Discharge by Performance & Contingent contracts

by Raviteja P.A.N.V

Editor’s Note: Discharge is the process whereby the primary objectives and obligations under a contract, which is validly formed, come to an end.The primary obligations of a contract are those which determine the performance obligation of the parties. In short, discharge of a contract does not destroy the contract; it just brings the primary obligations to an end.The most common method of discharge of a contract is through performance of both parties’ primary obligations. It is important to note that there are various other methods also, for the discharge of a contract.

DISCHARGE BY PERFORMANCE:

A contract is said to be discharged by performance when both the parties perform all the primary obligations both express and implied which are set out under the contract. The obligation is considered performed only if the performance complies with the standard of performance required. A failure to do so constitutes a breach.

The Standard of Performance: The general rule is that, the performance obligation is strict, so that the contractual obligation is precisely and completely performed. Some examples of strict obligations are the obligations as to description, fitness for purpose, satisfactory quality etc. The only exception to this is the de minimis rule i.e. only microscopic deviations. If the rule of de minimis is not applicable in a particular situation then it constitutes breach. In Arcos Ltd v. Ronassen[ii] timber staves of half an inch in thickness were purchased to make into cement barrels. In fact, most of the timber was one-sixteenth thicker than the contractual description, although this was still perfectly usable for the purpose of making cement barrels. This nevertheless amounted to a breach of contract. Since this act amounted to breach of condition, the buyer could reject the timber. In certain cases, the obligation is qualified. In the case the obligation is qualified; there is no requirement to achieve a guaranteed result. The sole obligation is only to exercise reasonable care and skill.Any failure to exercise reasonable care and skill would amount to breach. In Liverpool City Council v. Irwin there was an obligation to take reasonable care to keep the common parts of a tower block in good condition, and on the facts that the local authority had met this standard of performance. The case was held in favour of the city council.

In the Indian scenario, S.37 of the Contract Act elucidates the obligation of parties to   a contract.

Sec. 37 of the Indian Contract Act- Obligation of parties to contracts- the parties to a contract must either perform, or offer to perform their respective promises, unless such performance is dispensed with or excused under the provisions of this Act, or of any other law.

            Promises bind the representative of the promisors in case of the death of such promisors before performance, unless a contrary intention appears from the contract.

Various High Courts while interpreting S.37 held that the proviso to it maintains that the promise binds the representatives. In the case of Basanti Bai v. Prafulla Kumar Routral[iii],Cuttack High Court held that “if the contract is legal, and enforceable, then even if one of the parties to the contract dies leaving no legal heir, the persons, who acquire interest over the subject- matter of the contract through that deceased party would be bound by the contract and specific performance can be enforced against such persons.”

Offer of performance: this aspect is looked into under S.38 of the Indian Contract Act. If the promisor ‘offers’ to perform his obligation under the contract to the promise, this offer is then termed ‘tender of performance’. This then, has to be accepted by the promisee, if the promisee doesn’t accept the offer, then the promisor will not be responsible for any non-performance. It entitles him to sue the promisee for breach of contract. It can be said that a tender of performance is equivalent to performance. For example, where the obligation of a contracting party was for conversion of arhar, whole pulse into dal and the work was completed and accepted by the other party, the obligation of the contractor came to an end.[iv]

The tender of performance in order to be termed as fulfilled must comply with the following conditions:

  1. The tender of performance must be unconditional.

This is mentioned in S. 38(1) of the Contract Act. A tender is said to be conditional when it is not in accordance with the terms of the contract.

  1. The tender must be made at a proper time and place, and under such circumstances that the person to whom it is made may have a reasonable opportunity of ascertaining that the person by whom it is made is able and willing there and then to do the whole of what he is bound by his promise to do.[v]

The tender must be made within the time and at the place specified as in the contract. If so made, the promisor is under no further responsibility, if the tender is not accepted.[vi]This principle was first established in the case of Startup v. Macdonald[vii] in which, the defendant bought of the plaintiff ten tons of linseed oil to be delivered within the last 14 days of the month of March. The plaintiff tendered on the last of the 14 days at 9 in the night. The defendant refused to accept owing to the lateness of the hour. He was held liable for the breach as the jury found out that, though the hour was unreasonable, yet there was time for the defendant to have taken in and weighed the goods before midnight. He should, therefore have accepted the tender and “then no doubt, the contract would have been literally performed”.

