assignment of contract under indian contract act

COMMERCIAL LAW BLOG

Research & Updates

Sub-contracting and Assignment : Resolving the Legal Conundrum

assignment of contract under indian contract act

The performance of a contract may require third party involvement towards the fulfilment of obligations under a contract. In certain specific circumstances, the contracting parties may decide to “sub-contract” or “assign” their rights and obligations to a third party depending upon the nature of the contract.

In common parlance, sub-contracting and assignment are used interchangeably, however, a significant difference lies between the two when one examines the terms from a legal stand point. This post aims to discuss the concept of Sub-Contracting and Assignment and explains the key difference between the two concepts.

Sub-contracting

Sub-contracting refers to the delegation of certain duties and obligations by contracting parties to a third party, i.e. a sub-contractor who aids in the performance of the contract. According to the Black’s Law Dictionary, a sub-contract is “where a person has contracted for the performance of certain work and he, in turn, engages a third party to perform the whole or part of that which is included in the original contract, his agreement with such third person is called a subcontract and such person is called a subcontractor .” [1] A subcontractor could be a company, self-employed professionals or an agency undertaking to fulfil obligations under a contract.

Sub-contracting is generally undertaken in complex projects where the contract has a prolonged life cycle or multiple components for completion of a project, for instance, infrastructure contracts, construction contracts, renewable energy contracts or certain information technology-related contracts. However, the rights and duties of the sub-contractor under the sub-contracting agreement are relatively similar to that of the principal contractor in the main agreement.

Furthermore, while drafting a contract, one must ensure to incorporate a clause on sub-contracting which clearly spells out that parties to the contract shall sub-contract the rights and obligations only after seeking prior written consent from the other party. The sub-contracting arrangement maybe two-fold, depending upon the nature of the main contract:

Primarily, the basic idea behind delegation of the obligations to a sub-contractor is to ensure greater flexibility in the performance of the contract. However, it is imperative to enter into a sub-contractor’s agreement that specifies all the details of the work to be performed by the subcontractor, including optimum time required to accomplish the task, payment of charges to the subcontractor, termination of the agreement, etc.

While subcontracting is time-saving and cost efficient, it may result into legal issues between the contracting parties. For instance, issues may arise with respect to the payment conditions where the payment to sub-contractor is contingent upon or linked to the principal contractor receiving its payment from the employer. Further, the courts in India have always upheld the principle of privity of contract between employer and the principal contractor on the one hand and between the principal contractor and sub-contractor(s) on the other. The Supreme Court of India in the case of Zonal General Manager, Ircon International Ltd. v. Vinay Heavy Equipments [2] upheld that in the absence of a back-to-back covenant in the main contract, “ the distinct and sole liability of the middle-contractor is presumed and that the rules in relation to privity of contract will mean that the jural relationship between the employer and the main contractor on the one hand and between the sub-contractor and the main contractor on the other will be quite distinct and separate” . Therefore, in order to avoid ambiguities and future legal squabbles, careful consideration must be given while drafting specific terms and obligation that will pass down the contractual chain.

Assignment of contract refers to an act of transferring contractual rights and liabilities under the contract to a third party with other party’s concurrence. Section 37 of the India Contract Act, 1872 (“ Contract Act ”) enables the contracting parties to dispense with the performance of a contract by way of an assignment. While the principle of assignment is well recognized under Indian law, it derives its origin from the English law.

Assignment of rights is a “complete transfer of rights to receive benefits” accruing to one party under a contract. Performance of a contract may be assigned as long as the contracting parties provide their consent towards the assignment. However, the act of assignment needs to be looked at from the perspective of the contracting parties. Essentially, there are three parties involved, namely, the assignor, assignee and obligor.

An important principle affecting assignments is that the burden or liability under a contract cannot be assigned. Essentially, the moot question that often arises is with respect to assignment of “rights” vis à vis assignment of “obligations”. The Supreme Court in the case of Khardah Company Ltd. v. Raymon & Co. (India) Private Limited [3] categorically distinguished between assignment of “rights” and “obligations”. The court upheld that, “ an assignment of a contract might result by transfer either of the rights or of the obligations thereunder. But there is a well-recognised distinction between these two classes of assignments. As a rule, obligations under a contract cannot be assigned except with the consent of the promisee, and when such consent is given, it is really a novation resulting in substitution of liabilities. On the other hand rights under a contract are assignable unless the contract is personal in its nature (or) the rights are incapable of assignment either under the law or under an agreement between the parties” . Primarily, the court clarified that obtaining prior consent to assign “obligations” under a contract would be considered as novation as it will result into substitution of liabilities and obligations to the assignee. Moreover, introduction of a new party into an existing contract will result into novation of a contract i.e. creation of a new contract between original party and new party. As the courts have interpreted that transfer of obligations can be undertaken through novation, the assignment clause in a contract must clearly deal with novation, if the intention is to transfer obligations.

Furthermore, the Supreme Court, in the case of Gopalbhai Manusudhan [4] , reaffirmed that whenever there is a case of assignment or even the transfer of the obligations, it must be acclaimed that there is the presence of the consent of the parties. Without the consent of the parties, the assignment will be not considered valid. In addition to upholding the legal point, this ruling also indicates that before establishing a commercial contract, the parties must consider the different complications of contracts, such as the objective of the contract and the presence of an assignability clause in the agreement.

Therefore, the judicial trend in India has time and again reiterated and laid down that rights under contract can be assigned unless (a) the contract is personal in nature i.e. requires personal engagement of a specific person or (b) the rights are incapable of assignment either under law or under an agreement between the parties. In the case of Robinson v. Davison [5] , the defendant’s wife pledged to perform piano at a concert on a specific date. Due to “her illness”, she was unable to fulfil her obligation, which was to play the piano at an event. The contract in this instance was ruled to be solely dependent on the defendant’s wife’s good health and personal talent, and the defendant’s wife’s illness led the contract to be void. Further, the court ruled that the defendant could not be held liable for damages as a result of the contract’s non-performance. The wife could not assign her right/obligation to a third party because the contract was founded on the “promisor’s expertise” in the aforesaid case.

While assignment is a boiler plate clause, it requires careful consideration on a case-to-case basis. For instance, in real estate transactions, a buyer would insist on retaining the right to assign the “agreement to sell” in favour of a nominee (a company, affiliate or any other third party), in order to facilitate final conveyance in favour of the intended buyer. Similarly, in lending transactions, a borrower will be prohibited from assigning rights under the contract, however, the lender will retain absolute and free right to assign/sell loan portfolios to other lenders or securitisation company.

The apex court has time and again reiterated that the best policy is to unequivocally state the intent with respect to assignment in the agreement to avoid litigation in the future. The contracting parties must expressly specify the rights and obligations stemming from assignment under a contract. Any agreed limitation on such an assignment must be expressly laid down in the contract to avoid adverse consequences.

For a person drafting a contract, it is important to understand these subtle differences, between sub-contracting and assignment. While “sub-contracting” is delegating or outsourcing the liabilities and obligations, “assignment” is literally transferring the obligations. It will be not fallacious to say that an “assignment” transfers the entire legal obligation to perform to the party assigned the obligation whereas, subcontracting leaves the primary responsibility to perform the obligation with the contracting party.

Archana Balasubramanian (Partner), Vaishnavi Vyas (Associate)

[1] Black’s Law Dictionary 4th ed. (St. Paul: West, 1951).

[2] 2006 SCC OnLine Mad 1107

[3] MANU/SC/0428/1962

[4] Kapilaben & Ors. v Ashok Kumar Jayantilal Seth through POA Gopalbhai Manusudhan 2019 (10) SCJ 269

[5] (1871) LR 6 Ex 269

Follow Blog via Email

Enter your email address to follow this blog and receive notifications of new posts by email.

Email Address:

This website does not provide any legal advice and is for information purposes only. Any reliance on information or opinion contained herein would be against the advice of the administrators of this website and entirely at risk and cost of the recipient or user of this information. No attorney-client relationship is formed through this website, directly or indirectly. Opinions are of authors and does not necessarily bind the administrators or owners of the website or the law firm.

Create a website or blog at WordPress.com

Already have a WordPress.com account? Log in now.
Subscribe Subscribed
Copy shortlink
Report this content
View post in Reader
Manage subscriptions
Collapse this bar

India: Subcontracting v. Assignment

The performance of a contract may require third party involvement towards the fulfilment of obligations under a contract. In certain specific circumstances, the contracting parties may decide to "sub-contract" or "assign" their rights and obligations to a third party depending upon the nature of the contract.

Sub-Contracting

Sub-contracting refers to the delegation of certain duties and obligations by contracting parties to a third party, i.e. a sub-contractor who aids in the performance of the contract. According to the Black's Law Dictionary, a sub-contract is "where a person has contracted for the performance of certain work and he, in turn, engages a third party to perform the whole or part of that which is included in the original contract, his agreement with such third person is called a subcontract and such person is called a subcontractor ." 1 A subcontractor could be a company, self-employed professionals or an agency undertaking to fulfil obligations under a contract.

Primarily, the basic idea behind delegation of the obligations to a sub-contractor is to ensure greater flexibility in the performance of the contract. However, it is imperative to enter into a sub-contractor's agreement that specifies all the details of the work to be performed by the subcontractor, including optimum time required to accomplish the task, payment of charges to the subcontractor, termination of the agreement, etc.

While subcontracting is time-saving and cost efficient, it may result into legal issues between the contracting parties. For instance, issues may arise with respect to the payment conditions where the payment to sub-contractor is contingent upon or linked to the principal contractor receiving its payment from the employer. Further, the courts in India have always upheld the principle of privity of contract between employer and the principal contractor on the one hand and between the principal contractor and sub-contractor(s) on the other. The Supreme Court of India in the case of Zonal General Manager, Ircon International Ltd. v. Vinay Heavy Equipments 2 upheld that in the absence of a back-to-back covenant in the main contract, " the distinct and sole liability of the middle-contractor is presumed and that the rules in relation to privity of contract will mean that the jural relationship between the employer and the main contractor on the one hand and between the sub-contractor and the main contractor on the other will be quite distinct and separate" . Therefore, in order to avoid ambiguities and future legal squabbles, careful consideration must be given while drafting specific terms and obligation that will pass down the contractual chain.

Assignment of contract refers to an act of transferring contractual rights and liabilities under the contract to a third party with other party's concurrence. Section 37 of the India Contract Act, 1872 ("Contract Act") enables the contracting parties to dispense with the performance of a contract by way of an assignment. While the principle of assignment is well recognized under Indian law, it derives its origin from the English law.

Assignment of rights is a "complete transfer of rights to receive benefits" accruing to one party under a contract. Performance of a contract may be assigned as long as the contracting parties provide their consent towards the assignment. However, the act of assignment needs to be looked at from the perspective of the contracting parties. Essentially, there are three parties involved, namely, the assignor, assignee and obligor.

