Satyabrata Ghose v. Mugneeram Bangur & Co.

A land-development company sold plots on a promise to build roads and drains first. The government then requisitioned the land for war use. The company said the contract was frustrated and tried to cancel it. The Supreme Court held that Section 56 of the Indian Contract Act governs the question, and that the contract was not frustrated.

Quick Revision

Parties

Satyabrata Ghose — appellant and plaintiff. He was the nominee and assignee of the original purchaser, and he sued to enforce the plot-sale agreement.

Mugneeram Bangur & Co. — first respondent and first defendant. It was the land-development company that agreed to sell the plot and to build roads and drains.

Bejoy Krishna Roy — second defendant and a pro forma respondent. He was the original purchaser who signed the agreement with the company.

The bench was Mukherjea, Bose and Bhagwati JJ. Mukherjea J. delivered the judgment of the Court.

Procedural History

1. The plaintiff sued the company on 18 January 1946. The Court of the Additional Subordinate Judge, 7th Court, Alipore, tried the suit.
2. The trial judge overruled all the company's pleas. He passed a decree (the court's formal order) for the plaintiff by his judgment dated 10 October 1947.
3. The company appealed to the District Judge of 24-Parganas in Title Appeal No. 8 of 1948. The District Judge dismissed the appeal on 25 February 1949.
4. The company filed a second appeal to the High Court at Calcutta, Appellate Decree No. 318 of 1949. A Division Bench of Das Gupta and Lahiri JJ. heard it.
5. Only one question was argued in the High Court. It was whether the requisition orders frustrated the contract of sale.
6. The High Court answered yes on 6 September 1950. It dismissed the plaintiff's suit on that ground alone.
7. The plaintiff came to the Supreme Court under a certificate granted by the High Court under Article 133(1)(c) of the Constitution. Civil Appeal No. 80 of 1952 was decided on 16 November 1953.

Facts

1. The company owned a large tract of land near the Dhakuria Lakes in Greater Calcutta.
2. It started a scheme to develop the land for residential use. The scheme was called Lake Colony Scheme No. I.
3. The company divided the whole area into many plots. It invited offers from intending purchasers.
4. Its plan was to sign agreements with purchasers and take only a small part of the price as earnest money (a deposit paid to bind the bargain).
5. The company undertook to build the roads and drains needed to make the land fit for building. After that the purchaser would be called on to complete the conveyance by paying the balance.
6. On 5 August 1940 Bejoy Krishna Roy signed one such contract. He paid Rs. 101 as earnest money.
7. The receipt recorded the terms. The company made an agreement to sell to him or his nominee 5 K. more or less in plot No. 76 on a 20 and 30 ft. road, Southern Block, Lake Colony Scheme No. 1. The average rate was Rs. 1,000 per Cotta.
8. The conveyance was to be completed within one month from completion of the roads, on payment of the balance. Time was deemed the essence of the contract (the time limit was strict).
9. In case of default the agreement would be treated as cancelled, with forfeiture of the earnest money.
10. The payment terms were one third at registration and the balance within six years, with interest at Rs. 6 per cent per annum.
11. On 30 November 1941 Bejoy Krishna Roy made the plaintiff his nominee for the contract.
12. The trial judge and the lower appellate court held that the plaintiff was really an assignee of Bejoy Krishna Roy's rights. He sued as nominee.
13. On 12 November 1941 the Collector of 24-Parganas passed an order under section 79 of the Defence of India Rules. It requisitioned a portion of the scheme land for military purposes.
14. On 20 December 1941 the government requisitioned another part. A third order, for the balance of the land, was passed some time later.
15. In November 1943 the company wrote to Bejoy Krishna Roy. It said a considerable portion of the land had been taken by the government, and no one knew how long the government would keep it.
16. The letter said the roads and drains could not be built during the war, and possibly for many years after it. The company therefore decided to treat the agreement as cancelled.
17. The letter gave two options. The first was to take back the earnest money within one month.
18. The second was to complete the conveyance within one month by paying the balance. The purchaser would take the land as it stood, and the company would build the roads and drains after the war as circumstances permitted.
19. The letter said that if neither option was accepted, the agreement would be deemed cancelled and the earnest money forfeited.
20. Bejoy Krishna Roy handed the letter to the plaintiff. Lawyers for both sides then exchanged letters.
21. The plaintiff refused both options. He said the company was bound by the agreement and could not resile (back out) in law.
22. On 18 January 1946 the plaintiff sued the company and Bejoy Krishna Roy. He asked for two declarations.
23. The first was that the contract dated 5 August 1940 was still subsisting. The second was that he was entitled to a conveyance on paying the agreed price in the agreed manner.
24. The company raised many defences. The main ones were that the suit was not maintainable under section 42 of the Specific Relief Act, and that the plaintiff had no locus standi (standing to sue).
25. The most material plea was that frustration had discharged the contract. The company said supervening events made it impossible to perform a material part of it.
26. Bejoy Krishna Roy filed no written statement. The plaintiff examined him as a witness.

