Holding

Clauses 3 and 5 are valid and, together with clause 2, impose a minimum guaranteed royalty on 50,000 tons when production falls short, while clause 2 royalty is payable only on the quantity actually sold and delivered.

Summary

The State of Gujarat (successor to the State of Bombay) sued Dhrangadhra Chemical Works Ltd. for unpaid royalty under a 1950 agreement that required payment at Rs.0-2-3 per Bengal Maund on salt sold, a minimum annual production of 50,000 tons, and a guaranteed minimum royalty if production fell short. The company argued that clauses 3 (minimum production) and 5 (minimum royalty) were vague and void, contending that royalty was payable only on salt actually sold and delivered under clause 2. The trial court held that the company must pay the minimum royalty for years when production was below 50,000 tons and that clause 2 applies only to quantity sold. The Gujarat High Court reversed this, saying clause 5 could not override clause 2 and that no royalty was due in short‑fall years. The Supreme Court restored the trial court’s decree, ruling that clauses 3 and 5 are valid, supplement clause 2, and impose a minimum guaranteed royalty, while clause 2 royalty is calculated on the quantity actually sold and delivered.

Issues considered

Whether clause 5 creates a binding liability to pay a minimum royalty when the company fails to produce the stipulated 50,000 tons.
Whether clause 2 royalty is payable on the total quantity manufactured or only on the quantity sold and delivered.
Whether clauses 3 and 5 are void for vagueness and uncertainty.
How clauses 2, 3 and 5 should be read together for a harmonious construction of the agreement.

Subjects

royaltycontract interpretationminimum guaranteed royaltysalt manufacturinggovernment contractstate successionclause constructionvagueness

Judgment

.•

630
A

STATE OF GUJARAT

B v.

DHRANGADHRA CHEMICAL WORKS LTD.

April 9, 1985

c [D. A. DESAI, A.P. Srn AND V. BALAKRISHNA EJ«DI, JJ.]

Royalty, claitn for - Constitution of India Article· 229 - Govc~nn 1 ~ 11 t
(
contract for rihgt to 1rza•111Jact11re .wilt· Agree111ent dated 29. 1. /937 as inodijicd •
by a further ·agreements dated 4.f. 1950 • Clt11Hes 2 t J 5 - Interpretation
of- ~Vllether clauses 3 a11d 5 obligate pay111e 11t of royalty for n1ininuon 50,UOO
tons.

D
On January 29, 1937 an agreement had been t:ntercd into between the
Dhran~adhra Chemical Works· Ltd. and the Maharaja of l)hrangadhra
whereunder the company purchased from the Government of Maharaja, Shrce
Shakti Alkali Works in Dhrangadhra and th<! Salt Works at Kuda with
exclusive rights to m1nufacture salt at the Kuda Work<1 on certain condi~
tions. In ...\.pril 1948, the princely State of Dhrang~dhra got merged in the
E ncwely formed State of Saurashtra. By a further agreement dated January
4, 1950 entered into between the company and the Government Saurashtra ,
the company agreed to PJY to the Government of Sau·rashtra royalty at the
rate of R~. 0-2-3 (2 annas, 3 pies) per Bengal Maund on the total quantity'
of salt sold by them every year. The payment of royalty was to be made
as and when delivery was given by the respondent co1npany to the purchaser.
Under clause 3 of the said agreement the respondent company agreed to
manufacture a minimum quantity of atleast 50,000 ·tons of salt every year in
F
addition to the quantity required by the respondent company for
consumption in their Alkali factory. Clause 5 of the agreement provided for
the payment of a minimum royalty equivalent to an amount chargeable on the
minilnum quantity to be manufactured by the respondent company in accor-
dance with clause 3.

