Contract & Agreement Litigation Cases in India.

Thursday 21 November 2013

The discharge of the principal debtor will not discharge the surety where it is not brought about by the voluntary act of the creditor.


The discharge of the principal debtor will not discharge the surety where it is not brought about by the voluntary act of the creditor, but by the operation of law, such as the bar under the statute of limitations or by reason of bankruptcy or liquidation of the principal debtor (see Cartger v. White.

-----------------------------------------------------------------------

Kerala High Court
Radha Thiagarajan vs South Indian Bank Ltd. And Ors. 
Author: K Thommen
Bench: T K Thommen, M F Beevi
JUDGMENT
Kochu Thommen, J.
1. The second defendant in a suit for recovery of money is the appellant. The plaintiff is the South Indian Bank Ltd. (also referred to herein as " the bank " or the " creditor " as the context may require). The first defendant (also referred to herein as " the owner " or the " principal debtor ") is a limited company which owned a textile mill, the management of which had been taken over by the Central Government under the Industries-(Development and Regulation) Act, 1951 (the "1951 Act"), and which has been subsequently nationalised under the Sick Textile Undertakings (Nationalisation) Act, 1974 (Act No. 57 of 1974) (the "Nationalisation Act"). Defendants Nos. 2 and 3 (also referred to as " the sureties") executed in favour of the bank a continuing guarantee in respect of the overdraft account which the first defendant had with the bank and under which the plaint amount is alleged to be still outstanding from the first defendant as the principal debtor and defendants Nos. 2 and 3 as the sureties. The third defendant died during the pendency of the suit and additional defendants Nos. 4 to 16 were impleaded as the legal representatives of the third defendant. The second defendant is also one of his legal representatives. The suit against the first defendant was dismissed in view of the alternative remedy available to the plaintiff under the Nationalisation Act, but it was decreed against defendants Nos. 2 and 3 in the sum of Rs. 84,514.32 together with interest, subject to the direction that the liability of the legal representatives of the third defendant should be decided at the stage of execution.
2. The management of the textile mill (hereinafter referred to as "the undertaking ") was assumed by the Central Government under Section 18A of the 1951 Act with effect from July 14, 1972. Subsequently, as from August 18, 1972, it was declared as a relief undertaking in terms of the Kerala Relief Undertakings (Special Provisions) Act, 1961 (Act 6 of 1962) ("the 1961 Act"). During the pendency of the suit, the Nationalisation Act which received the assent of the President of India on December 21, 1974, came into force as from April 1, 1974. The First Schedule to that Act contains the names of the undertakings and their owners as well as the amounts awarded to them in compensation. The undertaking of the first defendant is mentioned as item No. 78 and the compensation awarded to it is Rs. 26,05,000.
3. The suit has been instituted by the bank for realisation of the amount due to it from the first defendant under the overdraft account which was granted on the strength of the guarantees executed by defendants Nos. 2 and 3. Exhibits A-1 and A-2, respectively, are the demand promissory note and the overdraft agreement for a sum of Rs. 1,00,000 executed by the first defendant on October 11, 1969. Exhibits A-3 and A-4 are the guarantees dated October 11, 1969, and April 18, 1970, executed by defendants Nos. 2 and 3 in favour of the bank in respect of the said overdraft account. It is specifically provided in exhibit A-3 that it is a continuing guarantee up to a maximum of Rs. 4,25,000 with interest thereon at the rate of 11% per annum. It contains the necessary reservation of remedies against the sureties. Clauses 3 to 5 provide that the liability of the sureties will remain unaffected, notwithstanding any time, indulgence or other release granted by the bank to the principal debtor or the bankruptcy or insolvency of the principal debtor or any arrangement or composition made between them. These provisions have been reaffirmed in exhibit A-4.
4. Counsel for the appellant, Sri Govinda Warrier, submits that the liability of the principal debtor was extinguished by virtue of the provisions of the Nationalisation Act and consequently the liability o'f the sureties which is accessory or secondary in character was also extinguished and the suit was, therefore, on the coming into force of the Nationalisation Act, no longer maintainable and accordingly the learned judge ought to have dismissed the suit against all the defendants. He further points out that, in so far as the suit was dismissed against the first defendant, there is res judicata as regards that claim as the plaintiff has not challenged that part of the decree. On that ground alone, whatever right the plaintiff had against the first defendant, he says, became extinct and to that extent defendants Nos. 2 and 3, being sureties, were fully exonerated. Counsel submits that the only remedy which the bank has is to prove its claims under the Nationalisation Act and it has no remedy by means of a suit as against the principal debtor or the sureties.
5. Sri Ramesh Babu, appearing for the bank, submits with much learning and skill that the Nationalisation Act does not extinguish the obligations of the principal debtor or the sureties or affects the rights of the creditor, but provides for a mode of payment to the various creditors from out of the compensation awarded to the former owner of the nationalised undertaking. That remedy, under the Act, is without prejudice to the contractual rights and obligations of the parties. He says that the discharge granted to the owner under the Nationalisation Act is only to the extent to which the claims of the creditors are admitted and for the balance amount, the owner remains fully liable in terms of the contract. He further submits that in so far as the sureties are concerned, they remain liable under the guarantee and are bound to pay the amount due to the bank in the event of default by the principal debtor. Since the first defendant did not pay the amount demanded by notice dated September 25, 1972, the sureties became liable to pay the same. The dismissal of the suit against the first defendant, he says, does not affect the liability of the sureties.
These are the only contentions urged at the Bar on either side.
6. A contract of guarantee (or suretyship) is a contract to answer for the debt, default or miscarriage of another person : (see " Anson's Principles of the English Law of Contract", 22nd edition, page 69). Section 126 of the Indian Contract Act says: " A ' contract of guarantee ' is a contract to perform the promise, or discharge the liability, of a third person in case of his default". In such a contract, there must always be three persons in contemplation: the principal debtor, the creditor and the surety (also called the guarantor). The liability of a surety is accessory or secondary or collateral. In a contract of indemnity, on the other hand, the promisor makes himself primarily liable and undertakes to discharge the liability in any event (see Anson, op. cit).
7. The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract (section 128 of the Contract Act). Where there is no principal, there can be no surety. "As a general rule, a voluntary discharge of the principal discharges the surety also, yet the surety may, by express stipulation in the guarantee, agree to remain liable, even after the discharge of the principal debtor " : De Colyar's Law of Guarantees and of Principal and Surely, 3rd edition, page 417.
8. Where there is an absolute release of the principal debtor, the remedy against the surety is gone, because the debt itself is extinguished. It would be a fraud on the principal debtor to profess to release him and then to sue the surety who in turn might sue the principal debtor. On the other hand, if the creditor, at the time he releases the principal debtor, reserves his remedies against the surety, such release merely amounts to a covenant not to sue, but does not discharge the surety (see George W. Brandt "The Law of Suretyship and Guarantee", Chicago, 1905, volume I, para 165). As stated by Lord Hatherley:
"...such a release (which is subject to a reservation) is not to be construed as absolute, but only as a covenant not to sue. That being so, the remedy is gone as between the debtor and creditor, inasmuch as the creditor cannot sue the debtor; but as against all other persons the rights of the creditor are reserved..."
9. Green v. Wynn [1869] Law Rep.4 Ch App Cas 204. The law on this aspect is stated by the Privy Council in Mahanth Singh v. U. Ba Yi, AIR 1939 PC 110, at pages 111, 112, 113 as follows:
" A surety is discharged if the creditor, without his consent, either releases the principal debtor or enters into a binding arrangement with him to give him time. In each case, the ground of the discharge is that the surety's right to pay the debt at any time and after paying it, to sue the principal in the name of the creditor is interfered with. To hold that in such cases the creditor still retained his right against the surety, and that the surety on his part could still sue the principal debtor, would mean that the release or grant of time was of no effect inasmuch as the debtor would still be liable at any moment to an action at the suit of the surety.
Where an absolute release is given, there is no room for any reservation of remedies against the surety: see Webb v. Hewitt [1857] 3 K&J 438 and Commercial Bank of Tasmania v. Jones [1893] AC
313. Where, however, the debt has not been actually released, the creditor may reserve his rights by notifying the debtor that he does so, and this reservation is effective not only where the time of payment is postponed but even where the creditor has entered into an agreement not to sue the debtor. In neither case is there any deception of the debtor since he knows that he is still exposed to a suit at the will of the surety....
The appellant's act in continuing to sue the surety though he withdrew his action against the principal debtors was in their view a clear reservation of his rights. Indian authority illustrating this proposition is to be found in Murugappa v. Munusami [1920] 7 AIR Mad 216; 54 IC 758; 38 MLJ 131 and Nur Din v. Allah Ditta [1932] 19 AIR Lah 419; 138 IC 305; 13 Lah 817."
10. The conduct of the creditor discharging a surety may, unless otherwise stipulated, arise from such circumstances as the creditor varying the terms of the original contract between himself and the principal debtor, or between himself and the surety, or where he takes a new security from the principal debtor in lieu of the original security, or where he releases or discharges the principal debtor or a co-surety, or where he compounds with or gives time to the principal debtor or agrees with him to give time to the surety or where loss occurs through his negligence or fault (see Sections 133, 134, 135 and 139 of the Contract Act). However, mere forbearance on the part of the creditor to sue the principal debtor or to enforce any other remedy against him does not, unless otherwise provided in the guarantee, discharge the surety (see Section 137 of the Contract Act). Mere neglect to sue (as distinguished from a positive agreement or an act or omission within the meaning of Sections 134, 136 and 139 of the Contract Act, the legal consequence of which is to discharge the principal debtor and not merely to bar the remedy) will not affect the right of the creditor against the surety. These provisions, as stated by the Privy Council, are declaratory of the principles adopted in English law on the matter: see Mahanth Singh v, U Ba Yi, AIR' 1939 PC 110; see also Carter v. White [1884] 26 Ch D 666 ; Sankara Kalana v. Virupakshapa Ganeshapa [1883-84] ILR 7 Bom 146, Krishto Kishori Chowdhrain v. Radha Romun Munshi [1886] ILR 12 Cal 330, Subramania Aiyar v. Gopala Aiyar [1909-11] ILR 33 Mad 308 and Dil Mohammad v. Sain Das, AIR 1927 Lah 396. Referring to the rule laid down by Lord Eldon in Satmtell v. Howdrth [1817] 3 Mer 272, 279, Lord Diplock says in Moschi v. Lep Air Services Ltd. [1972] 2 WLR 1175, 1183 (HL):
" ......that where the creditor, after the guarantee has been entered into, gives a contractual promise to the debtor to allow him time to pay the guaranteed debt, the guarantor is discharged from his obligation to the creditor. This is because the creditor by altering the debtor's obligation to him has deprived the guarantor of his equitable right to compel the debtor to perform his original obligation to the creditor, which was all that the guarantor had guaranteed. In contrast, the guarantor is not discharged by the mere voluntary forbearance of the creditor to take steps to obtain timeous performance by the debtor of the obligation which is the subject of the guarantee ; for this does not affect the guarantor's equitable right to compel the debtor to perform it."
11. The discharge of the principal debtor will not discharge the surety where it is not brought about by the voluntary act of the creditor, but by the operation of law, such as the bar under the statute of limitations or by reason of bankruptcy or liquidation of the principal debtor (see Carler v. White [1881-5] All ER Rep 921, London Chartered Bank of Australia, In re [1893] 3 Ch 540; Jacobs, In re : Ex parte Jacobs [1875] 10 Ch App Cas 211, Fitzgeorge, In re: Ex parte Robson [1905] 1 KB 462, Garner Motors Ltd., In re [1937] 1 All ER 671 (Ch D) and Bank of India Ltd. v. Rustom Fakirji Cowasjee, AIR 1955 Bom 419, 431, See also " Rowlatt on Principal and Surety ", 4th edition, page 177 and William W. Story, " A Treaties on the Law of Contracts ", Volume II, para. 869). As stated by McKay J.:
"The discharge of the principal which discharges a surety must be a discharge by some act or neglect of the creditor, and a discharge by operation of law being, as it is, against the consent and beyond the power of the creditor, does not discharge the surety."
12. Phillips v. Solomon, (42 Go. 192) (quoted by Brandt op. cit, para. 168). But if the contract under which the debt becomes due is not enforceable by reason of the substantive law (as opposed to some procedural regulation) and is, therefore, void ab initio--void from its very inception--(section 2(g) of the Contract Act), as, for example, a contract with an alien enemy, or has become illegal in the course of its performance (section 2(j) of the Contract Act), as, for example, a contract with one who had been an alien friend but later became an alien enemy, the debt in such cases of voidness or nullity is extinguished and not merely barred, and so is the obligation of the surety. The " nullity of the principal obligation necessarily induces the nullity of the accessory " : Ferry v. Burchard (21 Conn 597) per Storra J. (quoted by Brandt op. cit, Volume I, para. 379); see also Mahanth Singh v. U Ba Yi, AIR 1939 PC 110 at page 113. While the bar of limitation or the law of insolvency or liquidation or the requirements of procedural law making the contract unenforceable, but without extinguishing rights and remedies, will leave the obligation of the surety unimpaired, the intervention of substantive law destroying rights and obligations wholly or partly will, to the extent of such extinguishment, release the surety. One striking illustration of the latter is where the law itself, as in the case of the Madras Agriculturists Relief Act, 1938 (Act IV of 1938) (considered in A.L.S.P.PL. Subramania Chettiar v. Moniam P. Narayanaswami Gounder, AIR 1951 Mad 48 [FB] or the Agriculturists Debt Relief Act (Kerala), 1958 (Act 31 of 1958) (considered in Mani v. Kochuouseph [1965] KLT 1266), is found to provide that the debt due from the principal debtor is partly or wholly extinguished, and not merely barred. In such a case, the liability of the surety is pro tanto extinguished.
13. The question, therefore, is whether in the present case, on account of the Nationalisation Act, there was an extinguishment of the whole or part of the principal debt due from the first defendant and whether defendants Nos. 2 and 3 were pro tanto released from their liability. We shall presently consider the relevant provisions of the Nationalisation Act, but before we do so, we shall briefly consider the effect of the two earlier statutes.
14. Section 18A of the 1951 Act enables the Central Government to take over by notified order the management of the whole or any part of the undertaking and exercise such functions of control as specified in the order. The object of such take-over is to conserve a sick industry by preventing further deterioration in its capacity for production and by developing and regulating the industry. With this object in view, the Kerala Legislature enacted the 1961 Act declaring any notified industry as a relief undertaking and suspending the enforcement of all remedies and staying all proceedings against such industry during the period of the relief undertaking. As a result of the operation of these two enactments, the undertaking in question has been already in the care and management of the Government ever since July 14, 1972.
15. The Nationalisation Act is in effect a continuation and culmination of the process of take over initiated under the earlier enactments. With effect from April 1, 1974, the undertaking stood nationalised. Consequently, the undertaking and the right, title, and interest of the owner in relation to it stood transferred to and vested absolutely in the Central Government and thereupon in the National Textile Corporation (Section 3).
