Ex nudo pacto non oritur actio

Maygha Viswanat

The law relating to contracts forms one of the most fundamental aspects of the legal arena. We individuals get into contracts on a day to day basis be it with friends, relatives or colleagues. Since, we live in a world where we keep entering into contracts, it often becomes imperative to analyse the various components of a contract. Out of all the components constituting a contract, the most important is consideration.

The concept of consideration is the most basic and essential feature of a valid contract. Consideration is based on the phrase, “quid pro quo”. Consideration basically means something in return for the promise made by the offeror. Sir Frederick Pollock has defined consideration, “It is the price for which the promise of the other is bought, and the promise thus given for value is enforceable.” In the case, Curie v. Misa (([1875] LR 10 Ex 153; (1875-76) LR 1 App Cas 554))the term was defined, “A valuable consideration in the sense of the law may consist of some right, interest, forbearance, detriment, loss or responsibility, given, suffered or undertaken by the other”. The Indian Contract Act states, “When at the desire of the promissory, the promise or any other person has done or abstained from doing something or does or abstains from doing something or promises to do or abstain from doing something, such act or abstinence or promise is called a consideration for the promise.”

The maxim ex nudo pacto non oritur actio means, “No action arises on a contract without consideration”. Since consideration is the founding platform to a contract, a contract without consideration is void. In the case of S. Parameswari vs. Balasubramanian ((SECOND APPEAL No.881 of 1997)), the court held that in this case there was no breach of contract by the defendant , since the plaintiff could not prove consideration from her side. Since, there was no consideration from the side of the plaintiff, the contract was declared void.

Though a contract without consideration is void, there are certain exceptions to this as present in Section 25, Indian Contract Act. As per Section 25 of Indian Contract Act, an agreement without any consideration is declared to be void, but there are some exceptions in this rule, in which an agreement is enforceable even though they are made without consideration. For instance, contracts made out of love and affection is one instance wherein consideration is not required. Thus with regard to contracts based on love and affection, the maxim does not hold valid. Even in cases involving promises to pay time barred debts since no consideration is required, the maxim ex nudo pacto non oritur actio does not stand validated.

Though these exceptions are present, consideration is still the very basis on which a contract is formed. Without consideration, a contract becomes naked. It is the concept of consideration that brings life to a contract and makes it actionable before the court of law. Thus, the maxim ex nudo pacto non oritur actio is one of the key elements and maxims looked by the court while deciding cases pertaining to contracts.

Specific Performance of Contracts

Abhinav Gaur, Research Associate

Every contract broaches an obligation upon each party to such contract, to either do or not to do something. Upon breach of such obligation created by a promise to an act/omission under the agreed terms of contract, is raised a right upon the Promisee to get compensated for losses incurred due to such breach by the Promisor and simultaneously is raised another obligation upon the Promisor to compensate for such losses.

Here comes the role of the Specific Performance of Contract, where a question arise, what if a Promisee would want Promisor to compensate not monetarily but, by doing what he was supposed to do as per the contract, in other words, what if performance of contract is more significant and money for breach totally insignificant to compensate the Promisee? What if there is no ‘strait-jacket formulae’ to quantify the damage incurred by any such breach by the Promisor. The Specific Relief Act comes to the rescue and answers all such questions by providing for Specific Performance of Contracts.

A decree of Specific Performance, is through which a court directs the defendant to perform the contract according to its terms, in other words, it is an order of court taken by a plaintiff directing the defendant to perform the contract according to its terms.

Specific Performance: The Indian Outlook

The Indian Law follows the trails of common law, wherein the right to specific performance is not out rightly available to promisee on breach by promisor, but is an exceptional right and is exercised by courts on their discretion.

Under the following circumstances, the specific performance is granted:

  1. Where non-performance of such contracts, of which compensation is not an adequate remedy ((Section 10, The Specific Relief Act));
  2. where enforcement of the terms of the contract is not difficult, expensive or ineffective ((Section 14, The Specific Relief Act));
  3. where the plaintiff’s conduct does not disentitle from seeking the equitable relief ((Section 16, The Specific Relief Act));
  4. where the court on its discretion, considers it fit to grant specific performance ((Section 20, The Specific Relief Act)).