Issues Raised

The Court took up three contentions of the appellant as its questions. It added a fourth point that arose from the respondent's alternative argument.

1. Does the English doctrine of frustration have no application in India because of section 56 of the Indian Contract Act? (Frustration means discharge of a contract by a later event beyond the parties' control.)
2. Even if the English law applies, can it apply to contracts for sale of land?
3. On the admitted facts, was there any frustrating event that took away the basis of the contract or made its performance impossible in any sense?
4. Did the requisition orders make performance illegal, so that the contract became void under section 56?

Arguments Contended

For the appellant (the plaintiff)

The Attorney-General for India appeared for the appellant. He made three contentions.

• The English doctrine of frustration, on which the High Court based its decision, has no application in India because of section 56 of the Indian Contract Act.
• Even if English law applies, it cannot apply to contracts for sale of land. English judges themselves have said so.
• On the admitted facts there was no frustrating event. Nothing took away the basis of the contract or made performance impossible in any sense.
• The judgment does not list any case that the appellant relied on.

For the respondent (the company)

Mr. Gupta appeared for the respondent company.

• The contract was frustrated because the requisition orders made performance of a material part of it impossible. This was the company's most material plea.
• In the alternative, the requisition order made performance illegal. The contract therefore became void under section 56 as soon as the order was made.
• Counsel relied on certain provisions of the Defence of India Rules and on illustration (d) to section 56 of the Contract Act.
• The company also pleaded that the suit was not maintainable under section 42 of the Specific Relief Act and that the plaintiff had no locus standi. The judgment calls these pleas not relevant for its purpose.

Court's Reasoning

The judgment has no numbered paragraphs. It is one opinion, delivered by Mukherjea J. for the whole Court. The steps follow the order of the judgment.

Mukherjea J. (for the Court)