16. As a result of such vesting, all the assets of the undertaking were freed and discharged from any trust, obligation, mortgage, charge, lien or other incumbrances or restraints affecting them (Section 4). Every liability, other than a liability arising from loans advanced by the Central or State Government or by the National or State Textile Corporation to the undertaking after the management of the same had been taken over under the 1951 Act, is, subject to the provisions of Section 27 concerning category I of the Second Schedule to the Act, stated to be the exclusive liability of the owner himself and enforceable against him only (Section 5). In respect of such posterior period as is referred to in Section 5(2), Section 4(6) provides that if any suit, appeal or other proceeding instituted by or against the textile company in respect of such undertaking is pending, the same will not abate or be prejudicially affected by reason of such transfer, but can be continued and enforced by or against the National Textile Corporation.
17. Sections 8 and 9 provide for payment of amounts to the owners as compensation for the nationalisation of the undertakings. While Section 8 provides for payment of an amount equal to the amount specified in the corresponding entry in column (4) of the First Schedule, Section 9 provides, in consideration of the retrospective operation of Sections 3, 4 and 5, for payment of a further amount at the rate specified in Section 6 of the Sick Textile Undertakings (Taking Over of Management) Act, 1972, and also for payment of interest. Section 8 says that the amount shall be paid in cash and in the manner specified in Chapter VI which contains Sections 17 to 26.
18. Section 17 provides for the appointment of Commissioners of Payments in respect of different areas. Section 18 says that the Central Government shall, within 30 days from the date specified, pay in cash to the concerned Commissioner, for payment to the owner, such amount as is specified in the First Schedule and also the amount payable in terms of Section 9. Section 19 says that the National Textile Corporation is entitled to receive, up to the specified date, to the exclusion of all other per- sons, any amount due to the undertaking realised after the appointed day, i.e., April 1, 1974, even if such realisations pertain to a period prior to that day. As a result of this and the earlier provisions, the owner is deprived of all the assets of the undertaking, including the amounts realised subsequent to April 1, 1974, even if they pertain to the anterior period. All that the owner is entitled to receive as compensation for the loss of all this is what sections 8 and 9 provide for payment through the Commissioner, but subject to the disbursement in satisfaction of the admitted claims of the creditors in accordance with the mode prescribed under Sections 20 to 24.
19. Section 20 says that every person having a claim against the owner should prefer his claim before the Commissioner within the time prescribed in that section. The priority of claims is specified in Section 21. It reads;
"21. Priority of claims.--The claims arising out of the matters specified in the Second Schedule shall have priorities in accordance with the following principles, namely :--
(a) category I will have precedence over all other categories and category II will have precedence over category III and so on ;
(b) the claims specified in each of the categories except category IV shall rank equally and be paid in full, but if the amount is insufficient to meet such claims in full, they shall abate in equal proportions and be paid accordingly ;
(c) the liabilities specified in category IV shall be discharged, subject to the priorities specified in this section, in accordance with the terms of the secured loans and the priority inter se of such loans, and
(d) the question of payment of a liability with regard to a matter specified in a lower category shall arise only if a surplus is left after meeting all the liabilities specified in the immediately higher category."
20. The Second Schedule referred to in the section contains two parts : Part A deals with categories I and II while Part B deals with categories III to VI, among which category IV concerns secured loans. The priority of claims mentioned in Section 21 provides that category I will be preferred to all other categories, category II will be preferred to the remaining categories, and so on. In respect of each category, with the exception of category IV, the claims will rank equally and will be paid in full, but if the amount is insufficient to meet them in full, the claims will abate in equal proportions and will be paid accordingly. In regard to category IV, the liability will be discharged, subject to the priorities mentioned in the section, in accordance with the terms of the secured loans and the priority inter se of such loans. Section 21(d) specifically provides that no lower category will be paid unless there is a surplus left aftet meeting all the demands of the immediately higher category.
21. Section 22 deals with the examination of claims. It says that the Commissioner must, on receipt of the claims, arrange them in the order of priority specified in the Second Schedule and examine them in accordance with that order. If, on an examination of the claims, the Commissioner comes to the conclusion that the amount paid to him is not sufficient'to meet the liabilities specified in any lower category, it will not be necessary for him to examine the liabilities in respect of such lower category.
22. Sub-section (1) of Section 23 refers to the admission or rejection of claims. Sub-section (3) says that every claimant should file proof of his claim within the date specified by the Commissioner, failing which such claimant would be excluded from the benefit of the disbursement made by the Commissioner. Such date has to be notified in the manner provided under Sub-section (2). Sub-section (4) says :
"(4) The Commissioner shall, after such investigation as may, in his opinion, be necessary and after giving the sick textile undertaking an opportunity of refuting the claim and after giving the claimants a reasonable opportunity of being heard, in writing, admit or reject the claim in whole or in part."
23. Before a claim is so admitted or rejected, the sick textile undertaking has to be afforded an opportunity of refuting the claim and the claimants have to be given a reasonable opportunity of being heard. Sub-sections (5) to (7) prescribe the procedure for investigation by the Commissioner and appeal to a civil court from his decision. It would appear from Sub-section (4) and other provisions that the admission or rejection of a claim is based on two factors; (1) the merits of the claim, and (2) the availability of money. If, upon hearing the parties, the claim is found to be valid, and the amount provided as compensation is sufficient to meet it wholly or in part in accordance with the priorities specified in Section 21, such claim will be admitted to the extent to which the amount permits. On the other hand, if the claim is found to be not admissible at all for want of merit or for want of money, it will be rejected. In other words, the admission or rejection of a claim in whole or in part may be for either of the two reasons. To the extent to which a claim is admitted, the amount due in respect of such admitted claim has to be credited or paid in the manner provided under Section 24. This section reads:
" 24. Disbursement of money by the Commissioner to
claimants.---After admitting a claim under this Act, the amount due in respect of such claim shall be credited by the Commissioner to the relevant fund or be paid to the person or persons to whom such sums are due and on such credit or payment the liability of the owner in respect of such claim shall stand discharged. "
24. The section deals only with the admitted claim and not the claim as originally lodged by the claimant. It is to the extent to which a claim is admitted, that the amount falls due pro tanto under that claim and it is that amount which is credited to the relevant fund or paid to the claimant. On such credit or payment, the liability of the owner will, in respect of the admitted claim, stand discharged pro tanto. This, in our view, is the meaning of this provision. The words " the liability of the owner in respect of such claim " mean the liability in respect of the claim admitted in terms of Section 23(4), and it is only to that extent the liability stands discharged and not any further. The discharge under the section has, therefore, no effect upon any claim which has been rejected in part or whole, and, in regard to any such claim, the remedy against the owner has to be pursued outside the statute. Section 25 says that any balance left with the Commissioner out of the moneys paid to him in relation to the undertaking, after meeting the liabilities specified in the Second Schedule, must be disbursed by him to the owner, provided the Commissioner is satisfied as to the right of such person to receive the whole or any part of the amount. In the event of any doubt or dispute as to his right, the matter has to be referred by the Commissioner to the competent court and the Commissioner shall make the disbursement in accordance with the decision of that court.
25. Section 27 refers to assumption by the Central Government and discharge by the National Textile Corporation of the liability of the owner arising in the post-take-over management period out of any items specified in category I of the Second Schedule which refers to loans advanced by a bank or any other institution, or any other loan or credit availed of for the purpose of trade or manufacturing operations.
26. It is significant that the only liability of the owner which is assumed by the Central Government and discharged by the National Textile Corporation is the liability which arose subsequent to the take-over of the management under the 1951 Act (which in the present case was on July 14, 1972) as provided under Section 27 in respect of the loans and credits of category I, and also in respect of the loans and amounts advanced by the Central or State Government or the National or State Textile Corporation mentioned in Section 5(2) read with Section 4(6). (We are told that the present claim includes a sum of Rs. 2,000 which pertains to the post-take-over management period). Every other liability of the owner, to the extent to which it is not admitted for disbursement under Chapter VI, remains undischarged under the Nationalisation Act, and in respect of the same, the owner is liable to be proceeded against by the claimant in accordance with the general law.
27. Section 35 is apparently meant to protect the interest of the creditors whose claims are not admitted in terms of the Act. It provides that a textile company specified as the owner in the First Schedule shall not be wound up except with the consent of the Central Government.
28. These and other provisions of the Nationalisation Act indicate that, apart from nationalising, reorganising and rehabilitating a sick textile undertaking, the object of the Act is to equitably distribute the compensation due to the owner among the various claimants in accordance with the prescribed priorities and pay only the balance, if any, to the owner. In this respect, these provisions, though not identical, are in some ways akin to the provisions of the Insolvency Act, 1956 (Act 2 of 1956). We must, however, hasten to add that while the insolvent is, with certain specified exceptions, released fully from all debts provable under the Insolvency Act, the discharge of the owner under the Nationalisation Act is only to the extent to which claims against him are admitted and he continues to remain liable under the contract for the rejected claims, and can, therefore, be sued for the undischarged debts.
29. Significantly, Section 45 of the Insolvency Act specifically provides that an order of discharge of the insolvent does not have the effect of releasing a surety. This was a well-recognised principle of the common law even before it was adopted by the statute: English v. Darley [1800] 2 Bos & P 61, 62 (cited in [1947] 63 LQR 355); Ex parte Jacobs, In re Jacobs [1875] Law Rep 10 Ch App 211; See Rowlatt, op ctt. p. 173. The same is the position in liquidation proceedings. The dissolution of a company does not release the surety : See the principles stated in Ex parte Jacobs: Jacobs, In re [1875] Law Rep 10 Ch App 211; London Chartered Bank of Australia, In re [1893] 3 Ch 540, 546-547; Fitzgeorge, In re: Ex parte Robson [1905] 1 KB 462; Garner Motors Ltd., In re [1937] 1 All ER 671 (Ch D) and Jagannath Ganeshram Agarwala v. Shivnarayan Bhagirath, [1941] 11 Comp Cas 11 ; AIR 1940 Bom
247. In both these events, the principal debtor is released personally. The creditor's right to sue is converted into a right to prove and he thus retains his nexus, though of a different character, with the principal debtor which can be enforced (see Stremit Industries Ltd. v. Gardner, [1970] 92 WN (NSW) 435, 436-437). The insolvency of an individual (or the liquidation of a company) thus results in a release of the principal debtor, and the creditor's rights against him are transformed into rights against his assets: see [1947] 63 LQR 355, 365 "The debtor's possible inability to perform the principal obligation is the creditor's motivation for asking for a guarantee and the guarantor for giving it. The law could, therefore, never countenance that a creditor should lose the benefit of the guarantee at the very moment he most needs if." (Moscki v. Lep Air Services Ltd. [1973] AC 331, 356 H (HL): See Johan Steyn [1974] 90 LQR 246, 264. As stated by Jordon C. J.:
" There is no reason to attribute to the Legislature, when it releases or provides for the release of a bankrupt debtor, an intention to deprive a creditor who will otherwise go unpaid to some extent or perhaps entirely, of recourse against the guarantor whose obligation he has been prudent enough to obtain."
30. Insurance Office of Australia Ltd. v. T.M. Burke P. Ltd. [1935] 35 SR (NSW) 438, 442-443 (quoted in [1947] 63 LQR 355, 366. This principle applies with equal, if not greater, force to a case such as the present, where the principal debtor is released under the Nationalisation Act only to the extent to which the claims against him are admitted, and his liability for the undischarged debts remains unaffected. To that extent, the liability of the surety remains unimpaired.
31. There is no merit in the contention that the Nationalisation Act has extinguished the liability of the principal debtor, although he is discharged to the extent to which the claims against him are admitted and credited or paid under the Act and is, therefore, no longer liable to be proceeded against to the extent of such accord and satisfaction. His liability in respect of the balance amounts remains unimpaired: See Anand Kumar v. Dhani Ram, ILR (1978) 2 P&H 329.
32. To the extent of such undischarged liability, the surety is liable to be proceeded against even before the creditor has exhausted his remedies against the principal debtor: Bank of Bihar Ltd. v. Dr. Damodar Prasad [1969] 39 Comp Cas 133; AIR 1969 SC 297 ; and Jagannath Ganeshram Agarwala v. Shivnarayan Bhagirath [1941] 11 Comp Cas 11, 15 ; AIR 1940 Bom 247, 249. On payment, the surety will be subrogated to the rights of the creditor as against the principal debtor, and he will also be entitled to enforce the implied promise of the principal debtor to indemnify him and thus recover from the principal debtor whatever sum the surety has rightfully paid under the guarantees (see Sections 140, 141 and 145 of the Contract Act). Furthermore, when there is an actual accrued debt and the surety is liable and admits liability for the amount guaranteed, he has a right to compel the principal debtor to relieve him from his liability by paying off the debt: Ascherson v. Tredegar Dry Dock and Wharf Co. Ltd. [1909] 2 Ch 401.
33. It is true that the plaintiff has not appealed against that part of the decree rejecting its claim against the first defendant. But the claim was not rejected on merits, but on. the sole ground of the alternative remedy available under the Nationalisation Act. Consequently, as pointed out by the Supreme Court in Daryao v. State o/U.P., AIR 1961 SC 1457, 1466, a rejection solely on the ground of alternative remedy does not constitute a bar. In any event, such rejection does not debar the plaintiff's right of enforcing its claim against the sureties. Mere forbearance on the part of the plaintiff to sue the principal debtor, or to enforce its remedies against it by way of appeal, in the absence of any provision in the guarantee to the contrary, does not discharge the sureties (see Section 137 of the Contract Act: Murugappa Mudaliar v. Munusami Mudali [1920] 38 MLJ 131, 134, Hata v. Smail, AIR 1932 Lah 414, L. Khushal Chand v. Gattri Shankar, AIR 1935 Lah 906,Bombay Dyeing and Mfg. Co. Ltd. v. State of Bombay, AIR 1958 SC 328, Mahanth Singh v. U Ba Yi, AIR 1939 PC 110). In any view of the matter, the contract of guarantee, as we have noticed above, contains the necessary reservation of remedies against the sureties so as to keep them bound under the guarantee, notwithstanding the plaintiff's forbearance or omission to challenge the decree by an appeal or cross-objection. Furthermore, the sureties can themselves " set the law in operation against the debtor": per Lindley LJ. Carter v. White [1883] 25 ChD 666, 672. Accordingly, we see no merit in the contention that the plaintiff is debarred from enforcing its claim against defendants Nos. 2 and 3 in terms of the contract.
34. Story points out in his Commentaries on Equity Jurisprudence, 2nd edition', 1892, page 215:
"...The contract of suretyship imports entire good faith and confidence between the parties in regard to the whole transaction..., the creditor is, in all subsequent transactions with the debtor, bound to equal good faith to the surety;...
......if a creditor does any act injurious to the surety or inconsistent with his rights, or if he omits to do any act, when required by the surety, which his duty enjoins him to do, and the omission proves injurious to the surety, in all such cases the latter will be discharged, and he may set up such conduct as a defence to any suit brought against him in equity."

