Contract Act: Performance, Breach & Special Contracts — Practice

Question 1

Distinguish a contract of indemnity from a contract of guarantee on at least five named bases.

Accepted Answer

Definitions. Section 124 of the Indian Contract Act, 1872 defines a contract of indemnity as a contract 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. 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.

Number of parties. Indemnity has two — the indemnifier and the indemnity holder. Guarantee has three — the surety, the principal debtor and the creditor.

Number of contracts. Indemnity involves one contract, between indemnifier and indemnity holder. Guarantee involves three: between the creditor and the principal debtor, between the creditor and the surety, and an implied contract between the surety and the principal debtor.

Nature of liability. The indemnifier's liability is primary and independent — it arises on his own promise and does not depend on any other person's default. The surety's liability is secondary and conditional; it arises only when the principal debtor defaults.

Existing debt. In indemnity there is no existing debt at the time of the contract; the liability is contingent upon a loss that may never occur. In guarantee there is an existing or contemplated debt or obligation owed by the principal debtor, and the surety undertakes to answer for it.

Right against the third party after payment. An indemnifier who has paid cannot sue the third person in his own name unless there is an assignment of the claim. A surety who pays is subrogated to the rights of the creditor and steps into his shoes against the principal debtor, and may also rely on the implied promise of indemnity from the principal debtor.

Purpose. Indemnity protects against a loss that may or may not arise. Guarantee provides security for an obligation that exists or is contemplated.

A sixth basis worth adding: in a guarantee, consideration need not move to the surety — anything done or any promise made for the benefit of the principal debtor is sufficient consideration for the surety's promise.

Question 2

A carrier undertakes to deliver a machine shaft to an engineering works by 10 June. He delivers on 20 June. The works was closed for those ten days for want of the shaft, losing profits of ₹8,00,000, and also lost a particularly lucrative contract worth ₹30,00,000. Advise on the recoverable damages, distinguishing the position where the carrier was told the mill would stand idle, and where he was told nothing.

Accepted Answer

Provision. Section 73 of the Indian Contract Act, 1872 provides that when a contract has been broken, the party who suffers by the breach is entitled to receive compensation for any loss or damage caused to him which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it. Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach.

The section thus creates two limbs. General damages cover loss arising naturally in the usual course of things and are always recoverable. Special damages cover loss arising from special circumstances, and are recoverable only where those circumstances were within the knowledge of the party in breach at the time the contract was made.

Where the carrier was told nothing.

A carrier receiving a machine shaft for carriage would ordinarily suppose the customer to have a spare, or the delay to cause inconvenience rather than total stoppage. The closure of the entire works is not a loss arising naturally in the usual course of things from late delivery of a component; it depends on the special circumstance that this shaft was the only one and that the works could not operate without it.

Without communication of that circumstance, the ₹8,00,000 of lost profits is not recoverable. The works may recover general damages — the ordinary loss flowing from ten days' delay, such as any additional expenditure caused by the delay and interest on the value of the goods for the period.

Where the carrier was told the mill would stand idle.

The special circumstance is then within the knowledge of both parties at the time of contracting. The loss of ₹8,00,000 was a loss the parties knew, when they made the contract, to be likely to result from a breach, and it falls squarely within section 73's second limb. It is recoverable.

The lost contract worth ₹30,00,000.

This is not recoverable in either case. Loss of an exceptionally lucrative contract, not disclosed to the carrier and not within his contemplation, is remote and indirect within the meaning of section 73's concluding words. Even where the carrier knew the mill would stand idle, he did not know of and could not have contemplated a contract of that character. If the works wished to make the carrier answerable for it, the circumstance had to be communicated at the time of contracting, and the carrier would then have had the opportunity to price the risk or decline the carriage.

Mitigation. In both cases the works is under a duty to take reasonable steps to reduce its loss — for instance by hiring a substitute shaft if one was obtainable — and cannot recover for loss that reasonable steps would have avoided.

Question 3

A contract for the construction of a factory provides that the contractor shall pay ₹50,000 for every week of delay. The contractor is eight weeks late, and the owner's actual loss is ₹1,20,000. Advise on the amount recoverable, and explain how the Indian position differs from the English rule.

Accepted Answer

Provision. Section 74 of the Indian Contract Act, 1872 provides that when a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or the penalty stipulated for.

The English position, for contrast. English law distinguishes a liquidated damages clause, being a genuine pre-estimate of the loss likely to flow from the breach, from a penalty, being a sum fixed in terrorem to compel performance. A liquidated damages clause is enforced according to its terms, so the stipulated sum is recoverable in full without proof of loss and even if the actual loss is smaller. A penalty clause is struck down entirely, and the claimant is remitted to proving actual damages.

The Indian position. Section 74 abolishes that distinction. It does not ask whether the named sum was a genuine pre-estimate or a penalty; both are treated the same way. The named sum operates as a ceiling on what may be awarded, and within that ceiling the court awards reasonable compensation.

