This article is written by Khushnuma Rahman, Amity Law School, Amity University Patna, 3rd Year BBALL.B(Hons) student during an internship at LeDroit India.
Keywords:
- Performance of contract
- Indian Contract Act, 1872
- Discharge of contract
- Breach of contract
- Tender of performance
- Specific performance
- INTRODUCTION
The performance of a contract is the fulfilment of duties and obligations agreed upon by the parties involved, marking the discharge of the contract. It can be categorized into complete, substantial, or partial performance, depending on how precisely the terms are met. In some cases, third-party performance may also be acceptable if the contract allows it. Timing and tender of performance are crucial, particularly if time is “of the essence” in the agreement. Non-performance or improper performance can lead to a breach of contract, triggering legal remedies such as damages, rescission, or specific performance to address the violation.
1.1 PERFORMANCE OF CONTRACT UNDER INDIAN CONTRACT ACT, 1872
The performance of a contract refers to fulfilling the obligations agreed upon by the parties involved in the contract. The contract is considered discharged or completed when both parties perform their respective duties as stipulated. Here are the key aspects of contract performance. The Indian Contract Act, of 1872 defines and elaborates on the various facets of contract law, including performance, which constitutes the execution of duties by the contracting parties. If these obligations are met, the contract is discharged, meaning it ceases to exist.
1.2 Who Can Perform the Contract?
According to Section 40 of the Indian Contract Act, performance must be by the promisor or their legal representatives unless the contract specifies otherwise. However, when the contract’s nature is personal, such as contracts of skill, they must be performed by the original promisor.
1.3 Time and Place of Performance
Sections 46 to 50 of the Act deal with the time and place of performance. If the contract specifies time, it must be adhered to, or the non-performance may lead to a breach. In the case of Tarsem Singh v. Sukhminder Singh (1998), the court reiterated that time-bound contracts are crucial, especially in real estate transactions.
2. Discharge of Contract by Performance
A contract is said to be discharged when the obligations of the parties under the contract come to an end, meaning that the parties are no longer bound by the contract’s terms. Discharge of a contract by performance occurs when both parties have fully completed their respective contractual duties. Under the Indian Contract Act, of 1872, performance is a critical concept that signifies the successful execution of contractual obligations.
The concept of performance and discharge by performance is addressed under Sections 37 to 67 of the Act, which outlines the rules for when and how a contract is deemed to have been performed. Let us examine the key aspects of discharge by performance, including complete, substantial, and partial performance, as well as performance by third parties and the impact of time in contracts.
2.1 Complete Performance
Complete performance occurs when all parties fulfil their respective obligations, resulting in the termination of the contract. In the case of Union of India v. Kishorilal Gupta (1960), the Supreme Court of India held that when both parties have performed their respective duties, the contract is discharged.
For example, in a construction contract, if a contractor builds a house according to the exact specifications agreed upon and the buyer pays the agreed-upon amount, the contract is fully performed and discharged.
2.2 Substantial Performance
This occurs when a party has fulfilled the essential aspects of the contract, but there may be minor deviations. The other party is still obligated to perform, though damages may be claimed for the deficiencies. The doctrine of substantial performance has been upheld in multiple judgments, including the landmark State of Karnataka v. Shree Rameshwara Rice Mills (1987).
For instance, in a building contract, if a contractor has built a house according to the agreed specifications but left out minor fittings or fixtures, the contract may still be considered substantially performed. The contractor would be entitled to payment, but the homeowner could claim compensation for the incomplete work.
2.3 Partial Performance
Partial performance refers to situations where only a portion of the contractual obligations have been fulfilled. In certain cases, the partial performance of a contract can lead to the discharge of the contract, but only if both parties agree to accept partial fulfilment. Without mutual consent, partial performance is generally not considered enough to discharge the contract. For example, if a supplier delivers only half of the goods promised under a contract, the other party may either accept the partial performance and discharge the contract with appropriate compensation or refuse it, thereby treating it as a breach.
