This article has been written by Menaga Devi S.N. pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution course from LawSikho.
This article has been edited and published by Shashwat Kaushik.
Table of Contents
Introduction
The Indian Contract Act of 1872, defines the term “contract” under Section 2 (h) as “an agreement enforceable by law.” In other words, we can say that a contract is anything that is an agreement and enforceable by the law of the land. A contract is generally between two or more parties and follows the legal maxim “Quid pro quo,” which means an agreement between two or more parties in which there is a reciprocal exchange of goods or services. For example, consider a business agreement where one exchanges something for something else of similar value. In other words, “favour for favour.” Even if a quid pro quo is considered legal, it may be perceived as unethical or shady in some cases.
Contract law governs the legal principle of the exchange of goods or services between individuals or businesses. It also examines contract principles such as enforceability, breach, voidability, performances, etc. It also provides remedies available to parties who suffer damages or harm from another party’s breach.
What is a divisible contract
A divisible contract is a contract in which the performances of each party are divided into matching pairs of duties. A divisible contract is one that has multiple parts or is divided into multiple segments. Each segment exists and can be completed independently. The performance of one segment doesn’t relieve the party from the obligations over other segments, and further, a breach of one segment doesn’t excuse the performance of the other segments by the parties.
Divisibility refers to the ability to separate a contract into distinct segments, parts or sections, each of which can be treated as an independent agreement. Not all contracts are divisible, and it depends on various factors, including the intent of the parties, the nature of the contract and the practicality of performance. For example, the construction of a building is undertaken by a contractor through a contract, which includes various phases of work such as plumbing, electrical work, flooring, ceiling, finishing, site planning, etc.
Essential requirements for a valid contract
- There must be an offer and acceptance.
- According to Section 11 of the Indian Contract Act 1882, every person who enters into the contract must be competent, of sound mind, and major, i.e., over 18 years and above.
Case law
Mohori Bibee vs Dharmodas Ghose
Facts of the case
Dharmodas Ghose entered into an agreement with a moneylender to secure a loan amount of Rs 20,000 while he was a minor. At the time of the agreement, the person who acted on behalf of the moneylender had knowledge that Dharmodas Ghose was a minor. On attainment of majority, Dharmados brought an action against the defendant, alleging that when he executed the mortgage, he was a minor, therefore the mortgage itself is void ab initio.
Issues involved in the case
- Whether the mortgaged deed is void under Sections 2, 10, and 11 of Indian Contract Act 1872 or not?
- Is the mortgage deed void or not?
- Whether the mortgage deed comes under Sections 64 and 65 of Indian Contract Act 1872.
Judgement of the Court
The Court states that the agreement entered into between minors is void ab initio, i.e., void at the beginning. The person acting on behalf of the money lender knows the fact that Dharmados is a minor, conceals the fact and proceeds with the agreement willfully, so the application of the doctrine of estoppel is not valid.
- Under Section 23 of Indian Contract Act 1882, lawful consideration is essential for valid contracts, i.e., the consideration should be legal and should not be impossible to perform.
- Consent should be free, not given under undue influence, coercion, fraud, misrepresentation or mistake.
- There must be an intention to create a legal agreement and an intention to perform the contract.
Difference between divisible contracts and indivisible contracts
In a divisible contract, it is easy to separate, i.e., partial fulfilment is allowed and doesn’t affect the validity of the contract. But in an indivisible contract, it is undividable. When one cannot perform the object, the whole contract becomes void.
Examples:
- A agrees to pay $4000 to B in monthly instalments – Divisible contract
If A defaults on paying the second instalment, it doesn’t affect the validity of the contract.
- A agrees to pay B $2000 on December 23, 2023, the full amount for a purchase made by him- indivisible contract
If A defaults on paying that amount on the due date, the contract is void, and it is a breach of contract.
Case laws surrounding divisible contracts
Lowy vs. United Pacific Ins. Co (1967)
Facts of the case
In this case, the petitioner and respondent entered into a contract for area development, including paving the streets, installing barriers, and installing a sewer.
