Unit 4: Performance of Contract Chapter Notes | Business Laws for CA Foundation PDF Download

Overview

Performance of Contract 

Types:  Based on Section 37, "Performance of Contract" can be classified as actual or attempted.

(a) Actual Performance:  This occurs when a party to a contract fulfills their obligations as per the terms of the agreement, within the specified time and manner.

Example 1:  For instance, if X borrows ₹5,00,000 from Y at an interest rate of X% with a promise to repay the total amount after one month, and X repays the amount on the due date, this constitutes actual performance.

(b) Offer to Perform or Attempted Performance:  This situation arises when the promisor offers to perform their obligation, but the promisee refuses to accept the performance.

Example 2:  For example, if A promises to deliver certain goods to B, and A takes the goods to the designated place during business hours, but B refuses to accept the delivery, this is an attempted performance as A has fulfilled their part of the contract.

Conditions to be met for a Valid Tender or Attempted Performance

 Example 3:  For instance, if A offers to repay B only the principal amount of a loan, this would not constitute a valid tender, as it does not include the entire amount of principal and interest.

 (ii) The offer to perform must be made at a reasonable time and place. 

 Example 4:  If A offers to deliver goods to B at an unreasonable hour or in an inconvenient location, the tender may be considered invalid.

 (iii) The performance must be made in a manner that is consistent with the terms of the contract. 

 Example 5:  If A is required to deliver goods in a specific manner, such as by a certain method of transportation, failure to do so may render the tender invalid.

 (iv) The offer to perform must be communicated to the other party in a clear and unambiguous manner. 

 Example 6:  If A offers to perform but the terms are unclear, such as by using vague language, the tender may not be valid.

 (v) The performance must be made with the intention of fulfilling the contractual obligation. 

 Example 7:  If A offers to perform but does not intend to follow through, the tender may be considered invalid.

 (vi) The offer to perform should not be subject to any conditions or qualifications. 

 Example 8:  If A offers to perform but adds conditions that were not part of the original contract, the tender may be invalid.

 (vii) The offer to perform should be made in good faith and without any intention to deceive or mislead the other party. 

 Example 9:  If A offers to perform with the intention of misleading B, the tender may be invalid.

 (viii) The offer to perform should be made with the capacity to fulfill the terms of the contract. 

 Example 10:  If A offers to perform but lacks the ability to do so, the tender may be invalid.

By Whom a Contract May be Performed 

1.  Promisor Himself:  A promise must be performed by the promisor himself if the contract indicates that it was the parties' intention for the promise to be fulfilled personally. This isApplicable in contracts involving personal skill, diligence, or trust. For example, if A promises to paint a picture for B, A must do it himself.
2.  Agent:  If personal consideration is not essential to the contract, the promisor or his representative can hire a competent person to perform it.
3.  Legal Representatives:  Contracts requiring personal skill or based on personal consideration end with the promisor's death. Other contracts bind the legal representatives of the deceased promisor to perform unless the contract states otherwise. Their liability is limited to the value of the inherited property.

Transfer of Rights and Obligations in Contracts

In this section, we will discuss the transfer of rights and obligations in contracts, including the concepts of assignment, succession, and the role of joint promisors.

Assignment of Rights and Obligations:

Definition:  Assignment refers to the transfer of rights and obligations under a contract from one party to another.

Key Points: 

• An assignor can transfer their rights and obligations to an assignee unless prohibited by the contract.
• The assignee takes on the rights and obligations of the assignor.
• The original parties to the contract must be notified of the assignment for it to be effective.

Succession in Contracts:

Definition:  Succession refers to the transfer of rights and obligations under a contract by operation of law, such as in the case of inheritance.

 Key Points: 

• When a party to a contract dies, their rights and obligations may pass to their legal heirs or representatives.
• Legal heirs are not personally liable for the debts of the deceased party beyond the value of the inherited estate.
• For example, if a son inherits his father's estate, he is responsible for the father's debts only up to the value of the estate.

Joint Promisors in Contracts:

Definition:  Joint promisors are individuals who make a joint promise to fulfill the terms of a contract.

 Key Points: 

• When two or more people make a joint promise, they must fulfill it together unless the contract specifies otherwise.
• If one of the joint promisors dies, their legal representatives must fulfill the promise with the surviving promisors.
• If all joint promisors die before fulfilling the promise, their legal representatives must fulfill it together.

Example:  If A, B, and C jointly promise to pay D ₹600,000, they must fulfill the promise together. If A dies before the promise is fulfilled, his legal representatives must fulfill the promise with B and C. If all three die, their legal representatives must fulfill the promise together.

Distinction between Succession and Assignment

Assignment:  Involves the voluntary transfer of rights and obligations by one party to another. The assignee takes on the responsibilities and benefits of the assignor.

