Repudiation under the Indian Contract Act

Repudiation under the Indian Contract Act, 1872 [“the Act”] is governed by Section 39 of the Act, reproduced hereinbelow:

“39. Effect of refusal of party to perform promise wholly. — a party to a contract has refused to perform, or disabled himself from performing, his promise in its entirety, the promisee may put an end to the contract, unless he has signified, by words or conduct, his acquiescence in its continuance.

Illustrations

(a) A, a singer, enters into a contract with B, the manager of a theatre, to sing at his theatre two nights in every week during the 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 a contract with B, the manager of a theatre, to sing at his theatre two night’s in every week during the 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.”

Many a times, during the performance of the Contract, one of the parties refuses to perform the contract either by words or by conduct. Such refusal to perform the contract by the party is called repudiation of contract. The party which has repudiated the contract is called the party in default and the other party is called the innocent party.

Repudiation how made

Any intimation, whether by words or conduct, that a party declines to continue with the contract is repudiation, if the result is likely to deprive the innocent party of substantially the whole benefit of the contract.¹ Repudiation may occur if one party refuses to perform his part (renunciation), or makes it impossible for himself to perform (disables himself) or show an intention not to fulfil his part of the contract.

Repudiation can be express or implied

Repudiation can be made by expressly conveying the intention to the innocent party, refusing to perform the contract. The problem arises when the party in default pleads repudiation by conduct or by implication. In that case, repudiation has to be gathered from the conduct of the parties. The party in default must be able to show that it refused to perform a vital part of the contract which as a result prevented the innocent party or the promisee from getting, in substance what he bargained for. In a fact situation wherein parties entered into a contract to develop a solar power plant for which A was required to supply and install solar panels on its own cost. A refuses to supply and install solar panel. Installation of solar panels being vital and fundamental to construction of power plant and A’s refusal to supply and install the same constitutes repudiation of contract by conduct. Illustraion (a) to Section 39 also depicts a situation whereby a party has, by conduct, repudiated the contract by willfully absenting herself from the theatre for putting a singing performance which is vital part of her contract.

On the other hand, an express repudiation must be in plain and clear language intimating an intention not to perform the contract.² A mere notice of intention to break the contract cannot amount to repudiation under Section 39 of the Act.³

The question in every case is whether the conduct of the party in default is such as to amount abandonment of contract or a refusal to perform it or, having regard to facts and circumstances and the nature of transaction, to “ evince an intention not to be bound by the contract”⁴ The question to be asked is : “Is the Act to be relied on as rescission an act which on the part of the person doing it amounts to an abandonment or refusal by him to perform this part of the contract? ” An intimation that “it is no use for you to go on because I tell you that I do not mean to keep the contract” constitute repudiation of contract.⁵

However, repudiation of contract ought not be gathered from the facts and circumstances in a perfunctory manner. The courts have concurrently held that repudiation of a contract is a serious matter and it is not to be lightly found or inferred. When there is no refusal to perform and only mode of performance is questioned, it cannot be said to be a case of repudiation.⁶ Mere failure to perform the contract cannot be said to be a repudiation of it unless it evinces an intention no to go on with the contract.⁷

Options available to the Promissee

There is a general misconception that the contract comes to an end when a party has repudiated the contract. However, Section 39 of the Act unambiguously elucidates that a contract can be terminated only at the instance of the innocent party and not at the instance of the party which has repudiated the contract. The emphasis must be laid on the words “the promisee may put an end to the contract, unless he has signified, by words or conduct, his acquiescence in its continuance.” Therefore, repudiation of contract by a party in default gives rise to following options to the promisee or the innocent party viz-

Accept the repudiation and sue for damages for breach of contract; or
Choose to disregard or refuse to accept the repudiation, in which case the contract remains in full effect.⁸

The Bombay High Court in Sidhivinayak Realties Pvt. Ltd. v Hotel limited and ors.⁹ succinctly explained repudiation as follows:

“117…In view of Section 39 of the Contract Act, there must be not only categorical refusal to perform by the promisor of its promise in its entirety, but must be acceptance of such repudiation by the promisee to put an end to the contract. In my view, mere notice of intention to break the contract cannot amount to repudiation under Section 39 of the Contract Act. There must be two parties to put an end to contract. Acceptance or repudiation must be equivocal and must be communicated to the party in breach.”