35. This principle of justice and equity, in our view, must necessarily guide the subsequent conduct of the creditor. We are told by the plaintiff's counsel that the claim filed by the bank under the Nationalisation Act is still pending disposal. Accordingly, we are of the view that, in executing the decree appealed against, credit shall be given to the sureties of any amount which the plaintiff might realise in terms of the Sick Textile Undertakings (Nationalisation) Act, 1974. The decree is accord- ingly modified and its execution shall stand postponed to the final disposal of the plaintiff's claim pending before the authority under the said Act. Subject to this modification, we confirm the decree and dismiss the appeal. We do not, however, make any order as to costs.

Section 56 in The Indian Contract Act Cases India.

Section 56 in The Indian Contract Act Cases India.

56. Agreement to do impossible act. An agreement to do an act impossible in itself is void. Contract to do 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. 2[ 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. Illustrations
(a) A agrees with B to discover treasure by magic. The agreement is void,
(b) A and B contract to marry each other. Before the time fixed for the marriage, A goes mad. The contract becomes void.
(c) A contracts to marry B, being already married to C, and being forbidden by the law to Which he is subject to Practise polygamy, A must make compensation to B for the loss caused to her by the non- performance of his promise.
(d) A contracts to take in cargo for B at a foreign port. A' s Government afterwards declares war against the country in which the port is situated. The contract becomes void when war is declared.
(e) A contracts to act at a theatre for six months in consideration of a sum paid in advance by B. On several occasions A is too ill to act. The contract to act on those occasions becomes void.

