Law of indemnity and guarantee

Contract of indemnity : contract whereby one party promises to save the other party from loss caused to him by the conduct of the promisor himself or any other person –  a class of contingent contracts - promisor is called indemnifier – promisee is called indemnity-holder or indemnified.

Example : A and B claim certain goods from a railway company as rival owners -  A takes delivery of the goods by agreeing to compensate the railway company against loss in case B turns to be the true owner – contract of indemnity between A and railway company.

May be express or implied – implied contract of indemnity may be inferred from the circumstances of the case or relationship of the parties. 

Example : T instructs A to sell certain cattle belonging to O – O held A liable and recovered damages from him – Held,  contract of indemnity implied from T’s conduct in asking A to sell the cattle – A entitled to recover the loss from T. 

Rights of indemnity-holder when sued  - entitled to recover from the indemnifier :

1. all damages which he may be compelled to pay in any suit in respect of any matter to which promise to indemnify applies.
2. All costs which he may be compelled to pay in bringing or defending any such suit – but must have acted prudently.
3. All sums which he may have paid under the terms of any compromise of any such suit – compromise should not be contrary to the orders of the indemnifier – should be prudent or authorised by the indemnifier. 

Rights of indemnifier – Similar to rights of surety

Contract of guarantee : contract to perform the promise or discharge the liability of a third person in case of his default – may be written or oral – may be express or implied – can also be inferred from the course of conduct of the parties.

Surety - Person giving the guarantee or the guarantor

Principal Debtor – person in respect of whose default the guarantee is given.

Creditor – person to whom the guarantee is given.

Essential features of contract of guarantee  :

1. Concurrence – requires concurrence of all the three parties, viz. the principal debtor, surety and the creditor.
2. Principal Debt – guarantee secures payment of a recoverable debt – of no principal debt, there can be no valid guarantee - primarily liability is that of principal debtor – liability of surety is secondary which arises when there is default by principal debtor. 

In following cases guarantee of void debt is enforceable :

a)      guarantee given by directors of a company securing payment of their company’s loan which was void as being ultra vires  - enforceable against directors.

b)      Guarantee of minor’s debt  - if debt is void, the contract of the surety is not collateral but a principal contract - surety liable as principal debtor himself

1.      Fulfilment of all essentials of a valid contract  - consideration received by principal debtor is sufficient for the surety – benefit to the surety himself is not necessary.

Example :  B requests A to sell and deliver to him goods on credit – A agrees to do so provided C will guarantee the payment of the price of the goods – C promises to guarantee the payment in consideration of A’s promise to deliver the goods – this is sufficient consideration for C’s promise.

Example :  A sells and delivers goods to B – afterwards C requests A to forbear to sue B for the debt for a year – in return, C promises to pay for them in default of payment by B – A agrees to forbear as requested – this is sufficient consideration for promise. 

Example :  A sells and delivers goods to B – afterwards C, without consideration, agrees to pay for them in default of B – the agreement is void being without consideration. 

2.      Writing not necessary – contract of guarantee may be oral or written – may also be express or implied from the circumstances of the case. 

Guarantee is not a contract of uberrimae fides or one of absolute faith – it does not require full disclosure of all material facts by principal debtor or creditor to the surety before the contract is entered into.

Sec 142 : a guarantee obtained by means of misrepresentation made by creditor or with his knowledge and assent, concerning a material party of the transaction, is invalid.

Sec.143 : a guarantee obtained by a creditor by means of keeping silence as to material circumstances is invalid.

Fraud or misrepresentation on the part of principal debtor is not enough to set aside the contract unless the creditor is a party to it or had knowledge about it – in case of guarantee given to a banker, no obligation lies on banker to inform the intending surety of circumstances affecting the credit of the principal debtor.

National Provincial Bank of England V Glanusk – S guaranteed P’s account with bank – afterwards, P drew on this account and paid off an overdraft he had with another bank – Bank suspicious that P was defrauding S but did not communicate its suspicions to S – Held, bank under no obligation to disclose to the surety – guarantee not discharged. 

However, if guarantee is of nature of an insurance (as in fidelity guarantee), all material facts must be disclosed – otherwise voidable at option of surety.

London General Omnibus Co. V Holloway – L employed P as clerk to collect money – P misappropriated some receipts – L threatened to dismiss P – loss made good by P’s relations - L agreed to retain P in service on having a fidelity guarantee – H gave his guarantee – L did not made disclosure of P’s previous dishonesty - HeldHH

Held, the surety believed he was making himself answerable for a presumably honest man, not for a known thief – owning to non-disclosure by L, guarantee could not be enforced against H.

Co-operative Commission  Shop Ltd V. Udham Singh – fresh guarantees obtained for the fidelity of a manager of bank without disclosing his previous defalcations (misappropriation/embezzlement) – Held, sureties not liable for further defalcation. 

