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Miscellaneous Appeal No. 18 of 1961, decided on 23rd September 1964.
S. 30‑Award--Validity cannot be challenged by relying on facts stated in affidavit neither forming part of award nor accompanying same.
Champsey Company v. Jivraj Baloo Co. A I R 1923 P C 66 rel.
Ss. 55, 66, 62, 64 & 75 --Contract of sale‑Rescission‑Time essence of contract‑Failure of promisor to perform his part of contract within given time Contract becomes voidable‑Party rescinding contract in exercise of option granted by S. 64‑‑Express or immediate communication of rescission not compulsory.
In the rescission of a voidable contract in exercise of the option granted by section 64 of the Contract Act, 1872 there is nothing in the provisions of the Act that makes immediate or express communication of rescission compulsory. The importance of communication arises from the option or the dual course open to the promisee. If he exercises the option in favour of one course, then the contract becomes voidable by him which, in accordance with section 2 (i) of the Act, means that he may enforce it but the promisor cannot and if he exercises the option in favour of the other course, then the contract remains equally binding on both the parties. The promisee has thus to choose from or to elect between the two courses that are open to him. It is in the interest of both the parties that the choice should be made clearly and quickly so that no ambiguity in the conduct of the promisee or delay after the .law has given the option to him may prejudice the promisor nor such ambiguity and delay may cause estoppel to be created against the promisee himself. If there is neither prejudice to the promisor, nor estoppel or the bar of the ordinary law of limitation in the way of the promisee, then the promisee can make his choice whenever he likes and in any manner he likes. It may be, for instance, by filing a suit or by taking a defence or in suitable cases, even by the amendment of pleadings. Prejudice is usually caused and estoppel is created either (i) when there is delay or failure in discontinuing the receipt of benefits or in restoring the benefits received by the promisee, or (ii) when the promisor is misled by the conduct of the promisee into taking steps to further perform the contract.
Fazal Din v. Municipal Committee, Lyallpur P L D 1956 Lah. 916 and Kailasananda Sarma v. The President, District Board, Tanjore A I R 1928 Mad. 211 considered.
Kumaraswami v. Karuppuswami A I R 1953 Mad. 380; Bengal Oil Mills v. Dada Sons Ltd. P L D 1964 Kar. 18 ;. Professor Williston: Monumental Work on Contracts, Vol. V, Section 1454‑A; D. F. Mulla : Commentary on Chap. IV, Specific Relief Act, 1877 ; Mutthaya Maniagaran v. Lekku Reddiar I L R 1914 Mad. 412 and The Paper Sales Ltd. v. Chokhani Brothers A I R 1946 Bom. 429 ref.
K. A. Ghani for Appellants.
Mansoorul Arifeen for Respondents.
Date of hearing : 23rd September 1964.
This is an appeal from the judgment of the First Assistant Judge, Hyderabad, dated the 20th of December 1960, by which he set aside the award that was given by a sole arbitrator and ordered the refund of Rs. 2,500.00 which the defendants, who are the respondents in these proceedings, had deposited in the Court.
2. The main ground which induced that judgment was that the agreement of sale on the basis of which the award was given, had become void by frustration because the Martial Law Authorities had fixed the price of the article which‑ was the subject‑matter of the agreement.
3. The article that was to be supplied under the agreement was cottonseed. The appellant, who was the plaintiff before the trial Court, was to supply 5,000 Mds. of it at the rate of Rs. 16‑6‑0 per maund. The delivery was to take place by instalments of 400 maunds per day from the 1st of November 1958, onwards. Counsel for the parties have conceded that had the supply been made under the arrangement, it would have been completed on the 12th of November 1958. The terms of the transaction were, reduced to writing, and one of them was that:
"Any dispute arising between the parties out of this contract, including the interpretation or meaning of any of the clauses herein contained, shall be referred to arbitration."
