Supreme Court’s take on Contingent Contracts v. Frustrated Contracts

Supreme Court’s take on Contingent Contracts v. Frustrated Contracts

Introduction

The Indian Contract Act, 1872 (ICA) defines the term “contract” under §2(h) as an agreement between two or more parties that engenders liability that is enforceable by law[1]. But sometimes these obligations might be affected due to sudden unexpected and unforeseen circumstances that are incapable of being known beforehand, eventually discharges the parties from their contractual obligations[2].

The term “frustration” is not defined by the Indian Contract Act. However, the Black Law’s Dictionary has elucidated the word frustration concerning contracts as “the doctrine where a party’s principal purpose is substantially frustrated by unanticipated changed circumstances, then that party’s duties are discharged and the contract is terminated”. It is also called as “frustration of purpose”[3].

In India, under the Indian Contract Act, §56 encompasses the concept of the frustration of contracts. The parties involved in the contract are set free from their contractual obligations as a consequence of an ensuing impossibility owing to the external factors and forces. Section 32 is associated with the conception of contingent contracts. It only applies when the contracts are discharged and the parties involved are relieved from their liabilities as per the terms pre-conditioned in the contract[4].

Contingent Contracts

The word “contingency” means something that is related to a future event and is uncertain. So, the term contingent contract means an agreement that is based on the occurrence or the non-occurrence of a future event that is likely or not likely to happen.Chapter III of the Indian Contract Act, 1872 incorporating §31-36 lays down the provisions that deal with the contingent contracts.

Section 31 of ICA defines a contingent contract is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen[5]. The term “collateral” here stipulates the event when the contract becomes valid depending upon the eventuality of the conditions specified in the contract in question.

Illustration: A and B enters into a contract, where A states that he would transfer the ownership and the possession of the disputed house to B if he wins the case. Here the transfer is conditional upon A winning the litigation. Hence, it is a contingent contract where the execution of the contractual obligations depended on a specific event.

Section 32 of the ICA concerns the implementation of contracts contingent on the happening of an uncertain event. Unless and until the event occurs, the contract cannot be enforced and when such an event becomes impossible, then such a contract stands void.

Illustration: A and B entered into a contract which stated that A would pay B Rupees One Lakh, if he married C. But, in the meanwhile C died without marrying B So, the contract becomes void.

Section 33 of ICA deals with the execution of contracts contingent on the not happening of a particular future event.

Illustration: A agrees to pay B Rupees Ten Thousand if a certain ship does not return from its voyage. The ship sinks while returning. Hence, the contract here can be enforced.

Section 34 deals with contracts contingent on the future conduct of a living person. If the future event on which a contract is a contingent is the way a person will act at an unspecified time, the event shall be considered to become impossible when such person does anything which renders impossible that he should so act within any definite time, or otherwise than under further contingencies.

Illustration: A agrees to pay B a sum of money if B marries C. But instead, C marries D. The marriage of B to C must now be considered impossible, although D may die, and C may afterward marry B.

Section 35 of ICA is regarding contracts contingent on happening of specified events within a fixed time. If the event does not happen within the specified time, then the contract becomes void.

Illustration: A agrees to pay B a certain amount of money if the ship returns within a year. If the ship returns within the specified time, then the contract is enforceable, if not it becomes void.

Section 36 states that agreements and contracts contingent on impossible events are void.

Illustration: A agrees to pay B Rupees One Thousand if two parallel lines intersect at a point, which is impossible. Hence the contract here is void.

Essential Elements of a Contingent Contracts

  • The implementation of the contract depends upon the occurrence or non-occurrence of some future event.
  • The occurrence or the non-occurrence of the event must be uncertain at the time of the agreement.
  • The future uncertain event must be collateral to the contract in question.

Frustrated Contracts

The Doctrine of Frustration was coined in Taylor v. Caldwell[6]. In this case, the context of the contract was a music hall. The defendant has accepted to let the music hall to the plaintiff on a specific date for entertainment.But the hall was destroyed due to fire before the dates. Howbeit, the plaintiff filed a case against the defendant asking for compensation due to the breach of contract. The defendant pleaded that due to supervening impossibility, he was discharged from his contractual obligations. The defense was successful and the suit was dismissed[7]. Hence, the doctrine was incorporated as the Doctrine of Frustration.

Section 56 of the Indian Contract Act speaks about the Doctrine of Frustration. It says, in certain circumstances, the parties to a contract are discharged from fulfilling their contractual responsibilities when there is a supervening impossibility, then the contract is said to be frustrated. This doctrine can be invoked when the performance of the contractual liabilities become impossible or when there is a fundamental change in the situation.

There are two forms of the impossibility of performance of the contractual obligations under §56 of ICA:

  • An agreement to do an impossible act is void from the very beginning.

E.g.: An agreement to put life into the dead body, is void.

