Background:

  1. The disruption in the supply chain caused due to Covid-19 has had a long-reaching impact on the contractual obligations of commercial entities. Commercial entities are resorting to taking refuge of the Doctrine of Frustration to mitigate their contractual burden. Section 32 and Section 56 of the Indian Contract Act, 1872 encompass the Indian Law on Frustration of Contract. However, the scope of application of Section 32 and Section 56 of the Indian Contract Act is distinctive with respect to the discharge of obligations of parties. Therefore, considering the new adjusted realities of the contemporary world after covid-19, the applicability of Section 32 and Section 56 of the Indian Contract Act, 1872 has acquired the central stage of legal discussions. This article aims to provide clarity on the scope and application of Section 32 and Section 56 of the Indian Contract Act, 1872.

Section 56 of the Indian Contract Act, 1872

  1. Section 56 of the Indian Contract Act deals with the doctrine of frustration. Section 56 has three limbs, under the first limb, it declares an agreement to do an act impossible in itself as void.

Under the second limb, it renders the contract void on account of a subsequent event that the promisor could not prevent, thereby rendering the performance of the contract either impossible or unlawful. Under the third limb, the promisor is fastened with the liability of payment of compensation to the promisee for the loss suffered by him, if the promisor knew or with reasonable diligence, he might have known which the promisee does not know, that performance of the contract would be impossible or unlawful.

Section 32 of the Indian Contract Act, 1872

  1. Section 32 deals with the frustration of contingent contracts. Before proceeding further, it is necessary to take que about the contingent contract as defined under Section 31 of the Indian Contract Act. As per Section 31 of the Indian Contract Act, Contingent contracts are contracts that are dependent upon the happening or non-happening of the uncertain future event. In other words, the right created under Contingent Contracts may be one which parties agree shall be enforceable only on the happening of some future event, as to which neither of the parties makes any promise and which is, therefore collateral to the contract, its import being merely to mark the moment at which a right created by the contract becomes enforceable.

The interplay between Section 32 and Section 56 of the Indian Contract Act

  1. The applicability of Section 32 or Section 56 of the Indian Contract Act, 1872, hinges upon the fact as to whether the parties have contemplated the liabilities arising out of the occurrence of the supervening event or not. The liabilities accruing on the occurrence of the supervening event are usually dealt with in the force majeure clauses of the contract. The Black's Law Dictionary defines the force majeure clause1 as-

"a contractual provision allocating the risk of loss if performance becomes impossible or impracticable, esp. as a result of an event or effect that the parties could not have anticipated or controlled."

  1. The law regarding the application of Section 56 and Section 32 of the Indian Contract Act was discussed by the Hon'ble Supreme Court in the case of Satyabrata Ghose v. Mugneeram Bangur & Co. 2 wherein the Court had held that where the contract itself either impliedly or expressly contains a term, according to which performance would stand discharged under certain circumstances, the dissolution of the contract would take place under the terms of the contract itself and such cases would be dealt with under Section 32 of the Act. If, however, frustration is to take place de hors the contract, it will be governed by Section 56.

The finding of the Apex Court in Satyabrata Ghose v. Mugneeram Bangur & Co. (Supra) was affirmed by the Supreme Court in Energy Watchdog and Ors. vs. Central Electricity Regulatory Commission and Ors.3:

"32. "Force majeure" is governed by the Indian Contract Act, 1872. In so far as it is relatable to an express or implied Clause in a contract, such as the PPAs before us, it is governed by Chapter III dealing with the contingent contracts, and more particularly, Section 32 thereof. In so far as a force majeure event occurs de hors the contract, it is dealt with by a Rule of positive law Under Section 56 of the Contract. "

  1. Therefore, if the parties have contemplated the consequences that will ensue on the happening of the supervening event, then the parties will be bound by the consequences agreed in the contract. Such types of contracts would amount to contingent contracts under Section 31 of the Indian Contract Act and consequences arising out of such contingent contracts will be enforceable under Section 32 of the Indian Contract Act.
  1. However, if the performance of the contract is rendered impossible by an event not contemplated by the parties in the contract, then such contracts will be void under Section 56 of the Indian Contract Act. The law in this regard was laid down by the Hon'ble Supreme Court in the case of National Agricultural Co-operative Marketing Federation of India v. Alimenta S.A4.

The relevant extract of the judgment is reproduced hereinbelow for reference:

"47. 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. In this case, provisions of Section 32 of the Contract Act are attracted and not Section 56. In case an act becomes impossible at a future date, and that exigency is not provided in the agreement on the happening of which exigency, is impossible or unlawful, the promisor had no control which he could not have prevented, the contract becomes void as provided in Section 56. However, Section 56 also provides liability for a cause where the promisor has agreed 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 a promisor must make compensation to such a promise and is liable to pay damages. The latter part of Section 56 is applicable when the promisee did not know the act to be impossible or unlawful and that it was not known to the promisor; the action was impossible or unlawful or with reasonable diligence might have known."

  1. Further, the Hon'ble High Court of Delhi in the case of NTPC Limited v. Voith Hydro Joint venture5 extrapolated on the applicability of Section 32 and Section 56 of the Indian Contract Act. The dispute between the parties arose relating to the frustration of the Contract.

It was contended on behalf of the Petitioner that it was bound only to restitute the Respondent under Section 65 of the Indian Contract Act and not pay any damages as the contract was frustrated under Section 56 of the Indian Contract Act. The Court while dismissing the contention of the petitioner observed that if the contract expressly provides for the consequences in case its performance has been rendered impossible on account of any supervening eventuality, the contract is not rendered void in its entirety. The parties would be bound by already contemplated consequences of the supervening event according to the provisions of the contract. The court took note of the force majeure clause in the agreement and stated that the provision of the contract (force majeure) will prevail over Section 56 of the Indian Contract Act.

Conclusion: Implication of Section 32 and Section 56 of the Indian Contract Act

  1. The aforementioned judgments demonstrate that if the parties have allocated the liabilities on the occurrence of an uncertain event, then the same will be binding upon them. The law laid down assumes significant importance as remedies ensuing out of the frustrated contracts will vary. If the contract is frustrated under Section 56 of the Indian Contract Act, the same will be treated as void and parties will be entitled to restore the benefit availed under Section 65 of the Indian Contract Act. On the other hand, if the parties have agreed regarding the allocation of liabilities on the occurrence of an uncertain future event, the parties will be bound by the provisions of the contract, and they cannot resort to Section 65 or any other provision of the Indian Contract Act.

Footnotes

1 Black's Law Dictionary, Ninth Edition, Page 718.

2 Satyabrata Ghose v. Mugneeram Bangur & Co., MANU/SC/0131/1953.

3 Energy Watchdog and Ors. vs. Central Electricity Regulatory Commission and Ors. MANU/SC/0408/2017.

4 National Agricultural Co-operative Marketing Federation of India v. Alimenta S.A, MANU/SC/0382/2020.

4 National Agricultural Co-operative Marketing Federation of India v. Alimenta S.A, MANU/SC/0382/2020.

5 NTPC Limited v. Voith Hydro Joint Venture, MANU/DE/2103/2019.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.