff on its own from the bag converters of their choice and thus the conversion was on a principal to principal basis between the plaintiff and the converter.

21. A specific stand has been taken by the defendant that in terms of the plaintiff's contract with the defendant the plaintiff was to supply cement to the defendant packed in the craft paper bags at a fixed price. Thus the responsibility was of the plaintiff to have arranged for the craft paper and the payment made by the defendant was at fixed price. There was no separate payment made on account of the craft paper and thus there was no question of relationship of a principal and agent between the parties.

22. The defendant has also pleaded that the entire quantity of cement contracted to be purchased from the plaintiff was in fact purchased and paid for and the craft paper to be utilized for packaging was thus so utilized. Thus in case the plaintiff had imported excess craft paper in anticipation of further supplies and had got the same converted into paper bags, the liability could not be fastened on the defendant.

23. The Arbitration Clause between the parties is not denied but it is stated that there were no disputes to be referred to Arbitration. Be that as it may it would be suffice to note at this stage that both the parties have accepted the jurisdiction of the Civil Court to decide the controversy in question.

24. On the pleadings of the parties the following issues were framed on 25.3.1982:

1. Was craft papers imported by the plaintiff for an on behalf of the defendant and as its agent? If so of what amount and weight?

2. Were the craft paper bags prepared by the plaintiff for an on behalf of defendant and as its agent? If so of what quantity and value?

3. What was the effect of the ban imposed by the Government on th export of cement?

4. Were any bags which were prepared by the plaintiff for complying with the export orders of the defendant left over? If so of what quantity and value?

5. Did the plaintiff prepare craft paper bags in anticipation of the orders to be placed by the defendant for the export of cement and under the instructions of the defendant? If so how many and of what value?

6. Did plaintiff suffer any loss in the disposal of what the craft paper bags? If so how much and to what effect?

7. Is defendant liable for the loss so incurred by the plaintiff?

8. Is plaintiff entitled to interest and if so at what rate?

9. Is plaintiff otherwise entitled to claim damages from the defendant? If so how much?

10. Relief.

25. PW-1, Shri J.P. Jain proved certain documents on the basis of the records maintained by the plaintiff while PW-2 Shri P.C. Mehta dealt with the issue of quantum of unutilized paper bags. Shri Mehta was holding the office of the Manager (Accounts) of the plaintiff and gave the details of the paper imported. The total value of paper imported was Rs. 1,28,61,532.27. The conversion charges were also proved showing the total cost incurred by the plaintiff. 6,61,714 bags were left unused and were sold as per the Government orders for use of packing of cement in the local market in lieu of old gunny bags. The cost of these bags were worked out to Rs. 31,36,087/-. The plaintiff realized a sum of Rs. 12,91,926.28/- by utilization of these bags resulting in a loss of Rs. 18,94,161/- apart from interest.

26. Shri S.K. Navlakha appeared as PW-3 to prove his authority to institute the suit and the averments as set out in the plaint. An affidavit of evidence of Shri P.M. Talati was also filed to prove the case of the plaintiff.

27. The defendant led the evidence of one witness DW-1 Shri O.P. Harea, Marketing Manager, setting out the case of the defendant. It may be noticed that the testimonies led by the parties show that the case is more or less made out on the documents filed and the legal plea about the existence of the relationship of principal and agent which was really the only question argued by the learned counsels though in the written synopsis of the defendant there is an attempt to insert submissions never advanced before the Court.

28. The first two issues relate to the question of the relationship between the plaintiff and defendant both for import of the craft paper and for its conversion into paper bags. These are the two material issues since the plaintiff can only succeed if the relationship of principal and agent is established. In fact both the learned counsels for the parties argued as much.

29. The learned counsel for the plaintiff has emphasized on the conditions imposed at the stage of import dealing with the manner in which the craft paper was to be utilized. There is no dispute that the license was obtained by the defendant for the plaintiff. This paper was to be utilized only for manufacture of paper bags for packing of cement to be exported by the STC and the conversion had to also take place only through converters appointed and approved by the defendant. The manner of disposal of any unutilized stock was as per the directions of the defendant. The plaintiff furnished even the necessary undertakings in this behalf. Learned counsel for the plaintiff thus submitted that the ownership, control and supervision in respect of import was of the defendant.

30. The defendant after the ban on export of cement even made endeavors initially to seek permissions for exemption of duty from the Government and thereafter for disposal of the stock, which was however granted subject to certain terms and conditions.

