Applicability of Section 56 of Contract Act in cases of frustration of contract due to unforeseen events like floods

High Court Restores Arbitrator's Modified Award in Sand Lifting Contract Dispute Madhya Pradesh High Court Upholds Application of Doctrine of Frustration Under Section 56 of Indian Contract Act Due to Unforeseen Floods

In a significant ruling, the Madhya Pradesh High Court, led by Justice Vivek Jain, has restored the modified arbitration award favoring Babu Singh Sikarwar, in a dispute involving the M.P. State Mining Corporation Ltd. The court's decision comes after a protracted legal battle centered on the doctrine of frustration under Section 56 of the Indian Contract Act, 1872, due to excessive and abnormal rains which caused flooding in the Chambal River, preventing the appellant from fulfilling the contractual obligation to lift sand.

The dispute traces back to an agreement executed on November 9, 1995, between Sikarwar and the corporation for the sale of 1,75,000 MT of sand, which was to be lifted by October 31, 1996. The appellant was required to remit Rs. 54,25,000 for the contract. However, unforeseen floods between July and September 1996 rendered the extraction of sand from the Rajghat quarry in Morena impossible, invoking the clause of frustration of contract due to an act of God.

Initially, the arbitrator granted relief to the appellant by directing the refund of royalty for July and August 1996, recognizing the impossibility of performance due to the floods. However, the District Court overturned this award, citing the arbitrator's failure to consider certain contractual clauses. The matter was remanded, and upon reconsideration, the arbitrator reaffirmed the initial award, prompting another challenge from the respondent.

The High Court's latest judgment underscores the applicability of Section 56, noting that the occurrence of floods was not contested by the respondent. The court highlighted that the contract did not account for the possibility of such natural disruptions, and the absence of a warranty clause obligating performance despite such events justified the application of the doctrine of frustration.

Justice Jain emphasized that the arbitrator’s decision was consistent with public policy and Section 56, as the contract's essence was fundamentally altered by the unforeseen natural event. The court's ruling sets aside the District Court's previous order, thereby reinstating the arbitrator's modified award.

The judgment reiterates the principle that unforeseen events leading to the impossibility of performance, when admitted by the opposing party, warrant relief under the doctrine of frustration, aligning with established legal precedents.

Bottom Line:

Applicability of Section 56 of the Indian Contract Act in cases of frustration of contract due to unforeseen events like floods - Modified award of Arbitrator restored as it was in accordance with Section 56 and not in conflict with public policy of India.

Statutory provision(s): Arbitration and Conciliation Act, 1996 Section 37, Indian Contract Act, 1872 Section 56

Babu Singh Sikarwar v. M.P. State Mining Corp. Ltd., (Madhya Pradesh)(Jabalpur) : Law Finder Doc Id # 2816786