Distinction between a contract of indemnity and a contract of guarantee

Sl. No.	Basis	Contract of indemnity	Contract of guarantee
1	No. of parties	There are two parties – the indemnifier (promisor) and the indemnified/indemnity-holder (promisee)	There are three parties- the creditor, the principal debtor and the surety.
2	Type of liability	The liability of the indemnifier to the indemnified is primary and independent.	The liability of the surety to creditor is collateral/secondary; the primary liability being of the principal debtor.
3	No. of contract(s)	Only one contract, i.e. between the indemnified	There are three contracts : one between the principal debtor and the creditor, the second between the creditor and the surety (guarantee) and the third between the surety and the principal debtor ((indemnity).
4	Request to contract	Not necessary for indemnifier to act at request of the indemnified.	Surety gives the guarantee at the request of the surety.
5	Arising of liability	Liability of indemnifier arises only on happening of contingency.	The liability of principal debtor is already there on an existing debt; the liability of surety arises only on default by the principal debtor.
6	Right to sue	Indemnifier cannot sue a third party for loss in his own name unless there is assignment in his favour.	On discharging the debt of the principal debtor, the surety steps into the shoes of the creditor and can sue the principal debtor in his own right.

Kinds of guarantee -  May be –

a)      for repayment of a debt – existing or future.

b)      for payment of the price of goods sold on credit, or

c)      for good conduct or honesty of a person employed in a particular office (known as fidelity guarantee).

Can also be differentiated as  -

a)      Specific guarantee – extends to a single transaction or debt – comes to end when the guaranteed debt is discharged or the promise is performed. 

b)      Continuing guarantee : extends to series of transactions – liability of surety extends to all transactions contemplated unless revocation of guarantee – may also cover continuing transactions for a fixed period. 

Example :  S guarantees payment to C to the amount of Rs.10,000 for any goods he supplies to P from time to time – C supplies P with goods to the value of above Rs.10,000 – P pays for it – afterwards C supplies goods to the value of Rs.20,000 – P fails to pay – guarantee of S is a continuing one and he is liable to C to the extent of Rs.10,000. 

Kay V Groves  - G provides guarantee in following terms “I hereby agree to be answerable to K for the amount of five sacks of flour to be delivered to T, payable in one month” – five sacks actually supplied – T paid for them -  further supplies made during the same month for which T failed to pay – Held, it was not a continuing guarantee to cover subsequent deliveries though not exceeding in the whole five sacks – G not liable for various subsequent parcels. 

Revocation of continuing guarantee  - revocation can be as to future transactions only – modes :

a.       By notice of revocation by surety to the creditor.

Offord V Davies – S stands surety for P for any amounts which C may lend to P from time to time in the next 12 months upto a maximum of Rs.10,000 – after 3 months, S revokes the guarantee when C had lent Rs.3,000 to P – S discharged from all liability to C for subsequent loans but remains liable for Rs.3,000 on default of P.

b.      By death of surety – however, liability for previous transactions remain.

c.        By other modes – novation, variation of terms of contract, release/ discharge of principal debtor, compounding with principal debtor, creditor’s act or omission impairing surety’s eventual remedy or loss of security.

Extent of surety’s liability   :

1. Surety’s liability co-extensive with that of principal debtor, unless specified to the contrary – it may be made less than that of principal debtor but never greater – creditor can sue surety without suing the principal debtor.

2. surety’s liability may be for a part of the entire debt or for the entire debt subject to a limit.

3. May be a continuing guarantee  - may be unlimited or upto a specified limit.

4. Where original agreement is void or voidable - surety liable as principal debtor – in such cases, surety’s liability is principal one and not collateral

5. If creditor does not sue the principal debtor within period of limitation – surety is not discharged.

6. Death of principal debtor or his discharge by law does not release the surety from his obligations.

Rights of surety :

1.      Against the creditor

a.       Right to require creditor to sue principal debtor first – liable to indemnify creditor for any expense or loss therefrom – in case of fidelity guarantee, he can ask the creditor to dismiss the principal debtor in case of proven dishonesty.

b.      Right to set-off or counter-claim  which debtor has against the creditor.

c.        On payment of the guaranteed debt, right to claim from creditor all the securities which he holds.

d.       Right to equities which creditor could have enforced against the principal debtor or persons claiming through him.

Example :  C advances to P Rs,2,000 on guarantee of S – C also takes further security for Rs.2,000 by way of pledge of P’s furniture – C cancels pledge – P becomes insolvent – S is discharged from liability to the amount of the value of furniture. 

e.       Right of subrogation – after payment of guaranteed debt by surety, surety steps into shoes of creditor – gets right to sue principal debtor for recovery. 

