The Supreme Court of India (“Court” or “Supreme Court”) in National Agricultural Cooperative Marketing Federation of India (NAFED) v. Alimenta SA (2020) discussed the issue of impossibility of performance of a contract in light of Section 32 (enforcement of contracts contingent on an event
happening) and Section 56 (agreement to do an impossible act) of the Indian Contract Act, 1872 (“ICA”). In this note, I will discuss the relevant provisions of the ICA, the facts surrounding this case and the Court’s observations leading to this decision.
What are contingent contracts?
Section 31 of the ICA defines a contingent contract as “a contract to do or not to do something, if some event, collateral to such contract, does or does not happen”. The use of the word ‘collateral’ to describe the event indicates that the contract is deemed to be valid when executed, however, its performance remains conditional upon the occurrence of such specified event.
Illustration A:
A and B entered into a contract, which stated that A would transfer a disputed land to B, if A won the case in the court. This transfer was conditional upon A winning the litigation. Therefore, this is a contingent contract where performance of the contractual obligations is dependent upon a specified event.
A contingent contract that is dependent on the occurrence of an uncertain future event, cannot be enforced by law till such event takes place. Section 32 of ICA states that when such an event becomes impossible, the contract becomes void.
Illustration B:
A, an insurance company, insures a car purchased by B. As per the terms of the insurance, the car was insured against loss during transit. The car was damaged when it was not in transit. Therefore, the event insured for did not take place, and A would not be liable to perform its part of the contract (of providing the insurance amount to B).
What does Section 56 of the ICA say?
Section 56 of the ICA envisages two forms of impossibility of performance of contractual obligations – (a) an agreement to do an impossible act is void from the very outset; (b) an agreement to do an act, where the act becomes impossible after the agreement is entered into, due to the intervention of some event that the promisor could not prevent, in which case, the agreement becomes void at the stage of the occurrence of such event.
The implication of taking the defense of frustration is that the agreement is rendered void. Impossibility of performance may entail physical impossibility, i.e. the subject matter of the agreement has been destroyed or is no longer in existence, or the performance of the contract becomes impracticable or useless, having regard to the object and purpose the parties had in mind while entering into it. (Satyabrata Ghose v. Mugneeram Bangur & Co.)
Compensation for loss due to non-performance of act known to be impossible or unlawful (Section 56 of ICA)
Where the party making a commitment to do an act under a contract knew, or with reasonable diligence might have known, that such act was impossible or unlawful, and the other party was not aware of the same, the former would be liable to compensate the latter for losses arising due to non-performance of the contract.
NAFED v. Alimenta SA (2020)
• Facts of the Case
AFED, a canalizing agency of the Government of India (“GoI”) and Alimenta SA (“Alimenta”) entered into a contract whereby the former was required to supply a specified quantity of groundnuts (“Commodity”) to the latter between 1979-80 (“Original Contract”). NAFED was unable to export the committed quantity during such period. As such, the parties executed an addendum to the contract (“Addendum”) for NAFED to supply the remaining quantity of the Commodity between 1980-81. NAFED was permitted to export the Commodity by the GOI for a period of 3 years, i.e. only during 1977-80.
However, to carry forward the quantity to be supplied under the Original Contract and to supply the same at a later period, the relevant executive order required NAFED to procure specific permission from the GoI for such extended period. When NAFED approached the authority for permission to export the remaining quantity, it was denied the same repeatedly. Due to GoI’s refusal to permit NAFED to export, it was unable to export the Commodity, and informed Alimenta of the same via telex. Treating this telex as a notice of default, Alimenta initiated arbitration proceedings to resolve the dispute. Later, an arbitral award was passed, mandating NAFED to fulfill its obligations under the Addendum. Seeking to enforce this award, Alimenta approached the Delhi High Court (“HC”).
• Delhi High Court’s judgment
The Delhi High Court ruled in favour of Alimenta, accepting its argument that due to GoI’s refusal to permit the export, NAFED’s performance of the contract had become impossible. The Delhi High Court observed that it was a case of self-induced frustration. NAFED had executed the Addendum, knowing full well that it would not be able to perform its part of the contract in the absence of the permission from the GoI. Therefore, though the contract was rendered impossible (as per Section 56 of the ICA), NAFED would be liable to compensate Alimenta for making the commitment to supply while having knowledge of the possibility that it may not be allowed to perform its obligation. This decision was challenged by NAFED in the Supreme Court.