1. Noted: The facts were for the most part uncontroverted. The dispute turned on one short point. It was whether the contract was discharged by supervening circumstances that affected performance of a material part of it.
2. Noted: The first argument raised a debatable point. It was the true scope of section 56 and how far it takes in the English rule of frustration.
3. Noted: Section 56 is in Chapter IV of the Contract Act, on performance of contracts. It deals with one circumstance in which performance is excused because the contract is void.
4. Noted: The first paragraph of section 56 says an agreement to do an act impossible in itself is void. This is the same as in England. It covers what is impossible by its very nature.
5. Noted: The second paragraph deals with discharge by supervening impossibility or illegality of the act agreed to be done. Its wording is quite general. The illustrations are poorly drafted, in the Court's view, but cannot cut down the general words.
6. Held: The word impossible in section 56 is not used in the sense of physical or literal impossibility.
7. Why: Performance may not be literally impossible but may be impracticable and useless for the object the parties had in view. If an unexpected event or change of circumstances totally upsets the foundation of the bargain, the promisor can be said to find it impossible to do the act.
8. Noted: Judges and jurists in England have offered various theories on the basis of frustration. The essential idea in all of them is impossibility of performance. Impossibility and frustration are often used as interchangeable expressions.
9. Noted: Lord Loreburn said parties are excused if substantially the whole contract becomes impossible of performance, or impracticable by a cause for which neither was responsible.
10. Noted: In Joseph Constantine Steamship Line v. Imperial Smelting Corporation, Viscount Maugham called frustration only a special case of discharge by impossibility arising after the contract. Lord Porter agreed and rested the doctrine on the same basis.
11. Noted: The Nagpur High Court in Kesari Chand v. Governor-General in Council held the same. Frustration is a special case of impossibility and falls under section 56. The Court agreed entirely.
12. Noted: The Court found support in Ganga Saran v. Ram Charan. There Fazl Ali J. said Indian courts must look primarily to the law in sections 32 and 56 of the Indian Contract Act, 1872.
13. Held: "the doctrine of frustration is really an aspect or part of the law of discharge of contract" by supervening impossibility or illegality. It therefore falls within section 56.
14. Held: It is incorrect to say section 56 covers only physical impossibility and that English frustration principles apply where it does not.
15. Held: To the extent the Contract Act deals with a subject, it is exhaustive. English law principles cannot be imported outside the statutory provisions.
16. Held: English decisions have only persuasive value. They help to show how English courts decided cases in similar circumstances.
17. Noted: The Court wished to clear up a misconception that may arise from the complexity of English law. English frustration law developed under the guise of reading implied terms (unwritten conditions) into contracts. The court implies a term or exception and treats it as part of the contract.
18. Noted: In Taylor v. Caldwell, Blackburn J. first stated the doctrine in its modern form. A music hall that was to host concerts burnt down by accident. The contract was held subject to an implied condition that the parties are excused if performance becomes impossible from the perishing of the thing without default of the contractor.
19. Noted: In Robinson v. Davison, the defendant's wife was to play the piano at a concert. She was too ill to perform on the day. The contract had no term for illness. It was held that her illness excused her.
20. Noted: Bramwell B. said the court was not adding a new term to an express contract. The question was whether the original contract was absolute or conditional. Given its terms, it was conditional.
21. Noted: English law passed through several stages, and its authorities are not uniform. Many statements of the highest English courts call frustration a device that reconciles the rules on absolute contracts with a special exception that justice demands (Hirji Mulji v. Cheong Yue Steamship Co.).
22. Noted: The court cannot claim a dispensing power or alter contracts. But when an unexpected event occurs that the parties did not contemplate, the contract is taken to be what they would, as fair and reasonable men, have agreed (Dahl v. Nelson, Donkin & Co.).
23. Noted: Lord Wright said in Joseph Constantine that the court decides what the parties as reasonable men should have intended, not what they actually intended. The court personifies the reasonable man.
24. Noted: In Denny, Mott and Dickson v. James B. Fraser, Lord Wright said the implied term theory is no real explanation. It only pushes the problem back one stage.
25. Noted: Lord Wright added that the theory is inconsistent with the true theory of frustration. The doctrine is invented by the court to supplement the defects of the actual contract. The implied-condition theory has never been acted on as a ground of decision. It is merely a theoretical explanation.
26. Noted: In British Movietonews v. London and District Cinemas, Denning L.J. read Lord Wright as giving the court a qualifying power. It may qualify the absolute or literal terms of a contract to do what is just and reasonable.
27. Noted: Denning L.J. said the day is gone when courts could answer an unforeseen injustice by blaming the sufferer for not inserting a protective clause. Parties are no longer credited with a prophet's foresight.
28. Noted: The House of Lords reversed that decision. Viscount Simon disapproved Denning L.J.'s statement. He said the law had not changed and the courts have no wider power than before. The principle remains the same.
29. Noted: Viscount Simon added that theoretical lawyers may debate whether the rule rests on an implied term or on the basis of the contract no longer existing. In either view it is a question of construction.
30. Held: These differences in English legal theory do not concern Indian courts while the Contract Act has a statutory provision. The only doctrine to apply is supervening impossibility or illegality in section 56, taking impossible in its practical and not literal sense.
31. Held: "section 56 lays down a rule of positive law". It does not leave the matter to be decided by the intention of the parties.
32. Noted: The Lord Chancellor in the latest House of Lords decision puts the whole doctrine on the principle of construction. But construction can arise in two totally different ways.
33. Noted: In the first class of cases, the question is what the parties actually intended. The contract itself may contain an express or implied condition that releases them. That is a question of construction pure and simple.
34. Held: Under the Contract Act a promise may be express or implied (section 9). If the court finds the contract itself contains a term for discharge, the contract ends under its own terms. Such cases are outside section 56 altogether.
35. Held: English law treats these as frustration. In India they are dealt with under section 32 of the Act, which covers contingent contracts (contracts depending on a future event), or similar provisions.
