Indian Contract Act, 1872 – Sections 46–67: Performance, Frustration and Discharge of Contract

SECTION 46 - TIME FOR PERFORMANCE WHERE NO APPLICATION IS REQUIRED AND NO TIME IS SPECIFIED

Section 46 applies where:

• the promisor is bound to perform without any demand or application by the promisee; and
• no time for performance has been fixed.

In such a case, the promise must be performed within a reasonable time.

What amounts to reasonable time depends upon the facts and circumstances of each case. There is no fixed period which applies to every contract.

Example

A agrees to repair B's machine, but no date for completion is fixed.

A must complete the repair within a reasonable time, having regard to matters such as:

• nature of the repair;
• availability of parts;
• urgency of the work; and
• surrounding circumstances.

SECTION 47 - TIME AND PLACE FOR PERFORMANCE WHERE TIME IS SPECIFIED AND NO APPLICATION IS REQUIRED

Section 47 applies where:

• the promise is to be performed on a certain day; and
• the promisor has undertaken to perform it without any application by the promisee.

The promisor may perform the promise:

• at any time during the usual hours of business on that day; and
• at the place where performance ought to be made.

Example

A promises to deliver goods at B's warehouse on 10 June.

A should tender delivery on 10 June during the usual business hours at B's warehouse. An attempt to deliver the goods at midnight would not ordinarily amount to proper performance merely because it is still the same calendar date.

SECTION 48 - APPLICATION FOR PERFORMANCE ON CERTAIN DAY

Section 48 applies where:

• the promise is to be performed on a certain day; but
• the promisor has not undertaken to perform without application by the promisee.

In such a case, the promisee must apply for performance:

• at a proper place; and
• within the usual hours of business.

What amounts to proper time and place is a question of fact in each case.

Thus, under Section 47 the promisor must perform on his own, while under Section 48 the promisee must first apply for performance.

SECTION 49 - PLACE FOR PERFORMANCE WHERE NO PLACE IS FIXED

Section 49 applies where:

• the promisor must perform without any application by the promisee; and
• no place for performance has been fixed.

The promisor must ask the promisee to appoint a reasonable place for performance and must perform there.

Statutory Illustration

A agrees to deliver 1,000 maunds of jute to B on a fixed day, but no place for delivery has been mentioned.

A must ask B to appoint a reasonable place and must deliver the jute at that place. The promisor cannot simply choose any place convenient to himself.

SECTION 50 - PERFORMANCE IN MANNER OR AT TIME PRESCRIBED OR SANCTIONED BY PROMISEE

A promise may be performed in any manner or at any time which the promisee prescribes or sanctions.

Thus, the promisee may agree to a different manner or time of performance from what might otherwise have been required.

Payment Through Bank

B owes A money.

A directs B to transfer the amount to A's bank account.

If B properly follows that direction and the amount is credited as instructed, the payment is valid even though some later difficulty arises with the bank.

Payment by Post

If B specifically directs A to send money through post, proper posting in the prescribed manner may discharge A because B himself selected that mode of performance.

SECTION 51 - RECIPROCAL PROMISES TO BE SIMULTANEOUSLY PERFORMED

Where reciprocal promises are to be performed simultaneously, neither party is bound to perform unless the other party is ready and willing to perform his corresponding promise.

Statutory Illustration

A agrees to deliver goods to B, and B agrees to pay for them on delivery.

A need not deliver unless B is ready and willing to pay. Similarly, B need not pay unless A is ready and willing to deliver.

Thus, a party cannot demand simultaneous performance from the other while himself being unwilling or unable to perform.

SECTION 52 - ORDER OF PERFORMANCE OF RECIPROCAL PROMISES

Section 52 determines the order in which reciprocal promises must be performed.

WHERE THE CONTRACT FIXES THE ORDER

If the contract expressly states the order of performance, the parties must follow that order.

For example, if A must first obtain a statutory approval and B must thereafter make payment, the agreed sequence governs the parties.

WHERE NO ORDER IS EXPRESSLY FIXED

If the contract does not specify the order, the promises must be performed in the order required by the nature of the transaction.

Illustration

A agrees to build a house for B for a fixed price.

The nature of the transaction ordinarily requires A to construct the house before B becomes bound to pay the price.

