17 Sep 2010

Act of God: The law revisited

In a recently reported decision [Indian Rare Earths Ltd. v. Managing Director, Southern Electricity Supply Company of Orissa Ltd., AIR 2010 Ori 115] the Orissa High Court has clarified the scope of a well indoctrinated concept under contractual law relating to vis majure or 'Act of God' which absolves the parties of the liabilities under the agreement. The High Court was dealing with a demand by the electricity supply company towards electricity charges where it was argued that due to the 'Act of God' demand could not be affixed on the consumer. 

The High Court, explaining the concept, inter alia observed as under;
6. Aforesaid provisions go to show that the demand charge relates to a charge on the consumer for keeping reserve the energy to supply him to the extent of contractual demand of energy. A consumer is liable to pay the same if the energy is supplied to the consumer by the licensee whether he draws or utilizes the same or not. The aforesaid relationship of the consumer with the supply company arises out of a contract entered into between them, having mutual obligations. Here in this case, it is seen that by the act of the God, it became impossible for the supply company to supply the power to the consumer. The supervening circumstances in which neither of the parties had any control, made the contract for the same impossible of being performed & as such during the said period, it can be said that the contract was hit by the "doctrine of frustration". In such a situation the supply company has no obligation to supply power & if any claim would have been made by the consumer for non-supply of energy, it goes without saying that the company could have escaped from the liability thereof taking the resort to the aforesaid doctrine of frustration. When the company could have escaped from the liability by availing of the doctrine of frustration, in such premises, it is fallacious to say that it could have pressed the consumer to pay the tariff charge even though, it has not supplied the power to the Petitioner. In this regard Section 56 of the Indian Contract Act, 1872 envisages as follows: 
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.
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, & which !he promise did not know to be impossible or unlawful, such promisor must make compensation to such promise for any loss which such promise sustains through the non-performance of the promise.
In the case of Satyabrata Ghose v. Mugneeram Bangur & Co. and Anr. reported in A.I.R. 1954 S.C. 44, the Hon'ble Apex Court in this regard has held as follows:
The essential idea upon which the doctrine of frustration is based is that of impossibility of performance of the contract; in fact impossibility & frustration are often used as interchangeable expressions. The changed circumstances make the performance of the contract impossible & the parties are absolved from the further performance of it as they did not promise to perform an impossibility. 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 & hence comes within the purview of Section 56. To the extent that the Contract Act deals with a particular subject, it is exhaustive upon the same & 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 & may be helpful in showing how the Courts in England have decided cases under circumstances similar to those which have come before Indian Courts. 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 S. 56, taking the word 'impossible' in its practical & not literal sense. Section 56 lays down a rule of positive law & does not leave the matter to be determined according to the intention of the parties. In cases, 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 & such cases would be outside the purview of Section 56 altogether. They would be dealt with under Section 32 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 con tract. The relief is given by the Court on the ground of subsequent impossibility when it finds that the whole purpose or basis of a con tract 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. 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 & at an end. The Court undoubtedly has to examine the contract & the circumstances under which it was made. The belief, knowledge & intention of the parties are evidence, but evidence only on which the Court has to form its own conclusion whether the changed circumstances destroyed altogether the basis of the adventure & its underlying object. This is really a rule of positive law & as such comes within the purview of Section 56 of the Contract Act.
7. In view of the aforesaid authoritative pronouncement in this case, as during the period in dispute there being no contractual obligation on either of the parties, levy of demand on the Petitioner as made by the Opp. Party- Company cannot be sustained.

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