Date: 29th February, 2020
To,
Mr. Nikhil Singh,
Associate,
Argus Partners,
New Delhi
Respected Sir,
Arbitration Agreement
Arbitration Agreement are usually signed at the beginning of a business relationship – long
before there’s a disagreement. They are often just a few sentences long, and are commonly found
near the end of a larger contract under a heading such as “Arbitration” or “Dispute
Resolution.” An arbitration clause will typically say that all disputes arising under the larger
contract will be submitted to binding arbitration.
Novation
Novation in layman’s language refers to that situation where when the parties to a contract agree
to substitute the existing contract with a new contract. It simply means substitution of an existing
contract with a new one. When, by an agreement between the parties to a contract, a new
contract replaces an existing one, they already existing contract is thereby discharged, and in its
place, the obligation of the parties in respect of the new contract comes into existence.
Novation should take place before the expiry of the time of the performance of the original
contract. If it does not, there would be a breach of the contract, and if a new contract is
subsequently substituted for an existing one, it would only way be to adjust the remedial rights
arising out of the breach of the old contract.
CONDITIONS OF THE VALID NOVATION:
The following conditions are to be satisfied for valid novation:
1) to substitute new contract, the old contract must exist
2) the new contract must fulfill the essentials of a valud contract. (As prescribed under section 10
of the Indian Contract Act , 1872
Kinds of Novation -
Novation is of the two kinds which are as follows -
(a) Novation in the terms of the contract,
(b) Novation by the change in the parties to the contract.
a) Novation in the terms of the contract -
Novation may also involve the substitution of a new contract for the old. The parties to a
contract are free to alter the contract which they have originally entered into if they do so. Their
ability as regards the original agreement is extinguished, and in its place, they become bound by
the new altered agreement.
For example : ‘A’ takes loan from ‘B’ Rs 5,000 . A made a contract and both are parties to a
contract and ‘A’ gives Rs 5,000 in the place of estate this is a new contract and the old contract
they give 5,000 rupees, In this contract the parties are same but the parties to a contract are
substitute to a new one in alter termed in the place of the old contract. It may be noted that the
novation is valid but both parties are agree on it. Any parties have freedom to entire into the
contract with any terms of their choice, they are also free to alter the terms of its by their mutual
consent.
b) Novation by the change in the parties to the contract -
It is possible that by novation an obligation may be created for one party in place of
another. If under an existing contract, 'A' is bound to perform the contract in favor of 'B', the
responsibility of 'A' could be taken over by 'C'. Now instead of 'A' being liable towards 'B' by
Novation 'C' becomes liable towards 'B'.
For example : ‘A’ is bound to perform the contract in favour of ‘B’ the responsibility of ‘A’
could be taken over by ‘C’. Now ‘A’ being liable towards ‘B’ by novation ‘C’ become liable
towards ‘B’ both the parties to the contract have right to take the decision or change the parties to
the contract. But there are different parties to the contract , both the parties to the contract are
free to make any recession to the contract they will do so. But after the cancellation of the
original contract.
EFFECT OF NOVATION:
Under section 62 of the Indian Contract Act, 1872, when the main agreement is novated,
rescinded or altered, it loses its validity and hence the arbitration agreement becomes void. The
principle is that if the contract is superseded by another, the arbitration clause, being a
component part of the earlier contract, falls with it.
Frustration of a contract
Frustration is an act outside the contract due to which the completion of a contract becomes
impossible. A contract may be frustrated where there exists a change in circumstances, after the
contract was made, which is not the fault of either of the parties, which renders the contract
either impossible to perform or deprives the contract of its commercial purpose. Where a
contract is found to be frustrated, each party is discharged from future obligations under the
contract and neither party may sue for breach. An example of this is where a hall, which has been
booked for the performance of a play, is destroyed by fire, after the contract has been concluded,
but before the date of performance of the play.
The impossibility of performance and frustration are often interchangeable expression.
Section 56 of Indian Contract Act deals with impossibility to perform the contract.
FRUSTATION HAPPENS IN TWO SITUATIONS:
First: where the performance is physically cut off - the performance of the contract becomes
physically impossible because of the disappearance of the subject-matter.
Second: where the object has failed - The performance of the act may not be literally impossible
but it may be impracticable and useless from the point of view of the object and purpose which
the parties had in view; and if an untoward event or change of circumstances totally upsets the
very foundation upon which the parties rested their bargain, it can very well be said that the
promisor finds it impossible to do the act which he promises to do.