An important principle affecting assignments is that the burden or liability under a contract cannot be assigned. Essentially, the moot question that often arises is with respect to assignment of "rights" vis à vis assignment of "obligations". The Supreme Court in the case of Khardah Company Ltd. v. Raymon & Co. (India) Private Limited 3 categorically distinguished between assignment of "rights" and "obligations". The court upheld that, " an assignment of a contract might result by transfer either of the rights or of the obligations thereunder. But there is a well-recognised distinction between these two classes of assignments. As a rule, obligations under a contract cannot be assigned except with the consent of the promisee, and when such consent is given, it is really a novation resulting in substitution of liabilities. On the other hand rights under a contract are assignable unless the contract is personal in its nature (or) the rights are incapable of assignment either under the law or under an agreement between the parties" . Primarily, the court clarified that obtaining prior consent to assign "obligations" under a contract would be considered as novation as it will result into substitution of liabilities and obligations to the assignee. Moreover, introduction of a new party into an existing contract will result into novation of a contract i.e. creation of a new contract between original party and new party. As the courts have interpreted that transfer of obligations can be undertaken through novation, the assignment clause in a contract must clearly deal with novation, if the intention is to transfer obligations.

Furthermore, the Supreme Court, in the case of Gopalbhai Manusudhan 4 , reaffirmed that whenever there is a case of assignment or even the transfer of the obligations, it must be acclaimed that there is the presence of the consent of the parties. Without the consent of the parties, the assignment will be not considered valid. In addition to upholding the legal point, this ruling also indicates that before establishing a commercial contract, the parties must consider the different complications of contracts, such as the objective of the contract and the presence of an assignability clause in the agreement.

Therefore, the judicial trend in India has time and again reiterated and laid down that rights under contract can be assigned unless (a) the contract is personal in nature i.e. requires personal engagement of a specific person or (b) the rights are incapable of assignment either under law or under an agreement between the parties. In the case of Robinson v. Davison 5 , the defendant's wife pledged to perform piano at a concert on a specific date. Due to "her illness", she was unable to fulfil her obligation, which was to play the piano at an event. The contract in this instance was ruled to be solely dependent on the defendant's wife's good health and personal talent, and the defendant's wife's illness led the contract to be void. Further, the court ruled that the defendant could not be held liable for damages as a result of the contract's non-performance. The wife could not assign her right/obligation to a third party because the contract was founded on the "promisor's expertise" in the aforesaid case.

While assignment is a boiler plate clause, it requires careful consideration on a case-to-case basis. For instance, in real estate transactions, a buyer would insist on retaining the right to assign the "agreement to sell" in favour of a nominee (a company, affiliate or any other third party), in order to facilitate final conveyance in favour of the intended buyer. Similarly, in lending transactions, a borrower will be prohibited from assigning rights under the contract, however, the lender will retain absolute and free right to assign/sell loan portfolios to other lenders or securitisation company.

For a person drafting a contract, it is important to understand these subtle differences, between sub-contracting and assignment. While "sub-contracting" is delegating or outsourcing the liabilities and obligations, "assignment" is literally transferring the obligations. It will be not fallacious to say that an "assignment" transfers the entire legal obligation to perform to the party assigned the obligation whereas, subcontracting leaves the primary responsibility to perform the obligation with the contracting party.

1.Black's Law Dictionary 4th ed. (St. Paul: West, 1951).

2. 2006 SCC OnLine Mad 1107

3. MANU/SC/0428/1962

4. Kapilaben & Ors. v Ashok Kumar Jayantilal Seth through POA Gopalbhai Manusudhan 2019 (10) SCJ 269

5. (1871) LR 6 Ex 269

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Login to Mondaq.com

Password Passwords are Case Sensitive

Forgot your password?

Why Register with Mondaq

Free, unlimited access to more than half a million articles (one-article limit removed) from the diverse perspectives of 5,000 leading law, accountancy and advisory firms

Articles tailored to your interests and optional alerts about important changes

Receive priority invitations to relevant webinars and events

You’ll only need to do it once, and readership information is just for authors and is never sold to third parties.

Your Organisation

We need this to enable us to match you with other users from the same organisation. It is also part of the information that we share to our content providers ("Contributors") who contribute Content for free for your use.

Constitution of India
Indian Penal Code
Indian Contract Act
Indian Evidence Act
Transfer of Property
Intellectual Property Rights
Consumer Protection
Right to Information
Human Rights
Voice of Women
Expert Corner
Case Summary
Legal Maxims
General Knowledge
Submit Post

Assignment of Contract

An agreement enforceable by law becomes a contract. A contract involves both rights and obligations because a contract is an agreement enforceable by law. An agreement involves promises from both sides, and thus, there is the creation of both rights and obligations. For instance, X promises to sell his car to Y, and Y promises to pay Rs. 5,00,000 for his car. This constitutes a valid contract between X and Y. Here, the right on the part of X is to get Rs. 5,00,000 as consideration for selling his car, and the obligation for X is to deliver the car to Y as consideration for Rs. 5,00,000 paid to X by Y for selling his car.

Similarly, the right on the part of Y is to get the car delivered as consideration for Rs. 5,00,000 paid, and the obligation for Y is to pay Rs. 5,00,000 as consideration for the vehicle. If either X or Y fails to discharge their responsibility, there will be a breach of contract. In this way, a contract leads to the creation of both rights and obligations for both parties.

Assignment of contract refers to transferring contractual rights and liabilities under the contract to the third party with or without the other party’s concurrence. For instance, X owes Y Rs. 1,000, and Y owes Z the same amount. In this case, Y is under obligation to pay Rs. One thousand to Z and has the right to receive Rs. 1,000 from Z. In this case if Y asks Z to directly pay Rs. 1,000 to X, and if X accepts the same, there will be an assignment of Y’s right to Z. But, if in a similar situation, instead of transferring his ownership, Y would have transferred any of his obligations, then it would amount to novation. Section 37 of the Indian Contract Act, 1872, enables the parties to dispense the performance by way of the contract’s Assignment. Apart from conforming with the Indian Contract Act, 1872, there are exceptional circumstances where the contract assignment must be duly stamped in conformity with the provisions of the Indian Stamp Act, 1899.

The common law system did give effect to three kinds of transactions, viz., acknowledgment, novation, and power of attorney, which to some extent did work of an assignment. Under the Indian Contract Law, any form of contract can be assigned as long as consent is involved in the Assignment. The consent of the ‘promisee’ is necessary for assigning any obligation under the contract. There are three parties involved in contracts of Assignment, namely, the assignor, assignee, and obligor. The working and application of the contract assignment depend on a multiplicity of factors such as the contract’s language, applicability, availability of the assignment clause in the agreement, etc. There are contracts that contain a clause prohibiting Assignment, while other contracts require the consent of the other party to the Assignment.

But if a contract between two parties relies entirely on the’ promisor’s skill or expertise, then such a contract cannot be assigned under any circumstances. This is because the ‘promisee’ has entered into the contract based on the’ promisor’s skill or expertise. The case of Robinson v Davison is important case law in this regard . In this case, the defendant’s wife promised to play piano on a particular at a concert. She was unable to discharge her liability, that is, to play piano at the concert because of her illness. In this case, it was held that the contract was directly dependent on the good health and the personal skill of the defendant’s wife, and the illness of his wife discharged the contract. It was also stated that the defendant could not be made liable to pay compensation for the non-performance of the contract. As the contract was based on the ‘promisor’s skill in the above case law, the wife could not assign her right/obligation to any third party.

Case Study: Kapilaben & Ors. v Ashok Kumar Jayantilal Seth through POA Gopalbhai Manusudhan Case

Kapilaben & Ors. v Ashok Kumar Jayantilal Seth through POA Gopalbhai Manusudhan is a recent judgment delivered by the Supreme Court of India on November 25, 2019, concerning the Assignment of rights and Interests in a contract. In this judgment, the Supreme Court reaffirmed that a party to a contract could not assign its liabilities or obligations without the consent of the other party.

The facts of the case are: The appeals to the Supreme Court resulted from the Gujrat High Court’s decision that had allowed the appeals of the respondent against the trial court’s decision. The dispute, in this case, is related to a property owned by the appellants (Vendor). The appellant has had formulated an agreement to sell in favor of some of the respondents in 1986 regarding the above-mentioned property. The respondents, who were the original vendees, had paid a part of the consideration part. The Original Vendees, in 1987, assigned the former’s rights in favor of Respondent 1 and executed an agreement in favor of Respondent 1. This led to several disputes, and subsequently, Respondent 1 filed suits against the Original Vendees and the vendor demanding specific performance of the agreement executed in 1987. The Respondent’s suits were dismissed by the trial courts stating that the Original Vendees could not have assigned their outstanding obligation of paying Vendor the remaining money to Respondent 1 without the consent of the Vendor. On the other hand, Gujrat High Court reversed the decision of the trial court and declared the Assignment of rights in favor of Respondent 1 as valid.

The Supreme Court in its judgment reaffirmed the view of the trial courts and stated that: “ It is further relevant to note that under the 1987 agreements, payment of the outstanding consideration amount is to be made to the original vendees, not the Appellants, and possession/ownership of the suit property is to be handed over by the original vendees. The 1987 agreements nowhere provide for the discharge of the original vendees’ pending obligations towards the Appellants by Respondent Nos. 1. Hence, we are inclined to accept the Appellants’ argument that the 1987 agreements were not a case of Assignment but appear to be independent/sovereign agreements for sale which were contingent and dependent on the execution and implementation of the 1986 agreement. Therefore, the only way Respondent Nos. 1 can seek specific performance of the 1986 agreement against the Appellants is by proving the Appellants’ knowledge of and consent to transfer the original vendees’ rights and liabilities Respondent Nos. 1.”

From the above discussion, it is clear that the Assignment of contract refers to transferring contractual rights and liabilities under the contract to the third party with or without the other party’s concurrence. Section 37 of the Indian Contract Act, 1872, thatenables the parties to dispense is the performance by way of Assignment of the contract. Under the Indian Contract Law, any form of contract can be assigned as long as consent is involved in the Assignment. The consent of the ‘promisee’ is necessary for assigning any obligation under the contract. The working and application of the contract assignment depend on a multiplicity of factors such as the contract’s language, applicability, availability of the assignment clause in the agreement, etc. There are contracts that contain a clause prohibiting Assignment, while other contracts require the consent of the other party to the Assignment. The Assignment of obligations/liabilities is not possible in the case of contracts solely relying on the personal skill or expertise of the ‘promisor’.

The recent judgment of the Supreme Court in Kapilaben & Ors. v Ashok Kumar Jayantilal Seth, through POA Gopalbhai Manusudhan Case, also reaffirms that in case of transfer/assigning of outstanding obligations under the contract, the consent of the other party is a necessary condition to make the Assignment valid. Even though this judgment reaffirms the point upheld by law, it still suggests the parties to a contract consider the various complexities of contracts, the intent contract, the availability of the assignability clause in the written agreement, etc., before drafting a commercial contract.

