Person Should Abide by his Agreements

The underlying moral principle behind the law of contracts is that a person should abide by his agreements and fulfil his promises. If one of the parties break an obligation that a contract enforces, a new obligation arises – an obligation to compensate for the loss to the other party. Law does not seek to enrich a party to a contract , but merely compensate him if he has suffered any damages. [1]

A contract is formed by mutual agreement between the parties. Hence, a contract mutually formed cannot be dissolved unilaterally. According to Anson, the parties to a contract which is wholly executory also have an obligation to maintain their contractual relation till the time of performance arrives. “A contract is a contract from the time it is made and not from the time performance is due.” [2] These principles underlie the concept of anticipatory breach. Even though rooted in such fundamental principles, it was not until 1853 ( with the landmark judgement of Hochster v. De la tour [3] ) that the doctrine of anticipatory breach became fully materialised and was embedded into the Common law. The paper familiarises the reader with the essential requirements under the doctrine of anticipatory breach in the context of Section 39 of the Indian Contract Act, 1872 after discussing the genesis of this doctrine in Common law with judgement in Hochster. The interpretation of Section 39 by the Indian judiciary has been mentioned by discussion of relevant judgements

Discharge of a contract is a process by which, primary obligations under a contract come to an end. Discharge of a contract by breach can take place in three forms: renunciation by a party of his liabilities, disability or impossibility of performance created by his own act, and lastly, by total or partial failure of performance. [4] Repudiation of a contract can occur either through renunciation [5] or if a party incapacitates himself from performing his part because of his own actions or even when there is a failure in performing. [6] When a party, before the time of performance of the contract, makes it clear to the other party either by words or by conduct, his intention to not perform the contractual obligations, then it can be termed as ‘anticipatory repudiation’. Once the repudiation is accepted by the other party it amounts to ‘anticipatory breach’ of contract. As opposed to this, a present or actual breach of a contract shall occur only when the time of performance of contract arrives. Although all the above three forms mentioned for discharge by breach can be compendiously described as repudiation, the term is used mainly for renunciation before time of performance. [7] Discharge of a contract by breach, which constitutes a repudiation by a party, does not automatically terminate innocent party’s obligations under the contract. Rather it has the effect of giving an option to the injured party to either treat the contract as at an end or to continue with it. The concept of anticipatory breach, in the light of Section 39, shall be discussed in detail in the later part of the paper.

CHAPTER 1 :CASE ANALYSIS:

ALBERT HOCHSTER V. EDGER FREDERICK DE LA TOUR [8]

Serious questions of law came to light and a golden opportunity was obtained to answer them. The case brought a significant change in the understanding of the basic principles of contract law. It would be wrong to say that this case originated the doctrine of ‘anticipatory breach’. The judgements pronounced before 1853 also paid a lip-service to the basic principles underlying the doctrine. Prior to Hochster also it was recognised that the innocent party would have a right of action if the other party incapacitated himself or prevented the other party from carrying out duties under the contract. [9] Two cases must be mentioned to illustrate this point. Both of these cases were cited as an authority while ruling Hochster v De la tour.

In the 1846 case of Mary Short v. Stone [10] , the defendant was held liable for breach of promise of marriage made to the plaintiff when he married another person after the promise was made. It was held that the defendant had clearly incapacitated himself from fulfilling the promise and hence was liable for the breach. In Cort v. Ambergate etc. Railway Company [11] , it was held that since the defendant company had renunciated the contract during its performance, the plaintiff was discharged from performing his further obligations under the contract. The plaintiff could maintain an action for damages without requiring to manufacture and tender the rest of the goods .

As it will be clear from the discussion of the case, not only did the decision in Hochster v De la tour firmly establish the principles underlying anticipatory breach, but also supported the policy to combat waste and unnecessary losses.

FACTS: On 12th April, 1853, plaintiff was engaged by the defendant as a courier to accompany him for a tour for three months on the continent of Europe commencing from June 1,1853 for a certain wage or salary. Both the parties agreed to the terms and conditions and a valid contract was formed. But on May 11th, 1853, the defendant wrote to the plaintiff that he had changed his mind and declined plaintiff’s services. He also refused to make the plaintiff any compensation. Action was commenced by the aggrieved party on May 22nd. Also, between the filing of the lawsuit on (May 22nd) and June 1st, the plaintiff obtained an engagement with another employer, Lord Ashberton on similar terms but not commencing before July 4th.

