Supreme Court of India

VEB DEUTRFRACHT SEEREEDEREI ROSTOCK (D.S.R. LINES)DEPARTMENT OF THE GERMAN DEMOCRATIC REPUBLICversusNEW CENTRAL JUTE MILLS CO. LTD. AND ANR.

Citation: 1993 INSC 367
Decided: 5 November 1993
Bench: M M PUNCHHIN P SINGH

Holding

The appellant is deemed a department of the German Democratic Republic; therefore Section 86 of the Code of Civil Procedure applies and, in the absence of Central Government consent, the suit cannot be entertained.

Summary

The New Central Jute Mills Ltd. sued VEB Deutfracht Seereederei Rostock (D.S.R. Lines) for delivering damaged spare parts. The defendant claimed to be a department of the German Democratic Republic (GDR) and invoked Section 86 of the Code of Civil Procedure, 1908, which bars suits against foreign states without prior consent of the Central Government. The Calcutta High Court trial judge dismissed the suit on this ground; a Division Bench later set aside that order, directing the issue to be considered during trial. On appeal, the Supreme Court examined whether the appellant was indeed a department of the GDR, whether Section 86 applies to commercial contracts, and whether consent must be obtained before the suit proceeds. Relying on Article 12 of the GDR Constitution and a consular certificate, the Court held the appellant to be a department of the GDR, making Section 86 applicable, and held that the suit could not be entertained without Central Government consent. Consequently, the appeal was allowed, restoring the trial court’s dismissal of the suit.

Issues considered

Whether VEB Deutfracht Seereederei Rostock is a department or instrumentality of the German Democratic Republic for purposes of Section 86, CPC.
Whether Section 86, CPC applies to a suit arising out of a commercial contract and breach of contract.
Whether prior consent of the Central Government is required before a suit against a foreign state can be entertained.
At what stage the bar under Section 86 may be raised – at the pleading stage or only at final disposal.

Legislation cited

Code of Civil Procedure, 1908s. 86

Subjects

Section 86 CPCsovereign immunityforeign statecommercial contractcentral government consentstate departmentbreach of contractjurisdiction

Judgment

VEB DEUTRFRACHT SEEREEDEREI ROSTOCK (D.S.R. LINES) A
A DEPARTMENT OF THE GERMAN DEMOCRATIC REPUBLIC
v.
NEW CENTRAL JUTE MILLS CO. LTD. AND ANR.

NOVEMBER 5, 1993.
B
[M.M. PUNCHHI AND N.P. SINGH, JJ.)

Code of Civil Procedure, 1908-Section 86-Scope of-Indian company
purchasing spare parts and accessories from foreign company-Goods found
damaged-Suit filed. by Indian Company4"oreign Company, a State Depart- . C
ment claiming immunity as instlUmentality of State-Necessary prior consent
of Central Government not obtained-Suit-Maintainability of

The Respondent-Company filed a suit before the High Court against
the appellant-a foreign company, for decree of a sum of Rs. 2,40,000
alleging that it purchased diverse spare parts and accessories from die D
appellant, which were found to be damaged. The appellant opposed the
suit on the ground that it was an instrumentality of the State and as such
the suit could not be entertained without the prior consent of the Central
Government as requirei:I by S.86 of the Code of Civil Procedure 1908. A
Single Judge allowed the objection and dismissed the suit. E
On appeal, the Division Bench set aside the order of the Trial Judge
and directed that the objection taken by the appellant-defendant be con·
sidered during the trial of the suit. Against this decision, the defendant
preferred the present appeal.
F
The appeal was contested by the Respondent-Company stating that
the dispute had arisen in connection with a commercial contract and so
S.86 CPC. was not applicable, as sovereign immunity could not be extended
to commercial contracts.

Allowing the appeal, this Court
G

HELD : 1.1. In view of Article 12 of the Constitution of the German
Democratic Republic, and the certificate granted by the Counsel General
of the German Democratic Republic, the appellant shall be deemed to be
a department of the Government of German Democratic Republic. (666-C] H
659
660 SUPREME COURT REPORTS [1993) SUPP. 3 S.C.R.

