Contingent contracts agreed in advance attract Sec 32 & not Sec 56 of ICA

Case: NAFED v. Alimenta SA

The Supreme Court, in a recent case, held that when parties agree to in advance on contingency, which makes performance of the contract become impossible, Section 32 of Contract Act shall be applied and not Section 56.

Facts of the case        

National Agricultural Cooprative Marketing Federation (NAFED) had entered into a contract with a foreign firm Aliment SA, for the supply of ground nuts. The contract had a condition that the export will take place, if the Government of India will grant permission. In a particular year, the govt. suspended export of ground nuts and hence, the export was not made. The defendant alleged breach of contractual obligations against NAFED, the petitioner. The defendant got a foreign arbitration award against the petitioner, which was allowed by the Delhi High Court to be enforced in India. The petitioner appealed in the Supreme Court against the order.

Issue of the case: Whether the contract was void under Section 32 or Section 56 of the Indian Contract Act?

Judgement

The Apex court held that the Contract had a specific condition of government’s sanction to enable the export, and both the parties were aware of this condition.

Section 32 talks about the enforcement of contracts contingent on an event happening. It says that a contingent contract which depends on an uncertain future event, cannot be enforced in the court of law unless and until that event has happened. If such event becomes impossible, the contract becomes void.

Section 56 talks about an agreement to do an impossible act or to do an act which becomes impossible or illegal afterwards. The promisor will be made liable under this Section, if he knew that the act was unlawful or impossible to be performed.

The Court opined that the respondent here invoked Section 56 to hold the petitioner liable for non- performance of his part of the contract, since it knew about the condition which was laid down.

However, it is clear that the condition of government’s permission was known to both the parties, without which the export was not possible. Also, the contract has expressly provided for the condition, hence it becomes a contingent contract under Section 32 as the performance of the contract was based on an uncertain event.

The parties have agreed to a contingent contract which depends on an uncertain event of government’s permission to export the ground nuts. This was an agreement to do an act impossible in itself without permission and hence is void under Section 32. Section 56 cannot be attracted as both the parties were aware about this impossibility without government’s permission.