References:

The Indian Contract Act, 1872, No. 2(h) (Indian).
Dr. R.K. Bangia, The Indian Contract Act, 2 (12 th Edition, 2005), Allahabad Law Agency, Haryana.
Krishnendu Kanungo & Pritisha Chakraborty , Assignment Of Rights And Its Practical Relevance In Financial Transactions: A Lender’s Perspective Manupatra, http://docs.manupatra.in/newsline/articles/Upload/E915DA6B-361C-493B-91D1-96D8EB703128.pdf (last accessed Mar. 12, 2021).
The Indian Contract Act, 1872, No. 37 (Indian)
Sir Oshley Roy Marshall, The Assignment of Choses in Action (Pitman Publishing 1950).
Krishnendu, supra note 3, at 1.
Khared & Co. Ltd. v Ramon & Co. Ltd., AIR 1962 SC 1810.
Krishnendu, supra note 3, at 2.
Robinson v Davison, (1871) L.R. Ex. 269.
BANGIA, supra note 1, at 255.
Ramesh Vaidyanathan & Aishini Mandal, Assignment Of Contractual Obligations – Is Consent Necessary Advayalegal (Dec. 6, 2019) https://www.advayalegal.com/blog/contractual-rights/ (last accessed Mar. 13, 2021).

Kluwer Arbitration Blog

Does the assignment of a contract assign the arbitration agreement: the indian perspective.

Under the Indian Contract Act 1872 (“ ICA ”), an arbitration agreement is a distinct and separate contract. Like all other contracts, it can be transferred by way of assignment to third parties under Section 37 of the ICA. The Supreme Court of India in Khardah Company Ltd vs Raymon & Co. (India) Private Ltd has held that there is a distinction between the assignment of “rights” and “liabilities.” A contract stands novated when assigning rights and liabilities to a third party. This raises a fundamental question – does the arbitration agreement also stand novated when the principal contract is assigned to a third party? If it does, then as held by the Supreme Court in Kapilaben v. Ashok Kumar Jayantilal Sheth the assignment of every obligation, such as the obligation to refer the dispute to arbitration, requires the parties’ fresh consent.

If, on the other hand, the arbitration agreement does not stand novated on assignment of the principal contract, does it mean that the arbitration agreement is automatically transferred along with the principal contract to the third party without the need for fresh consent (“ Automatic Transfer Approach ”)?

The United States courts have always been divided in their approach. Some earlier decisions, such as Hosiery Mfrs’ Corp. v. Goldston and Nissan Motor Acceptance Corp v. Ross , support the Automatic Transfer Approach. On the contrary, decisions like Lachmar v. Trunkline LNG Co . require express consent of the assignee (third party). However, in recent years courts have critically analysed the principal contract than merely choosing sides to ascertain assignment of the arbitration agreement, adopting an approach similar to the highest court of Bulgaria .

In similar vein, the Indian courts have been inconsistent in their decisions on whether the assignment of a contract also amounts to the assignment of the arbitration agreement to a third party.

Requirement of Specific Consent

In Delhi Iron and Steel Co. Ltd. v. U.P. Electricity Board , the Delhi High Court took the view that the assignment of the principal contract does not ipso facto result in the assignment of the arbitration agreement. The principal contract is assignable, but the arbitration agreement is not. Since an arbitration agreement is a distinct and separate agreement, the arbitral intent between the original party and the assignee of the other party must be made manifest. A similar view was adopted in Vishranti CHSL v. Tattva Mittal Corpn. (P) Ltd . holding that in the absence of specific consent to the assignment of the arbitration agreement, the arbitration agreement would not be assigned to the third party, even if the principal contract has been assigned.

The basis for this view can be found in the judgement of the Indian Supreme Court in M.C. Chacko v. State of Travancore which held that a person who is not a party to the contract cannot enforce the terms of the contract. However, it is pertinent to note that even in this judgement, the Supreme Court had recognised the assignment exception. Thus, the requirement of specific consent by the assignee to transfer the arbitration agreement is an approach adopted by Indian courts only in a handful cases.

No Separate Consent Required

The predominant view by Indian courts has been that the doctrine of separability enshrined under Section 16 of the Arbitration and Conciliation Act 1996 (“ Act ”) relates to the right of the arbitral tribunal to rule on its own jurisdiction. The doctrine of separability and its jurisprudence cannot be extended to mean that a separate arbitration agreement is to be executed between the parties at the time of assignment of a contract. Therefore, as held by the Bombay High Court in DLF Power Ltd. v. Mangalore Refinery & Petrochemicals Ltd . (“ DLF ”), a third party, to whom the principal contract is assigned, can enforce the arbitration agreement.

Specifically, if the rights and obligations under the principal contract are assigned to a third party and this third party also performs obligations under the contract, such as making payments, seeking extension of time or approval, joint survey, etc., this third party is entitled to invoke arbitration.

Consensual Theory of Arbitration

Taking a similar approach, the Delhi High Court in Rajesh Gupta v. Mohit Lata Sunda held that if the parties to the principal contract knew of the assignment and were fully aware that a third party ‘had stepped into the shoes’ of another party, the arbitration agreement stood assigned. These views are essentially based on the consensual theory in arbitration stated in Aerens Goldsouk International Co. Ltd. v. Samit Kavdia , which recognises that non-signatories to the arbitration agreement can invoke the arbitration clause and are thus ‘parties’ to the arbitration agreement under Section 2(1)(h) of the Act.

Consequently, the consensual theory aims to infer consent from the parties’ behaviour if an agreement is not self-evident. Agency, assignment, and group of companies doctrine are among such theories. Recently, the Delhi High Court in Tomorrow Sales Agency (P) Ltd. v. SBS Holdings Inc. , held that the non-signatories may either invoke the arbitration agreement, being the beneficiaries of the contract, or otherwise be bound by the same. The Court noted, “ 30. Gary B. Born, has explained that the legal basis for holding that a non-signatory is bound by an arbitration agreement includes “both purely consensual theories (e.g., agency, assumption, assignment) and non-consensual theories ( e.g. , estoppels, alter ego).” However, this decision has been challenged in an appeal which is currently pending. It would be interesting to see how the court deals with the question of third parties invoking arbitration, especially in cases of assignment of the principal contract.

Nonetheless, the Bombay High Court in DLF echoed a similar view and held that the arbitration clause does not take away the right of assignment of a party to a contract if it is otherwise assignable. The High Court noted that there is a clear distinction between the assignment of rights under a contract by a party who has performed its obligations under the contract and the assignment of a claim. The latter is a mere claim which cannot be assigned in law. It further observed that once the other party has accepted the assignment and insisted on compliance with rights, duties and obligations, the assignee steps into the shoes of the assignor and will be entitled to all rights, obligations and benefits, including the arbitration agreement forming part of the said agreement.

Similarly, in Bestech India (P) Ltd. v. MGF Developments Ltd. , the Delhi High Court considered the parties’ conduct post-assignment of the contract and rejected the submissions of the original party that the assignee had no locus standi to file an application for appointment of an arbitrator or that the assignee had no privity of the contract with the original party.

While Indian courts have been inconsistent in following the Automatic Transfer Approach when the principal contract is assigned, the predominant view aligns with international practices. Though the minority view requiring specific consent for assignment of the arbitration agreement may be correct on a strict reading of the requirement of express consent to refer the dispute to arbitration, a more practical and pragmatic approach requires inferring such consent by the assignment.

As explained by the Singapore Court of Appeal in the case of BXH v. BXI , “an arbitration agreement does not have a purpose or life independent of the substantive obligations that it attaches to.” Thus, the requirement of express consent, though sound, defies a more holistic understanding of the purpose of the arbitration agreement, i.e. , to refer disputes arising out of the obligations under the principal contract to arbitration.

While the views discussed above were from different Indian High Courts, the applicability and binding nature of the arbitration agreement to non-signatories through assignment has now been recognised in the recent landmark judgment by the Indian Supreme Court in Cox and Kings Ltd. v. SAP India Pvt. Ltd. and Another which has been discussed on the Blog here . Though the Supreme Court has not explicitly addressed the issue of the requirement of express consent for assignment of the arbitration agreement, the extension of the arbitration agreement to non-signatories implies that specific consent may not be required for assignment of the arbitration agreement when the principal contract is assigned.

The author would like to thank Mr. Ankit Singh, Senior Associate, Mr. Ayush Kumar, Associate, ANR LAW LLP and Ms. Ramya Singh, Final Year Student, Ram Manohar Lohia National Law University, Lucknow for their research assistance.

________________________

To make sure you do not miss out on regular updates from the Kluwer Arbitration Blog, please subscribe here . To submit a proposal for a blog post, please consult our Editorial Guidelines .

Profile Navigator and Relationship Indicator Access 17,000+ data-driven profiles of arbitrators, expert witnesses, and counsels, derived from Kluwer Arbitration's comprehensive collection of international cases and awards and appointment data of leading arbitral institutions, to uncover potential conflicts of interest. Learn how Kluwer Arbitration can support you.

References [ + ]

Essentials of a valid contract under the Indian Contract Act,1872: A Comprehensive Analysis

Proposal (Section 2 (a)) ? �When one person signifies to another his willingness to do or to abstain from doing anything to obtain the assent of that other to such act or abstinence, he is said to make a proposal.�[i] Agreement (Section 2(e)) ? �Every promise and every set of promises forming consideration for each other is called an agreement �[ii] Contract (Section 2(h)) ? An agreement enforceable by Law [iii]