For the years 1950~53, there was a short fall in the production of salt
G by the respondent co1nany aggregating to 27300-0-54 tons, and the respondent
company made payments of royalty in terms of clause 2 of the agreement and
. refused to pay the minmum guaranteed royalty on 50,000 tons taking the
stand that clause 3 of the agreement was void due to vagueness and uncer-
tainty and since clause 5 was deperi.dent for its operation on clause 3 the said
clause 5 was also void due to vagueness. In spite of repeated demands the
respondent company persisted in its stand.
H
GUJARAT v.' DllRANGADllRA CHEMICAL 631
A
The State of Bombay, ~hich became the successor State, to the State of
Saurashtra in 1956 therefore, instituted the suit in the court of Civil Judge,
Senior Division, Surendranagar seeking to recover a slim of Rs. 506, 959-5-0
with interest at 6 per Cent per annum from the date of suit by way of
royalty payable by the respondent co!llp.any. The trial court, after a careful
and detailed consideration of the terms of ~he agreement as well as all the
relevant aspects of the case came to the conclusion that the respondent com·
pany was liable to pay royalty on the minimum quantity of 50,000 tons in
respect of each year in which the production of salt was less than 50,000 tons 8
after excluding the quantity required for consumptions in their own factory and
that for the years during which the production exceeded the stipulated minimum
of 50,000 toni;, royalty was chargeable only on the quantity of salt sold and
delivered by the cJmp1ny a id n lt 0:1 th! total quantity manufactured by it.
In this view it passed a decree in favour .of the appellant Which during the
p~ndency of the trial became th~ successor Govcril'meat to State of Bombay
on bifurcation of the State for a sum of Rs. 2,66,462-0-9 and dismissed the c
appellants' claim.

Whik concurring with th~ trial court [nth! view taken by it that under
clause 2 charge to royalty would. get attracted not by mere manufacture alone
but only at the pJint of sale and delivery of the salt to- the purchasers, the High
·court of Gujarat took ihe view in the two first and cross Appeals, that 'clause
5 could not be regarded as controlling Clause 2 and the liability o~ the tespon- D
dcnt company to pay royalty to government rested solely upon the terms of
clause 2 and held that merely on account of the fact that the respondent com~
pany had during certain years failed to manufacture the minimum quantity
of salt stipulated in clause 3, it could not be saddled with" liability for payment
of royalty during those years since under clause 2 royalty was to be paid
only on tQe quantity of salt actually sold and de,Hvered. The High Court
accordingly set aside the decree passe_d by the trial court aud dismisse~ the
appellant's suit, except regarding an amout of Rs. 16,631 which had been
admitted by the respondent cornpany to· be payable by it to the appellant.
Hence the two State appeals by certificate granted by the High Court under
Article 133 (1) (c) of the Constitution, as it stood-prior to the Amendment of
1972.
F
Allowing the appeals, the Court
HELD : 1. on· a coinbincd reading of clauses 2 to 5 of the Agreement
dated 4. 1. 50 it is clear, that while clauSe 2 was intended to operate and govern
the right5 and liabilities of the parties in respect of payment of royalty during
years whetl the compan):' mJ.intained' its normal scale of production, clauses
3 and 5 had.been deliberately in<>erted with the object and purpose of ensuring
that even in respect of lean years whe!-1 the production of salt by the comany G
~.fell short of the sitpulated minimum of 50,000 tons after excluding the quantity
required for the consumption in the company's own factory, the government
was to be paid a minimum guaranteed royalty equivalent to the amount charge-
able on 50,000 tons of salt which is stif)ulated as the minimum quantity to be
manufactured under clause 3. The interpretation Put on clause 2 by the High
Court ti.as the result of completely rendering clause 3 and 5 otiose. (637B·DJ H
632 SUPREME COURT REPORTS (1985] 3 S.C.R.

A 2. No doubt clause 2 is the princiPal clause providing for the
payment of royalty but it was to be operative in respect of years when the
production of salt by the company fell within the normal limits, lhat is above
the stipulated minimum. Clause 5 is a special provision for payment of a
n1inirnum guaranteed royalty in respect. of periods .when the production of
salt by the company fell short of the quaniity stipulated in clause 3. Hence
there is no conflict between clauses 2 and 5 ; on the contrary, they supplement
ll each other. [637E-F]
3. The terms of clause 2 are absolutely clear and provide for levy and
collection of royalty only when the salt is solJ and delivered by the comP?DY
to the purchasers. This obviously means that royalty can be charged thereunder
only on the quantity actu,ally sold and delivered by the company and not on
the total quantity manufactured by it during the particular years. [638A-B]
c CIVIL APPliHATE JURISDICTION: Civil Appeal Nos. 2144-2145
of 1970
From the Judgment and o,1cree dt. 13/l·i/24.3.69 of the High
Court of Gujarat in First Appeal Nos. 981/60 & 270/61.
M.N. Phadke, Girish Chandra, CY. Subba Rao and R.N.
J)
Poddar for the Appellant;