In common law system, specific performance is an order directed against the defendant. The order requires him to perform the contract, else suffer consequences in the nature of contempt. In civil law systems, the remedy is wider. It is the process by which them promisee receives the performance of the promise given to him. Thus the promisees can have the defect cured or the substitute at the expense of the promisor. The order therefore aims at the result, rather than a direction to the debtor.

Section 14 of The Specific Relief Act, 1963, puts certain limitations on the grant of specific performance, which are as follows:

  1. a contract, non-performance of which can be justified by an adequate relief in form of money, however an agreement to execute mortgage deed can be enforced;
  2. a contract which runs into a minute details or extensive details;
  3. a contract which involves performance of a continuous duty, which court cannot supervise ((Nathu Lal v Munni Lal AIR 1927 Lah 898; Vipin Bhimani v Sunanda Das AIR 2006 Cal 209; Karri Venkatareddy v Kollu Narasayya (1908) 1 IC 384 (Mad); Ramchandra Ganesh Purandhare v Ramchandra Kondaji Kate (1898) 22 Bom 46; K M Jaina Beevi v M K Govindaswami AIR 1967 Mad 369));
  4. a contract dependent on personal qualifications or volition of the promisor ((Makharia Brothers v State of Nagaland AIR 1999 SC 3466; Najibulla Sardar v Harimohan Mitra AIR 1932Cal 481; In the matter of Gunput Narain Singh (1875) 1 Cal 74; Vidha Ram Misra v Managing Committee Shri Jai Narain College AIR 1972 SC 1450; Nandganj SihoriSugar Co Ltd v Badri Nath Dixit AIR 1991 SC 1525));
  5. a contract which can be terminated by any party as per the terms of the contract ((Pratibha Singh v Shanthi Devi Prasad AIR 2003 SC 643));
  6. Contract is such that otherwise from its nature, the court cannot enforce specific performance of its material terms ((Mohunta Bhagwan Das v Surendra Narain Singh (1917) 42 IC 521; Naresh Chandra Roy v Union of India AIR 1987 Cal 147)).

Inadequacy Test

Inadequacy test is a test on which Plaintiff has to stand to the satisfaction of the court in a way to show and justify that the compensation as a relief would not give him adequate relief. Only because of this test, the remedy of specific performance becomes exceptional. Specific performance of a contract can be claimed in two cases: firstly when compensation cannot be ascertained; and when compensation would be inadequate ((Section 10, Specific Relief Act)).

As per the explanation to Section 10 of the Act, two rebuttable presumptions operate upon the question of inadequacy:

1. in cases of contracts to transfer immovable property, there is a presumption that compensation will not be adequate;

2. in cases of contract to transfer movable property there is a presumption that compensation is an adequate remedy.

The court has to consider not his personal disability or inability, but whether obtaining substitutein the market is objectively possible. The word “adequately” implies adequate in the opinion of the court based on the facts proved on record, though the plaintiff may consider it to be inadequate ((Brij Ballabh Das v Mahabir Prasad AIR 1924 All 529.)).

Furthermore, the goal of compensation requires that an effort be made to determine the value the promisee places on the promisor’s performance, as distinct from what the promisee, or anyone else, has offered to pay for it. The court may reply on the evidence that goods are not available in India, and can be procured only from abroad ((Hemraj Kapoor v Seventeen Textile Traders (India) AIR 1961 Pat 318 (temporary injunction refused on the principles of specific performance).)).

The need to prove that no substitute is available is primary to exercise the remedy of specific performance but any substitute must correspond to the promisee’s need. It must serve the purpose of the promisee. Arguendo, if exactly same goods are available from alternative sources, these might not substitute where the reputation or brand of the promisor is important or the goods are not available on comparable or convenient terms or warranties, or their supply will be incompatible with other commitments. These may be difficult to locate, their availability may involve such delay as to disrupt the promisee’s business, their price may be substantially higher than the contract price, or alternative manufacturers may not have comparable reputations for quality.

Thus, what has to be seen is that the promisee must not suffer due to promisor’s non-performance and the essence of every contract must be kept.

Conclusion and Critique

In light of various judgments and judicial pronouncements it has been time and again observed that the ‘inadequacy test’ has done more of harm than the relief, and the reason is its exceptional nature.