------------------------------------------------------------------------------------------
provisions of Section 56 of the Indian Contract Actadopting the Doctrine of Frustration of English Law because of the impossibility of performing thecontract would not be applicable in the facts and circumstances of the present case and that the learned Additional District Judge has committed mistake in invoking the principle of law as laid down in the said section. Mr. Chatterjee's second line of argument is that the present case squarely comes under the ambit of Section 12 of the Specific Relief Act, 1963. Mr. Chatterjee has submitted that by virtue of the application of Section 12(3) of the Specific Relief Act, read withSection 20(4) and explanation (i) to Section 10 of the said Act, the instant case is the fit case where the court should grant a decree for specific performance of the contract. Mr. Chatterjee has further submitted that there is no clause or any term in the agreement for sale debarring the plaintiff from getting the sale deed executed in respect of the suit property
------------------------------------------------------------------------------------------

Calcutta High Court
Smt. Purnima Rani Dutta vs Smt. Lakshmi Bala Dasi on 8 July, 1987
Equivalent citations: AIR 1988 Cal 148
Author: S Chakravarty
Bench: S Chakravarty, G C Chatterjee
JUDGMENT
Sukumar Chakravarty, J.
1. This appeal is directed against the judgment and decree passed by Shri A. K. Chakravorty, the learned Additional District Judge, First Court, Midnapore, in other Appeal No. 306 of 1977 reversing the judgment and decree passed by Shri M. N. Das, the learned Subordinate Judge, First Court, Midnapore in Other Suit No. 35 of 1975 and dismissing the suit.
2. Plaintiff Purnima Rani Dutta, filed the aforesaid suit against the defendant Lakshmi Bala Dasi for specific performance of the contract for sale of the suit property and for possession. It was the case of the plaintiff in brief that the suit property originally belonged to one Sushila Sundari Dasi who executed a deed of gift dated 29-6-51 in favour of the defendant in respect of the suit property. The defendant possessed the suit property since then and her name was duly recorded in the R. S. record of rights. The defendant entered into an agreement to sell the suit property to the plaintiff for a consideration of Rs. 5,300/- and executed a registered deed of agreement on 24-11-72 on acceptance of Rs. 500/- as earnest money towards the consideration. It was agreed between the parties that within four months from the date of the execution of the deed of agreement the plaintiff would pay the balance consideration money of Rs. 4,800/- and the defendant would execute the sale deed in respect of the suit land in favour of the plaintiff. It was further stipulated in the agreement that the defendant within three months from the date of the execution of the deed of agreement would amicably evict the tenant in respect of the suit property and at the time of the execution of the sale deed, the defendant would give vacant" possession of the suit property to the plaintiff and that in default the defendant would refund the earnest money of Rs. 500/- with interest to the plaintiff. After the execution of the deed of agreement for sale the defendant handed over the title deeds to the plaintiff. The plaintiff tendered the balance consideration money in terms of the agreement and requested the defendant to execute the sale deed but the defendant on some pretext did not accept the balance consideration money from the plaintiff and did not execute the sale deed in terms of the agreement. The plaintiff was all along ready and willing to perform her part of the contract but the defendant refused to perform her part of the contract. The plaintiff accordingly brought the suit.
3. The defendant contested the suit after filing the written statement. The defendant admitted in her written statement the execution of the deed of agreement for sale, the acceptance of the earnest money of Rs. 500/-and also the handing over of the title deeds to the plaintiff. The defendant, however, denied the plaintiff's allegation regarding the tender of the balance consideration money within the stipulated period, time being the essence of the contract. The defendant further contended that the plaintiff failed to perform her part of the contract in terms of the agreement and that it was not possible on the part of the defendant to give vacant possession of the suit property in terms of the agreement. The defendant accordingly expressed her willingness to refund the earnest money with interest but the plaintiff demanded Rs. 1,000/-which the defendant refused to pay. The plaintiff being enraged by defendant's such refusal, brought the suit. The plaintiff was therefore not entitled to the relief as prayed for.
4. The learned Subordinate Judge on consideration of the materials on the record found that the defendant executed the deed of agreement in favour of the plaintiff for sale of the suit property in terms of the agreement for a consideration of Rs. 5,300/- and that the defendant accepted the earnest money of Rs. 500/-. The learned Subordinate Judge also found that the time was not the essence of the contract and that the plaintiff within the stipulated period requested the defendant to accept the balance amount of the consideration money and to execute the sale deed and that the plaintiff was ready and willing to perform her part of the contract. The learned Subordinate Judge accordingly passed the judgment and decree for specific performance of the contract in favour of the plaintiff.
5. On appeal the learned Additional District Judge concurred with the aforesaid findings of the learned Subordinate Judge but found that as the defendant was not in a position to give vacant possession of the suit property by evicting the tenants within the stipulated time in terms of the agreement, the agreement for sale itself became void because of the supervening impossibility in performing her part of the contract. The learned Additional District Judge, accordingly, dismissed the suit after reversing the judgment and decree of the learned Subordinate Judge.
6. Mr. Chatterjee appearing for the appellant plaintiff has challenged the j udgment and decree of dismissal as passed by the learned Additional District Judge on the following grounds. His first ground is that in the absence of specific plea being taken in the written statement with regard to the fact that the agreement for sale became void because of the supervening impossibility to perform any part of the contract and in the absence of any issue framed for the purpose in the suit the learned Additional District Judge committed mistake in taking up such point for the first time in the appeal as the said point is based on the mixed question of fact and law. Mr. Chatterjee has further submitted that the provisions of Section 56 of the Indian Contract Act adopting the Doctrine of Frustration of English Law because of the impossibility of performing the contract would not be applicable in the facts and circumstances of the present case and that the learned Additional District Judge has committed mistake in invoking the principle of law as laid down in the said section. Mr. Chatterjee's second line of argument is that the present case squarely comes under the ambit of Section 12 of the Specific Relief Act, 1963. Mr. Chatterjee has submitted that by virtue of the application of Section 12(3) of the Specific Relief Act, read with Section 20(4) and explanation (i) to Section 10 of the said Act, the instant case is the fit case where the court should grant a decree for specific performance of the contract. Mr. Chatterjee has further submitted that there is no clause or any term in the agreement for sale debarring the plaintiff from getting the sale deed executed in respect of the suit property by the defendant in terms of the agreement because of defendant's failure to give vacant possession of the suit property after evicting the tenants therefrom and that accordingly the plaintiff is entitled to get a decree for specific performance of the contract for sale when both the courts below have found that the plaintiff was ready and willing to perform her part of the contract. In support of his submission, Mr. Chatterjee has relied on the decisions in the case of Arun Prokash Boral v. Tulsi Charan Bose reported in AIR 1949 Cal 510 and in the case of Labanya Roy v. Rai Saheb Phanindra Mohan Mukherjee reported in (1964) 68 Cal WN 611. Mr. Chatterjee's further submission is that the decision in the case of T. V. Kochuvareed v. P. Mariappa Gounder reported in AIR 1954 Trav Co 10 as referred to by the learned District Judge, based on different facts is not applicable in the facts of the present case and that assuming that the said decision is applicable, then also, the principle of law as enunciated in the said case does not stand in the way of plaintiff's getting the relief for specific performance of the contract for sale of the suit property, so far as it relates to the execution of the sale deed by the defendant in terms of the agreement, and giving symbolical possession of the suit property with tenants therein.
7. Mr. Roy Chowdhury appearing for the defendant-respondent while supporting the dismissal of the suit, has submitted that the instant case is one where the contract as conceived by the parties had become wholly impossible of performance and not one where there was the possibility of substantial performance and therefore was not governed by Section 12 of the Specific Relief Act but was hit by the second para of Section 56 of the Indian Contract Act. Mr. Roy Chowdhury further submits that the impossibility of performance of the part of the contract rendering the contract void under Section 56 of the Indian Contract Act", is the question of law and that accordingly such question of law can be agitated in appeal even in the absence of specific averment in the written statement and even in the absence of issue framed for the purpose, when it is admitted that the defendant was not in a position to give vacant possession of the suit property after evicting the tenants therefrom and when the defendant made a mention of such impossibility in the written statement Mr. Roy Chowdhury has further submitted that he does not entirely rely on the decision in AIR 1954 Trav Co 10 bused on the different facts in support of the dismissal of the suit.
8. It has already been stated that the plaintiff in this case has filed the suit for specific performance of the contract for sale of the suit property by getting the sale deed executed by the defendant in terms of the agreement for sale and for possession in the suit property. The agreement for sale dt. 24-11-72 is Ext. 1. It is an admitted fact that the defendant agreed to sell the suit property to the plaintiff for Rs. 5,300/- and executed the agreement for saie Ext. 1 and accepted the earnest money of Rs. 500/-.
9. The salient conditions as incorporated in the agreement for sale Ext. 1 are as follows : -
(i) the plaintiff shall pay to the defendant the balance consideration money of Rs. 4,800/-within four months from the date of the agreement for sale and shall get the sale deed executed in respect of the suit property by the defendant at the expensesof the plaintiff.
(ii) the defendant shall get her tenants in the suit property amicably evicted within three months from the date of the agreement for sale and shall give vacant possession of the suit property to the plaintiff a t the time of the execution of the sale deed in favour of the plaintiff and in default the defendant shall be liable to repay the earnest money with interest and expenses.
10. Both the courts below have found that the time was not of the essence of the contract and that the plaintiff was ready and willing to perform her part of the contract and that the plaintiff requested the defendant to execute the sale deed in terms of the agreement by accepting the balance consideration money of Rs. 4,800/- which was tendered by the plaintiff, after rejecting the defence case that the plaintiff was not ready and willing to perform her part of the contract.
11. There is no dispute to the fact that the agreement for sale Ext. 1 also proves that the condition in the agreement for sale stating the defendant's obligation to give vacant possession after a micably evicting her tenants from the suit property is defendant's part of the contract in terms of the agreement for sale. The decisions in (1964) 68 Cal WN 611 and AIR 1949 Cal 510 also lend support to such view. It is true that the impossibility of performance of the defendant's part of contract to give vacant possession by evicting the tenants from the suit property rendering the contract void in terms of Section 56 of the Indian Contract Act was not specifically pleaded in the written statement although it was contended therein that the plaintiff did not tender the balance consideration money within the stipulated time and that it was not possible for the defendant to give vacant possession of the suit property and that accordingly the defendant offered to pay Rs. 600/- inclusive of the earnest money of Rs. 500/- and interest thereon but the plaintiff refused to accept the same and demanded Rs. 1,000/-.
12. It may be mentioned also that no issue with regard to the rendering the contract void because of the impossibility of performance of the contract was framed and no evidence to that effect was also adduced. D. W. 1 (defendant) has only stated in her evidence that she could not evict the tenants from the suit property within the stipulated time. There is nothing in evidence on the side of the defendant to show that the defendant made any effective attempt to get her tenants evicted from the suit property and that having failed in her such attempt, she communicated the impossibility of such performance to the plaintiff. In case of this nature, the defendant cannot be allowed to take advantage of her own default. The decisions in the cases reported in AIR 1949 Cal 510 and (1964) 68 Cal WN 611 support such view. In the aforesaid cases based upon the facts that according to the agreement to sell premises, the vendor contracted to give vacant possession to the purchaser, but by the default of the vendor, he was unable to give such possession, it was held that in a suit for specific performance of the contract by the purchaser, the purchaser had option to take the premises without vacant possession and that the vendor could not say that the purchaser could not do so as the contract was contract to deliver vacant possession and not a contract to deliver the premises with the tenant, and that a party was not entitled to rely on his own default and failure to excuse himself from the performance of the contract.
