Mr. Lal, a well-known builder, entered into a contract with Mr. Kumar, a property developer, to construct a large shopping mall in Jaipur for a total consideration of ` 10 crores, to be completed within 18 months. After the work began, both parties mutually decided to alter the nature of their agreement. By mutual consent, a new contract was substituted, under which Mr. Lal would instead construct a five-star luxury hotel on the same land for an increased price of `12 crores. This new agreement expressly cancelled the earlier mall contract.
However, six months after the new agreement was executed, the State Government, under its Urban Development Policy, passed a law prohibiting the construction of hotels in that particular commercial zone, though the construction of shopping malls was still permitted. Due to this prohibition, Mr. Lal stopped the construction work and informed Mr. Kumar that the contract had become impossible to perform. Mr. Kumar, however, filed a suit against Mr. Lal for breach of the new contract, demanding damages on the ground that Mr. Lal had failed to perform his obligation.
Decide, under the provisions of the Indian Contract Act, 1872, whether Mr. Lal is liable for breach of contract or whether the contract has become void due to impossibility.

Question

Mr. Lal, a well-known builder, entered into a contract with Mr. Kumar, a property developer, to construct a large shopping mall in Jaipur for a total consideration of ` 10 crores, to be completed within 18 months. After the work began, both parties mutually decided to alter the nature of their agreement. By mutual consent, a new contract was substituted, under which Mr. Lal would instead construct a five-star luxury hotel on the same land for an increased price of `12 crores. This new agreement expressly cancelled the earlier mall contract. 
However, six months after the new agreement was executed, the State Government, under its Urban Development Policy, passed a law prohibiting the construction of hotels in that particular commercial zone, though the construction of shopping malls was still permitted. Due to this prohibition, Mr. Lal stopped the construction work and informed Mr. Kumar that the contract had become impossible to perform. Mr. Kumar, however, filed a suit against Mr. Lal for breach of the new contract, demanding damages on the ground that Mr. Lal had failed to perform his obligation. 
Decide, under the provisions of the Indian Contract Act, 1872, whether Mr. Lal is liable for breach of contract or whether the contract has become void due to impossibility.

Accepted Answer

According to section 62 of the Indian Contract Act 1872, if the parties to a contract agree to substitute a new contract in place of the old one, or to rescind or alter it, the original contract need not be performed. 
Section 56 provides that an agreement to do an act which is impossible in itself is void. Further, if a contract was possible when it was made, but becomes impossible or unlawful after formation due to some event beyond the control of parties, it becomes void. 
However, mere commercial hardship or rise in cost is not impossibility. Impossibility applies only when the performance has become absolutely impracticable or unlawful. 
In the instant case, at first, Mr. Lal agreed to construct a shopping mall for `10 crores within 18 months. Subsequently, both Lal and Kumar, by mutual consent, substituted the original agreement with a new one, under which Lal was required to construct a luxury hotel for `12 crores. By this substitution, the earlier mall contract stood discharged. During the continuation of the new contract, the State Government imposed a legal prohibition on the construction of hotels in that particular zone, which directly affected the subject matter of the agreement. 
Here, the first contract for the construction of a mall was discharged by novation under Section 62, since a new contract was formed with mutual consent. Therefore, the mall contract no longer remained enforceable. 
As regards the substituted contract for construction of the hotel, a subsequent change in Law by the government prohibited hotel construction in that area. This made performance of the hotel contract unlawful and impossible. Under Section 56, the contract therefore became void due to supervening impossibility. 
Hence, Mr. Lal is not guilty of breach of contract because non performance resulted from an event beyond his control. Mr. Kumar cannot claim damages as the contract stood discharged by impossibility. Both parties are therefore relieved from their respective obligations.

Question Scenario

Suggested Answer

1. Provisions of the Act / Applicable Law

2. Analysis & Application of Facts

3. Conclusion & Verdict

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