  1. The tender must be made in such a manner that the other party has an opportunity to determine whether the person making the tender is able and willing to his obligations under the contract. In the case of Alcon Constructions v. Board of Trustees[viii] it was held that a tender made to any one of the promisees’ has the same legal consequence as a tender to all of them.

Substituted performance- this is also known as ‘vicarious performance’. The promisor in the absence of waiver cannot substitute for the agreed performance anything different, even though the substituted performance might appear to be better than, or at least equivalent to, the agreed performance.[ix] Sec. 40 and Sec. 41 of the Indian Contract Act deal with this aspect. If there was a personal performance was intended then, the contract has to be performed by the promisor himself. He cannot delegate the performance to any other person.[x] This is general in cases where in the personal skill of the promisor is required.The nature of promise is itself an indication whether the promisor has to perform it personally or not.In the matter above mentioned, if the promisor dies, then the contract cannot be enforced against his legal representatives nor can they enforce the promise.

JOINT PROMISES AND THEIR PERFORMANCE:

Under the English law if one of the several joint promisors dies, the rights and liabilities under the contract are transferred upon to the surviving joint promisors.  However, the Indian stance on this is that we find a variance. Under Sec 42 of the Contract Act, the joint promisors must, during their lives, fulfil the promise. If any one of them dies, then the legal heirs of the deceased person along with the other surviving promisors have to perform.

In the case of Mukund Das Raja Bhagwan Das v. State Bank of Hyderabad[xi] it was held that when a joint promise is made and there is no express agreement to the contrary, the promisee may compel any one or more of the joint promisors to perform the whole of the promise. And a joint promisor, who has been compelled to perform the whole of the promise, may require the other joint promisors to make an equal contribution towards the performance unless there is a different intention cropping up from the agreement. If any of the promisors makes a default in such contribution, the remaining joint promisors must bear the deficiency in equal shares.[xii]In England, in the case of a joint contract only a single cause of action can exist can be sued only once.[xiii]But the case in India is that, Sec. 43 of the Contract Act allows an action to be brought against any one of the joint promisors without impleading others as defendants. And there is no bar on the point that if creditor sues one joint promisor, can he sue the others at a later point? The answer is that a subsequent suit against other promisors should be allowed to proceed.[xiv]

Under S.44 of the Contract Act, the creditor is conferred upon the right to release anyone of the joint promisors form his liability and this does not discharge the others from their liability. English Law takes a stand which is contrary to this view. Under it discharge of one joint promisor amounts to a discharge of all, unless the creditor expressly preserves his rights against them.

TIME AND PLACE FOR PERFORMANCE:

When no time for performance is specified in the contract, it must be done within a reasonable time.[xv] What is a reasonable time is in each particular case, a question of fact.[xvi] Unreasonably long delay cannot be regarded as reasonable. In a contract where in the date of performance is fixed, it must be performed during the usual business hours of the day and at the place where such a performance ought to be performed.[xvii]When a promise has to be performed within a certain time, it must be performed on any day before the lapse of that time.[xviii] If the promisor brings the goods after the business hours and they are not received, it cannot be said that the promise has been performed.When a promise is to be performed and no place is fixed, it is the duty of the promisor to apply to the promisee to appoint a reasonable place for the performance of the promise, and to perform it at such a place.[xix] In the case of L.N.Gupta v. Tara Mani[xx] where in a promissory note executed at Bangalore stated that it would be payable at Bangalore or at any place in India. The payee settled in New Delhi and demanded payment there. It was held that under Sec.49 it is the duty of the debtorto seek his creditor and to pay him there. The time and manner of performance of any promise can be sanctioned by the promisee.[xxi]

Reciprocal promises:

