Easun Engineering Co Ltd vs The Fertilisers and Chemicals Travancore Ltd Case acknowledged that the impossibility imposed by the law is a valid excuse for failure to perform. Contracts that are lawful when they are formed but become illegal or difficult to fulfil later because of a change in the law or circumstances are impossible to perform and therefore become frustrated. When a change in the law renders the contract void, the contract is considered being discharged.
BENCH: Justice A. Abdul Hadi
Indian Contract Act: Section 56
- There was a contract for the supply and installation of eighteen Power Transformers between the appellant, i.e., Easun Engineering Co Ltd and the respondent, The Fertilizers and Chemicals Travancore Ltd.
- The terms of the contract dictated that it was a “firm price” contract, therefore, the price could not be changed until the contract was completed. The contract also stated that if a delay in supplying transformers is caused by a “force majeure” event, the condition of firm price will not apply, and the defaulting party will not be required to pay damages.
- The appellant supplied six power transformers following which, because of the 400% increase in the price of a type of oil required in manufacturing the power transformer because of a war in the Middle East, the appellant could not fulfil their contractual obligations.
- The respondent ended the contract. The respondent sought damages worth of Rs. 26,44,243/- from the appellant. The appellant made a counter-claim of Rs. 12,33,325-75.
- Whether the appellant had breached the contract by failure to perform the contractual obligations and was therefore liable?
- Whether the contract between Easun Engineering Co Ltd vs The Fertilisers and Chemicals Travancore Ltd stood frustrated?
- The appellant contended that the respondent unilaterally ended the contract without providing an adequate and justifiable reason, although they had fulfilled their contractual obligations and that the respondent had breached the contract. The appellant claimed they could not supply due to force majeure events such as strikes, power outages, and a massive increase in the cost of transformer oil due to war conditions.
- The respondent claimed the appellant had failed to perform the contract under the terms of the purchase order that they accepted. Therefore; they had no other option but to end its contract, and that, because of appellant’s breach of contract, is entitled to compensation. They plead that this was a mere case of commercial hardship and hence damages should be awarded for breach of performance.
Justice A. Abdul Hadi: The appellant’s main grievance was that the price of transformer oil increased after the contract was signed. However, the increase cannot be described as something that would be expected in normal business conditions. However, the 400 percent increase was extremely unusual because of unforeseen war conditions. As a result, it is safe to conclude that a “different situation” “unexpectedly emerged,” as the Supreme Court observed in M/s. Alopi Parshad v. Union of India. The contract ceases to bind the parties at that point “Not because the Court, in its discretion, thinks it just and reasonable to qualify the terms of the contract, but because on its true construction it does not apply in that situation.” Here, we can safely assume that the aforementioned abnormal price increase because of the war situation is an unfavorable event or change of circumstances that “totally upsets the very foundation upon which the parties rested their bargain.” As a result, Easun Engineering Co. Ltd. may find it impossible to deliver the transformers it promised.
The Madras High Court observed that the price of oil escalated out of all proportions, rendering the respondents unable to supply the power transformers. Commercial Hardship refers to not allowing a party to back out of a contract because of a lack of profitability. However, a 400 percent increase in prices makes the contract impossible to perform. Hence, the court held the contract to be frustrated because of the impossibility of performance.
The decision, in this case, establishes the principle that impossibility created by a change in the law or a change in the circumstances after the formation of the contract can be considered as a valid justification for the non-performance of contractual obligations. In such circumstances, the contract stood frustrated because of the supervening event, rendering the contract impossible to perform. The learned judge’s decision was justified and it is a significant case pertaining to the doctrine of frustration and Section 56 of the Indian Contract Act, 1872.