Two consequences follow. The claimant need not prove actual loss in order to recover something, since the section says compensation is available whether or not actual damage is proved. But the claimant cannot simply demand the named sum: the court determines what compensation is reasonable in the circumstances and awards no more than the named figure.

Application. The sum named is ₹50,000 a week, and the delay is eight weeks, so the amount named is ₹4,00,000. That is the ceiling.

The owner's actual loss is ₹1,20,000. Reasonable compensation would ordinarily be measured by the loss actually suffered, and there is nothing in the facts suggesting that a higher figure would be reasonable.

The court would therefore award reasonable compensation not exceeding ₹4,00,000, and on these facts that is likely to be ₹1,20,000 or a figure close to it. The owner cannot recover ₹4,00,000 merely because the contract names it.

Conclusion. The recoverable amount is reasonable compensation, capped at ₹4,00,000 and on these facts approximating the actual loss of ₹1,20,000. A candidate who answers that the full ₹4,00,000 is recoverable because the clause is a genuine pre-estimate has applied English law and misstated the Indian position.

Question 4

State the doctrine of supervening impossibility under section 56 and the grounds on which it operates. Advise whether the contract is discharged where (a) a hall hired for a concert burns down; (b) a supplier's costs double because of a sudden rise in raw material prices; (c) a contract to export goods becomes unlawful by a subsequent government prohibition; (d) a manufacturer cannot deliver because his workers are on strike.

Accepted Answer

Provision. Section 56 of the Indian Contract Act, 1872 provides that an agreement to do an act impossible in itself is void, and 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 becomes unlawful, becomes void when the act becomes impossible or unlawful.

The second limb is the doctrine of supervening impossibility or frustration. Section 65 provides the consequence: any person who has received advantage under a contract that becomes void must restore it or make compensation for it.

Grounds on which the doctrine operates. Destruction of the subject matter; the death or incapacity of a party where personal performance was contemplated; a subsequent change of law rendering performance unlawful; the outbreak of war or a declaration of a party as an alien enemy; and the non-occurrence of a state of things which formed the basis of the contract.

Grounds on which it does not operate, which are examined at least as often: mere commercial difficulty, hardship or increased cost; the failure of one of several means of performing; strikes, lockouts and civil disturbance; and the default of a third party on whom the promisor relied. The doctrine relieves impossibility, not difficulty.

(a) The hall burns down. The contract is discharged. The subject matter has been destroyed without the fault of either party, and performance has become physically impossible. Any advance paid must be restored under section 65.

(b) The supplier's costs double. Not discharged. A rise in the price of raw materials makes performance more expensive, not impossible. The supplier undertook to deliver at the contract price and bears the risk of price movement, which is precisely the kind of risk a fixed-price contract allocates. Commercial hardship, however severe, is not frustration.

(c) Export becomes unlawful by a subsequent prohibition. Discharged. Performance has become unlawful by reason of an event the promisor could not prevent, which falls squarely within the second limb of section 56. The law will not compel a party to do what it has itself forbidden.

(d) Workers on strike. Not discharged. A strike is a difficulty in performance rather than an impossibility, and it is a risk inherent in the promisor's own undertaking to produce and deliver. He remains liable, and his remedy, if any, lies against those responsible for the disruption. The position would differ only if the contract expressly provided for strikes as an excusing event, in which case the parties' own allocation of risk governs.

Question 5

S guarantees a loan of ₹20,00,000 made by a bank to D. Without S's knowledge, the bank (i) agrees with D to extend the repayment date by six months; (ii) releases a machine it held as security for the loan; (iii) merely delays suing D for a year. Advise S in each case.

Accepted Answer

Provision. The surety's liability is co-extensive with that of the principal debtor under section 128, but the Act protects the surety by discharging him where the creditor alters the bargain he guaranteed. The governing principle is that the surety is entitled to have the transaction he guaranteed left as it was.

(i) Agreement to extend the repayment date by six months.

Section 135 provides that a contract between the creditor and the principal debtor by which the creditor makes a composition with, or promises to give time to, or not to sue, the principal debtor, discharges the surety unless the surety assents to such contract.

Here the bank has agreed with D to give time. The agreement was made without S's knowledge and therefore without his assent. S is discharged.

The reason is that giving time alters the surety's position materially. The surety's right of subrogation includes the right to pay off the debt and immediately proceed against the principal debtor. An extension deprives him of that right for the period of the extension, and it also prolongs the period during which the debtor's financial position may deteriorate. Note that an agreement with a third person to give time to the principal debtor does not discharge the surety, because it does not bind the creditor.

(ii) Release of the machine held as security.

Section 141 provides that a surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time the contract of suretyship is entered into, whether or not the surety knows of the existence of such security; and if the creditor loses or, without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security.