31. Learned counsel for the plaintiff referred to Chapter 10 of the Indian Contract Act, 1872 (hereinafter referred to as the said Act), which deals with agency. Learned counsel referred to the provisions of Sections 182, 185, 186, 187, 188 & 222. The said provisions read as under:

182. 'Agent' and 'principal' defined. - An 'agent' is a person employed to do any act for another, or to represent another dealings with third persons. The person for whom such act is done, or who is so represented, is called 'principal'.

185. Consideration not necessary. - No consideration is necessary to create an agency.

186. Agent's authority may be expressed or implied. - The authority of an agent may be expressed or implied.

187. Definitions of express and implied. - An authority is said to be express when it is given by words spoken or written. An authority is said to be implied when it is to be inferred from the circumstances of the case; and things spoken or written, or the ordinary course of dealing, may be accounted circumstances of the case.

188. Extent of agent's authority. - An agent, having an authority to do an act, has authority to do every lawful thing which is necessary in order to do such act.

An agent having an authority to carry on a business, has authority to do every lawful thing necessary for the purpose, or usually done in the course, of conducting such business.

222. Agent to be indemnified against consequences of lawful acts. - The employer of an agent is bound to indemnify him against the consequences of all lawful acts done by such agent in exercise of the authority conferred upon him.

32. A reading of the aforesaid provisions shows that in case of a relationship of a principal and agent the authority of an agent may be expressed or implied and an implied authority has to be inferred from the circumstances of the case. Thus if the plaintiff is the agent of the defendant then in terms of Section 222 of the said Act, the defendant is liable to indemnify the plaintiff as a consequence of all the lawful acts done by the plaintiff which in the present case would be the import of the craft paper.

33. Learned counsel for the plaintiff referred to the judgment of the Apex Court in Chairman, Life Insurance Corporation and Ors. v. Rajiv Kumar Bhasker . It was held by the Supreme Court that the relationship of principal and agent can only be established by the consent of the principal and agent. The said consent need not necessarily be to the relationship of principal and agent itself. The principal and agent would be held liable to have consented if they have agreed to a state of facts on which the law imposes the consequences which result from agency, even if they do not recognize it themselves and even if they have professed to disclaim it. It was held that agency is consensual and not contractual. For creating a contract of agency in view of Section 185 of the said Act even passing of consideration is not necessary.

34. Learned counsel for the defendant emphasized the fact that a reference to the documents would show that the relationship between the plaintiff and the defendant was of a seller and a buyer. There was no element of agency in the interse relationship. It was the obligation of the plaintiff to supply the cement for ultimate export in craft paper bags. The Contract between the parties did not envisage or obligate the defendant to make arrangements for such craft paper bags. It was thus contended that the defendant only facilitated the plaintiff in importing the craft paper at the specific request of the plaintiff. The relevant communications in this behalf is dated 17.9.1976 (Exhibit D-4), which is as under:

DL/133/549

September 17,1976

State Trading Corporation of India, (Cement Export Division) Chandralok Building, Janpath, New Delhi.

Dear Sirs,

As discussed, in the interest of maximising exports and in order to enable us to keep the required stock of paper bags so that the export of cement may not suffer at any time, we request you to issue the Letter of Authority in our favor for importing 1,000 tonnes of kraft paper in order to cover our January to march exports. An early issuance of Letter of Authority in our favor will enable us to arrange early shipments, so that stocks may be maintained at all time in advance.

The offer for 1000/2000 tonnes from ELOF HANSSON is for US$ 452, G.I.F. net. As soon as Letter of Authority is issued in our favor we will open L.C. and complete all other formalities in order to arrange early shipments. The paper will be of the same quality and specifications as are being imported now from Scandinavian countries.

We hereby again confirm that we have nominated Overseas Packaging Industrial Pvt. Ltd., Bombay (OPI) who are approved converters, as our converter for paper bags.

Kindly issue Letter of Authority immediately in order to avoid any kind of delay in importing paper and making bags through the approved converter, OPI.

Thanking you,

Yours faithfully,

for SHREE DIGVIJAY CEMENT COMPANY LIMITED Sd/-

M.L. Rathi General Manager (Admn.)

35. Learned counsel for the defendant also emphasized the fact that the purchase order contained the stipulation that in case of any acts of the Government including but not restricted to imports or exports neither party shall have the right to claim eventual damages. Thus the object was that since the imposition of a ban was not something over which either of the parties have any control neither party shall claim any amount against each other as a consequence of the damages suffered arising from the same.

