Performance of Contract (करारांचे पालन)

Performance means contract is discharging (release)

Performance is one of the mode of discharging of a contract

Each party to the contract is bound to perform promises according to the stipulated terms. So, we can say that, Performance, in law, is act of doing that, which is required by a contract.

Performance of Contract

Possibilities :-

1. Pays money with interest on 1^st Oct takes back bike (Actual Performance).

2. Pays money on 1^st Oct but, y refuses ( X has offered to perform)

In 2^nd case, the question is, does ‘X’ cannot get his bike back from ‘Y’ since ‘Y’ has refused to accept money ?

Effect of tender of performance :

1. Promisor not responsible for non-performance

2. promisor does not lose his rights under the contract.

Essential Elements of Valid Tender(Offer) :

1. Unconditional : eg : Contract of ‘X’ with ‘Y’ for the supply of cotton bales and payment after one month.

‘X’ will supply goods to ‘Y’ and after one month ‘Y’ will make payments.

But at the time of delivery ‘X’ demands some advance which is not in agreement….. Since it is not in accordance with the agreement, it is not a valid tender.

4. Reasonable Opportunity : Promisee can inspect as per agreement.

5. Whole obligation : Supply wholly as per the agreement. If it is not as per the agreement, then it is not a valid tender.

eg : X agreement to supply 100kg Sugar Y.

X supplies only 75kg of sugar. Y can reject because it is not a valid tender.

6. To proper person : Either promisee or his agent or third party if appointed by the promisee.

If several promisee, then either to all or any one of them. Even if it is offered to one of several, it will have same legal consequence.

7. By proper person : Either promisor or agent or appointed 3^rd party.

8. Exact Amount : Exact amount as per the agreement. If any deviation is made, then it is not a valid tender.

Contracts which must be performed (37 to 39)

Obligation of parties to contracts (Section 37)

The parties to a contract must either perform, or offer to perform, their respective promises, unless such performance is dispensed(exempted) with or excused under the provisions of this Act, or of any other law. Promises bind the representatives of the promisors in case of the death of such promisors before performance, unless a contrary intention appears from the contract.

Illustrations

(a) A promises to deliver goods to B on a certain day on payment of Rs. 1,000. A dies before that day. A’s representatives are bound to deliver the goods to B, and B is bound to pay the Rs. 1,000 to A’s representatives.

(b) A promises to paint a picture for B by a certain day, at a certain price. A dies before the day. The contract cannot be enforced either by A’s representatives or by B.

Thus, a party is released from performing his part of the contract by law eg, an insolvent from paying his debtors, or a person whose performance of a transaction is declared by law to be illegal.

When the personal skill and qualities are involved in the performance of the contract, the contractual relations are put to an end by death of the promisor.

Sec 38 : The promisor must offer to perform his obligation under the contract to the promise. The offer is called “tender of performance” It is then for the promisee to accept the performance. If he does not accept, “the promisor is not responsible for non-performance, nor does he thereby lose his rights under the contract”. This is the effect of section 38 which is as follows :

Effect of refusal to accept offer of performance (Section 38)

Where a promisor has made an offer of performance to the promisee, and the offer has not been accepted, the promisor is not responsible for non-performance, nor does he thereby lose his rights under the contract.

Every such offer must fulfil the following conditions:—

(1) it must be unconditional;

(2) it must be made at a proper time and place, and under such circumstances that the person to whom it is made may have a reasonable opportunity of ascertaining that the person by whom it is made is able and willing there and then (immediately) to do the whole of what he is bound by his promise to do;

(3) if the offer is an offer to deliver anything to the promisee, the promisee must have a reasonable opportunity of seeing that the thing offered is the thing which the promisor is bound by his promise to deliver. An offer to one of several joint promisees has the same legal consequences as an offer to all of them.

Illustration : A contracts to deliver to B at his warehouse, on the 1st March, 1873, 100 bales of cotton of a particular quality. In order to make an offer of performance with the effect stated in this section. A must bring the cotton to B’s warehouse, on the appointed day, under such circumstances that B may have a reasonable opportunity of satisfying himself that the thing offered is cotton of the quality contracted for, and that there are 100 bales.