The bank has parted with the machine without S's consent. S is discharged to the extent of the machine's value. If the machine was worth ₹7,00,000, S remains liable for ₹13,00,000 and is released as to the balance.

The reason is the same principle in another form. On paying, the surety would have been subrogated to the creditor's rights including the security, and the creditor cannot destroy the surety's expected recourse and still hold him to the full amount.

(iii) Mere delay of a year in suing D.

S is not discharged. Section 137 provides expressly that mere forbearance on the part of the creditor to sue the principal debtor, or to enforce any other remedy against him, does not, in the absence of any provision in the guarantee to the contrary, discharge the surety.

The distinction from (i) is between a binding promise and passive inaction. In (i) the bank contracted with D to give time, which altered the legal relationship and bound the bank. Here the bank has simply not acted, which alters nothing: S could at any moment have paid the debt and proceeded against D himself. A surety who is concerned about delay has that remedy in his own hands.

Conclusion. S is wholly discharged by (i), discharged to the extent of the security's value by (ii), and not discharged at all by (iii).

Question 6

Explain the ways in which agency may be created, and state the conditions for a valid ratification. Advise whether ratification is effective where an agent contracts on behalf of a company that has not yet been incorporated.

Accepted Answer

Creation of agency.

By express agreement, oral or in writing. No consideration is necessary to create an agency.

By implied agreement, inferred from the conduct, situation or relationship of the parties. This includes agency by estoppel, where a person by his words or conduct leads a third party to believe that someone is his agent and is then precluded from denying it; and agency by holding out, a species of estoppel arising from a prior course of conduct, as where a principal has habitually paid for goods ordered by a servant and is bound by a further such order.

By necessity, where a person entrusted with another's property is compelled by circumstances to act to preserve it. It requires a real and pressing emergency, an inability to communicate with the principal, and bona fide action in the principal's interest. A carrier who sells perishable goods that cannot be delivered is the standard example.

By ratification, where a person acts on another's behalf without authority and that other subsequently adopts the act.

By operation of law, as where a partner is the agent of the firm for the purposes of its business.

Conditions for a valid ratification.

The act must have been done on behalf of a principal who was named or at least identifiable at the time of the act. An act done by a person on his own behalf cannot afterwards be adopted by another.

The principal must have been in existence at the time the act was done.

The principal must have had contractual capacity both at the time of the act and at the time of ratification.

The principal must have full knowledge of the material facts. Ratification in ignorance of a material fact is not binding.

The whole transaction must be ratified. A principal cannot adopt the beneficial part and reject the rest.

The act ratified must be lawful; a void or illegal act cannot be ratified.

Ratification must be within a reasonable time and must not injure a third person or terminate any right or interest of a third person.

Ratification relates back to the date of the act, so the agent is treated as having been authorised from the outset.

Application — pre-incorporation contracts.

Where an agent contracts on behalf of a company not yet incorporated, ratification is not effective. The requirement that the principal be in existence at the time of the act is not satisfied: at the moment of contracting there was no company, and a non-existent person cannot have an agent. Since ratification relates back to the date of the act, it would have to relate back to a time when the purported principal had no legal existence, which is impossible.

The consequence is that the promoter who made the contract is personally liable on it. Once incorporated, the company cannot ratify, but it can enter into a fresh contract on the same terms — a novation, which creates a new obligation from the date of that fresh agreement rather than retrospectively. Under the Specific Relief Act, 1963 a pre-incorporation contract for the purposes of the company may also be enforced by or against the company where it has been warranted by the terms of incorporation and the company has accepted it and communicated that acceptance.

Question 7

Define bailment and state its essentials. Distinguish a particular lien from a general lien and state who may claim a general lien.

Accepted Answer

Definition. Section 148 of the Indian Contract Act, 1872 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. The person delivering the goods is the bailor and the person to whom they are delivered is the bailee.

Essentials.

Delivery of possession of the goods from the bailor to the bailee. Delivery may be actual or constructive, as where the key to a warehouse is handed over.

A purpose for which the goods are delivered — safe custody, repair, carriage, hire or security.

An obligation to return the same goods, or to dispose of them according to the bailor's directions, once the purpose is accomplished.

Ownership does not pass. This is what distinguishes bailment from sale, in which property passes to the buyer. The requirement that the same goods be returned in specie distinguishes bailment from a loan of money or of fungible goods, where an equivalent rather than the identical thing is returned.

Particular lien. A particular lien is the right to retain the specific goods in respect of which a charge is due, until that charge is paid. It is available to a person who has by his labour or skill improved the goods — a tailor who has made up cloth, a repairer who has mended a machine — and it extends only to those goods and only to the amount due in respect of them.

General lien. A general lien is the right to retain any goods of the other party that come into the holder's possession, for any amount due from that party on any account, not merely in respect of the goods retained.