Promises which form the consideration or part of the consideration for each other are called reciprocal promises.[xxii] When reciprocal promises have to be simultaneously performed, the promisor is not bound to perform unless the promisee is ready and willing to perform his promise.[xxiii] In Hashman v. Lucknow Improvement Trust[xxiv]  wherein the defendant had to pay a certain sum for levelling charges of the land; the question was that whether the amount had to be paid before the levelling or after the levelling. The Hon’ble Allahabad High Court held that “in ordinary course of business, work is not usually paid for before it is done. It is the custom in some cases for payment to be made in instalments as the work progresses but the person for whom work is done is not expected to pay the entire cost in advance without an express agreement to that effect.” This ruling emphasises that the order in which reciprocal promises must be performed may be fixed by the contract and the order so fixed must be followed. In case, if there is no such order present, then they will have to be performed in a manner which the nature of transaction requires them to be. Liability of party preventing the other one fromperformance is that the agreement becomes voidable at the option of the party so prevented and he is entitled to compensation from the other party for any loss which he might sustain in consequence of the non-performance of the contract.[xxv]In the case Har Prasad Choubey v. Union of India[xxvi] wherein a bidder to whom a coal mine was knocked down was allowed to have refund of his deposit when the coal commissioner refused to permit him to take coal to U.P., any such restriction being not present in the terms of the auction. This principle is embodied in Sec. 53 of the Contract Act. Effect of a party’s default is laid down in the case of Nathulal v. Phoolchand[xxvii] in which the plaintiff was the owner of a ginning factory constructed on an agricultural land and nominally held in the name of his brother. He sold the factory to the defendant who paid half the price at once and was put in possession, the balance being payable on a fixed date. The buyer defaulted in paying up on that date and the seller rescinded the contract and brought an action for possession.The Hon’ble court held that, if the obligations have to be performed in an order as under the contract, one of the parties to the contract cannot require compliance with obligation by the other party without in the first instance performing his own part of the contract which in the sequence of obligations is to be performed by him earlier. An offer of payment before the time fixed is not valid performance so as to demand performance from the opposite side.[xxviii]

TIME FOR PERFORMANCE:

The effect of failure to perform in specified time on a contract is laid in Sec. 55 of the Contract Act. Time is generally considered to be of the essence of the contract in the following three cases:

  1. Where the parties have expressly agreed to treat it as of the essence of the contract;
  2. Where delay operates as an injury;
  • Where the nature and necessity of the contract requires it to be so construed, for example, where a party asks for extension of time for performance.[xxix]

In the case of Bhudra Chand v. Betts,[xxx] in which the plaintiff stipulated with the defendant to engage his elephant for the purpose of Kheda operations. The contract provided that the elephant would be delivered on the 1st October, 1910; but the defendant obtained an extension of time till 6th October and yet did not deliver the elephant till the 11th. The plaintiff refused to accept the elephant and sued for damages for breach. The court held that he was entitled to recover as the parties intended that time should be of the essence of the contract.

Concerning business matters- In commercial contracts time is ordinarily of the essence of the contract.[xxxi]The matter depends upon the intention of the parties contracting. One has not to look at the letter but at the substance of the agreement in order to ascertain the real intention of the parties regarding the matter of time.[xxxii]In a contract for the sale and purchase of goods the prices of which fluctuated rapidly in the market, the time of delivery and payment are considered to be of the essence.

Construction contracts- time is of essence in contracts in the field of construction because it is a commercial service. The termination of contract was held to be proper where the contractor was not able to do anything to carry out repair of a flood protection dam in spite of extension of time. The matter of time was very important factor in the contract.[xxxiii] The Supreme Court held that in construction contracts, the time of completion would be of essence only when special features exist.[xxxiv]

Sale transactions- the courts have to look into the facts of each case involving a transaction to determine whether the time factor was of essence or not. In the case of Bowes v. Shand [xxxv] in which a contract for sale of rice to be shipped at Madras during March of April, 1874, by a ship named ‘Rajah of Cochin’, the stipulation in regard to shipment was held to be a condition of the contract and the contract was not held to be satisfied by the shipment a month earlier, i.e. in February. An Indian case in this aspect is the case of China Cotton Exporters v. Behari Lal Ramcharan Cotton Mills Ltd.[xxxvi] The appellants had an import business at Bombay, contracted to supply the respondent mill a quantity of Italian staple fibre cotton. The shipment was to take place in October or November. There was a particular clause in the contract which read “the contract is submit to import licence and therefore the shipment date is not guaranteed.” It was held that in spite of the clause, time was of the essence and the buyer was entitled to avoid the contract.

Land and property dealings- In Gomathinayagam Pillai v. Palaniswami Nadar[xxxvii] the Hon’ble Supreme Court held that, it would normally be presumed that time was not of the essence of the contract. Mere incorporation in the written agreement of a clause imposing penalty in case of default does not by itself evidence an intention to make time of the essence. Intention of the parties can be inferred from the nature of property agreed to be sold, the possibility of price fluctuation, the need for entering into the contract, conduct of the parties before and at the time subsequent to the contract and other surrounding circumstances. A stipulation in the contract regarding the time should be taken in the light of other provisions and such other factors may either exclude or strengthen the inference that time was held of the essence.[xxxviii]

In Rakha Singh v. Babu Singh[xxxix] where in an agreement to sell land there was a stipulation that the sale deed would be executed within one month of the date of securing permission form the Land Ceiling authorities, but there was no such stipulation as to the effect of failure of keeping the date. Held that the vender was entitled to specific performance; the stipulated time was not of essence. In the case of Swarnam Ramachandra v. A C Jayapalan[xl] it was held that a unilateral attempt on the part of the vender to make time as essence was improper.

