India: Abandonment Of Contract In Cases Involving Reciprocal Promises: An Analysis Of Section 67 Of The Indian Contract Act, 1872

Introduction

'Abandonment' has been defined in the Black's Law Dictionary as "the relinquishing of a right or interest with the intention of never reclaiming it". Further, the word 'Abandon' has been defined as 'to leave completely and finally; forsake utterly; to relinquish, renounce; to give up all concern in something¹ '. The issue of what constitutes 'abandonment of contract' is an especially intricate exercise in cases involving reciprocal promises i.e., cases where promises form the consideration or part of the consideration for each other² . Indian Contract Act, 1872 ("Act") has statutorily incorporated one such instance in the form of Section 67 of the Act. Section 67 of the Act provides that if any promisee neglects or refuses to afford the promisor reasonable facilities for the performance of his promise, the promisor is excused by such neglect or refusal as to any non-performance caused due to the neglect or refusal to afford such reasonable facilities. Therefore, under a contract where affording reasonable facilities by promisee for the performance of the contract is a reciprocal promise, any neglect or refusal to afford the same may result in non-performance by the promisor being excused under Section 67 of the Act.

The Hon'ble Supreme Court had in its recent judgement titled Shripati Lakhu Mane v. Member Secretary, Maharashtra Water Supply and Sewerage Board and Ors,³ ("Shripati Lakhu case") ruled on the ambit of protection afforded by Section 67 of the Act to promisor when promisee has refused to afford reasonable facilities for performance. In the Shripati Lakhu case, Hon'ble Supreme Court also distinguished the term 'abandonment' from the ambit of Section 67 of the Act which deals with cases involving non-performance attributable to the promisee's refusal to afford reasonable facilities for the performance. Hon'ble Supreme Court had held that refusal of a contractor to continue to execute the work, unless the reciprocal promises are performed by the other party, cannot be termed as an abandonment of the contract. This Article examines the issue of Abandonment of contract by non-performance in the context of Section 67 of the Act as laid down by the Hon'ble Supreme Court in Shripati Lakhu case.

Essentials of Abandonment under Contract Law

According to the Black's Law Dictionary, abandonment must be total and must clearly indicate an absolute relinquishment.⁴ In Wadhwa Group Holdings Pvt Ltd v. Homi Pheroze Ghandhy and Another, Hon'ble Bombay High Court had ruled that any finding on abandonment is essentially a question of fact and must be supported by a plea of fact raised in its behalf. Abandonment, like waiver of an existing right, involves firstly, full knowledge of the party's right and secondly, an intentional act of giving up in the face of such knowledge. To that end, Hon'ble Bombay High Court held that a case of abandonment was a plea of fact or at least a mixed plea of law and fact.⁵ The intentional relinquishment as stated hereinabove cannot be plainly inferred from delay in performance of the obligations under a contract. Previously, Hon'ble Supreme Court has held that "studied inaction" for nearly six years by the appellant and the Government leads to an inference of abandonment.⁶ In K.S. Vidyanadam and Ors v. Vairavan,⁷ delay on the part of the plaintiff in payment of dues, purchase of stamp papers and then asking for the execution of sale deed was taken as total inaction on the part of the plaintiff resulting in a denial of relief of specific performance to the plaintiff. It was further held that even where time is not of the essence of the contract, the plaintiff must perform his part of the contract within a reasonable time and reasonable time should be determined by looking at all the surrounding circumstances including the express terms of the contract and the nature of the property.

In view of the above, a finding of abandonment may be interpreted as silence/inaction against a duty/obligation of performance of the contract within a reasonable time. Pertinently, the burden to prove the abandonment of the contract is on the defendant i.e. party that alleges abandonment.⁸ Unexplained and wanton delay cannot be equated to mere delay and in such case, the burden is very heavy on the plaintiff to show that he had a purpose and not a design when he maintained silence.⁹

The interpretation of the term 'abandonment' by the Courts can also be read along with reference to Section 67 of the Act which contemplates a non-performance of promise by the promisor caused by the neglect or refusal of the promisee to make available reasonable facilities for the performance of his promise. Simply put, it is essential for the operation of Section 67 of the Act that the contract provides for the obligation of the promisee to afford the promisor reasonable facilities for the performance of his promise. Additionally, it is also essential that the promisor establishes that the non-performance was caused by the neglect or refusal of the promisee in fulfilment of its obligations as stipulated in the contract and Section 67 of the Act. Given that Section 67 of the Act also uses the phrase 'neglect' in addition to 'refusal' in the context of affording 'reasonable' facilities, issues such as what constitutes 'reasonable facilities' and whether the promisee was negligent would be addressed by the Courts in view of facts and circumstances of the particular case.

Facts of the Case in the Shripati Lakhu Case:

In the Shripati Lakhu case, Plaintiff-Appellant was a successful bidder in the tender for the execution of the work of the Regional Rural Piped Water Supply Scheme for Dabhol-Bhopan and other villages in Ratnagiri District. In this regard, Plaintiff-Appellant was issued with a work order on 03.07.1986 for the execution of the work at the cost of Rs 80,45,034/-. The time for the completion of the work was stipulated as 30 months. However, Respondent No.3 had issued a letter dated 28.07.1986 informing the Appellant that the work order was kept in abeyance. The work was resumed after Respondent No.3 had informed Plaintiff-Appellant vide letter dated 17.12.1986 to start the work in accordance with the work order issued in this regard. After Plaintiff-Appellant initiated the execution of work from 29.12.1986, it was informed by the Respondent about the non-availability of C-1 pipes and cement pipes of the diameters stipulated in the contract. Later, the Respondent directed a change in the terms of the work order by substituting pipes of different diameters and had correspondingly demanded modified rates. Petitioner-Appellant did not proceed with the work.

