A contract is made to be performed. Most contracts are performed without incident. Some are performed late, some are performed differently from what was promised, and some are not performed at all. The Contract Act provides a structured framework for what happens in each of these scenarios. Sections 37 to 67 govern performance. Sections 73 to 75 govern damages for breach. The Specific Relief Act, 1963 governs alternative remedies including specific performance and injunctions.
Performance — the general rule
Section 37 establishes the basic rule: "The parties to a contract must either perform, or offer to perform, their respective promises, unless such performance is dispensed with or excused under the provisions of this Act, or of any other law."
Performance must be in the manner and at the time provided in the contract. If the contract is silent, performance must be within a reasonable time and in a reasonable manner. The test of "reasonable" depends on the nature of the contract, the relationship between the parties, and the commercial context.
A party that offers to perform but is prevented from doing so by the other party has discharged their obligations. They can sue for breach without themselves being in breach.
Who performs, and to whom
The Act addresses these questions in sections 40 to 45. The general rules:
- Performance is normally to be done by the promisor personally, unless the contract or the nature of the contract suggests otherwise. Personal-skill contracts (singers, lawyers, doctors, artists) must be performed personally.
- Where the contract permits delegation, the promisor can engage another to perform on their behalf. Most commercial contracts permit delegation expressly or implicitly.
- Performance is normally to be made to the promisee. Payment to a third party at the promisee's instruction is good performance.
- On the death of a promisee, performance is owed to the legal representative.
- On the death of a promisor, performance is owed by the legal representative, unless the contract was personal in nature, in which case it is discharged.
Time of performance
Section 55 addresses the consequences of failing to perform on time. The provision distinguishes between contracts where time is "of the essence" and contracts where it is not.
If time is of the essence — meaning the contract or the surrounding circumstances make clear that performance by a specific date is critical — failure to perform on time is a breach, and the other party can rescind the contract. If the other party accepts late performance, they can still claim damages for the delay, but the contract is preserved.
If time is not of the essence, late performance does not entitle the other party to rescind. They must accept performance and claim damages, if any.
How do courts determine whether time is of the essence? They look at:
- Express language in the contract ("time is of the essence" is the typical formulation).
- The nature of the contract — for example, contracts for perishable goods or for seasonal demand are typically time-essential.
- The conduct of the parties — if the parties have treated time as flexible throughout the engagement, courts will infer that time was not essential.
- The consequences of delay — if delay causes specific identifiable loss, it is more likely that time was essential.
In commercial real estate transactions, time is generally not presumed to be of the essence, even when specific dates are stated. This is a long-standing rule of Indian property law that often surprises parties. In commercial contracts for goods and services, time is more readily found to be of the essence.
Breach — what counts
A breach occurs when a party fails to perform their contractual obligations without lawful excuse. Breach can be:
- Total breach — complete failure to perform.
- Partial breach — performance of some but not all obligations.
- Anticipatory breach — declaration in advance that the party will not perform. Section 39 specifically addresses anticipatory breach: when a party renounces the contract or disables themselves from performing before the time for performance arrives, the other party can immediately treat the contract as broken.
- Constructive breach — conduct that makes performance impossible or commercially impracticable, even without an express renunciation.
The aggrieved party in each case has specific remedies. The Contract Act provides for damages; the Specific Relief Act provides for specific performance and injunctions; the contract itself may provide for liquidated damages, termination, or other contractual remedies.
Damages for breach — Sections 73 and 74
Section 73 is the foundational provision for damages. It allows the aggrieved party to recover compensation for any loss or damage caused to them which naturally arose in the usual course of things from the breach, or which the parties knew, when they made the contract, to be likely to result from the breach.
This two-limb test — known as the rule in Hadley v Baxendale after the English case from which it derives — limits recoverable damages to:
- Direct damages — losses that naturally arise from this kind of breach. The price differential when goods are not delivered. The cost of finding alternative services when a contractor walks away.
- Indirect damages — losses that the parties knew at the time of contracting were likely to arise. These require the special circumstances to have been communicated to the breaching party at the time of contracting. Lost profits from a downstream contract that the supplier knew about, for example.
Damages that were not in the contemplation of the parties at the time of contracting are not recoverable, even if the breach caused them. A supplier who breaches a routine commercial contract is not liable for the full collapse of the buyer's business if the supplier had no idea that the buyer was relying on this specific supply for that purpose.