Who may claim a general lien. It is available only to bankers, factors, wharfingers, attorneys of a High Court and policy brokers, or to any other person where there is an express contract conferring it. The list is exhaustive apart from express agreement, and the restriction exists because a general lien is a considerably stronger right than a particular lien, entitling the holder to hold goods unconnected with the debt claimed.

Question 8

Define pledge and state the pawnee's rights on the pawnor's default. Explain the circumstances in which a valid pledge may be made by a person who is not the owner of the goods.

Accepted Answer

Definition. Section 172 of the Indian Contract Act, 1872 defines pledge, or pawn, as the bailment of goods as security for payment of a debt or performance of a promise. The bailor is called the pawnor and the bailee the pawnee.

Pledge is a species of bailment, so all the general rules of bailment apply, with additional rules reflecting its security character.

The pawnee's rights on default.

The right of retainer. The pawnee may retain the goods not only for payment of the debt or performance of the promise, but also for the interest on the debt and all necessary expenses incurred by him in respect of the possession or preservation of the goods.

The right to extraordinary expenses. He is entitled to receive from the pawnor extraordinary expenses incurred for the preservation of the goods, though he cannot retain the goods for these.

On default, two alternative remedies. The pawnee may bring a suit against the pawnor upon the debt or promise and retain the goods as collateral security. Or he may sell the goods, after giving the pawnor reasonable notice of the sale.

The notice requirement is mandatory and cannot be excluded by contract. If the proceeds of sale are less than the amount due, the pawnor remains liable for the balance; if they exceed it, the pawnee must account to the pawnor for the surplus. A sale without reasonable notice does not pass good title as against the pawnor and renders the pawnee liable in damages.

Pledge by a non-owner.

The general rule is that only the owner can create a valid pledge, but the Act protects a pawnee who acts in good faith in four situations.

A mercantile agent who is, with the consent of the owner, in possession of the goods or of the documents of title, may make a valid pledge when acting in the ordinary course of business, provided the pawnee acts in good faith and has no notice at the time of the pledge that the pawnor lacked authority.

A person in possession of goods under a contract voidable on the ground of coercion, undue influence, fraud or misrepresentation may make a valid pledge, provided the contract has not been rescinded at the time of the pledge and the pawnee acts in good faith without notice of the defect in title.

A person having a limited interest in the goods may pledge them to the extent of that interest. A person who has repaired goods and holds a particular lien may pledge them to the extent of his lien.

A co-owner in sole possession of the goods with the consent of the other co-owners may make a valid pledge.

A fifth case is a seller in possession after sale, or a buyer in possession before the property has passed, who may create a valid pledge in favour of a pawnee acting in good faith without notice.

The unifying policy is the protection of a bona fide pawnee who has taken possession in the ordinary course, at the expense of an owner who has himself put the pledgor in a position to appear entitled.

Question 9

Set out every ground on which a surety is discharged, and identify the single principle from which they can be derived. Explain why mere forbearance and an agreement with a third person to give time are both excluded.

Accepted Answer

The grounds.

By revocation. A continuing guarantee may at any time be revoked by the surety as to future transactions, by notice to the creditor. The surety remains liable for transactions already entered into.

By the surety's death. The death of the surety operates, in the absence of contrary contract, as a revocation of a continuing guarantee as to future transactions. The estate remains liable for transactions concluded before the death.

By variance in the terms of the contract. Section 133 provides that any variance made without the surety's consent in the terms of the contract between the principal debtor and the creditor discharges the surety as to transactions subsequent to the variance.

By release or discharge of the principal debtor. Section 134 provides that the surety is discharged by any contract between the creditor and the principal debtor by which the principal debtor is released, or by any act or omission of the creditor the legal consequence of which is the discharge of the principal debtor.

By a composition, an extension of time, or a promise not to sue. Section 135 provides that a contract between the creditor and the principal debtor by which the creditor makes a composition with, or promises to give time to, or not to sue, the principal debtor, discharges the surety unless he assents to it.

By the creditor's act or omission impairing the surety's eventual remedy. Section 139 provides that if the creditor does any act inconsistent with the rights of the surety, or omits to do any act which his duty to the surety requires him to do, and the eventual remedy of the surety against the principal debtor is thereby impaired, the surety is discharged.

By loss of security. Section 141 provides that the surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time the contract of suretyship is entered into, whether or not the surety knows of it, and that if the creditor loses or without the surety's consent parts with such security, the surety is discharged to the extent of its value.

By invalidation of the contract. A guarantee obtained by misrepresentation made by the creditor, or by concealment of a material circumstance, is invalid, as is a guarantee obtained on the understanding that a co-surety would join and who does not.

The single principle. The surety is entitled to have the transaction he guaranteed left as it was, and to have preserved intact the recourse he would have on paying.