A 1.2. The immunity and protection extended to the foreign State on
the basis of International Law should not be stretched to a limit, so that
a foreign company and corporation trading within the local limits of the
Jurisdiction of the Court _concerned, may take a plea of Section 86 of the
Code of Civil Procedure, 1908 although prima facie it appears that such
B company or corporation is liable to be sued for any act or omission on
their part or for any breach o~ the terms of the contract entered on their
behalf. It is neither the purpose nor the s_cope of Section 86 to protect such
foreign traders, who hav~ committed breach of the terms of the contract,
causing loss and injury ·to the plaintiff. But, if it appears to the Central
Government that, a"!lf attempt on the part of the plaintiff, to sue a foreign
C State, including any company or Corporation, is just to harass or to drag
them in a frivolous litigation, then certainly the Central Government shall
be justified in rejecting any such application for consent, because such
motivated action on the part of the plaintiff, may strai_n the relations of
this country with the foreign State. [666·G·H & 667·A·B]
D
1.3. In the instant case, the appellant being a foreign State within. the
meaning of Section 86 C.P.C. and the plaintiff-respondent not having
obtained the consent of the Central Government as required by Section 86
C.P.C the suit filed on its behalf was rightly not entertained by the Trial
E · Court. The question whether a suit should be entertained, cannot be
deferred, till the stage of the final disposal of the suit, because that will
sene neither the interest of the plaintiff nor of the defendant. The object
or Section 86 Is to save foreign States from being harassed by defending
suits In which there are hardly any merits. If the foreign State Is required
to Ole written statement and to contest the said suit and only at the stage
F or final disposal, a verdict Is given whether in the facts and circumstances
or the particular case, such foreign State is entitled to the protectJon or
Section 86 or the Code, the very object and purpose of the section shall be
. frustrated. The bar of Section 86 can be taken at the earliest opportunity
and the Court concerned is expected to examine the same. [667·C·E]
G
Mirza Ali Akbar Kashani v. United Arab Republic, (1966) 1 SCR 319,
Baccus S.R.L. v. Servicio Nacional Del Trigo, (1957) 1 Q.B. 438, Kmjina v.
The Tass Agency, [1949) 2 All England Law Reports 274 & Royal Nepal
Airline Corporation v. Monorama Mehar Singh Legha, AIR (1966) Cal. 319
referred to.
DEP'IT. OFTI:IEOERMAN DEMOCRATIC REPUBLICv. JUTE MILLS LTD. [N.P. SINOH, J.J 661

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 4208 of A
1983.

From the Judgment and Order dated 21.1.83 of the Calcutta High
Court in Appeal No. 94 of 1982.

Dr. Shankar Ghose, Parijat Sinha and B.D. Ahmed for the Appellant. B
P.R. Seetharaman for the Respondents.

The Judgment of the Court was delivered by

N.P. SINGH, J. The defendant is the appellant in this appeal. The C
suit in question was filed by the respondent, for a decree for Rs. 2,40,000
alleging that the respondent had purchased diverse spare-parts and acces-
sories from the appellant, which were found to be damaged. The appellant
is a Company incorporated under the appropriate laws of the West Ger-
many and is carrying on its business in West Germany as also at Calcutta. D
An objection was taken at the initial stage on behalf of the appellant
that it was a department and/or agent and/or instrumentality of the Govern-
ment of German Democratic Republic, which is recognised as a sovereign
foreign State and as such the suit in question cannot be entertained against
the appellant without prior consent- of the Central Government as required E
by Section 86 of the Code of Civil Procedure (hereinafter referred to as
"the Code"). The same plea was taken even no behalf of the carrier, which
also belongs to and is owned by the German Democratic Republic. In
support of the stand and in order to attract the bar of Section 86 of the
Code, the appellant produced the certificate dated 18.9.1981 granted by F
the Counsul General of the German Democratic Republic at Bombay
saying:

VEB Deutfracht, Seereederei Rostock, abbreviated as 'D.S.R.
commonly known as D.S.R. Lines constitutes a department of the
Government of the Ger~an Democratic Republic exercising the G
rights .of a legal entity."

The Constitution of the German Democratic Republic was also produced.
Reference was made to Article 12 of the said Constitution which says :

"Mineral resources, mines, power stations, barrages and large H
662 SUPREME COURT REPORTS (1993] SUPP. 3 S.C.R.