ISSUES: Several issues came to light before the Court in this case.

1.First of all, was there a breach of contract at all? Is it possible in law to break a contract before the time of performance arrived? How could the defendant’s refusal in May incapacitate him from travelling with the plaintiff in June?

2.Secondly, would it have made any difference if the plaintiff had filed the suit on June 2nd and not May 11th?

3.Thirdly, was the plaintiff justified in obtaining engangement with another person before June 1st?

REASCONING AND DECISION: Lord Campbell CJ delivered the final judgement on behalf of the four judge bench:

Court on Issue No 1

The Court answered the first issue in the affirmative, holding that it was possible to have a breach of contract (in the present case) before 1st June . The reading of the judgement gives an impression that Court arrived at such a conclusion by logically expanding the already accepted notion that rendering one’s performance impossible ( due to one’s own mistakes) or preventing the other party from performing is a breach of contract. They reasoned that it is hardly ever truly impossible for one to not fulfil his contractual duties. For example, if a seller A of goods makes a contract with B, a buyer but before the day fixed for delivery to B sells the goods to C instead, he is said to have committed a breach. But it is very well possible for the seller to repurchase the goods from his supplier and sell them to C before the date of delivery. Hence if a person can be held liable for breach because he has rendered performance “impossible” out of his own volition, he can also be held liable when he has clearly and absolutely refused to perform his duties .

Another line of reasoning was that after the formation and before the execution of the contract a relation existed between the parties. The relation was an implied promise that neither of the parties would do anything to the detriment of other party or the contract.. Thus an implied contract existed between the plaintiff and defendant from April 12 to June 1

The Court on Issue No.2

The Court held that the plaintiff had a right to sue the defendant immediately for breach of contract . The Court based this on two grounds.

1. The matter was looked at from the point of view of injured party. The defendant was the one who had wrongfully renounced the contract and then he could not expect the plaintiff to just hope that he will fulfil his promise. Deciding otherwise would have been unfair for the plaintiff who was the innocent party. The defendant had committed a wrong and hence he could not complain if he was sued .

2. The Court held that the injured party will be given an option. It can treat the refusal to perform as a breach and sue immediately ( the plaintiff need not need to wait till June 1st to sue) subject to mitigation in damages because of some supervening circumstance, or the party can wait till the time of performance, thereby keeping the contract alive and then sue for appropriate remedies. A wrongful (anticipatory) repudiation is, in effect, an offer to rescind and not a breach in itself. Anticipatory refusal becomes a breach when the other party accepts it and puts an end to the contract. If the party (whose trust has been broken) decides to not act upon the refusal, there is no effect on the contract.

Court on Issue No 3:

The defendant’s counsel contended that the fact that the plaintiff sought service of another employer waived his right to seek remedy for alleged breach of contract as it portrayed that he was not ready and willing to perform his part of the contract. The Court held that it was required of the plaintiff to be ready and willing to perform his part of the contract only before the defendant announced his intention of ultimate non-performance.

The Court held that the plaintiff’s act of seeking service under another employer was in fact the more rational choice. If the plaintiff were bound to wait till June 1st he would have wasted time, money, manpower , etc to prepare for the tour. Even though he could have claimed for damages on June 1st, but till then no productive activity would result. On the other hand, the option to sue immediately ensures no such loss. Further, it would be advantageous to the defaulting party also as it would lead to mitigation of damages payable to the plaintiff .

IMPACT: The Court effectively overruled the earlier judgements like Phillpotts v. Evans [12] and Ripley v M’Clure [13] although it seems that it made rather vague and unclear attempts to try and distinguish from those cases. Even though both the cases were concerned with assessment of damages, one can certainly not ignore the statements of Parke B. That clearly reflect the rationale of the judgements. In Phillpotts v Evans, Parke B said that:“I think no action would then have lain for the breach of the contract, but thatopl7 the plaintiffs were bound to wait until the time arrived for delivery of the wheat, to see whether the defendant would then receive it.” In Ripley v. M’Clure also, Justice Baron Parke had another opportunity to assert that an anticipatory refusal was “was no breach, and nothing more than an expression of an intention to breach the contract, not final, and capable of being retracted.