3. Effect of Failure in Performance: Breach of Contract
A breach of contract occurs when one party fails to fulfil their contractual obligations as agreed upon, leading to a violation of the contract’s terms. Under the Indian Contract Act, of 1872, the concept of breach is crucial as it determines the legal consequences for the party that has failed to perform. The non-breaching party, also known as the aggrieved or innocent party, is entitled to seek remedies such as damages, specific performance, or contract rescission. In this section, we will explore the types of breach, the consequences of breach under the Indian Contract Act, and the various legal remedies available to the aggrieved party.
Types of Breach of Contract
A breach of contract can occur in different forms, and the legal consequences depend on the type and severity of the breach. Broadly, breaches can be categorized into two types:
(i) Actual Breach
An actual breach occurs when one party fails to perform their contractual obligations when performance is due. This breach can take place either on the date specified in the contract or during the execution of the contract.
- Example: If a supplier agrees to deliver goods on a specific date but fails to do so without a valid excuse, an actual breach has occurred.
(ii) Anticipatory Breach
An anticipatory breach occurs when one party, before the due date of performance, indicates either explicitly or through their actions that they will not be able to perform their contractual obligations. The aggrieved party can immediately treat the contract as breached and seek remedies, even before the performance date.
- Example: In a contract for the sale of goods, if the seller informs the buyer before the delivery date that they will be unable to supply the goods, it constitutes an anticipatory breach.
3.1 Consequences of Breach of Contract
When a breach of contract occurs, the aggrieved party is entitled to legal remedies to address the harm caused by the breach. The consequences of a breach depend on the type of breach and the specific terms of the contract. Here are the major consequences:
(i) Right to Terminate the Contract: In cases of significant breaches, the innocent party has the right to terminate the contract and treat themselves as discharged from further obligations under it. This is particularly relevant in cases of material breaches that affect the core of the contract.
- Example: If a party fails to deliver goods as specified in the contract, the buyer can terminate the contract and seek other suppliers.
(ii) Claim for Damages
The most common consequence of a breach is the entitlement of the aggrieved party to claim damages. Damages refer to monetary compensation awarded to the non-breaching party to cover the loss caused by the breach. The principle behind damages is to restore the injured party to the position they would have been in had the breach not occurred.
3.2 Legal Remedies: Damages, Specific Performance, and Injunctions
The remedies for breach include:
- Damages: Monetary compensation for the loss caused by the breach.
- Specific Performance: A court order requiring the party to fulfil their obligations.
- Injunction: A court order preventing the party from doing something that would violate the contract.
The Indian Contract Act, of 1872, provides various remedies to the aggrieved party in the event of a breach. These remedies are aimed at compensating for the loss suffered or compelling the breaching party to perform their obligations.
(i) Damages
Several types of damages can be awarded under the Indian Contract Act:
- Ordinary Damages: These are the damages that naturally arise from the breach. They are also referred to as general or compensatory damages. Section 73 of the Act outlines the entitlement to compensation for losses that directly result from the breach.
- Special Damages: If the breaching party was aware of special circumstances that could lead to greater losses, the aggrieved party may be entitled to special damages. For instance, if a party delays the delivery of machinery needed for a critical business function, they may be liable for the additional loss caused by the delay.
- Nominal Damages: When a breach occurs but no substantial loss is suffered by the aggrieved party, nominal damages (a small sum) may be awarded to recognize that a breach has taken place.
- Exemplary or Punitive Damages: In cases where the breach is particularly egregious or involves fraud, punitive damages may be awarded to punish the breaching party.
Case Law Example:
In Hadley v. Baxendale (1854), a foundational case followed by Indian courts, the principle of foreseeability in damages was established. The court held that damages for breach should be limited to those that were foreseeable by both parties at the time the contract was made.
(ii) Specific Performance
Specific performance is a remedy where the court orders the breaching party to perform their contractual obligations rather than paying damages. This remedy is typically awarded in cases where monetary compensation is inadequate, such as contracts involving the sale of unique goods or property.
Case Law Example:
In Lachman Das v. Jagat Ram (2007) the court ruled that in cases involving unique properties, the remedy of specific performance should be granted, as monetary damages would not suffice to compensate for the breach.
(iii) Injunctions
An injunction is a court order restraining a party from doing something that would breach the contract. This remedy is used to prevent a party from taking actions that would violate the terms of the contract.