The defendant completed 98 percent of the contracted work, but a dispute arose concerning the payment of $7,200 for extension work. The plaintiff introduced changes to the original plan, leading to disagreements. Subsequently, the defendant ceased performance. In response, the plaintiff promptly engaged alternative contractors to complete the remaining 2 percent of the work. Despite successful completion, the plaintiff filed a breach of contract case against the respondent, alleging non-compliance with the agreement terms. The core issues involve payment disputes, alterations to the original plan, and the defendant’s cessation of performance.
Issues involved in the case
Whether the contract is divisible or not? Is the respondent eligible to claim the amount for the work completed by him?
Judgement of the Court
The Court said that the contract is divisible in nature. Because the petitioner gave a surety bond of $73,500 to the respondent for area development work, the respondent asked for another surety bond for the extension work before the second phase began, and the appellant refused to pay, so the respondent stopped the performance.
Further, the contract is divisible, and the respondent is entitled to claim the amount for the work done by him. Because the respondent breached the second phase of the contract, it does not make the whole contract null and void.
Steele vs. Tardiani (1946)
Case related to breach of contract and quantum meruit, part performance.
Facts of the case
In this case, Tardiani and Steele entered into a contract to cut the firewood. Steele makes the condition that the wood must be 6 feet long and 6 inches in diameter. As per the requirement, Tardiani and other workers cut the wood. But the requirement of 6 inches in diameter was changed in mid of work and Tardiani and others cut the wood to 6 inches in diameter mistakenly.
Issues involved in the case
Whether Tardaini is entitled to the payment? Is there a breach of contract?
Judgement of the Court
Yes, Tardiani is entitled to the payment even though there is a breach of contract
because when Steele received the woods, which varied in range, he didn’t notify Tardiani about the breach of contract and simply accepted the woods and sold them to his customers. It implies the express acceptance given by Steele in this case. Even though it is part performance, Tardiani and others are entitled to receive remuneration based on the Latin maxim Quantum Meruit – one deserves to receive pay as much as his work is done. This case highlights the importance of communication and quantum meruit.
Access Insurance Planner Inc. vs. Gee (2015)
Facts of the case
- In this case, Gee and Phillip Wardell, who runs Access Insurance planners, entered into an employment agreement where Gee would self generate business for access and Phillip Wardell would pay the commission to Gee.
- Philip Wardell agreed to pay 50 percent commission on the amount paid by an insurer to Access on health policies and 25 percent commission on property and casualty policies. Access agreed to pay initial and renewal policies commission to Gee.
- Gee started work in 2004. She became suspicious in the year 2007 when her commission in the year 2005 was unpaid. In the beginning of 2009, she communicated with Phillip Wardell through email about the payment discrepancies, but it didn’t lead to any final conclusions. Gee pleaded to correct that financial mistake by paying her commission but Wardell refused that there was no mistake and eventually, in 2010, he terminated Gee.
- Access Insurance Planner Inc. stated that it is time barred according to the statute of limitations and that it is an indivisible contract so Gee has no rights because she just proceeded with the contract even though she became suspicious.
Issues involved in the case
- whether the issue is time barred under the statute of limitations or not?
- Is the employment agreement divisible or divisible in nature?
- Is Gee eligible for damages?
Judgement of the Court
The Florida Supreme Court stated that it is a divisible contract because whenever Gee gets paid for insurance, it is a divisible one, i.e., able to separate because the parties agreed to pay commissions for each and every insurer that is introduced by Gee.
Gee became suspicious in 2007 and she communicated about the issues to Phillip Wardell and she got terminated. In this issue, it is not a time barred issue because it is a divisible contract. The final judgement awarded damages only for the premium received by the defendant after January 11, 2007.
Darst vs. Meduna (1942)
In this case, the difference between a divisible and an indivisible contract is clearly explained by the Court. When the subject of the sale of a contract consists of different articles and the apportionment of the purchase price to each is made, then the contract is a divisible contract. The Supreme Court ruled in favour of Darst, holding that the state could not involuntarily commit a person to a mental institution and subject them to treatment without first providing them with a hearing. The Court also held that the state must prove that the person is mentally ill and that the treatment is necessary and in the patient’s best interests.
