In a recent decision in the case NAFED vs Alimenta S A, the Supreme Court had the occasion to discuss the circumstances under which the provisions of Sections 32 and 56 of the Indian Contract Act 1872 apply when the performance of a contract has become impossible.
The main point in this case was whether a foreign award was opposed to public policy of India and was therefore unenforceable(separate report on that may be read here).
However, the bench comprising Justices Arun Mishra, M R Shah and B R Gavai also considered the incidental question whether the contract had become void under Section 32 or Section 56 of the Contract Act.
The appellant in the case, National Agricultural Cooperative Marketing Federation (NAFED), had a contract with a foreign-firm Alimenta SA for supply of ground nuts.
One of the conditions in the contract was that the export will be subject to the permission granted by the Government of India.
Since the Government of India prohibited export of ground nuts during the particular year, NAFED could not make the exports. This led to the allegation by Alimenta SA that NAFED had committed breach of its contractual obligations. The dispute eventually culminated in an foreign arbitration award against NAFED.
Alimenta sought the enforcement of arbitration award in India. When the Delhi HC allowed the application, NAFED appealed to the SC.
The SC had to decide the issue whether the enforcement of award, which seeks to impose liability on NAFED for obeying the directions of the Government of India, was opposed to the public policy of India.
Frustration of Contract
Before delving into that issue, the Court discussed if the contract was rendered void under Section 32 of Section 56 of the Contract Act.
There was an argument by Alimenta that frustration will not rescind the contract ab initio and that legal rights already accrued under it before the event of frustration will be left undisturbed.
In this connection, the Court referred to Section 32 of the Act, which states as :
"32. Enforcement of contracts contingent on an event happening.— Contingent contracts to do or not to do anything if an uncertain future event happens, cannot be enforced by law unless and until that event has happened.If the event becomes impossible, such contracts become void."
Section 56 of the Contract Act deals with the agreement to do an impossible act or to do acts afterward become impossible or unlawful. It also 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.
The attempt of Alimenta was to invoke Section 56 to state that NAFED was liable for non-performance as it knew about the condition of Government of India.
'Force Majeure', 'Act Of God' & 'Doctrine Of Frustration' Under Indian Contract Act [Explainer]
In that regard, the Court noted that the contract had a clear stipulation regarding the necessity of government sanction, and both the parties were thus aware of it.
Since the contract itself provided for the stipulation, the Court noted that Section 32 will apply.
"Section 32 of the Contract Act applies in case the agreement itself provides for contingencies upon happening of which contract cannot be carried out and provide the consequences. To this case, provisions of Section 32 of the Contract Act is attracted and not section 56".
The Court also noted that both the parties were aware of the fact that without government sanction, export would be impossible.
"In the present case, because of the clear stipulation in Clause 14 of the Agreement, it is apparent that the parties have agreed for a contingent contract. They knew very well that the Government's executive, or legislative actions might come in the way as provided in Clause 14 of the Agreement", the Court noted.
Therefore, the Court said that Section 32 of the Contract Act is attracted and not the provisions of section 56.
"It was an agreement to do an act impossible in itself without permission, and that is declared to be void by section 32. The contract was capable of being performed in case the Government gave the requisite authorization. It is not an event that was not in contemplation at the time of entering into the agreement. Government permission was necessary. Section 56 is not attracted as the promisor and promisee both knew the reason in advance as in agreement such a contingency was provided itself in case of Government's executive order comes in the way, for cancellation of the contract. Thus, the contract became void on the happening of the contingency, as provided in section 32 of the Contract Act"
"In this case, 'expected event' was a refusal by the Government as agreed to under Clause 14 of the Agreement. On the happening of such an event, it is so fundamental as to be regarded by law as striking at the root. As such, we are of the opinion that the contract was rendered void in terms of section 32 of the Contract Act". the bench added.
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