In a recent decision[1], the Supreme Court has demarcated the ambit and parameters of the doctrine of frustration as it applies under Maldives law.

The decision of the apex court answers two key questions: (i) if a contract between two parties could be discharged due to impossibility of performance on the occurrence of a supervening circumstance; and (ii) what remedies may be available to affected parties in the event of such discharge.

The doctrine of frustration in the Maldives is primarily captured in the country’s Contract Act which in its essential form is a collection of common law principles.

Barge carrying rock boulders

Coral Gate Maldives Private Limited (CG) made a contract with BMC Transport and Projects Private Limited (BMC) to carry 3000 metric tons of rock boulders on a BMC barge from the Indian port of Tuticorin to a port in Maldives. Just a few miles away from Maldives, the barge was faced with inclement weather causing it to capsize and lose its cargo, including the rock boulders. Incidentally, CG had released payment for the full amount of the carriage of goods to BMC just two days before the incident occurred. CG wanted its money back.

The case had travelled through the lower court, high court and reached the apex court as an appeal from BMC.

Section 22 dissected

The case revolved around two sections of the country’s Contract Act of 1991.

One of the sections was s19 which outlines three events of discharge permitted by the Act and goes on to state that if any of them occurs the contract is deemed to have been discharged. The court invited its attention to s19 (c) which provided one of the three events of discharge: performance of the contract is prevented due a supervening circumstance beyond the contemplation of parties.

The other section at play was s22(a): if the performance of a contract is frustrated by operation of law or intervention of a supervening event beyond the contemplation of the parties, the contract shall be deemed to have been discharged.

The top court’s review was more localized around s22 (a) and took its time to break down the constituent elements of the section to qualify for the defense of frustration or avail the benefit of the law: a supervening circumstance beyond the contemplation of the parties at the time of contract should occur; and the altered circumstances should make it impossible to perform the contract.

The court was quick to remind that according to other subsections of the same section the benefit of s 22 (a) would not be available: if the supervening event makes performance of the contract only costlier; or if that event is attributed to the negligence of a party to the contract or is a party’s own doing.

Common law influence

The highest court of the land was of the view that the law on frustration remains to be settled in the country. Using this opportunity to establish the doctrine of frustration in the Maldives, the court was appropriately influenced by a number of common law precedents and finally leaned on the multifactorial test formulated in a celebrated English case[2].

Key decision points

Needless to say, the court’s decision reflected the application of the doctrine of frustration as it relates to the facts before it.

First, the court decided on the fundamental question whether or not the parties had the occurrence of bad weather within their contemplation: if the barge could face bad weather and cause it to capsize and lose its cargo.

Having scanned a series of events that occurred between the parties, the court was of the view that such an event was not within the contemplation of the parties: they did not appreciate the risks involved in the voyage and did not deal with apportionment of risk; they did not evidently insist on insurance over the carriage of goods (even if the shipper had insured the risk of loss of cargo); and it is shown that goods are often carried between Indian ports and Maldives without the requirement of a voyage policy.

This conclusion, according to the court, is further amplified by the fact that CG had released the full payment of consideration to BMC ahead of the cargo being delivered at Maldives port as required by the contract. The court was of the view that this act of payment reflects that the parties had not considered the risk of loss or presence of any risk to cargo that could have prompted the parties to deal with the risk or its mitigation.

Further, there was no force majeure clause in the contract.

Additionally, the incident that happened was not habitual. The loss of cargo occurred in a sudden change of weather that capsized the vessel. This could not have been foreseen by the parties at the time of contract.

The law in the decision

Where frustration occurs – if the contract provides for events of frustration, the parties may act according to contract. If the contract is silent on the eventuality of frustration, the affected party may seek redress as provided in the Contract Act.

The court’s reference is towards s22 (d) of the Contract Act where it says that a party to a contract may claim for payment either due to it or paid by it before knowing that the contract had become impossible to perform. However, the parties may not be bound by their contractual obligations post such event.

Relying on a catalogue of English case law, the court formed the view that BMC is under an obligation to reimburse all payment made by CG under the contract since it was established that (i) the payment was made by CG prior to its knowledge of the event of frustration; and (ii) no benefit to CG ever occurred under that contract.

This conclusion also reinforces the two critical elements which ought to be weighed in granting relief in cases where contracts become impossible to perform due to supervening events.

 

Note: The full decision of the Supreme Court may be found here.

By MN

Photo: Courtesy of Mihaaru

[1] BMC Transport and Projects Private Limited v. Coral Gate Maldives Private Limited (2020) SC 6 August 2020

[Case Number: 2013/SC-A/34]

[2] Edwinton Commercial Corporation v Tsavliri Russ (Worldwide Salvage & Towage) Limited – (The Sea Angel) [2007] 2 All E.R. (Comm) 634