They are made with free consent
Made between two or more competent parties.
Made for lawful consideration.
Made with a lawful object.
Not expressly declared to be void.
Offer and acceptance
Intention to create a legal obligation
The terms contained in an agreement must not be vague or uncertain
The agreement must be capable of performance
Other legal formalities
An offeror expresses his willingness to do or abstain from doing with a view to obtain the assent of the offeree
Intention to create a legal relation.
A valid offer could be in expressed form i.e in words either written or spoken or implied form i.e by conduct.
The terms of the offer must be certain and not ambiguous.
The acceptance must be communicated to the offeror by the offeree. Communication of acceptance by post: Section 4 of the Act lays down that �the communication of the acceptance is complete against the proposer when it is put in the course of transmission to him to be out of the power of the acceptor; as against the acceptor when it comes to the knowledge of the proposer.�[iv] Communication of acceptance by telephone ( Instant communication ): Parties can communicate the acceptance through direct communication, the communication is completed when the acceptance is clearly heard and understood. Thus, properly received by the offeror.
The acceptance must be unconditional and absolute. In the case of Bhagwandas Kedia v. Girdharilal & co .[v] Plaintiff made an offer on the telephone from Ahmedabad to the defendants in khamgaon to purchase some goods. The defendant accepted his offer. It was held that the contract was made where the acceptance was communicated i.e Ahmedabad. The contract is completed when the offeror had heard the acceptance at his end rather than when the acceptor has spoken the words of acceptance unlike the case when the letter of acceptance is posted and it gets completed the moment is posted.
Intention to create legal obligation Agreements made by the parties without an intention to create a legal obligation are not enforceable by law. The law presumes that the parties in case of domestic and social agreements do not have an intention to create a legal obligation. Illustration: A promised B to come over for lunch at his place but due to some work he couldn�t make it. B cannot sue A, as the agreement between them was not made with the intention to create a legal obligation. In the case of Balfour v. Balfour [vi], A husband agreed to pay his wife a certain amount as maintenance every month while he was abroad. Husband failed to pay the promised amount. The wife sued him for the recovery of the amount. As it was a social agreement she cannot recover the amount as the parties did not intend to create any legal obligations. The test of the intention of creating legal relations is objective. What matters is not what the parties had in mind, but what a reasonable man would think. If a promisor contends that he had no intention to create a legal obligation then this would not exempt him from liability. While in the case of commercial agreements the law presumes that the intention to create legal obligations is present.
The act of abstinence which is the consideration for the promise should be done at the desire of the Promisor.
It should be done by the promisee or other person. In India privity of consideration is not applicable,i.e the consideration can be moved from the promisor, promisee, or by the third party too but not if the third party is a minor.
A written and registered agreement based on natural love and affection between the near relatives.
A promise to compensate a person who has already voluntarily not by request done something for the promisor.
A promise made to pay a time-barred debt.
Lawful Object A contract must be made with a lawful object, which means it must not be forbidden by law; or defeat the provisions of any law, or is fraudulent, or involves or implies injury to the person or property of another is immoral or opposed to public policy. A contract made with an unlawful object is void. Forbidden by law means an agreement made for the purpose which is forbidden by law. For eg. Selling tobacco without a license. Defeat the provisions of law means that the object of the agreement is such that, though not directly forbidden by law, it would, if permitted, defeat the provisions of any law. For eg. an Agreement to sell drugs. Fraudulent purpose means an agreement made to defraud others Injurious to a person or his property: Agreement made to injure a person or his property has an unlawful object and is thus, void. Immoral Agreements are not allowed to be enforced by Law and immorality depends on the standards of morality prevailing at a particular time in the society and is approved by the Courts. For eg. A promise to cast a person in an adult film. Opposed to public policy means an agreement that is opposed to the policy of law at a stated time i.e opposed to the public good or public interest. According to Section 24, if a part of the consideration or object which is unlawful can be separated from the other lawful part, the Court will enforce only the lawful part. If no such aggregation is possible, the whole of the agreement is void.
Law acts as a protector of children's rights because they are not that mature to make rational judgments about contracts. Thus, an agreement with a minor is void except where the contract is for his benefit
Estoppel cannot be applied against a minor. The minor is not estopped against taking the defense of minority even if he acted fraudulently. The procedural rule of estoppel cannot override the plain provision of law laid down in the Contract Act.
A minor is liable for a tort but not liable for a tort arising out of contracts.
The doctrine of Restitution: If a minor misrepresents his age and obtains property, he can be compelled to restore it, only if it is traceable in his possession. If he sold the goods and converted them, he cannot be made to repay the value of the goods. This doctrine is not applied where the minor has taken cash instead of goods. In the case of Mohori Bibi v. Dharmodas Ghose [xvi], a minor executed a mortgage of Rs. 20,000/- and received a certain sum for the mortgage. The mortgagee filed a suit for the recovery of his mortgage money and the sale of the property in default. The Court held that an agreement by a minor was absolutely void as it is against him, thus the mortgagee cannot recover the money or sell the minor�s property.
Of unsound mind: According to Section 12 �a person is said to be of sound mind for the purpose of making a contract if, at the time when he makes it he's capable of understanding it and of forming a rational judgment as to its effect upon his interests�[xvii]. It will include a drunken or delirious person also. A patient in a mental asylum, who is sane during the intervals can make a contract in those periods when he is sane. In the case of Inder Singh v Parmeshwardhari Singh [xviii], property worth Rs. 25,000 was agreed to be sold for just Rs. 7000/-. His mother proved that he was a born idiot incapable of understanding the contract and making a rational judgment about his interests. The court held the contract to be void. Mere lunacy will not make the contract void and that person must be incapable of exercising his judgment.
Disqualified from contracting under any law he is governed. For eg. Alien enemies, Ambassadors, Convicts, Insolvents
Terms of the agreement must be certain The terms and conditions present in an agreement must be clear and unambiguous. According to Section 29 of the Act lays down that the contracts made with uncertain terms are void. Illustration: A agrees to sell B hundred tons of oil, it is not clearly intended which oil. Thus, the agreement is void. Here, A should have specified clearly the kind of oil he agreed to sell.
If the subject matter of the contact gets destroyed
If the event which is contemplated does not occur
If the party died or became incapable of performing the contract.
Any Government or legislative intervention transforms the contemplated conditions.
If there is any change in the circumstances.
Act of the third Person
Commercial hardships
Failure of one of the objects
Self-induced
In case of completed transfers or contracts.
Agreements by way of the wager (Section 30
Agreements to do impossible acts (Section 560
Uncertain and ambiguous agreements (Section 29)
Agreements without consideration (Section 25)
Agreement having unlawful consideration or object 9Section 23 and Section 24 )
Agreements in which the consent is based on a mistake (Section 20)
Agreements in restraint of marriage (Section 26), trade (section 27), and Legal proceedings (section 28)
Other legal formalities A contract can be in written form or can be entered orally. In certain cases, it is given under the Act that the contract must be in writing, registered or there must be witnesses, etc. All these legal formalities also decide the validity of a contract.
Section 2(a) Indian Contract Act, 1872
Section 2(e) Indian Contract Act, 1872
Section 2(h) Indian Contract Act, 1872
Section 4 Indian Contract Act, 1872
AIR 1966 SC 543
(1919) 2K.B. 571
Section 2(d) Indian Contract Act, 1872
Section 23 Indian Contract Act, 1872
1886 ILR 14 Cal 64
Section 13 Indian Contract Act, 1872
Section 15 Indian Contract Act, 1872
Section 16 Indian Contract Act, 1872
Section 21 Indian Contract Act, 1872
Section 22 Indian Contract Act, 1872
(1889) 14 App Cas 337
(1903) 30 Cal 539
Section 12 Indian Contract Act, 1872
AIR 1957 Pat 491
QB (1863) 3 B & S 826

Law Article in India

Please drop your comments, you may like.

A Study Of Mistakes In Cont...

Bridges v/s Hakesworth: Jus...

Differences Between Tort An...

Analysing Ajhudhi Prasad vs...

Principle of Preponderance ...

Mutual Rights And Liabiliti...

Legal question & answers, lawyers in india - search by city.

Law Articles

How to file for mutual divorce in delhi.

How To File For Mutual Divorce In Delhi Mutual Consent Divorce is the Simplest Way to Obtain a D...

Increased Age For Girls Marriage

It is hoped that the Prohibition of Child Marriage (Amendment) Bill, 2021, which intends to inc...

Facade of Social Media

One may very easily get absorbed in the lives of others as one scrolls through a Facebook news ...

Section 482 CrPc - Quashing Of FIR: Guid...

The Inherent power under Section 482 in The Code Of Criminal Procedure, 1973 (37th Chapter of t...

The Uniform Civil Code (UCC) in India: A...

The Uniform Civil Code (UCC) is a concept that proposes the unification of personal laws across...

Role Of Artificial Intelligence In Legal...

Artificial intelligence (AI) is revolutionizing various sectors of the economy, and the legal i...

File caveat In Supreme Court Instantly

Bringing you the Best Analytical Legal News

Validity of a contract, voidable contract and void agreement as given under Indian Contract Act, 1872

by Sharmin Godrej Irani†

Click to share on Facebook (Opens in new window)
Click to share on Twitter (Opens in new window)
Click to share on LinkedIn (Opens in new window)
Click to share on WhatsApp (Opens in new window)
Click to print (Opens in new window)
Click to email a link to a friend (Opens in new window)
Click to share on Telegram (Opens in new window)
Click to share on Reddit (Opens in new window)
Click to share on Tumblr (Opens in new window)
Click to share on Pinterest (Opens in new window)
Click to share on Pocket (Opens in new window)
Click to share on Skype (Opens in new window)

The Indian Contract Act, 1872 (the Act) defines the term “contract” under Section 2( h ) stating: “An agreement enforceable by law is a contract.” In other words, an agreement that the law will enforce is a contract [1] . Section 10 of the Act deals with enforceability. First part of Section 10 of the Act clearly states that “All agreements are contracts if they are made by the free consent of the parties competent to contract, for a lawful consideration and with a lawful object.” Offer and acceptance is not sufficient to constitute a contract. Thus, all agreements are contracts if they fulfil certain conditions of enforceability. These are the factors that must accompany an agreement to materialise into a contract. Whereas the second part of the section states that “and are not hereby expressly declared to be void”. The author discusses Sections 20, 26, 27, 28, 29, 30 and the first para of Section 56 in the light of this part of the provision.

Are void agreements said to be void ab initio?

The two terms void agreements and void ab initio should not be used interchangeably. Thus, the answer is in negative. The consequences of agreements that are void ab initio differ from void agreements. Void agreements are those agreements that are expressly declared to be void under Sections 24-30 of the Act under the heading “void agreements”.

The term “void” is given under Section 2( g ) of the Act which states as follows: “An agreement not enforceable by law is said to be void.” A void agreement is not enforceable at the option of either party [2] . e.g., agreements which are only partly illegal/unlawful i.e., which is opposed to the law of the land, the court will enforce the part which is not illegal provided that it is severable from the rest of the agreement. In many cases of contracts relating to trade or legal proceedings, the court knock out the objectionable clause of the agreement and allow rest to be enforced. Another example of severance, Section 27 says that an agreement shall be void to that extent i.e., to the extent of unreasonable restraint [3] . Whereas agreements that are void ab initio may be avoided altogether and if any price is paid, it cannot be recovered.

Consequences of void agreements

Illegality of an agreement is also a void agreement [4] , but it is not necessary that void agreement is always illegal. Sections 25 to 30 refer to cases in which agreement is only void, though the consideration is not necessarily unlawful. In respect to the main or the primary agreement nothing can be recovered under either kind of agreement and if something has been delivered or some payment made, it cannot be recovered back [5] . But we have seen above severance as an exception to the above rule under Sections 24-30 as it comes within the heading void agreements. Similarly, another exception to the above rule is in case of “collateral transactions”.

Collateral transactions as an exception

The only material difference between an illegal and void agreement relates to their effect upon collateral transactions. A collateral transaction means a transaction subsidiary to the main transaction. For example, where money is given to a person to enable him to pay a wagering debt, the wage is the main transaction and the loan subsidiary to it. If the main transaction is only void, its collateral transaction will remain enforceable. If the main transaction is illegal, for example, smuggling, a collateral transaction like money given to a person to smuggle, will also be tainted with the same illegality and the money will be irrevocable [6] . Thus, the first example points towards void agreements given under Sections 25-30 of the Act whereas the second example concerns those agreements that are void ab initio as given under Section 23 of the Act (unlawful consideration or object).