13. In the case reported in (1964) 68 Cal WN 611. on discussion of the relevant provisions of Specific Relief Act it wasfurther held that the plaintiff purchaser was entitled to a decree for specific performance of the agreement for sale upon relinquishment by her of her claim to vacant possession and also of her claim to compensation for loss or damages. It appears that in neither of the aforesaid two cases, the vendor-defendant took up the plea that the contract had become void being hit by second part of Section 56 of the Indian Contract Act because of the impossibility of performance of the contract.
14. The second part of Section 56 of the Indian Conlract Act runs as follows : "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."
15. It appears that the 'doctrine of frustration' known to the English law has been adopted in the provisions of Section 56 of the Indian Contract Act. In the case reported in AIR 1954 Trav. Co. 10, the relevant observation as made by the Division Bench on the scope of Seclion 56 of the Indian Contract Act may be quoted hereunder : "The doctrine of frustration known to English law has been statutorily recognised under the Indian Law. In Cricklewood Property and Investment Trust Ltd. v. Laighton's Investment Trust Ltd. 1945 AC 221 at page 225(H) this doctrine has been explained as follows : 'Frustration may be defined as the premature determination of an agreement between parties, lawfully entered into and in course of operation at the time of its premature determination, owing to the occurrence of an intervening event or change of circumstances so fundamental as to be regarded by the law both as striking at the root of the agreement, and as entirely beyond what was contemplated by the parties when they entered into the agreement'. For the application of this doctrine it is essential to ascertain the facts assumed by the parties as forming the fundamental basis of their contract and then to see how far the subsequent developments have resulted in the determination of the very basis of the contract, thereby rendering its performance impossible."
16. The facts in the case reported in AIR 1954 Trav. Co. 10 on the reliance of which the learned Additional District Judge dismissed the instant suit, were as follows : The suit was for specific agreement for sale of the several items of properties movable and immovable. The main item of property consisted of the tile factory under the name of Sivakasi Tiles Works. The other items of properties were the lands, bungalow and other buildings as well as the machinery and other accessories attached to the factory. Those properties belonged to the 1st defendant in the suit. Plaintiff who was a dealer in tiles negotiated with the 1st Defendant for the purchase of the Sivakasi Tiles Works together with all the properties attached to it and entered into the registered agreement on 22-5-1950 (Ext.D) setting forth the terms of the proposed sale and purchase. The sale price was fixed at Rs. 90,000/- and at time of the execution of the Ext. D an earnest money of Rs. 5003/-was paid by the plaintiff to the 1st defendant. It was stipulated in the agreement deed Ext. D that the sale deed should be executed before 15-7-1950, that on the date of the registration of the deed Ext. D, plaintiff should make a ready cash payment of Rs. 50,000/- out of the sale consideration before the Registering Office, that for the balance of consideration of Rs. 35,000/- plaintiff should execute mortgage of the same properties in favour of the 1st defendant with a provision for payment of that amount with six per cent interest on or before 31st May, 1951 and that all the expenses of the transaction were to be met by the plaintiff himself. The 1st defendant was to deliver possession of all the movable and immovable properties to the plaintiff at the time of the execution of the sale deed. The parties had also expressly stipulated that time should be of the essence of the agreement between them and the consequences to follow from the default by either party were also provided for in Ext. D. The plaintiff was ready and willing to perform his part of the contract and asked the 1st defendant to perform his part of the contract by issue of the notice. To this notice, the 1st defendant sent the reply stating that one Neelacanda Iyer was in possession of the Sivakami Tile Works under an outstanding lease and that the lessee had refused to surrender possession of the factory and that therefore it had become impossible to effect the sale as contemplated in Ext. D.
17. The Travancore Cochin High Court in the aforesaid facts found that some of the itemscovered by the agreement for sale Ext. D consisted of movable properties which were surrendered to the lessee under Ext. 1 when that lease arrangement was entered on 1st Jan. 1917. It was not known as to whether those items did not really exist and if so in what condition. At any rate the 1st defendant was not now in a position to deliver those items to the plaintiff. Without such delivery there could be no completed sale in respect of those movable properties. The plaintiff had not stated that he was prepared toaccept the sale in respect of defendant No. 1's title to the remaining items of immovable properties only. So long as it is not possible for defendant to hand over those movables to the plaintiff and to effect a sale of them, the provision in Ext. D that the plaintiff should execute a mortgage in favour of the defendant No. 1 in respect of all the properties to be included in the sale deed, to secure the deferred consideration of Rs. 35,000/- could not be implemented. The High Court found also that the part of the contract to be specifically enforced did not stand on a separate and independent footing from the remaining part of the con tract as per the terms embodied in Ext. D. According to the Travancore Cochin High Court, it was clear from these terms that the parties contemplated only a single and indivisible transaction by way of sale with immediate delivery ol possession and for effecting such a conveyance the time stipulated was expressly stated to be of the essence of the contract. The High Court further observed that several terms contained in Ext. D read as a whole clearly rules out the possibility of splitting up the contract into separate and independent parts and of piecemeal performance of such parts. It was further held that the deliberate insertion of the provision in Ext. D that time was of the essence of the particular contract, was the surest indication that transfer of title and possession had to be simultaneous and within the stipulated time, and that the parties did not want the contract to be governed by the normal rules applicable to contracts for sale of immovable properties. The Travancore Cochin High Court accordingly dismissed the plaintiff's suit for the relief of the specific performance of the contract for sale by applying the doctrine of frustration as embodied in Section 56 of the Indian Contract Act.
18. The facts of the instant case under our consideration are different from those in the case reported in AIR 1954 Trav Co 10. This is why perhaps Mr. Roy Chowdhury has (not?) relied on the decision in that case. The agreement for sale Ext. 1 in the instant case consists of mainly two parts regarding the contract. By the first part, the plaintiff is under obligation to pay the balance consideration money of Rs. 4,800/- and to get the sale deed executed by the defendant within four months from the date of the agreement for sale and the defendant is under obligation to execute the sale deed in terms of the agreement. By the second part, the defendant is under further obligation to get the tenants evicted from the property proposed to be sold within three months from the date of the agreement and to deliver vacant possession of the said property at the time of the execution of the sale deed, and that in default, the defendant shall repay the earnest money with interest and expenses. There is nothing in the agreement for sale Ext. 1 to indicate that time was of the essence of the contract and that the agreement for sale would stand cancelled because of the failure of the performance of either party's part of the contract. In this suit for specific performance of the contract for sale, plaintiff has claimed for possession without mentioning vacant possession. Mr. Chatterji has submitted that his client plaintiff has no objection to get possession of the suit property with the tenants therein when the defendant has not taken any effective steps to evict those tenants in terms of the agreement and to give vacant possession. In a contract of this nature in respect of the immovable properties as envisaged in the agreement for sale Ext. 1, second part of Section 56 of the Indian Contrast Act is not attracted and does not stand in the way of enforcement of the contract for safe when the alleged impossibility of performance of the defendant's part of the contract for giving vacant possession has been resorted to by the defendant without making any bona fide and effective attempt to evict the tenants in terms of the agreement and without keeping the plaintiff informed about his such attempt and failure.
19. It appears from the facts and circumstances as discussed in this case with reference to the agreement for sale Ext. 1 that the present case attracts the provisions of Section 12(3) of the Specific Relief Act which runs as follows :
"(3) Where a party to a contract is unable to perform the whole of his part of it, and the part which , must be left unperformed either --
(a) firms a considerable part of the whole, though admitting of compensation in money; or
(b) does not admit of compensation in money;
he is not entitled to obtain a decree for specific performance; but the court may, at the suit of the other party, direct the party in default to perform specifically so much of his part of the contract as he can perform, if the other party --
(i) in case falling under cl. (a), pays or has paid the agreed consideration for the whole of the contract reduced by the consideration for the part which must be left unperformed and in a case falling under cl. (b) pays or has paid the consideration for the whole of the contract without any abatement; and
(ii) in either case, relinquishes all claims to the performance of the remaining part of the contract and all right to compensation, either for the deficiency or for the loss or damage sustained by him through the default of the defendant."
20. It has already been stated that in this suit for specific performance of the contract and possession, the plaintiff has not claimed any compensation. It maybe noted here that the plaintiff in this suit has not claimed for khas possession as well. Mr. Chatterjee submits that the plaintiff has relinquished the claim for compensation and that the plaintiff has expressed her obtain (option ?) to get possession of the suit properties even with the tenants the rein who could not be evicted by the defendant. Both the courts below have found that the plaintiff is ready and willing to perform her part of the contract by paying the balance consideration money of Rs. 4,800/-for the whole of the contract without any abatement, although the defendant would be failing to perform her whole part of the contract. Placing reliance on the decision in (1964) 68 Cal WN 611, we are of the view that Section 12(3) of the Specific Relief Act is attracted in the instant case.
21. It is true that the specific performance of the contract isequitable relief. Explanation (i) to Section 10 of the Specific Relief Act provides that unless and until the contrary is proved, the court shall presume that the breach of the contract to transfer immovable property cannot be adequately relieved by compensation in money. As laid down in Section 20(i) of the Specific Relief Act, the jurisdiction to decree specific performance is discretionary, and the court is not bound to grant such relief merely because it is lawful to do so; but the discretion of the court is not arbitrary but sound and reasonable, guided by judicial principles and capable of correction by a court of appeal. Sub-section (4) of Section 20, of the Specific Relief Act enjoins that the court shall not refuse to any party specific performance of a contract merely on the ground that the contract is not enforceable at the instance of the other party.
22. In view of what has been discussed above we are of the view that the plaintiff is entitled to gel a decree for specific performance of the contract for sale of the suit property in the facts and circumstances of the present case and that the learned Additional District Judge was not justified in reversing the judgment and decree of the learned Subordinate Judge and dismissing the suit.
23. In the result, the appeal is allowed and the judgment and decree of the learned Additional District Judge reversing the judgment and decree of the learned Subordinate Judge and dismissing the suit are set aside and those of the learned Subordinate Judge are restored and restored with the modification that on plaintiff's payment of the balance consideration money of Rs. 4800/- the defendant shall execute the sale deed in terms of the agreement for sale Ext. 1 in respect of the suit property at the expenses of the plaintiff within two months from the date of the judgment of this Court and in default the plaintiff shall get the sale deed executed through the court on deposit of the aforesaid balance consideration money and that the plaintiff shall get possession of the suit property with tenants therein. We make no order as to costs.
Gobinda Chandra Chatterjee, J.


