Performance of Contracts in Business Law
- 1. Performance of Contracts JAYASHREE R SRI RAMAKRISHNA COLLEGE OF ARTS & SCIENCE
- 2. PERFORMANCE OF CONTRACT The term ‘Performance of contract‘ means that both, the promisor, and the promisee have fulfilled their respective obligations, which the contract placed upon them Section 27 of Indian contract Act 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 any other law
- 3. Thus, it is the primary duty of each contracting party to either perform or offer to perform its promise For performance to be effective, the courts expect it to be exact and complete
- 4. TYPES OF PERFORMANCE ACTUAL PERFORMANCE SUBSTANTIAL PERFORMANCE PARTIAL PERFORMANCE ATTEMPTED PERFORMANCE
- 5. ACTUAL PERFORMANCE When a promisor to a contract has fulfilled his obligation in accordance with the terms of the contract, the promise is said to have been actually performed Actual performance gives a discharge to the contract and the liability of the promisor ceases to exist.
- 6. Actual performance can further be subdivided into substantial performance, and partial Performance SUBSTANTIAL PERFORMANCE This is where the work agreed upon is almost finished. The court then orders that the money must be paid, but deducts the amount needed to correct minor existing defect. Substantial performance is applicable only if the contract is not an entire contract and is severable.
- 7. PARTIAL PERFORMANCE This is where one of the parties has performed the contract, but not completely, and the other side has shown willingness to accept the part performed. Partial performance may occur where there is shortfall on delivery of goods or where a service is not fully carried out.
- 8. Partial performance must be accepted by the other party. In other words, the party who is at the receiving end of the partial performance has a genuine choice whether to accept or reject. Substantial performance, on the other hand, is legally enforceable against the other party Payment is made on a different basis from that for substantial performance. It is made on quantum meruit, which literally means as much as is deserved. So, for example, if half of the work has been completed, half of the negotiated money would be payable.
- 9. ATTEMPTED PERFORMANCE When the performance has become due, it is sometimes sufficient if the promisor offers to perform his obligation under the contract. This offer is known as attempted performance or more commonly as tender. Thus, tender is an offer of performance, which of course, complies with the terms of the contract.
- 10. Essentials of a valid tender Unconditional Should be made at the proper time and place Whole obligation Should be made to the proper promise Must be for agreed quantity and quality Reasonable opportunity ton inspect Should be made in legal tender May be made to any of the joint promises
- 11. Who must perform the contract The promisor The agent Legal representative Third person Joint promisors
- 12. Who can demand performance Promisee
- 13. Discharge of Contract When the rights, obligations and duties of the parties come to an end it is known as the discharge of contract Discharge of contract also ceases the legally binding power of the contract Once a contract has been discharged the parties are no more obligated to each other and the contract becomes void
- 14. Discharge of contract means terminating the contractual relationship between the two or more parties who entered into the contract previously.
- 15. A contract may be discharged By performance By mutual agreement By Impossibility By operation of law By breach of contract By lapse of time
- 16. Discharge by performance When the parties of a contract perform their respective promises the contract is said to have been performed. A contract can be discharged by performance and it is the most common form of discharge of contract. A contract will be discharged if the duty stated in the contract has been fulfilled by the parties. If only one person in a contract performs the promise which is mentioned then he alone is discharged Performance may be Actual performance-In this case both the parties in a contract must perform their promises Offer to perform or tender When the promisor offers to give his performance under the contract, but the promisee refuses to accept the same, then it amounts to discharge by attempted performance
- 17. Discharge by mutual agreement The parties to a contract do not perform the promise stated in the contract if they arrive at a mutual agreement This requires substituting or altering the existing contract with a new one Eg:P’ owes a certain sum of money to ‘Q’ under a contract, but they arrive at a mutual agreement that henceforth ‘R’ will pay back the money owed to ‘Q’. This results in a mutual discharge of the contract between ‘P’ and ‘Q’ and a new contract is formed between ‘R’ and ‘Q’
- 18. Novation-It occurs when a contract is substituted for the old contract between the same or new parties. In order to enforce novation, the following conditions must be followed • There must be a valid reason for substituting the contract. • Consent of all the parties is required. • The old contract must be substituted before the expiry or breach of the contract Remission-Remission occurs when parties to a contract accept a lesser amount or lesser degree of performance than what was initially agreed upon in the contract
- 19. Alteration-It means changing one or more contract terms, thereby discharging the old contract and forming a new one. Alterations to a contract must take place with the consent of all the parties to the contract Rescission-Rescission takes place when the parties in the contract agree to dissolve the contract. In this case, the old contract stands discharged and no new contract is formed Waiver-The term waiver means the abandonment of a right. A party to a contract may have their rights specifically stated under the contract which also helps to release the other party from the contract and the contract is discharged Merger When an existing inferior right of a party, in respect of a subject matter, merges into a newly acquired superior right of the same person, in respect of the same subject matter, then the previous contract conferring the inferior right stands discharged by the way of merger.