The Supreme Court in Caltex (India) Ltd v. Bhagwan Devi Marodia[xli] in which the lessee of a petrol pump had to apply for the extension of the lease of the contract within a specified time. He was late by ten days in his application for renewal. The landlord refused to renew. The court held that, the time so fixed was the essence of bargain. Equity would not relieve him of the consequences of his own neglect.

Sale of Shares- The time of completion of the transaction is an important factor because; the value of a share fluctuates most of the time.

In cases other than commercial contracts the ordinary presumption is that time is not of the essence of the contract.[xlii] In a contract for the sale of immovable property, time would not be regarded as of the essence unless it is shown that the parties intended so.[xliii]

If the intention of the parties was not such that essence of time was not stressed upon then, in such a case the contract does not become voidable by the failure to do such things at or before the specified time. The party has to perform the contract even it is delayed. In A.P.S.E.B. v. Patel and Patel[xliv] wherein there was some delay on the part of the contractor in supplying some goods to the electricity board. And the court on finding that there was no such clause in the contract which laid emphasis on the essence of time held that the contractor still has to supply the goods. Wherein the time of performance is of essence of the contract, any delay will render the contract voidable at the option of the other party.[xlv] Delay by itself does not put an end to the contract.[xlvi]

Impossibility of Performance: the performance of a contract is quiet possible when it is made by the parties. But some subsequent event happens which renders the performance impossible or unlawful. In either case the contract becomes void.[xlvii] In Paradine v. Jane[xlviii] it was pointed out that subsequent happenings should not affect a contract already made. But in the subsequent case of Taylor v. Caldwell[xlix]Blackburn J., held that the above rule ‘is only applicable when the contract is positive and absolute, and not subject to any condition either express or implied.  These decisions led to differentiation between the two principles, the principle of sanctity of contract which supports the principle of absolute liability and the principle of absolute liability and the principle that a contract be discharged when the shared contractual assumption has been destroyed by change of circumstances.

PAYMENT:

Appropriation by debtor- Sec. 59 of the Contract Act confers the right of appropriation upon the debtor. The debtor if he has several outstanding debts has the right to request the creditor to apply the payment to the discharge of some particular debt. If the creditor accepts the payment, he is bound by the appropriation.[l]This principle applies to several distinct debts and not to a single debt payable by instalments.[li]

Appropriation by creditor- If the debtor makes payment without any appropriation, the creditor may use the payment at his discretion to wipe out any debt which he is due.[lii]

Appropriation by law- This is applicable in the case wherein neither party makes an appropriation. In such a situation the law gets the right to appropriate the payment and the law prefers to wipe out the debts in order of time in which they were incurred.[liii]

CONTINGENT CONTRACTS

Contingent contract under Indian Contract Act, is defined under Sec. 31 as ‘A contingent contract is a contract to do of not to do something, if some event, collateral to such contract does or does not happen.’  The main characteristic feature of a contingent contract is that the ‘uncertainty and futurity’ of the event to which it is related. The contract entirely depends upon a future event. For instance, a contract of insurance is the most common example of a contingent contract. The second most important aspect is that the event must be collateral to the contract. Although the whole transaction itself is made to depend upon it, it must be in a sense unessential to the transaction. The contract may be conditional, not on any external event, but on the voluntary act or the future conduct of one of the parties or of a third party. Where the contingency is the mere will of one of the parties, there is hardly any contract at all, and no legal obligation is incurred, and therefore such cases cannot be considered.[liv] Contract of life insurance is a contingent contract within the meaning of Sec. 31[lv]

Contracts contingent on an uncertain event happening can be enforced only on the happening of the event.[lvi] This is laid down in Sec. 32 of the Contract Act. In a case[lvii] wherein there was a contract for sale of a property contingent on the court sanctioning it; when the court refused to sanction the sale, the contract was held to have become void.