Case Law Example:
In Nokia Corporation v. Manish Agarwal (2007), the Delhi High Court issued a temporary injunction preventing the defendant from infringing on Nokia’s intellectual property, as the breach of contract could not be adequately compensated with damages.
4.4 Mitigation of Damages
The non-breaching party is under a legal obligation to mitigate their losses arising from the breach of contract. This means that the aggrieved party must take reasonable steps to reduce the extent of the damages. If they fail to mitigate the damages, they may not be entitled to full compensation for the loss.
- Tender of Performance and Its Legal Implications
Tender of performance occurs when a party to a contract offers to perform their contractual duties to the other party. This act demonstrates that the offering party is ready, willing, and able to fulfil their obligations, thereby providing an opportunity for the other party to accept or reject the performance.
4.1 Legal Principles Governing Tender of Performance
The Indian Contract Act, of 1872, provides a legal framework for tender of performance, particularly in Sections 37, 38, and 39. Here are the key principles:
- Nature of the Offer: The tender must be unambiguous and unequivocal. It should specify the terms of performance clearly and be made in good faith.
- Time and Place of Tender: The tender should be made at the agreed time and place specified in the contract. If no time or place is specified, it must be made within a reasonable time and at a reasonable location.
- Proper Manner of Tender: The tender must be made in the manner specified in the contract. For instance, if the contract requires performance in writing, then a verbal tender would not suffice.
- Capacity to Perform: The party making the tender must have the capacity to perform their obligations. This includes having the necessary resources and abilities to fulfil the contract.
4.2 Types of Tenders
Tender of performance can be classified into several types:
(i) Actual Tender
Actual tender occurs when a party offers performance directly and explicitly to the other party. This can include the delivery of goods, provision of services, or any other contractual obligation.
Example: A contractor physically delivers the completed project to the client as per their agreement.
(ii) Constructive Tender
A constructive tender refers to a situation where a party is ready to perform but is unable to deliver due to the other party’s refusal or obstruction. Even if the performance cannot be physically delivered, the offer still exists.
Example: A supplier is ready to deliver goods but cannot do so because the buyer refuses to accept delivery.
(iii) Tender of Payment
In contracts involving monetary transactions, the tender of payment occurs when a debtor offers to pay the amount due. If the creditor refuses to accept payment without valid justification, the debtor may not be liable for any additional charges or penalties.
Example: A tenant offers the monthly rent to the landlord, but the landlord refuses to accept it without a valid reason.
4.3 Consequences of Refusal to Accept Tender
When a valid tender of performance is made and the other party refuses to accept it, several legal implications arise:
- Liability for Breach: If the refusal is unjustified, the refusing party may be held liable for breach of contract. This includes potential claims for damages resulting from the refusal.
- Discharge of Obligations: A valid tender can lead to the discharge of the tendering party’s obligations. If the tender is refused, the party can treat the contract as fulfilled and seek to terminate it.
- No Further Performance Required: The party who made the tender may be relieved from further performance of the contract. They cannot be compelled to continue fulfilling obligations if the other party has refused their performance without justification.
- Claim for Damages: If the refusal to accept tender results in losses for the tendering party, they may claim damages for any resulting harm, as outlined under Section 73 of the Indian Contract Act.
5. Conclusion
The performance of a contract under the Indian Contract Act, of 1872 is fundamental to ensuring that legal obligations are met and contracts are discharged. Whether it is complete, substantial, or partial performance, each has its implications for the fulfilment or breach of the contract. When performance is tendered but refused, the tendering party is discharged. Non-performance results in a breach, entitling the aggrieved party to legal remedies, including damages and specific performance. As seen in cases like Startups Development Company and British Motor Trading, the Indian judiciary has reinforced the principles of contract performance to ensure justice is served.
6. References
- Startups Development Company v. Narayana Corporation (2021), available at Indian Kanoon.
- Union of India v. Kishorilal Gupta (1960), available at Manupatra.
- State of Karnataka v. Shree Rameshwara Rice Mills (1987), available at SCC Online.
- British Motor Trading v. Simpson Motors (2019), available at Indian Kanoon.