2.      Against the principal-debtor

a.       Right to be relieved from liability – before payment becomes due – debt must be ascertained – surety can compel principal debtor to relieve him from guarantee by paying off the debt.

b.      Right to indemnity – after payment made by surety to creditor, surety entitled to recover that amount alongwith any damage sustained from the principal debtor.

Example :  P indebted to C – S is surety – C sues S for recovery of debt – S defends suit having reasonable grounds to do so – S compelled to pay C amount of debt with costs – S entitled to recover from P amount of debt as well as costs paid by him.

3.      Against co-sureties

(a)    Right of contribution – each liable to contribute equally – liability may be limited to a maximum amount by each one – if any one makes payment to creditor, he is entitled to claim contribution from other co-sureties. 

(b)   Right on release of co-surety – even though creditor may release any of the co-sureties from his liability, the released co-surety will remain liable to others for contribution in event of default.

Discharge of surety :

1.      Discharge by revocation :

a) Revocation by surety by giving notice – continuing guarantee can be revoked as to future transactions by giving notice – specific guarantee cannot be revoked after liability has accrued.

b) Revocation by death – continuing guarantee revoked as to future transactions on death of surety – estate not liable for transactions after death even if creditor has no notice of death.

c) Revocation by novation – substitution of new contract for the old one – either between same parties or between any one of old parties and a new one – mutual discharge of old contract forms consideration for the new one.

2.      Discharge by conduct of the creditor –

(i) Variance in terms of contract – without the consent of surety – immaterial whether variation prejudicial to surety or not - discharged as to future transactions – where guarantee to perform several obligations, variance in nature of one will not discharge the rest.

Example :  S guaranteed payment for goods supplied by C to P – condition that 18 months’ credit to be given – C gives only 12 months’ credit – S is discharged.

General Steam Navigation Co. V Rolt – P contracted to built ship for C – contract money payable in instalments as work reached certain stages of completion – S became surety for due performance by P – C allowed P to draw large portion of last two instalments before they were due – Held, S discharged from liability. 

(ii) Discharge of principal debtor by creditor – wilful act or omission by creditor - surety is also released – but surety is not discharged by operation of law – omission of creditor to sue within the period of limitation does not discharge the surety.

      Hewison V Rickets  - C let goods to P under hire-purchase agreement – S guaranteed the payment of instalments – On instalments being in arrears, C seized the goods and determined the contract – then sued S on his guarantee – Held, as C had determined the contract, he could not recover from S.

      Example :  P contracts with C to build a house for C within a stipulated time – C has to supply the timber – S guarantees performance by P – C omits to supply the timber – S discharged from suretyship.

      Example :  C employs P at one place – S stood surety for P – this employment terminated – P employed by C at a different place – C takes security bond from another person – S is discharged. 

(iii) Compounding by creditor with principal debtor – contract by which creditor makes composition with or promises to give time to, or not to sue the principal debtor – surety is discharged unless he assents to such contract. 

         Midland Motor Showrooms Ltd V Newman  - P purchased motor car from C under hire-purchase agreement – S guarantees performance of the contract – for valuable consideration, C gives further time to P for payment of one of the instalments – Held, P discharged from any further liability.

         But in the following cases the surety is not discharged : 

(a)    where contract to give time to principal debtor is made by creditor with a third person and not with the principal debtor.

(b)   Mere forbearance on part of creditor to sue the principal or to enforce any other remedy against him, in the absence of anything to the contrary in the guarantee.

(c)    Release of one of the co-surety by the creditor does not discharge the other co-sureties – the surety so released is not discharged from his liability to the other sureties. 

(iv) Creditor’s act or omission impairing surety’s eventual remedy against principal debtor.

General Steam Navigation Co. V Rolt – P contracted to built ship for C – contract money payable in instalments as work reached certain stages of completion – S became surety for due performance by P – C allowed P to draw large portion of last two instalments before they were due – Held, S discharged from liability. 

Example : S gives guarantee for fidelity of a manager of bank – manager indulges in malpractices – directors wilfully ignore it – S stands discharged from obligation by conduct of the directors

(v) Loss of security – if creditor loses any security given to him at the time of contract of guarantee, or parts with it without consent of surety, surety is discharged to the extent of value of security – if separate debts secured by separate securities, loss of one security does not discharge the other debts.

Example :  C advances to P Rs,2,000 on guarantee of S – C also takes further security for Rs.2,000 by way of pledge of P’s furniture – C cancels pledge – P becomes insolvent – S is discharged from liability to the amount of the value of furniture. 

3.      Discharge by invalidation  -

(i)           Guarantee obtained by misrepresentation concerning a material fact – with knowledge or consent of creditor – guarantee invalid.

(ii)         Guarantee obtained by concealment of a material fact is invalid.