The Darst vs. Meduna decision was a major victory for the rights of mental patients. It established the principle that patients have a right to due process of law and that they cannot be subjected to involuntary treatment without their consent. The decision has also been cited as precedent in other cases involving the rights of people with disabilities.
The case had a significant impact on the way that mental health care is provided in the United States. In the wake of Darst vs. Meduna, states began to develop more stringent procedures for involuntary commitment and treatment. The decision also led to the development of new laws and regulations to protect the rights of mental patients.
Bariel vs. Tuinstra (1954)
Facts of the case
In this case, Tuinstra owns cows and runs a dairy farm. The animal health department inspected his farm and identified that some cows were infected by the disease and some were suspects so the inspection department ordered him to stop dairy farming and sell cows for slaughter. At that time, Bariel came to the defendant and said he would like to buy the livestock and lease the dairy farm. The defendant concealed the facts about the infections and sold the livestock to the appellant.
Bariel and Tuinstra entered into a contract for the sale of real estate and personal property, i.e., cattle and farm machinery and equipment, in a single document. The contract says that the amount should be paid every month. The appellant sells milk and dairy farms, and the amount is paid to the defendant.
The inspection takes place on the dairy farm and identifies some infections in the cows. The Health Department restricts the sale of milk and cows during this time. Then the appellant went to the health department to check the health of the cows and he found that when he purchased the cows themselves, they were infected and the health department put restrictions on selling these cows, but the respondent willfully concealed the facts and sold the cows to the appellant.
The appellant communicated about this issue and asked to return the purchase amount of the cows, but the respondent refused to refund. The appellant filed a case against the respondent.
Issues involved in the case
The respondent says that the contract is an indivisible one so it is unable to rescind on part of it.
Whether the contract is divisible or indivisible?
Judgement of the Court
The Court said that the contract is divisible in nature even though the apportionment is a gross payment and entered in a single document, but the purchase of personal property, i.e., livestock, machinery and equipment, and the contract of lease are divisible.
So, the appellant has the right to rescind the contract because, here, the respondent willfully concealed the fact of the infection of the cows.
Contract drafting checklist
| S.No | Considerations | Clause | Significance |
| 1 | There is a likelihood of a fifth wave of the COVID pandemic and the parties intend to suspend the agreement if there is a nationwide lockdown. | Force majeure clause | It provides a legal mechanism to the parties to suspend the agreement under unforeseen circumstances. |
| 2 | Woodpeckers is proposed to be appointed as the sole distributor to sell the furniture and other products of Norwood in the State of Kerala. Norwood has agreed to not appoint any other distributors in Kerala. | Exclusivity clause | It signifies that both the parties will be in an exclusive commercial relationship.Here, it grants woodpeckers the exclusive right to distribute and sell Norwood’s product in a specified region (Kerala), preventing Norwood from appointing any other distributor in that specified region. |
| 3 | Any damages to be paid by either of the parties will be restricted to a maximum of twice the amount of consideration/payment involved for the specific consignment or order in dispute. | Liquidated Damages / Limitation of Liability | signify the predetermined financial consequences agreed upon by the parties in case of a breach. |
| 4 | The parties have agreed to use emails and couriers addressed to the official email ID and registered address of the respective parties for all correspondence under the agreement. | Notices | It signifies how and to whom the official communication, legal notice, or notification related to the contract should be delivered.It ensures proper and effective communication between the parties involved. |
| 5 | Norwood intends to reiterate its right in the agreement to compel Woodpecker to perform/undertake their part of the contract if there is no justifiable reason for such non-performance. | Enforcement Clause / Remedies clause | It provides the rights and actions that the parties can take in the event of a breach of contract, including the ability to compel performance or seek remedies for non-performance. |
| 6 | Norwood will be sharing some secretive data and marketing strategies with Woodpecker and wants to limit its disclosure. | Confidentiality Clause | It is intended to restrict the disclosure of confidential information and proprietary strategies between the parties involved in the agreement. |