Whereas the first part of Section 10 dealing with void ab initio has been explained as follows:

Every contract is an agreement, but every agreement is not a contract. An agreement becomes a contract when following conditions are satisfied:

There is some lawful consideration for it.
The parties are competent to contract
Their consent is free.
The object is lawful. [7]

Why are those agreements whose consent is not freely obtained (except mistake) as given under Section 14 held to be voidable contracts? (This question has been answered under the heading voidable contracts). The author would like to point out Section 25 of the Act as well. Thus, agreement without consideration is held to be void agreement and not void ab initio. One of the ingredients of a valid contract is lawful consideration and not adequate consideration, the law recognises, with certain conditions, an agreement without consideration is a contract. But when an agreement the object and consideration of which is opposed to the law of the land, it is held to be void (although the word void ab initio is not expressly mentioned, the author expresses that these agreements are void ab initio). Parties are not, as a rule, so foolish as to commit themselves to an agreement to do anything obviously illegal, or at any rate to bring them into Court; so, the kind of question which arises in practice under this head is whether an act or some part of a series of acts, agreed upon between the parties does or does not contravene some legislative enactment or regulation made by lawful authority [8] (Thus, this is discussed under the heading “Agreements discovered to be void”).

Agreements discovered to be void

Section 65 of the Act deals with doctrine of restitution of any advantage received due to agreements discovered to be void and contracts that have become void. This type of validity is concerned with an agreement which never amounted to a contract. But the parties discovered this at a later stage. The effect of the principle laid down in the section is that when the parties have entered into an apparently valid contract and some benefits have been passed under it, and subsequently the contract is either discovered to be void or becomes void, the party who has received the benefits must restore them to the other. Thus, the section does not apply to a contract which the parties knew at the time of making it to be void. [9]

E.g., where parties discover their mistake as to a matter of fact essential to the agreement (under Section 20) or where a court of law holds it to be void under any of the Sections 23-30.

Unlawful object and doctrine of restitution

The concept of agreements whose object or consideration is unlawful in its entirety is based on the Latin term “ in pari delicto “. The expression “discovered to be void” presents some difficulty as regards agreements which are void for unlawful consideration (Sections 23 and 24). It seems that the present section does not apply to agreements which are void under Section 24 by reason of an unlawful consideration or object. The reason being that if the illegal purpose or any material part of it has been carried out, the money paid cannot be recovered back, for the parties then are equally at fault, and in pari delicto melior est conditio possidentis [10] . But there is an exception to this rule:

Firstly, the contract is still executory and the rule of “in pari delicto” . Where the contract is still executory in the sense that no part of the illegal purpose has been carried into effect, the money paid or goods delivered under it may be recovered. “But if he fails till the illegal purpose is carried out, or if he seeks to enforce the illegal transaction, in neither case can he maintain an action” [11] . Secondly, the parties are not at equal fault. Where the parties are not at equal fault, the less guilty may recover anything that he has given to the other under contract [12] .

Section 65 and mistake

Section 65 will cover cases of initial mistake [13] . Thus, the author at this point finds it appropriate to discuss the sections relating to “mistake” in the light of Section 13 dealing with the definition of “consent”. Thus, there may be an ambiguity or a fundamental error. Mistake may operate upon a contract in two ways. It may, firstly, defeat the consent altogether that the parties are supposed to have given, that is to say, the consent is unreal. Secondly, the mistake may mislead the parties as to the purpose which they contemplated. When a mistake does not defeat consent, but only misleads the parties, Section 20 of the Act shall apply [14] .

Explaining the above points in the light of its validity:

Under Section 20 an agreement is void by reason of mistake when both parties are mistaken as to a matter of fact essential to the agreement. A mistake as to an existing fact renders the contract void ab initio, but if the mistake is as to some future event, it is a binding contract which may be avoided at some future date if the expected event does or does not occur [15] . Thus, in the light of Section 65 of the Act where, for example, money is paid for the sale of goods, which unknown to the parties, have already perished at the time, the money is refundable. The principle will apply whether the agreement is void by reason of law or by reason of facts [16] .
Further Section 22 deals with agreements amounting to unilateral mistakes as to a matter of fact. These agreements are not held to be voidable contracts. Thus, the one party who was under mistake is not entitled to any relief. Also, no rectification is allowed and the person who was mistaken could not avoid the contract because it was his unilateral mistake [17] .

Initial agreement to do an act impossible in itself

Consequences

Section 56 of the Act deals with initial impossibility and subsequent impossibility. The author will deal only with initial impossibility in this segment. The essence of agreements which come within the ambit of first para of Section 56 is found in and read with Section 10 of the Act. Section 37 is not applicable to the first para of section 56 of the Act. The reason being that performance of promises arises after the parties have entered into a valid contract and their performance is dispensed with or excused under the provision of the Act.

The proposal can be made for anything. Legal as well as physical impossibility too. Thus, if the parties purport to agree to do something which is obviously impossible it is deemed to be a case in which they are not interested in performing their respective obligations or they do not understand at all as to what they are agreeing for [18] . This pre-contractual pre-existing impossibility may be known or unknown to the parties at the time of making of contract. If the parties are aware of such impossibility these agreements do not come within the heading void agreements but are those agreements ‘expressly declared to be void’ as given under Section 10 of the Act. Example of an initial impossibility will be – A agrees with B to discover a treasure by magic, being impossible of performance, the agreement is void. In case of pre-existing legal impossibility rendering an agreement unlawful, such as if there is no possibility of performance of the contract because it would be unlawful to do that, the agreement is void, such cases would also fall within Section 23 of the Act which declares that every agreement of which the object or consideration is unlawful is void [19] . Also, there is a difference between impossibility and commercial hardships. Thus, where the performance is not practically cut-off but only rendered more difficult or costly such cases do not fall within the purview of Section 56 of the Act [20] .

Contract becomes void

And when an agreement fulfilling all the requirements including enforceability came to be called a contract but subsequently on it becoming a contract ceases to be enforceable by law, then such contracts “becomes void” only “when it ceases to be enforceable”. This has been dealt in Section 2( j ) of the Act read along with Section 65 of the Act. Thus Section 2( j ) in comparison to Section 2( g ) deals with “unenforceable contract” rather than “not enforceable contract”. In other words, contract subsequently becomes unlawful or impossible of performance. Thus, the author uses the term “becomes void” rather than “void contracts” . This segment is to be read with Section 65 of the Act.

This segment will deal with:

Contract to do an act impossible/contracts becoming unlawful/illegal
Contingent contract becoming void
Voidable contracts which have been avoided.
Contract to do an act impossible

The essence of second para of Section 56 of the Act is found in Section 37 of the Act. The performance of agreements to do an act impossible in itself have been dispensed with or excused under the provisions of this Act. The parties need not perform their obligations. The parties are discharged from performing their obligations. There is an exception to this rule: when one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non-performance of the promise.

Contingent contract

The section emphasises that the contingency contemplated by the contract must be collateral to the contract. Distinguishing between proposal, acceptance and performance; a conditional offer differs from a contract wherein the condition is of uncertain nature. Firstly, a contract has already risen or a subsisting contract is there, but its performance cannot be demanded unless the contemplated event happens or does not happen [21] . Further Sections 32 and 33 of the Act deals with where enforcement depends upon happening or non-happening of an event. Thus, in case of enforcement of a contract depending on happening of an event, once the event has happened, the contingent contract becomes enforceable and where the performance of a contract depends upon the non-happening of an event, the parties have to wait till the happening of the event becomes impossible [22] .

Similar to the explanation given above, where enforcement of a contract under Section 32 depends on happening of a future uncertain condition and the event becomes impossible, such contract become void whereas Section 36 deals with contingent agreements is dependent on the occurrence of an impossible event such agreements are void from its very inception.

Thus, the applicability of the Sections 31-32 and 56 has been explained recently in National Agricultural Coop. Marketing Federation of India v. Alimenta SA [23] :

“47 . Section 32 of the Contract Act applies in case the agreement itself provides for contingencies upon happening of which contract cannot be carried out and provide the consequences. To this case, provisions of Section 32 of the Contract Act is attracted and not Section 56 . In case an act becomes impossible at a future date, and that exigency is not provided in the agreement on the happening of which exigency, impossible or unlawful, the promisor had no control which he could not have prevented, the contract becomes void as provided in Section 56 .”

Voidable contract which has been avoided

The expression “becomes void” is sufficient to cover the case of voidable contracts which has been avoided [24] . Thus Section 65 of the Act is applicable to voidable contracts that have been avoided as they become void under Section 2( j ) of the Act.

Voidable Contracts

Mutuality of contract

In the Concise Law Dictionary, the term mutuality of contract has been defined as: the doctrine of mutuality means that the contract must be mutually enforceable by each party against the other. An exception to the mutuality rule is voidable contract. Section 2( i ) defines voidable contract: an agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract. Voidable contract under the Act can be divided into two groups, contracts voidable in their inception under Sections 19 (voidability of agreements without free consent) and 19-A (power to set aside contract induced by undue influence) and voidable by subsequent default of one party under Section 39 (refusal of party to perform promise wholly), Section 53 (impossibility created by act of the party) and Section 55 (failure to perform at time fixed, time being of essence) [25] .

Unilateral promises and initial voidability

A unilateral promise is a promise from one side only and is intended to induce some action by the other party. The promisee is not bound to act, for he gives no promise from his side. But if he carries out the act desired by the promisor, he can hold the promisor of his promise [26] . Whereas voidable contracts are cases where lack of mutuality and obligation is due to some fact outside of the content of the bargain. These two classes of cases seem to be entirely distinguishable in principle. In the first, we have an entirely one-sided proposition. In the second, we have all of the affirmative elements of a valid contract, but the obligation of one of the parties is affected or taken away owing to the presence of some defence or negative element which does not affect the obligation of the other. Unilateral promises demand some mutuality or reciprocity of engagement as the basis of a contract in which one of the parties’ promises nothing definite in return [27] .

Conclusion:

The consequence of agreements that are void ab initio and void agreements differ. Void implies those agreements which are not enforceable whereas contracts that become void are unenforceable contracts. Similarly contracts that become void are basically valid contract but have become unenforceable due to reasons such as subsequent impossibility or there is Section 32 of the Act dealing with contingent contracts becoming void if the event becomes impossible. Whereas agreements that are discovered to be void is basically pre-existence of something which is subsequently found out. Voidable contracts lack mutuality but the reason for doing so was the presence of negative element while bargaining terms.

† Advocate, BSL LLB, DES Law College and LLM, ILS Law College, Pune.

[1] Avtar Singh, Law of Contract , Eastern Book Company, 7th edn., p. 2.

[2] Id ., 148.

[3] Id . , 287.

[4] See S. 24 of the Indian Contract Act .

[5] Avtar Singh, Law of Contract , 281.

[6] Id., 286.

[7] Id ., 3.

[8] Mulla, The Indian Contract Act , LexisNexis, 15th edn., p. 100.

[9] Avtar Singh, Law of Contracts , 342-343.

[10] Supra note 3 at 202.

[11] Avtar Singh, Law of Contracts , 282.

[12] Id., 345.

[13] Id., 343.