Illustration

A agrees to transport B’s goods from Patna to Delhi, and B promises to pay ₹50,000 as transportation charges. The contract does not specify the order of performance.

By the nature of the transaction, A must first transport the goods to Delhi, and B must thereafter pay the transportation charges.

SECTION 53 - ONE PARTY PREVENTING PERFORMANCE BY THE OTHER

Where a contract contains reciprocal promises and one party prevents the other from performing his promise, the contract becomes voidable at the option of the party prevented.

The party prevented is also entitled to compensation for any loss suffered because of the prevention.

Example

A agrees to carry out construction work at B's premises. B later refuses to allow A to enter the premises.

A may treat the contract as voidable and claim compensation for the loss caused by B's conduct. A party cannot prevent performance and then complain that the other party failed to perform.

SECTION 54 - DEFAULT IN PERFORMANCE OF PROMISE WHICH SHOULD BE PERFORMED FIRST

Section 54 applies where:

• a contract contains reciprocal promises;
• one promise must be performed before the other; and
• the party responsible for the first performance fails to perform it.

That party:

• cannot demand performance of the reciprocal promise; and
• must compensate the other party for any loss caused by his failure.

Example

A agrees to construct machinery for B, after which B is to pay the agreed price. If A fails to construct the machinery, A cannot demand payment from B and may also be liable for B's resulting loss.

Section 53 deals with prevention of performance by the other party, while Section 54 deals with failure by the party who was himself required to perform first.

SECTION 55 - FAILURE TO PERFORM AT FIXED TIME

Section 55 deals with contracts where performance is required:

• at a specified time; or
• before a specified time.

The legal consequence depends mainly upon whether time was intended to be of the essence of the contract.

WHERE TIME IS OF THE ESSENCE

If time was intended to be essential and the promisor fails to perform at the agreed time, the contract, or so much of it as remains unperformed, becomes voidable at the option of the promisee.

It does not automatically become void.

Example

A agrees to supply a wedding stage before a marriage ceremony on 10 June.

If the circumstances clearly show that delivery before the ceremony was fundamental, late delivery may entitle B to avoid the contract.

WHERE TIME IS NOT OF THE ESSENCE

Where time was not intended to be essential, delay does not make the contract voidable merely because the fixed date has passed.

However, the promisee may claim compensation for loss caused by the delay.

Example: A contractor agrees to complete renovation of B’s house by 1 June. B allowed A to continue renovation work even after 1st June without raising any objection. The circumstances show that the exact date was not intended to be essential. A completes the work on 10 June.

B cannot cancel the contract merely because of the delay, but if B had to pay ₹20,000 for temporary accommodation because of the late completion, B may claim compensation for that loss.

FIXING A DATE DOES NOT BY ITSELF MAKE TIME ESSENTIAL

The mere fact that the parties have mentioned a date does not automatically mean that time is of the essence.

The intention must be gathered from:

• language of the contract;
• nature of the transaction;
• subject matter;
• purpose of the contract; and
• surrounding circumstances.

Chand Rani v. Kamal Rani (1993)

The Supreme Court held that in contracts for sale of immovable property, time has traditionally not been regarded as ordinarily being of the essence.

However, the parties may make time essential through clear contractual language or surrounding circumstances.

Even where time is not strictly of the essence, performance must still take place within a reasonable time.

Hind Construction Contractors v. State of Maharashtra (1979)

The Supreme Court explained that merely fixing a time for completion does not necessarily make time the essence of the contract.

The contract must be read as a whole. Provisions allowing extension of time or compensation for delay may indicate that strict performance by the specified date was not intended to be fundamental.

ACCEPTANCE OF DELAYED PERFORMANCE

Where:

• time was of the essence;
• the promisor failed to perform on time; and
• the promisee nevertheless accepts delayed performance,

the promisee cannot claim compensation for delay unless, at the time of accepting the delayed performance, he gives notice of his intention to claim compensation.

Thus, accepting delayed performance without reserving the right to compensation may result in loss of that claim.

SECTION 56 - AGREEMENT TO DO IMPOSSIBLE ACT AND SUBSEQUENT IMPOSSIBILITY

Section 56 contains three important rules:

1. an agreement to do an act impossible from the beginning;
2. a valid contract which later becomes impossible or unlawful; and
3. compensation where the promisor knew or should have known that performance was impossible or unlawful.