- 20. By Impossibility Discharge of a contract by supervening impossibility is a contract that has become impossible or illegal to perform In these cases the contract becomes void. It is also known as the doctrine of frustration The ways in which it occurs are mentioned below; • On the destruction of subject matter, a contract will be discharged and no party will be held liable. • If the performance of the promise mentioned in the contract becomes unlawful then the contract will be void. • A contract tends to be discharged on accounts of death or personal incapacity. • When the circumstances surrounding a contract change then it will be discharged
- 21. By operation of law This mode of discharge of contract does not allow the fulfilment of the promise laid down in the contract by the provisions of law. Situations such as death, insolvency, merger, etc. do not enable the fulfilment of the promise, hence it results in the discharge of the contract
- 22. By breach of contract When a contracting party refuses or fails to perform or disables himself from performing or makes the performance of the promise stated in the contract impossible by his conduct, then the contract is said to be discharged by breach. A party to a contract may discharge it by actual breach or anticipatory breach.
- 23. By lapse of time A contract will be discharged if the performance is not completed within the given time period This might also result in a breach of contract. In that case, a person might file a suit under the court of law stating that his rights have been infringed and also claiming to enforce his rights.
- 24. BREACH OF CONTRACT A contract is breached or broken when any of the parties fails or refuses to perform its promise under the contract. Breach of contract is a legal cause of action in which a binding agreement is not honored by one or more parties by non-performance of its promise by him renders impossible.
- 25. According to Section 39, where the party has refused to perform or disabled himself from performing, his promise in its entirely, the other party may put an end to the contract, , unless that other party has expressly or impliedly signified its consent for the continuance of contract. If the other party chooses to put an end to the contract, the contract is said to be broken and amounts to breach of contract by the party not performing or refusing to perform its promise under the contract. This is called repudiation. Thus repudiation can occur when either party refuses to perform his part or makes it impossible for him to perform his part of contract in each of the cases in such a manner as to show an intention not to fulfil his part of the contract.
- 26. CONSEQUENCES OF BREACH OF CONTRACT Chapter VI (Section 73 to 75) of the Indian Contract Act,1872 deals with the consequences of breach of the contract. SECTION 73 1ST PARAGRAPH DEALS WITH COMPENSATION FOR LOSS OR DAMAGE CAUSED BY BREACH OF CONTRACT When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him ,which naturally arose in the natural 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. No compensation shall be given to any remote and indirect loss or damage sustained by reason of breach.
- 27. COMPENSATION IN REGARD TO FAILURE TO DISCHARGE OBLIGATION WHICH RESEMBLES THOSE CREATED BY THE CONTRACT An obligation resembling those created by contract has been incurred and has not been discharged, any person affected by the failure to discharge it is entitled to receive the same compensation from the party in default as if such person had contracted to discharge it and had broken his contract.
- 28. COMPENSATION FOR LOSS OR DAMAGE WHICH NATURALLY AROSE IN THE USUAL COURSE OF THINGS FROM SUCH BREACH Compensations to be recovered for loss or damage which the parties knew or which would have naturally arisen in the usual course, to be likely to result from the breach of it.