36. Noted: In the large majority of cases, frustration is not applied because the parties agreed to an implied term. The court gives relief on the ground of subsequent impossibility.
37. Held: Relief is given when an unexpected event or change of circumstances destroys the whole purpose or basis of the contract. The event must be beyond what the parties contemplated.
38. Why: Here there is no question of finding an implied term. The parties did not think about the matter at all, and could not have had any intention about it.
39. Held: Some events are so fundamental that the law regards them as striking at the root of the contract. The court can then pronounce the contract frustrated and at an end.
40. Noted: The court must examine the contract and the circumstances in which it was made. The parties' belief, knowledge and intention are evidence only. The court forms its own conclusion on whether the changed circumstances destroyed the basis of the venture and its underlying object.
41. Held: English judges may call this a rule of construction. But it is not a principle of giving effect to the parties' intention. It is a rule of positive law and comes within section 56.
42. Held: If the parties foresee an intervening circumstance but expressly stipulate that the contract will stand despite it, there can be no frustration. The basis of the contract is to demand performance despite that event, so it cannot disappear when the event happens.
43. Noted: Lord Atkinson said in Matthey v. Curling that a person who expressly contracts absolutely to do a thing not naturally impossible is not excused by act of God, the King's enemies or vis major (superior force). The Court also noted Morgan v. Manser in a footnote.
44. Held: A contention in the extreme form, that English frustration doctrine does not come within section 56 at all, cannot be accepted.
45. Held: The second contention (sale of land) could be disposed of in a few words. In England, judicial opinion generally is that frustration does not operate on contracts for sale of land (see Billington Estates Co. v. Stonfield Estate Ltd. in a footnote).
46. Why: In English law, once there is a concluded contract to sell land, the buyer becomes owner in equity. The seller holds the legal estate in trust for the buyer. Frustration can end only purely contractual obligations. It cannot destroy an estate already accrued.
47. Held: Under Indian law, section 54 of the Transfer of Property Act says a contract for sale of land does not of itself create any interest in the property. The obligations are the same as in other contracts. There is no reason why frustration should not apply to contracts for sale of land in India. This contention failed.
48. Noted: The last and most important point was whether the requisition orders dissolved the contract by frustration.
49. Noted: It was well settled and not disputed that when there is frustration, the contract ends automatically. It does not depend on the choice or election of either party, unlike rescission for repudiation or breach. It depends on the effect of what has actually happened on the possibility of performance (Denny, Mott and Dickson, per Lord Wright).
50. Noted: Usually one party says the contract is frustrated and the other denies it. The court decides the issue ex post facto (looking back) on the actual circumstances. The Court then examined the nature and terms of the contract and the circumstances in which it was made.
51. Noted: This was not an ordinary contract for sale of a piece of land. It was an integral part of a development scheme and one of many contracts the company made.
52. Noted: The company wanted to develop a large undeveloped area for residential use by making roads and drains. The purchaser wanted the land developed and made ready for building before he could be called on to complete the purchase.
53. Noted: The most material fact was that the contract fixed no time limit for making the roads and drains. The District Judge found as a fact that the parties had no understanding on this point.
54. Noted: The first requisition order came nearly 15 months after the contract. The company apparently did no work in that time.
55. Noted: War was already on when the parties contracted. Requisition orders for temporary possession of land for war purposes were normal events. Building materials were scarce and the government had imposed restrictions.
56. Held: The parties must have contemplated the risks and difficulties of such operations. That is probably why the contract gave no definite time. The time was left to the company's convenience, and the purchaser did not feel concerned.
57. Noted: The company had not begun development when the requisition order was passed in November 1941. No work or service was interrupted for an indefinite time. Only the start of the work was delayed.
58. Noted: The question was whether the delay would be so great and of such character that it would totally upset the basis of the bargain and the commercial object.
59. Noted: Requisition orders were by their nature temporary. The requisitioning authority was in law in the position of a licensee. The order might last through the war and after, or be withdrawn earlier.
60. Noted: If the parties had agreed a definite time limit, an indefinite delay could make performance within that time impossible. That would seriously affect the purpose of the venture.
61. Held: Where the contract had no time limit, and the parties could anticipate wartime restrictions, the requisition did not affect the fundamental basis of the agreement. It did not strike at the roots of the venture.
62. Noted: The High Court relied entirely on the time factor. The Court accepted that the parties could not contemplate an unlimited time. They might have had in mind a reasonable period given the work and the war conditions.
63. Noted: Das Gupta J. held that the company contemplated a period not much exceeding 2 or 3 years. He recorded the finding that the parties contemplated that the roads and drains would be built and the conveyance completed in the not distant future.
64. Held: This finding is inconclusive. It also goes against the finding of the District Judge, who was the last court of facts.
65. Held: Given the nature and terms of the contract, the war conditions at the time, the extent of the work, and the total absence of any agreed time, "it cannot be said that the requisition order vitally affected the contract or made its performance impossible".
66. Noted: Mr. Gupta argued in the alternative that the order made performance illegal, so the contract became void under section 56 when the order was made. He relied on the Defence of India Rules and illustration (d) to section 56.
67. Held: The Defence Regulations show only that violating a requisition order could be punished as a criminal offence. In substance the order only prohibited use of the land while it was in force. The Court had already discussed the effect of that prohibition. The criminal sanction made no difference.
68. Held: The illegality question was not raised in any court below. It was not raised even in the respondent's statement of the case. It would need study of the Defence of India Act and illustration (d). The Court would not allow it to be raised for the first time before it.
69. Held: The events did not make performance impossible, and the contract was not frustrated at all.