INITIAL IMPOSSIBILITY

An agreement to do an act which is impossible in itself is void from the beginning.

Statutory Illustration

A agrees with B to discover treasure by magic.

The agreement is void.

SUPERVENING IMPOSSIBILITY OR ILLEGALITY

A valid contract becomes void where, after it has been made:

• performance becomes impossible; or
• performance becomes unlawful

because of an event which the promisor could not prevent.

The contract becomes void from the time when performance becomes impossible or unlawful.

Example

A agrees to transport goods to a foreign country.

Before performance, war breaks out between India and that country and the proposed performance becomes unlawful.

The contract becomes void when performance becomes unlawful.

IMPOSSIBILITY IS NOT LIMITED TO PHYSICAL IMPOSSIBILITY

Satyabrata Ghose v. Mugneeram Bangur & Co. (1954)

Mugneeram Bangur & Co. owned a large tract of land near Dhakuria Lakes, Calcutta, and started a residential development scheme. Under the scheme, the company agreed to sell plots after constructing the necessary roads and drains. In 1940, Bejoy Krishna Roy agreed to purchase one such plot and paid earnest money. Satyabrata Ghose later became his nominee/assignee.

During the Second World War, a substantial portion of the land covered by the scheme was requisitioned by the Government for military purposes. Because of this, the company said that construction of roads and drains could not be carried out for an uncertain period and sought to cancel the agreement. Satyabrata Ghose insisted that the contract was still binding.

The company argued that the contract had become frustrated under Section 56 because subsequent events had made performance impossible. The Supreme Court rejected this contention. The requisition was temporary, no definite time had been fixed for completing the development work, and wartime restrictions were circumstances which could reasonably have been contemplated when the contract was made. Therefore, the foundation of the contract had not been destroyed and the contract remained enforceable.

Principles laid down

The Supreme Court laid down an important interpretation of Section 56 and the doctrine of frustration:

1. Section 56 contains the Indian law of frustration. The doctrine of frustration is part of the rule relating to supervening impossibility or illegality under Section 56. English law may assist in understanding the principle, but the matter in India is governed primarily by the Contract Act.
2. “Impossible” does not mean only physically impossible. Performance may become impossible in a practical or commercial sense where a subsequent event destroys the very foundation or purpose of the contract.
3. A contract is frustrated only when the supervening event fundamentally changes the circumstances so that the basis on which the parties contracted disappears. Mere delay, difficulty, inconvenience or increased hardship is not enough.
4. The doctrine applies only where the event is beyond the control of the parties and makes performance genuinely impossible or unlawful.

DESTRUCTION OF SUBJECT MATTER

Taylor v. Caldwell (1863)

A music hall was hired for concerts. Before the concerts could take place, the hall was accidentally destroyed by fire without fault of either party.

The contract was treated as discharged because the continued existence of the hall was essential to performance.

FRUSTRATION OF COMMON PURPOSE

Krell v. Henry (1903)

A room was hired specifically for viewing the coronation procession of King Edward VII. The procession was cancelled because of the King's illness.

Although the room still physically existed and could be occupied, the main purpose for which it had been hired had disappeared.

The case illustrates frustration where the foundation or common purpose of the transaction is destroyed.

MERE COMMERCIAL HARDSHIP IS NOT FRUSTRATION

A contract does not become impossible merely because performance becomes:

• more expensive;
• less profitable;
• inconvenient; or
• more difficult than expected.

Alopi Parshad & Sons Ltd. v. Union of India (1960)

The Supreme Court held that abnormal increases in cost or difficulty do not by themselves discharge a party from its contractual obligations.

A party cannot escape from a bad bargain merely because performance has become more Onerous.

SELF-INDUCED IMPOSSIBILITY

A party cannot ordinarily rely upon Section 56 where the impossibility was created by his own deliberate act or default.

Example: A agrees to sell a specific car to B on 20 October. Before that date, A voluntarily sells the same car to C. A cannot then claim that his contract with B has become impossible under Section 56, because the impossibility was created by A’s own deliberate act.

The supervening event must be one which the promisor could not prevent.