[14] Id ., 190.

[15] Supra note 3 at 96.

[16] Avtar Singh, Law of Contracts , 343.

[17] Id., 213.

[18] Sankhyan, Amar Singh, “Study of Dimensions of Principle of Frustation in Indian Contract Law System” , Journal of the Indian Law Institute, Vol. 37, No. 4, 1995, pp. 442-456, Jstor < www.jstor.org/stable/43953245 >. Accessed 25-11-2020.

[20] Avtar Singh, Law of Contracts , 321.

[21] Id., 290.

[22] Id., 292-293.

[23] 2020 SCC OnLine SC 381

[24] Supra note 3 at 203.

[25] Supra note 3 at 21.

[26] Avtar Singh, Law of Contracts , 84.

[27] “Mutuality and Consideration”, Harvard Law Review, December 1914, < https://www.jstor.org/stable/pdf/1325997.pdf >.

Section 125 CrPC: Can the second wife be entitled to maintenance from her husband?

Delhi HC granted bail to a man accused of raping woman he met on dating app on pretext of marriage

Do convicts have a fundamental right to procreate? Watch to know what Delhi High Court recently held

Criminology, Penology and Victimology book release

Book release of 8th edition of “Criminology, Penology and Victimology” revised by Sanjay Vashishtha

One comment.

Whether election for a constitutional Post falls under ” contract”, as promises are made by contestant to his electorate?

Join the discussion

SUGGESTIONS

Visual Try our Visuals feature which gives you an instant snapshot of the most relevant and landmark case laws.">

Cases cited for the legal proposition you have searched for.

Judgments 16962

...whether it is transferable or non-transferable. There was considerable argument before us on the question as to assignability of a contract . The law on the subject is well settled and might be stated in simple terms. An ...assignments. As a rule obligations under a contract cannot be assigned except with the consent of the promisee, and when such consent is given, it is really a novation resulting in substitution of liabilit... contract is personal in its character and incapable of assignment on that ground. But it is settled law that an arbitration clause does not take away the right of a party to a contract to...

...clients of ICICI Bank in favour of the assignee”. That, the assignment of a debt can never carry with it the assignment of the obligations of the assignor. Unless there is ...the borrower(s), an assignment of a debt can never carry with it the assignment of the obligations of the assignor unless there is a novation of the contract by all part...the borrower(s), the impugned deed of assignment is legally unsustainable without novation of original contract between ICICI Bank Ltd. (assignor) and the borrower(s) (assignee). We find no merit in the above argum...

...make assignment of the plot. The real question is whether the assignee has a legal right to claim performance of any part from the allottor. The answer of the said question depends upon the terms ... assignment of a contract might result by transfer either of the rights or of the obligations thereunder. But there is a well-recognised distinction between these two classes of assignments. As a rule...obligations under a contract cannot be assigned except with the consent of the promisee, and when such consent is given, it is really a novation resulting in substitution of liabilities. On the other hand ...

..., the Supreme Court held the compensation as falling in the latter category of a capital receipt. But, so far as the case before us is concerned, the assignment of the contract and the payment received...impaired the assessee in any manner in carrying on its business. In these circumstances, the payment for assignment of the contract , in our view, clearly is in the nature of a revenue receipt...business receipt. In the present case also the amount which is received by the assessee-company for assignment of a contract which it had entered into and which formed a part of its business activ...

...property, and the contract to assign thus becomes a complete assignment .”Applying the above principles to the facts of the instant case the High Court came to the... contract would, in equity, transfer the beneficial “interest” and of Jessel, M.R, in Collyer v. Isaacsthat “the contract to assign thus becomes a complete assignment ”. I find...mortgage security on existing chattels and also the benefit of what in form was an assignment of non-existing chattels which might be afterwards brought on to the premises. That assignment , in fact, constituted onl...

...appreciating that the assignor bank is only transferring its rights under a contract and its own asset, namely, the debt as also the mortgagee's rights in the mortgaged properties without in any manner affecting the rights ...held that the law on the subject of assignment of a contract is well settled. An assignment of a contract might result by transfer either of the rights or by transfer of...is a well recognized distinction between the two classes of assignments. As a rule, obligations under a contract cannot be assigned except with the consent of the promisee, and when such consent is given, it is really ...

...other party for assignment under Section 15(b) of the Specific Relief Act is only applicable in cases where the obligation is of a personal nature or where there is an express bar in the contract prohibiti...regarding development of housing scheme in the suit property shows that there was implied consent for assignment of rights under the 1986 agreement in favour of Respondent Nos. 1.III. Validity ...particularly deal with the assignability of contracts, this Court has opined time and again that a party to a contract cannot assign their obligations/liabilities without the consent of the other party. A ...

...P. Somarajan, J.:— The accused Nos. 4 and 5 respectively came up in two criminal cases foisted against them under Section 500 IPC, on the basis of a news item published in ‘Madhyamam Daily’ newspaper dated 29/06/2011. It...give the contract to Keltron, subsequently it was cancelled. It is at that juncture a news item was published in ‘Madhyamam Daily’ newspaper detailing the history of the alleged contract and attempt on...the part of the government to give the contract work to the defacto complainant, company. Now the company came up claiming that it would constitute defamation as against the company. 2...

...No.1, but what the learned Single Judge has overlooked is that there is a distinction between assignment of an obligation and the assignment of a right. The Constitution Bench of the ...obligations under a contract cannot be assigned except with the consent of the promise, and when such consent is given, it is really a novation resulting in sub-situation of liabili...concerned was situated. 14. Concerning the assignment of the right under the contract , on hiving off the business of defendant No.1 and the hived off business vested in defendant No.2...

...us, however, have no bearing on the point in question. They relate to sub-letting or assignment of a contract , contrary to the terms on which the contract was granted. For example there are cases in...own allegations. A large number of cases were cited before us as to whether the agreement was vitiated, as found by the learned Judge of the court below. Most of the cases cited before...contracts obtained from the railway company, that the defendants worked as the plaintiff's servants and that all the profits received by the carrying out of the contract ought to go to the plaintiff...

...vested in the insurer.16. The equitable assignment of the rights and remedies of the assured in favour of the insurer, implied in a contract of indemnity, known as “sub...is part of the law of contract and the other part of the law of restitution.”23. An “ assignment ” on the other hand, refers to a transfer of a.... Subrogation, as an equitable assignment , is inherent, incidental and collateral to a contract of indemnity, which occurs automatically, when the insurer settles the claim under the policy, by...

...essential from the assignment of a contract already broken, under which the only surviving right is the right to sue for damages? This right, it is to be observed, is quite distinct from and must not be...transferee of the reversion no question arises here, and we have nothing to do with it. But as between the lessor and the lessee the case is different. They had entered into a contract of leasing on...notice and thereupon to sue on the contract and enforce the penalty. That is the very point. Could he? For what is this, thus isolated, but a mere right to sue? How can it be distinguished in any...

...action, but as the enforcement of a cause of action legitimately supported by the underwriter's interest in recouping himself in respect of the amount of the loss which he had paid under the policy as ...insurance money or the right to claim the benefit of a contract not coupled with any liability.14. Section 6(e) of the Transfer of Property Act states that a mere right...maintenance. That interest must exist apart from the assignment and to that extent must be independent of it.15. A chose in action for breach of contract was not assignable at...

...he took the assignment of the policy on October 18, 1945 he was merely indulging in a gamble on Mahajan Deolal's life; the contract was therefore, void by reason of s. 30 of the Indian ...these contentions; because if Mahajan Deolal was himself guilty of a fraudulent suppression of material facts on which the respondent company was discharged from performing its part of the contract , the ap.... On behalf of the appellant, however, the contention was that s. 38 of the insurance Act provided a complete code for assignment and transfer of insurance policies and the assignment made in favour of...

...plaintiff in his evidence that the ' contract of bailment had been entered into by his agent. 4. I need not consider the case of assignment of a contract because in the in...filed by the consignor who was a party to the contract of consignment, the suit should have been dismissed, as it was a suit filed by a bare consignee against the Railway. The contention is well founded.... This is a case of bailment of goods to the Railway. The word "bailment" is thus defined in Section 148 of the Indian Contract Act :- "A "bailment" is the...

...sales-tax again, which the appellants contended, was not demandable as there were no second sales; the delivery of a kutcha delivery order did not amount to a sale of goods, but was only an assignment ...was only an assignment of a forward contract . Held, that the agreements...and the delivery of the kutcha delivery order did not amount to a sale of goods, but was only an assignment of a right to obtain delivery of the gunnies, which were not in existence ...

...Khardah Company Ltd. v. Raymon & Co. (India) Private Ltd. and Company, AIR 1962 SC 1810, the Supreme Court observed that an assignment of a ...rights or of the obligations thereunder. But there is well recognised distinction between these two classes of assignments. As a rule obligations under a contract cannot be assigned, except with the consent of the promisee ...the law or under an agreement between the parties.The doctrine of assignment is also known to the insurance law and an assignment of the policy is a transfer of the ...

....20. In Kapilaben's case (supra) this Court had considered that assignment of a contract might result in transfer of either rights or obligations thereunder. The transfer of oblig...particularly deal with the assignability of contracts, this Court has opined time and again that a party to a contract cannot assign their obligations/liabilities without the consent of the other party. A ...between these two classes of assignments. As a rule obligations under a contract cannot be assigned except with the consent of the promisee, and when such consent is given, it is really a novation resulting in subs...

...any case there was no evidence of compliance with Section 16(c) of the Act either by the seventh defendant or by the plaintiff. It is also contended that the assignment of the agreement in favour of the pl...bar for the allottee to make assignment of the plot. The real question is whether the assignee has a legal right to claim performance of any part from the allottor. Answer of the said question depends upon...well settled and might be stated in simple terms. An assignment of a contract might result by transfer either of the rights or of the obligations thereunder. But there is a well-recognized distinction...

...substitute the original contract with a new contract or rescind or alter. It cannot be done unilaterally…”33. In any case, obligations under a contract cannot be assigned, wit.... Novatio, rescission or alteration of a contract under Section 62 of the Indian Contract Act can only be done with the agreement of both the parties of a contract . Both the parties have to agree to... a ...

Keyword Alert(s)

Create alert, update courts.

Supreme Court & High Court

Overruled By

Our algorithms sense that you may get better results by trying out the same excerpt in our CaseIQ interface.

What is a Contract according to Indian Contract Act?

Indian Contract Act frames and validates the contracts or agreements between various parties. Contract Act is one of the central laws that regulate and oversee all the business wherever there is a case of a deal or an agreement. The following section will tell us what a contract is.

We will see how the Indian Contract Act, 1872 defines a contract. We will also define the terms as per the Act and see what that means. In these topics, we will decipher all the vivid aspects of the Contract Act. Let us begin by understanding the concept of a contract.

Contract Act

The Indian Contract Act, 1872 defines the term “Contract” under its section 2 (h) as “An agreement enforceable by law”. In other words , we can say that a contract is anything that is an agreement and enforceable by the law of the land .