London General Omnibus Co. V Holloway – L employed P as clerk to collect money – P misappropriated some receipts – L threatened to dismiss P – loss made good by P’s relations - L agreed to retain P in service on having a fidelity guarantee – H gave his guarantee – L did not made disclosure of P’s previous dishonesty - HeldHH

Held, the surety believed he was making himself answerable for a presumably honest man, not for a known thief – owning to non-disclosure by L, guarantee could not be enforced against H.

(iii)       Guarantee on contract that creditor shall not act on it until a co-surety joins – guarantee invalid if that other person does not join.

Example : S₂ signed a guarantee given to bank though it was intended to be joint and several guarantee of S₁, S₂, S₃ and S₄ – S₄ died without signing – bank did not agree with S₁, S₂ and S₃ to dispense with signature of S₄ – Held, S₂ not liable on guarantee. 

(iv)       Failure of consideration discharges the surety.

Example : P agrees to pay maintenance to C if C marries A – S guarantees performance of contract – A dies – S is discharged from surety. 

Discharge of contract

Discharge/termination of contract – all rights and obligations under contract cease – may be discharged by –

(1)   By performance

(2)   By agreement or consent

(3)   By impossibility of performance

(4)   By lapse of time

(5)   By operation of law

(6)   By breach of contract.

1. Discharge by performance – both parties fulfil their contractual obligations - within time - in prescribed manner – if only party fulfils its obligations, only that party discharged – gets right of action against other party for breach. 

May be –

a)      Actual performance – when both parties discharge their obligations.

b)      Attempted or tender performance – an offer to perform – where promisor offers to perform, but promisee refuses to accept performance, tender is equivalent to actual performance, except in case of tender of money – tenderer discharged without prejudice to his rights.

2. Discharge by agreement or consent – “a thing may be destroyed in the same manner in which it is constituted

Various methods are –

a)      Novation – new contract substitutes existing one – either between same parties or between one of the existing parties and a third party – must take place before expiry of old contract – in case new contract enforceable, parties can fall back upon the old contract.

Example : (i) A owes money to B – enters into agreement with B and gives him mortgage of his (A’s) estate – new contract replaces the old one.

Shanker Lal Damodar V A. Ajaipal  - existing mortgage discharged by substitution of new agreement of mortgage – new agreement not enforceable for want of registration – Held, parties could fall back upon the original mortgage.

b)      Rescission – when all or some terms of contract are cancelled – may be by mutual consent or on failure to perform by one party – party rescinding a voidable contract has to restore benefits received by him under the contract. Rescission may be (i) either total, or

                             (ii) partial -

Ø  Rescinding some terms of contract

Ø  Substituting new terms for old ones.

Ø  Adding new terms without modifying any old terms.

c)      Alteration – modification of one or more terms of old contract by mutual consent – old contract deemed to be discharged.

d)     Remission – acceptance of lesser fulfilment of promise made – e.g. acceptance of lesser amount than due in discharge of the whole debt – consideration not necessary for remission.

e)      Waiver – mutual abandonment of rights by parties to the contract – no consideration necessary for waiver.

f)       Merger – when inferior right accruing to a party under contract merges with superior right accruing to same party under same or other contract.

Example : P holds a property under a lease agreement – later P buys the said property under a different agreement – P’s rights as lessee merge into his rights as an owner

3. Discharge by impossibility of performance – also called pre-contractual or initial impossibility - may fall into two categories –

a) Impossibility existing at time of agreement – void ab initio – based on maxims – (i) lexion cogit ad impossibilia, i.e. law does not recognise what is impossible, and (ii) impossibilium nulla obligato est, i.e. what is impossible does not create an obligation – may be known or unknown to parties.

Couturier Vs. Hastie – H employed by C as del credere agent  to sell C’s cargo of corn which was in transit – H sold the cargo to a third person - Unknown to both,  the corn became fermented in transit and already sold by the master of the ship at an intermediate port – buyer repudiated the contract and H was sued for the price (being del credere agent) – Held, as goods had already been totally lost before the contract was made, the contract void ab initio due to impossibility of performance - H not liable. 

b) Impossibility arising subsequent to formation of contract – also known as post contractual or supervening impossibility – contract becomes void such act becomes impossible or unlawful – normally parties not discharged by supervening impossibility and are liable for damages – however, if caused by circumstances beyond their control, parties discharged from further performance – may be due to following reasons –

1. Destruction of subject matter – without fault of parties – contract discharged.

Taylor Vs. Caldwell – defendant agreed to let plaintiff use of their music hall between certain dates for concert – before the first day of concert, hall destroyed by fire without fault of either party – plaintiff sued defendant for their loss – Held, performance depended upon the continued existence of hall – performance becomes impossible on perishing of hall without default of the contractor – void.

Nickoll & Knight V Ashton, Edridge & Co. – cargo of cotton seed to be shipped by particular ship – before shipping, ship damaged by stranding – loading of cargo impossible – Held, contract discharged.

