In the present case, the Respondent Company, Mugneeram Bangur & Co, owned a land situated in Dhakuria Lakes within Greater Calcutta (Land). The Respondent Company was engaged in development of the said Land into residential use, under the name of Lake Colony Scheme No. 1. The entire land was divided into various plots for sale to intending buyers. At the time of entering into #agreementstosell with intending buyers, the Respondent-Seller used to accept earnest money from intending buyers.
Then he was to commence the work of #construction of roads and drains to make the Land suitable for living. Thereupon, the #contractsofsale were to be executed and the buyers were to pay the balance sale consideration.
In one such agreement, the Respondent Company entered into an Agreement to Sell dated 05-08-1940 (Agreement to Sell), with Mr Bejoy Krishna Roy, in respect of a portion of the Land. Mr Roy paid Rs. 101/- as Earnest Money Deposit (EMD) to the Respondent Company. Mr Roy further appointed the Appellant, Mr Satyabrata Ghose, as his nominee for purposes of the said Agreement to Sell and Contract of Sale on 30-11-1941.
Meanwhile, the District Collector, 24-Parganas, passed an Order dated 12-11-1941, of requisition of a portion of Land for military purposes. Thereafter, the District Collector, 24-Parganas, passed another Order dated 20-12-1941, of requisition of some other portions of Land.
Thus, the Respondent Company informed Mr Roy that he was unable to complete the construction of roads and drains during the period of war, due to the said Requisition Orders of the Government. Further, that the Respondent Company decided to terminate the Agreement to Sell dated 05-08-1940 and to return the EMD to Mr Roy. Alternatively, Mr Roy could pay the balance sale consideration within one month of receipt of the said letter, and further, take the possession of his portion of Land in an as is where is condition. The Respondent Company also promised to undertake the construction of roads and drains, after conclusion of war. But in the event that Mr Roy did not agree to either of the said options, then the Respondent Company would terminate the Agreement to Sell dated 05-08-1940 and forfeit the EMD.
But Mr Roy and his Nominee, did not agree to the aforesaid options and thus, filed a Suit on 18-01-1946 in the Court of Additional Sub-Ordinate Judge, Alipore, praying that the Court directs the Respondent Company to execute the Sale Deed. The said Alipore Court passed a Judgment dated 10-10-1947 and allowed specific performance by the Respondent Company.
The Respondent Company, then, filed an appeal against the said Judgment dated 10-10-1947, in the District Court of 24-Parganas. The District Court passed an Order dated 25-02-1949 and upheld the Alipore Court’s Order. This led to the filing of an appeal in the High Court of Calcutta by the Respondent Company. The High Court held that the Sale Contract was frustrated by the Requisition Orders of the Government and thus, dismissed the Suit. Thereafter, the Nominee of Mr Roy, appealed to the Supreme Court in 1952.
Whether the Agreement to Sell of portion of Land in dispute, is dissolved by frustration or has become impossible to perform, due to the occurrence of a supervening event which affected the material part of the Contract?
The Supreme Court discussed Section 56 of the Indian Contract Act 1872 as amended thereof (the Act) as follows:
Section 56 of the Act relates to performance of contracts and it purports to deal with one circumstance under which performance of a contract is excused or dispensed with on the ground of the contract being-void.
Section 56 of the Act is reproduced below:
Agreement to do impossible act.—
An agreement to do an act impossible in itself is void.
Contract to do an act afterwards becoming impossible or unlawful.—
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, unlawful, becomes void when the act becomes impossible or unlawful.
Compensation for loss through non-performance of act known to be impossible or unlawful.—
Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the nonperformance of the promise.
Herein, the Apex Court allowed the Appeal and made the following observations:
1- “The relief is given by the court on the ground of subsequent impossibility when it finds that the whole purpose or basis of a contract was frustrated by the intrusion or occurrence of an unexpected event or change of circumstances which was beyond what was contemplated by the parties at the time when they entered into the agreement. Here there is no question of finding out an implied term agreed to by the parties embodying a provision for discharge, because the parties did not think about the matter at all nor could possibly have any intention regarding it. When such an event or change of circumstance occurs which is so fundamental as to be regarded by law as striking at the root of the contract as a whole, it is the court which can pronounce the contract to be frustrated and at an end. The court undoubtedly has to examine the contract and the circumstances under which it was made. The belief, knowledge and intention of the parties are evidence, but evidence only on which the court has to form its own conclusion whether the changed circumstances destroyed altogether the basis of the adventure and its underlying object.”
2- That the Agreement to Sell had not stipulated any fixed time limit for construction of roads and drains. So, the Apex Court concluded that the parties may not have fixed a particular time limit for development of the Land and construction of roads and drains for the following reasons:
i) That the parties had knowledge about the war at the time of entering into the Contract. Thus, they may have contemplated that it would not have been possible to complete the construction within a fixed time period.
ii) Also, the Requisition Orders for temporary possession of lands for military or war purposes was a normal event during that period. Thus, they may have contemplated the potential difficulties and restrictions that could arise in completion of development of Land and construction of roads and drains.
3- Also, even before the Requisition Orders were passed, the Respondent Company had delayed the development of Land and construction of roads and drains. So, it could not be said that the difficulty or delay in construction was only due to the issue of the Requisition Orders.
The Apex Court held that the Requisition Orders did not vitally affect the root of the Agreement to Sell or made the performance of the Contract impossible. Thus, the Agreement to Sell was held not to be frustrated.
1- In some cases, parties may contemplate, at the time of entering into an agreement, that a particular intervening circumstance(s) may affect the performance of the agreement.
But if they stipulate in the contract, that despite the occurrence of such an event, they are bound to perform the contract, then in such cases, parties cannot plead frustration of contract when the intervening event happens.
2- Section 56 of the Indian Contract Act 1872 looks at a three-fold situation while construing frustration of contracts:
The first, is an agreement to do an act which is impossible, is void.
The second aspect is to do an act after the contract is made, becomes impossible or unlawful, then the contract is deemed to be void because of the impossibility or unlawfulness.
Thirdly, where one person promises another to do an impossible act knowingly, which the aggrieved party is not aware of, then the performing party of such an act must compensate the aggrieved party, for any loss which the aggrieved party suffers.
This Judgment is the first judgment that discusses force majeure and frustration of contracts. It has laid down that contracts can be deemed to be frustrated only and only when it strikes at the root of the contract or fundamentally alters the contract. In such a case the parties can seek discharge from contractual obligations.
The other important cases on force majeure and frustration will be discussed in different articles in the coming weeks.
Senior Legal Associate
The Indian Lawyer
Sushila Ram Varma
The Indian Lawyer