A bodies of water, the natural resources of the continental shelf, the
larger industrial enterprises, banks and insurance companies na-
tionally-owned farms, traffic routes, the means of transport of the
railways, ocean shipping and civil aviation, post and telecom-
munication. installations, are nationally-owned property, private
ownership thereof is inadmissible."
B
Iii respect of the carrier also, the Counsul General of the German
Democratic Republic at Bombay granted the certificate saying that the said
vessel "is owned by the people of the German Democratic Republic and,
hence, owned by the State."
c
A learned Judge of the Calcutta High Court by order dated 3.2.1982
allowed the objection taken on behalf of the appellant and rejected the
plaint saying that in absence of written consent by the Central Government,
as required by Section 86 of the Code, the suit filed on behalf of the
D respondent could not be entertained.- On appeal filed on behalf of the
respondent, the Division Bench set aside the order of the Trial Judge and
directed that whether the suit cannot be entertained in absence of consent,
. of the Central Government, should be considered during the trial of the
suit.
•. E
One of the principles of International Law is that every State
sovereign State respects the independence of every other foreign State.
. This absolute independence and the international comity underlines, the
relationship between sovereign States. The object of Section 86 of the Code
is to give effect to the principles of International Law. But, in India it is
F only a qualified privilege because a suit can be brought with the consent
of the Central Government in certain circumstances. Just as an inde-
pendent sovereign State may statutorily provide for its own rights and
liabilities to sue and be sued so can it provide rights and liabilities of
foreign States to sue .and be sued in its Courts. It can be said that effect
G of Section ·86 thus is to modify the extent of doctrine of immunity recog-
nised by the International Law. If a suit is filed in Indian Courts with the
consent of the Central Government as required by Section 86, it shall not
be open to any foreign State to rely on the doctrine of immunity. Sub-sec-
tion(!) of Section 86 says ill clear and unambiguous terms that no foreign
State may be sued in any court, except with the consent of the Central
H . Govemment certified in writing by the Secretary to that Government.
DEPTI. OF TiiE GERMAN DEMOCRATIC REPUBLIC v. JUTE MILLS LTD. (N.P. SINGH. J.1 663

Sub-section (2) prescribes that such consent shall not be given unless- it A
appears to the Central Government that the case falls. within any of the
clauses (a) to (d) of sub-section (2) of Section 86. Sub-section (6) enjoins
that where a request is made to the Central Government for the grant of
any consent referred to in sub-section (1), the Central Government shall
before refusing to accede to the request in whole or in part, give to the B
person making the request a reasonable opportunity of being heard. On a
plain reading of different sub-sections of Section 86, it is apparent that no
foreign State may be sued in any Court in India, except with the consent
of the Central Government which has to be certified in writing by the
Secretary to that Government. In view of the provisions aforesaid, before
any action is launched or a suit is filed against a foreign State, person C
concerned has to make a request to the Central Government for srant of
the necessary consent as required by sub-section (1) of Section 86 and the
Central Government has to accede to the said request or refuse the same
after taking into consideration all the facts and circumstances of the case.
In a sense it amounts to a bar on the power of Court itself which is entitled D
to try all suits of civil nature in view of Section 9 of the Code. But, Section
9 itself recognises. the limitation on such Courts to try any suit the cog-
nizance whereof is either expressly or impliedly barred. As. such whenever
a relief is sought against a foreign State, the Court before which sue~ claim
is lodged has to examine whether the person concerned has got the consent
of the Central Government in terms of Section 86 of the Code. E

The stand of the respondent is that as the dispute has arisen in
connection with a commercial contract, Section 86 shall not be applicable.
According to 'the respondent, tlie framers of the Code, while reconising the
sovereignty and the immunity of the foreign States on principles recognised p
by the International Law, never purported to give immunity to the breach
and contravention of the terms of the contract entered on behalf of the
foreign State; which has nothing to do directly or indirectly with the
sovereignty of the one State or the other but relates to commercial trade
between the two States. There cannot be any conceivable object to keep G
such contracts within the scope of Section 86. As a first impression, this
looks attractive. But, from bare reference to sub-section (2) (b) of Section
86, it shall appear that it requires such consent of the Central Government
even in respect of agreements relating to commercial or trading contracts,
because it say that such consent "shall not be given, unless it appears to
the Central Government that the foreign State ........... by itself or another, H
664 SUPREME COURT REPORTS [1993] SUPP. 3 S.C.R.

