- By Adv. Juhi Damodar
In our daily life, we always come across contracts, right from employment, business, or any other transaction. But we are more concerned about the business contracts because a lot of financial transactions, brand name, goodwill etc dependent on a good contract. Contracts are necessary for mutual understanding between the parties and for maintaining compliance. So, before getting into the topic, you have to understand the basics so that you enter into a good contract. Now, what is a contract? The Indian Contract Act of 1872 defines a contract as “An agreement enforceable by law”. So, ‘agreement’ and ‘enforceable by law’ are two important terms that must also be understood for clarity. Agreement is defined under Section 2 (e), of the Act, as “every promise and every set of promises, forming the consideration for each other”. Section 2(b) defines “ promise” as “when the person to whom the proposal is made signifies his assent thereto, the proposal becomes an accepted proposal. A proposal when accepted, becomes a promise”. Armed with this basic knowledge of the contract, you can now understand the topic.
Under the Indian Contract Act 1872 (“Act”), Section 2(f) defines reciprocal promise as promises which form the consideration or a part of it. These may be mutual & independent, conditional, or concurrent. While abandonment of a contract is a concept not included in any provisions in the legislation. In this article, we examine situations of reciprocal promise under various heads for clarity and also analyse how reciprocal promises connect to abandonment and breach which are situations that arise later on in a contract.
Where a reciprocal promise may be relevant.
Under section 51 of the Act, if reciprocal promise must be performed simultaneously, then the promisor need not perform unless the promisee performs his part. Illustrations: A and B contract that A shall deliver goods to B which will be paid by B on delivery. A need not deliver goods unless B is ready and willing to pay for goods on delivery.
If the order of its performance is expressly fixed in the contract, then under Section 52 of the Act, the reciprocal promise must be performed in that order only, otherwise, it must be performed in the order that is required. Illustration: A and B contract that A shall build a house for B at a fixed price. So, A must build a house before B pays for it.
Where a party fails to perform its obligation.
As per Section 53 of the Act when one party himself prevents the other from performing his promise, the contract becomes voidable at the option of the other and he is entitled to claim compensation for loss due to its non-performance. Illustration: A contracts that B shall execute work for A thousand rupees. B is ready and willing, but A himself prevents him from doing so. The contract is voidable at the option of B who may rescind it and recover compensation.
Where one of the reciprocal promises cannot be performed, or if they are dependent then under Section 54 of the Act, the party who fails to perform is liable to compensate others if any cost arose due to its non-performance. Illustration: If A contracts to take the apartment of B on rent and B agrees to give it after advance payment but A does not pay it, then A cannot claim the apartment. B may claim compensation.
Where there is the abandonment of contracts.
A Contract is abandoned when both parties have failed to fulfil it or one of them failed and the other does not dispute. According to the Black’s Law Dictionary, abandonment of the contract must be total and indicate that there is an absolute relinquishment. This failure must be shown by proof. The promisee must act against the promisor within a reasonable time otherwise it is abandonment. When one party to the contract abandons the contract then the other party will have a strong case for breach of contract.
Abandonment of contract may likely be confused with breach of contract due to the common condition between the two, which is the failure of one party to perform their part of the promise. However, the difference between them, though still unclear can be said to be differentiated by the way the aggrieved party reacts to this failure of performance in the contract. A Contract is said to be disposed when the parties to a valid contract fulfil their promises but if one of the parties in such a contract would have failed to fulfil their reciprocal promise then it would amount to a breach of contract. Under Section 73 of the Indian Contract Act, the aggrieved party can claim compensation for the damage caused due to the breach but in the case of abandonment, the other party does not dispute hence there is no claim. The Indian Contract Act 1872 does not expressly define breach of contract just like it does not expressly define the abandonment of the contract. Hence it is left to the discretion of the Courts to interpret the concept on a case-to-case basis.
