Sheikh Brothers Limited v Ochsner and Another (Civil Appeal No. 17 of 1954) [1955] EACA 284 (1 January 1955)

## COURT OF APPEAL FOR EASTERN AFRICA

Before Sir Barclay Nihill (President), Sir Enoch Jenkins, Justice of Appeal and BRIGGS, Justice of Appeal.

## SHEIKH BROTHERS LIMITED, Appellant ν.

## (1) ARNOLD JULIUS OCHSNER, (2) OCHSNER LIMITED, Respondents Civil Appeal No. 17 of 1954

(Appeal from the decision of H. M. Supreme Court of Kenya, de Lestang, J.)

Contract—Void contract—Mistake—Impossibility—Payment of compensation— Indian Contract Act, sections 20 and 56, paragraphs 1 and 3.

Arbitrators found a contract to be void under section 20 of the Indian Contract Act on the ground of mutual mistake as to a matter essential thereto and thus that it was also void for initial impossibility under section 56, paragraph 1 of the Act. It was argued that compensation was thus payable under section 56, paragraph 3 of the said Act.

Section 20 of the Indian Contract Act provides: "Where both parties to an Agreement are under a mistake as to a matter of fact essential to the Agreement, the Agreement is void."

Paragraph 1 of section 56 of the Act provides: "An Agreement to do an act impossible in itself is void" and paragraph 3 of the said section reads: "Where one person has promised to do something which he knew, or with reasonable diligence, might have known, and which the promisee did not know to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promise ssustains through the non-performance of the promise".

Held (22-12-54).—A contract may be void both under section 20 and section 56, paragraph 1, of the Indian Contract Act, but compensation is only payable under section 56, paragraph<br>3, of the Act where a contract otherwise valid is void by reason of impossibility or<br>illegality, so that where a contract is void for compensation is not payable under section 56, paragraph 3, aforesaid.

Appeal dismissed.

Cases referred to: The Salvador (1909) 26 T. L. R. 149; Bell and another v. Lever<br>Bros. Ltd. and others (1932) A. C. 161; Karimjee v. Haridas (1928) A. I. R. Sind 21;<br>Ainslie v. Morrison 18 E. A. C. A. 96.

Nazareth for appellant.

MacDougall for respondents.

BRIGGS, J. A.—This is an appeal from a decree or order of the Supreme Court of Kenya dismissing an application by the appellant company as party to an arbitration to set aside the award or alternatively to remit it to the arbitrators.

The appellants are owners of a sisal estate. They granted in 1950 to the first respondent a licence to work the estate. The licence permitted the first respondent to assign to a private limited company on certain terms and he so assigned to the second company. The licence required the licensees to "manufacture and deliver sisal fibre in average minimum quantities of 50 tons per month", with precise provisions as to the method of averaging. Only mature leaf was to be cut and only leaf from this estate was to be used. It was subsequently

found that the estate could not produce sufficient mature leaf to enable the necessary minimum deliveries to be made. Differences having arisen between the parties, they arbitrated under a clause in the licence and the arbitrators were asked to decide the following preliminary points: —

- (1) Whether the licence was void for mutual mistake. - (2) Whether the licence was void for impossibility; and if so, - (3) Whether the licensee was liable to compensate the licensor under the third paragraph of section 56 of the Indian Contract Act.

The arbitrators made an interim award answering the first question in the negative, and the second and third in the affirmative. On application by the licensee to the Supreme Court it was held that as regards the first issue there was error on the face of the award, since the arbitrators had held that the belief of the licensees that leaf production of the estate would be sufficient to enable them to perform their obligations under the licence did not in law constitute a mistake of fact. The court held that it was a mistake of fact. There was no finding in the award whether the mistake was unilateral or mutual, or whether it was on a matter of fact essential to the Agreement. The court remitted the award to the arbitrators and from that decision there was no appeal. The arbitrators then issued a revised award on the preliminary points. They found that the mistake was mutual and was on a matter of fact essential to the Agreement, and that accordingly the Agreement granting the licence was void for mistake. As regards the second and third issues they said: —

"We find no occasion to vary our original decision in regard to impossibility but in view of the fact that the contract is now held to be void our decision as to impossibility will not become operative."

The licensors asked the Supreme Court to reverse the finding that the mistake was on an essential matter, and also to hold that, even if the Agreement was void for mistake, the arbitrators' original decision that compensation must be paid under section 56 still held good, contrary to their opinion. The Supreme Court rejected both these contentions and the licensors' appeal.

The licensees had for some time worked the estate in intended part performance of the Agreement. They had manufactured and delivered some sisal fibre, though not enough. It was submitted for the appellants that this made it clear that the mistake could not be on a matter essential to the Agreement. I think this argument is completely fallacious. A licence of this nature might well be drawn in such terms that a deficiency of leaf-production would not be a "matter essential", but merely one affecting quantum of profits. In this licence, however, the requirement of 50 tons average per month minimum was quite deliberately made a fundamental term of the contract. Failure to produce that minimum meant not merely that profits would be reduced, but that the contract could not be performed at all. A mistake as to a fact which results in performance of the contract being impossible can hardly fail to be on a "matter essential to the Agreement". I think the arbitrators were clearly right on this point.