A trades within the local limits of the jurisdiction of the Court". If sub-section
2(b) of Section 86 itself prescribes that the consent to sue shall not be given
unless it appears to the Central Government that the foreign State which ·
is being sued, by itself or by any other authority, trades within the local
limits of the jurisdiction of the Court, how it can be held that such consent
B is not required in connection with commercial contracts. If for granting
consent the Central Government is required to be satisfied as to whether
such foreign State, by itself or by any other authority, trades within the local
limits of the jurisdiction of the Court concerned, then can it be urged that
commercial contracts relating to trade and business havihg' been enfor~d
on behalf of a foreign State are beyond the purview of Section 86 of the
C Code?
This Court' in the case of Mirza Ali Akbar Kashani v. United Arab
Republic, (1966] 1 SCR 319, pointed out in respect of seetion 86 :-

"......... s.86 (1) proceeds to prescribe a limited liability against
.D foreign States. The limitation on the liability of foreign States to
be sued is twofold. The first limitation is that such a suit cannot
be instituted except with the consent of the Central Government
certified in writing by a Secretary to that Government. This re-
quirement shows the anxiety of the Legislature to save foreign
E · States from frivolous or unjustified claims. The second limitation
is that the Central Government shall not give consent unless it
appears to the Central Government that the case falls under one
or the other of clauses (a) to (d) of s.86 (2). " ·

It is true that Government Corporations have been incorporated to
F undertake the activities, which at one time were directly part of the
activities of the foreign State. A question may arise whether the imm~ty
provided by Section 86 of the Code can be extended to even such Govern-
ment Undertakings which have their own legal entity. At one time, in view
of their corporate and juristic personality, such Government Corporations
G were held not to be part of a State having their own independent existence.
But, this aspect was re-examined by the English Court as well as this court
In the case of Baccus S.R.L. v. Se1Vicio Nacional Del Trigo, [1957] 1 Q.B.
438, it was said :

"Are we then to hold that the State of Spain. is deprived of
H sovereign immunity with respect to this activity of importing and

-
DEP'IT. OFTHEGERMAN D°EMOCRATIC REPt.:BLIC•. Jt.:TEMILL<; LTD. (:\.P. Sl:\GH.J.( 665

exporting grain by reason of the fact that the defendants arc a A
corporate body'! fn my view that would he plainly wrong. fn these
days the Government of a Sovereign State is not as a rule reposed
in one personal sovereign: it is necessarily carried out through a
complicated organization which ordinarily consists of many dif-
ferent ministries and departments. Whether a particular ministry
or department or instrument, call it what you will, is to be a
B
corporate body or an unincorporated body seems to me to be
purely a matter of governmental machinery."

Again, in Karjina v. The Tass Agency, (1949] 2 All England Law Reports
274, it was pointed out : C

"The history of the legislation in this country as regards the depart-
ments of State seems to me to show that it is quite possible that a
State may for certain purposes under its own legislation give some
department of State the status and the rights of a juridical entity D
without depriving the department of its general immunity from suit,
and it seems to me that it would be impossible to say - no doubt,
our government would not wish to say - that the Crown had thereby
deprived itself of the right to rely on that immunity if an attempt
were made to sue it in a foreign country. One must look in every
case at the facts to reach a conclusion whether the Crown has E
intended to give up its immunity generally or only for limited and
defined purposes."

In the case of Royal Nepal Airline Corporation v. Monorama Mehar
Singh Legha, AIR (1966) Cal. 319, a Division Bench of the Calcutta High F
Court held that Nepal Airlines Corporation having its office at Calcutta
shall be deemed to be department of the Government of Nepal on the basis
of the documents produced before the Court and as such was entitled to
claim immunity from the process of the Indian Court to exercise its
jurisdiction in respect of the claim for damages which had been brought
by the plaintiff of the said suit. But, at the same time, it must be impressed G
that any plea of immunity raised by a corporate undertaking of a foreign
State, has to be examined on the basis of materials produced on behalf of
such undertaking or corporation. The initial onus of establishing that such
corporation or undertaking had right to immunity, must be discharged. If .
it satisfies the court that because of any constitutional provision, although H
666 SUPREME COURT REPORTS (1993] SUPP. 3 S.C.R.

