Contingent Contract V/S Frustrated Contract

Introduction

The law of contract is that branch of law which determines the circumstances in which promises made by the parties to a contract shall be legally binding on them. Its rules define the remedies that are available in a court of law against a person who fails to perform his contract and the conditions under which the remedies are available. The law relating to contracts is contained in the Indian Contract Act, 1872. The Act deals with the general principles of the law of contract and some special contracts only such as contingent contract and frustrated contract.

Contingent Contract

The term ‘contingent’ means occurrence of an event which is dependent on something else. Section 31 of the Indian Contract Act, 1872, defines contingent contract as a contract to do or not to do something if some event, which is collateral to such contract does or does not happen. Contracts of insurance, indemnity or guarantee are examples of such contracts.

Case law

• In the case of N.P.O. Balayya K.v. Srinivasayya Setty and Sons[1], a person gives consent to his agent to pay the charges if he wins the legal proceeding. Here, the event is not at the option of the promisor. Therefore, he succeeded in the case and was held responsible to pay the charges to his agent and the promisor ought to have not had any capability to guide the event that makes a contract a contingent contract.

Essentials regarding contingent contracts

There are, however, certain rules or essentials regarding contingent contracts which are been stated from Section 32 to 36 of the 1872 Act. They are as follows:

1. Contingent agreements which depend upon the performance of the happening of an uncertain future event, its performance cannot be enforced until the event occurs. If the event becomes impossible, such contract becomes void (Section 32). For example, A agrees to pay a sum of money to B if he marries A’s daughter C. C dies without being married to B. The contract becomes void.
2. The contingent contracts to do or abstain from doing something if an uncertain future event does not happen can be enforced when the happening of that event becomes impossible. If the event takes place, then the contingent contract is void (Section 33). For instance, X promises to pay Y a sum of money if a certain ship does not return. The ship is sunk. The contract can be enforced when the ship sinks. On the other hand, if the ship returns, then the contract is void.
3. If a contract contingent upon how a person will act at a future time, the event shall be considered impossible when such person does anything which makes it impossible for the event to happen (Section 34). In the case of Frost v. Knight[2], the defendant promised the plaintiff to marry her on the death of her father. While the father was still alive, and the defendant married another woman. Therefore, it was held that the plaintiff had the right to sue the defendant as he married another woman, and the occasion of the wedding of the plaintiff and defendant would not occur.
4. Contingent contract to do or not to do anything, if a specified uncertain event happens within a fixed time, become void if the event does not happen or it is happening becomes impossible before the expiry of that time. However, if such uncertain event does not happen within a fixed time, such contracts may be enforced if the event does not happen or it is happening becomes impossible before the expiry of that time (Section 35).
5. If an agreement to do or not to do is based on the impossible event, then such agreement is void, whether the impossibility of the event is known or not to the parties to the agreement at the time when it is made (Section 36). For example, X promises to pay Y, Rs 500 if two straight lines should enclose a space. The agreement is void.

Frustrated Contract

The doctrine of frustration or frustration contract comes into play when the common object of a contract can no longer be achieved or when the contract becomes impossible of its performance due to the happening of certain events which are beyond the control of the parties. The concept of doctrine of frustration was evolved in England and is a parallel concept of supervening impossibility. It is really an aspect or part of law of discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done and hence comes under the purview of Section 56 of the Indian Contract Act, 1872.

Case law

• In Satyabrata Ghose v. Mugneeram[3], the Supreme Court observed that various judges and jurists propounded about  the doctrine of frustration in England but the essential reason upon which the doctrine relies upon is the impossibility of performance of the contract.

Statutory provision

Section 56 of the Indian Contract Act, 1872, provides that 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 non-performance of the promise.[4]

Supreme Court’s View Upon the Two Contracts

The National Agricultural Cooperative Marketing Federation of India v. Alimenta S.A.[5], is the landmark case where the Apex Court discussed about its view upon the contingent contracts and frustrated contract.

Facts

On 12 January 1980, the National Agricultural Cooperative Marketing Federation of India (NAFED) signed an agreement with Alimenta S A. to supply Indian HPS groundnut (Commodity).

The terms and conditions of the contract is to be the normal terms of the Oils, Seeds and Fats Association Union, London (FOSFA). A notable provision under the contract was clause 14 of the agreement, whereby the agreement or any unfulfilled part of it would be cancelled in the event of a prohibition of export by any executive or legislative act of the Government.

As per the deal, from 1979-1980 NAFED was expected to ship 5000 MT of the Commodity. However, under the stipulated timeline, NAFED could ship only 1900 MT. The remaining 3100 MT volume could not be transported due to environmental conditions disruption to the crops. Therefore, it was decided for an extension to the contract that the remaining quantity would be delivered during the period 1980-1981.

