India: Reciprocal Promises: An Overview

1 Introduction

In most commercial contracts, two or more parties typically undertake to perform certain obligations vis-à-vis each other. Such obligations could be in the nature of reciprocal promises i.e., promises which form part or the entire consideration for each other.1 In other words, the performance of one party's obligation is dependent upon the other party fulfilling its express or implied obligation. The principles of reciprocal promise often assume significance in government contracts (energy, infrastructure, etc.) where the government entity has certain critical obligations which may or may not be expressly captured in the agreements. Even if these are captured, the order and sequence may be unclear leading to a long and expensive dispute resolution process.

This newsletter aims to give an overview of the concept of reciprocal promises and make recommendations that could come in handy at the stage of contract drafting and negotiation.

2 Legal Framework

Sections 51 to 54 of the Indian Contract Act 1872 ("Act") are the relevant provisions which specifically pertain to reciprocal promises. While Sections 51 and 52 explain the different situations where a reciprocal promise may be relevant, Sections 53 and 54 pertain to situations where one party fails to perform its obligation.

Reciprocal promises can be of three types:

2.1 Mutual and independent: This concept, though not covered under the Act, has evolved through jurisprudence.2 It involves the contracting parties to undertake certain tasks which are independent of each other and their performance is not contingent upon one party performing its part of the contract. However, the performance of these mutual and independent promises is mandatory under the contract. For example, "A", a government entity, enters into a contract with a private contractor "B", where "B" has to build a bridge. If such contract imposes an obligation on "A" to share details of its, say, power projects with "B", where such information has no correlation with building the bridge, then merely because "A" did not share the relevant information, "B" will not be discharged from fulfilling its obligation to build the bridge. The two promises made by the parties to each other, though binding, are mutual and independent. In fact, "A" will be bound to share details of the power projects even if "B" defaults in the bridge work. However, if the contract mentioned that the aforementioned two promises had to be performed in a certain order, then regardless of them being mutual and independent, the terms of the contract would be upheld.

In the landmark case of Mrs. Saradamani Kandappan vs. Mrs. S. Rajalakshmi and Ors,3 the Hon'ble Supreme Court upheld the terms of the contract and recognized the reciprocal promises as mutual and independent. Saradamani had entered into an agreement with Rajalakshmi to purchase a piece of land for which payments had to be made in multiple installments. Saradamani paid all installments, but, before the last one, asked Rajalakshmi to show the title documents. Rajalakshmi refused and, consequently, Saradamani failed to pay the last installment. Since the last installment was not paid on time, Rajalakshmi terminated the contract. Saradamani filed a case for specific performance and after litigation at multiple forums, the Supreme Court held that the two promises, i.e., payment of the final installment and showing the title documents, were mutual and exclusive. It further held that the contract did not make payment contingent upon reviewing the title documents and, therefore, Saradamani's refusal to pay was not proper. However, since time was of the essence, the Supreme Court held that the contract stood terminated and it directed Rajalakshmi to return the payments received from Saradamani.

2.2 Conditional: This is the most common type of reciprocal promise which is almost always a contentious issue whenever there is dispute arising due to the breach of a government contract. As per this, the performance of one party is conditional upon the performance of an obligation by the other party. If such other party fails to perform its obligation in accordance with the contract, the first party would not be able to honor its promise. The assessment of whether a promise is conditional or not depends upon the facts and circumstances of each case. Let us re-look at the earlier illustration. If the contract between "A" and "B" also stipulated that "A" would build a road leading to the proposed bridge to enable "B" to move heavy machinery and equipment to the site, then breach by "A" of this obligation would impact "B's" ability to perform its part of the contract. Even if the contract did not expressly stipulate that building the road is a pre-condition to commencing work on the bridge, the transaction would still be deemed as a reciprocal promise due to its very nature and purpose, i.e., without the road, work on the bridge can't commence.

In M/s Shanti Builders vs. CIBA Industrial Workers' Co-Operative Housing Society Ltd.,4 a dispute arose in connection with certain construction work that had to be done by Shanti Builders. CIBA alleged that Shanti Builders had not completed the construction work in accordance with the contract which led them to suffer heavy losses. Shanti Builders, on the other hand, alleged that it had not been given a plot of land as the contractually stipulated payment for the construction work already completed, and till such payment was not made, it would not be in a position to complete the next phase of work. After hearing the parties, the court upheld the contentions of Shanti Builders and took the view that if the performance of a contract requires a certain sequence (even if it is not explicitly stated) then such sequence must always be followed. It further held that where reciprocal promises are dependent upon each other, one party cannot insist on the performance of a promise if it has not performed its corresponding promise.

2.3 Concurrent: This is, yet again, a common form of reciprocal promise where parties have to, expressly or impliedly, perform their obligations simultaneously. The party willing to perform its promise will be exempted from doing so if the other party is not "ready" and "willing" to perform its respective obligation. In J.P. Builders vs. A. Ramadas Rao,5 the Hon'ble Supreme Court held that "readiness" refers to financial capacity and "willingness" refers to the conduct of the aggrieved party wanting performance, and generally the former is backed by the latter. To understand this, let us go back to the original illustration. If "A" had to engage vendors through a tender process to source some raw materials for "B", all of which, including those sourced by "B", then if "A" was not "ready" and "willing" to issue tenders on time, "B" could discharge itself from performing its obligation. Concurrent performance of the reciprocal promises of "A" and "B" is, in this illustration, integral to the overall performance of the contract.

Footnotes

1 Section 2(f) of the Indian Contract Act, 1872

2 See AIR 2011 SC 3234

3 Supra

4 (2012) 4 Mah LJ 614

5 (2011) 1 SCC 429

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.