Self-Induced Frustration Amounts To Breach Of Contract, Promisor Obligated To Disclose Inability To Perform Entire Agreement: Telangana HC

Observing that self-induced frustration of a contract would also amount to its breach, the Telangana High Court underscored that the promisor is obligated to communicate to the promisee on closure of contract at the relevant time being privy to it, and a non-disclosure amounts to disablement of performance under Section 39 of Contract Act. 

A division bench of Justice Moushumi Bhattacharya and Justice B.R. Madhusudhan Rao in its order said:

“Breach of contractual obligations can assume various forms. Disabling another party from performing his/her contractual obligations or disabling oneself from performing, would also amount to breach. In other words, self-induced frustration of a contract would also amount to breach. The appellant's failure to inform the respondent of shortclosure of the contract at the relevant time, despite being privy to the same, amounts to disablement of performance as contemplated under section 39 of the 1872 Act. In other words, once the contract between the GPL and the appellant was closed on 26.10.2013, the appellant as the promisor, had an obligation to communicate this fact to the respondent, namely, that the appellant was disabled from performing its promise in its entirety.” 

Section 39 (Effect of refusal of party to perform promise wholly) states that when a party to a contract has refused to perform, or disabled himself from performing, his promise in its entirety, the promisee may put an end to the contract, unless he has signified, by words or conduct, his acquiescence in its continuance.

The order was passed in an appeal moved by NCC Power Project Limited, challenging an order passed by the Commercial Court which had held an order of the Arbitral Tribunal awarding damages for loss of profits at Rs. 5 crores to M/s Elecon EPC Projects Limited selected as the successful bidder for construction of thermal power plant.

Background

Gayathri Projects Limited (GPL) (principal employer) entered into a Joint Venture with NCC Power (the appellant/promisor) and issued a Tender Notification for designs, engineering, supplies, erection, testing and commissioning of 4,000 TPH External Coal Handling Plant for the construction of 2X660 MW Thermal Power Plant at Krishnapatnam. M/s Elecon EPC Projects Limited (claimant) was held as the successful bidder and a Letter of Award was issued to it by NCC Power on 02.03.2013. The project was valued at Rs. 183 Crores and based on the letter of Awards, Elcon EPC commenced with his contractual obligations.

In October, 2013, the management in NCC changed which ended the Joint venture that was entered into between NCC and GPL. M/s Elecon not being aware of the same, went ahead with the execution of its work and demanded as per the Contract. In April 2014, GPL awarded the same project to M/s Macmet India Limited, although there was no express termination of contract with Elecon.

In June, 2014, NCC invoked the Advance Bank Guarantee of Rs. 15,48,56,900 submitted by M/s Elecon against the advance of the Letter of Award. This led to M/s Elecon resorting to arbitration and an injunction against the invocation of the bank guarantee.

The Award was passed on 17.12.2016 in favour of M/s. Elecon for an amount of Rs.5,09,49,625/- along with interest @ 12% per annum and Rs.5 Crores towards damages together with interest @ 12% per annum from the date of the Award till realization. The appellant's petition for setting aside of the Award was dismissed by the Commercial Court on 30.03.2022, leading to the present Appeal.

The counsel for the Appellant (NCC/Promisor) contended that the award passed was bad in law and passed solely based of A.T. Brji Paul Singh v. State of Gujarat and following Hudson's Formula. The counsel contended that the same cannot be awarded in the absence of evidence.

After hearing both the arguments, the Bench noted that section 56 of the Contracts Act, 1872 contemplates for compensation for loss through non-performance of an act which the promisor knew to be impossible or unlawful.

“The underlying thrust of these provisions is simply to compensate the innocent party who has suffered due to the act of another, whether on account of breach, failure, or impossibility of performance,” the Bench noted.

Secondly, the Bench pointed to section 70 of the Act, which mandates a a person who enjoys a lawful, non-gratuitous act of another or receives a benefit from such act must compensate the latter for the benefit received.

“Section 70 would apply with full force to the facts of this case, since it is undisputed that the respondent No.1 continued to perform its contractual obligations while the appellant continued to reap the benefits thereof, on a deliberate act of suppression of the short-closure from the performing party/respondent No.1. The Courts have therefore filled the lacuna by adopting a fair means of assessing damages in suitable cases on the overarching need to compensate the party who has suffered the breach,” it said.

The Bench noted that Rs. 5 crores, which was awarded by the Tribunal, was less than 1/3^rd of the respondent's claim and thus could not have been said to be extravagant or arbitrary.

Lastly, relying on NTPC Ltd. Vs. M/s.Deconar Services Pvt. Ltd. and Dyna Technologies Private Limited Vs. Crompton Greaves Limited the bench ordered that although only a part of the order was challenged “slicing the Award into unnatural wedges would result in an incomplete reading of the reasons for allowing the claims.”

Thus, the appeal was dismissed.

Case title: NCC Power Projects Limited vs. M/s. Elecon EPC Projects Limited

Counsel for appellant: Sr. Counsel Avinash Desai representing Omer Farooq

Counsel for respondent: Sr. Counsel Dama Seshadri Naidu representing K.V. Pavan Kumar.

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