Proposed Amendment To Contract Terms Doesn't Constitute Anticipatory Breach Unless There Is Refusal To Perform Entire Contract: Calcutta High Court
The Calcutta High Court has held that a proposal to modify certain terms of a contract does not amount to anticipatory breach unless it demonstrates a clear intention to refuse performance of the contract in its entirety.
Justice Sugato Majumdar delivered the ruling while deciding two cross-suits arising out of a failed transaction concerning the transfer of control and management of M/s Bhoomi Minerals Ltd., a company owning a sponge iron manufacturing unit in Jharkhand.
The dispute arose after the promoters of the company, facing mounting debt and possible proceedings under the SARFAESI Act, agreed to transfer control of the company to the purchasers for a consideration of ₹28.01 crore. Pursuant to the Memorandum of Understanding (MoU) executed on September 20, 2010, the purchasers paid ₹1 crore as advance/earnest money.
Subsequently, differences emerged after the promoters proposed certain modifications to the terms of the MoU. The purchasers treated the proposal as an anticipatory breach of contract, terminated the arrangement, and sought refund of the ₹1 crore paid by them.
The promoters, on the other hand, contended that the purchasers had wrongfully terminated the agreement. Owing to financial distress and pressure from lenders, they were eventually compelled to sell the company to a third party for ₹22.5 crore, resulting in an alleged loss of ₹5.51 crore.
Before the Court, the purchasers argued that the proposed amendment fundamentally altered the agreed shareholding structure and reflected the promoters' intention not to perform their obligations under the original MoU. According to them, the proposed changes entitled them to terminate the contract on the ground of anticipatory breach and seek refund of the advance amount.
The Court examined Section 39 of the Indian Contract Act, 1872, which deals with refusal of a party to perform a contract in its entirety before the time fixed for performance. Referring to judicial precedents on anticipatory breach, the Court observed that the doctrine applies only where there is a clear and unequivocal refusal to perform the contract as a whole.
Analysing the proposed amendments, the Court found that the promoters had not expressed any intention to abandon or repudiate the transaction. The proposed modifications merely contemplated retention of majority shareholding as security until the purchasers secured the release of personal guarantees and collateral securities furnished by the promoters to the Indian Overseas Bank.
The Court held that the proposed amendments did not indicate any refusal to transfer the entire shareholding eventually, nor did they amount to destruction of the contractual relationship.
Holding that Section 39 was not attracted, the Court concluded that there was no anticipatory breach on the part of the promoters. Instead, it was the purchasers who terminated the subsisting MoU and thereby committed breach of contract.
Consequently, the Court held the purchasers liable for damages. Accepting the promoters' claim that they were compelled to sell the company at a substantially lower price due to the purchasers' breach, the Court awarded damages of ₹5.51 crore along with interest at the rate of 7% per annum from the date of institution of the suit.
On the issue of the ₹1 crore paid by the purchasers, the Court noted that the MoU did not contain any clause providing for forfeiture of earnest money. Relying on settled principles governing forfeiture of advance payments, the Court held that the amount could not be forfeited in the absence of an express contractual stipulation.
Accordingly, the Court directed the promoters to refund ₹1 crore to the purchasers with interest at the rate of 7% per annum from the date of institution of the suit until repayment. The Court further permitted the promoters to adjust the refundable amount and accrued interest against the decretal amount awarded in their favour.
Case Title: Uma Devi Agarwalla & Ors. v. Nirmal Kanodia & Ors.
Case Nos.: CS/124/2011 and CS/264/2012
Appearances:
For the Agarwallas (Promoters): Mr. Sabyasachi Chowdhury, Senior Advocate, Mr. Amit Meharia, Ms. Urmila Chakraborty, Ms. Paramita Banerjee and Mr. Sayan Dey, Advocates.
For the Kanodias (Purchasers): Mr. Jishnu Saha, Senior Advocate, Mr. Shiv Ratan Kakrania, Mr. Sukrit Mukherjee, Mr. Tanuj Kakrania, Ms. Jiya Bose and Ms. Shreya Goenka, Advocates.