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A consent decree cannot be frustrated under Section 56 of the Contract Act: Delhi High Court

The doctrine of frustration of contract does not apply to a consent decree and that a decree remains binding on the parties till set aside. A compromise, even if a contract, once has the imprimatur of the Court, is a decree of the Court and to be enforced as a decree and not as a contract. Vide Section 56 of the Contract Act, a contract to do an act which, after the contract is made, becomes impossible, becomes void when the act becomes impossible or unlawful. This was held by Hon’ble Justice Rajiv Sahai Endlaw in the case of Sarabjit Singh Chadha Vs. Dinesh Sehgal [CS(OS) 610/2018] on the 11th of August 2021 before the Hon’ble High Court of Delhi at New Delhi.

The brief facts of the case are, The present suit was filed, seeking recovery of Rs.5,98,40,000/- along with interest @ 10% per annum from the defendant/applicant. It was inter alia the case of the plaintiff/non-applicant, (i) that the plaintiff was a proprietor of M/s Jagat Overseas, which was closed in the year 2014 and the balances of which proprietorship firm were transferred to the personal account of the plaintiff which included closing stock of raw gold and gold/diamond jewellery weighing around 39,307.551 grams; (ii) that the plaintiff had been carrying on the business of gold and diamond for a very long period of time; (iii) that the defendant was also in the business of selling, making and designing of the plain gold jewellery; (iv) that the son of the plaintiff and the son of the defendant were friends and had also carried on many businesses together; (v) that in first week of September 2017, the son of the defendant approached the son of the plaintiff and made a business proposal that the defendant would offer services of making gold jewellery at a reasonable/lesser price than what was the prevailing rate in the market; (vi) that upon the son of the plaintiff not responding to the said offer, the defendant himself approached the plaintiff and offered to make gold jewellery for less than the market price prevailing at the time; (vii) that it was agreed, that the plaintiff would provide raw gold to the defendant for the job of making jewellery and thereafter a majority portion of the jewellery would be given back to the plaintiff and some items will be kept at the store of the defendant for display and sale and out of which the plaintiff would be entitled to a part of the profits and cost of his raw gold; (viii) that on 17th October, 2017, under cover of a voucher, the plaintiff handed over 20 Kg pure raw gold to the defendant, out of the stocks which the plaintiff had in his personal account after winding up of the business of M/s Jagat Overseas; (ix) that the said voucher was duly acknowledged by the defendant; (x) that the defendant also signed an order dated 17th October, 2017 bearing the complete list/description of the gold given by the plaintiff and the description of the jewellery to be made by the defendant; (xi) that the defendant also issued a receipt dated 17th October, 2017 whereby the defendant acknowledged receiving of 20 Kg of gold from the plaintiff; (xii) that the defendant also handed over a post-dated cheque dated 17th January, 2018 to the plaintiff for an amount of Rs.6 crores, as a performance guarantee; (xiii) that the defendant failed to deliver the jewellery/articles to the plaintiff within the agreed time; (xiv) that the cheque of the defendant was also dishonoured; and, (xv) that on complaint of the plaintiff, FIR No.85/2018 was also registered against the defendant. Accordingly, the suit for recovery of Rs.5,98,40,000/- came to be filed by the plaintiff. The defendant has filed this application, seeking setting aside of the consent decree dated 13th February, 2020 and consequently, restoration of the suit to its original position.

The counsel for the defendant submitted that, that a compromise decree is nothing but an agreement between the parties and its validity needs to be tested as per the principles governing the validity of an agreement, as enshrined in the Indian Contract Act, 1872. It was also submitted that that the compromise agreement has become impossible to perform on account of reasons which the defendant/applicant could not prevent and has therefore become void. Furthermore, that the compromise between the parties, which was essentially a contract, has become void under Section 56 of the Contract Act. The leaned judge heard the submissions and observed that Order XXIII Rule 3 of the CPC does not mandate the Court to pass a decree and dispose of the suit in terms of any compromise between the parties. The Court is mandated to pass a decree only if finds the contract to be “lawful”. It is not the plea of the defendant/applicant that the contract in the present case was not lawful. The plea is, of the contract, after the making thereof, having been frustrated. The judge held that, “De hors the merits of the plea of frustration, I am unable to agree that a compromise decree can be said to have been frustrated. CPC being the codified law qua proceedings in a suit and in execution of decrees passed in such suit, is a self-contained code and does not provide for a lawful consent decree being frustrated. Thus, the very premise on which the application has been filed i.e. of a compromise decree, having its genesis in a contract, which is found to be lawful by the Court, can be frustrated owing to subsequent events, falls and has no legs to stand on.”

The court also relied on the judgement in Shankar Sitaram Sontakke Vs. Balkrishna Sitaram Sontakke AIR 1954 SC 352, wherein, it was held that, “the doctrine of frustration of contract does not apply to a consent decree and that a decree remains binding on the parties till set aside. It was further held that once a Court puts its seal of approval of the comprise arrived at between the parties, it ceases to be a contract simplicitor and becomes binding upon the parties to it.” Thus, the petition was dismissed by holding, “Vide Section 56 of the Contract Act, a contract to do an act which, after the contract is made, becomes impossible, becomes void when the act becomes impossible or unlawful. It is neither the case of the defendant/applicant in the application that compliance of the decree by the defendant/applicant has become impossible or unlawful. The only thing which is pleaded is the economic constraints of the defendant/applicant, owing whereto the defendant/applicant is unable to comply with the decree and/or owing whereto the value under the decree has multiplied.

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