  • An agreement to do an act becomes impossible after entering into the contract, because of the obstruction caused due to some unforeseen event that the promisor could not prevent. Hence the agreement becomes void at the stage of occurrence of the event[8].

In Robinson v. Davison[9], the defendant’s wife was a piano player and had promised to play piano at a concert on an occasion. But the contract was held to be frustrated when the pianist became too ill to perform. In the action brought against by the plaintiff, the defendant was not held liable.

The Hon’ble Supreme Court in Satyabrata Ghose v. Mugneeram Bangur and Co[10], held that the consequence of taking the defense of frustration is that the contract becomes void. The impossibility of performance may involve the physical impossibility of performance, i.e., where the subject matter of the contract is wrecked or is not in existence anymore, or the performance of the contract becomes unfeasible or practically becomes impossible to perform in consonance with the object and purpose the parties had in mind while entering into the contract.

Section 56 also speaks about the compensation for loss through non-performance of the act known to be impossible or unlawful. Where the party (promisor) promised to do an act under a contract he knew, or with due diligence might have known that such act was unlawful or impossible to perform, where the other party (promisee)to the contract did not know to be impossible or unlawful, then the former party is liable to pay compensation to the latter for sustaining any loss due to the non-performance of the promise.

Contingent Contracts v. Frustrated Contracts

The Hon’ble Supreme Court of India, in the National Agricultural Cooperative Marketing Federation of India (NAFED) v. Alimenta SA (2020) addressed the issue of impossibility of performance of a contract in consonance with §32 and §56 of the Indian Contract Act, 1872.

Facts of the Case

NAFED is a canalizing agency of the Government of India (GOI), that entered into a contract with Alimenta SA. As per the contract, NAFED had to supply a fixed quantity of groundnuts to Alimenta between the years 1979-80. But, NAFED was unable to do so during that period. Hence, the parties annexed an addendum to the original contract that stated NAFED could furnish the remaining quantity of groundnuts between the years 1980-81. Howbeit, NAFED was entitled to export the commodity by the GOI only for a period of 3 years, i.e., during the course of 1977-80.Hence to move ahead with the original contract and to transport the materials in the latter period, NAFED had to acquire explicit permission from the Government of India.

When NAFED approached the concerned authority for seeking permission, it was refused repeatedly. Due to the GOI’s denial in sanctioning the permission, NAFED was unable to export the groundnuts. It apprised the same to Alimenta via Telex.

Considering the telex as a notice for default in not performing the contract, Alimenta initiated the arbitration proceedings against NAFED to fulfill the contractual obligations under the addendum. Seeking to implement the award, Alimenta moved to the Delhi High Court.

Delhi High Court’s Judgement:

The Delhi High Court decided in favor of Alimenta, supporting its contention that NAFED’s implementation of the deal had become impossible due to the GOI’s reluctance to approve the export.

The Delhi High Court observed that it was a case of self-induced frustration. It said that NAFED had executed the addendum in the contract, understanding perfectly well that it would not be able to fulfill its portion of the deal in the absence of permission or approval from the Government of India.  Hence, even though the contract was rendered impossible as per the §56 of the ICA, still NAFED would be liable to pay Alimenta for committing, despite knowing the possibility that it may not be permitted to serve its task.

This decision of the Delhi High Court was contested in the Hon’ble Supreme Court by NAFED.

Supreme Court’s Judgement:

  1. Presence of the express clause in the contract between NAFED and Alimenta

The Hon’ble Supreme Court stated that the express Clause 14 of the contract in question between the parties had to be read with the Original Contract and the addendum, which had not been taken into account by the Delhi High Court.

Summary of Clause 14:

“If export was prohibited on account of any executive or legislative act by the Government of origin, or a blockade or restrictionon export was imposed, the performance of thiscontract would stand extended by30 days, and if the export continued to be impossible beyond such period, thecontract orany unfulfilled part of it would stand canceled.”

The Supreme Court observed taking the express clause 14 into consideration that, the contract between NAFED and Alimenta was bound to be terminated since the act of delivering the goods had become impossible. The Delhi High Court has erroneously decided that it was a case of frustration under §56 of ICA and had fallen short in considering the specific clause 14 of the contract.

NAFED was a canalizing agency and hence, it would not have been possible on its part to export the commodity without prior permission from the GOI.

The impossibility of performance by NAFED was within the scope of clause 14 of the contract. Therefore, by enforcing the contractual provision, the unfinished part of the contract by NAFED would be terminated and it will not be held responsible for providing the supply or the compensation to Alimenta.

(ii)Applicability of the §32 of ICA v. §56 of the ICA

  • (i)Applicability:

Section 32 of the ICA applies to contracts that are specifically built upon contingencies, i.e., the agreement is carried out based on happening or not happening of a future event. It also stipulates the consequences in case of the failure in executing the contract.

Whereas

Section 56 of the ICA applies to contracts that become impossible to perform at a future date, or when there is a fundamental change in the circumstances which was beyond the control of the party whose performance was hindered. Also, the exigency is not provided in the agreement.

