Impossible For The Party To Fulfil Its Obligations Under The Contract; Parties Cannot Be Referred To Arbitration: Telangana High Court

The Single Bench of Chief Justice Ujjal Bhuyan observed that though the lease deed between the parties contained an arbitration clause, however, judicial notice could be taken of the fact that the pandemic had broken out in the relevant period under consideration, and hence, it was impossible for the tenant to have paid the rent during the said period. Thus, the Court ruled that it was not a fit case where the parties should be referred to arbitration.

The applicant/ landlord Veeraboina Yadaiah and the respondent / tenant Ramakanth Dande entered into a lease deed. The applicant sent a legal notice to the respondent demanding the payment of outstanding rent within a specified time, failing which the arbitration clause would be invoked by the applicant. After the respondent failed to make the said payment, the applicant invoked the arbitration clause. Thereafter, the applicant filed an application before the Telangana High Court under Section 11(6) of the Arbitration and Conciliation Act, 1996 for appointment of arbitrator.

The respondent submitted before the High Court that in view of the pandemic and the Covid-19 outbreak, it was impossible for the respondent to pay the rent during the relevant period under consideration. The respondent averred that since the circumstances were outside the control of the respondent, the doctrine of frustration was attracted to the dispute between the parties.

The High Court noted that though the lease deed between the parties contained an arbitration clause, providing for reference of the disputes to an arbitrator; however, judicial notice could be taken of the fact that the pandemic had broken out in the relevant period under consideration.

The Court observed that as per Section 56 of the Indian Contract Act, 1872, an agreement to do an act impossible in itself is void. Also, the Court noted that as per the first statutory explanation to Section 56, a contract to do an act which, after the contract is made, becomes impossible, or by reason of some event which the promisor could not prevent, becomes void when the act becomes impossible or unlawful.

The Court noted that the Division Bench of the Andhra Pradesh High Court in the case of A.P. Mineral Development Corporation Limited versus Pottem Brothers (2016) had held that the common law principle of frustration has received statutory recognition by its incorporation in Section 56 of the Indian Contract Act. The Division Bench had noted that as per Section 56, a contract becomes unenforceable when the act becomes impossible or unlawful. Thus, the Division Bench had ruled that where the entire performance of a contract becomes substantially impossible without any fault on either side, the contract is prima facie dissolved by the doctrine of frustration. The Division Bench had held that where a defence of frustration is raised, the Court has to consider whether the circumstances pleaded did exist which could reasonably be considered as sufficient to hold that the parties were absolved from their obligations under the contract.

Hence, the Court ruled that it was impossible for the respondent to have paid the rent on time, especially during the relevant period under consideration.

Thus, the Court held that despite the presence of the arbitration clause in the lease deed, it was not a fit case where the parties should be referred to arbitration. The Court observed that it was more appropriate if the parties seek resolution of their dispute by way of mediation.

The Court thus dismissed the application.

Case Title: Veeraboina Yadaiah versus Ramakanth Dande

Dated: 01.07.2022 (Telangana High Court)

Citation: 2022 LiveLaw (Tel) 71 

Counsel for the Applicant: Mr. Mohd Riyaz Pasha

Counsel for the Respondent: Mr. D V Sudhir Kumar

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