Contract Act: Performance, Breach & Special Contracts
Weightage: Units 8 to 12 of the Indian Contract Act — roughly 16 marks. The surety's discharge and the agency provisions are examined at almost every sitting, and the distinction between liquidated damages and a penalty is one of the few places where Indian law differs sharply enough from English law for examiners to exploit it.
The Act's sequence has established that a contract exists, that the parties were competent, that consent was free and that the object is lawful. This chapter takes the contract from that point to its end.
Performance
Who must perform
The promisor must perform, or offer to perform, unless the contract shows an intention that performance be by the promisor personally. Where the contract involves personal skill or confidence — a painter engaged to paint a portrait, a singer engaged to perform — only the promisor can perform, and the obligation ends on death.
Otherwise performance may be by the promisor, by his agent, or by his legal representatives after death, and the promisee must accept it.
Joint promises. Where two or more persons make a joint promise, then in the absence of contrary agreement all of them during their joint lives, and after the death of any of them his representative jointly with the survivors, must fulfil the promise. Liability is joint and several, so the promisee may compel any one or more of the joint promisors to perform the whole. A joint promisor compelled to perform may require the others to contribute equally, and where one is unable to contribute, the remainder bear the deficiency equally. A release of one joint promisor does not discharge the others.
Time and place
Where a promise is to be performed without application by the promisee and no time is specified, it must be performed within a reasonable time, what is reasonable being a question of fact.
Where time is of the essence and performance is delayed, the contract becomes voidable at the option of the promisee. Where time is not of the essence, delay does not avoid the contract, but the promisee is entitled to compensation for any loss. In commercial contracts, particularly for the sale of goods where prices fluctuate, time is ordinarily of the essence; in contracts for the sale of land it ordinarily is not.
Reciprocal promises
Promises which form the consideration for each other are reciprocal promises, and they fall into three classes:
- Mutual and independent — each party must perform without waiting for the other.
- Mutual and dependent — one party's performance is conditional on the other having performed first.
- Mutual and concurrent — both are to be performed simultaneously, as in a cash sale where delivery and payment happen together.
Where a party prevents the other from performing, the contract becomes voidable at the option of the party so prevented, who is also entitled to compensation.
Tender of performance
A tender, or attempted performance, is an offer to perform which the promisee refuses to accept. Where a valid tender is made and refused, the promisor is not responsible for non-performance and does not lose his rights under the contract.
A valid tender must be unconditional; made at a proper time and place; made to the promisee or a person authorised to receive it; and, where it concerns goods, must give the promisee a reasonable opportunity to inspect them to see that they answer the contract. Where money is tendered, the exact amount must be offered in legal tender.
Appropriation of payments
Where a debtor owes several distinct debts and pays an amount insufficient to discharge them all, three rules apply in order:
- The debtor's right first. If the debtor expressly intimates, or the circumstances imply, that the payment is to be applied to a particular debt, it must be so applied.
- The creditor's discretion next. Where the debtor makes no appropriation, the creditor may apply the payment to any lawful debt due to him, including a time-barred debt.
- Chronological order last. Where neither party appropriates, the payment is applied in discharge of the debts in order of time, including time-barred debts; if the debts are of equal standing, proportionately.
Discharge of contract
A contract is discharged — brought to an end — in six ways.
By performance, actual or by valid tender.
By agreement. Section 62 and section 63 provide the routes:
- Novation — substituting a new contract for the old, or a new party for an old one. The original contract need not be performed.
- Rescission — cancelling the contract by mutual agreement.
- Alteration — changing one or more terms with the consent of all parties.
- Remission — accepting a lesser performance than promised. Indian law departs sharply from English law here: no consideration is needed for remission, so a creditor's promise to accept ₹6,00,000 in satisfaction of ₹10,00,000 binds him.
- Waiver — abandoning a right.
- Merger — an inferior right merging into a superior one, as where a tenant buys the property he leases.
By impossibility of performance. Section 56 distinguishes two cases. An agreement to do an act impossible in itself is void from the outset. A contract to do an act which, after the contract is made, becomes impossible or unlawful, becomes void when the act becomes impossible or unlawful — this is the doctrine of frustration or supervening impossibility.
Grounds recognised as frustrating a contract include destruction of the subject matter, the death or incapacity of a party where personal performance was required, a change of law rendering performance unlawful, the outbreak of war, and the non-occurrence of a state of things that formed the basis of the contract.
Grounds not recognised are equally examined: mere commercial difficulty or increased cost, the failure of one of several means of performing, a strike or lockout, and the default of a third party. The doctrine relieves impossibility, not hardship.
