Impossibility to Perform Contract Due to Contingent Event is Covered Under Section 32 and not Section 56 : SC

In the matter of National Agricultural Cooperative Marketing Federation Of India (NAFED) vs  Alimenta S.A.,  a three judge bench (Coram: Justices Arun Mishra, M R Shah and B R Gavai) of the Supreme Court, while deciding four decades old controversy, ruled that when a contract becomes impossible to perform due to happening of a contingent event it shall be covered under section 32 of Indian Contract Act, 1872 (‘Contract Act’) and not under section 56 of the Contract Act.

Factual background:

NAFED and Alimenta S.A entered into contract for supply of 5000 metric tonnes of groundnut. This contract was for season of 1979-80. NAFED was a canalizing agency for Government of India (GOI) for exports of commodity. Out of 5000 metric tonnes, only 1900 metric tonnes could be shipped by NAFED.  The remaining quantity could not be shipped due to damage caused to crop by cyclone during the relevant period. Although, NAFED intended to perform the contractual obligation to supply remaining commodity, but did not get required permission from GOI because of restricted export policy and quota ceiling. NAFED informed Alimenta S.A. that the export of the contracted quantity was not possible because of the GOI’s executive action banning such exports. Alimenta S.A. filed arbitration proceedings before the Federation of Oil, Seeds and Fats Associations Ltd. (FOSFA), London on February 13, 1981. An Award was passed by FOSFA on November 15, 1989, by which NAFED was directed to pay a sum of USD 4,681,000 along with interest at the rate of 10.5% per annum from February 13, 1981 till the date of the award. Award was challenged by NAFED before Board of Appeal and appeal was rejected by Board of Appeal on September 14, 1990, while enhancing the interest rate to 11.25%.

Alimenta S.A filed Suit under section 5 and 6 of the Foreign Awards (Recognition and Enforcement) Act, 1961 before Delhi High Court for enforcement of award. Delhi High Court by its order dated January 28, 2000 held that award is enforceable. Review Petition filed by NAFED against this order was dismissed by Delhi High Court on May 5, 2000. Thereafter, an appeal was filed against the said order by NAFED before Division Bench of Delhi High Court and appeal was  rejected on September 6, 2010. Hence, appeal was filed by NAFED before the Supreme Court.

It was argued by NAFED that award does not deal with restriction imposed by GOI on export of commodity and award is against public policy and therefore, unenforceable in India. On the contrary, it was argued by Alimenta S.A. that scope of interference in enforcement of foreign award is limited and it is not against public policy.

Observations of the Court

Main issue that required consideration before the apex court was whether NAFED   was   unable   to   comply   with   the   contractual obligation to export groundnut due to the Government’s refusal as such the contract became void and   unenforceable   in   view   of   Clause   14   of   FOSFA   Agreement. Consequently, NAFED could not have been held liable to pay damages.

Clause 14 of the Agreement mandates that in the event of prohibition of export by an executive or legislative act of the government, the contract shall be extended for a further period of 30 days and if the contract is still proving impossible to perform for the reasons mentioned in the clause, the contract or unfulfilled part shall stand cancelled.  Therefore, it is apparent that the contract came to an end in terms of Clause 14 of the Agreement.  The contract became void in view of section 32 of Contract Act. The stipulation in Clause 14 releases both parties from the performance of the contract.

Section   32   of   the   Contract   Act   provides   for   enforcement   of contingent   contracts.  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.  Section 56 of the Contract Act deals with the agreement to do an impossible act or to do acts which afterwards become impossible or unlawful. Since, the events were stipulated in clause 14 of the Agreement, provisions of  section  32 of  the  Contract  Act is  attracted  and  not section 56.

Supreme Court held that because of the clear stipulation in Clause 14 of the Agreement, it is apparent that the parties have agreed for a contingent contract as they were aware of the fact that    Government’s executive, or legislative actions might come in the way as provided in Clause 14 of the Agreement. Thus, this case will be covered under section 32 of the Contract Act and not section 56. NAFED was capable to perform the contract if required permissions were given to it by GOI. Section 56 is not attracted as the promisor and promise 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.

 Supreme Court relied on an earlier decisions in the matter of Satyabrata Ghose v. Mugneeram Bangur & Co. and Boothalinga Agencies v. V.T.C. Poriaswami Nadar, AIR wherein  court considered that if the contract contained impliedly or  expressly   a   stipulation,   according   to   which   it   would   stand discharged on happening of particular circumstances and will be covered under section 32 of the Contract Act and provisions of section 56 of the Contract Act could not apply to self-induced frustration.

Hence, the Court held that the contract between NAFED and Alimenta S.A.t was rendered void in terms of section 32 of the Contract Act. It would have been unlawful for NAFED to affect the supply in view of the Government’s refusal to accord the permission, and both the parties knew it very well and agreed that the contract would be cancelled in such an exigency for non­supply in quantity. Thus, the parties agreed for its cancellation as such an award is against the basic law and public policy as applied in India.

Supreme Court held that award is ex-facie illegal and in contravention of fundamental law. It was against the fundamental public policy of India to enforce such an award, as any supply made would contravene the public policy of India relating to export for which permission of the GOI was necessary. NAFED could not be held liable to pay the damages. In light of these observations, the appeal filed by NAFED was allowed and order passed by High Court was set aside. Supreme Court further held that the award is unenforceable.

By

Amit Singh,

Abhay Nevagi & Associates, Advocates