 Example:  If a father’s estate includes debts and assets, the son inherits both, but is only liable for debts up to the value of the estate. If a contract is assigned to a third party, the third party assumes the rights and obligations of the original party.

Liability of Joint Promisors and Promisees 

• When two or more people make a joint promise, they are all responsible for fulfilling it together during their lifetime. If one of them dies, their legal representative must fulfill the promise along with the surviving promisor(s).
• After the last survivor dies, the legal representatives of all the original promisers must fulfill the promise.
•  Example:  If X, Y, and Z borrow money together, they must repay it together while they are alive. If X dies, his representative S, along with Y and Z, should repay the debt. If all three die in an accident, their legal representatives must fulfill the promise.
• This rule applies only if the contract does not state otherwise.

 Compulsion of Joint Promisors to Perform (Section 43) :

• When two or more people make a joint promise, the promisee can compel any one or more of the joint promisors to fulfill the entire promise, unless there is an express agreement stating otherwise.
• Each promisor has the right to demand contribution from the other joint promisors for their share in the performance of the promise, unless the contract indicates a different intention.
• If one of the joint promisors is compelled to perform the entire contract, they can seek contribution from the others.
• If any joint promisor fails to contribute, the remaining joint promisors must share the loss resulting from that default equally.

 Explanation to Section 43 :

• This section does not prevent a surety from recovering payments made to the principal on behalf of the principal or entitle the principal to recover payments made by the principal from the surety.
•  Example:  If A, B, and C jointly promise to pay D ₹3,00,000, D can compel any one of them to pay the full amount.
•  Example:  If A, B, and C are promised to pay D ₹3,00,000, and C cannot pay anything, A can be compelled to pay the entire amount and is entitled to receive ₹1,50,000 from B.

Effect of Section 43:

 Section 43  makes the liability in a joint contract both joint and several. This means that the promisee can compel any one or more of the joint promisors to perform the whole promise.
Example 16 Explanation  : In the given scenario, X, Y, and Z jointly promise to pay ₹6,000 to A. According to Section 43:

• A can compel any one of the joint promisors (X, Y, or Z) to pay the entire amount.
• If Z is compelled to pay the whole amount, Z has the right to seek reimbursement from X and Y.
• Since X is insolvent but has enough assets to pay half of his debts, Z is entitled to receive ₹1,000 from X's estate (representing half of X's debt) and ₹2,500 from Y to cover the remaining amount.

Effect of Release of One Joint Promisor:
Section 44  deals with the effect of releasing one joint promisor in a joint promise.

• When two or more persons make a joint promise, if the promisee releases one of the joint promisors, it does not discharge the other joint promisor or promisors from their obligations.
• The released joint promisor is still responsible to the other joint promissor or promissors.

Example Explanation

• In Example 17, where A, B, and C jointly promised to pay ₹9,00,000 to D:
• If D releases A from liability, it does not relieve B and C of their obligations.
• B and C remain liable to pay the entire amount of ₹9,00,000 to D.
• Although A is not liable to pay D, he is still liable to pay B and C, as he must contribute to the other joint promisors.

Devolution of Joint Rights:
Section 45  of the Indian Contract Act deals with the devolution of joint rights when a promise is made to two or more persons jointly.

• Unless stated otherwise in the contract, the right to claim performance rests with the joint promisees during their joint lives.
• After the death of any joint promisee, the right to claim performance rests with the legal representative of the deceased joint promisee, jointly with the surviving joint promisees.
• After the death of the last surviving joint promisee, the right to claim performance rests with the legal representatives of all joint promisees jointly.

Example Explanation

• In Example 18, where A promises to repay ₹5,00,000 with interest to B and C jointly:
• If B dies before the repayment, the right to demand payment rests with B's legal representatives, jointly with C during C's lifetime.
• After C's death, the right to demand payment rests with the legal representatives of B and C jointly.

Time and Place for Performance of the Promise

• Time for Performance of Promise - Section 46: When a promisor is required to perform a promise without any request from the promisee and no specific time is mentioned for the performance, it must be done within a  reasonable time.  The term  "reasonable time"  should be understood based on the specific facts and circumstances of each case
• Time and Place for Performance of Promise - Section 47: When a promise is to be performed on a specific day without a request from the promisee, the promisor can fulfill it at any time during regular business hours on that day, at the appropriate place of performanc
• Application for Performance on a Specific Day - Section 48: When a promise is to be performed on a specific day and the promisor is not required to perform it without a request from the promisee, the promisee must request performance at a suitable time and place during regular business hours, as per the contract terms.
• Place for Performance of Promise - Section 49: When a promise is to be performed without a request from the promisee and no specific place is designated for performance, it is the responsibility of the promisor to ask the promisee to specify a reasonable place for performance and to carry out the promise at that location.
• Performance in Prescribed Manner or Time - Section 50: A promise can be fulfilled in any manner or at any time specified or approved by the promisee.