36. I have given deep thought to the controversy since this is the principal question to be considered between the parties. There is no doubt that the Contract for supply did not make a separate provision for supply of packaging material though it prescribed the manner of packaging. The packaging had to be procured by the plaintiff. It can however not be lost sight of that the true relationship in respect of this packaging material between the parties must be deciphered from the manner in which the parties operated the transaction. This is also the ratio of the judgment of the Apex Court in Chairman LIC & Ors. case (Supra). It is not necessary that a consideration must pass in this behalf and agency has to be held to be consensual and not contractual. Thus the fact that there was no separate consideration provided for the craft paper would have no material bearing on the relationship of the parties nor the absence of a Contract in this behalf. It is the surrounding circumstances and the manner of import and utilization of the craft paper which would determine whether the relationship between the plaintiff and defendant in respect thereof was of principal and agent or otherwise.

37. The admitted position is that the defendant had arranged for the license on service margin. That however would not itself suffice to fasten any responsibility on the defendant as the principal. However there are certain important conditions imposed by the defendant on the plaintiff which have material bearing.

38. The paper to be imported against license was to be utilized only for manufacture of paper bags for packing of cement to be exported by the defendant. It had to be specifically labeled with the name of the defendant. I am unable to accept the plea of the learned counsel for the defendant insofar as the conversion of paper into bags is concerned that the defendant did not have a role to play. There was a clear stipulation that it is only through converters appointed and approved by the defendant that the craft paper could be converted into bags to be utilized by the defendant.

39. The two most important aspects of the transactions are that in case of any unutilized stock remaining with the plaintiff, the same had to be disposed of in the manner directed or specified by the defendant. Not only that, the plaintiff did not have the rights to sell or dispose of any unutilized paper bags. The aforesaid conditions thus clearly show that the total control of the manner of utilization of the craft paper was with the defendant. No doubt the plaintiff paid for it and imported the same under the license but thereafter it was to be governed only as per directions of the defendant. The fact that the defendant did not have to pay any separate price for the bags as a component of the price of the cement to be contained in the bags would not make any difference as consideration is not something which is mandatory in establishing a relationship of a principal and agent. The plaintiff had also given an undertaking in the prescribed form to utilize the craft paper imported exclusively for the paper bags to be manufactured for benefit of the defendant to export the cement. The undertaking was comprehensive in itself indicating that the plaintiff would be liable for penal action in case of mis-utilisation of sack craft paper.

40. I am thus of the considered view that the aforesaid parameters do fall within the ambit of a principal and agent relationship as enunciated in the recent judgment of the Apex Court Chairman, LIC & Ors. case (Supra).

41. Another important factor to be considered is also the manner in which the parties understood the transaction. It has been observed in Chairman, LIC & Ors. case (Supra) that the consent for the relationship need not necessarily be of principal and agent itself but so long as they have agreed to state of facts on which the law imposes consequence which result from agency, it is the relationship of principal and agent which would govern the parties. The defendant in fact made representations to the Government to initially seek relaxation on the duty to mitigate the losses. This was found not acceptable to the Government which vide its communication dated 21/22.3.1978 (Exhibit PW-1/1) observed that the defendant being a commercial organization has to conduct a large number of transactions and must be prepared to bear losses in some of them and profits in others. The matter was further followed up vide communication dated 26.10.1978 (Exhibit P-4). The Government considered it appropriate to grant permission for the manufacturers of the cement to utilize the bags imported through the license obtained through the defendant subject to certain terms and conditions. Even in the said communication it was stipulated that the permission would not constitute an approval of the Government for use of imported craft paper under any rules/regulations and it would be the responsibility of the defendant/purchaser to obtain such clearance.

42. The defendant was conscious of its liability and tried to mitigate its losses. The initial attempt was to see that the losses were mitigated to the full but on being informed by the Government that the defendant must be ready to bear the losses and thus deal with the manufacturers in respect of the transactions, the losses were sought to be mitigated by seeking permission for using the bags for sale of cement within the country. However, utilization in this manner being subject to certain conditions could not recover the full cost of the bags.

43. In my considered view the plaintiff has thus been able to establish the relationship of principal and agent in respect of transaction and the craft paper was imported by the plaintiff for and on behalf of the defendant and was converted into bags for the use of the defendant.

44. Insofar as the question of quantum is concerned, the testimony of the witnesses of the plaintiff clearly establishes the total amount of craft paper imported utilized and the balance amount outstanding. It has been proved that 6,61,714 bags remained unutilized as per the testimony discussed hereinabove.

45. The issues are thus answered in favor of the plaintiff.

46. The ban imposed by the Government on export of cement has been proved through the documents (Exhibit P-4) and it is not even the stand of the defendant that there was no ban imposed. On the other hand the defendant is sought to mitigate the losses by seeking requisite permissions from the Government. Thus it is clear that the effect of the ban was that no export of cement could take place. The issue is answered accordingly.