It is important to note that NAFED was a resurrecting agent for the Government of India to export the product, and as such, in order to move forward any export from the previous year to the next year, NAFED was required to receive the Government’s express permission. Although NAFED had permission to enter into exports from 1977-1980, it had no authorization to bring forward the exports for the 1979-1980 season to the 1980-1981 season. In spite of this, NAFED approached the government to acquire the permission required.

The government did not give the authorization, however, and ordered NAFED not to send any remaining amounts from previous years. As such, NAFED did not enforce the previous year’s contract with Alimenta and told Alimenta that it was not necessary to export the agreed quantity due to the executive order of the government prohibiting such exports. Alimenta viewed this as a default by NAFED and, on 13 February 1981, began arbitration proceedings before FOSFA. Thereafter, there were several rounds of lawsuits between 1981 and 1987 before the Delhi High Court and the Supreme Court, wherein NAFED tried to prevent Alimenta from pursuing the arbitration. NAFED also obtained a notification from the Government at this period that the directives failing to execute the previous year’s deal on NAFED were lawful and binding. Ultimately, the Supreme Court referred the parties to the pending tribunal before FOSFA to vacate its judgment dated 9 January 1987.

On 15 November 1989, FOSFA passed its award (Impugned Award), which ordered NAFED to pay those amounts along with interest thereon to Alimenta. Aggrieved, NAFED filed an appeal opposing the Impugned Judgment before the Court of Appeal.

The Board of Appeal passed the award on 14 September 1990 thereby aggravating the problems concerning NAFED by rising the grant number and value. Armed with the Impugned Award, Alimenta lodged a lawsuit pursuant to Sections 5 and 6 of the Foreign Awards Act , 1961, requesting implementation of the Impugned Award and the award awarded by the Board of Appeal. The case eventually reached the Supreme Court due to an appeal filed by NAFED and allowed the Supreme Court to adjudicate the matter on merits. By the judgment under consideration the Supreme Court has disposed of the case.

Observations of the Hon’ble Supreme Court

The Hon’ble Supreme Court observed that that Section 32 of the Indian Contract Act extends in the event that the arrangement itself allows for contingencies on the occasion of which contract cannot be performed and the repercussions arise. In the case that an act is impossible at a future date and the condition is not set out in the arrangement on the nature of the obligation, necessary or illegal, the promisor has no power which he could not have avoided, the contract is invalid as given in section 56. Section 56 also offers recourse, however, for a circumstance in which the Promiser has undertaken to do something that he knew or should have known with due caution and which the Promisee did not know was unreasonable or unconstitutional. A promiser like this will make restitution for such commitment and is entitled to pay penalties. The second part of section 56 occurs where the promisee did not consider the act to be unreasonable or unlawful and the promisor did not know it; the conduct was unlikely or unlawful or should have known it with fair caution.

Impossibility and frustration are used as the expressions of interchangeability. The principle of frustration is one aspect of a contract being discharged. In India, the only concept that the courts have to go through is one of interfering in impossibility or illegality as set out in section 56, and the English rulings can have compelling merit in this respect but are not binding.

If the contract contained a stipulation indirectly or expressly that it should be dismissed upon the event of particular circumstances. The termination of the deal will proceed under the terms of the contract itself. Those cases will be completely under the purview of section 56 of the Contract Act. They would be treated in accordance with section 32 of the Contract Act which deals with contingent contracts.

Therefore, the Hon’ble Supreme Court observed that if a contract contains a stipulation implicitly or expressly that it would be discharged in the event of specific circumstances. The termination of the deal will proceed under the terms of the contract itself. Those cases will be completely under the purview of section 56 of the Indian Contract Act. They would be treated in accordance with section 32 of the Contract Act which deals with contingent contracts.

Conclusion

Based on the interpretation of the Supreme Court on the applicability of Articles 32 and 56 of the Indian Contract Act , 1872, it can be concluded that the distinguishing factor in whether a contingency qualifies for Section 32 or 56 is whether or not such contingency was expected by and within the knowledge of the parties. The parties’ intent can generally be assessed from the terms of the contract, and where the terms of the contract provide for such contingency, either expressly or impliedly, the court should confine itself to applying the very terms that the parties have negotiated and voluntarily agreed to.

Hence, extending Section 56 to situations where any incident frustrates contract efficiency is not the correct solution. The problem whether the incident was actually unforeseen or if the parties foreseen it and arranged for it in the contract must also be considered.

References:

[1] N.P.O. Balayya K.v. Srinivasayya Setty and Sons,  AIR 1954 SC 26 (India).

[2] Frost v. Knight, (1872) LR 7 Exch 111 (UK).

[3] Satyabrata Ghose v. Mugneeram, AIR 1954 SC 44  (India).

[4] Section 56 of the Indian Contract Act, 1872

[5] AIR 1987 SC 643