Performance of Reciprocal Promises 

The law regarding the performance of reciprocal promises is outlined in Sections 51 to 58 of the Indian Contract Act. Here is a summary of the key provisions:

 Section 51: Performance of Reciprocal Promises 

• When two parties make reciprocal promises, they must perform their respective promises simultaneously unless the circumstances indicate otherwise.
• If one party is ready and willing to perform their promise but the other party is not, the first party can sue for breach of contract.

 Section 52: Performance of Promise in a Certain Order 

• If the nature of the promises requires one to be performed before the other, they must be performed in that order.
• For example, if A promises to deliver goods to B and B promises to pay for them upon delivery, A must deliver the goods before B makes the payment.

 Section 53: Performance of Promise in a Particular Manner 

• If the promisee has specified a particular manner of performance, the promisor must adhere to it.
• If no specific manner is prescribed, the promise can be performed in a reasonable manner.

 Section 54: Performance of Promise in a Reasonable Time 

• If the time for performance is not specified, the promise must be performed within a reasonable time.
• What constitutes a reasonable time depends on the circumstances of each case.

 Section 55: Performance of Promise on a Specific Day 

• If a promise is to be performed on a specific day, it must be done on that day unless the parties agree otherwise.

 Section 56: Performance of Promise at a Specific Place 

• If the place of performance is not specified, the promisor can choose a reasonable place for performance.

 Section 57: Performance of Promise by a Third Party 

• A third party can perform a promise on behalf of the promisor unless the promisee has a personal interest in the performance.

 Section 58: Performance of Promise in Case of Death 

• If the promisor dies before performance, the promise can be enforced against their legal representatives unless the nature of the promise is personal.

Appropriation of Payments

• When a debtor owes multiple debts to the same creditor and makes a payment that is insufficient to cover all the debts, the payment needs to be appropriated or adjusted among the debts.
• Appropriation of payments is governed by Sections 59 to 61 of the Indian Contract Act.

(i) Application of Payment Where Debt to be Discharged is Indicated (Section 59):

• If a debtor owes several distinct debts to one creditor and makes a payment with clear instructions or under circumstances suggesting that the payment is intended for a specific debt, the creditor must apply the payment accordingly.
• For example, if a debtor specifies that a payment of ₹1000 is to clear a particular debt of ₹2000, the creditor must accept and apply the payment to that specific debt.

(ii) Application of Payment Where Debt to be Discharged is Not Indicated (Section 60):

• If a debtor makes a payment without indicating which debt it should be applied to and there are no other circumstances to guide the application, the creditor has the discretion to apply the payment to any lawful debt that is due and payable.
• The creditor cannot apply the payment to a disputed debt.

(iii) Application of Payment Where Neither Party Appropriates (Section 61):

• If neither the debtor nor the creditor specifies how the payment should be applied, the payment will be applied to discharge the debts in the order of time, regardless of whether they are barred by the limitation law.
• If the debts are of equal standing, the payment will be applied proportionately to each debt.

Contracts That Need Not Be Performed with Mutual Consent 

(i) Effect of Novation, Rescission, and Alteration of Contract (Section 62)

• Section 62 of the Contract Act states that if the parties to a contract agree to substitute a new contract for the old one, or to rescind or alter it, the original contract does not need to be performed.

(a) Effect of Novation

• Novation occurs when the parties to a contract agree to substitute a new contract for the old one.
• In this case, the old contract is discharged, and it need not be performed.
• Novation can happen between the same parties or different parties, with the mutual consideration being the discharge of the old contract.
• Example: If A owes B ₹100,000, and A, B, and C agree that C will pay B instead of A, this is novation. A's liability ends, and a new contract between B and C is created.

(b) Effect of Rescission

• A contract can also be discharged by rescission.
• When the parties agree to rescind a contract, it need not be performed.
• In rescission, only the old contract is cancelled, and no new contract replaces it.
• It is important to note that novation involves rescission as well.
• Both novation and rescission discharge the contract by mutual agreement.

(c) Effect of Alteration of Contract

• When the parties to a contract agree to alter its terms, the original contract is rescinded, and it need not be performed.
• Alteration can have the effect of substituting a new contract for the old one.
• The difference between novation and alteration is subtle.
• In both cases, the original contract is not performed, but novation involves a new contract, while alteration involves changes to the existing contract.

Difference between Novation and Alteration

• Novation involves substituting an existing contract with a new one, which can include changes in terms or parties.
• Alteration, on the other hand, involves changing the terms of the contract while keeping the same parties.
• In novation, a new contract entirely replaces the old one, whereas in alteration, the old contract remains with modified terms.