Every ground follows. The surety agreed to answer for a particular bargain, so varying that bargain substitutes an obligation he never guaranteed, which is why section 133 discharges him whether or not the variance is to his prejudice. On paying, the surety is subrogated to the creditor's rights against the principal debtor and to the securities the creditor held, so releasing the debtor, giving him time, or parting with a security destroys or postpones the very recourse the surety relied on. And a creditor who obtains the guarantee by misrepresentation or concealment never obtained a genuine assent to the bargain at all.

Why mere forbearance is excluded. Section 137 provides expressly that mere forbearance to sue the principal debtor, or to enforce any other remedy against him, does not discharge the surety in the absence of a contrary provision in the guarantee.

The reason follows from the principle. Passive inaction changes nothing in the legal relationship: the debt remains due, the securities remain held, and the surety's rights are untouched. Critically, the surety has the remedy in his own hands — he may at any time pay the creditor and, by subrogation, proceed against the principal debtor himself. A surety who is anxious about the creditor's delay is not without recourse, and it would be unreasonable to discharge him for the creditor's mere passivity.

Why an agreement with a third person is excluded. Section 136 provides that where a contract to give time to the principal debtor is made by the creditor with a third person, and not with the principal debtor, the surety is not discharged.

Again the principle explains it. Such an agreement does not bind the creditor as against the principal debtor. The creditor remains free to sue the debtor at once, the debt remains presently due, and the surety's position and his rights of subrogation are entirely unaltered. What discharges is an alteration of the surety's actual position, not a promise made to someone with no power to change it.

Question 10

Distinguish a sub-agent from a substituted agent, stating the rule against delegation and its exceptions. Explain the consequences for the principal, the agent and the third party in each case, and advise where an agent properly appoints a sub-agent who then defrauds the principal.

Accepted Answer

The rule against delegation. An agent is chosen for personal confidence, and the general rule is delegatus non potest delegare — a delegate cannot further delegate. An agent cannot lawfully employ another to perform acts which he has expressly or impliedly undertaken to perform personally.

Exceptions. Delegation is permitted where the principal expressly or impliedly permits it; where the ordinary custom of the trade allows it, as with an advocate engaging a clerk or a banker employing a correspondent; where the nature of the agency requires it, as where specialised work must be done by a professional; where the act is purely ministerial and involves no confidence or discretion; and in an unforeseen emergency.

Sub-agent. 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, so far as regards third persons, represented by the sub-agent and is bound by and responsible for his acts as if he were an agent originally appointed by the principal. But the agent remains responsible to the principal for the sub-agent's acts, and the sub-agent is responsible to the agent and not to the principal — save that the sub-agent is directly responsible to the principal for fraud or wilful wrong.

Where improperly appointed, the principal is not represented by, and is not bound by, the acts of the person so employed. The agent stands towards that person as his principal, and is responsible to the principal for his acts.

Substituted agent. A substituted agent is a person named by the agent, at the express or implied authority of the principal, to act for the principal in the business of the agency.

He is not a sub-agent but an agent of the principal himself. He is responsible to the principal directly, and the principal is directly responsible for his acts to third parties. The agent, having named him, has only the duty of exercising the same discretion as a man of ordinary prudence would exercise in his own case, and having exercised it he is not responsible to the principal for the substituted agent's acts or negligence.

The key differences. A sub-agent is appointed by the agent and works under his control; a substituted agent is named by the agent at the principal's request and works directly under the principal. A sub-agent answers to the agent; a substituted agent answers to the principal. The agent is liable for a sub-agent's conduct; the agent's liability as to a substituted agent ends with the exercise of reasonable care in selection. There is no privity between principal and sub-agent; there is privity between principal and substituted agent.

Application — a properly appointed sub-agent who defrauds the principal.

Three relationships must be addressed.

As between the principal and third parties. The appointment being proper, the principal is represented by the sub-agent as regards third persons and is bound by his acts done within the scope of the agency. A third party who dealt with the sub-agent in good faith can hold the principal.

As between the principal and the agent. The agent is responsible to the principal for the acts of a properly appointed sub-agent. The principal may therefore proceed against the agent for the loss, and the agent's remedy is against the sub-agent.

As between the principal and the sub-agent. The general rule is that the sub-agent is responsible to the agent and not to the principal, there being no privity between them. Fraud is the express exception: the sub-agent is directly responsible to the principal for fraud or wilful wrong.

Conclusion. The principal may proceed directly against the sub-agent, because the wrong is fraud and the statutory exception applies; and he may alternatively proceed against the agent, who is responsible for the acts of a sub-agent he properly appointed. He is not confined to one route. Had the loss arisen from mere negligence rather than fraud, the principal's claim would have lain against the agent alone.

Question 11

Explain the difference between actual and anticipatory breach, the options open to the aggrieved party on an anticipatory breach, and the risk attaching to each option. Illustrate with a contract for delivery of goods on 1 December repudiated on 1 September.

Accepted Answer

Actual breach occurs at the time when performance is due, or during the course of performance. A seller who fails to deliver on the due date, or who delivers goods that do not conform, commits an actual breach.