Mr. V. Gouri Shankar. K.L. Har/1i, M.K. Arora,. and Ms. JT.
Wahi, for the Respondent.
The Judgment of the Court was delivered by,
E
JlALAKRISHNA ERADI, J. These two appeals have been fi!e.J
by the State of Gujarat on the strength of a certificate granted by
the High Court of Gujarat under Article 133 (1) (c) of the Consti-
tution of India as it stood prior to the Amendment of 1972.
Dhrangadhra was a princely State in Kathiawar region ruled
F by a Maharaja, until April, 1948, when pursuant to the covenant
entered into by the Maharaja with the Government of India it
became merged in the newely formed State of Saurashtra.

On January 29, 1937, an agreement had been entered into
between theDharanagadhra Chemical Works Ltd., (hereinafter called
G the 'defendant company') and the Maharaja of Dhrangadhra where-
under the defendant company purchased from the Government of
Maharaja, Shree Shakti Alkali Works in Dhranagadhra and the
Salt Works at Kuda with exclusive rights to manufacture salt at
the Kuda Works on certain conditions. ·That agreement was
subsequently modified as per the Minutes of the Board of Directors
u of the defendant company recorded on April 5, 1953. After the
GUJARAT v. DHRANG\DHRA CHEMICAL (Balakrishna Eradi, J.) ·633

merger of the Dhrangadhra State in the State of S1urashtra, A
the aforesaid agreement was further modified by an agreement
dated January 4, 1950 entered into.between the defendant compmy
and the Government of Saurashtra. It is with that agreement
alone that we are concerned with in these appeals. Under that
agreement, the defendant company agreed to pay to the Govern·
8
ment of Saurashtra roylty at the rate of Rs. 0-2-3 (2 annas, 3 pies)
per Bengal Maund on the total quantity of salt sold by them every
year. The payment of royalty was to be made as and when
delivery was given by the defendant company to the purchaser.
Under clause (3) of· the said agreement the defendant company
. agreed to manufacture a minimum quantity of at least 50,000 tons of c
salt every year in addition to the quantity required by the defendant
company for consumption in there Alkali factory. Clause (5) of
the agreement provided for the payment of a minimum royalty,
equivalent to an amount chargeable on the minimum quantity to
be manufactured by the defendant company in accordance with
clause (3). D

There was a short fall in the the production of salt by the
company for the years 1950-53 aggregating to 27300-0-54 tons.
The royalty payable in respect of the said quantity of salt calculated
at the agreed rate of 2 annas, 3 pies per Bengal Maund amounted
E
to Rs. 1,07, 495-10-0. Differences arose between the Government
of Saurashtra and the defendant company with respect to the royalty
payable under the agreement. The said dispute mainly ·centred
round two points. According to the Government, irrespective of
the quantity of salt actually sold by the company during any year,
the company was bound to pay a minimum guarantee royalty in F
respect of 50,000 tons of salt by virtue of. the combined operation
of clauses· (3) and "(5) of the agreement. The stand taken by the
defendant company 'that clause (3) of the agreement was void due
to vagueness and uncertainty and since clause (5) was dependant
for its operation on clause (3), the said clause (S) was also vide due·
to vag_ueness. According to the defendant. company their liability G
to pay royalty was only under clause (2), whereundcr royalty was
realisable by the Government only on the total amount of salt
actually sold and delivered by the defendant company in each year.
In spite of repeated demands made by the Government of Saurashtra
the defendant company persisted in its aforesaid stand .. Whil~
1uatters stood thus, that as a result of the State reorganisation of H
634 SUPREME COURT REPORTS (1985] 3 S.C.R

/I 1956, the State of Bombay became the successor State to the State
of Saurashtra.