This definition has two major elements in it viz – “agreement” and “enforceable by law”. So in order to understand a contract in the light of The Indian Contract Act, 1872 we need to define and explain these two pivots in the definition of a contract .

In section 2 (e), the Act defines the term agreement as “every promise and every set of promises, forming the consideration for each other”.

Now that we know how the Act defines the term “agreement”, there may be some ambiguity in the definition of the term promise.

The Act in its section 2(b) defines the term “promise” here 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”.

In other words, an agreement is an accepted promise, accepted by all the parties involved in the agreement or affected by it. This definition says that in order to establish or draft a contract, we need to initiate some steps:

The definition requires a person to whom a certain proposal is made.
The person (parties) in step one has to be in a position to fully understand all the aspects of a proposal .
“signifies his assent thereto” – means that the person in point one accepts or agrees with the proposal after having fully understood it.
Once the “person” accepts the proposal, the status of the “proposal” changes to “accepted proposal”.
“accepted proposal” becomes a promise. Note that the proposal is not a promise. For the proposal to become a promise, it has to be an accepted proposal.

To sum up, we can represent the above information below:

Agreement = Offer + Acceptance.

Enforceable By Law

Now let us try to understand this aspect of the definition as is present in the Act. Suppose you agree to sell a bike for 30,000 bucks with a friend. Can you have a contract for this?

Well if you follow the steps in the previous section, you will argue that once you and your friend agree on the promise, it becomes an agreement. But in order to be a contract as per the definition of the Act, the agreement has to be legally enforceable.

Thus we can say that for an agreement to change into a Contract as per the Act, it must give rise to or lead to legal obligations. In other words, must be within the scope of the law. Thus we can summarize it as Contract = Accepted Proposal (Agreement) + Enforceable by law (defined within the law)

(Source: lawmantra)

So What Is A Contract?

Now we can define a contract and more importantly, understand what is “Not” a contract. A contract is an accepted proposal (agreement) that is fully understood by the law and is legally defined or enforceable by the law.

So a contract is a legal document that bestows upon the party’s special rights (defined by the contract itself) and also obligations that are introduced, defined, and agreed upon by all the parties of the contract.

Difference Between Agreement And Contract

Let us see how a contract and agreement are different from each other. This will help you summarize and make a map of all the important concepts that you have understood.

Solved Question on Contract Act

Q1: “A person A agrees to sell his house to a person B for 50 lakh.” This is an example of:

An agreement
Neither a Contract nor an Agreement
It is a contract as soon as A gets the money.

Answer: Let us see what we need for the above to be a contract. We need Accepted Proposal (Agreement) + Enforceable by law (defined within the law). We have an “accepted proposal” by A as inferred from the phrase “A agrees to sell..”, but we don’t know whether B has been made a party to the agreement or not. So this is neither a contract nor an agreement and the answer is C) Neither a Contract nor an Agreement.

Customize your course in 30 seconds

Which class are you in.

Indian Contract Act 1872: Part I

Essentials of a Contract
Legal Rules Regarding Consideration
Doctrine of Privity of Contract
Agreements without Consideration
Types of Contract – Based on Performance
Proposal or Offer
Types of Contracts – Based on Validity
Types of Contract – Based on Formation

Download the App

Breach of Contract: Meaning, Essentials, Principles, Cases and Remedies under Indian Contract Act, 1872

Post author: Team LawFoyer
Post published: 8 April 2024
Post category: Articles / Contract Law
Post comments: 0 Comments
Reading time: 10 mins read

Author: Monika Gurjar, Dharmashastra National Law University, Jabalpur

INTRODUCTION

The history of contract dates-back to ancient times where people used to enter into contract especially for domestic purposes. With the advancement of society and its need the nature of contract has also changed and had become complex. In a modern world, every individual is dependent on other, such interdependence is visible in modern complex market structure. Due to such interdependence, the consequences of breach (violation) of contract sometimes becomes grave. To regulate this, and to prevent such grave losses, the government came with the Indian Contract Act which provides remedy to the innocent parties of the contract. The Act in its Section 2 (h) says contract is as an agreement which is enforceable by law, which means the parties to the contract are legally bound to perform the promise made. The infringement or non-performance of the terms and conditions of the contract is called breach of contract.

Keywords : contract, breach, damages, liquidated, unliquidated

INSTANCES OF BREACH OF CONTRACT

After the formation of contract fulfilling all the prerequisites provided under section 10 (agreements that became contract), the parties to the contract becomes bound to perform the promises made to each other in the form of terms & conditions in the contract. The act under its Section 37 mentions the right and duties of the parties to the contract. And any deviation or omission to perform the conditions of contract leads to the infringement of contract.

The refusal of the either party to perform the promise made in the contract wholly, or if party is partially performing the contract and the other party does not give acquiescence to it, in such cases the party partially performing the promise becomes liable of breach of contract as provided in section 39 of the act.

When there is a time bound contract (time is of essence of contract) between the parties, where the obligations need to be performed within the prescribed time limit, if any party who enters the contract fails to discharge his obligations within that fixed time limit, then such failure leads to breach of contract according to section 55 of the contract act.

REMEDIES UNDER INDIAN CONTRACT ACT

There are three kinds of remedy that are available to the party suffering from the breach of contract. These are;

Compensation

In case of non-performance (breach) of contract, the remedy available to the non- breaching party is compensation for the actual loss caused to the party. Under the Indian contract act, this compensation is mentioned as damages which is present in two forms;

Liquidated Damages: As the term indicate liquidates damages is the amount to be paid in case of breach which is decided or determined by the parties before suffering the breach or during the time of formation of contract. Section 74 of the act says that if there is genuine pre estimate amount decided by the parties then, in such kind of cases actual loss to the party is not required to be proved, and mere breach of conditions of contract gave rise to damages under this section.
Unliquidated Damages: There are cases of violation of conditions of contract where the party had not decided the amount that will be payable if either partybreaches the contract, in such conditions reasonable compensation is decided by the court by taking into consideration the actual loss suffered, mitigating factors and the relation of loss with the act of breach. The aforementioned is given in section 73 of Indian Contract Act, 1872.

Section 74 deals with the case where the parties to the contract had stipulated the compensation or amount as penalty then the actual loss caused to the aggrieved party needs to be proved. The reason for penalty in the contract is to deter the parties and to ensure the performance of the contract.

Specific Performance

The other remedy available to the aggrieved party is provided under section 10 of specific relief act whereby the party can get the decree of specific performance of contract from the court, to compel the party (breaching party) to perform the contract. The circumstances where such remedy can be given by the court is provided under the specific relief act.

RECENT DEVELOPMENTS

1. M/s Devchand Construction v. Union of India [1]

In the case M/s Devchand Construction v. Union of India, the Kerala high court held that mere breach or failure to properly perform the terms of contract does not automatically give right to seek compensation in section 73 and 74 of Indian contract Act, but such breach shall cause actual damage or loss to the aggrieved party. Therefore, the section 73, 74 and 75 cannot be invoked if the party had not suffered any loss.

2. The Indian Hotels Company Ltd. v. Union of India and Ors [2]

In case of “The Indian Hotels Company Ltd. v. Union of India and Ors”, the Delhi high court repeated the settled law that “section 74” of the Indian contract act which provides for liquidated damages cannot be invoked at stage of pre-formation of contract.

3. The Chairman, Coal India Limited & ors vs Star Cement Limited [3]

The Meghalaya High Court, in “The Chairman, Coal India Limited & ors vs Star Cement Limited” held that in event of breach of contract, the party claiming compensation from the party in breach is only entitled to the amount to the extent of loss suffered by it, unless there is genuine pre-estimate decided by the parties.

4.Emerge Tech Global Services P Ltd. v. Mr M.R. Vindhyasagar & Anr

In case of “Emerge Tech Global Services P Ltd. v. Mr M.R. Vindhyasagar & Anr” the madras high court had made a distinction between the restitutionary damages and the compensatory damages. It further said that the purpose of compensatory damages is to made the good the loss caused to the aggrieved party and are provided in cases where the damages are identifiable. However, restitutionary damages are awarded to disgorge the benefit received by the breaching party at the expense of non- breaching party.

The idea behind the contract act is to prevent the parties of the contract from injustice and exploitation. In a contemporary scenario, contracts are made on days-to-days basis at different levels such as the contract between big corporate firms which involves a large amount of money. In such cases, breach of conditions of contract by any party puts the other party into great loss, which is unjust for that party. The Indian contract act by following the principle of natural justice provided appropriate remedy to the parties. The section 74 of the act creatively protects the interest of both the sides.

Online Articles / Sources Referred

But-for rule in Contract Law

Adjudication of claim for damages under Sections 73, 74 and 75 of Indian Contract Act, 1872 B. V. R. Sarma

Cases Referred

Devchand Construction v. Union of India

The Indian Hotels Company Ltd. v. Union of India and Ors

The Chairman, Coal India Limited & ors vs Star Cement Limited

Emerge Tech Global Services P Ltd. v. Mr M.R. Vindhyasagar & Anr

Statutes Referred

Indian Contract Act, 1872

[1] Devchand Construction v. Union of India, (2022) SCC OnLine Ker 826

[2] The Indian Hotels Company Ltd. v. Union of India And Ors. 2022 LiveLaw (Del) 287

[3] Coal India Ltd. v. Star Cement Ltd., (2023) SCC OnLine Megh 323

Sale under transfer of property act: provisions, essential principle and cases, love without boundaries: the timeless journey of same mex marriage from history to hope, criminal liability of artificial intelligence machines in india, leave a reply cancel reply.

Journal Website
Call For Papers
Volume 1 Issue 2
Submit Assignment
Join our team
Write for us
Case Analysis
Legal Drafts
20th Edition Harvard Blue Book
Submit Event
Quiz Competitions
Call for Papers
Courses & Workshops
Essay Competitions
MUNs, Youth Parliament & Other Competitions
Apply For Internship
Internship Reviews
Verify Internship Certificate
About LawFoyer

Breach of Contract under Indian Contract Act 1872: Explained

This article on ‘Breach of Contract under Indian Contract Act: All you need to know’ was written by Madiha Khan, an intern at Legal Upanishad.

Introduction

According to the Indian Contract Act, a contract is an agreement that is enforceable by law. There must be an offer and acceptance of that offer through the free consent of both parties. As it is known, all contracts are agreements but all agreements are not contracts. A contract is also known as a legally binding agreement. So, for there to be a breach of contract there must be a contract and not merely an agreement.

A breach occurs when one of the parties to a contract refuses to perform the obligations that were promised by them at the time of the making of the contract. A breach of contract can be either an actual breach or an anticipatory breach. Breach of contract usually comes under civil wrong. To file a case for breach of contract, it must be proven that a legally binding contract was in place and that it had been breached.

A bench of Justices SA Nazeer and Krishna Murari said the distinction between mere breach of contract and cheating, is a fine one. Generally, a breach of contract gives rise to only civil liability but in case there is intent to cheat the other party then an offense can be filed under Section 405 (Criminal breach of trust.) and 420 (cheating) of the Indian Penal Code, 1860. Section 39- Anticipatory breach talks about the refusal of a party to perform the promise wholly.