Hochster can be distinguished from Cort v.Ambergate etc. Railway Company as in the former, action was filed before the date of performance of the contract. .Hochster involved renunciation before time of performance had arrived ( wholly executory contract), whereas Cort invoved renunciation during performance of a contract . From the fact that it is Hochster v De la tour which is credited with initiating doctrine of anticipatory breach shows that the term ‘anticipatory’ was held by the Court to mean repudiation before the time of performanc’ had arrived, i.e. wholly executory contracts. But similar principle can also apply to those situations where renunciation and impossibility of performance is created during performance. (partial performance is left)

FROST V. KNIGHT [14] :. The Court of Exchequer Chamber considered the principle laid down in Hochster as “settled law” and held that it was as much applicable in contracts involving personal status and personal rights as in commercial interests. “Anticipatory breach doctrine” was thus held to be applicable not only in cases where date of performance was fixed, but also in those cases where performance was contingent upon an event which might or might not happen. [15]

PRINCIPLE V. POLICY.

The rule laid down in Hochster to give an innocent party an option to accept or refuse the repudiation, reflected a broad proposition of law that a contract mutually made cannot be dissolved unilaterally. [16] A blatant and clear refusal by one party leaves the innocent party little option. Even though law gives him the formal authority to ultimately decide the status of contract (as continuing or at an end), the practical concerns carry the implication that party has no option but to accept the repudiation. The contract does not really end because of any ‘mutual agreement’ in the sense that the innocent party does not agree to rescind the contract in its innermost mind, but the situation is more aptly described as ‘refusal invites refusal’. [17]

Effect of Acquiescence to Continue contract: If the innocent party chooses to continue with the contract, he definitely holds the other party bound to the contract and can insist on performance when the time comes. The defaulting party then gets a chance to perform his liabilities under the contract and the contract might be executed by both the parties as originally contemplated. The innocent party continues the contract at his own risk and peril, he himself remains bound to his liabilities. But when the other party has blatantly and clearly announced his intention or he has inferred such an intention, it is very likely that the contract will not be performed. In such a case, the losses resulting from breach of contract can be minimised by accepting the repudiation and ending the contract immediately. Continuing the contract will impose an opportunity cost to the innocent party. The loss is even more when he is the one who is supposed to perform as his performance will prove to be wasteful if the defaulting party does not change his mind. Even though he can raise an action for damages eventually, the wastage of time, manpower and such resources cannot be avoided. He remains open to the risk of falling market rates which can affect his damages. On the other hand, accepting the repudiation will result in minimum possible loss to the injured party. Moreover, the injured party is under an obligation to take all the reasonable steps to avoid losses occurring from the breach. In other words, if the innocent party creates unnecessary waste, he must pay for himself. For all these reasons stated above, the legal tenability of the option of continuing the contract is questionable Nevertheless, the right to disregard the repudiation is recognised by Indian as well as English Courts.

The law seeks to protect the innocent party by preserving his legitimate interest, if any, in continuance of the contract. But isn’t it also the duty of the law to make sure that no option works to the prejudice of the innocent party ?The law of anticipatory breach was laid down in Hochster not as a whip to punish the deliberate contract-breakers, but to spare the dilatory and the unfortunate and avoid wasteful performance. [18] This utility of the doctrine is served by only one of the two options. The approach of giving an option has been criticized as encouraging wasteful performance. [19] In English law also, this clash of policy and principle has led to completely contradictory decisions in cases based on similar facts. [20] If a legal system’s desire to combat waste is stronger than its willingness to give the innocent party a ‘right’, ‘power’ or ‘authority’, then it is more likely that act of wrongful repudiation will be considered as breach giving rise to a cause of action immediately. Indian legal system, however endorses the view that the injure party should be allowed to exercise the choice. This is evident in Section 39 of Indian Contract Act discussed in detail in the next chapter.

CHAPTER 2: ANTICIPATORY BREACH AND THE INDIAN CONTRACY ACT 1872.