Anticipatory breach occurs before performance falls due, where a party either expressly repudiates his obligation or by his own act disables himself from performing it. Section 39 of the Indian Contract Act, 1872 provides that when a party to a contract 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 two options.

First, the aggrieved party may accept the repudiation, treat the contract as at an end immediately, and sue for damages at once without waiting for the date of performance. He is not obliged to keep himself ready to perform.

Second, he may decline to accept the repudiation, keep the contract alive, and wait for the date of performance, treating the repudiation as having no effect until then.

The risks attaching to each.

Accepting the repudiation. Damages are assessed by reference to the position at the date of the repudiation, or at the date the contract is terminated. If the market subsequently moves against the aggrieved party — if prices rise sharply between September and December in a buyer's case — he cannot recover the larger loss he would have suffered had he waited, because he elected to close his position when he did. He must also mitigate from that point.

Keeping the contract alive. This is where the more significant risk lies, and it is the point examiners test. If the aggrieved party keeps the contract alive, it remains alive for both parties and for all purposes. Two consequences follow.

The repudiating party retains the opportunity to change his mind and perform on the due date, and if he does so there is no breach at all and no claim.

More seriously, the contract remains exposed to supervening events. If, before the date of performance, some event occurs which frustrates the contract under section 56 — the subject matter is destroyed, or performance becomes unlawful — the contract becomes void and both parties are discharged. The repudiating party escapes liability altogether, and the aggrieved party, who had a good claim in September, is left with nothing.

Illustration. A contracts on 1 July to deliver goods to B on 1 December. On 1 September A writes to B repudiating the contract.

If B accepts the repudiation on 1 September, he may sue immediately. Damages will be measured by the difference between the contract price and the market price around that date, and B must mitigate by seeking alternative supply.

If B declines to accept the repudiation and waits, the contract stands. If A relents and delivers on 1 December, B must accept and pay, and has no claim. If A does not deliver, B sues for damages measured at 1 December, which may be greater or smaller than the September figure depending on the market.

But if in October the goods, being specific goods, are destroyed, or an export prohibition makes delivery unlawful, the contract becomes void under section 56. A is discharged, and B recovers nothing despite A's repudiation two months earlier.

The practical guidance follows: an aggrieved party should accept the repudiation and sue unless he has a positive reason to want performance and is confident that no frustrating event is likely.

Question 12

Explain the basis of quasi-contractual obligations and set out the five situations in sections 68 to 72. Advise whether a claim lies where (a) a person pays another's municipal tax to protect his own tenancy; (b) a trader delivers goods to the wrong address and the recipient consumes them; (c) a person voluntarily repaints his neighbour's gate and demands payment.

Accepted Answer

Basis. Quasi-contractual obligations arise where there is no agreement between the parties at all, yet the law imposes an obligation resembling one arising from contract. Their foundation is the principle that a person should not be unjustly enriched at another's expense — a person who has obtained a benefit at another's cost, in circumstances where it would be unjust to retain it, must restore it or pay for it.

The five situations.

Section 68 — necessaries supplied to a person incapable of contracting, or to anyone whom he is legally bound to support. The supplier is entitled to be reimbursed from the property of that incapable person.

Section 69 — a person who is 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 anything for another, or delivers anything to him, not intending to do so gratuitously, and such other person enjoys the benefit thereof, the latter is bound to make compensation to the former in respect of, or to restore, the thing so done or delivered.

Section 71 — a person who finds goods belonging to another and takes them into his custody 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.

(a) Paying another's municipal tax to protect one's own tenancy.

Section 69 applies. The claimant is interested in the payment: if the tax remained unpaid the property might be sold and his tenancy destroyed, so he has a real interest of his own in seeing it paid. The other person is bound by law to pay it, the liability being statutory. And the claimant has in fact paid it.

All three requirements are met and the claim succeeds. The tenant may recover the amount from the owner. Note that the interest must be a genuine one requiring protection; a stranger who pays another's tax out of officiousness has no claim under this section.

(b) Goods delivered to the wrong address and consumed by the recipient.

Section 70 applies. The trader lawfully delivered goods, he plainly did not intend to do so gratuitously since he is a trader delivering stock, and the recipient has enjoyed the benefit by consuming them.

The recipient is bound to make compensation. It is no answer that he did not order the goods: the obligation arises from his having accepted and enjoyed the benefit, not from any agreement. The position would be different had he simply left the goods untouched and available for collection, since he would then have enjoyed no benefit and could not be compelled to pay for what he neither ordered nor used. This is why section 70 requires that the person actually enjoy the benefit.

(c) Voluntarily repainting a neighbour's gate and demanding payment.

No claim lies. Section 70 requires that the act be done not intending to do so gratuitously, and it presupposes that the recipient had the opportunity to accept or reject the benefit.