Offer must be unconditional : The tender of performance must be unconditional. A tender becomes conditional when it is not in accordance with the terms of the contract. For example, a tender of an amount less than what is due under the contract is not an effective tender.

Proper time and place and ability to do the whole :

Startup V. Macdonald : The defendant bought of the plaintiff ten tonnes of linseed oil to be delivered within the last 14 days of the month of March. The plaintiff tendered on the last of the fourteen days at 9 o’clock at night. The defendant refused to accept owing to the lateness of the hour.

… He was held liable for the breach as the jury found that, though the hour was unreasonable, yet there was time for the defendant to have taken in and weighed the goods before midnight. He should, therefore, have accepted the tender and then no doubt, the contract would have been literally performed.

Obligation to pay a debt : In the case of an obligation to pay a debt, the mere fact that the payment was tendered and refused does not discharge the debtor from his liability to pay the debt. (Dixon v. Clark)

Section 39 of the Indian Contract Act gives expression of the doctrine of anticipatory breach. (taking the form of an announcement or indication that a contract will not be honoured, आगाऊ)

Effect of refusal of party to perform promise wholly (Section 39)

When a party to a contract has refused to perform, or disabled himself from performing, his promise in its entirety (total and complete), the promisee may put an end to the contract, unless he has signified, by words or conduct, his acquiescence (assent/acceptance without protest) in its continuance.

Illustrations

(a) A, a singer, enters into contract with B, the manager of a theatre, to sing at his theatre two nights in every week during next two months, and B engages to pay her 100 rupees for each night’s performance. On the sixth night A willfully absents herself from the theatre. B is at liberty to put an end to the contract.

(b) A, a singer, enters into contract with B, the manager of a theatre, to sing at his theatre two nights in every week during next two months, and B engages to pay her at the rate of 100 rupees for each night. On the sixth night A willfully absents herself…… With the assent of B, A sings on the seventh night…. B has signified his acquiescence in the continuance of the contract, and cannot now put an end to it, but is entitled to compensation for the damage sustained by him through A’s failure to sing on the sixth night.

In a case before the SC a part of the goods were delivered by the seller himself under agreed instalments, but for the rest, delivery orders were sent asking the buyer to take deliveries from the mills directly. Since these delivery orders contained conditions which were not there in the contract, it was held that the seller was in breach of his contract (Juggilal Kamlapat v. Pratapmal Rameshwar)

By whom promise is to be performed. (40 to 45)

Person by whom promise is to be performed (Section 40)

If it appears from the nature of the case that it was the intention of the parties to any contract that any promise contain in it should be performed by the promisor himself, such promise must be performed by the promisor. In other cases, the promisor or his representatives may employ a competent person to perform it.

Illustrations

(a) A promises to pay B a sum of money. A may perform this promise, either by personally paying the money to B, or by causing it to be paid to B by another; and, if A dies before the time appointed for payment, his representatives must perform the promise, or employ some proper person to do so.

(b) A promises to paint a picture of B. A must perform this promise personally.

Section 40 depends upon the nature of contract. If from the contract it appears that personal performance of promisor is required, then it should be performed by the promisor himself otherwise a appointed third person or representative can perform.

Effect of accepting performance from third person (Section 41)

Devolution (हस्तांतरण ) of joint liabilities (Section 42)

When two or more person have made a joint promise, then, unless a contrary intention appears by the contract, all such persons, during their joint lives, and, after the death of any of them, his representative jointly with the survivor or survivors, and, after the death of the last survivor the representatives of all jointly, must fulfill the promise.

Example : X+Y+Z= to repay loan of Rs 30000/- jointly of A

Performance : 1. X+Y+Z should jointly pay

2. If X dies : XLR + Y + Z

3. If X & Y dies XLR + YLR + Z

4. If all X,Y & Z dies : LR’s of X,Y & Z

( Same principle applies to section 45 also.)

Any one of joint promisors may be compelled to perform (Section 43)

When two or more persons make a joint promise, the promisee may, in the absence of express agreement to the contrary, compel any one or more of such joint promisors to perform the whole promise.

Each promisor may compel contribution : Each of two or more joint promisors may compel every other joint promisor to contribute equally with himself to the performance of the promise, unless a contrary intention appears from the contract.