4. Disputes arose between the parties owing to the action of the Martial Law authorities who had fixed the price of cottonseed on the 10th of November 1958, at Rs. 12 per maund. This fact was notified to the public on the 11th of November 1958, and gazetted on the 14th of November 1958. The respondents failed to take delivery of the goods therefore, the appellants, who were the sellers, gave notice to them on the 4th of December 1958, demanding damages on the basis of the market price prevailing on the 10th of November 1958, and thereafter referred their claim to arbitration. The arbitration commenced on the 5th of June 1959 and an award for Rs. 15,299‑8‑0 with 6 per cent. interest from the date of the award until payment was given in favour of the appellants on the 7th of September 1959.
5. The award has been set aside, as mentioned above, by the learned Assistant Judge, Hyderabad and this appeal has been preferred to question his order.
6. Mr. K. A. Ghani appearing on behalf of the appellants has contended that the performance of the contract can be said to have been frustrated from the 11th of November 1958, on which date the price fixed by the Martial Law authorities was notified to the public, but the performance of the contract had to commence on the 1st of November 1958 ; therefore, there was no effect of frustration on the performance of the contract between the 1st and the 10th of November 1958. As the breach of the contract had taken place during the period in which there was no frustration, there was subsisting contract on the 11th of November 1958, when frustration took place. In this respect, counsel has relied on the judgment given in the case of Kumardswami v. Karuppuswami (A I R 1953 Mad. 380). A Division Bench of the High Court of Madras has observed in it as follows:
"When a contract has been broken it is dead, and there is nothing which could thereafter be kept alive."
7. Mr. Mansoorul Arifeen appearing on behalf of the respondents has not disputed that breach, if any, had taken place before the frustration, but has contended that frustration took place on the 10th of November 1958, and not on the 11th of November 1958. This appeal would have required lengtheir arguments if a judgment by A. S. Faruqui, J., on the effect of the fixation of prices by the Martial Law authorities on those contracts in which higher prices had been agreed upon, was not available. His Lordship's judgment was given in the case of Bengal Oil Mills v. Dada Sons Ltd. (P L D 1964 Kar. 18). He has held in it that the price fixed by the Martial Law authorities did frustrate those contracts in which the prices agreed upon were higher than the price fixed under Martial Law Regulation No. 40, and that the price so fixed was effective from the 11th of November 1958. I respectfully agree that that is the correct date on which frustra tion should be taken to have occurred because the public came to know of the ruling price on that date. The difference however, between counsel for the parties with regard to the date of frustration is not substantial in this appeal. The important aspect of the discussion is that frustration did take place and that the breach, if any, had taken place before it.
8. The main defence of counsel for the respondents is that the award was illegal, firstly, because the arbitrator had calculated damages in disregard of the established principles of law and, secondly, because from the legal point of view no breach can be said to have taken place before the contract became void by frustration.
9. In support of the first contention, counsel took the stand that damages were demanded by the appellant on the basis of the price prevailing on the 10th of November 1958 ; whereas the breach, if any, can be said to have taken place, in terms of the contract, on every day from the 1st to the 10th of November 1958 ; therefore, damages could not be awarded for the whole period on the basis of the price that prevailed on the 10th of November 1958, only. It was pointed out to counsel by Mr. K. A. Ghani that the argument was out of place in this case because there is no mention in the award as to how the damages were calculated by the arbitrator, to which counsel replied that an affidavit had been submitted by the arbitrator before the trial Court in another connection, which leads to the conclusion that the price prevailing on the 10th of November 1958, was the basis of his calculations. There is an affidavit of the arbitrator, in paragraph 5 of which he has stated that:
"The plaintiff gave reasonable time and was fair in assessing his damages according to the prevalent rate on 10‑11‑58."