A person who paints a neighbour's gate unasked, without any prior intimation that payment would be expected, has acted as a volunteer. The neighbour was given no opportunity to decline, and cannot be compelled to pay for a service thrust upon him. Allowing such claims would let anyone impose obligations on others by conferring unwanted benefits.

This is the reason the words about gratuitous intention appear in the section: they exclude the officious intermeddler while protecting the person who acts in circumstances where payment is plainly contemplated. Note that if the neighbour, knowing payment was expected, watched the work being done and said nothing, the position would change — his acquiescence would supply the acceptance the section requires.

Question 13

A creditor holding a guarantee wishes to give the principal debtor more time without losing the surety, and also wishes to release one of two co-sureties. Advise on how each may be achieved lawfully, and explain the position of the remaining co-surety.

Accepted Answer

Giving time to the principal debtor without discharging the surety.

The difficulty. Section 135 provides that a contract between the creditor and the principal debtor by which the creditor promises to give time to the principal debtor discharges the surety, unless the surety assents to that contract. So an extension granted in the ordinary way releases the surety entirely.

The reason is that the extension deprives the surety of a right he actually holds. On paying, the surety is subrogated to the creditor's rights and may proceed against the principal debtor at once; an extension postpones that recourse and prolongs the period in which the debtor's position may worsen.

Three lawful routes are available.

Obtain the surety's consent. Section 135 excepts the case where the surety assents to the contract giving time. Consent should be obtained in writing and should refer specifically to the extension proposed, since a general prospective consent may be construed narrowly.

Reserve rights against the surety. Where the creditor, in the very contract by which time is given, expressly reserves his rights against the surety, the surety is not discharged. The reasoning is that the surety's recourse is preserved: because the creditor may still proceed against the surety, and the surety on paying may still proceed against the debtor, the debtor has obtained no real indulgence as against the surety, and the surety's position is unaltered.

Include a provision in the guarantee itself. A guarantee may contain a term permitting the creditor to give time, make compositions or vary the terms without discharging the surety. Section 135 operates in the absence of the surety's assent, and an advance assent contained in the guarantee is effective. This is why institutional guarantee forms invariably contain such a clause.

A fourth point worth noting: an agreement to give time made with a third person rather than with the principal debtor does not discharge the surety at all, because it does not bind the creditor as against the debtor.

Releasing one co-surety.

The position is governed by the rule on co-sureties' contribution together with the principle protecting each surety's recourse.

Where several persons are co-sureties for the same debt, they are liable, in the absence of contrary agreement, to contribute equally to the extent of their respective obligations. A co-surety who pays more than his share may recover contribution from the others.

Section 138 provides that where there are co-sureties, a release by the creditor of one of them does not discharge the others, and the released co-surety is not thereby freed from his responsibility to the other sureties.

So the remaining co-surety is not discharged by the release. But the released co-surety remains liable to contribute to the remaining co-surety, so the release does not in substance reduce the burden the released party bears as between the sureties themselves — it only removes the creditor's direct claim against him.

The practical consequence for the creditor is that releasing one co-surety achieves less than it appears to: the creditor may still recover the whole from the remaining co-surety, who may then claim contribution from the released one.

The position of the remaining co-surety.

He remains liable to the creditor for the whole debt, his liability being co-extensive with the principal debtor's under section 128 and the creditor being free to proceed against any surety without exhausting remedies against others.

On paying, he has the right of subrogation against the principal debtor and the implied right of indemnity from him; the right to the benefit of every security the creditor held at the time the guarantee was given; and the right of contribution against the released co-surety under section 138.

He would, however, be discharged pro tanto if the creditor lost or parted with a security without his consent, under section 141 — so the creditor's freedom to deal with the arrangement is not unlimited even after obtaining the consents described above.

Question 14

Explain the modes of discharge of a contract by agreement, and why Indian law does not require consideration for remission. Advise where a creditor owed ₹10,00,000 accepts ₹6,00,000 in full satisfaction and later sues for the balance.

Accepted Answer

Modes of discharge by agreement. Sections 62 and 63 of the Indian Contract Act, 1872 provide the routes.

Novation — the substitution of a new contract for the existing one, either between the same parties or by the substitution of a new party. On a valid novation the original contract need not be performed and is discharged. It requires the consent of all parties, including the party being substituted or released.

Rescission — the cancellation of the contract by mutual agreement, all parties being released from their obligations.

Alteration — a change in one or more terms with the consent of all parties. The original contract is discharged and replaced by the altered one. Note the contrast with a unilateral material alteration of a written contract, which discharges the other party without agreement.

Remission — the acceptance of a lesser fulfilment of the promise than was originally agreed. Section 63 provides that every promisee may dispense with or remit, wholly or in part, the performance of the promise made to him, or may extend the time for performance, or may accept instead of it any satisfaction which he thinks fit.

Waiver — the abandonment of a right, so that the other party is released from his obligation.