2. Non-existence or non-occurrence of particular state of things – also called ‘frustration of contract’.

Example – A and B contract to marry each other – before date fixed for marriage, A goes mad – contract becomes void.

Krell V Henry – H hired flat from K for June 26 and 27, 1902 for witnessing coronation procession of Kind Edward VII – K knew of  H’s purpose – coronation procession cancelled due to illness of King – Held, cancellation discharged the contract – H excused from paying the rent of the flat.

 3. Death or incapacity for personal service –

Robinson V Davison – R undertook to perform at concert for certain price – before she could perform, she was taken seriously ill – Held, she was discharged due to illness.

4.Change of law

Baily V De Crespigny  - D leased land to B – agreed to erect a building on adjoining land – subsequently, the adjoining land acquired by railway company under statutory authority – Held, D excused from performance of contract.

Noor Bux V Kalyan  - A agreed to transport B’s goods – subsequently, A’s trucks requisitioned by government under statutory power – Held, contract discharged

5. Outbreak of war – contract entered into with alien enemy during war is unlawful and void – contracts entered into before outbreak of war, are suspended during war and may be revived after the war is over.

In following cases, contract not discharged on grounds of supervening impossibility –

a) Difficulty of performance – may be due to unforeseen events or delays

Blackburn Bobbin Co. V Allen & Sons – A sold Finland timber to B - to be delivered between July and September – Before actual delivery, war breaks out in August – transport disorganised – A unable to deliver – Held, A not discharged.

Tsakiroglou & Co. Ltd. V Noblee Thori G.m.b.H.  – A agreed to sell 300 tons of Sudan groundnuts to B c.i.f. Hamburg – usual route via Suez Canal – Shipment to be made in November/December, 1956 – canal closed on November 2, 1956 – reopened only in following April – A refused to ship goods via Cape of Good Hope – pleaded contract frustrated by reason of closing of Suez Canal – Held, contract not frustrated as A could have transported goods via Cape of Good Hope.

B) Commercial impossibility – contract not discharged on non-realisation of expected high profits or increase in cost of acquisition because of outbreak of war or inflation or sudden depreciation of money.

Karl Ettlinger V Chagandas & Co.  – A promised to send goods from Bombay to Antwerp in September – before shipment, war breaks out – sharp increase in shipping rates – Held, contract not discharged.

C) Impossibility due to failure of third person – where non-performance due to default of third person on whose work the promisor relied – contract not discharged.

Harnandrai Fulchand V Pragdas – A entered into contract with B for sale of certain type of cloth to be produced by C – C did not manufacture that cloth- Held, A liable for damages.

Ganga Saran V Ram Charan – A agreed to sell to B specified quantity of cotton goods to be manufactured by a particular mill – time schedule agreed upon for delivery – mill failed to produce goods - A could not fulfil his agreement with B – Held, B entitled to recover damages from A. 

D) Strikes, lock-outs or civil disturbances –

Budget V Binnington – Unloading of ship delayed beyond date – due to strike by dock workers – Held, ship-owners entitled to damages, the impossibility of performance being no excuse.

Jacobs V Credit Lyonnais – A agreed to supply to B certain goods procured from Algeria – goods not produced due to riots and civil disturbance in Algeria – Held, there was no excuse for non-performance of contract.

E) Failure of one of the objects – where contract entered into with several objects, failure of one of them does not discharge the contract.

Herne Bay Steamboat Co. V Hutton – HB agreed to let out boat to H for viewing a naval review on occasion of coronation of Edward VII and for sailing around the fleet – naval review cancelled due to king’s illness – but fleet assembled – boat could be used to sail around the fleet – Held, contract not discharged.

4. Discharge by lapse of time – due to the performance becoming time barred on applicability of the Limitation Act, 1963.

5. Discharge by operation of law-

a.       by death – contracts involving personal skill or ability terminated on death of promisor – in other contracts, rights and liabilities devolve on legal representatives

b.      by merger - when inferior right accruing to a party under contract merges with superior right accruing to same party under same or other contract.

Example : P holds a property under a lease agreement – later P buys the said property under a different agreement – P’s rights as lessee merge into his rights as an owner

c.       by insolvency – person adjudged insolvent discharged from all liabilities incurred prior to such adjudication.

d.      By unauthorised alteration of terms of the written agreement – where a party makes any material alteration without consent of other party – voidable at the option of other party – if however alteration is not material, parties may opt to carry out the common intention.

6. Discharge by breach of contract – non-fulfilment of contractual obligation  - may be either –

A) Actual breach of contract – may take place -

1. at the time when performance due – one party fails or refuses to perform his obligation under the contract – if time is not essence of contract, the other party may accept delayed performance subject to payment of compensation.
2. During the performance of contract – non performance by one party – other party entitled to sue for breach of contract - may be by –

• Express repudiation – either by word or act.