Section 39 of the Indian Contract act, gives effect to the concept of anticipatory breach, although the term is not explicitly stated anywhere in the whole act. Section 39 reads thus: “Effect of refusal of party to perform promise wholly: When a party to a contract has refused to perform, or disabled himself from performing, his promise in its entirety, the promise may put an end to the contract, unless he has signified, by words or his conduct, his acquiescence in its continuance.” Two illustrations have also been mentioned to aid interpretation of the above provision. It must be noted that there is no mention of the word “anticipatory”. Section 39 deals with effect of repudiation on the innocent promisee. Upon reading the provision as a whole, one can infer that it is applicable for those situations wherein performance is partially or fully left to be delivered. This also becomes clear by the two illustrations provided in the Act itself. The scope of section 39 extends to not only to wholly executory contracts but also to those situations where even partial performance is left and repudiation is during performance. From what can be inferred from Hochster (discussed above) and from Anson’s influential book on Contract Law (used also by Indian judges as an authority in judgements), the researcher infers that the word ‘anticipatory’ , at least in English Common Law, covers those contracts which are completely to be performed in future ( wholly executory )and not those which have been partially performed.

The explaination of the important words mentioned in the Section has been given below:

REFUSAL or RENUNCIATION: EXPRESS or IMPLIED: The refusal or renunciation to perform contractual obligations must be in respect to some vital and material respect of the contract . Refusal must be clear and absolute and must be reasonably understood by the other party as if demonstrating his intention not to perform. A mere failure to perform an obligation under a contract need not constitute refusal. [21]

DISABLED himself from performing: When a party deliberately does some act that puts the performance of the contract out of his power or when he deliberately creates such circumstances which render his performance of the contract or of an essential part of the contract impossible , he is said to have “disabled himself from performing.”

3 “MAY PUT AN END TO” The word “may” indicates that innocent party has right to either accept or reject the repudiation. Hence the principle similar to that laid down in Hochster is applied.

4 PUT AN END TO: ACCEPTING REPUDIATION: The case of Muralidhar Chatterjee v. International Film Company [22] made it clear that the words “put an end to” meant “voidable” (at the option of injured party). The repudiatory breach rendered the contract voidable. This invokes Section 66 of the Indian Contract Act which provides for mode of communication voidable contracts. [23]

5 SIGNIFIED, by words or conduct,….( REFUSAL OF REPUDIATION)

The decision to continue the contract, must be ‘signified’. The word ‘communicated’ has not been used. A party can signify either by words or by conduct. The affirmation ( acquiescence to continue the contract ) must be ‘signified’ to the guilty party ‘in clear and unequivocal terms’. [24] This requirement is to serve the purpose that even the guilty party needs to know whether contract is alive or has been terminated. If he is not aware that the contract is alive, he might become liable for actual breach.

It is necessary to study few of the judgements delivered by the Indian Court to get a clear understanding of the application and interpretation of Section 39. Some of the judgements have been discussed below.

CHAPTER 3: INDIAN CASES ON SECTION 39

The cases disucussed below also cover certain issues apart from those discussed below. However, for the purpose of this paper, focus has been on the interpretation of Section 39 by the Courts.

1 Muralidhar Chatterjee v. International Film Company Limited [25] Two major issues relating to interpretation of Section 39 were addressed in this case. Firstly, whether putting an end to means the same as “voidable” , under section 2(i). .And secondly, whether under Section 64, the innocent party was liable to restore to the defaulting party any benefit it had received under the contract.

FACTS: The appellant had entered into a contract with the respondents for distribution of films in certain areas. He had paid Rs4000 in advance for getting the prints. On 1-12-1936 , the appellant wrote a letter to the respondent alleging several breaches of contract and clearly expressed his intention not to continue any business with the company. Repudiation was accepted by the respondent by a letter dated 21-1-1937. It was found that, in fact, the appellant had committed an anticipatory breach but the issue that perplexed the Court was whether he could still recover the advance amount he had paid. ?

HELD: It was held that the contract had been rescinded by the respondents and hence he was entitled to receive the advance money under section 64. The respondents being the innocent party were entitled to recover damages but the cross claim would stand upon an independent footing.