It is indeed not readily available to the promisee but on the contrary promisee who is already suffering because of promisor’s non-performance, is made to further suffer because it has to satisfy court by standing the inadequacy test.

I propose that inadequacy test must be ruled out, since without it plaintiff will have to show the existence of a valid contract, its terms and subsequent breach by the defendant, and also, he will be able to seek the relief of his choice. If plaintiff chooses the remedy by way of specific relief, the onus would be on the defendant to show that substitutes or alternatives are available, if any. The reason to it being more just would be that the burden of proof would shift to the ‘contract breaker’.

Certainly, such a change would bring a paradigm shift in the volition of contract makers and would also encourage performance of contracts.

Damages under Indian Contract Act

Author: Sourish Saha, Research Associate

Damages are of two types, liquidated and unliquidated. Liquidated damages ((Defined in Smith v. Smith 4 Wend. (N.Y.) 470, Eakin v. Scott 70 Tex. 442, 7 S.W. 777))may be defined as the amount of the damages has been ascertained by the judgment in the action or when a specific sum of money has been expressly stipulated by the parties to a bond or other contract as the amount of damages to be recovered by either party for a breach of the agreement by the other ((The Law Dictionary, http://thelawdictionary.org/liquidated-and-unliquidated-damages/, accessed June 2013)). Unliquidated damages ((Cox v. Mclaughlin, 76 Cal. 60, 18 Pac. 100))are such as are not yet reduced to a certainty in respect of a sum, such damages limit the plaintiff’s right to recover damages or such as cannot be fixed by a mere mathematical calculation from ascertained data in the case ((Supra n. 2)). If the liquidated damages clause for any reason is found not to be enforceable under law, the contractor will still be liable to the employer for unliquidated damages. The only exception to this rule is if the parties have previously agreed that no damages, will be payable for completion of the terms of contract, then there would be no damages.

Liquidated Damages

Liquidated damages are also known as ascertained damages. They are damages whose amount the parties designate during the formation of a contract for the injured party to collect as compensation or reimbursement upon a specific breach while discharging a contract be it frustration, or late performance for example. When damages are not predetermined, then the amount recoverable is said to be a general estimation of the damage incurred by the aggrieved party. Therefore, a court or tribunal in the event of breach specifically decides such an amount. The parties can alternatively agree upon the damages if there is an out-of-court settlement.

In common law principles, liquidated damages clause will not be enforced if its objective is to punish the wrongdoer rather than to compensate the party who has incurred damages. In such cases thereof, it is referred to a penal clause ((“Liquidated damages, penalties and the Just Compensation rule: Some notes on an enforcement model and a theory of efficient breach”, Columbia Law Review, p 77)). The justification for this is that the enforcement of the term would require an equitable order of specific performance. The courts ensuring equity will try to seek to achieve a fair result and will not enforce a term that will lead to the unfair benefit of the enforcing party. For an order of liquidated damages, the following two conditions must be met. Firstly, the amount of the damages identified must roughly approximate the damages likely to fall upon the party seeking the benefit of the term ((Supra n. 5)). Secondly, the damages must be relatively vague at the time the contract is made that such a clause will likely save both parties in the future while estimating damages.

In 2007 the Office ((Office of Fair Trading v Abbey National plc and Others [2009] UKSC 6))of Fair Trading (OFT) investigated why credit card companies were excessively charging its customers. In its estimation, the OFT established that these excessive charges was unlawful under the law of United Kingdom and that these credit card companies were liable to be fined. The OFT said it would investigate any charge over 12 pounds though this was not intended to indicate that £12 is a fair and acceptable arrangement. It said it would be up to the court to determine such an amount based on the established legal precedent that the only recoverable cost would be actual costs incurred.

Unliquidated Damages in Tort and Contract Law

The concept of unliquidated damages appears in the law in both torts and contract law though the term is used most commonly in contract law. Indemnity that are sufficiently uncertain may be referred to as unliquidated damages and may be so categorized because they are not accurately calculable or are subject to a contingency which makes the amount of damages doubtful. Unliquidated damages refer to damages in a breach of contract case that were not predetermined by the party, for example in case of medical negligence. It can refer to any damages award a court awards in a breach of contract case based on the damages incurred. It can also refer to damages in a tort case that are left to the discretion of the judge such as damages for pain and suffering. Unliquidated damages are also awarded in cases of negligence, trespass, nuisance and vicarious liability. Anything which causes qualitative damage not ascertained by a fixed amount, it is the onus of the court or the adjudicating body to give unliquidated damages ((Michael Furmston, G.C. Cheshire and H.S. Fifoot, , Law of Contract, Oxford University Press, 15th edn, 2007)).