Section 73 also imposes a duty to mitigate. The aggrieved party must take reasonable steps to minimise their loss. If they could have avoided some loss by reasonable efforts but did not, the avoidable portion is not recoverable.
Section 74 addresses liquidated damages — pre-agreed amounts payable on breach. The section allows recovery of either the liquidated amount or actual damages, whichever is lower, capped at the liquidated amount. Indian courts treat liquidated damages cautiously: if the liquidated amount is grossly disproportionate to actual loss, courts will reduce it. The doctrine of penalties from English common law applies in modified form — Indian courts will not enforce a clause that is penal rather than compensatory.
The practical consequence is that liquidated damages clauses in Indian contracts must be calibrated to genuine pre-estimates of loss, not punitive amounts intended to deter breach. Drafting a clause as "the breaching party shall pay Rs. X as liquidated damages" with X far in excess of any actual loss invites reduction by the court.
Specific performance — the Specific Relief Act
Damages are the default remedy. Specific performance — a court order requiring the breaching party to actually perform the contract — is the exception. The Specific Relief Act, 1963, as amended in 2018, governs when specific performance is available.
The 2018 amendment was significant. Before 2018, specific performance was discretionary; courts would grant it only where damages were inadequate. After 2018, specific performance is the default remedy for breach of contract, except in specified categories where damages are appropriate. The amendment was intended to make Indian commercial contracts more reliably enforceable by reducing the risk that a breaching party could simply pay damages instead of performing.
Specific performance is most commonly granted for:
- Contracts for the sale of immovable property — courts will order the seller to convey the property rather than pay damages.
- Contracts for the sale of unique goods — items where damages cannot adequately compensate because the goods cannot be obtained in the market.
- Service contracts that the breaching party has substantially commenced.
Specific performance is generally not granted for:
- Contracts of personal service — courts will not order a person to work for another. The remedy is damages.
- Contracts requiring ongoing supervision by the court — where the court would have to monitor performance over time.
- Contracts where the breaching party has substantially defaulted and continuing the relationship would cause hardship.
Injunctions
An injunction is a court order requiring a party to do something (mandatory injunction) or to refrain from doing something (prohibitory injunction). Injunctions are commonly used to enforce negative covenants — confidentiality obligations, non-solicit clauses, exclusivity provisions — and to prevent ongoing or threatened breach.
Interim injunctions can be obtained pending the final disposal of a case, where the court is satisfied that there is a prima facie case, the balance of convenience favours granting the injunction, and irreparable harm would result if the injunction is not granted. The three-factor test is applied in practically every commercial injunction application in India.
Termination of the contract
Beyond damages, specific performance, and injunctions, the aggrieved party can usually also terminate the contract. Section 39 of the Contract Act provides this right in cases of anticipatory breach. Section 75 provides that a party who rescinds a contract for breach by the other side can also claim compensation for any damage they have suffered through non-fulfilment.
Most commercial contracts contain express termination provisions detailing when each party can terminate, the notice required, and the consequences of termination. These contractual termination rights operate alongside the statutory rights and are typically more specific.
Frustration — Section 56
Section 56 addresses contracts that become impossible to perform due to subsequent events. "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."
This doctrine of frustration discharges both parties from further performance when an unforeseen event makes the contract substantially impossible. Examples include destruction of the subject matter, change of law that makes performance illegal, and supervening incapacity of a party in a personal services contract.
Frustration is narrowly applied. It does not cover commercial inconvenience, increase in cost of performance, or temporary difficulties. The supervening event must make performance substantially impossible, not merely harder.
The COVID-19 pandemic produced an enormous body of litigation on frustration. Indian courts generally held that the pandemic did not by itself frustrate contracts — the test remained whether performance was substantially impossible, not merely inconvenient. Force majeure clauses in contracts were more often invoked successfully, but only where the clause was drafted to capture the specific circumstances.
Closing thought
The performance and remedies provisions are where contract law meets dispute resolution. Most contractual relationships do not reach this point; performance happens as expected and the underlying framework is invisible. When a relationship breaks down, however, the architecture of remedies determines what the aggrieved party can actually get from the other side. Knowing whether a breach entitles you to rescind, to specific performance, to damages, or to an injunction shapes how you approach the negotiation, the threat of litigation, and the litigation itself.
The final assessment follows this module. Ten questions covering the full course material. Pass at 70% and you will earn your free certificate of completion. Best of luck.