Cort V Ambergate etc. Rly. Co. – C contracted with railway company to supply 300 tons of railway chairs at specified price – to be delivered in instalments – after delivery of 1.787 tons completed, railway company asked C to stop further delivery – Held, railway company liable for breach of contract.

• Implied repudiation – impossibility created by act of a party to contract – tantamounts to breach of contract – other party discharged from further performance.

O’Neil V. Armstrong – P, a British subject, engaged by Captain of a warship owned by Japanese government to act as fireman – Japanese government declared war on China – P was informed that the performance of contract would bring him under penalties of Foreign Enlistment Act – P left the ship – Held, he was entitled to recover the wages agreed upon.

B) Anticipatory breach of contract – in executory contract (performance still due), one party repudiates his obligation under the contract before the time for performance arrives – other party absolved from performance of his obligation under the contract – may also sue for breach of contract

May be done by –

• Express renunciation – e.g. before date of actual delivery, supplier intimates the buyer that he is not going to supply the goods.
• Some act so that performance becomes impossible

Lovestock V Franklyn  - A promised to assign to B within seven years, all his interest in a lease for a sum of £.140 – before expiry of seven years, A assigned his interest to another person – Held, this was anticipatory breach of contract by implied repudiation. 

• Anticipatory breach does not necessarily discharge the contract, unless the promisee so chooses.

Hochster V. De La Tour – D engaged H on 12^th April to enter into his services as courier – to accompany him upon a tour – employment to commence on 1^st June – on 11^th May, D wrote to H telling him that his services were no longer required – H brought a suit for damages although time for performance had not yet arrived – Held, suit of H tenable – entitled to damages.

If promisee refuses to accept repudiation by promisor and treats it as alive, the consequences may be –

• promisor may perform his promise when the time for performance arrives and promisee is bound to accept the performance.
• while the contract is still alive, a supervening impossibility may discharge the contract – promisee loses his right to sue for damages.

Avery V. Bowden – B chartered A’s ship – agreed to load it with cargo within 45 days at Odessa – when ship reached Odessa, B unable to supply the cargo – A did not accept refusal and continued to demand cargo – before expiry of 45 days, war breaks out rendering performance of contract impossible – Held, contract discharged and A could not sue for damages. 

Measure of damages in anticipatory breach of contract

• if contract ended by  promisee at once – damages will be measured by difference between price prevailing on the date of breach and the contract price.
• If contract kept alive till the date of performance – measure of damages will be difference between price prevailing on the date of performance and the contract price.       

Performance of contract

Performance complete when parties fulfil their respective obligations arising under the contract – within time and manner prescribed in the contract – actual performance or offer to perform must unless such performance dispensed with or excused.

Offer to Perform  : Sec.38 : tender to performance equivalent to actual performance – promisor excused from further performance – entitled to sue promisee for breach of contract. 

Essentials of valid tender :

1.      Must be unconditional – when not in accordance with terms of contract, it becomes conditional.

2.      Must be made for whole quantity contracted for or for whole obligation – if negligible deviation from terms of contract, may be allowed keeping in view practical aspect.

Shipton, Anderson & Co. V Weil Bros & Co.  – contract to deliver 4950 tons of wheat – seller delivered 4950 tons 55 lbs. – Held, contract duly performed by seller.

3.      Must be made by  promisor or his duly authorised agent.

4.      Promisor must be in position and be willing to perform his promise.

5.      Must be made at proper time and place – tender of goods after business hours or before due date is not valid tender.

6.      May be made to one of several promisees – deemed to have effect as if tender to all of them.

7.      In case of tender of goods, must give reasonable opportunity for inspection of goods.

Startup Vs. Macdonald – contract to sell 10 tons of linseed oil – to be delivered ‘within last 14 days of March’  - delivery tendered on 31^st March at 8.30 pm – defendant refused to accept goods owing to lateness of hour – Held, though hours unreasonable, defendant could accept delivery before midnight.

8.      In case of tender of money, must be in legal tender – if creditor refuses to accept it, debtor not discharged from debt – can be set up as defence by the debtor.

Refusal to perform promise wholly : Sec.39 :

When promisor refuses to perform his promise wholly – promisee entitled to repudiate the contract – deemed to have rescinded a voidable contract – bound to restore all benefits received by him under the contract – but if promisee gives tacit (implied) assent in continuance of contract, he cannot repudiate the contract.

Example : A, a singer, enters into contract with B, a theatre manager – A to sing at B’s theatre two nights every week for next two months for Rs.100 per performance – A wilfully absents herself on sixth night – B entitled to repudiate the contract – but if B allows A to sing on seventh night, he has signified tacit continuance – barred from repudiating the contract – but entitled to sue for damages.

