Performance of Contract and Section 56 of Indian Contract Act, 1872 : High Court Explains the Principles in its Recent Judgment

Performance of Contract and Section 56 of Indian Contract Act, 1872 : High Court Explains the Principles in its Recent Judgment

One cannot have an agreement to mine coal from the Coal Block when the Supreme Court has outlawed the allocation of the Coal Block. Therefore, the CMSA became impossible to perform upon the cancellation of allocation by the Supreme Court. Thereby, the CMSA became void within the scope of Section 56 of the Indian Contract Act, 1872. However, to attract the element of compensation in relation to any promise that has become impossible to perform, as provided for under Section 56 of the Indian Contract Act, 1872 the necessary ingredients are that the promisor knew and the promisee did not know, that the promise was impossible to perform. If such ingredients are met, the promisor must make compensation to the promisee for any loss sustained through the non-performance of the promise.  

Therefore, necessarily, to invoke Section 56, the promise in question ought to have been spelt out. Then the knowledge of the promisor that the promise was an impossibility, and the absence of knowledge of the promisee about the impossibility must be shown. It is then that a case for compensation would be made out. Moreover, the very fact that Section 56 of the Indian Contract Act provides for compensation for any loss sustained, there would be a need to assess the loss sustained and a fair assessment of how to compensate for such loss. The aforesaid standard would necessitate examining evidence and assessing what the parties contracted and what the promisor knew about the impossibility or illegality of performance and what the promisee did not know about such impossibility or illegality. Likewise, evidence of loss suffered would need to be led and the compensation amount would have to be arrived at based on empirical evidence. 

Indeed, an interim arbitral award may be made in respect of any matter when nothing further is needed to be done to hold up judgement on that issue. In other words, other elements of the arbitration proceedings would not need to delay pronouncement upon a matter on which the Arbitral Tribunal is convinced and has formed judgement. However, that does not mean that the judgement formed in this process does not have to withstand the scrutiny to which any arbitral award would be subjected. 

Refer Mahaguj Collieries Ltd v. Adani Enterprises Ltd [2026] GCtR 388 (Bombay).