Saturday, October 06, 2007

Contract Act_Practical Problems_1

A bank sanctions to an oil merchant a loan against the security of groundnut oil and an agreement is entered into between the bank and the borrower. Before the loan is disbursed, the Reserve Bank issues a statutory directive to all banks prohibiting grant of advances against the security of groundnut oil and, therefore, the bank cancels the loan. Can the customer sue the bank for damages for breach of contract ?

No- In the given problem, the customer shall not be entitled to claim damages from the bank for breach of contract. The relief to the bank shall be available under Section 56 of the Indian Contract Act, 1872. Section 56 provides that a contract to do an act which, after the contract is made, becomes impossible, or by reason of some event, which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.

In the present case, performance by the bank after receipt of statutory directive from the Reserve Bank shall naturally be unlawful on its part. The contract shall, therefore, become void exonerating the bank of performance.

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