Section 65 provides the consequence: when an agreement is discovered to be void, or a contract becomes void, any person who has received advantage under it must restore it, or make compensation for it, to the person from whom he received it.
By lapse of time, where the period of limitation expires without the contract being enforced.
By operation of law, through death where performance was personal, insolvency, or the unauthorised material alteration of a written contract.
By breach. An actual breach occurs at the time performance is due or during performance. An anticipatory breach occurs before performance falls due, where a party repudiates or disables himself from performing. Section 39 provides that where a party has refused to perform or disabled himself from performing his promise in its entirety, the promisee may put an end to the contract, unless he has signified by words or conduct his acquiescence in its continuance.
The election on anticipatory breach carries a consequence worth stating. The aggrieved party may sue immediately, or may keep the contract alive and wait for the date of performance — but if he waits, the contract remains alive for both parties, and he takes the risk that some supervening event will frustrate it and discharge the repudiating party altogether.
Remedies for breach
Damages
Section 73 provides the basic rule. When a contract has been broken, the party who suffers is entitled to receive compensation for any loss or damage caused to him which naturally arose in the usual course of things from the breach, or which the parties knew, when they made the contract, to be likely to result from its breach.
The section then adds the limitation that is examined most often: such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach.
The two limbs generate the classification:
- Ordinary or general damages — losses arising naturally in the usual course of things. These are always recoverable.
- Special damages — losses arising from special circumstances, recoverable only if those circumstances were communicated to the defaulting party at the time of contracting. A carrier told merely to deliver a machine part is liable for the ordinary loss of delay; he is liable for a factory's lost profits only if he was told the factory would stand idle without the part.
- Nominal damages — a token sum where a legal right was infringed but no real loss was suffered.
- Exemplary or vindictive damages — generally not awarded in contract, since the object is compensation and not punishment. Two exceptions are recognised: breach of a promise to marry, and the wrongful dishonour of a customer's cheque by a bank, where the injury is to reputation.
The aggrieved party is under a duty to mitigate — to take reasonable steps to reduce the loss — and cannot recover for loss that reasonable steps would have avoided.
Liquidated damages and penalty
Section 74 is where Indian law departs decisively from English law and is examined for exactly that reason.
Under English law, a court distinguishes a liquidated damages clause, being a genuine pre-estimate of loss which is enforced as written, from a penalty, being a sum fixed in terrorem which is struck down.
Section 74 abolishes the distinction. It provides that when a contract has been broken and a sum is named in it as the amount to be paid in case of breach, the party complaining of the breach is entitled to receive from the party in breach reasonable compensation not exceeding the amount so named, whether or not actual damage or loss is proved.
So under Indian law the named sum operates as a ceiling, not as an entitlement. The court awards reasonable compensation up to that figure. A candidate who writes that a genuine pre-estimate is recoverable in full and a penalty is void has applied English law and will lose the marks.
Other remedies
Rescission of the contract, releasing the aggrieved party from his own obligations.
Quantum meruit — literally, as much as is earned. Where a contract is discharged before complete performance, a party who has done work under it may claim reasonable remuneration for the part performed. It is available where the contract is discovered to be void, where one party prevents the other from completing, where a divisible contract has been partly performed, and where an indivisible contract has been performed badly but the other party has taken the benefit.
Specific performance and injunction, granted under the Specific Relief Act, 1963. Specific performance compels actual performance and is granted where damages are an inadequate remedy, characteristically for contracts concerning land or unique goods. It is refused where damages are adequate, where the contract requires continuous supervision, and where it involves personal skill or a personal relationship. An injunction restrains a breach of a negative stipulation.
Quasi-contracts
Sections 68 to 72 create obligations resembling contract though no agreement exists, resting on the principle that a person should not be unjustly enriched at another's expense.
- Section 68 — necessaries supplied to a person incapable of contracting, reimbursable from that person's property.
- Section 69 — a person interested in the payment of money which another is bound by law to pay, and who therefore pays it, is entitled to be reimbursed by the other.
- Section 70 — where a person lawfully does something for another, or delivers anything to him, not intending to do so gratuitously, and the other enjoys the benefit, the other must compensate him. The words about gratuitous intention matter: a volunteer cannot manufacture a claim.
- Section 71 — a finder of goods belonging to another is subject to the same responsibility as a bailee.
- Section 72 — a person to whom money has been paid, or anything delivered, by mistake or under coercion, must repay or return it.
Contract of indemnity and contract of guarantee
Indemnity
Section 124 defines a contract of indemnity as one by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person.
There are two parties: the indemnifier and the indemnity holder or indemnified. The indemnity holder is entitled to recover all damages he is compelled to pay in any suit in respect of a matter to which the promise of indemnity applies, all costs he is compelled to pay in bringing or defending such a suit where he acted prudently, and all sums paid under a compromise of such a suit that was not contrary to the indemnifier's orders and was prudent.