The above statement is, however, not adequate to support the contention of counsel that the arbitrator had calculated damages on the basis of the price which prevailed on the 10th of November 1958. Moreover, the affidavit was not a part of the award ; nor is there anything on the face of the award to indicate the method by which the damages were calculated by the arbitrator. In these circumstances, it is wrong to build an argument against the l, award with the help of the affidavit which had neither accompanied nor formed a part of the award. It could only be inferentially connected with the award but not as a fact so that its contents could be said to be patent on the face of the award. The following observations of their Lordships of the Privy Council in the case of Champsey Company v. Jivraj Baloo Co. (AIR1923PC66) are an authority in this respect:‑--
"The law on the subject has never been more clearly stated than by Williams, J. in the case of Hodgkinson v. Fernie 3 C B N S 189:
The law has for many years been settled, and remains so at this day that, where a cause or matters in difference are referred to an arbitrator, a lawyer or a layman, he is constituted the sole and final judge of all questions both of law and of fact . . . . . The only exceptions to that rule are cases where the award is the result of corruption or fraud, and one other, which though it is to be regretted, is now; I think firmly established, viz where the question of law necessarily arises on the face of the award or upon some paper accompanying and forming part of the award. Though the propriety of this letter may very well be doubted, I think .it may be considered as established."
Further:
"An error in law on the face of the award means, in their Lordships' view, that you can find in the award or a document actually incorporated thereto, as for instance, a note appended by the arbitrator stating the reasons for his judgment, some legal proposition which is the basis of the award and which you can then say is erroneous . . . Here it is impossible to say, from what is shown on the face of the award, what mistake the arbitrators made. The only way that the learned Judges have arrived at finding what the mistake was is by saying: Inasmuch as the arbitrators awarded so and so, and inasmuch as the letter shows that the buyer rejected the cotton, the arbitrators can only have arrived at that result by totally misinterpreting clause 52. But they were entitled to give their own interpretation to clause 52 or any other article, and the award will stand unless, on the face of it they have tied them selves down to some special legal proposition which then, when examined, appears to be unsound."
10. Counsel for the respondents next argued in support of his second contention that no breach of the contract can at all be said to have taken place because, according to him, under section 55 of the Contract Act read with section 66 of that Act, mere failure of a promisor to perform his part of a contract within a given time, when such time is of the essence of the contract, makes the contract only voidable by the promisee, and not void. In this case time was admittedly of the essence of the contract ; therefore, the contract had become voidable owing to the failure of the respondents to take delivery of the goods within the agreed time. As such, it was the duty of the promisee to give a notice in terms of section 66 of the Contract Act to rescind the contract. In the absence of such rescission, counsel argued, the contract had remained in force until it became void by frustration; therefore, no damages could be legally claimed or awarded. I have heard counsel for the parties on the effect of sections 55 and 66 of the Contract Act and have reached the conclusion that, for reasons set out below, the contention is not sound.
11. The English law on the subject of rescission is not exactly the same as it is in the United States of America, but it is more complicated in this country than in England. Professor Williston has given four general reasons for the confusion that exists in the law relating to rescission in section 1454‑A of Volume V of his monumental work on Contracts. One of then is that restoration of benefits is sometimes considered to be a necessary concomitant of rescission, though it is not so because where rescission takes place by agreement, the terms of the agreement govern the transaction ; another is that the parties to contracts frequently use the words rescind' and rescission' inaccurately. The other two are:
"It is sometimes assumed, especially in the English books, that contracts, unless they fall within those classed as voidable, cannot be abrogated or rescinded by one party‑that mutual assent is necessary‑and in order to enable the Court to reach the desired result, a material breach or repudiation is treated by fiction as if it were an offer to rescind. In fact, under appropriate circumstances, a contract may be terminated not only by mutual consent, but by the act of one party, or by the Court, and the words rescind' or rescission' as applied in any of these cases should not give rise to misunderstanding, though other words may be more commonly used in some classes of cases.
In the Restatement of Contracts' the words in question are used chiefly where the termination of the contractual relation is by mutual consent. Avoid' or discharge' or other equivalents are generally, though not always, used where the relation is terminated in other ways.
Under a usage originating in the English books subsequent to the development of the doctrine of anticipatory breach, rescind' and rescission' are used where the contract has not been terminated but where one party has acquired an excuse for non‑performance because of a breach of repudiation by the other. This usage violates the plain meaning of the words. It should rather be said that the contract still exists, and that one party has a defence."