PROMISOR KNEW OR SHOULD HAVE KNOWN OF IMPOSSIBILITY

Where:

• a person promises to do something;
• he knew, or with reasonable diligence should have known, that it was impossible or unlawful; and
• the promisee did not know this,

the promisor must compensate the promisee for the loss caused by non-performance.

Statutory Illustration

A contracts to marry B even though A is already married and the proposed marriage is unlawful. A knows the circumstances, but B does not.

A must compensate B for the loss caused by the non-performance.

SECTION 57 - RECIPROCAL PROMISES TO DO LEGAL AND ILLEGAL THINGS

Section 57 applies where parties make:

• one set of reciprocal promises which is lawful; and
• another set, operating in certain circumstances, which is unlawful.

The lawful part constitutes a contract, while the unlawful part is a void agreement.

Statutory Illustration

A and B agree that:

• A will sell a house to B for ₹10,000; and
• if B uses the house as a gambling house, B will pay A ₹50,000.

The sale of the house for ₹10,000 is lawful and enforceable. The agreement connected with use of the property as a gambling house is unlawful and void.

Section 57 therefore allows lawful and unlawful sets of promises to be separated where they are genuinely distinct.

SECTION 58 - ALTERNATIVE PROMISE, ONE BRANCH ILLEGAL

Where an alternative promise contains:

• one legal branch; and
• one illegal branch,

only the legal branch can be enforced.

Statutory Illustration

A promises to pay B ₹1,000. In return, B promises to deliver either:

• rice; or
• smuggled opium.

The promise concerning rice is enforceable. The illegal alternative concerning smuggled opium cannot be enforced.

APPROPRIATION OF PAYMENTS - SECTIONS 59 - 61

Sections 59 - 61 apply where a debtor owes several distinct debts to the same creditor and makes a payment which is insufficient to discharge all of them.

The order of priority is:

1. the debtor chooses - Section 59;
2. if the debtor does not choose, the creditor may choose - Section 60;
3. if neither chooses, the law appropriates - Section 61.

SECTION 59 - DEBTOR INDICATES THE DEBT

Where a debtor owes several distinct debts to the same creditor and, while making payment, expressly or impliedly indicates the debt towards which it is to be applied, the creditor must apply the payment accordingly.

Statutory Illustration

A owes B several debts.

One debt is exactly ₹1,000 under a promissory note due on 1 June, and there is no other debt of the same amount.

A pays B ₹1,000 on 1 June.

The circumstances indicate the debt to which the payment relates, and B must appropriate it accordingly.

The debtor's intention may therefore be shown either:

• expressly; or
• from the surrounding circumstances.

SECTION 60 - WHERE DEBTOR MAKES NO APPROPRIATION

Where:

• the debtor gives no indication; and
• the circumstances also do not identify the debt,

the creditor may apply the payment at his discretion to any lawful debt actually due and payable from the debtor.

TIME-BARRED DEBT

The creditor may even appropriate the payment towards a lawful debt whose recovery through a suit has become barred by limitation.

Thus, where the debtor has made no appropriation, a time-barred debt may still be selected by the creditor under Section 60.

The debt must nevertheless be genuine, lawful, due and payable.

SECTION 61 - WHERE NEITHER PARTY MAKES APPROPRIATION

Where neither the debtor nor the creditor makes any appropriation, the law applies the payment to the debts in order of time.

Therefore, the oldest debt is ordinarily discharged first.

This applies whether the debt is:

• within limitation; or
• barred by limitation.

DEBTS OF EQUAL STANDING

If the debts are of equal standing, the payment is applied proportionately among them.

Example

A owes B two debts of equal standing:

• ₹10,000; and
• ₹20,000.

A makes an unappropriated payment of ₹6,000.

The payment will be divided proportionately:

• ₹2,000 towards the first debt; and
• ₹4,000 towards the second.

SECTION 62 - NOVATION, RESCISSION AND ALTERATION

Section 62 provides that where the parties agree:

• to substitute a new contract for the existing contract;
• to rescind the existing contract; or
• to alter it,

the original contract need not be performed.

NOVATION

Novation means substitution of a new contract in place of the old contract.

The new contract may involve:

• changed terms;
• changed parties; or
• both.

The important requirement is that the parties must intend the new contract to replace the original contract.

