Supreme Court on applicability of Section 32 instead of Section 56: When contingency is agreed in advance
Introduction
The “Doctrine of Frustration” and “Force-Majeure” have become important facets of law during the time of global pandemic. Section 32 and Section 56 of the Indian Contract Act, 1872 (“ICA”) are the statutory provisions which come closest to encapsulating the principle of “Force-Majeure”. Section 32 of the ICA relates to contingent contracts and governs the express “Force-Majeure” clause in the contracts whereas Section 56 expresses the principle behind the concept of “Force-Majeure” in the form of the doctrine of frustration in the contracts.
The Supreme Court (“SC”) had recently in National Agricultural Co-operative Marketing Federation of India (“NAFED”) vs Alimenta S.A. (“Judgment”)i , stated that a foreign award which was against the fundamental policy of Indian law (which would adversely affect the administration of justice) cannot be enforced. The Sc along with the aforesaid also dealt with the circumstances under which the provisions of Section 32 and Section 56 of the ICA can be invoked, where the performing party is unable to perform its obligation(s) under the contract. In this article we touch upon the secondary aspect of the Judgment.
Brief facts of the case
In this case, NAFED (“Appellant”) and Alimenta S.A. (“Respondent”) entered into a contract on January 12, 1980 for supply of 5000 metric tonnes of Indian HPS Groundnut (“Commodity”) and the terms and conditions of the contract were as per Federation of Oil, Seeds and Fats Association Limited (“FOSFA”). The Appellant was a canalizing agency of the Government of India (“GOI”) and therefore there was a condition stipulated in the contract that for any export carried forward to next year from the previous year, it would require the express permission and consent of the GOI. In August 1980, out of the contracted Commodity of 5000 metric tonnes, the Appellant could ship only 1900 metric tonnes due to damage caused to crop by cyclone etc. in Saurashtra region. On October 6, 1980 both the parties (i.e., the Appellant and Respondent) executed an “Addendum to Agreement” for supply of remaining 3100 metric tonnes. Pertinently, Appellant was permitted by GOI to enter into exports for 3 years 1977-1980 but it had no permission to carry forward the supply to the subsequent year i.e., on 1980-81 and the GOI did not grant permission to Appellant for the supply of the remaining Commodity despite several requests of the Appellant. This led to the allegations by the Respondent that the Appellant has committed breach of its contractual obligations. The dispute eventually culminated in a foreign award against the Appellant, to which the Appellant preferred an appeal before the Delhi High Court. After a series of proceeding and appeals, the Delhi High Court upheld that the foreign award was enforceable and converted into a decree of the court. Subsequently, the Appellant aggrieved by the Impugned judgement filed an appeal before the SC.
Issue in question
One of the issues that arose before the SC was “Whether the enforcement of foreign award, which seeks to impose liability on Appellant for obeying the directions of the GOI, was opposed to the public policy of India”. The SC while dealing with the issue has dealt with an incidental question of law as under what contingencies the contract can be rendered void under Section 32 or Section 56 of the ICA, which is discussed in this update.
SC’s observation
The SC while interpreting Section 32 and Section 56 of the ICA held that Section 56 deals with the agreement to do an impossible act(s) or to do act(s) which become impossible or unlawful afterwards, which makes the promisor liable for compensation for the non-performance of the promise, if he knew or could have known with reasonable diligence that the act was unlawful or impossible. Section 32 of the ICA applies in case where the contract itself provides for contingencies upon happening of which contract cannot be carried out and provide the consequences of non-performance of the contract.
In reference to this, the SC opined that in the present case, both the parties were well equipped with the fact and agreed to it that Appellant being a canalising agency, could not supply the commodity without the prior permission of GOI nor could lawfully carry forward last year’s supply to next year as GOI’s permission was necessary to make it. In any such event if the GOI’s permission could not be obtained due to any reason(s). The Appellant would not be able to perform its part of obligation(s), and then the Appellant would not remain liable for any such non-performance.
The SC also analysed the judgement Ram Kumar vs P.C. Roy & Co. (India) Limitedii and found that that “Frustration” depends on what has actually happened and its effects on the possibility of performing the contract. Where one party claims that there have been frustration and the other party contests it, the Court has to decide ‘ex post facto’on the actual circumstances of the case.
The SC after analysing and discussing catenas of Indian Court Judgements such as Boothalinga Agencies vs V.T.C. Poriaswani Nadariii , Kunjilal Manohar Das vs Durga Prasad Debi Prasadiv, Smt. Sushila Devi and Ors vs Hari Singh & Othersv concluded that “expected event” in the present case was refusal by the GOI. On the happening/occurrence of such an event, it is fundamental as to be regarded by law as striking at the root and therefore, the contract was rendered void as per Section 32 of the ICA.
Further, the SC also clarified that in the present case because of the clear stipulation, it is apparent that the parties have already agreed for a contingent contract. Thus, Section 32 is attracted and not Section 56 as both the parties knew in advance that such a contingency was provided itself in case GOI’s executive order comes in the way, for the cancellation of the contract. Thus, the contract became void on the happening of the contingency, as provided in Section 32 of the ICA.
Conclusion
The SC in allowing the appeal clarified that the Appellant could not supply the required quantity of Commodity in view of the GOI’s refusal to accord the permission. The parties agreed and were aware of the fact that the contract would be cancelled on GOI’s refusal to accord the permission of supply as they were bound by the contract. Thus, the parties agreed for its cancellation and as such an award is against the basic law and public policy of India.
For a contract to be contingent contract, it is advised to have these essential elements amongst others - (i) valid contract to do or not to do something; (ii) performance of the contract must be conditional; (iii) The event mentioned in the clause must be collateral to such contracts and should not be at the discretion of the promisor; and (iv) some rules have to be followed for a contingent contract to be enforceable.
(i) Civil Appeal No. 667 of 2012
(ii) AIR 1952 Cal 335 (338)
(iii) AIR 1969 SC 110
(iv) AIR 1920 Cal. 1021(1024)
(v) (1971) 2 SCC 288