| 7 | Woodpecker is apprehensive that Norwood may poach its sales experts and retailers in Kerala since Norwood is a more profitable and powerful company than Woodpecker. They want to protect themselves by introducing a specific clause in the agreement. | Non-Compete & Non-Solicit | It is designed to prevent Norwood from hiring or enticing away Woodpecker’s sales experts and retailers in the specified region. |
| 8 | There are other furniture companies planning to enter the retail market space in Kerala and Norwood does not want | Exclusivity / Non- Compete | It signifies that Woodpecker is proposed to be appointed as the sole distributor and Norwood agrees not to appoint any other distributors in the specified region. |
| 9 | Woodpecker will be using the logo, graphical representation and other packaging/branding material which bears the name of Norwood for advertising and sales of furniture and other products. | Intellectual Property Right | It signifies in protecting Norwood’s brand identity and assets, ensuring exclusive use of its logo and branding material by Woodpecker for advertising and sales. It establishes the rights, limitations, and obligations related to intellectual property, preventing unauthorised use and potential harm to Norwood’s brand reputation. |
| 10 | Woodpecker has conveyed to Norwood that they possess the required trade licence and other registrations under applicable state legislation which permits them to advertise and sell the furniture and other products in Kerala. | Representations and Warranties Clause | It is a contractual provision in which one party makes specific statements about the accuracy of certain facts, and the other party relies on those statements when entering into the agreement |
Matching essential clauses of a contract with contract checklist
| S.No | Considerations | Clause | Significance |
| 1 | Should any provision of this Agreement be determined to be void, invalid, unenforceable or illegal for whatever reason, such provision(s) shall be null and void; provided, however, that the remaining provisions of this Agreement shall be unaffected thereby and shall continue to be valid and enforceable. | Severability clause | It stipulates that if any provision of the contract is found to be invalid or unenforceable, the remaining provisions will still be valid and enforceable. This helps to ensure that the overall contract remains effective and operational, even if certain parts are deemed legally problematic |
| 2 | Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties. Subject to the preceding sentence, this agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. | Assignment clause | It signifies the parties’ agreement on whether one party can transfer or assign its rights, obligations, or duties under the contract to another party |
| 3 | This Agreement contains the entire agreement and understanding among the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements, understandings, inducements, and conditions, express or implied, oral or written, of any nature whatsoever with respect to the subject matter hereof. The express terms hereof control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms hereof | Entire agreement clause | It signifies that the written contract contains the complete understanding and agreement between the parties, superseding any prior oral or written agreements, negotiations, or understandings. It helps prevent the parties from relying on extraneous materials or oral representations that are not explicitly included in the written contract. |
| 4 | The Courts of Kerala have exclusive jurisdiction to settle any dispute arising out of or in connection with this Agreement (including a dispute relating to the existence, validity or termination of this Agreement or any non-contractual obligation arising out of or in connection with this Agreement) (a “Dispute”). | Jurisdiction | It helps determine the specific court that will have the authority to hear and decide legal matters related to the contract, providing clarity and avoiding potential jurisdictional conflicts. |
| 5 | This Agreement may be amended or modified only by a written instrument signed by the duly authorised representatives of both parties. | Amendment / variation clause | It signifies the provision within a contract that outlines the procedures and conditions under which the parties can make changes or modifications to the terms and conditions of the agreement |
Drafting clauses of the instrument
- The disclosing party is Kiran Beverages Limited is a well-established company located in Kolkata, West Bengal, exclusively engaged in the manufacturing and distribution of signature beverages known for their unique taste. Kiran Beverages Limited acts as a first party in this agreement.
- The First Party’s beverages (“product”) have gained widespread consumer acceptance, and the manufacturing process, considered “one of its kind,” is a closely guarded trade secret protected by necessary licences.
- The First Party, having selected exclusive manufacturers and distributors across India, operates its manufacturing units in full secrecy and confidentiality.