47. Issue Nos. 4 & 5 deal with the question of quantification of the import, its utilization and the balance still remaining unutilized. The testimonies produced show the total amount of the bags made and the balance remaining unutilized. It may be noticed that though in terms of letter dated 21.9.1976 the craft paper import was to cover the export of cement from January to March 1977, the arrangement continued till July 1977 when the ban was imposed.

48. I am unable to accept the plea of the learned counsel for the defendant that the defendant has failed to establish that the balance bags which remained unutilized or that the testimony of the plaintiff was contradictory. In fact the real plea of the learned counsel for the defendant was that there was no relationship of principal and agent and thus there could be no liability for the said bags.

49. The factor which has to be kept in mind is that these bags could not be disposed of except as per the instructions of the defendant and thus the defendant cannot plead ignorance about the quantum of the bags remaining unutilized.

50. I am thus of the considered view that the plaintiff has been able to establish that the bags to be utilized for defendant were lying unutilized.

51. This issue relates to the quantification of damages. The plaintiff had unutilized paper bags. The Government circular dated 26.10.1978 helped in mitigating the losses. However the permission for use for internal market of the paper bags was subject to certain terms and conditions. These were as under:

i. The packing charges in the said paper bags was to be the same as those packed in jute bags.

ii. The number of paper bags would be counted against the limit allowed for use of serviceable second hand jute bags.

iii. The permission was not to constitute as an approval of the Government for use of the bags under any other rules/regulations.

52. The plaintiff utilized the same and has proved that the cost of 6,61,714 second hand jute bags as per the price fixed by the Cement Controller would be Rs. 12,91,926/-. The net loss thus suffered by the plaintiff would be Rs. 18,94,161/-.

53. Insofar as the liability of the defendant is concerned, the findings on Issue Nos. 1 & 2 has shown that the relationship of the parties is of a principal and agent. Section 222 of the said Act mandates that if any loss is suffered by the agent, the principal would indemnify the same. This is so since a Contract of agency is different from a contract of sales as an agent after taking delivery of the property does not sell it as his own property but sells the same as the property of the principal and under his instructions and directions. The loss thus suffered by the agent has to be indemnified. This principle has been propounded by the Supreme Court in The Bhopal Sugar Industrial Ltd. v. Sales Tax Officer, Bhopal . In Sri Tirumala Venkateswara Timber and Bamboo Firm v. Commercial Tax Officer, Rajahmundry AIR 1968 Supreme Court 784, a distinction between contract of sale and contract of agency was explained. The essence of the agency to sell is the delivery of the goods to a person who is to sell them, not as its own property but as the property of the principal who continues to be the owner of the said property and will therefore be liable to account for the sale proceeds. It is explained that the true relationship in each case has to be gathered from the nature of contract, its terms and conditions and the terminology used by the parties is not decisive of the legal relationship. Such a question is a mixed question of fact and law.

54. The result of the aforesaid discussion is that the defendant would be liable to re-compensate the plaintiff for the loss of Rs. 18,94,161/- in respect of paper bags.

55. The plaintiff has claimed interest @ 15 per cent per annum stating that it was availing all facilities from the bank at this rate. I am however not inclined to grant the said interest rate especially after taking into consideration the nature of the transaction. The paper bags were to be utilized for the cement to the supplied to the defendant for export and it was a Government ban which put an end to the same for which none of the parties were responsible. The suit was adjourned on numerous occasions for settlement and was even dismissed for non-prosecution and then restored I am of the considered view that taking into consideration all these factors the plaintiff should be held entitled to simple interest @ 6 per cent per annum.

56. The sale permission was granted by the Government of India on 26.10.1978 and the losses mitigated. The plaintiff called upon the defendant through legal notices on 22.11.1978 & 29.11.1978 to pay the amount but the defendant refused the liability vide letter dated 17.1.1979. I am thus of the considered view that the interest should be paid from 1.1.1979 on the failure of the defendant to pay the amount after notice. The plaintiff is thus held entitled to a sum of Rs. 18,94,161/- along with simple interest @ 6 per cent per annum from 1.1.1979 till the date of payment.

57. A decree is passed in favor of the plaintiff and against the defendant for a sum of Rs. 18,94,161/- along with simple interest @ 6 per cent per annum from 1.1.1979 till the date of payment. The plaintiff shall also be entitled to proportionate costs.

58. Decree sheet be drawn up accordingly.