The State of Bombay instituted the suit out of which these two
appeals have arisen in the Court of Civil Judge, Senior Division,
Surendranagar seeking to recover Rs. 506,959-5-0 with interest at
B 6 per cent per annum from the date of suit by way of royalty
claimed to be payable by the defendant company on the terms of
the aforesaid agreement . of 1950. In defence to the suit, the
defendant company reiterated the pJsition it had taken in response
to the claims made on it by the Government of Saurashtra namely,
that clause~ (3) and (5) of the agreement were vague and void and
c that under clause (2) its liability was to pay royalty only on the
actual amount of salt sold by the company during each year:

The basis of the claim put-forward by the plaintiff was that
during the years when there was a short fall in the production, the
company ·was bound to pay royalty on the minimum _guaranteed
quantity of 50,000 tons of salt and that a sum of Rs. 1,07,495-10-0
D was due on this account. It was further urged on behalf of the
plaintiff that on a proper construction of clause (2) of the agree-
ment, the liability of the company was I? pay royalty not on the
quantity of salt sold and delivered by them during the years when
more than the minimum quantity stipulated in clause (3) had been
manufactured but on the actual quantity manufactured by the com-
E
pany irrespective of whether any portion thereof rcmaincJ
unsold.

The Trial Court after a careful and detailed consideration of
the terms of the agreement as well as all the relevant aspects of the
F case to the conclusion that the defendant company is liable to pay
royalty on the minimum qurntity of 50,000 tons in respect of each
year in which the production of salt was less than 50,000 tons after
excluding the quantity required for consumption in their own
factory. For the years during which the production exceeded the
G stipulated mini mum of 50,000 tons, the Trial Court held that royalty
was chargeable only on the quantity of salt sold and delivered by
the company and not on the total quantity manufactured by it. In
this view it passed a decree in the plaintiff's favour for a sum of
Rs. 2,66,462-0-9 and dismissed the suit in respect of the remaining
part of the plaintiff's claim.
H
GUJARAT v. DHRANGADHRA CHEMICAL (Balakrishna Eradl, J .) 635

While the matter was pending in the Trial Court, the. bifurca- A
tion of the State of Bombay had taken place and the area in
question became the part of the territory ofU1c S~ate of Gujarat
and the State of Gujarat had been substituted as plaintiff in tlie
suit.

Both the defendant company as well as the State of Gujarat B
filed appeals in the High Court questioning the correctness of the
aforesaid judgment and the decree of the learned Civil Judge.
First Appeal No. 981 of 1960 was appeal filed by the defendant
company· and First Appeal No.270 of 1961 was State's appeal.
Both these appeals were heard ·together by the Division Ben~h of
the High Court and they were disposed of under the judgment now C
impugned before us..

the High Court on a consideration of clauses (2), (3) and (5)
of the agreement was of opinion that even though clause (5) dealt
with a particular contingency namely, the failure of the defendant D
company to manufacture minimum quantity of salt as specified in
clause (3), it was "introduced by way o(abundant caution and not
by way of limiting the ambit and .scape of the operative part of the
agreement namely, clause 2." In the view of.the High Court, clause
(5) could not be regarded as controlling clause (2) and the liability
of the defendant company to pay royalty to Government rested
solely upon the terms of clause (2). In this view the High Court E
· held that merely on a<:count of the fact that the defendant company
had during certain years failed to. manufacture the minimum quan-
tity of salt stipulated in clause (3), it could not be saddled with
liability for payment ot royalty during those years since under
clause (2) royalty .was to be paid only on the quantity of salt F
actu1lly sold and delivered. The Division Bench of the High Court
concerned with the Trial ·court in the view taken by it that under
clause (2) the charge to royalty would get attracted not by mere
manufacture alone but only at the point of sale and delivery of the
salt to the purchasers. On the basis of the foregoing conclusions
reached by it, the High Court set aside the decree passed by the G
learned Civil Judge and dismissed a suit except regarding an amount
of Rs. !6,631 which had been admitted by the defendant company
to be payable by it to the plaintiff. Aggrieved by the said decision of
the High Court, the State of Gujarat has preferred these two
appeals before this Court.
H
636 SUPREME COURT REPORTS [1985] 3 s.C.R'

After hearing arguments on both sides and scrutinising the
A
terms of the agreement dated fanuary 4, 1950, we have unhesitatingly
come to the conclusion that the High GJurt was not right ininter-
fering with the·decree passed by the learned Civil Judge.

Since the points raised in the appeals turn on the inter-
pretation to be placed on the clauses (2) to (5), we shall reproduce
B those clauses in full.

They read-

"2. The company shill p1y a royalty to the Government at
the rate of 0-2-3 per Bengal maund on the total quantity
c of salt sold by them every year. The amount of royalty
nnder this clause shall be-paid by the company as and
when delivery is given by the company to the pur-
chaser, and for the purposes of ascertaining the royalty
chnrgeable under this clause the company shall pro·
duce the sale notes, delivery notes and such other
D documents or records as may be required by an Officer
authorised by Government in this behalf.