Merger — where an inferior right merges into a superior right accruing to the same person, as where a tenant purchases the property he holds on lease and the leasehold interest merges into the freehold.

Why no consideration is required for remission.

This is a deliberate departure from English law and is examined for that reason.

Under English law, a promise to accept a lesser sum in satisfaction of a larger debt is unsupported by consideration, because the debtor gives nothing he was not already bound to give. The creditor may accordingly resile from the promise and sue for the balance unless something additional was provided — payment at an earlier date, at a different place, or in a different form.

Section 63 removes the requirement. It expressly empowers the promisee to dispense with or remit performance wholly or in part, and to accept any satisfaction he thinks fit, without any mention of consideration.

The policy reason is practical. A creditor who has genuinely agreed to take less has usually done so because taking less is better than taking nothing, and the arrangement is commercially rational. Requiring consideration would either defeat such settlements or force the parties into artificial devices to manufacture it. Indian law prefers to hold parties to what they actually agreed.

Application.

The creditor was owed ₹10,00,000 and accepted ₹6,00,000 in full satisfaction. That is a remission of ₹4,00,000 within section 63 — the acceptance of a lesser performance than was promised.

No consideration is necessary for the remission to be effective. The creditor's promise to accept the smaller sum in full satisfaction is binding on him from the moment it is made and acted upon.

The debt is therefore discharged in full on payment of ₹6,00,000. The creditor cannot afterwards sue for the balance of ₹4,00,000, and a suit for it would fail.

The contrast with English law should be stated expressly in the answer, because it is the point being tested: on identical facts an English court would allow the creditor to recover the balance for want of consideration, whereas section 63 makes the remission binding. A candidate who concludes that the balance is recoverable has applied the wrong system of law.

Question 15

Explain when an agent is personally liable on a contract made for his principal, when an agency is irrevocable, and the effect of termination as against the agent and as against third parties. Advise where a principal revokes an agency but the agent, unaware, concludes a contract with a customer who is also unaware.

Accepted Answer

Personal liability of the agent.

The general rule is that an agent who contracts within his authority on behalf of a disclosed principal incurs no personal liability. The contract is between the principal and the third party, and the agent drops out.

The exceptions, in which the agent is personally liable:

Where the contract expressly provides for his personal liability.
Where he acts for a principal resident abroad, in the absence of a contrary contract.
Where he acts for an undisclosed principal, the third party having contracted with him alone; the third party on discovering the principal may elect to hold either.
Where he acts for a principal who cannot be sued, such as a minor or a foreign sovereign.
Where he exceeds his authority, in which case he is liable for breach of warranty of authority.
Where he signs a contract in his own name without qualifying his signature as agent.
Where he receives or pays money by mistake or fraud.
Where trade usage or custom makes him personally liable.
Where the principal is not in existence at the time of the contract, as with a pre-incorporation contract.

Irrevocable agency.

An agency is irrevocable in three situations.

Where the agent has an interest in the subject matter of the agency. Where the agency is coupled with an interest — as where goods are consigned to an agent who is authorised to sell them and reimburse himself from the proceeds for advances made — the authority cannot be terminated to the prejudice of that interest, in the absence of an express contract to the contrary.

Where the agent has incurred a personal liability in the course of the agency, the principal cannot revoke so as to leave him exposed.

Where the authority has been partly exercised, the principal cannot revoke it in respect of acts and obligations already arising from acts done in the agency.

Also relevant: where the agency is for a fixed term and the principal revokes without sufficient cause before the term expires, the revocation is effective but the principal must compensate the agent, and reasonable notice must be given of any revocation or renunciation.

Effect of termination as against the agent and third parties.

The termination of the authority of an agent does not take effect as regards the agent until it becomes known to him, and as regards third persons until it becomes known to them.

The reason is protective. An agent who does not know his authority has ended cannot be expected to stop acting, and a third party dealing with a person who has appeared to be an agent is entitled to rely on that appearance until the contrary is brought home to him. This is why revocation of a public agency must be publicly notified, and why individual customers who have dealt with an agent should be given direct notice.

Application.

The principal has revoked, but neither the agent nor the customer knows of the revocation.

As against the agent, the termination has not taken effect, because it has not become known to him. He was therefore still authorised at the moment he concluded the contract, and he has not exceeded his authority. He incurs no personal liability for breach of warranty of authority.

As against the customer, the termination has likewise not taken effect, because it has not become known to him. The customer dealt with a person who was, so far as he could know, the principal's agent, and he is entitled to rely on that.

Conclusion. The principal is bound by the contract and must perform it. His remedy, if any, lies in the fact that he failed to communicate the revocation — which is precisely the risk the rule allocates to him, since he alone was in a position to give notice and chose or omitted to do so.

Had the customer known of the revocation, the position would be different: the termination would have taken effect as against him, the agent would have had no ostensible authority in his eyes, and the principal would not be bound.

Practice — Contract Act: Performance, Breach & Special Contracts

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