The Supreme Court of India in the matter of National Agricultural Co-opeartive Marketing Federation of India(NAFED) vs Alimenta SA Ci, put forth the grounds on which Section 32 (Contingent contract”) and Section 56 (Agreement to do impossible act) of the Indian Contract Act, 1872 may be invoked in the scenario of non-performance of obligation under the commercial contract by the party obligated to perform for the benefit of other Party.
Though the appeal was filed before the apex court to decide the enforceability of the foreign award, however, the Court has also deliberated upon the incidental question of law covering Section 32 and Section 56 of the Indian Contact Act. 1872.
Synopsis of the Case:
a) National Agricultural Cooperative Marketing Federation (NAFED) (Appellant) executed a contract with the foreign entity Alimenta SA (Respondent) for supply of 5,000 metric tonnes of Indian HPS groundnut (Commodity).
b) NAFED was a canalizing agency for the Government of India for the exports of the commodity. For any export, which is to be carried forward to next year from the previous year, NAFED required the express permission and consent of the Government of India, being a canalizing agency, which was expressly mentioned in the contract executed between Alimenta SA and NAFED.
c) The transaction was governed by covenants such as Force Majeure and Prohibition contained in Clause 14 of the Agreement, whereby in case of prohibition of export by executive order or by law, the agreement would be treated as cancelled.
d) In August 1980, NAFED shipped only 1900 metric tonnes of commodity in receipt to the first Agreement. The balance stocks of 3100 metric tonnes of commodity could not be shipped as scheduled, due to the Government restrictions.
e) This led to the allegation by Alimenta SA that NAFED committed breach of contractual obligation and eventually the matter was decided through arbitration, against the NAFED.
f) The NAFED filed an appeal with the Supreme Court, upon allowance of application of enforcement of award by the High Court.
Key Consideration under Section 32 and Section 56 are as follows:
Section 32 of the Contract Act provides for enforcement of contingent contracts, which reads as:
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. —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.”
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.
Whereas, 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 provides for liability of the promisor to do something which he knew or might have known with reasonable diligence an act which is impossible or unlawful; as such, the promisor must make compensation for the non-performance of the promise.
However, in the present case the parties were well equipped with the fact, that NAFED required the express permission and consent of the Government of India, being a canalizing agency, and in any event such permission could not be obtained due to any reason, than NAFED would not be able to perform its obligation, however, NAFED will not be liable for any such non-performance.
Court quoted that:
Ram Kumar v. P.C. Roy & Co. (India) Ltd., AIR 1952 Cal. 335 (338), the High Court held:
“20. Frustration depends on what has actually happened & its effect on the possibility of performing the contract. Where one party claims that there has been frustration & the other party contests it, the Court has got to decide the issue ‘ex post facto’ on the actual circumstances of the case.
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.
Further, in the instant case the Supreme Court has observed that because of the clear stipulation in clause 14 of the contract, it is apparent that the parties have agreed for a contingent contract. Also, that 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.
Section 56 deals with such contract and situation, wherein the performance of an act by a Party was possible at the time of its execution, however, due to occurrence of some supervening act or situation, beyond the control of either party, which has shaken the very foundation of the contract. Whereas, the section 32 deals with such situation where the contract itself provides for contingencies upon happening of which contract cannot be carried out and provide the consequences, alike present case.
In the scenario of entire nation lockdown, which led performance of contract at halt, the obligatory party, which is default due situation prevalent in the market, may either take a plea of Force Majeure, if the contract expressly provides so. However, in the absence of a force majeure clause in the contract, such party may invoke the doctrine of frustration under Section 56 of the Indian Contract Act, 1872, provided that a contract has become impossible, and the arrangements and conditions have become entirely different from those envisaged in the contract.
Hence, while deciding upon which provisions or doctrine to be invoked on occurrence of any such situation, wherein the performance of obligation become impossible, the parties should carefully evaluate the situation and available remedies thereto.