12. As to the law applicable to our country, D. F. Mulla has observed in his commentary on Chapter IV of the Specific Relief Act, 1877, under the heading: "Of the Rescission of Contracts" that:
"Apart from faults of workmanship, it seems doubtful whether a great part of sections 35‑38 is not out of place here. The grounds on which contracts mad be voidable have already been laid down. in the Contract Act; and, by the very definition, rescission depends not on the Court but on 'the option of a party, which he can exercise without the aid of the Court. No one in England ever heard of a suit merely for rescission. Modern practice would allow of suing for a judicial declaration that a contract is rescinded ; but in fact there is always some further object, such as recovering back a deposit or other payment under the contract, re conveyance of property which has been transferred, or cancellation of the instrument in which the contract was expressed.
Section 35 has been influenced by Article 1903 of the New Yark Draft Civil Code, section 36 is identical with Article. 1904. It seems not to have occurred to any one in the Indian Legislative Department to see that the language conformed to the Contract Act, which it does not."
13. The above observations indicate the complications that exist in our law as well as the importance that has become attached in it to express rescission of a voidable contract owing to the provisions made in the Specific Relief Act, 1877, to the effect that a suit may be instituted for that purpose. The author has emphasised the necessity of clear rescission in his commentary on section 64 of the Contract Act, as follows:‑--
"It is hardly needful to say that rescission must be express and unequivocal. The clearest form of it is , bringing a suit to set aside the contract."
14. In view of the above‑mentioned obscure state of the law counsel for the respondents had an excuse for taking the stand that, in the absence of express rescission of the contract it has remained voidable. In support of this stand he has referred to the following observations of a Division Bench of this Court in Fazal Din v. Municipal Committee, Lyallpur (P L D 1956 Lah. 916).
"The true conception of a voidable contract is that it remains in abeyance till the party that has the option exercises it. It then becomes, if the party approves, a full fledged contract."
It was a corollary of the above proposition of law, according to him, that a voidable contract remains in abeyance if is is neither approved nor rescinded. This inference was contradicted by another precedent that was cited by him. He referred to Kailasananda Sarma v. The President, District Board, Tanjore (A I R 1928 Mad. 211), in which the learned Single Judge has observed that:
"When a party to a contract is entitled to cancel the contract by reason of the breach by the other, notice of cancellation should be given to the other party. If no notice is given then it must be deemed that the breach was condoned and that the contract was allowed to continue."
Both the above‑quoted observations were meant to correctly decide the cases to which they were applied but were not intended to serve as complete statements of the law of rescission.
15. I pressed counsel to further clarify his stand and he found it difficult to sustain the proposition that an omission to expressly rescind a voidable contract keeps it in abeyance unconditionally and for an indefinite period, because if this proposition was correct, then it would be open to the promisee to delay rescission by waiting to let the prices go down steeply in a declining market and then to expressly rescind the contract in order to recover a big amount of money by way of damages. But it stands to reason that he cannot be allowed to do so. Reference may in this connection be made to Mutthaya Maniagaran v. Lekku Reddiar (I L R 1914 Mad. 412) and The Paper Sales Ltd. v. Chokhani Bros. (A I R 1946 Bom. 429), and to the following emphatic remark of D. F. Mulla against permitting such a practice
"It is immaterial (in this respect) that no notice was given by A to B that the contract was at an end."
16. The above is an indirect argument against the stand taken by counsel for the respondents. For purposes of appreciating the direct argument it is necessary to refer to the relevant provisions of the Contract Act. A reference should, in this connexion, be made to the first paragraph of section 55 of the Act, which is as follows :‑--
"When a party to a contract promises to do a certain thing at or before a specified time, or certain things at or before the specified times, and fails to do any such thing at or before the specified time, the contract, or so much of it as has not been performed, becomes voidable at the option of the promisee, if the intention of the parties was that time should be of the essence of the contract."