Under the law in the US and in most locations, contracting parties can create their own private law by creating a contract with specific terms and conditions. Within the scope of the agreement, each party exchanges something of value with the other even if that something of value is just a promise to do something at a later date. The adjudicatory body will enforce the contract made by the parties and will penalize a person who breaches said contract. In general such damages cannot be set-off. Therefore, no interest will be allowed on unliquidated damages.

Conclusion

It is by now well-settled that “a claim for unliquidated damages does not give rise to a debt until the liability is adjudicated and damages assessed by a decree or order of a Court or other adjudicatory authority ((Union of India v. Raman Iron Foundry. AIR 1974 SC 1265)). The Court has also allowed “the writ petition holding that the claim that the Government has against the writ petitioner for breach of the terms of the surety agreement is only in the nature of a right to unliquidated dam-ages and so long as the sum recoverable by way of unliquidated damages remains undetermined it cannot be said that any amount is ‘due’ to the Government from the petitioner and hence steps cannot legally be initiated against him under the Revenue Recovery Act for recovery of the amount from the petitioner ((Vadakkel, J. in Universal Marine Agencies v. State of Kerala, 1977 Ker LT 949, Also see Commissioner of Income-tax, Kerala-I v. Nenmony Investments Agencies Ltd., 1978 Ker LN 11)). The Appellate Tribunal in another case also held that the nature of the liability under the arbitration award in the instant case is one for unliquidated damages ((Asuma Cashew’s case (I. .T. A. No, 249 (Coch) of 1982).))and that the liability to pay the damages became crystallised when the amount of damages is accepted either by negotiation or is determined by an arbitrator or by a court. The Appellate Tribunal Tribunal took the view in this case that it was not a case where the quantum of damages alone was referred to the arbitrator, but it was a case where the very question as to whether the assessee is liable to pay damages was referred to arbitration ((Ibid.)). Therefore, unliquidated damages are given for more of arbitration proceedings where the nature of the contract cannot be boiled down to monetary terms at the time of entering into a proceeding/contract. Liquidated damages are easily verifiable at the time of entering the contract and sometimes also mentioned in the terms of the contract as a percentage or ratio of the total losses incurred.

Discharge of Contract under Indian Contract Act

Author: Sourish Saha, Research Associate

A contract is discharged when the agreement is terminated. The most desirable case is when a contract terminates because it has been completely performed with all its terms carried out. A contract may be terminated for other reasons, such as a party’s breach or default. The various modes by which a contract can be discharged are by performance, by impossibility, by operation of law, by agreement, by bar of limitation and by breach of contract ((http://www.lawteacher.net/contract-law/lecture-notes/discharge-lecture.php, (visited Jun 30, 2013).)). 

Doctrine of Frustration

Where the supervening circumstances have so changed by the time of performance of the terms of a contract, by which the parties are compelled to perform the promise under conditions which have been changed, would require them to do something alternatively, which they had never agreed to do otherwise. Such a performance is called frustration of contract. This doctrine arises from the coming into existence of facts not within the contemplation of the parties but beyond the control of parties ((Couturier v Hastie (1856) 5 HL Cas 673)).

Firstly, a contract is discharged when its performance becomes impossible on account of a change of statutory law of the land. Parties generally contract on the basis of the law existing at the time of the contract ((Taylor v Caldwell (1863) 3 B&S 826.)). Secondly, the commercial frustration of adventure by delay means the happening of some unforeseen delay without the fault of either party to a contract. Contract is discharged by frustration. Thirdly, a contract is discharged by frustration if a specific thing that is essential to the performance of the contract is destroyed. Finally, non-existence of a state of things ((Herne Bay Steamboat Co v Hutton [1903] 2 KB 683.))that form the basis of the contract, frustrates the contract itself ((FA Tamplin v Anglo-Mexican Petroleum [1916] 2 AC 397)). Death of the party to contract is like non-existence or non-occurrence of the event ((Krell v Henry [1903] 2 KB 740)). Interference by the government may frustrate the contract ((Metropolitan Water Board v Dick Kerr [1918] AC 119)).