SPECIFIC GROUNDS OF FRUSTATION:
Following are the well- established grounds of frustration, but the list is not exhaustive:
Destruction of subject matter: when the actual and specific subject-matter of the
contracts has ceased to exist. For Example: A contract to exhibit a film in a cinema hall
was held to have become impossible of performance when on account of heavy rains the
rear wall of the hall collapsed killing three persons and its license was cancelled until the
building was reconstructed to the satisfaction of the chief engineer. The owner was under
no liability to reconstruct and it took him some time, by that time the film would have
lost its appeal. [ V.L.Narasu v. P.S.V.Iyer]
Change of circumstances: A contract will frustrate where circumstances arise which
make the performance of the contract impossible in the manner and at the time
contemplated. If there is entirely unanticipated change of circumstances the question will
have to be considered whether this change of circumstances has affected the performance
of the contract to such an extent as to make it virtually impossible or extremely difficult
or hazardous [ Pameshwari Das Mehra v. Ram Chand Om Prakash]
Non- occurrence of contemplated events: Sometimes the performance of a contract
remains entirely possible, but owing to the non-occurrence of an event contemplated by
both parties as the reason for the contract, the value of the performance is destroyed. For
example: Ram chartered a steamboat to take out a party of paying passengers for the
purpose of viewing the naval review (The Naval Review was proposed to be held on the
occasion) and for a day’s cruise around the fleet. But the review was cancelled and the
defendant had no use of the ship. So contract gets frustrated.
Death or Incapacity of the party: A party to a contract is excused from performance if
it depends upon the existence of a given person, if that person or becomes too ill to
perform. Thus, where the nature or terms of a contract require personal performance by
the promisor, his death or incapacity puts an end to the contract. For Example: the
contract was between Ram and a painter to do a painting for Ram, but before the
completion of the contract, the painter died.
Government or Legislative intervention- Where new Government/ Legislative policies
prevent the performance of the contract, e.g. ban on sale/purchase of specific products
fundamental to the contract
Intervention of war- Where outbreak of war makes it impossible to fulfil the contractual
obligations
EFFECT OF FRUSTRATION:
Following conditions are needed in order to effect the frustration:
a. Frustration should not be self-induced - the essence of 'frustration' is that it should
not be due to the act or election of the parties. Frustration should arise without blame or
fault on either side.
b. Frustration operates automatically- Frustration operates automatically to
discharge the contract "irrespective of the individuals concerned, their temperaments and
failings, their interest and circumstances'."The legal effect of frustration does not depend
on their intention or their opinions, or even knowledge, as to the event."
c. Adjustment of Rights – If the contract has become void or any agreement is
discovered to be void, any person who has received any advantage under such agreement
or contract is bound to restore it, or to make compensation to it, to the person from whom
he received it.
Force Majeure
Force Majeure meaning "superior force" refers to such situations which obstruct the
continuation or lawful existence of a contract amidst the parties. The inclusion of such
clause in the contract allows a party to suspend or terminate their duties and obligations
in case of occurrence of an act which may be classified as Force Majeure. The act can be
qualified to be force majeure when it is unforeseen, unstoppable, unpredictable,
irresistibility, externality, etc.
Usually parties mutually decide over the list of events to be categorized under this clause
which includes acts of war, riots, fire, flood, hurricane, earthquake, explosion, strikes,
lockouts, slowdowns, prolonged shortage of supplies, governmental action prohibiting or
impeding any party from performing its respective obligations under the contract causing
its frustration. The purpose of force majeure clause id two fold: it allocates risk and outs
the parties on notice of events that may suspend or excuse service.
For Example: Reliance Industries, which operates the world's largest refining complex,
has declared force majeure on gasoline exports from its Jamnagar site. Force majeure is
typically declared when matters deemed beyond a refinery's control disrupt supplies,
allowing it to void some of its contractual obligations to customers.1
EFFECT OF FORCE MAJEURE:
A force majeure clause relieves one or both parties from liability to perform contract
obligations when performance is prevented by an event or circumstance beyond the
parties’ control. The act qualified for the force majeure frustrates the contract and
thereafter, the concept of frustration of the contract is followed.
It is clear that if force majeure clauses are not incorporated in contracts between parties,
and if there happens an event which makes the contract’s performance impossible, then
the doctrine of frustration will be applied. This is because the said doctrine is applicable
in case of events which happen after the contract is made and for which neither any party
is responsible nor can they prevent it from happening.
Thank You!
1
https://www.businesstoday.in/current/corporate/reliance-industries-force-majeure-on-gasoline-jamnagar-
plant/story/281334.html