The exercise of the above‑mentioned option to treat a contract as broken for claiming damages owing to its breach is included in the expression "rescission" as it is used in the Act. The mode of communicating rescission is stated in section 66; the effect of an agreement to rescind a contract is laid down in section 62; and the consequences of the rescission of a voidable contract are set out in section 64 of the Contract Act as follows:
"When a person at whose option a contract is voidable rescinds it, the other party thereto need not perform any promise therein contained in which he is promisor. The party rescinding a voidable contract shall, if he has received any benefit thereunder from another party to such contract, restore such benefit, so far as may be, to the person from whom it was received."
Section 75 of the Act makes it clear that‑
"a person who rightfully rescinds a contract is entitled to compensation for any damage which he has sustained through the non‑fulfilment of the contract",
So that there may not be any doubt that the rescission of a voidable contract in exercise of the option granted by section 64 of the Act is not necessarily its annulment or abrogation.
17. There is nothing in the above provision or any other provision of the Contract Act that makes immediate or express communication of rescission compulsory. The importance of communication arises from the option or the dual course open to the promisee. If he exercises the option in favour of one course, then the contract becomes voidable by him which, in accordance with section 2 (i) of the Act, means that he may enforce it but the promisor cannot and if he exercises the option in favour of the other course, then the contract remains equally binding on both the parties. The promisee has thus to choose from or to elect between the two courses that are open to him. It is in the interest of both the parties that the choice should be made clearly and quickly so that no ambiguity in the conduct of B the promisee or delay after the law has given the option to him may prejudice the promisor nor such ambiguity and delay may cause estoppel to be created against the promisee himself. I there is neither prejudice to the promisor, nor estoppel or the bar of the ordinary law of limitation in the way of the promisee, then the promisee can make his choice whenever he likes and in an manner he likes. It may be, for instance, by filing a suit or by taking a defence or in suitable cases, even by the amendment of pleadings. Prejudice is usually caused and estoppel is created either (i) when there is delay or failure in discontinuing the receipt of benefits or in restoring the benefits received by the promisee, or (ii) when the promisor is misled by the conduct of the promisee into taking steps to further perform the contract. Williston has explained and discussed the relevant circumstances at length. Some of the discussion contained in Section 1469 of Vol. V of his above‑mentioned book may be usufully reproduced here as follows :‑--
"It is also said that one who wishes to rescind must manifest his election to do so without undue delay, or the right will be lost. It seems probable, however, that this is true only where the party seeking rescission has received money or property which he must restore as a condition of relief, or where there is further performance due under the contract from the other party which in the absence of notice he might suppose would be accepted in spite of his prior breach. The cases, though containing broader statements, generally fall in these classes. There seems no reason why a plaintiff who has paid a sum of money for the defendant's promise to give him a horse may not, after breach of his promise by the defendant, wait any period short of that fixed by the Statute of Limitations before deciding whether to sue for the value of the horse or for the recovery of the price."
18. With the above exposition of the reasons for disagreeing with the contentions of counsel for the respondents, I pass on to his last objection to the award that the arbitrator has acted illegally in allowing interest at the, rate of six per cent. per annum on the amount of the damages. Counsel for the parties have jointly taken the stand that interest could be legally allowed in this case from the 20th of December 1960, which is the date of the order of the trial Court, because the Court had the power to allow it under section 29 of the Arbitration Act, 1940. In deference to this stand the award is modified to the extent that interest is disallowed from the date of the award, but is allowed from the 20th of December 1960, under section 29 of the Arbitration Act, 1.940. I see no reason as to why a person who without justification withholds the payment of damages arising from a commercial transaction should not pay interest on such damages at all and thus be allowed to take advantage of the money withheld by him and to cause further loss to the aggrieved party by depriving him of his dues.
19. In conclusion of all the foregoing discussion, I accept the appeal, set aside the order of the First Assistant Judge, Hyderabad, dated the 20th of December 1960, and subject to the above‑noted modification made the award a rule of the Court. The appellants will get the costs of these proceedings.
K.B.A. Appeal accepted.
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