Discharge by performance

The general rule is that the parties must perform precisely all the terms of the contract in order to discharge their obligations ((Cutter v Powell (1795) 6 Term Rep 320.)). Tender of performance is equivalent to performance in the situation where party A cannot complete performance without the assistance of party B and party A makes an offer to perform which party B refuses. A further exception exists where a court is satisfied that substantial performance is present. If however, the performance is not held to amount to substantial performance the claimant is entitled to nothing. Ambiguity arises as to what amounts to substantial performance ((Bolton v. Mahedeva [1972] 1 WLR 1009, Hoenig v Issacs [1952] 2 All ER 176)). The rule relating to discharge through full performance applies where an entire contract exists. In situations where it is possible to divide a contract into separate parts, which means, if a sum is agreed to be payable periodically, then the courts can award a sum for the separate parts of the contract which have been finished ((Ritchie v. Atkinson (1808) 10 East 295)). In the exceptions of contract discharged by performance, performance can be prevented by the promise. This means where the promisee prevents completion of the performance then the promisor is entitled to payment for the work, which has been concluded ((Planche v Colburn [1831] EWHC KB J56)).

Unilateral Discharge

Unless the agreement is made final, for unilateral discharge, consideration must be furnished in order to make the agreement enforceable. Unilateral discharge takes place where only one party has rights to surrender. When one party has entirely performed his part of the promise, he is no longer obligated to perform anything under the law but has rights to compel the performance of the agreement by the other party ((http://www.e-lawresources.co.uk/Discharge-through-performance.php, (visited Jun 29, 2013).)).

Breach

A failure to perform the terms of a contract constitutes a breach. It can happen in the two following ways. Either by anticipatory breach or he may break a condition or otherwise break the contract in such a way that it amounts to a substantial failure of consideration. The innocent party is not under any obligation to wait until the date fixed for performance before commencing his action ((Hochster v. De La Tour (1853) 2 E&B 678)). It appears that the right to keep the contract alive subsists even where the innocent party is increasing the amount and not mitigating the damages received ((White & Carter v. McGregor [1962] AC 413)). Where the innocent party elects to treat the contract as continuing the affirmation can be regarded as a species of waiver ((Panchaud Freres SA v. Establissments General Grain Co [1970] 1 Lloyd’s Rep 53)).

Other Exceptions to Discharge of Contract

Personal incapacity is where the personality of one of the parties is significant may frustrate the contract or make it difficult to be discharged ((Condor v. The Baron Knights [1966] 1 WLR 87, Phillips v. Alhambra Palace Co [1901] 1 QB 59.)). The non-occurrence or non-existence of a specified event may frustrate the contract as discussed earlier ((Herne Bay Steamboat Co v. Hutton [1903] 2 KB 683)). Governmental interference may also frustrate the contract ((Metropolitan Water Board v. Dick Kerr [1918] AC 119)). Supervening illegality also leads to frustration of contract ((Denny, Mott & Dickinson v James Fraser [1944] AC 265)).

Conclusion

Discharge of a contract means termination of a contract. Discharge of contract can be performed in the ways mentioned in the first paragraph of this article. A discharged contract refers to contract that is fully performed. It is the act of making a contract or agreement null. The exceptions though have been highlighted in the article as well. It is something important that sometimes discharge becomes difficult because of breach or by impossibility or illegality, it is compulsory for both the parties to either execute the terms or it is the onus of the court to award compensation. In conclusion, discharge may take place by performance of the contract, release, accord, extinguishment, set off, rescission, defeasance, extinction, inability of the parties, lapse of time, bankruptcy or insolvency, or release of partners.

Minor’s Contract under Indian Contract Act

Author: VS Warrier

Section 10 of the Indian contract act requires that the parties must be competent to contract. Competence to contract is defined in section 11. Who are competent to contract-every person is competent to contract who is of age of majority according to the law he is subject, and who is of sound mind, and who is not disqualified from contracting by any law he is subject to.

AGE OF MAJORITY

The age of majority is generally eighteen, except when a guardian of minor’s person or property has been appointed by the court, in which case it is 21 years. Continue reading “Minor’s Contract under Indian Contract Act”