Sunday, May 11, 2014

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). 


vswami said...

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.

vswami said...


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.