Contract Litigation in India Cases.

Contract Litigation in India Cases.

The doctrine of frustration is really an aspect or part of the law of discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done and hence comes within the purview of S. 56 of the Indian Contract Act.. The view that s. 56 applies only to cases of physical impossibility and that where this section is not applicable recourse can be had to the principles of English law on the subject of frustration is not correct. English cases can have only a persuasive value, and are only helpful in showing how English courts decided cases under similar circumstances.
Section 56 of the Indian Contract Act lays down a rule of positive law and does not leave the matter to be determined according to the intention of the parties.
According to the Indian Contract Act. a promise may be express or implied. In cases, therefore, where the court gathers as a matter of construction that the contract itself contained impliedly or expressly a term, according to which it would stand discharged on the happening of certain circumstances, the dissolution of the contract would take place under the terms of the contract itself and such cases would be outside the purview of S. 56 altogether. Although in English law these cases are treated as cases of frustration, in India they would be dealt with under s. 32 of the Indian Contract Act which deals with contingent contracts or similar other provisions contained in the Act. In the large majority of cases however the doctrine of frustration. is applied not on the ground that the parties themselves agreed to an implied term which operated to release them from the performance of the contract.
-----------------------------------------------------------------------------------

----Supreme Court of India
Satyabrata Ghose vs Mugneeram Bangur & Co., 

PETITIONER:
SATYABRATA GHOSE
Vs.
RESPONDENT:
MUGNEERAM BANGUR & CO., AND ANOTHER
DATE OF JUDGMENT:
16/11/1953
BENCH:
MUKHERJEA, B.K.
BENCH:
MUKHERJEA, B.K.
BOSE, VIVIAN
BHAGWATI, NATWARLAL H.
CITATION:
1954 AIR 44 1954 SCR 310
CITATOR INFO :
R 1958 SC 328 (25)
RF 1959 SC 135 (20)
R 1965 SC1523 (1)
R 1968 SC1024 (8)
R 1971 SC1756 (11)
F 1977 SC1019 (1,11)
A 1980 SC1717 (26)
A 1980 SC1717 (26)
ACT:
Indian Contract Act (IX of 1872), s. 56- Agreement to sell land-Doctrine of frustration- Applicability-Doctrine whether applicable in India- Scope of s. 56 Impossible meaning of- Agreement for sale of land-Buyer's rights-English and Indian law.
HEADNOTE:
The doctrine of frustration is really an aspect or part of the law of discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done and hence comes within the purview of S. 56 of the Indian Contract Act.. The view that s. 56 applies only to cases of physical impossibility and that where this section is not applicable recourse can be had to the principles of English law on the subject of frustration is not correct. English cases can have only a persuasive value, and are only helpful in showing how English courts decided cases under similar circumstances.
Section 56 of the Indian Contract Act lays down a rule of positive law and does not leave the matter to be determined according to the intention of the parties.
According to the Indian Contract Act. a promise may be express or implied. In cases, therefore, where the court gathers as a matter of construction that the contract itself contained impliedly or expressly a term, according to which it would stand discharged on the happening of certain circumstances, the dissolution of the contract would take place under the terms of the contract itself and such cases would be outside the purview of S. 56 altogether. Although in English law these cases are treated as cases of frustration, in India they would be dealt with under s. 32 of the Indian Contract Act which deals with contingent contracts or similar other provisions contained in the Act. In the large majority of cases however the doctrine of frustration. is applied not on the ground that the parties themselves agreed to an implied term which operated to release
311
them from the performance of the contract. The relief is given by the court on the ground of subsequent impossibility when it finds that the whole purpose or basis of a contract was frustrated by the intrusion or occurrence of an unexpected event or change of circumstances which was beyond what was contemplated by the parties at the time when they entered into the agreement. Here there is no question of finding out an implied term agreed to by the parties embodying a provision for discharge, because the parties did not think about the matter at all nor could possibly have any intention regarding it. When' such an event or change of circumstance occurs which is so, fundamental as to be regarded by law as striking at the root of the contract as a whole, it is the court which can pronounce the contract to be frustrated and at an end. The court undoubtedly has to examine the contract and the circumstances under which it was made. The belief, knowledge and intention of the parties are evidence, but evidence only on which the court has to form its own conclusion whether the changed circum- stances destroyed altogether the basis of the adventure and its underlying object. This may be called a rule of construction by English Judges but it is certainly not a principle of giving effect to the intention of the parties which underlies all rules of construction. This is really a rule of positive law and as such comes within the purview of s. 56 of the Indian Contract Act.
The reason underlying the rule of English law that the doctrine of frustration does not apply to contracts for the sale of land. is that under the English law, ,is soon as the agreement to sell is complete the buyer becomes the owner of the land in equity. As a mere agreement to sell does not confer any rights of ownership on the buyer under the Indian law, the doctrine of frustration is as applicable in India to agreements for sale of land as in the case of other agreements.
In 1940 as an integral part of a development scheme of an extensive area of land- started by the defendant company, it entered into a contract with the plaintiff's predecessor for the sale of a Plot of land to the latter accepting a small sum of money as earnest. It undertook to construct roads and drains and the conveyance was to be completed soon after the completion of tile roads on payment of the balance of the Price. As a considerable portion of the area comporised in the scheme was requisitioned by the Government for military Purposes in 1941, the company wrote to the defendant that the road construction could not be taken up for an indefinite period and required him to treat the agreement as cancelled and receive back his earnest: Held. that having regard to the nature and terms of the contracts the actual existence of war condition at the time when it was entered into the extent of the work involved in the scheme fixing no time limit in the agreement for the cons- truction of the roads etc., and the fact that the order of requisition was in its very nature of a temporary character, the requisition did not affect the fundamental basis of the contract; nor
312
did the performance of the contract become illegal by reason of the requisition, and the contract had not therefore become impossible within the meaning of s. 56 of the Indian Contract Act.
Joseph Constantine Steamship Co. v. Imperial Smelting Cor- poration Ltd. ([1942] A.C. 154), Tamplin Steamship Co. Ltd. v. Anglo American Products Co. Ltd. ([1916] A.C. 397), Kesari Chand v. Governor General in Council (I.L.R. 1949 Nag. 718), Ganga Saran v. Ram Charan ([1952] S.C.R. 36), Taylor v. Caldwell (3 B. and S. 826), Robinson v. Davison (L.R. 6 Ex. 269) Denny Mott and Dickson Ltd. v. James B. Frazer & Co. Ltd. [1944] A.C. 265) referred to.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 80 of 1952. Appeal from the Judgment and Decree dated the 6th September, 1950, of the High Court of Judicature at Calcutta (Das Gupta and Lahiri JJ.) in Appellate Decree No. 318 of 1949 from the Judgment and Decree dated the 25th February, 1949. of the Court of the District Judge of Zillah 24 Parganas in Title Appeal No. 8 of 1948 arising out of the Judgment and Decree dated the 10th October, 1947, of the Court of the Additional Subordinate Judge, 7th Court, Alipore.
M.C. Setalvad, Attorney-General for India (Aurobindo Guha and Gobinda Mohan Roy, with him) for the appellant. Atul Chandra Gupta (Bijan Behari Das Gupta, with him) for respondent No. 1
1953. November 16. The Judgment of the Court was delivered by
MUKHERJEA J.The facts giving rise to this appeal are, for the most part, uncontroverted and the dispute between the parties centres round the short point as to whether a contract for sale of land to which this litigation relates, was discharged and came to an end by reason of certain supervening circumstances which affected the performance of a material part of it.
To appreciate the merits of controversy, it will be necessary to give a brief narrative of the material facts. The defendant company, which is the main respondent in this appeal, is the owner of a large tract of land situated, in the vicinity of the Dhakuria Lakes within Greater Calcutta. The
313
company started a scheme for development of this land for residential purposes which was described as Lake Colony Scheme No. I and in furtherance of the scheme the entire area was divided into a large number of plots for the sale of which offers were invited from intending purchasers. The company's plan of work seemed to be, to enter into agree- ments with different purchasers for sale of these plots of land and accept from them only a small portion of the con- sideration money by way of earnest at the time of the agree- ment. The company undertook to construct the roads and, drains necessary for making the lands suitable for building and residential purposes and as soon as they were completed. the purchaser would be called upon to complete the con- veyance by payment of the balance of the consideration money. Bejoy Krishna Roy, who was defendant No. 2 in the suit and figures as a pro forma respondent in this appeal, was one of such purchasers who entered into a contract with the company for purchase of a plot of land covered by the scheme. His contract is dated the 5th of August, 1940, and he paid Rs. 101 as earnest money. In the receipt granted by the vendor for this earnest money, the terms of the agree- ment are thus set out:--
"Received with thanks from Babu Bejoy Krishna Roy of 28 Tollygunge Circular Road, Tollygunge, the sum of Rs. 101 (Rupees one hundred and one only) as earnest money having agreed to sell to him or his nominee 5 K. more or less in plot No. 76 on 20 and 30 ft. Road in Premises No. Lake Colony Scheme No. 1, Southern Block at the average rate of Rs. 1,000 (Rupees one thousand only) per Cotta. The conveyance must be completed within one month from the date of completion of roads on payment of the balance of the consideration money, time being deemed as the Essence of the Contract. In case of default this agreement will be considered as cancelled with forfeiture of earnest money. Mokarari Mourashi
314
Terms of payment:One third to be paid at the time of registration and the balance within six years bearing Rs. 6 per cent. interest per annum".
On 30th November, 1941, the plaintiff appellant was made a nominee by the purchaser for purposes of the contract and although he brought the present suit in the character of a nominee, it has been held by the trial judge as well as by the lower appellate court, that he was really an assignee of Bejoy Krishna Roy in respect to the latter's rights under the contract. Some time before this date, there was an order passed by the Collector, 24-Parganas, on 12th of November, 1941 under section 79 of the Defence of India Rules, on the strength of which a portion of the land covered by the scheme was requisitioned for military purposes. Another part of the land was requisitioned by the Government on 20th of December, 1941. while a third order of requisition, which related to the balance of the land comprised in the scheme, was passed sometime later. In November, 1943, the company addressed a letter to Bejoy Krishna Roy informing him of the requisitioning of the lands by the Government and stating inter alia that a considerable portion of the land-appertaining to the scheme was taken possession of by the Government and there was no knowing how long the Government would retain possession of the same. The constructs of the proposed roads and drains, therefore, could not be taken up during the continuance of the war and possibly for many years after its termination. In these circumstances,, the company decided to treat the agreement for sale with the addressee as cancelled and give him the option of taking back the earnest money within one month from the receipt of the letter. There was offer made in the alternative that in case the purchaser refused to treat the contract as cancelled, he could, if he liked, complete the conveyance within one month from the receipt of the letter by paying the balance of the consideration money and take the land in the condition in which it existed at that time, the company undertaking to construct the roads and the drains, as circumstances might permit, after the termination of the war.
315
The letter ended by saying that in the event of the addressee not accepting either of the two alternatives, the agreement would be deemed to be cancelled and the earnest money would stand forfeited. This letter was handed over by Bejoy Krishna to his nominee, the plaintiff, and there was some correspondence after that, between the plaintiff on the one hand and the company on the other through their respective lawyers into the details of which it is not necessary to enter. It is enough to state that the plaintiff refused to accept either of the two alternatives offered by the company and stated categorically that the latter was bound by the terms of the agreement from which it could not, in law, resile. On 18th of January, 1946, the suit, out of which this appeal arises, was commenced by the plaintiff against the defendant company, to which Bejoy Krishna Roy was made a party defendant and the prayers in the plaint were for a two-fold declaration, namely, (1) that the contract dated the 5th of August, 1940, between the first and the second defendant, or rather his nominee, the plaintiff, was still subsisting; and (2) that the plaintiff was entitled to get a conveyance executed and registered by the defendant on payment of the consideration money mentioned in the agreement and in the manner and under the conditions specified therein.