Sharing of loss by default in contribution : If any one of two or more joint promisors make default in such contribution, the remaining joint promisors must bear the loss arising from such default in equal shares.

Explanation : Nothing in this section shall prevent a surety from recovering, from his principal, payments made by the surety on behalf of the principal, or entitle the principal to recover anything from the surety on account of payments made by the principal.

Here suppose ‘D’ forces to pay A only, the full amount of Rs. 3000 and if A pays the full amount of Rs. 3000/- to ‘D’ , then, A has a right to claim from B & C, their respective shares.

Sharing of loss by default in contribution : In above example, let’s see following two possible cases :

Case I : (A pays Rs 3000) C is declared insolvent can pay only Rs 500/- then the loss of Rs 500/- should be shared by A & B……………… means A should pay Rs 1250/-, B should pay Rs. 1250/- and C to pay only Rs. 500/-

Case II : (A pays Rs 3000) C is declared insolvent and cannot pay anything the the loss of Rs 1000/- should be bared by A & B…………………….. means now A will pay Rs. 1500/- & B will pay Rs. 1500/-

Illustrations

(a) A, B and C jointly promise to pay D 3, 000 rupees, D may compel either A or B or C to pay him 3,000 rupees.

(b) A, B and C jointly promise to pay D the sum of 3,000 rupees. C is compelled to pay the whole. A is insolvent, but his assets are sufficient to pay one-half of his debts. C is entitled to receive 500 rupees from A’s estate, and 2,250 rupees from B.

(c) A, B and C are under a joint promise to pay D 3,000 rupees. C is unable to pay anything and A is compelled to pay the whole. A is entitled to receive 1,500 rupees from B.

(d) A, B and C are under a joint promise to pay D 3,000 rupees. A and B being only sureties for C. C fails to pay. A and B are compelled to pay the whole sum. They are entitled to recover it from C.

Effect of release of one joint promisor (Section 44)

Where two or more persons have made a joint promise, a release of one of such joint promisors by the promisee does not discharge the other joint promisor or joint promisors, neither does it free the joint promisor so released from responsibility to the other joint promisor or joint promisors.

Devolution of joint rights (Section 45)

When a person has made a promise to two or more persons jointly, then unless contrary intention appears from the contract, the right to claim performance rests, as between him and them, with them during their joint lives, and, after the death of any one of them, with the representative of such deceased person jointly with the survivor or survivors, and, after the death of the last survivor, with the representatives of all jointly.

Time and place for performance (46 to 50)

Varghese Paul v. Narayan Naik. : Where the place for performance is fixed in the promise, the performance must be offered at that place. Where, however, no place is fixed and the promisor has undertaken to perform without application by the promisee, “the promise should be performed at the place where it ought to be performed”.

These principles are laid down in section 46 to 50

Time for performance of promise, where no application is to be made and no time is specified (Section 46)

Where, by the contract, a promisor is to perform his promise without application by the promisee, and no time for performance is specified, the engagement must be performed within a reasonable time.

Explanation: The question “what is a reasonable time” is, in each particular case, a question of fact.

Time and place for performance of promise, where time is specified and no application to be made (Section 47)

When a promise is, to be performed on a certain day, and the promisor has undertaken to perform it without the application by the promisee, the promisor may perform it at any time during the usual hours of business on such day and at the place at which the promise ought to be performed.

Illustration

A promises to deliver goods at B’s warehouse on first January. On that day A brings the goods to B’s warehouse, but after the usual hour of closing it, and they are not received. A has not performed his promise.

Saraswat Trading Agency v. UOI : When a promise has to be performed within a certain time, it must be performed on any day before the lapse of that time.

Application for performance on certain day to be at proper time and place (Section 48)

When a promise is to be performed on a certain day, and the promisor has not undertaken to perform it without application by the promisee, it is the duty of the promisee to apply for the performance at a proper place and within the usual hours of business

Explanation: The question “what is proper time and place” is, in each particular case, a question of fact.

Place for the performance of promise, where no application to be made and no place fixed for performance (Section 49)

When a promise is to be performed without application by the promisee, and no place is fixed for the performance of it, it is the duty of the promisor to apply to the promisee to appoint a reasonable place for the performance of the promise, and to perform it at such a place.