- 29. SECTION 73 2nd PARAGRAPH DEALS WITH REMOTE AND INDIRECT LOSS OR DAMAGE It states that no compensation is payable for remote and indirect loss or damage arising out on account of breach of contract. The indirect loss cannot be said to arise on usual course of things. The aggrieved party can claim compensation for indirect loss or loss of profit, only where it is expressly made known to the other party or contemplated by contract that breach of non-performance of the contract would result in some indirect loss or loss of profit to the party
- 30. SECTION 73 3rd PARAGRAPH DEALS WITH BREACH OF RESEMBLING CONTRACT It confers a statutory right upon a party to get compensation from a party who has incurred a statutory obligation to pay compensation in case default even though there may be no contract to pay compensation . The party in default is under obligation to pay compensation to injured party as if there was contract and has broken such contract.
- 31. SECTION 74 PENALTIES IN REGARD TO BREACH OF CONTRACT The party to the contract may agree at the time of contracting that , in the occurrence of breach,the party in default have to pay a stipulated sum of money to the other, or may agree that in the event of breach by one party any amount paid by him shall be forfeited. If this sum is genuine pre-estimate of damage likely to flow from the breach is called ‘liquidated damages’ . If it is not genuine pre-estimate of the loss, but an amount intended to secure performance of the contract, it may be called as ‘penalty’.
- 32. SECTION 75. COMPENSATION TO THE PARTY RIGHTFULLY RESCIDING THE CONTRACT A person who rightfully resides the contract is entitled to compensation for any damage which he has sustained through non fulfillment of the contract .A party to a contract is entitled to rescind the contract in circumstances given in Section 39, 53, 55, 64 and 65 of the Contract Act
- 33. Remedies for breach of contract There are three main ways in which a party can breach a contract, including: • Anticipatory breach; • Minor breach; and • Material or fundamental breach. Anticipatory breach is referred to as anticipatory repudiation. This type of breach occurs when a breaching party tells a non-breaching party that they will not be providing the performance which was promised in the contract. Once the non- breaching party is notified, they may be able to sue for a breach of contract.
- 34. A minor breach of contract occurs when one party fails to perform a minor aspect of the performance under the contract. With a minor breach, the entire contract has not been violated and it may still be substantially performed. The most common type of breach which is the basis for a breach of contract claim is a material or fundamental breach. This type of breach is so substantial that it, in effect, cancels the contract because it renders the performance of either party impossible.
- 35. Contracts may also be breached if: • They are fraudulent; • They were formed illegally or are unconscionable; or • If there is a mistake of fact in the terms of the contract.
- 36. Remedies to a Breach of Contract If one or more of the parties to a contract do not perform according to the terms of their contract, a breach of the contract has occurred. The remedies for a breach of contract include: • A remedy specified in the contract itself, such as liquidated damages; • An award of money damages; • Restitution; • Rescission; • Reformation; and • Specific performance.
- 37. Equitable Remedy An equitable remedy is a remedy which may be ordered by a court in a breach of contract case. Generally, remedies are divided into two categories, legal remedies and equitable remedies. A legal remedy is a remedy which allows the non-breaching party to recover compensatory damages, or money damages. Equitable remedies, on the other hand, are actions which a court must prescribe.
- 38. Contract of Indemnity Contract of Indemnity means “to save against loss” or in other words, it is a special type of contract wherein security or protection against the loss is reserved so as to indemnify or compensate. Special contracts are contained in Section 124 to Section 238 of the Indian Contract Act,1872. These special contracts are Indemnity, Guarantee, Bailments, pledge, and Agency.
- 39. According to Section 124 of the Indian Contract Act, 1872: A contract by which one party promises to save the other from loss caused to by the conduct of the promisor himself, or by the conduct of any other called a contract of indemnity.
- 40. Essential Elements: 1. There must be a loss; the claim for indemnity does not hold if there’s no loss suffered. 2. The loss must be caused either by the promisor or by any other person. 3. Indemnifier is only liable for the loss.
