The Supreme Court on Frustration and Statutory Contracts

In
its recent judgment in
Mary v State of Kerala, the
Supreme Court has considered the scope of section 56 of the Contract Act, 1872,
and its relationship with statutory contracts. The appellant responded to an
invitation to tender for the right to vend arrack in certain shops in Kalady in
Kerala. Her bid of approximately Rs. 25.6 lakhs was successful and she
deposited 30 percent (Rs. 7.68 lakhs) in accordance with Rule 5(10) of the
Kerala Abkari Shops (Disposal in Auction) Rules 1974 (‘the Rules’). Soon after, it emerged that the residents of Kalady
were strongly opposed to an arrack shop in the vicinity for religious reasons
and staged violent protests. The authorities were unable to assure the
appellant that they would guarantee the safety of the shop and its employees.
So the appellant claimed that the contract was frustrated, refused to pay the
balance and sought to recover the deposit already paid. The Excise Department declined
to refund the deposit claiming that it was empowered to forfeit it under Rule
5(15) of the Rules. The appellant filed two writ petitions, one challenging the
provisions of the Rules that allowed the State to make a demand for the
remainder of the purchase price and the other challenging its refusal to refund
the deposit. In 1995, a single judge of the Kerala High Court allowed both writ
petitions. In 2003, a Division Bench, however, held that while the State was
not entitled to call upon the appellant to pay the balance, it was not obliged
to refund because it was empowered to forfeit the deposit under the Rules. It
held that the appellant could not invoke section 56 of the Contract Act to have
a statutory contract declared void.
From this order the appellant obtained leave to appeal to the Supreme Court.

The
Supreme Court appears to have taken the view that the only real question of law
in this case was whether section 56 of the Contract Act is applicable to a
statutory contract and that if this were an ordinary contract the appellant
would have an unanswerable case that it was frustrated. This may not, however, be axiomatic: it is, of course, possible that the contract has been frustrated
(leaving aside the statutory context for the moment) but that would depend on
an analysis of the scope of section 56, the terms of the contract and the
nature of the frustrating event. That is not to say that statute cannot exclude the Contract Act (it can, unless the contract merely incorporates its terms by reference) but only that it is possible that these events do not frustrate a contract even if the Contract Act applies.

Secondly,
the Supreme Court observes that the appellant has not ‘purposely, or for any
oblique motive, or as a device to avoid any loss, refused to execute the
agreement’. With respect, it is not at all clear that this is a germane
consideration in deciding whether a contract has been frustrated: often, a
party who pleads a common mistake or frustration or indeed any other rule of
contract law that excuses him from further performance does so because it has
turned out that he has made a bad bargain. That fact—in itself—is no reason to prevent
him from invoking those rules: it may be different if it is shown, as for
example it was in the well-known
McRae case, that the
particular frustrating event was at the risk of the party seeking to have the
contract declared void. That is a matter of construction. But the mere fact
that the doctrine of frustration may allow the claimant to escape a bad bargain
cannot matter: for example, suppose Caldwell & Bishop (in
Taylor
v Caldwell
) had realised that they had made a most
improvident bargain in allowing Taylor & Lewis to have the Surrey Gardens
& Music Hall for £100 per day, the fact that it was reduced to cinders
before the time of performance was no doubt a welcome development (assuming
they were insured!) but that does not advance the analysis of whether the destruction of the Hall was at their risk or not.

Turning
to the main issue in the case, the Court held that the appellant could not
invoke section 56 because the statutory contract excluded it. The Court’s
reasoning is that since Rule 5(15) authorised the State to forfeit the deposit
for non-performance, the contract had
made provision
for non-performance, unlike in the cases cited to it by
counsel for the appellant. With respect, it is submitted that this cannot be
correct: the non-performance on which the frustration argument is founded is
not the refusal to pay the remainder
of the purchase price but the supposed inability to run the shop on account of
the disruption caused by the locals. Now the contract appears to have
made no express provision for that:
it is certainly possible to take the view that the contract impliedly allocates
this and any other business risk to the appellant but that is different from
saying that Rule 5(15) excludes
section 56. Consider the following passage from the judgment:

Now
reverting to the decisions of this Court in the cases of Sushila Devi (supra) and
Har Prasad Choubey (supra), we are of the opinion that they are clearly
distinguishable. In those cases the contract itself did not provide for the consequences
for its non-performance. On the face of the same, relying on the doctrine of frustration,
this Court came to the conclusion that the parties shall not be liable. As stated
earlier, in the face of the specific
consequences having been provided
, the appellant shall be bound by it and
could not take benefit of Section 56 of the Contract Act to resist forfeiture of
the security money.

With
great respect, it is hard to see how this can be correct. If the argument of
the appellant that the contract is frustrated is well-founded, it follows that
the contract,
including Rule 5(15) is
(under s 56) void and the Indian Act, unlike pre-1943 English law, provides
that benefits received under a void contract must be restored to the payor.
This is essentially a restitutionary remedy and it was considered at great
length, although not in the context of frustration, by the Privy Council in
Murlidhar Chatterjee v
International Film Co
. But to say that the existence of Rule 5(15) excludes s 56 is, it is respectfully
submitted, is to beg the question, because the point of invoking s 56 is to have
the contract (including Rule 5(15)) declared void. The result in the case may be correct and one can have an argument
about whether the frustrating event satisfies the conditions of s 56 or
whether, assuming it does, a restitutionary remedy should follow but these issues
have little, if anything, to do with Rule 5(15). 

About the author

V. Niranjan

2 comments

  • The view of the writer casting aspersions on the correctness of the conclusion reached by the apex court cannot be faulted to be illogical; if pursued in depth might certainly result in a better view being taken.
    The subject contract has come to be looked upon, also specially referred to, as a ‘statutory' contract. Also, special significance or importance, though, in one’s view not at all warranted, has sought to be attached to the ‘rule (s)’ framed by that authority. Infer-ably, the reason behind such thinking is that one of the parties happens to be a so-called ‘statutory’ authority. Whatever that be, the intriguing question that craves for a righteous answer is this : – Why that should make any difference to giving effect to a provision of the Contract Act , both in letter and spirit, to a transaction, which is purely a ‘commercial’ transaction.
    Incidentally, in modern times, there is no gainsaying that the concept of ‘government’ (so also, the attendant ideology of ‘good governance’ itself) having been subjected to a violent change- that is, the activities of the government having been pathetically but increasingly ‘commercialized’in every sense / dimension- why the need for making any such hypothetical distinction, based on faulty logic?
    Law experts may wish to so re-frame the foregoing proposition as considered necessary, before venturing to deliberate at length; so as to eventually help the judiciary in adjudication of such disputes based on a refined thinking.

  • Rider:

    For a better understanding and appreciation of the foretasted proposition, primarily with s view to provoking an in-depth deliberation, the following need to be kept in focus:
    The principle of “interpretation” of a statutory provision, that has been receiving more and more attention of courts, in recent times, is graphically described as, “UPDATING CONSTRUCTION”.
    The said principles, in a manner of urging, may have to be construed to be an extension of the other rules of interpretation enunciated by courts in decided cases, commonly to aid ascertainment of so called “Contextual Meaning”.
    2. The numerous principles lucidly set out in re.
    M/S. Girnar Traders vs State Of Maharashtra & Ors … – Indian Kanoon
    The judgment, it deserves to be noted, is more than a land mark in that, the plethora of case law cited and discussed at very great length provide adequate guidance for courts to prudently follow in any matter taken up for final adjudication on special leave, of any issue requiring an analytical approach.

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