- The receiving party is Mr. Amit Roy, acting as a second party. A distributor based in Bengaluru, Karnataka, has successfully distributed and sold the product, establishing a commendable relationship with the first party.
- The parties acknowledged that during the course of discussion between them, the receiving party shall become privy to certain confidential information relating to the disclosing party, and the receiving party has agreed to be bound by the non-disclosure provisions of this agreement to govern the use and disclosure of the confidential information.
- In consideration of the mutual promises and agreement between the parties hereto, the parties agreed to enter into this agreement to govern the terms and conditions of their association.
Confidentiality clause
The confidentiality clause has to protect confidential information that is disclosed by the first party to the second party. Whenever the receiving party receives confidential information from the disclosing party, he is bound to protect the information from disclosure.
Here,
The first party is the disclosing party and the second party is the receiving party. The disclosing party may, from time to time, provide to the receiving party under or relating to this agreement all information communicated in writing or orally relating to business affairs, any technical data, or know-how, including but not limited to, that which is or relates to:
- Business Plan, secret Recipe to the Beverages, inventions, ideas, techniques, and data;
- non-public market information and product plans;
- product plans, products, services, customers, markets, software, developments, inventions, processes, designs, drawings, engineering, and hardware configuration information.
Which pre-contractual instrument is beneficial for the client at this stage
A Memorandum of Understanding is beneficial for the client at this stage. Here, the first party and second party have a mutually beneficial relationship. The first party has received knowledge about the intention of the second party to expand its business through joint ventures or mergers. The first party needs some confidential information to enter into the joint venture, amalgamation, or merger and the MOU helps secure the confidential information, which has separate clauses to secure the information.
Can ‘confidentiality clause’ in such an instrument be enforced independently
Yes, even though a contract is terminated between the parties, confidentiality clauses will prevail to secure the rights of the second party and the first party is obliged to safeguard the confidential information that is shared by the second party.
After termination of the contract or MOU, if the first party discloses the confidential information that is shared by the second party, then the instrument is enforceable against the first party.
In the MOU, the duration of non disclosure of confidential information should be clearly mentioned and remedies should also be mentioned in case the first party violates the non disclosure clause.
Other clauses of the instrument
Proposed arrangement
The term “proposed arrangement” refers to a plan or agreement that is suggested, recommended, or put forward for consideration and encompasses the terms, conditions, and details that are currently under discussion and negotiation between the two parties.
The First Party has expressed its willingness to explore the possibility of a joint venture, amalgamation/merger, or another business arrangement with the Second Party. Based on that, the second party shares confidential information. Whether the parties enter into a MOU or NDA, both help secure confidential information.
Term and termination
The parties mentioned the effective date of the contract or agreement. When the second party shared his confidential information with the first party, the agreement was enforced and the first party was obliged to protect the confidential information. He should not disclose it to anyone without the previous approval of the second party. Even though the contract is terminated, the first party is bound to secure the confidential information. The mode of termination should be clearly mentioned in the agreement. Notice period and remedies in case of violation of provisions should be clearly mentioned in that agreement
Remedies
| S.No | Material breach | Remedies |
| 1 | The distributor may fail to maintain the quality/ quantity of the products. | The distributor has to pay compensation to the company. |
| 2. | The distributor may fail to deliver the products within the delivery time or delay delivery. | |
| 3. | Distributor may fail to correct the material breach within the cure period | The company may sue for damages or terminate the agreement as per this agreement. |
| 4. | Distributors may fail to share the accounts and sales records with the company. |
Conclusion
Overall, the pivotal concept of divisibility in contract law is to ensure that each party is aware of their responsibility under the contract. It is important to understand and communicate the principles of divisibility to ensure that contracts are clear, concise and legally enforceable.
References
- https://www.upcounsel.com/divisible-contracts
- https://law.justia.com/cases/california/supreme-court/2d/67/87.html
- https://fpbl.com.au/FPBL2022/Cases/steele.html
- https://www.legalserviceindia.com/legal/article-232-case-analysis-mohori-bibee-v-s-dharmodas-ghose.html