Example: A owes B ₹1 lakh payable on 1 December. Later, A and B agree that instead of paying ₹1 lakh on that date, A will transfer his motorcycle to B in full satisfaction of the debt.

The old contract is replaced by a new contract with different terms. This is novation.

Lata Construction v. Dr. Rameshchandra Ramniklal Shah (2000)

The Supreme Court held that novation requires complete substitution of the new contract for the old one.

Merely entering into a later arrangement does not amount to novation if the parties intended the rights under the earlier contract to continue. There must be a clear intention that the earlier contract is to be extinguished and replaced by the new one.

RESCISSION

The parties may mutually agree to cancel the contract. Once the contract is validly rescinded by agreement, the original obligations need not be performed.

Rescission under Section 62 should be distinguished from rescission of a voidable contract under Section 64:

• Under Section 62, cancellation takes place by mutual agreement.
• Under Section 64, a person who has the legal right to avoid a voidable contract exercises that statutory right.

ALTERATION

The parties may also mutually agree to alter the terms of their contract. After a valid alteration, performance is governed by the altered terms rather than the original terms.

Alteration under Section 62 requires agreement between the parties. One party cannot ordinarily alter the contract unilaterally unless the original contract itself validly gives such a power.

SECTION 63 - PROMISEE MAY DISPENSE WITH OR REMIT PERFORMANCE

Section 63 gives an important power to the promisee.

The promisee may:

• dispense with the performance of the promise, wholly or partly;
• remit the performance, wholly or partly;
• extend the time for performance; or
• accept any other satisfaction which he thinks fit instead of the promised performance.

Thus, the promisee may voluntarily give up the whole or part of what is due to him.

REMISSION DOES NOT REQUIRE FRESH CONSIDERATION

Under Indian law, fresh consideration is not required for a valid remission under Section 63.

For example, A owes B ₹5,000.

If B voluntarily agrees to accept ₹2,000 in full satisfaction of the entire debt, payment of ₹2,000 discharges the whole debt.

B cannot thereafter demand the remaining ₹3,000.

This is different from the traditional English common-law rule that mere part-payment of an existing debt does not ordinarily discharge the whole debt without some additional consideration.

Indian law is governed by Section 63.

Kapur Chand Godha v. Mir Nawab Himayat Ali Khan (1963)

A creditor accepted a smaller amount in full satisfaction of a larger claim.

The Supreme Court held that once the smaller amount had been accepted in full satisfaction, the creditor could not later recover the balance.

The case confirms that under Section 63, a promisee may validly remit part of a debt without receiving fresh consideration.

ACCEPTANCE OF SATISFACTION FROM A THIRD PERSON

A creditor may also accept performance from a third person in satisfaction of the debtor's obligation.

For example, A owes B ₹5,000. C pays B ₹2,000 on behalf of A, and B accepts that amount in full satisfaction of A's entire liability.

The debt is discharged according to the terms on which B accepted the payment.

EXTENSION OF TIME

The promisee may also extend the time allowed for performance. Fresh consideration is not required merely because the promisee gives the promisor additional time under Section 63.

SECTION 64 - CONSEQUENCES OF RESCISSION OF VOIDABLE CONTRACT

Section 64 applies where a contract is voidable at the option of one party, and that party chooses to rescind it.

When the contract is rescinded:

• the other party is no longer required to perform any promise which he was bound to perform under the contract; and
• the party rescinding the contract must restore any benefit which he has received from the other party, so far as restoration is possible.

Example

A purchases goods from B because B obtained A's consent by fraud.

A later rescinds the contract.

If A has already received the goods, he cannot ordinarily cancel the contract and at the same time keep the goods. He must restore the benefit received from B.

The purpose of Section 64 is therefore to prevent a party from both avoiding the contract and retaining the benefit obtained under it.

SECTION 65 - RESTITUTION AFTER VOID AGREEMENT OR CONTRACT BECOMING VOID

Section 65 provides that where:

• an agreement is discovered to be void; or
• a contract becomes void,

a person who has received an advantage under it must:

• restore that advantage; or
• make compensation for it

to the person from whom the advantage was received.

The purpose of the provision is to prevent one party from unfairly retaining a benefit when the legal basis for retaining it has disappeared.

