Section 2(f) of The Indian Contract Act, 1872 says that “Promises which form the consideration or part of the consideration for each other, are called Reciprocal Promises”.[1] In essence, this implies that promises exchanged in a contract are referred to as reciprocal promises. When multiple promises must be fulfilled concurrently, the promisor is not required to fulfil them unless the promisee is prepared and willing to fulfil his end of the bargain.[2] This principle has been established under Section 51.
For example, If Party A and Party B sign a contract wherein A will deliver particular goods to B and the payment shall be made in cash upon delivery, then there is no obligation on A to deliver the aforementioned goods unless they see a willingness on the side of B to make the payment in cash.
In the majority of business contracts, two or more parties normally agree to fulfil certain responsibilities toward one another. Such responsibilities may take the form of reciprocal promises, which are assurances that provide some or all of the consideration for one another. In other words, the performance of the responsibility of a party is conditional upon the other party completing their own. The notable clauses with respect to reciprocal promises are Sections 51 to 54 of the Indian Contract Act of 1872. While Sections 51 and 52 describe the various circumstances in which a reciprocal promise may be applicable, Sections 53 and 54 deal with instances in which one party breaches its responsibility.
Background
Contracts are the foundations for many agreements. Contracts often include one party promising to do something in exchange for the other party performing another act. However, parties to contracts sometimes only agree to take particular actions or make promises to take certain actions. Promises are not tangible, in contrast to an act. As a result, several questions may arise because of its nature. One is considered to make a proposal when he or she indicates their will to do (or not do) something. A proposal becomes a promise when it is accepted by the other party (to whom it is offered). In this case, the one who makes the proposal is the “promisor” and the individual to whom this proposal is made to is the “promisee”. The act of the promise is known as “consideration of the promise” when the promisee acts in accordance with the promisor’s wishes and either fulfils the promise or refuses to fulfil it. An agreement is created by these promises. Reciprocal promises are the kind of promises that make up an agreement.
Consideration and Promise
Under Section 2(d) of the Act, it states that consideration occurs when the promisor makes a promise to do or not do anything; this action is referred to as consideration of the promise. Reciprocal Promises is the term used when such promises constitute an agreement. Reciprocal promises are a portion of the consideration or make up the consideration for the contract, as stated in section 2(f) of The Indian Contract Act. A promise for a promise that creates an agreement is called a reciprocal promise.
A question may arise as to whether every consideration can be considered as a reciprocal promise. Consideration is typically referred to as a reciprocal promise since it is a promise made by the promisee to the promisor as part of an agreement. Similar to reciprocal promises, consideration is a promise for a promise and a reciprocal promise is a promise for a promise, however specifics will depend on the circumstances and nature of the transaction. Consideration may include cost or some value in exchange for the promise as a consideration. Each transaction may include a different amount of consideration. As an illustration, consider money or a commitment as consideration to do or not do anything.
To answer another question as to whether every reciprocal promise is a consideration, reciprocal promises are not regarded as consideration. Reciprocal promises are a list of commitments made by both parties to a contract. Reciprocal promises create agreements. However, depending on the transactions occurring, there could be exceptions to the statement.
Types of Reciprocal Promises
- Mutual and Independent
Although not protected by the Act, this idea has developed via jurisprudence. It requires the contracting parties to carry out certain duties independently of one another, and their execution is not reliant on the other party carrying out its obligations under the agreement. However, the contract requires the fulfilment of these separate and overlapping obligations.
For example, let’s say that “A,” a government organization, and “B,” a private contractor, enter into a contract for “B” to construct a bridge. If such a contract requires “A” to disclose information on, for instance, power projects to “B,” but such information has no bearing on building the bridge, then “B” will not be released from fulfilling its commitment to build the bridge simply because “A” did not provide the pertinent information. Although they are mutual and independent, the two pledges made by the parties to one another are binding. In fact, even if “B” falters on the bridge construction, “A” will still be required to divulge information about the power projects. However, even if the aforementioned two commitments are mutual and independent, the contract’s conditions would be maintained if it specified that they must be fulfilled in a specific sequence.