- 41. Types of Contract of indemnity 1. express contract: An express contract is a contract whose terms the parties have explicitly set out. This contract is made either written or oral. 2. implied contract: An implied contract is created when two or more parties have no written contract, but the law creates an obligation in the interest of fairness based on the parties’ conduct or circumstances.
- 42. Rights of Indemnified or Indemnity Holder Rights of Indemnity Holder or Indemnifier is defined on section 125 of Indian Contract Act. Defined into three sections 1. Damages, 2. Costs 3. Sums
- 43. Contract of Guarantee A contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the “surety”, the person in respect of whose default the guarantee is given is called the “principal debtor”, and the person whom the guarantee is given is called the “creditor.” A guarantee may be either oral or written.
- 44. Contract of Guarantee will be mentioned in Section 126 of an Indian Contract Act,1872 also with three other terms namely: 1. surety : who gives the guarantee, 2. principal debtor : in respect of whose default the guarantee is given. and 3. creditor : to whom the guarantee is given.
- 45. A contract of guarantee is a contract to perform the promise, or discharge the liability of a third person in case of its default. The person who gives the guarantee is called the Surety, the person for whom the guarantee is given is called the Principal Debtor; and the person to whom the guarantee is given is called the ‘Creditor’.
- 46. Essentials of a Contract of Guarantee: • The concurrence of All the Parties. … • Liability. … • Existence of a Debt. … • Consideration. … • Writing not Necessary. … • Essentials of a Valid Contract. … • No Concealment of Facts. … • No Misrepresentation.
- 47. Rights of a surety The creditor ought not to fluctuate terms of the agreement between the creditor and the principal debtor without the surety’s assent. The creditor ought not to discharge the principal debtor from his liability under the agreement. The impact of the release of the principal debtor is to release the surety too In the event that an agreement is made between the Creditor and Principal debtor for intensifying the last’s liability or making a guarantee to him the growth of time for doing the commitments or swearing up and down to not to beyond any doubt, releases the surety unless he consents to such an agreement. the surety is released if the creditor debilitates the surety’s possible remedy against the principal debtor
- 48. Kinds of Guarantee A guarantee may be given in two ways: 1. Specific Guarantee 2. Continuous guarantee. Specific Guarantee: A guarantee, given for only one specific transaction between the debtor and the creditor, is called a specific guarantee. It is intended to come to an end with the completion of the transaction.
- 49. Continuing guarantee: In continuing guarantee a guarantee extends to a series of transactions. The guarantee is not limited to only one transaction but to many transactions. Section 129 deals with Continuing guarantee in detail.
- 50. Difference between Indemnity and Guarantee A contract where one party (the indemnifier) promises to compensate the other party (the indemnified) for any loss or damage incurred due to the actions of a third party or any specified event. A contract where one party (the guarantor) promises to fulfill the obligation or pay the debt of a third party (the principal debtor) if the third party defaults. Two parties: the indemnifier and the indemnified Three parties: the creditor, the principal debtor, and the guarantor.
- 51. Purpose To provide protection against loss or damage. To provide assurance to the creditor that the debt or obligation will be fulfilled. Nature of Liability Primary liability: the indemnifier's liability arises when the indemnified suffers a loss. Secondary liability: the guarantor's liability arises only when the principal debtor defaults. Right to recover The indemnifier can recover the amount paid to the indemnified The guarantor can recover from the principal debtor any amount paid to the creditor. Example Insurance policies where the insurer indemnifies the insured for losses incurred. A loan guarantee where a guarantor assures the bank that they will repay the loan if the borrower defaults. Scope of Protection Broad, covering any specified event causing loss. Narrow, specifically related to the fulfillment of an obligation or payment of a debt.
- 52. Concept of Bailment Section 148 of the Indian Contract Act deals with the concept of Bailment, Bailor and Bailee. A bailment is a contract in which one person transfers goods to another person with a contract that he will return the goods after completion of the purpose for which contract takes place. The person who delivers goods to another person is known as Balior and the person to whom bailor delivered goods, is known as Bailee.