In their first award the arbitrators had found that "in the years before 1951 the estate had shown an average tonnage production well below 50 tons per month", that "there was insufficient leaf to enable the licensee to carry out his obligations", and to that extent there was impossibility. They then quoted the third paragraph of section 56 and said: —

"We consider that the licensee, had he exercised reasonable diligence before agreeing to the terms of the licence, might have known that it would not be possible to produce the minimum stipulated for in the licence, and

that consequently he must make compensation as visualized in the provisions of the section quoted."

This part of the first award must be considered in reference to the passage which I have quoted from the second. In particular, what did the arbitrators mean by "our original decision in regard to impossibility"? Does it refer only to the actual finding that there was impossibility, or does it include the consequences which were to flow therefrom? I am prepared to assume in favour of the appellants that the latter is the correct view. One has therefore a finding that it was impossible to do what the licensee had undertaken to do and that, though he did not know that, he might with reasonable diligence have known it. It is also found in the second award, and implied in the first, that the licensor did not know it. The conditions for payment of compensation under section 56 would therefore undoubtedly exist, unless the avoidance of the Agreement under section 20 removes this obligation. What the compensation would amount to, if it were payable, and what basis would be adopted if it had to be assessed, are questions which do not arise on this appeal, and which I shall not attempt to answer.

Mr. Nazareth, for the appellants, opened his argument on this point by saying that this was a case of initial impossibility, not supervening impossibility. He contended that accordingly sections 20 and 56 had exactly the same effect in rendering the Agreement void *ab initio*. They did not conflict and full effect should be given to the whole of both of them. I think the first part of this argument must be accepted. It was always the case that this Agreement would not be able to be performed, though that fact became known to the parties only at a later date. I think therefore that the Agreement was to do an act impossible in itself and was void ab initio. The real question, as it seems to me, is then whether the third paragraph of section 56 may be invoked where there was initial impossibility or illegality, but in addition the Agreement was void ab initio on some other ground. It will assist to consider some of the grounds on which an Agreement may be void *ab initio*.

By section 10, an Agreement is a contract, i.e. valid and enforceable (s. 2) (h)), if made "by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and . . . not hereby expressly declared to be void". An Agreement may be void *ab initio* by reason of infancy (s. 11), unsoundness of mind (s. 11), disqualification by law from contracting (s. 11), absence of consensus as to subject-matter (s. 12) or as to identity of a party (s. 12), absence of "free consent" owing to mistake (ss. 14 and 20), illegality (s. 23), lack of consideration (s. 25), restraint of marriage (s. 26), restraint of trade (s. 27), restraint of legal proceedings (s. 28), uncertainty (s. 29), wagering (s. 30), or impossibility (s. 56). This list is probably not exhaustive. The different moral qualities affecting the grounds of avoidance lead to different treatment. In certain cases of impossibility or illegality the innocent party may be entitled to compensation from the one who is to blame. Where lack of capacity exists the Agreement is void and the utmost relief that can be obtained is a return of benefits received by the party unable to contract. Similarly where there is a lack of consensus. So also where there is mutual mistake. In these cases the parties are both blameless and no question of compensation should arise. In some cases both parties are to blame for making an improper agreement. It will be void and again no compensation will be payable. Mr. Nazareth argues that, if an agreement is declared by law to be void for more than one reason, it is still no more void than it is if avoided by impossibility alone. If a contract may be void for impossibility and compensation still be payable in resepect of it, it may also be void for any number of other reasons and compensation will still be payable. This argument is superficially attractive, but I think it fails. It necessarily involves, I think, the proposition that, apart from the special grounds of avoidance which

led to compensation, every ground of avoidance has, under the Indian Contract Act, the same legal consequences, and I think this must be unsound. Consider the case of an agreement by an infant or other person lacking contractual capacity. He agrees to do something impossible in such circumstances that compensation would ordinarily be payable under the third paragraph of section 56. It can hardly be suggested that he would be made to pay compensation. Consider next the case of an agreement which is void for lack of consensus as to parties, and void also for impossibility in the same circumstances. It seems to me that the lack of any true Agreement between the parties precludes any right to compensation. Consider next any of the types of agreement which are avoided on grounds of public policy, e.g. a wager. Given the same conditions as to impossibility, I think public policy would preclude the payment of any compensation. A contract avoided for mutual mistake lacks the necessary element of "free consent". See section 14. But this is perhaps not a very happy expression. The real ground for avoidance, as stated by *Pollock and Mulla*, 6th Ed. 135, is "that the true intention of the parties was to make their agreement conditional on the existence of some state of facts which turns out not to have existed at the date of the agreement". The condition precedent to contractual obligation is not fulfilled. When the matter is put in this way it is apparent that there was never an effective Agreement at all. Why then should compensation be payable if the intended Agreement happened to be impossible or unlawful?

The position in the present case is a little obscured because the same fact gave rise to both the mistake and the impossibility; but I cannot see that this really affects the matter. Its effect must be considered separately on the two issues.