A such corporation has its separate legal entity, still it shall be de'cmed to be
a department of the Stale for purpose of immunity, then only the onus will
shift lo the plaintiff lo disprove any such claim.

In. the present case, the appellant had produced the Constitution of
the German Democr.atic Republic, Article 12 whereof has been
B reproduced above, which provides that larger industrial enterprises, banks,
insurance companies, nationally-owned farms, means of transport of the
railways, ocean shipping and civil aviation, post and telecommunication
installations, are nationally-oWned property, private ownership thereof is
· inadmissible. ln view of the aforesaid Article 12 of the Constitution and
C the certificate granted by the Counsul General of the German Democratic
Republic, the appellant shall be deemed to be a department of the Govern-
ment of Getman Democratic Republic.

Sub-section (2) of Section 86 of the Code says that such consent shall
D not be given unless it appears to the Central Government that the suit in ·
question has been filed under the conditions mentioned in clauses (a) to
(d) of sub-section (2) of Section 86. Clause (b) of sub-section (2) provides
that consent shall be given, in respect of a suit, which has been filed against
a foreign State, if such foreign State 'by itself or another, trades within the
local limits of the jurisdiction of the Court'. When sub-section (2) provides
E t~at such consent shall be given by the Central Government in respect of
cases covered by clause (b) of sub-section (2), then a person who is to sue
in any court of competent jurisdiction, against any such foreign State or
any company or corporation which can be held to be a foreign State in
respect of any breach of contract, is entitled to apply for consent of the
F Central Government and the Central Government is expected to consider
the said request taking into consideration the facts and circumstances of
that particular case. While considering the question of grant or refusal of
such consent, the Central Government is expected to examine that question
objectively. Onc.e the Central Government is satisfied that a cause of action
G has accrued to the applicant against any foreign company or corporation,
which shall be deemed to be a foreign State, such consent should be given.
The immunity and protection extended to the foreign State on the basis of
International Law should not be stretched to a limit, so that a foreign
company and corporation, trading, within the local limits of the jurisdiction •.
of the Court concerned, may take a plea of Section 86 although prima facie
H it appears that such company or corporation is liable to be sued for at).y
DEP'IT. OF THE GERMAN DEMOCRATIC REPUBLIC v. JUTE MILLS LTD. [N.P. SINGH, J.) 667

act or omission on their part or for any breach of the terms of the contract A
entered on their behalf. It is neither the purpose nor the scope of Section
86 lo protect such foreign traders, who have committed breach of the terms
of the contract, causing loss and injury to the plaintiff. But, if it appears to
the Central Government that, any attempt on the part of the plaintiff, to
sue a foreign State, including any company or corporation, is just to harass
or to drag them in a frivolous litigation, then certainly the Central G.overn-
B
ment shall be justified in rejecting any such application for consent, be-
cause such motivated action on the part of the plaintiff, may strain the
relations of this country with the foreign State.

In the present case, the appellant having been held to be a foreign
State within the meaning of Section 86 and the plaintiff- respondent not
c
having obtained the consent of the Central Government, as required by
Section 86, the suit filed on its behalf was not rightly entertained by the
Trial Court. The question whether a suit should be entertained, cannot be
deferred, till the stage of the final disposal of the suit, because that will
serve neither the interest of plaintiff nor of the defendant. The object of D
Section 86 is to save foreign States from being harassed by defending suits
in which there are hardly any merit. If the foreign State is required to file
written statement and to contest the said suit and only at the stage of final
disposal, a verdict is given whether in the facts and circumstances of the
particular case, such foreign State is entitled to the protection of Section E
86 of the Code, the very object and .purpose of Section 86 shall be
frustrated. The bar of section 86 can be taken at the earliest opportunity
and the Court concerned is expected to examine the same.

Accordingly, the appeal is allowed. The order of the Division Bench
is set aside and the of the Trial Court is restored. In the facts and F
circumstances of the case, there shall be no order as to costs.

G.N. Appeal allowed.

H.
"

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