Guarantee
Section 126 defines a contract of guarantee as a contract to perform the promise, or discharge the liability, of a third person in case of his default.
There are three parties: the surety who gives the guarantee, the principal debtor in respect of whose default it is given, and the creditor to whom it is given. There are correspondingly three contracts — between creditor and principal debtor, between creditor and surety, and an implied one between surety and principal debtor.
A guarantee may be oral or written. Consideration for the guarantee is anything done, or any promise made, for the benefit of the principal debtor; the surety need receive nothing himself.
The distinction
Indemnity has two parties; guarantee has three. In indemnity there is one contract; in guarantee there are three. The indemnifier's liability is primary and independent; the surety's liability is secondary and arises only on the principal debtor's default. In indemnity there is no existing debt at the time of the contract, the liability being contingent on a loss; in guarantee there is an existing or contemplated debt owed by the principal debtor. An indemnifier who pays cannot sue the third party in his own name unless there is an assignment; a surety who pays is subrogated to the creditor's rights and steps into his shoes against the principal debtor.
The surety's liability and rights
Section 128 provides that the liability of the surety is co-extensive with that of the principal debtor, unless otherwise provided by the contract. The creditor may therefore proceed directly against the surety without first exhausting remedies against the principal debtor or any security.
A guarantee may be specific, covering a single transaction and ending when it is discharged, or continuing, extending to a series of transactions. A continuing guarantee may be revoked as to future transactions by notice to the creditor, and is revoked as to future transactions by the death of the surety, though the estate remains liable for transactions already entered into.
Rights of the surety.
Against the principal debtor — the right of subrogation, standing in the creditor's shoes on payment; and the right of indemnity, since in every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety.
Against the creditor — the right to the benefit of every security which the creditor has against the principal debtor at the time the guarantee was entered into, whether or not the surety knew of it. This right is protected by section 141.
Against co-sureties — where several persons guarantee the same debt, they are liable to contribute equally in the absence of contrary agreement, and where they have guaranteed different sums, equally up to the limit of their respective obligations.
Discharge of the surety
This is the most heavily examined part of the topic, and every ground rests on the same principle: the surety is entitled to have the bargain he guaranteed left as it was.
- By revocation of a continuing guarantee as to future transactions, by notice.
- By the surety's death, as to future transactions.
- By variance in the terms of the contract between the creditor and the principal debtor, made without the surety's consent (section 133). The surety is discharged as to transactions after the variance, and this is so whether or not the variance prejudices him.
- By the release or discharge of the principal debtor (section 134), whether by a contract between creditor and principal debtor or by any act or omission of the creditor whose legal consequence is the discharge of the principal debtor.
- By a compromise, or a promise to give time to, or not to sue, the principal debtor made without the surety's consent (section 135). Note that an agreement with a third person to give time to the principal debtor does not discharge the surety, and that mere forbearance to sue does not discharge him.
- By the creditor's act or omission impairing the surety's eventual remedy (section 139).
- By the creditor losing or parting with the security held at the time the guarantee was given, without the surety's consent (section 141). The surety is discharged to the extent of the value of the security.
- By invalidation of the contract, as by misrepresentation or concealment of a material fact by the creditor.
Bailment and pledge
Bailment
Section 148 defines bailment as the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them.
Its essentials are delivery of possession, a purpose, and an obligation to return the same goods or dispose of them as directed. Ownership does not pass — which is what distinguishes bailment from sale — and the goods must be returned in specie, which distinguishes it from a loan of money.
Duties of the bailee. To take as much care of the goods as a person of ordinary prudence would take of his own goods of the same bulk, quality and value; not to make unauthorised use of them; not to mix them with his own goods without consent; to return them on the expiry of the purpose or time without demand; and to deliver any increase or profit accruing from them.
Duties of the bailor. To disclose known faults in the goods — and where the bailment is for hire, the bailor is liable for damage arising from faults whether or not he knew of them; to bear extraordinary expenses; to indemnify the bailee for loss arising from his defective title; and to receive the goods back.
Lien. A particular lien entitles a person who has expended labour or skill on goods to retain those goods until paid. A general lien entitles the holder to retain any goods of the other in his possession for any sum due, and is available only to bankers, factors, wharfingers, attorneys of a High Court and policy brokers, or where expressly agreed.
Finder of goods. A finder is a bailee. He must take reasonable care, must try to find the owner, and may retain the goods against the owner until paid his expenses. He may sue for a reward offered, and may sell the goods where the owner cannot with reasonable diligence be found, or refuses to pay the lawful charges, and the goods are perishable or the charges amount to two-thirds of the value.