To claim damages the following questions need to be looked into – What is a contract? Whether the contract existed? Whether the contract was void-ab-initio? Whether the essentials of a valid contract were followed? Was there indeed a breach of contract?

Essentials of a valid contract

Offer and acceptance – a party must make an offer and the other party must accept the offer.
Reciprocal promise – both parties intend to form a legally binding contract.
Consideration – there must be some sort of exchange either in monetary terms or in any other way.
Competent person – the parties must be legally able to enter into a contract, for instance, they shouldn’t be minors or a lunatic.
Consent – there must be free consent. Provisions for free consent are from sections 14 to 22.
Legality – the contract must be legal, i.e. it must not be illegal.
There must be the performance of the contract on time.

When is a contract breached?

A contract is breached when there is a violation of certain terms and conditions stated in the contract. There are various reasons a breach can occur, such as delay in payment, postponement in delivery of the assets, etc. If there is any breach, the Act also gives the remedies for breach of contract. Breach of contract can ensue for both written as well as oral contracts and the parties can resolve it through negotiations among themselves, through court, or through arbitration. The breach can be either wholly or partially in nature. At the beginning of the suit, the court will assess the nature of the breach.

Breach of Contract under Indian Contract Act

Types of breaches:

Anticipatory breach – When a party refuses to perform his part of the promise wholly before the performance of the contract, the other party can either, end the contract, i.e. terminate the contract or continue the contract. For instance, A enters into a contract with B for the supply of 5000 notebooks at Rs.60 each on or before the 1st of January 2023. B on 15th December 2022 refuses the delivery of goods to A, i.e. before the due date, this is known as anticipatory breach
Actual breach – Unlike the anticipatory breach, the actual breach happens at the time of the execution of the contract. It is either committed at the time of the performance of the contract, meaning on the due date, or during the performance of the contract, like not delivering the goods at the scheduled place. For instance, X enters into a contract with Y promising to deliver 100 bag packs on 1st September 2020. However on the date of delivery X fails to deliver the same, this is an actual breach.

Where can a suit for breach of contract be filed?

The suit for damages in case of breach of contract is filed at the place where the contract is made or at the place the breach occurred. It can also be filed according to the clause inserted in the breach section of the contract.

Remedies in case of breach

The primary purpose of remedies in cases where the breach is not of criminal nature is to restore the faultless party in the position they would have been in had there not been a breach. It is a way to reimburse the non-breaching party.

List remedies for breach of contract

The recession of Contract – a party can rescind the contract and refuse the performance thereof in case the other party to the contract does not fulfill his obligations. As per section 75, the party who rescinds the contract is entitled to receive compensation for such recession.
Sue for Damages – a party can claim compensation for loss suffered by them in the normal course of business, from the other party that has broken the promise. Under section 73 there are two types of damages, liquidated and unliquidated damages.
Sue for Specific Performance – in this the party who breached the contract will have to perform his obligation according to the contract. To avail this remedy a decree of specific performance is to be obtained from the court.
Injunction – an injunction is a court order to restrain a person from doing a certain act. This availed of stopping a party from doing something which he has promised to not do during the existence of the contract
Quantum Meruit – it means as much as earned. When a party is prevented from finishing his part of the contract by the other party, this remedy is applied to reimburse the party for the work he has done.

In Hadley v Baxendale , it held that the damages can only be claimed for all losses which can be foreseen in the usual course of business. But damages cannot be awarded for those losses that cannot be assumed generally. Thus, Hadley can’t be awarded damages for the loss of profit which Baxendale was not aware of.

The court cannot order specific performance in some cases. Such as:

When monetary compensation is sufficiently redressed
Where the execution or performance of the contract cannot be overseen by the court.
When personal services are contracted for,
When a minor is a party to the contract.

Suggestions

In case of leave and license agreement any party can give notice of one month or as per the conditions stated in the contract to terminate the contract to avoid breach of contract.

Going for arbitration is a quicker option than going through court proceedings if the contract has an arbitration clause.

Conclusion

Contracts are meant to be upheld the promise stated. Nevertheless, there are many cases of breach of contract and to mitigate these breaches remedies are provided to the contracting parties. These remedies usually aim to make the breacher perform the contract as was agreed by the parties at the time of entering the contract. It is paramount to thoroughly understand the terms and conditions of the contract to avoid breaching it.

“Indian Contract Act, 1872, JK Shah Classes, available at: https://www.jkshahclasses.com/announcement/IndianContractAct1872.pdf
“Remedies for Breach of Contract”, Toppr, available at: https://www.toppr.com/guides/business-laws-cs/indian-contract-act-1872/remedies-for-breach-of-contract/
“Hadley v Baxendale – 1854”, Law Teacher, available at: https://www.lawteacher.net/cases/hadley-v-baxendale.php

Join Our Community

COMMENTS

Assignment of contract
Section 2 (h) of the Indian Contract Act, 1872 defines a contract as "an agreement enforceable by law". It is characterised by an offer and an acceptance along with consideration and is backed by the power of law. An agreement is a promise by one party to another. A proposal once accepted becomes a promise.
Sub-contracting and Assignment : Resolving the Legal Conundrum
Assignment. Assignment of contract refers to an act of transferring contractual rights and liabilities under the contract to a third party with other party's concurrence. Section 37 of the India Contract Act, 1872 ("Contract Act") enables the contracting parties to dispense with the performance of a contract by way of an assignment.
Subcontracting v. Assignment
ASSIGNMENT. Assignment of contract refers to an act of transferring contractual rights and liabilities under the contract to a third party with other party's concurrence. Section 37 of the India Contract Act, 1872 ("Contract Act") enables the contracting parties to dispense with the performance of a contract by way of an assignment.
Assignment of Contract
Section 37 of the Indian Contract Act, 1872, thatenables the parties to dispense is the performance by way of Assignment of the contract. Under the Indian Contract Law, any form of contract can be assigned as long as consent is involved in the Assignment. The consent of the 'promisee' is necessary for assigning any obligation under the ...
Does the Assignment of a Contract Assign the Arbitration Agreement: The
Under the Indian Contract Act 1872 ("ICA"), an arbitration agreement is a distinct and separate contract. Like all other contracts, it can be transferred by way of assignment to third parties under Section 37 of the ICA. The Supreme Court of India in Khardah Company Ltd vs Raymon & Co. (India) Private Ltd has held... Continue reading
PDF Assignment of Rights and Its Practical Relevance in Financial
contract, that is, the creation of a new contract between the original party and the new party, which makes it all the more necessary for assignment clauses in contracts to deal with novation; if the intention is to transfer obligations as well. As per the Transfer of Property Act, 1882, assignment of contractual rights or benefits has been
PDF The Indian Contract Act, 1872
The Indian Contract Act, 1872 1.5. enforceable by law becomes void when it ceases to be enforceable". Thus a void contract is one which cannot be enforced by a court of law. Example : Mr. X agrees to write a book with a publisher. After few days, X dies in an accident. Here the contract becomes void due to the impossibility of performance of the
The Indian Contract Act, 1872
The Indian Contract Act, 1872 Act 9 of 1872. Published in Gazette 9 on 25 April 1872 ... under a contract, a sum of money, the amount of which has not been ascertained. A, without ascertaining the amount, gives to B, and B, in satisfaction thereof, accepts, the sum of 2,000 rupees. This is a discharge of the whole debt, whatever may be its amount.
India Code: Indian Contract Act, 1872
The Indian Contract Act, 1872. भारतीय संविदा अधिनियम, 1872. Rules Regulations Notifications Orders Circulars Ordinance Statutes. Sections; ... Obligation of person who has received advantage under void agreement, or contract that becomes void. Section 66. Mode of communicating or revoking rescission of ...
Indian Contract Act, 1872
The Indian Contract Act, 1872 prescribes the law relating to contracts in India and is the key act regulating Indian contract law.The Act is based on the principles of English Common Law.It is applicable to all the states of India. It determines the circumstances in which promises made by the parties to a contract shall be legally binding.
Essentials of a valid contract under the Indian Contract Act,1872: A
The law of Contract in India is contained in the Indian Contract Act,1872 and it is mainly based on English common law consisting of judicial precedents. The Act ensures that the rights and obligations arising out of the contract are honored and the promises are kept. It provides for the appropriate legal remedies to the aggrieved party in case ...
Doctrine of Privity of Contract
The law does not allow a stranger to file a suit on the contract. This right is available only to a person who is a party to the contract and is called Doctrine of Privity of Contract. Let's understand this with the help of an example: Peter has borrowed some money from John. Peter owns a property and decides to sell it to Arjun.
PDF The Indian Contract Act
15. "Coercion" defined. "Coercion" is the committing, or threating to commit, any act forbidden by the Indian Penal Code (45 of 1860) or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement. 16.
Subcontracting v. Assignment
The performance of a contract may require third party involvement towards the fulfilment of obligations under a contract. In few specific circumstances, the contracting parties may decide go "sub-contract" or "assign" their rights and obligations at a third party depending upon the nature of the contract. 93-638, gave Indian tribes the authority to contract the the Federal government to ...
Validity of a contract, voidable contract and void agreement as given
The Indian Contract Act, 1872 (the Act) defines the term "contract" under Section 2(h) stating: "An agreement enforceable by law is a contract."In other words, an agreement that the law will enforce is a contract.Section 10 of the Act deals with enforceability.
assignment+of+a+contract
But such restrictions are strictly construed, and California courts have developed a assignment of a contract assignment of of contract (1962). " [ A] provision in a contract or a rule of law against assignment does not preclude the assignment of money due or to become due under the contract or of money damages for the breach of the contract ."
What is a Contract according to Indian Contract Act?
The Indian Contract Act, 1872 defines the term "Contract" under its section 2 (h) as "An agreement enforceable by law". In other words, we can say that a contract is anything that is an agreement and enforceable by the law of the land. This definition has two major elements in it viz - "agreement" and "enforceable by law".
Breach of Contract: Meaning, Essentials, Principles, Cases and Remedies
Under the Indian contract act, this compensation is mentioned as damages which is present in two forms; Liquidated Damages: As the term indicate liquidates damages is the amount to be paid in case of breach which is decided or determined by the parties before suffering the breach or during the time of formation of contract.
PDF The Indian Contract Act, 1872 Arrangement of Sections
56. Agreement to do impossible act. Contract to do an act afterwards becoming impossible or unlawful. Compensation for loss through non-performance of act known to be impossible or unlawful. 57. Reciprocal promise to do things legal, and also other things illegal. 58. Alternative promise, one branch being illegal. Appropriation of payments 59.
Breach of Contract under Indian Contract Act 1872: Explained
A contract is breached when there is a violation of certain terms and conditions stated in the contract. There are various reasons a breach can occur, such as delay in payment, postponement in delivery of the assets, etc. If there is any breach, the Act also gives the remedies for breach of contract. Breach of contract can ensue for both ...