Understanding Interpretation of Contract to Determine the Contingency

HPA INTERNATIONAL v. BHAGWANDAS FATEH CHAND DASWANI AND OTHERS [(2004) 6 SCC 537]

The Concept

Section 32 of the Indian Contracts Act deals with contingent contracts. Contingent contracts are contracts to do or not to do something, if some collateral event to such contract does or does not happen.

A contingent contract cannot be enforced, if the event on which it is dependent upon does not take place. If such an event becomes impossible, the contract is void. 

Facts

The owner of the suit property (testator) executed a will and two codicils whereby he bequeathed the vendor the right of enjoyment of the suit property during the life of the testator, but without any power to dispose-off the property. In the Will, it was provided that after the death of the vendor, his male issue living at the time of his death would take all the properties absolutely.

In the absence of any such male issue of the vendor, the properties would be taken by other descendants (‘Reversioners’). The testator died and the vendor arranged for the sale of the suit property to the vendee. At this point it is pertinent to note that there were coercive demands for recovery of public dues by attachment and sale of property by public authorities.

The vendor had time constraints to sell the property as soon as possible to receive a fair price. Another point which needs to be noted is that the vendor had only life interest in the property, whereas the right to succession lay with the reversioners (as the vendor did not have any male heir).

Hence, court sanction was required for the sale of the said property. The agreement executed between the vendor and the vendee contained a clause that if the court sanction which was required for the sale of the property was not accorded then the vendor will refund the advance amount taken from the vendee and the agreement will stand cancelled.

The reversioners raised objections against the sale and the court sanction got delayed. The vendor assuming that the court would not give the sanction, cancelled his agreement with the vendor and refunded the advance amount.

However, the vendor later on sold the same property to a subsequent vendee. The vendee then filed a suit praying that the property be re-conveyed to them. The trial court held the matter in favour of the vendee/Plaintiff and ordered the subsequent vendees to re-convey the properties to the Plaintiff.

The Division Bench of the High Court reversed the judgment on the following grounds: 

• The agreement was contingent upon the sanction of the court for the sale being obtained, as such sanction was not obtained, the agreement is now unenforceable. 
• The suit which was filed to obtain the sanction of the court was dismissed and no appeal was preferred against the same. The Division bench held that such dismissal and lack of further appeal, has made the dismissal final. As the agreement was contingent upon the sanction the sale agreement for the suit property also stands cancelled and hence the suit for specific performance will also have to be dismissed.

Thus, the vendees appealed before the Supreme Court. 

Issues

Whether the sale agreement was contingent upon the court sanction and whether in the absence of such sanction, the sale agreement is now unenforceable? 

Arguments by the Appellant 

1. The vendor clearly committed a breach of the terms of the Sale Agreement. Actions such as sending a notice for terminating the contract, thereafter instructing his lawyer to withdraw the suit for sanction followed by the negotiations with the subsequent vendee and selling the property at a higher price, show mala fides on the part of the vendor.  
2. The subsequent vendee purchased the property with knowledge of the prior agreement. Hence, they hold the property in trust for the benefit of the prior vendee and hence are required to convey the property to the prior vendee under decree for specific performance of the prior contract. 
3. The contract was not a contingent one. The  grant of sanction of the court was frustrated by the vendor himself by prematurely rescinding the contract and instructing his lawyer not to prosecute the sanction suit. Hence, the dismissal of the suit was a consequence self-induced by the vendor and the vendor cannot now take advantage of his own wrong.  
4. The clause in the contract requiring sanction of the Court for transfer of reversioners’ interest was a condition solely in favour of the vendee which he could waive and the vendor could not insist on fulfillment of that condition as a fundamental term of the contract.

Arguments by the Respondent

1. The sale agreement was a contingent contract – the contingency being to get the  sanction of the court which did not materialize. Upon failure of that contingency, the agreement stood cancelled. Hence, the agreement is unenforceable in accordance with Section 32 of the Indian Contract Act read with definition of ‘Contingent Contract’ contained in Section 31 of the said Act. 
2. Even after the notice of termination of the contract, the suit asking for sanction of the court was not withdrawn. The vendee got himself impleaded and later transposed as the Plaintiff in the said suit. Vendee himself claimed a lesser relief of life interest. Hence, he himself was thus responsible for rendering the sanction suit infructuous.

Judgment

The Hon’ble Supreme Court dismissed the Appeal based of following reasons:

1. Time was of essence for the vendor as he had pressing demands from public authorities requiring him to clear the public dues as soon as possible. If he did not dispose of the property soon, he would not have been able to get a fair price. Hence, the vendor could not afford to wait for an unreasonably long time for the court sanction to be accorded. As the vendor did wait for a reasonable time before he decided to cancel the contract, it cannot be said that the vendor was in breach.
2.  The agreement was subject to the court sanctioning the sale, hence, before such sanction was accorded, the agreement could not have come into force. Such sanction was a condition precedent for the agreement to come into force.
3. The sale agreement between the vendor and the vendee required the transfer of the entire interest in the property (life interest of the vendor and the right of succession of the reversioners). It was an indivisible contract depending upon the sanction of the court. The reversioners were not parties to contract and the vendee knew that the vendor had only life interest in property and he could not convey more than his own interest. Hence, the transfer of the entire interest was dependent upon the sanction of the court which was never granted. 

Reflective Question

Would the decision be different, if court sanction for the sale was not required?