• Supreme Court’s Judgment
a. Express clause of the contract between the parties
The Court observed that the Delhi High Court had failed to take into consideration Clause 14 of the contract between the parties (“Clause 14”), which had to be read with the Original Contract and the
Addendum. A summary of this clause has been reproduced below for reference.
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 restriction on export was imposed, the performance of this contract would stand extended by 30 days, and if the export continued to be impossible beyond such period, the contract or any unfulfilled part of it would stand canceled.
In light of the above, the contract was bound to stand canceled in accordance with Clause 14, since the act of supplying the Commodity was rendered impossible. The HC had incorrectly decided that it was
a case of frustration under Section 56 of the ICA, and had failed to take into consideration the stipulation in Clause 14. NAFED was a canalizing agency and could not have supplied the Commodity without prior permission of the GoI.
Therefore, impossibility of performance was well within the scope of Clause 14 above. Applying this contractual provision, the unfulfilled part of the contract would stand canceled, i.e. NAFED would not be liable to make the supply.
b. Applicability of Section 32 of the ICA vs. Section 56 of the ICA
| Particulars | Section 32 | Section 56 |
| Applicability | Where the agreement: • specifies contingencies upon the happening of which the agreement cannot be carried out, and • provides for the consequences for failure to carry out the obligations |
Where: • an act becomes impossible at a future date, • the event rendering the act impossible was beyond the control of the party whose performance was prevented, and • that exigency is not provided for in the agreement. |
| Implication on the agreement |
The contract shall be rendered void. | |
| Implication on the parties |
Once the agreement is rendered void, neither party shall be required to perform its obligations. |
If the party whose performance is prevented due to the exigency, knew or with reasonable diligence might have known that such exigency could occur and the other party did not have knowledge of the same, the former would be liable to compensate the latter for any loss sustained due to non-performance |
c. Inapplicability of Section 56 in the current facts
i. Clause 14 clearly stipulates that an executive or legislative action can render the supply impossible. As the contract provided for such a contingency and stated that in such event the contract would stand
canceled, the contingency was not unforeseeable, which is the essence of Section 56. The Court reiterated its decision in Satyabrata Ghose v. Mugneeram Bangur & Co.2 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 Section 56 of the ICA and would be dealt with under Section 32 of the ICA.” This was further reaffirmed in Naihati Jute Mills Ltd. v. Khyaliram Jagannath.
ii. The very fact that the contract provided for this situation, demonstrates knowledge on the parts of both NAFED and Alimenta, that the performance of NAFED’s obligation, i.e. supply of the Commodity, was dependent on GoI’s permission, and in its absence, the contract would be canceled. Thus, when NAFED was unable to perform its part of the contract due to the GoI’s refusal to give permission, NAFED could not have been fastened with the liability to pay damages for losses incurred by Alimenta.
d. Applicability of Section 32:
Due to the clear stipulation in Clause 14, it is apparent that both the parties had agreed upon a ‘contingent contract’. They had entered to an agreement where NAFED was required to fulfill an obligation that would be impossible in itself in the absence of GoI’s permission, and therefore it would now be declared to be void by virtue of Section 32, due to NAFED’s failure to procure such permission.
Author’s Take
On the basis of the Supreme Court’s interpretation surrounding the applicability of Sections 32 and 56 of the ICA, it can be concluded that the distinguishing factor when it comes to whether a contingency qualifies for Section 32 or 56, is whether such contingency was expected by and within the knowledge of the parties or not. The intent of the parties can generally be gauged from the terms of the contract, and where the terms provide for such contingency, whether expressly or in an implied manner, the court should restrict itself to an application of the very terms that the parties have negotiated and voluntarily agreed to.
Hence, a blanket approach of applying Section 56 to cases where some event frustrates the performance of the contract is not the right approach. One also has to take into consideration the whether the event was indeed unforeseeable or whether the parties foresaw it and provided for it in the contract.
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Disclaimer: This post has been prepared for informational purposes only. The information/or observations contained in this post does not constitute legal advice and should not be acted upon in any specific situation without seeking proper legal advice from a practicing attorney.