Illustration

A undertakes to deliver a thousand maunds of jute to B on a fixed day. A must apply to B to appoint a reasonable place for the purpose of receiving it, and must deliver it to him at such place.

Performance, in manner or at time prescribed or sanctioned by promise (Section 50)

The performance of any promise may be made in any manner, or at any time which the promisee prescribes or sanctions.

Illustrations

(a) B owes A 2,000 rupees. A desires B to pay the amount to A’s account with C, a banker. B who also banks with C, orders the amount to be transferred from his account to A’s credit and this is done by C. Afterwards, and before A knows of the transfer, C fails. There has been a good payment by B.

(b) A and B are mutually indebted. A and B settle an account by setting off one item against another, and B pays A the balance found to be due from him upon such settlement. This amounts to a payment by A and B, respectively, of the sums which they owed to each other.

(c) A owes B 2,000 rupees. B accepts some of A’s goods in deduction of the debt. The delivery of the goods operates as a part payment.

(d) A desires B, who owes him Rs. 100, to send him a note for Rs. 100 by post. The debt is discharged as soon as B puts into the post a letter containing the note duly addressed to A.

Performance of reciprocal promises (51 to 58)

Section 2(f) Promises which form the consideration or part of the consideration for each other, are called reciprocal promises;

So we can say that, when a contract consists of an exchange of promises, they are called reciprocal promises.

(Act v. Promise) eg

Sell Bycical

A B

Pay Rs. 2000/-

Section51 : When such promises have to be simultaneously performed, the promisor is not bound to perform unless the promise is ready and willing to perform his promise. This principle is laid down in section 51

Promisor not bound to perform, unless reciprocal promisee ready and willing to perform (Section 51)

When a contract consists of reciprocal promises to be simultaneously performed, no promisor need perform his promise unless the promisee is ready and willing to perform his reciprocal promise.

Illustrations

(a) A and B contract that A shall deliver goods to B to be paid for by B on delivery. A need not deliver the goods, unless B is ready and willing to pay for the goods on delivery.

B need not pay for the goods, unless A is ready and willing to deliver them on payment.

(b) A and B contract that A shall deliver goods to B at a price to be paid by installments, the first installment to be paid on delivery.

A need not deliver, unless B is ready and willing to pay the first installment on delivery.

B need not pay the first installment, unless A is ready and willing to deliver the goods on payment of the first installment.

Order of performance of reciprocal promises (Section 52)

Where the order in which reciprocal promises are to be performed is expressly fixed by the contract, they shall be performed in that order, and where the orders is not expressly fixed by the contract, they shall be performed in that order which the nature of transaction requires.

Illustrations

(a) A and B contract that A shall build a house for B at a fixed price. A’s promise to build the house must be performed before B’ s promise to pay for it.

(b) A and B contract that A shall make over his stock-in-trade to B at a fixed price, and B promise to give security for the payment of the money A’s promise need not be performed until the security is given, for the nature of the transaction requires that A should have security before he delivers up his stock.

Hashman v. Lucknow Improvement Trust : The defendant took a lease of land from the Municipality of a town on condition that, he pays Rs. 630/- for levelling charges and possession was to be delivered after levelling. The question arose whether the sum was to be paid before or after the levelling. The agreement was silent on the point. And, therefore, the court held that “in the ordinary course of business, work is not usually paid for before it is done.

Liability of party preventing event on which contract is to take effect (Section 53)

When a contract contains reciprocal promises, and one party to the contract prevents the other from performing his promise, the contract becomes voidable at the option of the party so prevented; and he is entitled to compensation from the other party for any loss which he may sustain in consequence of the non-performance of the contract.

Illustration

A and B contract that B shall execute some work for A for a thousand rupees. B is ready and willing to execute the work accordingly, but A prevents him from doing so. The contract is voidable at the option of B; and, if he elects to rescind it, he is entitled to recover from A compensation for any loss which he has incurred by its non-performance.

Ramchandra Narayan Nayak v. Karnataka Neeravari Nigam Ltd., Where the contract was for making a canal and the promisee department had to supply cement, etc. and while the contractor had started digging the material was not supplied nor he was permitted to purchase in the open market, the working stopped. The Department considered this as a breach. The security deposit and earnest money was forfeited and payment for work already done was withheld. All this was held to be wrong. The amounts forfeited and payment of the bill were ordered to be made with interest at 9 per cent.