Contracts of which performance not necessary  :

1. when its performance becomes impossible – contract unlawful and void.

Example : A contracts to take in cargo for B at a foreign port – A’s government afterwards declares war against country in which the foreign port situated – contract becomes void when war is declared.

Taylor Vs. Caldwell – defendant agreed to let plaintiff use of their music hall between certain dates for concert – before the first day of concert, hall destroyed by fire without fault of either party – plaintiff sued defendant for their loss – Held, performance depended upon the continued existence of hall – performance becomes impossible on perishing of hall without default of the contractor – void.

2. when parties agree to substitute a new contract for it or to rescind or alter it.
3. When promisee dispenses with the performance of promise, either wholly or in part – or extends the time of such performance – or accepts any satisfaction for it.
4. When voidable contract rescinded by person entitled to rescind it.
5. When promisee neglects or refuses to afford the promisor reasonable facilities for performance of his promise.
6. Example : A contracts B for repair of B’s house – B neglects or refuses to point out the places at which his house requires repairs – A excused for non-performance of contract due to such neglect or refusal when it is illegal.

Persons entitled to perform the promise :

• Promisor himself – contracts involving exercise of personal skill, volition or diligence of the promisor, e.g. contract to paint a picture or sing, or founded on personal confidence between the parties, e.g. contract to marry.
• Agent – duly authorised – only when personal consideration is not the foundation of the contract.
• Legal representatives – contracts other than those involving personal consideration  - liability limited to value of the property inherited.
• Contracts involving personal skill of promisor comes to end on death of the promisor.
• Third persons – when promisee accepts performance of the promise from third person, he is debarred from afterwards enforcing it against the promisor.
• Joint promisors – any or all of the joint promisors can fulfil the promise – valid discharge.

Rules regarding devolution of joint liabilities :

Unless specified to the contrary, all joint promisors must jointly fulfil the promise – if any promisor dies, his legal representatives liable jointly.

1. Unless express agreement to the contrary, any one of joint promisor may be compelled to perform – means liability is joint and several.
2. Joint promisor compelled to perform may claim contribution from other joint promisors.
3. Sharing of loss arising from default – in case of any joint promisor committing a default in contribution, remaining joint promisors must bear the loss arising from such default.

Example : A, B and C jointly promise to pay Rs.3,000 to D – C compelled to pay the whole sum – A becomes insolvent – A’s assets sufficient to pay off one-half of his debts – C entitled to recover Rs.500 (one-half of Rs.1000) from A’s estate and Rs.1250 (one-half of remaining Rs.2500) from B.

4. Release of one joint promisor does not discharge other joint promisors – released joint promisor continues to be liable to the other joint promisors. 

Rules regarding devolution of joint rights :

Unless specified to the contrary, right to claim performance lies with all joint promisees – if any one joint promisee dies, right rests with his legal representatives to claim jointly with other promisees – suit for enforcement must be instituted by all the joint promisees.

Persons entitled to demand performance :

1.      Promisee only.

2.      In few cases, third party – e.g. beneficiary of a trust, beneficiary of marriage or family settlement, principal etc.

3.      Legal representatives – in case of death of promisee.

Time and place of performance : As specified in the agreement.

1.      When no application to be made and no time specified – promisor to perform without application by promisee – within reasonable time.

2.      When time is specified and no application to be made – if date or day specified, promisor to perform without application by promisee – during business hours – at place and on day as specified.

3.      When application for performance on certain day and place – duty of promisee to apply for performance at proper place and within business hours.

4.      Application by promisor to promisee – when no place fixed, duty of promisor to apply to promisee to appoint a reasonable place for performance of promise.

5.      Performance in manner and at time specified by promisee.

Reciprocal promises – promises which form consideration or part of consideration for each other.  Types are -

1. Mutual and independent – each party must perform independently.

Example : A agrees to pay the price of goods to B on 1^st January.  B promises to supply the goods on 20^th January – promises are mutual and independent.

2. Conditional and dependent  - where performance of one set of promise is dependent upon prior performance of the other set.

Example – A promises to supply goods to B if B gives him payment in advance – if B does not give the advance, A need not perform his promise.

3. Mutual and concurrent – both set of promises to be performed simultaneously – e.g. sale of goods for cash.

Rules regarding performance of reciprocal promises :

1. Simultaneous performance – promisor need not perform his promise unless promisee ready and willing to perform his promise.

2. Order of performance – where order expressly specified in contract – performance must be in the specified order – if no order specified – then in the order which nature of transaction requires.

3. Effect of one party preventing another from performing his promise – contract voidable at the option of the party so prevented – also entitled to sue for compensation.

4. Effect of default of promise to be performed first – cannot claim performance of promise from the other party – other party can sue for compensation.