We take into consideration, 2012, Supreme Court judgement in Shripati Lakhu Mane Vs. Member Secretary, Maharashtra Water Supply and Sewerage Board & Ors which decided on the issue as to whether there was abandonment in this case and made valuable observations.
Facts of the case:
The Appellant is a registered contractor with the Govt of Maharashtra and he received a work order to be executed within a period of 30 months for consideration of Rs.80,45,034/- only. A certain type of pipe needed by them was to be provided for executing the work but the same was not available. So, the appellants notified the same respondents and demanded that fresh rates be finalized. The Respondents sent a letter to the appellants asking them to stop the pipeline work and start the work at Panchanadi. Subsequently, more letters were sent from both sides wherein there were issues related to starting the work, an increase in fine and disagreement on the revised rates.
The Trial Court vide its Judgment and Order dated 02/02/1998, decreed the Suit partially and directed the Respondents to pay the Appellant, a sum of Rs. 24,97,077/- together with interest @10% per annum from the date of the Suit till realization. Later the High Court overturned this Judgment and Order passed by the Trial Court regarding the three heads of claims.
The issue considered by the Supreme court:
Whether there was an abandonment of the contract in this case?
Supreme Court decision:
A court considering the facts and submissions of both sides held that :
- Whenever there is a material change in the contract then as per the Law of Contract, such contracts need not be performed by the parties. And it will not amount to abandonment.
- When a party refuses to perform his part of the contract then it is called a breach of contract because here the party has not abandoned his right as provided in the contract. In this case, it amounts to a breach and not an abandonment of the contract.
- Refusal to perform his part of the promise unless his reciprocal promises are met is not an abandonment of the contract. It was stated that refusal by one party in a contract entitles the other to either sue for breach, rescind the contract, and sue on a quantum meruit for the work which is already done.
The Supreme Court observed in this case that the High Court had rejected these 3 claims namely : (i) Release of the security deposit to the tune of Rs. 2,21,000/- (ii) Overheads for the period from Jan 1989 to 30th September 1990 to the tune of Rs. 5,63,115/- and (iii) the loss of profits to the tune of Rs. 9,73,250/-, solely on the ground that the Appellant had abandoned its work under the main Contract. In this regard, the Apex Court after carefully perusing the facts of the case and the timeline of the events noted that the Appellant was not guilty of abandonment of the contract. Further, the Supreme Court while placing its reliance on Section 3(a) of the Contract entered into between the parties to the dispute, the Bench made a note that this particular clause enabled the Respondents to rescind the Contract, forfeit the security deposit and entrust the work to another contractor at the risk and costs of the Appellant. However, this clause had never been invoked by the Respondents.
Hence, the Apex Court allowed the Appeal and held that the High Court had erred in overturning the Judgment and Order passed by the Trial Court regarding the three heads of claims, based on the wrong interpretation of abandonment of Contract by the Appellant. Thus, the Impugned Judgment and Order dated 24-04-2009 passed by the High Court was set aside and the Judgment and Order dated 02-02-1998 passed by the Trial Court was once again restored.
Conclusion
Landmark judgements like Saradamani Kandappan vs.S. Rajalakshmi & Ors2, M/s Shanti Builders vs. CIBA IWCHS Ltd3, J.P. Builders vs. A. Ramdas Rao & Anr etc.4 and Shripati Lakhu Mane vs Member Secretary, MWSS Board & Ors5 gives clarity on these situations in case of contract but as every case is unique we must understand that these judgements do indicate the need for the Act to be updated from time to time because without proper guidelines the parties will face uncertainties when they enter into contracts especially when big financial transactions or brand names being involved. The possibility of parties suffering because of uncertainties may be immense and the loss would never be compensated.
References:
- The Indian Contract Act, 1872
- Civil Appeal Nos.7254-7256 of 2002
- (2012) 4 Mah LJ 614
- (2011) 1 SCC 429
- Civil Appeal No.556 Of 2012
apexadvocates