Sec. 34 of the Contract Act, deals with the event on which contract is contingent to be deemed impossible, if it is the future conduct of a living person. This was dealt with in the case of Jaunpur Sugar Factory’s case[lviii] in which one R agreed to take shares in the company if the company would appoint him its sloe agent at a certain place. The company went into liquidation before doing so and R was entered on the list of contributories. Held that R was not liable, as the contract to take shares was contingent on the company appointing him as agent.

Edited by Saksham Dwivedi

[i]Lord Diplock, in Photo Production Ltd v. Securicor Transport Ltd  [1980] AC 827

[ii][1933] AC 470

[iii](2006) Cut LT 686 (Ori)

[iv]Food Corporation of India v. Surana Commercial Co (2003) 8 SCC  636

[v] Sec. 38(2), Indian Contract Act, 1872.

[vi]Arunachela Chetty v. Krishna Iyer 90 IC 481

[vii] (1843) 64 RR 810

[viii] AIR 1982 Goa 9

[ix]Legh v. Lillie (1860) 6 H & N. 165

[x]Davies v. Collins [1945] All ER 247

[xi] (1970) 2 SCC 766

[xii] Sec.43 (Para 3), Indian Contract Act, 1872

[xiii] R v. Hoare (1844) 13 M& W 494

[xiv] Mohd Askari v. Radhe Ram Singh (1900) 22 All 307

[xv]Sec. 46, Indian Contract Act, 1872

[xvi] Hungersford Investment Trust Ltd v. Haridas Mundhra (1972) 3 SCC 684

[xvii] Sec. 47, Indian Contract Act, 1872

[xviii] Saraswati Trading Agency v. Union of India, (2002) 1 ICC 1038

[xix] Sec. 49, Indian Contract Act, 1872

[xx] AIR 1984 Del 49

[xxi] Sec. 50, Indian Contract Act, 1872

[xxii] Sec. 2(f), Indian Contract Act, 1872

[xxiii] Sec 51, Indian Contract Act, 1872

[xxiv] (1927) 101 IC 874

[xxv] Sec. 53, Indian Contract Act, 1872

[xxvi] (1973) 2 SCC 746

[xxvii] (1969) 3 SCC 120

[xxviii] Vidya Vati v. Devi Das (1977) 1 SCC 293

[xxix]  Per R.K.Prasad J., Orissa Textile Mills Ltd v. Ganesh Das, AIR 1961 Pat 107

[xxx] (1915) 22 Cal LJ 566

[xxxi] China Cotton Exporters v. Beharilal Ramcharan Cotton Mills Ltd, AIR 1961 SC 1295

[xxxii] Sachidananda v. G.P. & Co, AIR 1964 Ori 269

[xxxiii] Nevilal Robita Construction (P) Ltd v. State of Bihar, AIR 2005 Pat 190

[xxxiv] Mcdermott International Inc v. Burn Standard Co Ltd, 92006) 11 SCC 181

[xxxv] (1877) 2 AC 455 HL

[xxxvi] AIR 1961 SC 1295

[xxxvii] (1967) 1 SCR 227, 231-32

[xxxviii]  Kochappu v. Somasundaram Chettiar, (1991) 1 Ker LJ 525

[xxxix] AIR 2002 P& H 270

[xl] AIR 2000 Bom 410

[xli] (1961) 2 SCR 238

[xlii] Lucknow Automobiles v. Replacement Parts Co, AIR 1940 Oudh 443

[xliii] Mulla Badruddin v. Tufail Ahmed, AIR 1963 MP 31

[xliv] AIR 1977 AP 172

[xlv]State of A.P. v. Associated Engg. Enterprises, AIR 1990 AP 294

[xlvi] Jain Mills and Electrical Stores v. State of Orissa, AIR 1991 Ori 117

[xlvii] Sec. 56, Indian Contract Act, 1872

[xlviii] King’s Bench, (1647) A

[xlix] Queen’s bench, (1863) 3 B&S 826

[l]Clayton, Re , (1816) 1 Mer 572

[li] Munno Bibi v. CIT, AIR 1952 All 514

[lii] Sec. 60, Indian Contract Act, 1872

[liii] Sec. 61, Indian Contract Act, 1872

[liv] Braunstein v. Accidental Death Insurance Co., (1861) 121 ER 904

[lv] Chandulal v. I.T.Commr., Gujarat, AIR 1967 SC 816

[lvi] Municipality Markapur v. Dodda Ramireddy, AIR 1972 AP 299

[lvii] Narain Pattro v. Aukhoy Narain, (1885) 12 Cal 152

[lviii] (1925) 23 ALJ 608

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