Effect of default as to the promise which should be performed, in contract consisting of reciprocal promises. (Section 54)

When a contract consists of reciprocal promises, such that one of them cannot be performed, or that its performance cannot be claimed till the other has been performed, and the promisor of the promise last mentioned fails to perform it, such promisor cannot claim the performance of the reciprocal promise, and must make compensation to the other party to the contract for any loss which such other party may sustain by the non-performance of the contract.

Illustrations

(a) A hires B’s ship to take in and convey, from Calcutta to Mauritius, a cargo to be provided by A, B receiving a certain freight for its conveyance. A does not provide any cargo for the ship. A cannot claim the performance of B’s promise, and must make compensation to B for the loss which B sustains by the non performance of the contract.

(b) A contracts with B to execute certain builder’s work for a fixed price, B supplying the scaffolding and timber necessary for the work. B refuses to furnish any scaffolding or timber, and the work cannot be executed. A need not execute the work, and B is bound to make compensation to A for only loss caused to him by non-performance of the contract.

(c) A contracts with B to deliver to him, at a specified price, certain merchandise on board a ship which cannot arrive for a month, and B engages to pay for the merchandise within a week from the date of contract. B does not pay within the week. A’s promise to deliver need not be performed, and B must make compensation.

(d) A promises B to sell him one hundred bales of merchandise, to be delivered next day and B promises A to pay for them within a month. A does not deliver according to promise. B’s promises to pay need not be performed, and A must make compensation.

Section 55 : Sometimes the parties to a contract specify the time for its performance. Ordinarily it is expected that either party will perform his obligation at the stipulated time. But if one of them fails to do so, the question arises what is the effect upon the contract. Section 55 provides the answer.

Effect of failure to perform at fixed time, in contract in which time is essential : (Section 55)

When a party to a contract promises to do a certain thing at or before a specified time, or certain things at or before a specified times and fails to do such thing at or before a specified time, the contract or so much of it as has not been performed, becomes voidable at the option of the promisee, if the intention of the parties was that time should be of essence of the contract.

Effect of such failure when time is not essential: If it was not the intention of the parties that time should be of the essence of the contract, the contract does not become voidable by the failure to do such thing at or before the specified time; but the promisee is entitled to compensation from the promisor for any loss occasioned to him by such failure.

Effect of acceptance of performance at time other than that agreed upon

If, in case of a contract voidable on account of the promisor’s failure to perform his promise at the time agreed, the promisee accepts performance of such promise at any time other than that agreed, the promisee cannot claim compensation of any loss occasioned by the non-performance of the promise at the time agreed, unless, at the time of acceptance, he gives notice to the promisor of his intention to do so.

Factors which make time of essence :- According to this section “if the intention of the parties was that time should be of the essence of the contract”, then a failure to perform at the agreed time renders the contract voidable at the option of the opposite party.

Time is generally considered to be of the essence of the contract in the following three cases :

1. Where the parties have expressly agreed to treat it as of the essence of the contract;
2. Where delay operates as an injury;
3. Where the nature and necessity of the contract require it to be so construed, for example, where a party asks for extension of time for performance.

Budhra Chand v. Betts : The conclusion is confirmed (as regards the essence of time) by the circumstances that the defendant obtained an extention of the time; if the time were not of the essence of the contract, he need not have asked for extention of time.

China Cotton Exporters v. Beharilal Ramcharan Cotton Mills Ltd. : In commercial contracts time is ordinarily of the essence of the contract.

Non-commercial matters : Lucknow Automobiles v. Replacement Parts Co : In cases other than commercial contracts, the ordinary presumption is that time is not of the essence of the contract.

Accordingly, “in a contract for the sale of immovable property, time would not be regarded as of the essence unless it is shown that the parties intended so.” (Mulla Badruddin v. Tufail Ahmed).

Impossibility of performance and frustration

Agreement to do impossible act. (Section 56)

An agreement to do an act impossible in itself is void.

Contract to do act afterwards becoming impossible or unlawful : A contract to do an act which, after the contract is made, becomes impossible or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.