“Put an end”: Acceptance of Repudiation

When the innocent party or the promisee chooses to accept the repudiation, he must make his decision to accept the repudiation known to the party in default, otherwise the contract continues, for “an unaccepted repudiation is a thing writ in water”¹⁰ . A contract is not broken by the mere notice of intention to break the contract.¹¹The words “may put an end to the contract” have been held to make the contract “voidable” at the option of the promisee.¹²

Mode of Acceptance

Acceptance of repudiation by the promise must be clear and it must be communicated to the party in breach. Since the repudiatory breach makes the contract voidable, the innocent party can rescind the contract and the rescission must be communicated in the same manner and be subject to the same rules as communication of proposal.¹³ Therefore, it is imperative that acceptance of repudiation must be followed by an intimation to the party in breach of acceptance of repudiation which brings a contract to an end and the parties are discharged from performing their obligations under the contract. Communication of acceptance is grounded on the principle that the guilty party needs to know with certainty whether the contract which he has repudiated has been terminated or kept alive, for if it is kept alive, he will yet have an opportunity of performance; and further that the guilty party must be entitled to treat the other party’s assertion that the contract is still alive as a reliable indication that when the time comes for performance, he must perform it, if he is to avoid committing the actual breach and he is therefore, entitled to assume that the innocent party will not change his mind in the meantime.¹⁴

The acceptance of repudiation can be generally communicated to the party in breach, personally or by an agent or even by bringing it to the notice of the party in breach through an intermediary.¹⁵

Affirmation of Contract: Acquiescence

Once the promisee or the innocent party exercises its option to affirm the contract i.e. refuse to accept the repudiation, then the promissee loses its right to repudiate the contract. Upon affirmation the right to repudiate is lost despite any anti-waiver clause in the contract.¹⁶ The exercise of options available to the promissee is grounded on the principle of doctrine of election that a party cannot exercise two remedies at the same time, having elected to choose one remedy, the party is estopped from exercising the other alternative remedy.

However, it is necessary that for such affirmation or acquiescence, the party must have knowledge of the facts giving rise to the breach and also of his right to elect i.e. to choose between the alternatives of accepting the repudiation and affirmation of the contract.¹⁷ If a party, freely and with full knowledge elects not to accept the repudiation, he cannot go back on this election and sue before the date of performance has arrived.¹⁸ However, it must be noted that by electing to affirm, the innocent party is not denuded of its rights to claim damages sustained because of the breach.¹⁹

Similarly, like in the case of acceptance of repudiation, affirmation of contract is also necessarily required to be conveyed to the other party in “clear and unequivocal terms”²⁰

Effect of Affirmation

Once the innocent party has affirmed the contract by refusing to accept repudiatory breach, the contract remains in full force for the benefit of both the parties. In White and Carter (Councils) Ltd. v Mcgregor²¹, parties entered into an agreement for three years for display of advertisement of a garage owner. However, the garage owner cancelled the contract on the same day. The advertisement contractor refused to accept the cancellation and displayed the advertisements as agreed. The House of Lords held that the advertising contractor was entitled to carry out the contract and claim the full contract price and was not obliged to accept the repudiation and sue for damages. The contention that on renouncing the contract, the contractor was not entitled to carry out the agreement and sue for damages, was not accepted.

Conclusion

Repudiation of contract is not to be taken lightly or derived in a perfunctory manner from the facts and circumstances of a case. Repudiation of contract has to be communicated in clear and unequivocal language to the innocent party who has two options i.e. either to accept the repudiation and sue for damages or reject the repudiation and affirm the contract, in which case the contract continues for the benefit of both the parties. It must be noted that repudiation of contract by party in default does not ipso facto result in termination of the contract. Termination can only take place at the instance of the innocent party when the repudiation is accepted in which case the defaulting party becomes liable to pay damages to the innocent party. On the other hand when repudiation is rejected, the contract remain in full effect and parties are not discharged from their obligations under the contract.

By Daksh Pandit