REASONING: Section 64 could be applied to cases of wrongful repudiation under section 39 as the words “put an end to” a contract had the same effect as rendering a “contract voidable at the option of injured party”. When the injured party puts an end to the contract by exercising his choice, he rescinds a voidable contract. Thus a repudiation while the contract was in executory condition meant an offer to rescind. So, if an injured party puts an end to the contract under section 39, a liability to make restitution attaches. On an independent and separate footing, claim for damages could be made by the injured party under section 75 since it rightfully rescinds the contract .

A later case, SV Harihara Iyer v. Mathew George [26] clarified that the defaulting party cannot recover his deposit if the other party chooses not to accept the repudiation and is ready and willing to hold on to the contract. Application of s 64 was conditional upon acceptance of repudiation by the innocent party.

2. V.K. Kumaraswami Chettiar and Ors.Vs: P.A.S.V. Karuppuswami Mooppanar [27]

FACTS: The seller ( appellant) had to deliver 10 bales of yarn anytime between 1st and 31st of August , 1943 at his discretion. Payment was to be made before receiving delivery. On 2-8-1943, goods were sent and notice was received by buyer who did not respond to it. On 30-8-1943, respondents demanded delivery and offered to pay the ceiling price fixed by the government on 20-8-1943 to which the sellers refused. Government prices were applicable for contracts existing after 15-8-1943. To determine who had committed the breach, Court had to find whether the contract was existing on 15-8-1943.

JUDGEMENT: It was affirmed by the Court that refusal (when there was something left to be performed under the contract) in itself did not constitute a breach, but was subject to acceptance by the innocent party. The exercise of option- to accept or refuse the repudiation , was only possible in cases of wholly executory and contracts with continuing performance.. It was clarified that once the time of performance had arrived and there was a refusal to perform one’s obligation , the act of refusal itself would amount to a breach and there would be no choice for the innocent party to accept or reject the refusal as contract would be dead. If even then innocent party wanted to continue the relationship, a new contract would arise. Section 39 applies only to situations when there was something left to be performed under the contract. The Court contended that even though there was no fixed date of performance, refusal to accept delivery on 2nd was an actual breach by the defendant and the contract was at an end.

3. Rash Behary Shaha v. Nrittya Gopal Nundy [28]

Two similar agreements were made between the plaintiff and defendant wherby the defendant agreed to sell the plaintiff 150 tons of sugar under each contract during the month of September and October; cash had to be paid before delivery, Although certain other issues were raised, for the purpose of this paper, focus shall be on the ‘refusal’ aspect under section 39. The plaintiff did not pay for the September shipment. On October 26th, the defendants rescinded the contract. The Court held that the delay in the obligation to pay money, did not go into the root or essence of the contract and the defendants were not entitled to rescind the contract. The real test was to ask whether act or conduct of one party gave a clear intimation of intention to abandon and altogether refuse to perform the contract. [29] . Although there was refusal to pay money when the first shipment arrived, the repeated attempts of the plaintiff showed that he was only asking for more time, so the ‘intention’ element was absent. Similar decision had been reached as early as 1879-80 in the case of Sooltan Chand v. Schiller, [30] where it was held that even though a large balance was due to the defendants, there was no refusal on part of plaintiffs as they were willing to pay when their cross-claims were adjusted. [31]

CONCLUSION:

The judgement in Hochster v. De la tour has firlmy rooted the principle of ‘anticipatory breach’. Although the term ‘anticipatory breach’ can be misleading, the essence of the doctrine has been grasped by the Indian judiciary . It is clear that the term does not imply ‘future breach’ although this is what the innocent party will anticipate. Rather, the cases clearly indicate that the term is used to mean that an immediate course of action lies if there is a clear refusal or indication of future non-performance. Even though the right to reject the repudiation is

provided to the innocent party, the reading of judgement indicates that the judges have emphasised on the merits of bringing a course of action immediately. But the merits of keeping other option available to the innocent party have seriously been doubted and criticised by various authors. Nevertheless, Indian legal system have given the innocent party right to choose its own course of action ( by Section 39 ) . They continue to view ‘anticipatory repudiation’ as an ‘offer to rescind’.