AGREEMENT DISCOVERED TO BE VOID

This part applies where the parties entered into an agreement believing it to be valid, but its invalidity is discovered later.

Example

A pays money to B under an agreement which both parties believe to be legally valid. It is later discovered that the agreement was void.

If Section 65 applies, B must restore the benefit received from A.

CONTRACT WHICH BECOMES VOID

This refers to a contract which was valid when made but later becomes void because of a subsequent event.

Section 56 provides an important example.

Example

A pays B an advance under a valid contract.

Before performance becomes due, a change in law makes the promised performance unlawful and the contract becomes void.

B may be required to return the advance received from A.

Kuju Collieries Ltd. v. Jharkhand Mines Ltd. (1974)

The parties entered into a transaction connected with mining rights which was unlawful under the applicable law.

The Supreme Court explained that the expression “agreement discovered to be void” contemplates a situation where the parties did not know of the invalidity when the agreement was made and discovered it later.

Where the parties knowingly enter into an illegal transaction, Section 65 cannot ordinarily be used simply to recover benefits exchanged under that illegal bargain.

The case therefore distinguishes between:

• an agreement whose invalidity is discovered later; and
• an agreement knowingly entered into despite its illegality.

IN PARI DELICTO

The maxim in pari delicto potior est conditio possidentis broadly means that where both parties are equally involved in an illegal transaction, the Court ordinarily does not assist one wrongdoer against the other.

This principle becomes relevant where restitution is claimed after an illegal transaction.

Loop Telecom and Trading Ltd. v. Union of India (2022)

The Supreme Court explained that restitution is intended to prevent unjust enrichment, but relief is not automatic merely because money or another benefit has passed under an invalid transaction.

The Court may consider:

• the nature of the illegality;
• the conduct of the parties; and
• whether the party claiming restitution was himself responsible for or involved in the illegality.

Thus, Section 65 cannot be treated as a general right to recover benefits from every unlawful transaction.

SECTION 65 DOES NOT ENFORCE A VOID AGREEMENT

Restitution under Section 65 is different from enforcing the original promise. If an agreement is void, the Court does not enforce the promised contractual benefit.

Section 65 merely requires restoration of an advantage already received, where the statutory conditions are satisfied.

SECTION 64 AND SECTION 65

Sections 64 and 65 deal with different situations.

Section 64 applies where there is a voidable contract which is later rescinded by the party entitled to avoid it.

Section 65 applies where:

• an agreement is discovered to be void; or
• a valid contract subsequently becomes void.

Thus, Section 64 concerns rescission of a voidable contract, while Section 65 mainly deals with restitution after a transaction is found to be void or later becomes void.

SECTION 66 - MODE OF COMMUNICATING OR REVOKING RESCISSION OF VOIDABLE CONTRACT

Section 66 deals with:

• communication of rescission of a voidable contract; and
• revocation of such rescission.

Such communication may be made in the same manner and subject to the same rules as apply to the communication or revocation of a proposal.

The communication principles contained in Sections 3 - 6 therefore become relevant, so far as applicable.

SECTION 67 - PROMISEE NEGLECTING TO AFFORD REASONABLE FACILITIES FOR PERFORMANCE

Section 67 protects the promisor where proper performance requires cooperation from the promisee.

Where the promisee:

• neglects; or
• refuses

to provide the promisor with reasonable facilities for performance, the promisor is excused from non-performance to the extent that the failure was caused by the promisee's neglect or refusal.

Example

A agrees to repair machinery situated inside B's factory. To perform the work, A must be allowed to enter the factory.

If B refuses A access to the premises, A cannot be held responsible for failing to repair the machinery to the extent that the failure resulted from B's refusal.

A promisee cannot refuse to provide the cooperation necessary for performance and then complain that the promisor failed to perform.

SECTION 53 AND SECTION 67

Sections 53 and 67 are related but deal with slightly different situations.

Under Section 53, one party to reciprocal promises prevents the other party from performing. The contract becomes voidable at the option of the party prevented, who may also claim compensation.

Under Section 67, the promisee neglects or refuses to provide reasonable facilities necessary for performance. The promisor is excused from the non-performance caused by that failure.

Thus, both provisions reflect the broader principle that a party cannot take advantage of a failure in performance which has been caused by his own conduct.

 

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