'Doctrine of fairness' is not applicable to Statutory Contracts

Holding that doctrine of reasonableness or fairness is not applicable to statutory contracts, Supreme Court of India (“Supreme Court”) has rejected an appeal wherein the appellant had sought the refund of security amount which was deposited to open an arrack shop.  In Mary v. State of Kerala and Ors [Judgment dated October, 22, 2013], the court had to consider the following issue:

“.....in  case  of  a  statutory  contract,  will  it necessarily  destroy  all  the  incidents  of  an ordinary  contract  that  are  otherwise  governed  by the Contract Act?”

Facts: The appellant, Mary, having succeeded in an auction for sale of privilege to open an arrack shop, had deposited 30% of the bid amount as security. However, near to the area, where the arrack shop had to be started, was the birth place of Adi Sankaracharya and also a Christian pilgrim centre. Because of this, physical resistance was offered by the local people so that the arrack shop could not be opened in the area. This situation led the appellant to believe that it was not possible for her to open arrack shop in the area. Accordingly, she requested the concerned authorities to consider the ‘proposed contract’ as rescinded.

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Declining the request of the appellant, the Excise Inspector sent a notice to the appellant thereby awarding the contract to open arrack shop in her favour. In addition to this, security deposit, as requested by the appellant, was not returned. Further communications took place between the appellant and the authorities but the request of the appellant was not accepted. Against this, the appellant filed a writ petition before the High Court of Kerala (“High Court”). Applying the doctrine of frustration and impossibility, the single judge bench of the High Court held that the contract had become void from its inception. On appeal to division bench, the single judge bench judgment was reversed and it was held by the High Court that the state was justified in forfeiting the deposit made as a security.

Relevant Legislations: Kerala Abkari Shops (Disposal in Auction) Rules, 1974; Indian Contract Act, 1872

Contentions:

Before the High Court (single judge), it was contended by the appellant that Rule 5(15)  and  5(16) of Kerala Abkari Shops (Disposal in Auction) Rules, 1974 (“Abkari Rules”), were  arbitrary  and  violative  of Article  14  of  the  Constitution  of  India. Both the single judge bench  and division bench of the High Court did not strike down these provisions. Under rule 5(15) of the Abkari Rules, money already deposited by the auction purchaser can be forfeited by the concerned authorities. Relying on section 56 of the Indian Contract Act, 1872 (“Contract Act”), it was contended on behalf of the appellant that the contract had become frustrated. Hence, the deposit money should be refunded. In this regard, reliance was placed on the cases: Sushila Devi v. Hari Singh, (1971) 2 SCC 288 and Har Prasad Choubey v. Union of India, (1973) 2 SCC 746. In both these cases, it was held by the court that where there are certain intervening circumstances, the respective contracts can become frustrated.

On behalf of the respondent, it was contended that since the terms and conditions for grant of privilege provided consequences in case of non-compliance, the division bench of the High Court was right in holding that the State was entitled to forfeit the entire deposit.

Findings of the Court:

In order to arrive at the decision, the Supreme Court referred to the rule 5(15) of Abkari Rules. According to rule 5(15), there shall be the forfeiture of already deposited money where the auction purchaser fails to discharge an obligation towards the agreement. Since the appellant had not executed the permanent agreement, as was required, the deposited money was liable to be forfeited in accordance with rule 5(15) of Abkari Rules.

To the question whether doctrine of frustration, as relevant under ordinary contracts, can be applied to a statutory contract, it was held by the court that a party cannot escape from liability where it takes an absolute responsibility under a statutory contract. Opining that though doctrine of frustration excludes ordinarily further performance where the contract is silent as to the position of the parties in the event of performance becoming literally impossible, it was held that:

                                       “......in  a  case  in which  the  consequences  of  non-performance  of contract  is  provided  in  the  statutory  contract itself,  the  parties  shall  be  bound  by  that  and cannot  take  shelter  behind  Section  56  of  the Contract  Act......”

Since the specified consequences were provided under Abkari Rules, the appellant could not take shelter behind section 56 of the Contract Act. Finding that the appellant had failed to discharge her obligations, the court was of the opinion that:

                                       “....in the face of the specific consequences having been provided, the appellant shall be bound by it and could not take benefit of Section 56 of the  Contract  Act  to  resist  forfeiture  of  the security money.”

Explaining the distinction between the cases of Sushila Devi (supra) and Har Prasad Choubey (supra) and the present, the court held that the contract in these cases did not provide for the consequences for its non-performance. Hence, they are distinguishable from the present case.

Validity of rules 5(15) and 5(16): On the question whether rules 5(15) and 5(16) of Abkari Rules are valid, it was held by the court that doctrine of fairness and reasonableness cannot be invoked to amend, alter, or vary an express term of the contract between the parties.  On this point, it was held by the court that:

                                       “....It is one thing to say that a statutory contract or for that matter, every contract must be construed reasonably, having regard to its language. But to strike down the terms of a statutory contract on the ground of unfairness is entirely different......”

[Ref: Assistant Excise Commissioner and Others v. Issac Peter and Others (1994) 4 SCC 104]

According to the court, since the licensee had taken a calculated risk, she cannot be relieved of the obligations undertaken by her under the contract. The court further rejected the applicability of the judgements in Central Inland Water Transport Corporation Limited and Another v. Brojo Nath Ganguly and Another etc. (1986) 3 SCC 156 and Delhi Transport Corporation v. D.T.C.Mazdoor Congress and Another  1991 Supp (1) SCC 600. It was held by the court that it is not possible for us to equate a contract of employment with a contract to vend arrack. That is, a contract of employment and a mercantile transaction stand on a different footing. In both these case, the court was concerned more with contract of employment.

In Conclusion, rejecting the appeal, the court held that the licensee, i.e., the appellant, had undertaken to abide by the terms and conditions of the Act and the Rules made thereunder which are statutory and in such a situation, the licensee cannot invoke the doctrine of fairness or reasonableness.