Authorities

• Tamplin Steamship Co. Ltd. v. Anglo-Mexican Petroleum Products Co. Ltd. [1916] 2 A.C. 397, 403 — quoted for Lord Loreburn's words on a contract becoming impracticable.
• Joseph Constantine Steamship Line Limited v. Imperial Smelting Corporation Ltd. [1942] A.C. 154 — followed. Viscount Maugham called frustration a special case of impossibility. Lord Wright's reasonable-man passage was quoted.
• Kesari Chand v. Governor-General in Council, I.L.R. 1949 Nag. 718 — approved. Frustration is a special case of impossibility under section 56.
• Ganga Saran v. Ram Charan [1952] S.C.R. 36, 52 — relied on. Courts in India must look primarily to sections 32 and 56.
• Taylor v. Caldwell, 3 B. & S. 826 — explained. It is the English case that stated the doctrine through an implied condition.
• Robinson v. Davison (1871) L.R. 6 Exch. 269 — explained. It is the English case on illness excusing a pianist.
• Hirji Mulji v. Cheong Yue Steamship Co. Ltd. [1926] A.C. 497, 510 — noted for frustration as a device reconciling absolute contracts with a justice-based exception.
• Dahl v. Nelson, Donkin and Co. (1881) 6 App. Cas. 38, 59 — noted for the fair-and-reasonable-men view.
• Denny, Mott and Dickson Ltd. v. James B. Fraser & Co. Ltd. [1944] A.C. 265, 274, 275 — Lord Wright's criticism of the implied-term theory was quoted. His statement that frustration ends the contract automatically was also noted.
• British Movietonews Ltd. v. London and District Cinemas Ltd. [1951] 1 K.B. 190 — Denning L.J.'s qualifying-power view was noted. The House of Lords reversed it ([1952] A.C. 166, 184).
• Matthey v. Curling [1922] 2 A.C. 180, 234 — Lord Atkinson's rule that an absolute promise is not excused by vis major.
• Morgan v. Manser [1947] 2 All E.R. 666 — cited in a footnote on the express stipulation that the contract will stand.
• Billington Estates Co. v. Stonfield Estate Ltd. [1952] 1 All E.R. 853 — cited in a footnote on the English view that frustration does not apply to sale of land.
• Also cited in footnotes: Tamplin Steamship, Kesari Chand, Ganga Saran, Hirji Mulji, Dahl v. Nelson, Denny Mott and Dickson, Morgan v. Manser and Billington Estates (all listed above).