The suit was resisted by the defendant company who raised a large number of defences in answer to the plaintiff's claim, most of which are not relevant for our present purpose. The principal contentions raised on behalf of the defendant were that a suit of this description was not maintainable under section 42 of the Specific Relief Act and that the plaintiff had no locus standi to institute the suit. The most material plea was that the contract of sale stood discharged by frustration as it became impossible by reason of the supervening events to perform a material part of it. Bejoy Krishna Roy did not file any written statement and he was examined by the plaintiff as a witness on his behalf. 316
The trial judge by his judgment dated 10th October, 1.947, overruled all the pleas taken by the defendant and decreed the plaintiff's suit. An appeal taken by the defendant to the Court of the District Judge of 24-Parganas was dismissed on the 25th February, 1949, and the judgment of the trial court was affirmed. The defendant company thereupon preferred a second appeal to the High Court which was heard by a Division Bench consisting 'of Das Gupta and Lahiri JJ. The only question canvassed before the High Court was, whether the contract of sale was frustrated by reason of the requisition orders issued by the Government? The learned Judges answered this question in the affirmative in favour of the defendant and on that ground alone dismissed the plaintiff's suit. The plaintiff has now come before us on the strength of a certificate granted by the High Court under article 133(I)(c) of the Constitution of India. The learned Attorney General, who appeared in support of the appeal, has put forward a three-fold contention on behalf of his client. He has contended in the first place that the doctrine of English law relating to frustration of contract, upon which the learned Judges of the High Court based their Decision has no application to India in view of the statutory provision contained in section 56 of the Indian Contract Act. it is argued in the second place, that even if the English law Applies, it can have no application to contracts for sale of land and that is in fact the opinion expressed by the English ,judges themselves. His third and the last argument is that on the admitted faacts and circumstances of this case there was no frustrating event which could be said to have taken away the basis of the contract or tendered its performance impossible in any sense of the word.
The first argument advanced by the learned AttorneyGeneral raises a somewhat debatable point regarding the true scope and effect of section 56 of the Indian Contract Act and to what extent, if any, it incorporates the English rule of frustration of contracts.
317
Section 56 occurs in Chapter IV of the Indian Contract Act which relates to performance of contracts and it purports to deal with one circumstances under which performance of a, contract is excused or dispensed with on the ground of the contract being-void. The section stands as follows: "An agreement to do an act impossible in itself is void. A contract to do an act which after the contract is made, becomes impossible, or, by reason of some event which the promiser could not prevent, unlawful, becomes void when the act becomes 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 promise sustains through the non-performance of the promise".
The first_paragraph of the section lays down the law in the same way as in England. It speaks of something which is impossible inherently or by its very nature, and no one can obviously be directed to an act. The second paragraph enunciates the law relating to discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done. The wording of this paragraph is quite general, and though the illustrations attached to it are not at all happy, they cannotderogate from the general words used in the enactment. This much is clear that the word "impossible" has not been used here in the sense of physical or literal impossibility. The performance of an act may not be literally impossible but it may be impracticbale and useless from the point of view of the object and purpose which the parties had in view and if an untoward event or change of circumstances totally upset the very foundation upon which the parties rested their bargain, it can very well be said that the promisor
L/B(D)2SCI-6(a)
318
found it impossible to do the act which he promised to do. Although various theories have been propounded by the Judges and jurists in England regarding the juridical basis of the doctrine of frustration, yet the essential idea upon which the doctrine is based is that of impossibility of performance of the contract: in fact impossibility and frustration are often used as interchangeable expressions. The changed circumstances, it is said, make the performance of the contract impossible and the parties are absolved from the further performance of it as they did not promise to perform an impossibility The parties shall be excused, as Lord Loreburn says(1),
"if substantially the whole contract becomes impossible of performance or in other words impracticable by some cause for which neither was responsible,."
In Joseph Constantine Steamship Line Limited v. Imperial Smelting Corporation Ltd.(2), Viscount Maugham obseryed that the "doctrine of frustration is only a special case of the discharge of contract by an impossibility of performance arising after the contract was made." Lord Porter agreed with this view and rested the doctrine on the same basis. The question was considered and discussed by a Division Bench of the Nagpur High Court in Kesari Chand v. Governor- General in Council(3) and it was held that the doctrine of frustration comes into play when a contract becomes impossi- ble of performance, after it is made, on account of circum- stances beyond the control of the parties. The doctrine is a special case of impossibility and as such comes under section 56 of the Indian Contract Act. We are in entire agreement with this view which is fortified by a recent pronouncement of this court in Ganga Saran v. Ram Charan(4), where Fazl
(1) See Tamplin Steamship Co. Ltd. v. Anglo-Mexican Petroleum Products Co. Ltd.[1916] 2 A.C. 397, 403. (2) [1942] A.C. 154 at 168.
(3) I.L.R. 1949 Nag. 718.
(4) [1952] S.C.R. 36 at 52.
319
Ali J., in speaking about frustration, observed in his judgment as follows:
"It seems necessary for us to emphasise that so far as the courts in this country are concerned, they must loot primarily to the law as embodied in sections 32 and 56 of the Indian Contract Act, 1872."
We hold, therefore, that the doctrine of frustration is really an aspect or part of the law of discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done and hence comes within the purview of section 56 of the Indian Contract Act. It would be incorrect to say that section 56 of the Contract Act applies only to cases of physical impossibility and that where this section is not applicable, recourse can be had to the principles of English law on the subject of frustration. It must be held also that to the extent that the Indian Contract Act deals with a particular subject, it is exhaustive upon the same and it is not permissible to import the principles of English law dehors these statutory provisions. The decisions of the English courts possess only a persuasive value and may be helpful in showing how the courts in England have decided cases under circumstances similar to those which have come before our courts.
It seems necessary however to clear up some misconception which is likely to arise because of the complexities of the English law on the subject. The law of frustration in England developed, as is well known, under the guise of reading implied terms into contracts. The court implies a term or exception and treats that as part of the contract. In the case of Taylor v. Caldwell(1), Blackburn J. first formulated the doctrine in its modern form. The court there was dealing with a case where a music hall in which one of the contracting parties had agreed to give concerts on certain specified days was accidentally burnt by fire. It was held that such a contract must be regarded "as subject to an implied condition that the parties shall be excused, in case, before breach, performance becomes impossible from perishing of the thing without
(1) 3 B & S. 826.
320
default of. the contractor." Again in Robinson v. Davison(1) there was a contract between the plaintiff and the defendant's wife (as the agent of her husband) that she should play the piano at a concert to be given by the plaintifl on a specified day. On the day in question she was unable to perform through illness. The contract did not contain any term as to what was to be done in case of her being too ill to perform. In an action against the defendant for breach of contract, it was held that the wife's illness and the consequent incapacity excused her and that the contract was in its nature not absolute but conditional upon her being well enough to perform. Bramwell B. pointed out in course of his judgment that in holding that the illness of the defendant incapaciated her from performing the agreement the court was not really engrafting a new term upon an express contract. It was not that the obligation was absolute in the original agreement and a new condition was subsequently added to it; the whole question was whether the original contract was absolute or conditional and having regard to the terms of the bargain, it must be held to be conditional.
The English law passed through various stages of development since then and the principles enunciated in the various decided authorities cannot be said to be in any way uniform. In many of the pronouncements of the highest courts in England the doctrine of frustration was held "to be a device by which the rules as to absolute contracts are reconciled with a special exception which justice demands"(2). The court, it is said, cannot claim to exercise a dispensing power or to modify or alter contracts. But when an unexpected event or change of circumstance occurs, the possibility of which the parties did not circumstance occurs, the possibility contract is taken to be not what the parties actual intended, but what they as fair and reasonable men would presumably have intended and agreed upon, if having such possibility in view they had made express provsion as to their rights and liabilities in the event of such occurrence(1). As Loard Wright (1) (1871) L.R. 6 Exch. 269.
(2) Vide Hirji Mulji v. Cheong Yue Steamship Co. Ltd. [1926] A.C. 497 at 510.
(3) Vide Dahl v. Nelson, Donkinand Co. (1881) 6 App. Cas. 38 at 59.
321
observed in Joseph Constantine Steamship Co. v. Imperial Smelting Corporation Ltd.(1).
"In ascertaining the meaning of the contract and its application to the actual occurrences, the court has to decide, not what the parties actually intended but what as reasonable men they should have intended. The court personifies for this purpose the reasonable man." Lord Wright clarified the position still further in the later case of Denny, Mott and Dickson Ltd. v. James B. Fraser & Co. Ltd.(1), where he made the following observations:
"Though it has been constantly said by high authority, including Lord Sumner, that the explanation of the rule is to be found in the theory that it depends on an implied con- dition of the contract, that is really no explanation. It only pushes back the problem a single stage. It leaves the question what is the reason for implying a term. Nor can I reconcile that theory with the view that the result does not depend on what the parties might, or would, as hard bargainers, have agreed. The doctrine is invented by the court in order to supplement the defects of the actual contract...... To my mind the theory of the implied condition is not really consistent with the true theory of frustration. It has never been acted on by the court as a ground of decision, but is merely stated as a theoretical explanation."
In the recent case of British Movietonews Ltd. v. London and District Cinemas Ltd.(1), Denning L. J. in the Court of Appeal took the view expressed by Lord Wright as stated above as meaning that "the court really exercises a qualifying power-a power to qualify the absolute., literal or wide terms of the contract in order to do what is just and reasonable in the new situation". "The day is gone," (1) [1942] A.C. 154 at 185.
(2) [1944] A.C. 265 at 275.
(3) [1951] 1 K. B. 190.
L/ B(D) 2SCI-7
322
the learned Judge went on to say, "when we can excuse an unforeseen injustice by saying to the sufferer 'it is your own folly, you ought not to have passed that form of words. You ought to have put in a clause to protect yourself'. We no longer credit a party with the foresight of a Prophet or his lawyer with the draftsmanship of a Chalmers. We realise that they have their limitations and make allowances accor- dingly. It is better thus. The old maxim reminds us that he who clings to the letter clings to the dry and barren shell and misses the truth and substance of the matter. We have of late paid heed to this warning, and we must pay like heed now."
This decision of the Court of Appeal was reversed by the House of Lords and Viscount Simon in course of his judgment expressed disapproval of the way in which the law was stated by Denning L.J. It was held that there was no change in the law as a result of which the courts could exercise a wider power in this regard than they used to do previously. "The principle remains the same", thus observed his Lordship. "Particular applications of it may greatly vary and theoretical lawyers may debate whether the rule should be regarded as arising from implied term or because the basis of the contract no longer exists. In any view, it is a question of construction as Lord Wright pointed out in Constantine's case and as has been repeatedly asserted by other masters of law."(1)
These differences in the way of formulating legal theories really do not concern us so long as we have a statutory provision in the Indian Contract Act. In deciding cases in India the only doctrine that we have to go by is that of supervening impossibility or illegality as laid down in section 56 of the Contract Act taking the word "Impossible" in its practical and not literal sense. It must be borne in mind, however, that section 56 lays down a rule of positive law and does not leave the matter to be determined according to the intention of the parties.
(1) [1952] A.C. 166 at 184.
323