Being aggrieved therefrom, Plaintiff-Appellant filed a suit for recovery of a sum of Rs 51,35,289/- comprising of a claim for the value of work done, the release of the security deposit, compensation and damages etc. The Trial Court by a judgment and decree dated 02.02.1998 decreed the suit partially, directing the Respondent to pay a sum of Rs 24,97,077/- together with interest at 10% per annum from the date of the suit till realization. In a regular civil appeal filed by the Respondent under Section 96 of the Code of Civil Procedure, 1908 against the judgment of the Trial Court, the Hon'ble Bombay High Court by judgment and decree dated 24.04.2009 allowed the appeal partially and reduced the decree amount to Rs 7,19,412/-.

While setting aside the judgment passed by the Hon'ble Bombay High court in the Shripati Lakhu case, the Hon'ble Supreme Court held that Petitioner-Appellant was not at fault for the non-performance of the contract. Hon'ble Supreme Court ruled that whenever a material alteration takes place in the terms of the original contract, on account of any act of omission or commission on the part of one of the parties to the contract, it is open to the other party not to perform the original contract. Such non-performance of the original contract by the promisor would not amount to abandonment. Hon'ble Supreme Court also emphasized that abandonment is understood in the context of a right and not in the context of a liability or obligation. In this backdrop, the Hon'ble Supreme Court held in the Shripati Lakhu case that refusal by a contractor to continue to execute the work, unless the reciprocal promises are performed by the other party, cannot be termed as an abandonment of the contract.

In view of the above, in the Shripati Lakhu case, Hon'ble Supreme Court held that Petitioner Appellant was not at fault for the non-performance of the contract. Hon'ble Supreme Court ruled that whenever a material alteration takes place in the terms of the original contract, on account of any act of omission or commission on the part of one of the parties to the contract, it is not open to the other party not to perform the original contract. The non-performance of the original contract would not amount to abandonment. Hon'ble Supreme Court had also emphasized that abandonment is understood in the context of a right and not in the context of a liability or obligation. It was held that the refusal of Petitioner-Appellant in the Shripati Lakhu case to perform the obligations cannot be termed as abandonment. Hon'ble Supreme Court held that the refusal of a contractor to continue to execute the work, unless the reciprocal promises are performed by the other party, cannot be termed as an abandonment of the contract.

In view of the aforesaid, Hon'ble Supreme Court ruled that the High Court was clearly in error in overturning the judgment of the Trial Court with regard to the aforementioned 3 claims, on a wrong understanding that there was abandonment of contract on the part of the Appellant. Hon'ble High Court had held that there was abandonment of contract on the basis that after the second bill was cleared in May, 1987 the work under the main contract had not progressed. Pertinently, Hon'ble Supreme Court ruled that the refusal of a contractor to continue to execute the work, unless the reciprocal promises are performed by the other party, cannot be termed as abandonment of the contract. Hon'ble Supreme Court further ruled that a refusal by one party to a contract to perform its reciprocal promises, may entitle the other party either to sue for breach or to rescind the contract and sue on a quantum meruit for the work already done. In view of the aforesaid, Hon'ble Supreme Court set aside the impugned judgment and decree of the Bombay High Court and restored the judgment and decree of the Trial Court.

Conclusion

The judgment of Hon'ble Supreme Court in the Shripati Lakhu case is significant as it distinguishes neglect or refusal to afford reasonable facilities for the performance of promise with the charge of abandonment. Therefore, in cases where the discharge of performance by the promisor is obstructed by the non-fulfilment of reciprocal promise, the non-performance of the promisor would be excused and cannot serve as a ground for abandonment of the contract. As has been noted in the Shripati Lakhu case and in law, the promisee may be entitled to sue for breach of contract or rescinding of contract and sue on a quantum meruit for the work already done.

Footnotes

1 Random House Diction (Unabridged Version) cited with approval in G.T. Lad and Ors v. Chemical and Fibres of India Ltd, (1979) 1 SCC 590.

2 Section 2(1)(f) of the Contract Act, 1872. 3 Shripati Lakhu Mane v. The Member Secretary, Maharashtra Water Supply and Sewerage Board and Ors, MANU/SC/0382/2022.

4 G.T. Lad v. Chemical and Fibres of India Ltd., (1979) 1 SCC 590.

5 Wadhwa Groups Holding Pvt Ltd v. Homi Pheroze Ghandhy and Another, 2019 SCC OnLine Bom 4083.

6 Atma Das v. Suriya Prasad, (1969) 3 SCC 616.

7 K.S. Vidyanadam v. Vairavan, (1997) 3 SCC 1.

8 Neminath Appayya v. Jambooran (AIR 1966 Mysore 154).

9 Kantilal C. Shah v. Devarajulu Reddiar (1977-II-MLJ 484).

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