Performance of Contract and Section 37 of Indian Contract Act

A contract is a promise or a set of promises which the law will enforce. However, the true essence of a contract lies not just in the promise but in the performance of that promise. When parties enter into a contract, they are bound by law to perform their respective obligations. 

The Indian Contract Act, 1872 specifically lays down provisions regarding the performance of contracts. Section 37 of the Indian Contract Act is a fundamental provision that mandates that parties to a contract must perform or offer to perform their promises, unless such performance is dispensed with or excused by law.

Understanding Performance of Contract

In everyday terms, the word “performance” means carrying out an action or task. Legally, performance of a contract means the fulfilment of obligations by the parties to the contract. This means each party must carry out what they have promised to do under the contract.

For example, if ‘A’ promises to deliver a book to ‘B’ on payment of five hundred rupees, then performance takes place when ‘A’ delivers the book and ‘B’ pays the money.

Section 37 of the Indian Contract Act, 1872: The Duty to Perform

Section 37 of the Indian Contract Act states:

“The parties to a contract must either perform, or offer to perform, their respective promises, unless such performance is dispensed with or excused under the provisions of this Act or any other law.”

This section imposes a primary obligation on each contracting party:

• To perform their promise, or
• To offer to perform their promise.

The section also provides that the obligation to perform is not discharged by the death of a promisor if their legal representatives are bound to perform, unless the contract specifically states otherwise.

Types of Performance of Contract

Section 37 and Section 38 of the Indian Contract Act distinguish between two types of performance:

Actual Performance

Actual performance occurs when a promisor makes an offer of performance to the promisee and the promisee accepts this offer. At this point, the promisor’s obligation is discharged, and the contract is said to be performed. For instance, when ‘A’ delivers the promised book to ‘B’ and ‘B’ accepts it, actual performance has occurred.

Attempted Performance or Tender of Performance

Attempted performance or tender occurs when the promisor makes an offer to perform the contract, but the promisee refuses to accept the performance. Under Section 38 of the Indian Contract Act, such a tender, if valid, discharges the promisor from liability, even though the promisee refuses to accept.

Types of Tender

Tender can be of two kinds:

• Tender of goods and services: The contract obligation is considered completed when the goods or services are offered for acceptance as per the terms of the contract. If the promisee refuses to accept, the promisor may withdraw the goods or services and is discharged from liability.
• Tender of money: The debtor tenders the money to the creditor, but if the creditor refuses to accept, the debtor’s liability to pay money still remains. Thus, a tender of money does not discharge the debt.

Essentials of a Valid Tender (Offer of Performance)

Section 38 of the Indian Contract Act sets out the conditions which must be fulfilled for a tender of performance to be valid:

1. Unconditional Offer: The offer to perform must be unconditional. It should not be subject to any terms or conditions.
2. Proper Time and Place: The offer must be made at a proper time and place. The place should be such that the promisee can reasonably verify the competence of the person making the offer and inspect the goods or services offered.
3. Reasonable Time for Inspection:  If the offer involves goods, the promisor must give the promisee reasonable time to verify that the goods correspond to the contractual terms.

Failure to satisfy any of these conditions makes the tender invalid and the promisor remains liable for non-performance.

Time and Place for Performance of Contract

The Indian Contract Act, 1872, provides guidance on the time and place of performance in Sections 46 to 50.

Section 46: No Time Specified and No Application by Promisee

If the contract does not specify the time for performance and the promisee is not required to make any application to the promisor to perform, the promisor must perform within a reasonable time. What constitutes a reasonable time depends on the nature of the contract, customs, and circumstances.

Section 47: Time Specified, No Application by Promisee

If a specific time is fixed for performance, and no application from the promisee is needed, the promisor may perform at any time during usual business hours on that day.

Section 48: Time Specified, Application Required by Promisee

When a specific day is fixed but the promisee must apply for performance, the promisee must apply at a proper time and place, and the promisor must perform within usual business hours thereafter.

Section 49: No Place Fixed, No Application by Promisee

If no place is fixed for performance and no application is required, the promisor must ask the promisee to appoint a reasonable place and perform there.

Section 50: Performance in Manner or at Time Prescribed by Promisee

The promisor may perform the promise in any manner or at any time or place which the promisee prescribes or sanctions.

Who Must Perform the Contract? (Section 40)

Section 40 specifies that if the terms of the contract show the parties’ intention that performance must be made by the promisor personally, then no one else can perform on the promisor’s behalf. However, if no such intention is clear, any competent person can perform the promise on behalf of the promisor.

For example, a contract to paint a portrait requires the artist’s personal skills, so only the artist can perform. On the other hand, if the contract is to deliver goods, the promisor may authorise an agent to deliver on their behalf.

Effect of Refusal or Disability to Perform

If a party refuses to perform or becomes incapable of performing their promise, the other party (promisee) may terminate the contract unless they clearly show acceptance of continuation through words or conduct.

Enforcement by Legal Representatives and Third Parties

• Legal Representatives: If the promisee dies, their legal representatives can enforce the contract unless the contract was personal in nature or shows contrary intention.
• Third Parties: Normally, a stranger to a contract cannot enforce it. Exceptions exist where a third party benefits from the contract, such as in family arrangements or trusts.

Joint Promisees and Their Rights (Section 45)

When there are multiple promisees:

• If all are alive, they must act jointly to enforce the promise.
• If any promisee dies, the survivors and legal representatives of the deceased jointly enforce the contract.
• If all promisees die, their legal representatives collectively enforce the contract.

Important Case Laws

• Basanti Bai vs Sri Prafulla Kumar Routrai (2006): The Orissa High Court ruled that where there is no legal representative of a deceased promisee, the person who acquires interest over the contract’s subject matter will bear the liability to perform on behalf of the deceased.
• M/S Great Eastern Energy vs M/S Jain Irrigation (2010): The Bombay High Court held that a tender specifying a validity period of four months cannot be accepted after expiry of that period. Acceptance after expiry and consequent forfeiture of security deposit was valid.

Conclusion

The performance of a contract is the foundation on which contractual relationships rest. Section 37 of the Indian Contract Act, 1872, clearly enshrines the principle that parties must either perform or offer to perform their promises unless excused by law. It ensures fairness by allowing a valid tender of performance to discharge obligations even if the other party refuses to accept.