3. The company shall manufacture at least 50,000 tons of
salt in addi<ion to the quantity required for consump-
tion in their works. However, if it become impossible
E to produce the minimun quantity of salt required to
be broduced by this clause on account of natural
circumstances beyond the control of the company
Government may relax this requirement to such extent
as may be deemed fit by Government in view of such
circumstances.
F
4. The company shall make all efforts to raise the pro-
duction of salt above the minimum specified in clause
3 above.

G 5. In case company fails to manufacture the minimum
quantity of salt as specified in clause (3) above and
Government do not think it fit to relax the require-
ments of the said clause in accordance with the pro·
visions mpntioned therein, then notwithstanding any-
thin(l containecj in clause 2 above the company shall
ff
GUJA)l.AT v. DHRANGADHRA CHBMICAL (Balakrishna Eradi, J.) 637
pay the minimum royalty equivalent to an amount A
chargeable on the minimum quantity to be manufactu-
red in accordance with clause (3) of this agreement."
' • We do not find possible to agree with the High Court that
clause (3) was only 'introduced by way of abundant caution' and that
clause (5) does not ci·eate any liability for payment of a minimum
royalty. On a combined reading of clauses (2) to (5), it appears to us to
B
be clear that while clause (2) was intended to operate and govern the
rig?ts and liabilities of the parties in respect of payment. of royalty
during years when the company maintained its normal scale of
production, clauses (3) and (5) had been delil>erately inserted with
the object and purpose of ensuring that even in respect of lean c
years when the production·of salt by the company fell short of the
stipulated minimum of '50,000 tons after excluding the quantity
required for. the consumption' in the company's own factory, the
Government was ' to lie. paid a minimum guaranteed royalty
equivalent to' the amount chargeable on 50,000 tons of salt which
is stipulated as the minimum quantity to be manufactured under D
clause (3). the interpretation put on clause (2) by the High Court
has the 'result of completely rendering clauses (3) and (5) otiose
and'such interpretation does not' commend itself to us. We do not
also find it possible to agree with the view expressed by the High
Court that the liability for payment of royalty emanated only from
clause (2). No doubt clause (2) is the principal clause providing E
for the payment of roy&lty but it was to be operative in respect of
years when the production of salt by the company fell within the
normal limits, that is above the stipulated minimum. Clause (5) is
a special provision for payment of a minimum guaranteed royalty
in respect of periods when the production of salt by the company
F
fell short of the quantity stipulated in clause (3). Hence there is
no conflict between clauses (2) and (5) ; on the contrary, they
supplement each other. We are, therefore, constrained to hold
that the High Court was in error in its conclusion that in respect of
years when the company failed to produce the minimum quantity
of salt stipulated in clause (3), it was under no liability at all to pay
G
any royalty to the Government under clause (5). The Trial Court
was, in our opinion, perfectly right in granting a decree to the
plaintiff for the amount of royalty payable in respect of the short
fall in production during the years 1950-53.

There remains only the fnrther question, whether under the ff'
638 SUPREME COURT REPORTS (1985] 3 S.C .R.

terms of clause (2), the royalty payable thereunder is to be com-
puted on the total amount of salt manufactured by the company or
on the quantity sold and delivered. In our opinion, the terms of
the clause are absolutely clear and provide for levy and collection
6f royalty only when the salt is sold and delivered by the company
to the purchasers. This obviously means that royalty can be
B charged only on tbe quantity actually sold and delivered by the
company and not on the total quantity manufactured by it during
the particular year. The concurrent findings recorded on this point
by the High Court and the learned Civil Judge do not, therefore,
call for any interference.
c In the result, we allow these appeals, set aside the judgment
·of the High Court and restore the judgment and decree of the
learned Civil Judge subject to the modification that the rate of
interest payable to the plaintiff on the decree amJunt shall be 12
per cent from the date of the llrial Court. The costs incurred by the
D' appellant in this Court in these appeals will be paid by the respon-
dent. The appellant will also get its full costs from the respondent in
the High Court in First Appeal No.981 of 1960. The defendant com-
pany will bear its own costs in the Trial Court as well as in the
High Court. The plaintiff will get proportionate costs in the
Trial Court while the defendant will bear its own costs.
E

S.R. Appeals allowed.
F