Provisions mentioned

• Section 56, Indian Contract Act: an agreement to do an impossible act is void. A contract to do an act that later becomes impossible, or unlawful by an event the promisor could not prevent, becomes void when the act becomes impossible or unlawful. A promisor who knew of the impossibility must compensate the promisee.
• Section 32, Indian Contract Act: deals with contingent contracts. The Court said contracts discharged by an express or implied term fall here.
• Section 9, Indian Contract Act: a promise may be express or implied.
• Section 54, Transfer of Property Act: a contract for sale of land does not by itself create an interest in the land.
• Section 42, Specific Relief Act: the company said the suit was not maintainable under it.
• Article 133(1)(c), Constitution of India: the High Court's certificate for appeal to the Supreme Court.
• Illustration (d) to section 56: the company relied on it for illegality. The Court left it undiscussed.
• Section 79, Defence of India Rules: the Collector's requisition orders were passed under it. The Defence of India Act was also referred to.

Judgement

1. The appeal is allowed.
2. The judgment and decree of the High Court of Calcutta are set aside.
3. The judgments and decrees of the courts below are restored.
4. The plaintiff will have his costs in all the courts.

Legal Principle / Ratio

Frustration of contract is part of the law of discharge by supervening impossibility or illegality, and it falls under section 56 of the Indian Contract Act. Impossible is read in its practical sense. A temporary requisition with no fixed time for performance does not end the contract. The key holding: "it cannot be said that the requisition order vitally affected the contract or made its performance impossible".

Related points

• Contracts discharged by an express or implied term of the contract itself are outside section 56. They fall under section 32 or similar provisions.
• If the parties stipulate that the contract stands despite an event, there is no frustration.
• The illegality argument was left undecided because it was raised late.

Critical Analysis

Analysis based on the judgment text.

• The Court rejects the implied-term theory in favour of positive law. It also says some contracts end under their own terms. The judgment separates them by whether the contract has an actual term for discharge or the parties never thought of the event. It gives no further test.
• The decision turns on the absence of a time limit and on wartime risks known to both sides. The judgment does not say what would follow if a time limit had been agreed, beyond saying that delay could then matter.
• The Court calls the illustrations to section 56 unhappy but does not examine them. The illegality argument and illustration (d) were left open.
• The judgment shows the High Court and the District Judge differed on what time the parties contemplated. The Court preferred the District Judge, as the last court of facts.

Significance

• The case settled that frustration in India is decided under section 56, not by English implied-term theory.
• It read impossible in the practical sense, so the section is not confined to physical impossibility.
• It held that the doctrine applies to contracts for sale of land in India, because an agreement to sell creates no interest in land.
• It fits with Taylor v. Caldwell as the English origin of the doctrine. This page does not use any later case.

Exam-Important Points

• Rule: frustration is part of section 56. Indian courts do not import English law outside the Act. The trap: English cases have only persuasive value.
• Rule: impossible means practical, not literal impossibility. The trap: a temporary delay with no agreed time limit is not frustration.
• Rule: frustration applies to contracts for sale of land in India. The reason: section 54 of the Transfer of Property Act says a sale contract does not of itself create an interest.
• Rule: frustration ends the contract automatically. It does not depend on either party's election.
• Rule: a contract with an express or implied discharge term falls under section 32, not section 56.
• Facts to remember: contract of 5 August 1940, earnest money Rs. 101, requisition orders from 12 November 1941, decision of 16 November 1953.
• Citation: AIR 1954 SC 44; 1954 SCR 310; Civil Appeal No. 80 of 1952.

Prepared from the full text of the judgment. The judgment has no numbered paragraphs, so no paragraph numbers are cited. The AIR and SCR citations and the appeal number are printed in the judgment text.