Reciprocal Promises and Appropriation of Payments

Nov 9

Written By BareMinLaw

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

In a Reciprocal Promise:
1. Each party promises something to the other.
2. One party’s duty to perform arises only if the other party is ready and willing to perform their promise

When a contract involves reciprocal promises to be performed at the same time, neither party has to perform their promise unless:
1. The other party is ready and willing to perform their reciprocal promise.

Illustration:

(a).

A agrees to deliver goods to B, who will pay on delivery.
A does not have to deliver unless B is ready and willing to pay.
B does not have to pay unless A is ready and willing to deliver.

(b).

A agrees to deliver goods to B, who will pay in instalments, first instalment on delivery.
A does not have to deliver unless B is ready to pay the first instalment.
B does not have to pay the first instalment unless A is ready to deliver the goods.

Section 52. Order of performance of reciprocal promises.

If a contract expressly fixes the order in which reciprocal promises are to be performed, they must be performed in that order.
If the order is not expressly fixed, the promises must be performed in the order required by the nature of the transaction.

Illustration:

(a).

A agrees to build a house for B at a fixed price.
A must build the house first, then B must pay.

(b).

A agrees to give his stock-in-trade to B, and B promises to provide security for the payment.
A does not have to deliver the stock until B provides the security, because the transaction requires it.

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

When a contract contains reciprocal promises (i.e., both parties have obligations to each other) and one party prevents the other from performing their promise then:

Voidable contract
- The contract becomes voidable at the option of the party whose performance was prevented.
Right to compensation
- The party so prevented is entitled to recover compensation for any loss suffered due to non-performance of the contract.

Illustration:

(a).

A contracts with B to have B execute certain work for A for 1,000 rupees.
B is ready and willing to perform, but A prevents him from doing the work.
B can choose to rescind the contract (void it) and recover any losses incurred because of A’s prevention.

Section 54. Effect of default as to that promise which should be first performed, in contract consisting of reciprocal promises.

When a contract has reciprocal promises, and one promise cannot be performed or cannot be claimed until the other is performed:
1. If the promisor of the first promise fails to perform, they cannot demand the other party’s promise to be performed.
2. They must compensate the other party for any loss caused by non-performance.

Illustrations:

(a).

A hires B’s ship to carry cargo. A does not provide cargo.
A cannot claim B’s promise to carry the cargo and must compensate B for the loss.

(b).

A contracts to do builder’s work, B provides scaffolding and timber.
B refuses.
A need not do the work, and B must compensate A for losses.

(c).

A contracts to deliver merchandise later, B promises to pay within a week. B does not pay.
A need not deliver, and B must compensate A.

(d).

A promises to sell 100 bales of goods next day, B promises to pay within a month.
A does not deliver.
B need not pay, and A must compensate B.

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

When a contract specifies that a party must perform a task at or before a certain time, & the party fails to perform by that time, then:
1. The contract, or the unperformed part, becomes voidable at the option of the promisee.
But this applies only if the parties intended time to be essential to the contract.

Effect of such failure when time is not essential.
If the parties did not intend time to be essential in the contract, then failing to perform by the specified time does not make the contract voidable.
However, the promisee is entitled to compensation for any loss caused by the delay.

Effect of acceptance of performance at time other than that agreed upon
If a contract is voidable due to late performance, and the promisee accepts performance later, then:
1. The promisee cannot claim compensation for the delay by default.
Unless the promisee gives notice to the promisor at the time of acceptance that they intend to claim compensation for the late performance.

Section 56. Agreement to do impossible act.

If a contract requires doing something that is impossible from the beginning, then the agreement is void and has no legal effect.

Contract to do an act afterwards becoming impossible or unlawful.
If a contract involves an act that later becomes impossible or unlawful after the contract is made, due to an event the promisor could not prevent, then:
The contract becomes void at the moment the act becomes impossible or unlawful.

Compensation for loss through non-performance of act known to be impossible or unlawful.
If a promisor knows or could have known that a promised act is impossible or unlawful, and the promisee does not know, then:
1. The promisor must compensate the promisee for any loss caused by non-performance.

Illustrations:

(a).

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

(b).

A and B contract to marry, but A dies before the marriage.
The contract becomes void.

(c).

A contracts to marry B but is already married and polygamy is illegal.
A must compensate B for her loss.

(d).

A contracts to take in cargo at a foreign port, but A’s government declares war.
The contract becomes void.

(e).

A contracts to act at a theatre for six months, but is too ill on several occasions.
The contract becomes void for those occasions.

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

When persons make reciprocal promises, and:
1. The first set of promises is legal, and
2. The second set of promises is illegal or forbidden by law, then:
  1. The first set of promises forms a valid contract.
  2. The second set of promises is void and unenforceable.
So , only the promises that are lawful and enforceable will constitute a valid contract.
Illegal promises in the same transaction do not affect the validity of the lawful promises.

Illustration:

(a).

A and B agree that A will sell B a house for 10,000 rupees.
They also agree that if B uses the house as a gambling house, he will pay A 50,000 rupees.
Legal contract: The sale of the house for 10,000 rupees.
Void agreement: The promise to pay 50,000 rupees if the house is used for gambling, because it involves an illegal object.

Section 58. Alternative promise, one branch being illegal.

If a contract has an alternative promise, where one option is legal and the other is illegal, then only the legal option can be enforced.

Illustration:

(a).

A and B agree that A shall pay B 1,000 rupees, and B will deliver either rice or smuggled opium.
The contract to deliver rice is valid, and the agreement to deliver smuggled opium is void.
Section 59. Application of payment where debt to be discharged is indicated.
When a debtor owes multiple separate debts to the same creditor, and:
1. The debtor specifies (expressly or by implication) which debt a payment is intended to discharge, and
2. The creditor accepts the payment, then:
Tthe payment must be applied to the specified debt.
The intention of the debtor, if clear and accepted by the creditor, determines which debt the payment discharges.

Illustrations:

(a).

A owes B several debts, including 1,000 rupees on a promissory note due on June 1. On that date, A pays B 1,000 rupees.
The payment discharges the promissory note, as it matches the exact debt.

(b).

A owes B 567 rupees among other debts.
B writes demanding this sum, and A pays 567 rupees.
The payment is applied to the debt specifically demanded by B.
Section 60. Application of payment where debt to be discharged is not indicated.
When a debtor makes a payment but does not specify which debt it is intended to discharge, and there are no other circumstances indicating the intended debt, then:
1. The creditor has the right to apply the payment at his discretion
2. The payment can be applied to any lawful debt actually due and payable, even if the debt is barred by limitation laws.
3. The debtor loses the choice if he has not specified the debt
4. The creditor’s discretion prevails, provided the debt is lawful and due.

Example:

A owes B three debts: 500, 700, and 1,000 rupees.
A pays B 500 rupees without saying which debt it is for.
So , B may apply the 500 rupees to any one of the three debts that is actually due and payable.

Section 61. Application of payment where neither party appropriates.

When a debtor makes a payment and:
(a) The debtor does not specify which debt it is meant to discharge &
(b) The creditor does not choose which debt to apply it to then:
The payment shall be applied as follows:

In order of time:
- Payments are applied to debts from the earliest to the latest, regardless of whether the debts are barred by limitation laws.
Debts of equal standing:
- If multiple debts are of equal priority or created at the same time, the payment is applied proportionally to each debt.

Illustrations:

(a). In order of time