Section 56 is rather curiously drawn. The first paragraph deals only with inherent impossibility, the second with supervening impossibility or illegality, and the third with compensation in cases of impossibility or illegality. It may well be that the provisions as to illegality, which one would expect to find in section 23, were inserted in section 56 as an afterthought. See also section 54. Whether impossibility or illegality is relied on, the policy of the section seems to be quite clear. In many such cases the person promising to do the impossible or unlawful act either knows, or ought to know, that it is impossible or unlawful before he makes the promise, while the other party may neither know nor have the means of knowing that this is the case. See illustration (c). In such a case it may fairly be said that the promisor is to blame, while the promisee is blameless. The court cannot, or will not, enforce the Agreement as a contract, but compensation should be paid to the promisee. It is, however, as a matter of common sense and equity alike, necessary in such a case that, had it not been for the unknown element of impossibility or illegality, the promisee would have been able to claim performance of a valid contract. If even apart from that unknown element, his agreement was never an enforceable contract, but was void for some other reason, there is no logical or moral basis for compensation. This leads me to the view that the provision for compensation in section 56 can only be invoked by the promisee when the Agreement is void only by reason of the impossibility or illegality and would otherwise have been a valid contract.

Another line of argument supports this view. The third paragraph of section 56 requires that a "promise" should have been made. Paragraphs $(a)$ , $(b)$ and $(c)$ of section 2 show what is meant by "a promise". It involves acceptance of a proposal, and if the promises are reciprocal an agreement is formed. If that agreement is enforceable, it is a contract; if not, it is void. Going back to the statement in *Pollock and Mulla* as to the grounds for avoidance of an agreement for mutual mistake, it may be argued that, since the proposal was subject to a condition precedent, which remained unfulfilled, it could never be effectively accepted and therefore never in reality became a "promise". This argument was not put to us at any length and I prefer to express no final opinion on it. I am content to rest myself on the grounds previously given.

Finally, I would mention the case of The Salvador (1909) 26 T. L. R. 149, which seems to show that, if my views on the effect of sections 20 and 56 are correct, the law of Kenya is the same as the law of England on this point. Mr. Nazareth sought to distinguish that case from this on the ground that this Agreement had been partly performed. I think that makes no difference. The principle would still apply that a benefit received without consideration would have to be returned; but where the Agreement covers a series of transactions, of which some are completed, the completed ones would presumably remain undisturbed. The question of compensation does not arise. I mention this English case chiefly because the commentaries on section 56 stress its difference from the common law. In this instance, and in many others, I find that their practical effect is the same, though the result may be arrived at by apparently different methods. I think the arbitrators and the Supreme Court were right, and I would dismiss this appeal with costs.

SIR ENOCH JENKINS, J. A.—I have had the advantage of reading the judgment of my learned brother Briggs, and find myself in general agreement with it.

The arbitrators have found that the Agreement is void under section 20 of the Indian Contract Act on the ground that there was mutual mistake as to a matter of fact essential to the Agreement. Both parties to the Agreement had the intention of making it conditional on the existence of a minimum production capacity of 50 tons of sisal a month, a capacity which did not exist. The arbitrators thus also found that the Agreement is void for impossibility, and the question at issue is whether the Agreement having been found void under section 20 is also void under section 56, and in particular whether paragraph 3 of section 56 applies.

I can see no reason for not holding that the Agreement, void under section 20, is also void under the first paragraph of section 56. Impossibility due to non-existence of the subject matter is a species of the genus mutual mistake, and Pollack and Mulla, 6th Edition, at p. 328 in commenting on the provisions of section 56 expressly refer to the fact that they have already dealt with impossibility by reason of the non-existence of the subject matter under the head of Mistake, section 20, and accordingly do not deal with it again.

But the third paragraph of section 56 introduces factors which are entirely foreign to the conception of mutual mistake. In the first place the promisor has promised to do something which he *knew*, but which the promisee did not know, to be impossible. That removes the Agreement completely from the scope of section 20, which requires that both parties to the Agreement shall be under the mistake of fact essential to the Agreement. If the promisor knew of the impossibility and the promisee did not here obviously can be no mutual mistake. This seems to me to be the governing motif of the third paragraph of section 56, a a set of circumstances in which the parties are not on equal terms as they are under section 20. Thus the words "or with reasonable diligence might have known" again imply a set of circumstances in which the promisor is in a different position from the promisee, for the latter is presumed not to know. There is no mutuality of mistake which is the essential element under section 20.

I am, therefore, of opinion that the arbitrators and the learned appellate Judge were correct in their view that the third paragraph of section 56 does not apply where as in the present case the Agreement is held to be void on the ground of mutual mistake of fact.

## I would accordingly dismiss the appeal.

SIR BARCLAY NIHILL (President).—I have come to the same conclusion as my learned brothers. In my opinion this was never an effective Agreement to which the third paragraph of section 56 of the Indian Contract Act could be applied. This conclusion is certainly consistent with the equity of the matter and for the reasons already stated in the judgments delivered I believe it to be also in accordance with the statute. The appeal is dismissed with costs.