  • Effect on the agreement:

In both cases, the contract becomes void.

  • The repercussion on the parties:

Under §32, if the contract is void, neither parties have to perform or complete the contractual obligation.

Whereas

Under §56, if any party with due diligence, whose performance is obstructed was aware of the ensuing impossibility, and the other party did not know about the same then, the former would be held accountable to compensate the latter for any loss endured because of the non-performance of the contractual obligations.

(iii) The irrelevancy of §56 in the current scenario

Clause 14 of the contract between NAFED and Alimenta specifies that, if the export is prohibited owing to any executive or legislative action, then the contract would be extended by 30 days. If even after the extended period the contract becomes impossible to perform, then the contract stands canceled.

Hence, the contingency on which the contract was based was rather quite probable and not unforeseeable, which is the essential ingredient to invoke §56 of the ICA.

The Court reiterated its decision in Satyabrata Ghose v. Mugneeram Bangur & Co.that “… if the contract contained an express or implied stipulation, according to which it would stand discharged on the occurrence of specific circumstances, its dissolution would take place as per the terms of the contract itself. Such cases would be outside the purview of §56 of the ICA and would be dealt with under §32 of the ICA.” This was further reaffirmed in Naihati Jute Mills Ltd. v. Khyaliram Jagannath[11]

Further, for §56 of the ICA to come into play, one of the parties should be unaware of the supervening impossibility. But, in this case, both the parties were well aware that the performance of the contractual obligation by NAFED was dependent on the permission sought from the GOI. So, due to the GOI’s refusal in giving permission, NAFED would not be held liable to pay damages for the losses endured by Alimenta.

(iv) Relevancy of §32 of the ICA in the present circumstances

As per the stipulation in Clause 14 of the contract, it is very well understood that both the parties in question had entered into a contingent contract. The contingency here was the procurement of permission from GOI by NAFED. Hence, without permission from the GOI, it was impossible to perform the contract.

Therefore, the failure in seeking permission from GOI by NAFED rendered the contract void in accordant with the §32 of the ICA.

Conclusion

This judgment of the Hon’ble Supreme Court of India lays down the elaborated principles distinguishing the contingent contracts from the contracts that are frustrated as per the Indian Contract Act, 1872.

The main point that distinguishes §32 from §56 is that whether the parties were aware and had the knowledge of the contingencies. The intention of the parties involved in such types of contracts can be ascertained through the terms and conditions of the contract or through the terms that are provided for such contingency in the contracts, either expressly or impliedly.

Also, a generic approach should not be followed while invoking §56 of the ICA in all the cases where the performance has been frustrated due to some event. We have to take into consideration if the event was unanticipated and unforeseeable or the parties involved in the contract predicted it and provided the same in the contracts[12]


[1] The Indian Contract Act, 1872 §2(h).

[2] Satyabrata Ghose v Mugneeram Bangur and Co, AIR 1954 SC 44 [14]. See also, Dhruv Dev Chand v Harmohinder Singh, AIR 1968 SC 1024 [6].

[3] Bryan A Garner, Black’s Law Dictionary (9th ed, West Group 2009).

[4] M. P. Ram Mohan, Promode Murugavelu, Gaurav Ray, Kritika Parakh, The Doctrine of Frustration under section 56 of the Indian Contract Act,Indian Institution of Management Ahmedabad, (Feb. 05, 2021, 3:00 PM), https://web.iima.ac.in/assets/snippets/workingpaperpdf/8569076382020-10-01.pdf.

[5] The Indian Contract Act, 1872 §31.

[6] Taylor v. Caldwell, 1863 (122) ER 309.

[7]Prof. Dr. Rega Surya Rao, Lectures on Contract (Contract I & II) 143 (2 ed. Asia Law House, Hyderabad).

[8]Subhashini Narayanan, Contingent Contracts vs. Frustrated Contracts: What does the SC have to say? Game Changer Law Advisors, (Feb.06,2021, 9:00AM), https://gamechangerlaw.com/contingent-contracts-vs-frustrated-contracts-what-does-the-sc-have-to- say/?utm_source=Mondaq&utm_medium=syndication&utm_campaign=LinkedIn-integration.

[9] Robinson v. Davison. (1871) LR 6 Ex 269.

[10] Satyabrata Ghose v Mugneeram Bangur and Co, AIR 1954 SC 44.

[11]Naihati Jute Mills Ltd. v. Khyaliram Jagannath, AIR 1968 SC 522.

[12]Subhashini Narayanan, Contingent Contracts vs. Frustrated Contracts: What does the SC have to say? Game Changer Law Advisors, (Feb.06,2021, 9:00AM), https://gamechangerlaw.com/contingent-contracts-vs-frustrated-contracts-what-does-the-sc-have-to- say/?utm_source=Mondaq&utm_medium=syndication&utm_campaign=LinkedIn-integration.

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