5. Reciprocal promises to do things legal and also other things illegal – if severable, the legal part is valid while the illegal part is void -  if not severable, then both set of promises are illegal and void. 

Time as essence of contract :

Performance of contract within specified time is essential – breach entitles the other party to consider it as repudiation – Time is essence or not in following types of contracts –

1. Commercial transactions – time is important factor

Mahabir Prasad Rungta V Durga Datt – transporter contracted to transport coal from colliery to railway station – colliery owner to keep the road in repair and arrange for petrol – colliery owner to pay for work done by 10^th of next month – transporter rescinded contract on allegation of non performance of promises by colliery owner – Held, in commercial transactions time is ordinarily of the essence of the contract.

2. Construction contracts – being construction a commercial service, time is essence of contract.

3. Sale transactions – courts to determine whether time factor essential or not depending on facts of each case.

China Cotton Exporters V. Bihari lal Ramchandra Cotton Mills Ltd.  – appellants carried on import business – contracted to supply quantity of Italian staple fibre cotton to respondent mill – shipment to take place in October or November – contract included remark “this contract is subject to import licence and therefore the shipment date is not guaranteed’ – part of goods supplied and accepted – rest not supplied – Held, in spite of shipment date being not guaranteed, supply within October/November, 1950 was guaranteed – time was essence of contract – buyer entitled to avoid the contract.

4. Land and property dealings – normally in transactions of immovable property, time is not essence of the contract – intention to be ascertained from other factors like nature of property, possibility of price fluctuation etc.

5. Sale of shares – time is important factor being such transaction of commercial nature.

6. In non-commercial transactions, ordinarily presumed that time is not of the essence of contract.

Appropriation of payments by creditor  :

When a debtor owes several debts to a creditor and makes payment insufficient to satisfy the whole of his indebtedness, the following rules regarding appropriation of the payment made –

(i)     Where the debtor intimates – if express intimation at time of actual payment that payment to be applied towards discharge of particular debt – creditor must do so – if no express intimation, circumstances to be looked into for appropriation.

(ii)   if no express intimation by debtor, and circumstances are not indicative - appropriation according to discretion of creditor – can also apply to a time barred debt – however, cannot apply to payment of a disputed or unlawful debt – until declaration of appropriation to debtor, creditor can also alter the appropriation. 

Rulia Devi V Raghunath Prasad  - unless specified to the contrary, payment to be first applied to the interest - after interest fully paid off, appropriation towards the principal.  

(iii)  Where debtor does not intimate and creditor fails to appropriate – appropriation in chronological order, i.e. in order of time – if debts are of equal standing, payment to be applied in discharge of each debt proportionately.  

Rule in Clayton’s Case : applicability where parties have several distinct debts between them and not to a single debt payable by instalments – unless there is a contrary intention, appropriation in order of date – first item on debit side to be discharged by first item on credit side.

Assignment of contracts  - transfer of contractual rights and liabilities to third party – with or without concurrence of the other party to the contract – assignment requires consideration between assignor and assignee – if no consideration, assignment revocable by assignor – third party to have same right of rescission against assignee as he had against assignor – notice to debtor must – if no notice given to debtor, payment made by debtor to assignor himself will constitute good discharge. 

Example : If A owes Rs. 500 to B and B owes similar amount to C – B has right to receive from A and is under liability to pay C – B can ask A to pay directly to C – if A accepts, that will be assignment of B’s right to C. 

Assignment by operation of law – by either of following two ways –

(i)     Death – upon death of a party – his rights and liabilities devolve on his heirs and legal representatives (except contracts requiring personal skill or services)

(ii)   Insolvency – on insolvency, rights and liabilities incurred prior to adjudication pass to Official Receiver or Assignee. 

Assignment by act of parties  - by wilful assignment.

Assignment of contractual obligations subject to following rules –

A.    Contractual obligations involving personal skill cannot be assigned.

B.     Promisor cannot assign his liabilities under a contract – promisee cannot be compelled to accept any other person as the person liable to him on the promise.

Robson Sharpe V Drummond  - D hired carriage from S at yearly rent for five years – S undertook to paint the carriage every and keep it under repair – contract with S alone - S retired from business after three years – R, a partner of S, informed D that he would maintain the carriage and receive payment – D refused to deal with R and returned the carriage - Held, D entitled to do so.

c. Contractual obligations can be performed through agent, unless personal skill involved – however, original party remains liable under the contract.

d. Promisor may transfer his liability under consent of promisee and transferee – in such cases, substitution of old contract by a new contract - novation takes place only by tripartite agreement between parties.

Assignment of contractual rights  : Subject to following rules –

1. Rights and benefits under contract not involving personal skill may be assigned – subject to all equities between original parties.  
2. Actionable claim (e.g. money debt, shares held in a company) can be assigned – must be through an instrument in writing – notice to debtor must.