In the landmark case of Mrs. Saradamani Kandappan vs. Mrs. S. Rajalakshmi and Ors[3], The Supreme Court affirmed the provisions of the agreement and acknowledged the mutual and independent nature of the reciprocal promises. Rajalakshmi and Saradamani had struck a deal for the purchase of a plot of property, which required a number of monthly payments. Prior to making the final payment, Saradamani requested that Rajalakshmi present the title paperwork. Saradamani failed to make the last payment as a result of Rajalakshmi’s refusal. Rajalakshmi cancelled the contract as a result of the last instalment not being paid on time. Following litigation in many venues, the Supreme Court ruled that the two promises—paying the last instalment and displaying the title documents—were mutually incompatible. Saradamani had brought a lawsuit for a particular performance. It also ruled that Saradamani’s reluctance to pay was improper since the contract did not stipulate that the buyer must first examine the title papers before making payment. However, the Supreme Court determined that the contract was dissolved because of the passing of time and ordered Rajalakshmi to refund the money she got from Saradamani.
- Concurrent
This is a typical instance of a reciprocal commitment when the parties are required to carry out their duties overtly or implicitly concurrently. If the other party is not “ready” and “willing” to carry out its responsibility, the party willing to execute its promise will be excused from doing so.
For example, in the previously provided example, if “A” was required to engage vendors through a tender process to source some raw materials for “B,” including those sourced by “B,” then “B” might discharge itself from completing its commitment if “A” was not “ready” and “willing” to issue bids on time. In this example, simultaneous fulfilment of “A’s” and “B’s” reciprocal promises is essential to the contract’s successful completion. The Supreme Court ruled in J.P. Builders v. A. Ramadas Rao[4] that “readiness” relates to financial capability and “willingness” refers to the behaviour of the person that is seeking performance, and that typically the former is supported by the latter.
- Conditional
This is the most typical kind of reciprocal promise, and it nearly always becomes a point of contention anytime there is a disagreement over a government contract that has been broken. According to this, the performance of one party is dependent upon the other party fulfilling a duty. The first party would not be able to keep its promise if the second party did not carry out its duties in line with the contract. Whether or not a promise is deemed conditional depends on the specifics of each situation.
For example, resuming the earlier example, if the contract between “A” and “B” also provided that “A” would construct a road leading to the proposed bridge in order to allow “B” to transport large machinery and equipment to the site, then “A’s” breach of this obligation would have an effect on “B’s” ability to fulfil its portion of the agreement. The transaction would still be seen as a reciprocal commitment owing to its fundamental nature and purpose, i.e., without the road, construction on the bridge cannot begin. Even if the contract did not clearly state that building the road is a precondition to beginning work on the bridge.
In M/s Shanti Builders vs. CIBA Industrial Workers’ Co-Operative Housing Society Ltd.[5] , a disagreement erupted over certain construction work that Shanti Builders was required to do. According to CIBA, Shanti Builders failed to finish the building work in line with the contract, which caused significant losses for them. On the other side, Shanti Builders claimed that it had not received a plot of land as the contractually required payment for the building work that had already been finished and that it would be unable to proceed with the next stage of the project unless such payment was made. The court backed Shanti Builders’ arguments after hearing from the parties and adopted the stance that if the fulfilment of a contract calls for a specific sequence (even if it is not expressly specified), then such sequence must always be followed. It also ruled that in cases where reciprocal pledges are reliant on one another, one party cannot demand the fulfilment of a promise if the other has not fulfilled its own.
Consequences to default
When a contract contains reciprocal promises, which means that one of them cannot be performed or that its performance cannot be claimed until the other has been fulfilled, and the promisor of the last-mentioned promise breaks that promise, that promisor cannot claim the fulfilment of the reciprocal promise and must instead compensate the other party to the contract for any losses that such other party may incur as a result of the contract’s non-performance.
For Example, A hires B’s ship to transport cargo from Bombay to Mauritius that B will furnish, with B getting a certain freight in exchange for transporting the cargo. A does not supply the ship with any cargo. A cannot demand that B fulfil his commitment, and must instead seek recompense from B for the harm that B suffers as a result of the contract’s non-performance.
Conclusion
Commercial contracts sometimes include reciprocal promises, particularly those that include the government, such as those for energy, infrastructure, etc. Courts frequently wrestle with contracts that contain reciprocal promises and have invalidated arbitral decisions made under Section 34 of the Arbitration and Conciliation Act due to an incorrect interpretation of reciprocity, underscoring the fundamental significance of this concept. Therefore, it is necessary to comprehend the subtleties of the interpretation, ramifications, and degree of responsibility placed on each side by such reciprocal promises.
Author: Ankitha Amby, Faculty of Law, PES University
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