When can a person go against the terms of contract?

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breach of contracts

Indian Contracts Act,1872 governs the laws relating to contracts in India.It deals with contractual obligations arising between the parties,the consequences of breaching the contract,remedies available for the parties who suffered loss due to breach of contracts and also the special contracts such as bailment,pledge etc., The agreements which are enforceable by law are called contracts.In short,all contracts are agreements but all agreements are not contracts.

Why it is important to know about contracts ?

We all come across the contracts in our daily life.For example buying groceries from super market,the tickets which we get from the bus conductor,signing in an application while installing it on  android mobile,etc., everything involves contracts and it plays a vital role in everyone’s life.So obviously it is very important for us to know about the contracts.

What constitutes a valid contract ?

According to section 10 of Indian Contracts Act,1872,all agreements are contracts if they made by free consent of competent parties,with lawful consideration,with lawful object and not expressly declared as void by law.If any agreement fulfills the above conditions then it will be valid contract and enforceable by law.With regard to competent persons,any person who is major(has completed 18 years of age) and not disqualified by any law from entering into a contract and of sound mind are capable of entering into a contract.

When a person can go against the terms of a contract ?

This has been dealt under Chapter IV of Indian Contract Act, 1872 under the heading ‘Contracts need not be performed’.Under section 62 of the Act,if the parties agrees to substitute a new contract or to rescind or to alter the old contract,then the parties can go against the terms of old contract.Substituting old contract with new one fall under the purview of principle of novation.But mere variation in the terms of contract cannot be covered under novation[i] and it must be made on the essence of contract on which it is formed.

The issue of novation cannot be raised in the appeal for the first time since it is mixed question of law and question of facts[ii].In Shankar Lal Damodhar V. Ambalal Ajaipal, AIR 1946 Nag 260,the court held that if the new agreement on mortgage deed is suffering from non enforceability due to lack of registration,then the original agreement will be binding on the parties.According to section 63 of the Act,promise may dispense with or remit performance of promise.For example,if M owes Rs.50000 to N,and N in satisfaction,accepts Rs.10000 for his claim on M.Thus the payment made by M discharges the whole debt and he need not pay the remaining amount of his debt.

The plaintiff bank accepted the payment of Rs.10,00,000 in the second agreement between the bank and the defendant.The court held that the bank cannot sue the defendant for the payment of  interest Rs.69,751.20 since it was not mentioned in the second agreement and the provisions of section 63 doesn’t allow the same[iii].The waiver of the party must show his intention that he will not insist upon his rights in future[iv].

Under section 64 of Indian Contracts Act,1872,when a contract has been rescinded by the party at whose option a contract is voidable,then the other party need not have to perform his obligation.If the promisee of the contract refuses or neglects to afford the necessary facilities for the performance of contract,then the promisor is excused if he didn’t perform his promise due to such negligence on the part of promisee.This excuse for non performance falls under the purview of section 67 of the Act.

Illustration : A enters into a contract with B for the delivery of 500 tons of wheat for consideration.If B refuses to mention the place of delivery,then A is excused for the non performance of the contract.

Other provisions of the Act as to the contracts in which a person can go against the terms :

As a whole,a person need not obey the terms of void contracts.To have more clear understanding we have to know what are all void contracts and when a contract becomes void.Any contract made by an incompetent person is a void contract.However in case of temporary mental illness,a person can enter into a contract when he is in sound mind.A contract entered into by a person who was under the influence of alcohol or any drugs at the time of entering into a contract,in which he cannot understand the terms of contracts will stand void.Contracts entered into by a minor is void[v] except for the contracts of necessities,apprenticeship,education and service.In Johnson V. Pyre (1665) 1 Sid 258,it was held that minor cannot be held responsible in any way which would lead to indirect way of enforcing his agreement.

Agreements which are void cannot be enforced by law and hence the parties to the contracts need not oblige to the terms of such contracts.Contracts which are made without free consent of parties are invalid contracts.If any contract is made by coercion[vi] or undue influence[vii] or fraud[viii] or misrepresentation[ix] then such contracts are voidable at the option of the party whose consent has been so caused.If he wishes to rescind the contract then he doesn’t need to perform anything as per the terms of contract.But if he accepts such contracts then he is liable and must obey the terms of contract as if he would have been if such consent is free and voluntary.

Agreements made by the parties who are under a mistake as to the subject matter of the fact which forms the essence of the agreement are void[x].For example,C enters into a agreement with D that he will sell his ship to him for 1000 dollars.The ship had been burnt at the time of entering into agreement and both parties are unaware of this fact and hence this agreement is void.The mistake as to the law which is not in force in India has same effect as mistake of fact[xi].When agreements are formed for unlawful consideration or for unlawful object is completely void under section 23 of Indian Contracts Act,1872.According to this section a consideration or object is considered to be unlawful if it is forbidden by law or if permitted it would contravene any provisions of law or fraudulent or inflict injury to any property (or) person or if the court finds it as immoral (or) against public policy.

