STATE OF GUJARAT versus DHRANGADHRA CHEMICAL WORKS LTD.

Citation: [1985] 3 S.C.R. 630 · Decided: 09-04-1985 · Supreme Court of India · Bench: D.A. DESAI · Disposal: Appeal(s) allowed

Judgment (excerpt)

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630 
STATE OF GUJARAT 
v. 
DHRANGADHRA CHEMICAL WORKS LTD. 
April 9, 1985 
[D. A. DESAI, A.P. Srn AND V. BALAKRISHNA EJ«DI, JJ.] 
Royalty, claitn for -
Constitution of India 
Article· 229 -
Govc~nn1~11 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. 
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 
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 
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 
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. 
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( • 
GUJARAT v.' DllRANGADllRA CHEMICAL 
631 
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 
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 
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-
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

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