Compensation for loss through non-performance of act known to be impossible or unlawful : Where one person has promised to do something which he knew or, with reasonable diligence, might have known, and which the promisee did not know to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non-performance of the promise.

Illustrations

(a) A agrees with B to discover treasure by magic. The agreement is void.

(b) A and B contract to marry each other. Before the time fixed for the marriage, A goes mad. The contract becomes void.

(c) A contracts to marry B, being already married to C, and being forbidden by the law to which he is subject to practice polygamy. A must make compensation to B for the loss caused to her by the non-performance of his promise.

(d) A contracts to take in cargo for B at a foreign port. A’s Government afterwards declares war against the country in which the port is situated. The contract becomes void when war is declared.

(e) A contracts to act at a theatre for six months in a consideration of a sum paid in advance by B. On several occasions A is too ill to act. The contract to act on those occasions becomes void.

Krell v. Henry

1. Henry agreed to hire the use of Krell’s rooms in London on 26^th & 27^th June 1902.

—-purpose to see coronation procession

—-part of rent paid in advance

1. Kings illness—no procession took place
2. Henry refused to pay balance
3. Krell could not recover the balance rent.

Because….

—–Object of contract, as recognised by both to view procession

—–Taking place of coronation was therefore the foundation of contract.

—-“The object of the contract was frustrated” by not happening of event.

—–Krell could not recover the balance rent.

Specific grounds of frustration :

(Cases when frustration of contract occurs) :

The principle of frustration of contract or of impossibilitu of performance is applicable to a great variety of contracts but the following grounds of frustration have become well settled.

Destruction of subject-matter : Actual specific subject-matter of the contract has ceased to exist.

eg. Defendant contracte to supply potatoes but the crop was destroyed..performance impossible (Howell v. Coupland)

Taylor v. Caldwell : A promise to let out a music hall was held to have frustrated on the destruction of the hall.

Change of Circumstances : Circumstances which make performance of contract impossible in the manner & at the time specified.

Non-occurrence of contemplated (fixed) event : It is necessary that, the happening of the event should be the foundation of contract. (krell v. Henry).

Death of incapacity of party : If the nature of contract terms require personal performance by the promisor, his death or incapacity puts an end to the contract.

Robinson v. Davison : Here the proposed musical concert had to be postponed due to ill help of the performing artiste (eminent pianist) on the contracted day. The plaintiff action for breach of contract failed.

Government of legislative intervention : i.e. imposition of Government restrictions or order

Intervention of war : Intervention of war or war like condtion in the performance of a contract may make the impossibility.

Effects of frustration : It is well settled that if & when there is frustration, the dissolution of the contract occurs automatically also.

Party receiving benefits is bound to restore it to other. (ref : sec 65)

Cases when there is no frustration of contract :

* When events could be foreseen, might have anticipated

* Commercial Hardship.

* Abnormal rise or fall in price.

* Self induced frustration by the concerned party ( it should not be in the hands of the party..it should be without blame on either party.)

Reciprocal promise to do things legal, and also other things illegal (Section 57)

Where persons reciprocally promise, firstly to do certain things which are legal, and, secondly under specified circumstances, to do certain other things which are illegal, the first set of promise is a contract, but the second is a void agreement.

Illustration

A and B agree that A shall sell B a house for 10,000 rupees, but that, if B uses it as a gambling house, he shall pay A 50,000 rupees for it.

The first set of reciprocal promises, namely, to sell the house and to pay 10,000 rupees for it, is a contract.

The second set is for an unlawful object, namely, the B may use the house as a gambling house, and is a void agreement.

Alterative promise, one branch being illegal (Secion 58)

In the case of an alternative promise, one branch of which is legal and the other illegal, the legal branch alone can be enforced.

Illustration

A and B agree that A shall pay B 1,000 rupees, for which B shall afterwards deliver to A either rice or smuggled opium.

This is a valid contract to deliver rice, and a void agreement as to the opium.

Summary : Performance of reciprocal promises (51 to 58)

51. Promisor not bound to perform, unless reciprocal promisee ready

and willing to perform

52. Order of performance of reciprocal promises

53. Liability of party preventing event on which contract is to take effect

54. Effect of default as to the promise which should be performed, in

contract consisting of reciprocal promises.