- 53. The contract of bailment is different from the contract of sale of a property. In the contract of sale of a property, after the completion of sale the ownership of the property gets transferred to the buyer. But, in bailment, only the possession of the property is transferred to the bailee and not the ownership and the possession of the property is transferred only for the period up to the completion of the purpose.
- 54. In law, the word bailment is used in its technical sense which means the change in the possession of goods i.e. one person transfers the goods to another person. On the other hand, Pledge is a kind of bailment in which one person bails his goods to another person as security against loans. Both bailment and pledge are examples of specific contracts. The contract of bailment can be classified into three categories: 1. For the exclusive benefit of the bailor. 2. For the exclusive benefit of the bailee. 3. For the mutual benefit of both. The person who delivers goods to another person is known as Balior and the person to whom bailor delivered goods, is known as Bailee.
- 55. Kinds of Bailment Gratuitous Bailment Under this Bailment, anyone, either the bailor or the bailee gets the sole benefit For sole benefit of Bailor The bailor transfer the goods to the bailee for some specific purpose which result in the benefit of bailor only i.e. bailee has no expectation in return For sole benefit of Bailee The bailor transfers the goods to the bailee for some specific purpose which result in the benefit of bailee only i.e. bailor does not get anything in return. The bailor only gets his goods back after completion of the purpose
- 56. Non Gratuitous Bailment Both the bailor and the bailee get some rewards in return i.e. mutual benefit of both. When bailor transfers his goods to the bailee for some specific purpose. After the completion of that specific purpose, the bailee returns the goods back to the bailor and in return gets the payment for his services.
- 57. Essentials of Valid Bailment 1. Agreement 2. Delivery of Goods 3. Purpose 4. Return of Goods
- 58. Agreement For a valid contract of bailment, both the bailor as well as bailee have to enter into an agreement that the bailor will transfer goods to the bailee for a specific purpose and after the completion of the purpose bailee will return the goods to the bailor and bailor will pay to the bailee for his services. Delivery of Goods For a valid bailment, it is necessary that the bailor will transfer i.e. deliver his goods to the bailee so that bailee can act towards completion of the purpose. The possession should be voluntary i.e. not by force, coercion, undue influence etc.
- 59. Delivery of possession of goods can be actual or constructive Actual delivery means when the bailor transfer the goods to the bailee that transfer should be in physical nature. Constructive delivery is the opposite of actual delivery. In constructive delivery, the document which shows the title of goods gets transferred, due to which indirectly the possession gets transferred.
- 60. Purpose Bailment takes place when the bailor transfers constructive to the bailee, the main reason why bailor transfer his goods is the performance of a specific purpose. And when that purpose gets completed the bailor return the goods to the bailee.
- 61. Return of Goods The contract of bailment comes to an end when the bailee after fulfilment of the purpose return the goods to the bailor or disposed of as per the direction of the bailor.
- 62. Duties of Bailor Duty to disclose any defect Duty to bear expenses Duty to indemnify bailee
- 63. Rights of Bailor Right to claim Damages Right to terminate the bailment Right to get back the possession of the Goods
- 64. Duties of Bailee Duty to take reasonable care Duty to not to make unauthorized use of goods Duty to not mix the goods Duty to Return the goods Duty to deliver the bailor increase or profit if any on the goods bailed
- 65. Pledge A pledge contract serves as a formal agreement between two or more parties, articulating the specific responsibilities and actions each party commits to in pursuit of a common objective. These contracts are collaboratively crafted by the involved parties and can be amended or updated as required. When drafting a pledge contract, it is imperative to include comprehensive details such as timelines, milestones, and repercussions for any failure to fulfill obligations
- 66. Essential Features Of Contract Of Pledge Contract Essentials Delivery Of Possession Ownership Cannot Be Transferred Security Against Debt Return Of Goods On Repayment
- 67. Rights And Duties Rights Of Pawnor -Right to Redemption -Right to Notification -Right to Inspection
- 68. Duties Of Pawnor To pay the debt To disclose the defect in goods To repay the necessary expenses Duty after sale