Pledge
Section 172 defines pledge, or pawn, as the bailment of goods as security for payment of a debt or performance of a promise. The bailor is the pawnor and the bailee the pawnee.
Pledge is a species of bailment, so all the bailment rules apply, with two additions arising from its security character. The pawnee has the right to retain the goods for the debt and the interest and expenses, and on default he may sue for the debt while retaining the goods as collateral, or sell the goods after giving reasonable notice of the sale — recovering any shortfall from the pawnor and accounting for any surplus.
Pledge by non-owners is permitted in defined cases, protecting a pawnee who acts in good faith: a mercantile agent in possession with the owner's consent; a person in possession under a voidable contract not yet rescinded; a person with a limited interest, to the extent of that interest; and a co-owner in sole possession with the others' consent.
Agency
Section 182 defines an agent as a person employed to do any act for another, or to represent another in dealings with third persons, and the person for whom such act is done or who is so represented as the principal.
The governing idea, and the one to state in any agency answer, is that the agent's acts within his authority bind the principal as if the principal had done them himself.
Any person of the age of majority and of sound mind may employ an agent, but any person may become an agent — a minor may act as agent, though he incurs no liability to his principal. No consideration is necessary to create an agency.
Creation of agency
- Express agreement, oral or written.
- Implied agreement, inferred from conduct or the relationship of the parties, including agency by estoppel, where a person by words or conduct leads another to believe someone is his agent and is then precluded from denying it, and agency by holding out, a species of estoppel arising from a course of prior conduct.
- Necessity, where a person is entrusted with another's property and circumstances compel him to act to preserve it — a carrier of perishable goods who sells them when they cannot be delivered. It requires a real emergency, an inability to communicate with the principal, and bona fide action in the principal's interest.
- Ratification, where a person acts on another's behalf without authority and that other subsequently adopts the act. Ratification requires that the act was done on behalf of a named or identifiable principal who was in existence and competent at the time of the act; that the principal has full knowledge of the material facts; that the whole transaction is ratified, since a part cannot be; and that the act ratified was lawful. Ratification relates back to the date of the act.
Sub-agent and substituted agent
The rule is that an agent cannot delegate — delegatus non potest delegare — but the Act recognises exceptions where the principal permits it, where the ordinary custom of the trade allows it, where the nature of the work requires it, or in an unforeseen emergency.
A sub-agent is a person employed by and acting under the control of the original agent in the business of the agency. Where properly appointed, the principal is bound by the sub-agent's acts as though he were an agent originally appointed, but the sub-agent is responsible to the agent and not to the principal, except for fraud or wilful wrong. Where improperly appointed, the principal is not bound and the agent is responsible for the sub-agent's acts.
A substituted agent is named by the agent, at the principal's request, to act for the principal in the business of the agency. The distinction is crucial: a substituted agent works directly under the principal, is responsible to the principal and not to the agent, and the agent's only duty is to exercise reasonable care in selecting him.
Personal liability of the agent
The general rule is that an agent acting within his authority for a disclosed principal incurs no personal liability. He is personally liable where the contract so provides; where he acts for a foreign principal; where he acts for an undisclosed principal; where he acts for a principal who cannot be sued, such as a minor; where he exceeds his authority; where he signs in his own name without qualification; where he receives money by mistake or fraud; and where trade usage makes him liable.
Termination of agency
Agency terminates by revocation by the principal; by renunciation by the agent; by completion of the business; by the death or unsoundness of mind of either party; by the principal being adjudicated insolvent; and by the expiry of the agreed period.
Termination does not take effect as to the agent until it becomes known to him, and as to third persons until it becomes known to them — which is why notice of revocation must be published where the agency was public.
An agency is irrevocable where the agent has an interest in the subject matter of the agency, where the agent has incurred a personal liability, and where the authority has been partly exercised, in respect of acts already done.
How this chapter is examined
Practical problems concentrate on three areas: the surety's discharge, where a creditor varies the terms, gives time, releases the principal debtor or loses a security; agency, where an agent exceeds authority, appoints a sub-agent, or the principal purports to ratify; and remedies, where a claimant seeks special damages without having communicated the special circumstances, or where a sum is named in the contract and section 74 must be applied.
Descriptive and distinguishing questions ask for indemnity against guarantee, bailment against pledge, sub-agent against substituted agent, and liquidated damages against penalty. Answer each on named bases with paired points, and for the last of these state expressly that section 74 makes the named sum a ceiling rather than an entitlement — that single sentence is what separates an answer applying Indian law from one applying English law.