In the latest decision of the House of Lords referred to above, the Lord Chancellor puts the whole doctrine upon the principle of construction. But the question of construction may manifest itself in two totally different ways. In one class of cases the question may simply be, as to what the parties themselves had actually intended and whether or not there as a condition in the contract itself, express or implied, which operated, according to the agreement of the Parties themselves to release them from their obligations; this would be a question of construction pure and simple and the ordinary rules of construction would have to be applied to find out what the real intention of the parties was. According to the Indian Contract Act, a promise may be express or implied(1). In cases, therefore, where the court gathers as a matter of construction that the contract itself contained impliedly or expressly a term, according to which it would stand discharged on the happening of certain circumstances the dissolution on of the contract would take place under the terms of the contract itself and such cases would be outside the purview of section 56 altogether. Although in English law these cases are treated as cases of frustration, in India they would be dealt with under section 32 of the Indian Contract Act which deals with contingent contracts or similar other provisions contained in the Act. In the large majority of cases however the doctrine of frustration is applied not on the ground that the parties themselves agreed to an implied term which operated to release them from the performance of the contract. The relief is given by the court on the ground of subsequent impossibility when it finds that the whole purpose or basis of a contract was frustrated by the intrusion or occurrence of an unexpected event or change of circumstances which was beyond what was contemplated by the parties at the time when they entered into the agreement. Here there is no question of finding out an implied term agreed to by the parties em- bodying a provision for discharge, because the parties did not think about the matter at all nor could possibly have any intention regarding it. When such an event or change of (1) Vide section 9.
L/B(D)2SCI-7(a)
324
circumstance occurs which is so fundamental as to be re- garded by law as striking at the root of the contract as a whole, it is the court which can pronounce the contract to be frustrated and at an end. The court undoubtedly has to examine the contract and the circumstances under which it was made. The belief, knowledge and intention of the parties are evidence, but evidence only on which the court has to form its own conclusion whether the changed cir- cumstances destroyed altogether the basis of the adventure and its underlying object(1). This may be called a rule of construction by English Judges but it is certainly not a, principle of giving effect to the intention of the parties which underlies all rules of construction. This is really a rule of positive law and as such comes within the purview of section 56 of the Indian Contract Act.
It must be pointed out here that if the parties do con- template the possibility of an intervening circumstance which might affect the performance of the contract, but expressly stipulate that the contract would stand despite such circumstances, there can be no case of frustration because the basis of the contract being to demand performance despite the happening of a particular event, it cannot disappear when that event happens. As Lord Atkinson said in Matthey v. Curling(1), "a person who expressly contracts absolutely to do a thing not naturally impossible is not excused for nonperformance because of being prevented by the act of God or the King's enemies......... or vis major". This being the legal position, a contention in the extreme form that the doctrine of frustration as recognised in English law does no come at all within the purview of section 56 of the Indian Contract Act cannot be accepted.. The second contention raised by the Attorney General can be disposed of in few words. It is true that in England the judicial opinion generally expressed is, that the doctrine of frustration does not operate in the case of contracts for (1) Vide Morgan v. Manser (1947] 2 AU E.R. 666. (2) [1922] 2 A.C. 180 at 234.
325
sale of land(1). But the reason underlying this view is that under the English law as soon as there is a concluded contract by A to sell land to B at certain price, B becomes in equity, the owner of the land, subject to his obligation to pay the purchase money'. On the other hand, A in spite of his having the legal estate holds the same in trust for the purchaser and whatever rights he still retains in the land are referable to his right to recover and receive the purchase money. The rule of frustration can only put an end to purely contractual obligations, but it cannot destroy an estate in land which has already accrued in favour of a contracting party. According to the Indian law, which is embodied in section 54 of the Transfer of Property Act, a contract for sale of land does not of itself create any interest in the property which is the subject-matter of the contract. The obligations of the parties to a contract for sale of land are, therefore, the same as in other ordinary contracts and consequendy there is no conceivable reason why the doctrine of frustration should not be applicable to contracts for sale of land in India. This contention of the Attorney General must, therefore, fail.
We now come to the last and most important point in this case which raises the question as to whether, as a result of the requisition orders, under which the lands comprised in the development scheme of the defendant company were requisitioned by Government, the contract of sale between the defendant company and the plaintiff's predecessor stood dissolved by frustration or in other words became impossible of performance.
It is well settled and not disputed before us that if and when there is frustration the dissolution of the contract occurs automatically. It does not depend, as does rescission of a contract on the ground of repudiation or breach, or on the choice or election of either party. It depends on the effect
(1) Vida Billington Estates Co. v. Stonfield Estate Ltd. [1952] 1 All E.R.853.
326
of what has actually happened on the possibility of performing the contrat (1). What happens generally in such cases and has happened here is that one party claims that the contract has been frustrated while the other party denies it. The issue has got to be decided by the court "ex post facto, on the actual circumstances of the case"(2). We will now proceed to examine the nature and terms of the contract before us and the circumstances under which it was entered into to determine whether or not the disturbing element,which is allowed to have happened here, has substantially prevented the performance of the contract as a whole.
It may be stated at the outset that the. contract before us cannot be looked upon as an ordinary contract for sale and purchase of a piece of land; it is an integral part of a development scheme started by the defendant company and is one of the many contracts that have been entered into by a large number of persons with the company. The object of the company was undoubtedly to develop a fairly extensive area which was still undeveloped and make it usable for residential purposes by making roads and constructing drains through it. The purchaser. on the other hand, wanted the land in regard to which he entered into the contract to be developed and make ready for building purposes before he could be called upon to complete the purchase. The most material thing which deserves notice is, that there is abso- lutely no time limit within which. the roads and drains are to be made. The learned District Judge of Alipore, who heard the appeal, from the trial court's judgment found it as a fact, on the evidence in the record, that there was not an understanding between the parties on this point. As a matter of fact, the first requisition order was passed nearly 15 months after the contract was made and apparently no work was done by the defendant company in the meantime. Another important thing that requires notice in this con (1) Per Lord Wright in Denny, Mott and Dicksom Ltd. v. Jameso B. Fraser and Co., Ltd. [1944] A.C. 265, 274, (2) Ibid.
327
nection is that the war was already on, when the parties entered into the contract. Requisition orders for taking temporary possession of lands for war purposes were normal events during this period. Apart from requisition orders there were other difficulties in doing construction work at that time because of the scarcity of materials and the various restrictions which the Government had imposed in respect of them. That there were certain risks and difficulties involved in carrying on operations like these, could not but be in the contemplation of the parties at the time when they entered into the contract, and that is probably the reason why no definite time limit was mentioned in the contract within which the roads and drains are to be completed. This was left entirely to the convenience of the company and as at matter of fact the purchaser did not feel concerned about it. It is against this background that we are to consider to what extent the passing of the requisition orders affected the performance of the contract in the present case.
The company, it must be admitted, bad not commenced the development work when the requisition order was passed in November, 1941. There was no question, therefore, of any work or service being interrupted for an indefinite period of time. Undoubtedly the commencement of the work was delayed but was the delay going to be so great and of such a character that it would totally upset the basis of the bargain and comercial object which the parties had in view? The requisition orders, it must be remembered, were' by their very nature, of a temporary character and the requisitioning authorities could, in law, occupy the position of a licensee in regard to the requisitioned property. The order might continue during the whole period of the war and even for some time after that or it could have been withdrawn before the war terminated. If there was a definite time limit agreed to by the parties within which the construction work was to be finished, it could be said with perfect propriety that delay for an indefinite period would
328
make the performance of the contract impossible within the specified time and this would seriously affect the object and purpose of the venture. But when there is no time limit whatsoever in the contract, nor even an understanding bet- ween the parties on that point and when during the war the parties could naturally anticipate restrictions of various kinds which would make the carrying on of these operations more tardy and difficult than in times of peace, we do not think that the order of requisition affected the fundamental basis upon which the agreement rested or struck at the roots of the adventure.
The learned Judges of the High Court in deciding the case against the plaintiff relied entirely on the time factor. It is true that the parties could not contemplate an absolutely unlimited period of time to fulfil their contract. They might certainly have in mind a period of time which was reasonable having regard to the nature and magnitude of the work to be done as well as the conditions of war prevailing at that time. Das Gupta, J., who delivered the judgment of the High Court, says first of all that the company had in contemplation a period of time not much exceeding 2 or 3 years as the time for performance of the contract; the purchaser also had the same period of time in contemplation. The learned Judge records his finding on the point in the following words:
"My conclusion on a consideration of the surrounding circumstances of the contract is that the parties contemplated that the roads and drains would be constructed and the conveyance would be completed in the not distant future."
This finding is inconclusive and goes contrary to what has been held by the District Judge who was undoubtedly the last court of facts. In our opinion, having regard to the nature and terms of the contract, the actual existence of war conditions at the time when it was entered into, the extent of the work involved in the development scheme and last though not the least the total absence of any definite period of time agreed to by the parties within which the work was
329
to be completed, it cannot be said that the requisition order vitally affected the contract or made its performance impossible.
Mr. Gupta, who appeared for the respondent company. put forward an alternative argument that even if the performance of the contract was not made impossible. it certainly became illegal as a result of the requisition order and con- sequently the contract became void under section 56 of the Indian Contract Act as soon as the requisition order was made. In support of his contention the learned counsel placed reliance upon certain provisions of the Defence of India Rules and also upon illustration (d) to section 56 of the Contract Act. All that the Defence Regulations show is that the violation of a requisition order could be punished as a criminal offence. But no matter in whichever way the requisition order could be enforced, in substance it did nothing else but impose a prohibition on the use of the land during the period that it remained in force. The effect of such prohibition on the performance of the contract, we have discussed above, and we do not think that the mere fact that the requisition order was capable of being enforced by a criminal sanction made any difference in this respect. In any view this question was not raised in any of the courts below and has not been indicated even in the respondent's statement of the case. We do not think that it would be proper to allow this question to be raised for the first time before us, as it requires consideration of the different provisions of the Defence of India Act and also of the implication of illustration (d) appended to section 56 of the Contract Act. In our opinion, the events which have happened here cannot be said to have made the performance of the contract impossible and the contract has not been frustrated at all. The result is that the appeal is allowed, the judgment and decree of the High Court of Calcutta are set aside and those of the courts below restored. The plaintiff will have his costs in all the courts.
Appeal allowed.
Agent for the appellant: S. C. Banerjee.
Agent for the respondent No. I : R. R. Biswas---------------------------------------------------------------------------------------