Illustrations: A and B enters into agreement to kill C.This is void agreement since the object is unlawful and immoral.

Alex enters into an agreement with Daney that he will pay him 100 dollars if he gets him employment in public sector.This is void since the consideration is unlawful.

Arun,Siva and Mahesh enters into an agreement to indulge in robbery and to share the gains equally.This agreement is void since the object is unlawful and against public policy.

Other void agreements :

  • Agreements in restraint of marriage[xii],in restraint of trade[xiii] and in restraint of legal proceedings[xiv] are void and parties to such contracts are not bound by its terms and conditions.
  • Agreements which are not certain are void.Example, agreement between the persons C and D that C will sell his articles for hundred rupees to D is void for uncertainty since the agreement doesn’t specify what kind of article is made for sale by C.
  • Agreements by way of wager is void under section 30 of Indian Contracts Act,1872.
  • Agreements which are formed on the happening or non happening of an uncertain specific event within fixed time becomes void if such mentioned time expires without the happening or non happening of such event.This has been dealt under Chapter III – contingent contracts, of Indian Contracts Act,1872.
  • And not forget to mention that agreements made contingent on impossible event is void under section 36 of the Act.Example, A enters into an agreement with B that he will pay him 200 pounds if sun rises in the west.This is an impossible event which is never going to happen and hence this agreement is void.

Circumstances in which a person need not perform the terms of the contracts :

In case of reciprocal promises,where two promises have to be performed simultaneously,the promisor need not perform his promise if the promisee is not ready to perform his part of promise under section 51 of the Act.Example, Q agrees with R that he will paint one painting for him for the consideration of 2 gold coins.Here R need not perform his promise of paying 2 gold coins unless Q is ready and willing to paint.Regarding section 56 of the Act, any agreement to do impossible act is void.To have a clear understanding on this section,the contracts are valid until it becomes void.Thus under this section the contracts are  valid at the time of its formation and once if it lose its validity due to some supervening factors which is beyond the control of parties,then it will become void[xv].

Illustrations: A enters into a contract with B who belongs to different nation for the exchange of goods.After the formation of this contract A’s nation declares war on B’s nation and therefore the contract becomes void.

A enters into an agreement with B that A will supply the goods for consideration through ship.The ship which carries the goods has sunk in the sea due to unexpected hurricane.Thus the contract becomes void.

If the agreement carries reciprocal promises which contains both legal and illegal things,then the contract is enforceable only to the extent of legal things and other part which constitutes of illegal things stands void.Example, if A and B enters into an agreement that A will rent his house to B for consideration and pays him Rs.5000 if B uses his house for counterfeiting currency notes.Here the first part of the agreement is valid and enforceable and second part of the agreement is void and parties are not required to perform the promise made in the second part of the agreement.The same thing applies to the alternative promises as well under section 58 of Indian Contracts Act,1872.

Consequences of rescinding voidable and void contracts :

If the parties rescind any voidable contracts or didn’t obey any terms of void contracts or didn’t perform any promise which is permissible under the provisions of law,it doesn’t attract any penal action against them for such breach.But still,if they receive any benefits from such contracts then they are bound to repay such benefits to the respective parties.This has been covered under the doctrine of ‘unjust enrichment’.And the same will apply to the other parties of the contract also if they incur any loss to them.

Conclusion :

Through the above sections and illustrations,it is very clear that a person can go against the terms of contracts if it is voidable at the option of party or if it is void contract or if it is expressly declared by law.As mentioned earlier,this will help us to have better knowledge on contracts which will make us to act wisely while handling them.And this also prevents the parties from filing unnecessary litigation before the court of law without any nexus in issue.Hence these provisions acts as a precautionary as well as preventive measures for the parties which saves them from falling into the  pit of loss.

Edited by Pragash Boopal

Approved & Published – Sakshi Raje

Reference

[i]Sasan power Ltd V. North American Coal Corporation India Pvt Ltd, AIR 2016 SC 3974.

[ii]Purbanchal cables & conductors Pvt Ltd V. Assam State Electricity Board, AIR 2012 SC 3167

[iii]Central Bank of India V. V.G.Naidu & Sons(leathers) Pvt Ltd, AIR 1992 Mad 139.

[iv]Jagad Bandhu Chatterjee V. Nilima Rani, (1969) 3 SCC 455.

[v]Mohori Bibee V. Dharmodas Ghose  (1903) ILR 30 Cal 539 (PC).

[vi]Indian Contracts Act,1872, S 15.

[vii]Indian Contracts Act,1872, S 16.

[viii]Indian Contracts Act,1872, S 17.

[ix]Indian Contracts Act,1872, S 18.

[x]Indian Contracts Act,1872, S 20.

[xi]Indian Contracts Act,1872, S 21.

[xii]Indian Contracts Act,1872, S 26

[xiii]Indian Contracts Act,1872, S 27.

[xiv]Indian Contracts Act,1872, S 28.

[xv]Satyabrata Ghose V. Mugneeram Bangur, AIR 1954 SC 44.