55. Effect of failure to perform at fixed time, in contract in which time is

essential

56. Agreement to do impossible act.

57. Reciprocal promise to do things legal, and also other things illegal

58. Alterative promise, one branch being illegal

Appropriation of payments (59 to 61)

( प्रदानाचे विनियोजन )

(Clayton’s Rule)(Claytons case, 1816)

When a debtor owing several distinct debts to one person, makes a payment, which is not sufficient to discharge all the debts, the question arises as to which particular debt the payment is to be applied. The Act, in setion 59 to 61 lays down the principles.

The Clayton’s Rule is based on the maxim “Quiequid solvitur secundum modum solventis”. It means, “whatever paid is paid or is to be applied according to the mode laid down by the payer.” Thus, according to this maxim, when a debtor makes a payment, he may appropriate it to any debt he pleases, and the creditors must apply it accordingly.

In India the Rule in Clayton’s case has been followed subject to the provision of the Indian Contract Act, 1872.

The Rules relating to the appropriation of payments made by a debtor, who owes a number of distinct debts to his creditor are contained in Sections 59 to 61 of the Indian Contract Act, 1872.

Rule I : Appropriation by debtor (where debtor intimates)(S 59)

Rule II : Appropriation by Creditor (where the debtor does not intimate)

(S 60)

Rule III : Appropriation by law (neither party appropriates) (debtor does

not intimate/creditor fails to appropriate) (S 61)

I) (Appropriation by debtor) (Clayton’s case)

59. Application of payment where debt to be discharged is indicated

Where a debtor, owing several distinct debts to one person, makes a payment to him, either with express intimation, or under circumstances implying, that the payment is to be applied to the discharge of some particular debt, the payment if accepted, must be applied accordingly.

Illustrations

(a) A owes B, among other debts, 1,000 rupees upon a promissory note, which falls due on the first June. He owes B no other debt of the amount. On the first June, A pays to B 1,000 rupees,. The payment is to be applied to the discharge of the promissory note.

The first principle laid down by section 59 confers the right of appropriation upon the debtor. If the debtor owes several distinct debts to the same creditor and makes payment, he has the right to request to the creditor to apply the payment to the discharge of some particular debt.If the creditor accepts the payments, he is bound by the appropriation. This principle was laid down as early as 1816 in “Clayton’s Case”. And since then incorporated in the section and also followed in a number of cases.

Leela Hotels Ltd.v. Housing and Urban Development Corporation Ltd. :

Where the mode of appropriation by the debtor is not acceptable to the creditor, yet he accepts the payments under protest about the mode of appropriation, it was held that the creditor was not bound by the appropriation.

Munno Bibi v. I.T. Commr : The principle applies to several distinct debts and not to a single debt payable by instalments.

Punjab National Bank v. Surinder Singh Mandyal : The rule applicable in cases like where the principle amount and interest amound were due on a single debt is that, the payment is first applied to wipe out interest and the balance is appropriated towards principal amount.

II) (Appropriation by Creditor)

Application of payment where debt to be discharged is not indicated (Section 60)

Where the debtor has omitted to intimate, and there are no other circumstances indicating to which debt the payment is to be applied, the creditor may apply it at his discretion to any lawful debt actually due and payable to him from the debtor, whether its recovery is or is not barred by the law in force for the time being as to the limitation of suits.

Rs. 100/- (of 1^st Jan 2017)(timebarred)

A…..owes……B Rs 200 (of 1^st Jan 2018)(time barred)

Rs. 300 (of 1^st Jan 2019)(not time barred)

A sends B Rs. 300/-..A omitted to intimate..A may apply at his discretion.

III) (Appropriaion by law.)

Application of payment where neither party appropriates (Section 61)

Where neither party makes any appropriation, the payment shall be applied in discharge of the debts in order of time, whether they are or are not barred by the law in force for the time being as to the limitations of suits. If the debts are of equal standing, the payment shall be applied in discharge of each proportionably.

This section applies when neither party makes an appropriation. In such a situation the law gets the right to appropriate the payments and the law prefers to wipe out the debts in the order of time in which they were incurred (FIFO principle).