(ii) Waiver or Remission of Performance by Promisee (Section 63)

• A promisee has the right to waive or remit the performance of a promise, either wholly or in part.
• The promisee can also extend the time for performance or accept any satisfaction they deem fit in place of the promised performance.
• This means that a contract can be discharged by remission.

Example: If A owes B ₹5,00,000 and B accepts ₹2,00,000 as full payment, the entire debt is discharged.

(iii) Restoration of Benefit under a Voidable Contract (Section 64)

• When a party rescinds a voidable contract, the other party, if they are the promisor, is not required to fulfill any promise in the contract.
• However, the party rescinding the contract must restore any benefits received from the other party under the contract.

Analysis of Section 64

• The party with the option to void the contract can terminate it.
• If they have received any benefit under the contract, they must restore it to the person from whom it was received.

Example: If an insurance company rescinds a policy due to non-disclosure of a material fact, they must refund the premium minus expenses incurred.

(iv) Obligations of Person who has Received Advantage under Void Agreement or contract that becomes void (Section 65)

• When an agreement is found to be void or a contract becomes void, any person who has received an advantage under such agreement or contract is obligated to restore it or compensate for it to the person from whom it was received.
• This is to ensure that the position prior to the contract is restored.

Analysis of Section 65

• The section emphasizes the need to restore the advantage received or provide compensation to the extent necessary to revert to the position before the contract.
• Example: If A pays B ₹1,00,000 to marry C, but C is already dead, B must repay A ₹1,00,000 as the agreement is void.

(v) Communication of Rescission (Section 66)

• Rescission of a contract voidable at the option of one party must be communicated to the other party in the same manner as a proposal under Section 4 of the Contract Act.
• Similarly, a rescission can be revoked in the same manner as a proposal.

(vi) Effects of Neglect by Promisee to Provide Reasonable Facilities for Performance (Section 67)

• If a promisee neglects or refuses to provide the promisor with reasonable facilities for fulfilling their promise, the promisor is excused from non-performance caused by such neglect or refusal.

Example: If an apprentice refuses to learn, the teacher is not liable for failing to teach.

Example: If A contracts with B to repair B's house, and B fails to specify the repair areas, A is excused from non-performance due to B's neglect. 

Discharge of a Contract

A contract is considered discharged when the obligations it entails come to an end. There are several ways in which a contract can be discharged:

(i) Discharge by Performance:

• Actual Performance: This occurs when both parties fulfill their obligations as per the contract. For example, when A delivers a car to B and B pays the agreed price, the contract is discharged by actual performance.
• Attempted Performance: This happens when one party tries to fulfill their obligation, but the other party refuses to accept it. For instance, if A contracts to supply timber to B, and B delivers the timber, but A refuses to accept it, this is attempted performance.

(ii) Discharge by Mutual Agreement:

• According to Section 62 of the Indian Contract Act, if parties agree to substitute a new contract, rescind, remit, or alter the original contract, it need not be performed.
• Example: If A owes B ₹1,00,000 and they agree to a new contract where A mortgages his estate worth ₹50,000 instead, the old contract is extinguished.

(iii) Discharge by Impossibility of Performance:

• Impossibility can be present from the beginning (impossibility ab initio) or arise later (supervening impossibility).
• Supervening impossibility can occur due to unforeseen legal changes, destruction of essential subject matter, non-existence of necessary conditions, or events like war.
• Example: If A agrees to find a treasure by magic, the contract is void due to initial impossibility. If A and B contract to marry, and A goes mad before the wedding, the contract becomes void.

(iv) Discharge by Lapse of Time:

• Contracts must be performed within a specified period as per the Limitation Act, 1963. If not performed within the limitation period, the promisee loses the legal remedy.
• Example: If a creditor fails to sue a buyer for debt recovery within three years, the debt becomes time-barred and unrecoverable.

(v) Discharge by Operation of Law:

• Contracts can be discharged by legal operations such as the death of the promisor or insolvency.

(vi) Discharge by Breach of Contract:

• Breach can be actual (default on due date) or anticipatory (repudiation before due date).
• If one party breaches, the injured party has a right to damages and is discharged from their part of the contract.
• Example: If A fails to deliver 100 kgs of rice to B on June 1, it is an actual breach. If time is not essential, B can give A another date for supply without claiming damages.

(vii) Waiver or Remission by Promisee:

• The promisee can waive or remit the performance of a promise, extend the time for performance, or accept any satisfaction they deem fit. This is known as remission.
• Example: If A owes B ₹5,00,000 and C pays B ₹1,00,000 in satisfaction of his claim on A, it discharges the whole claim.

(viii) Effects of Promisee's Neglect:

• If the promisee neglects to provide reasonable facilities for performance to the promisor, the promisor is excused from non-performance caused by such neglect.

(ix) Merger of Rights:

• When inferior and superior rights coincide in one person, the inferior rights merge into the superior rights. The inferior rights vanish and are not required to be enforced.