This article is written by Samia Mirza of 1st semester of Himachal Pradesh National Law University, Shimla, an intern under Legal Vidhiya.
ABSTRACT
Contract law is a dominant stone in the legal world which impacts the modern society on a significant level. In modern times, not all transactions are fulfilled completely at the exact time of the purchase or the agreement, there is an existence of the concept of borrowing or lending. The modern world follows the concept of debt or loans which basically refers to borrowing or lending an amount or furthering the payment of a certain transaction. The concept of debt gives rise to the terminology of debtor and creditor. They are the crucial elements of any contractual relationship. The understanding of debtors and creditors and their rights and duties are essential for someone to develop a crucial understanding of the contract law without any hinderance. This article seeks to further elaborate on the notion for a clear understanding of the concept.
Keywords: Debt, Debtor, Creditor, Lending, Contracts
INTRODUCTION
The concept of debt gives rise to debtor and creditor and debt refers to borrowing or lending of resources, typically financial assets with an obligation to further repay the amount later on. It is an institution which enhances the functioning of businesses houses as everyone does not have the capacity to arrange all required resources at an ease. The debtor and creditor play a significant role in Contract law and contract law governs the rights, duties and legal remedies available to both the parties for proper enforcement of the contracts. Both the parties have certain rights and duties to perform for a smooth completion of the contract.
WHAT ARE RIGHTS AND DUTIES?
Rights are duties are fundamental concepts in legal philosophy and they are closely interrelated as rights of one individual correspond to the duties of other. A right is a relation existing between two parties where the second shall conduct itself in such a way that the other is benefited. A right is legally created and the first is said to have a right against the second and latter has a duty to the first and vice versa depending on the situation.
Rights are claims or entitlements that empower them to act in a certain way. They are protected and established by the law. Rights can be conditional as well as absolute in nature. In contract law debtors and creditors have certain rights that protect their interests and ensure fairness in completion is contractual relationships.
Duties are obligations and responsibilities that parties have towards each other. They are imposed by law in contractual relationships and they prescribe that what one party should do and what one party should refrain from doing in order to protect the rights of each other. Both the parties ought to fulfil their duties as well in order to ensure smooth completion of contractual relationships.
It is clearly inferred that rights and duties are interconnected as the rights of one create the duty of the other party and vice versa and they generally create the basis of contractual relationships.
DEBTOR
A debtor is the party who has borrowings thus owes a debt or obligation to someone else. He/she is the one who borrows and is under the obligation to pay back the debt or borrowing. In contract law, the debtor is also knows as the ‘promiser’ and is the party who has to perform certain obligation or duty, mostly financially under the terms and conditions of the contract as both the parties have agreed upon. The debtor has made commitments or promises within the contract and these form the basis of their obligation. The debtor has obligations to perform and thus the creditor has corresponding rights to expect performance of the same.
Example- A and B are two parties. A lends money to B on the condition that B will pay the amount later. Here B is the debtor or the promiser.
RIGHTS OF PRINCIPLE DEBTOR
- Right to Enforce the Contract
An enforceable contract is an oral or written agreement which can be imposed in the courts of law. Debtors in the Indian law have the right to enforce the terms of the contract. Debtors should sustain the expectation that the other party will fulfil their obligation as agreed upon in the contract. This ensures that the debtor can hold the accountable for their of bargain.
2. Right to Specific Performance
Specific performance is a remedy in the law of contracts where a court issues an order asking a party to perform a specific act, which in result leads to the completion of a contract. It typically takes place after one party has breached the contract or not acquainting to the obligations of the contract. A debtor can claim this right if the creditor does not fulfil any contractual obligation or performs any misconduct such as proposing increased or different debt levels or reducing or tingling with the time durations.
3. Right to Rescission
If the contract is voidable or entered under any undue influence, coercion, mistake, fraud or misinterpretation then the debtor has the right to seek the rescission of the contract. It nullifies the contract and restores the parties to its original position before the commencement of the contract.
4. Right to Setoff
The right to setoff is the right which a debtor holds to reduce the amount which the debtor owes to a creditor by offsetting against it by the amount the which the creditor owes to the debtor. In simple terms, if the creditor owes some money to the debtor under any separate transaction or account the debtor can offset the amount, they owe against the amount owed to them. This can be used as a defence of non-payment by the debtor.
5. Right to Dispute Resolution
If a dispute arises between the creditor and debtor, the debtor has the right to seek resolution through mediation, litigation or arbitration. There are various avenues in Indian law to seek conflict resolution in contractual relationship which can be explored by the debtor.
6. Right to Fair Debt Collection Practices
In cases where debt collection is involved, debtors have rights protected by law such as the Reserve Bank of India (RBI) guidelines and other relevant and compatible regulations which prohibit exploitation, abusive or unfair means of debt collection and make sure that the debtors are treated fairly and do not undergo any sort of exploitative treatment by the creditors.
DUTIES OF PRINCIPLE DEBTOR
- Duty to Perform
In a contract both the parties have some obligation/duty to perform. It is the primary duty of the debtor to fulfil his obligations as agreed upon in the contract. These obligations may be of any nature as agreed upon. Failure to perform the asserted obligations constitutes breach of contract which may lead the debtor to face legal consequences.
2. Duty to Comply with Contractual Terms
One of the most primary obligations of the debtor is to comply with what he has agreed upon in the terms of the contract. Debtors must strictly adhere to all the terms and conditions specified in the contract and failure to do so may constitute a breach of the contract, entitling the creditor to get compensation or damages.
3. Duty of Good Faith
Debtors are bound by a duty of fair dealing and good faith while entering and performing a contractual relationship. It is required by them to act in a fair, reasonable and honest way in all contractual matters and they should not engage in any sort of conduct which breaches or frustrates the contract and undermines the expectations of the creditor and hinders the completion of the contract.
4. Duty to Mitigate Damages
If a contract is breached by the end of the debtor or the debtor is not able to fulfil his obligations, the debtor is under the legal obligation to mitigate the damages. The debtor has to take reasonable measures to mitigate the damages or reduce the loss faced by the creditor by the breach.
5. Duty to notify of Anticipatory Breach
If the debtor can anticipate that he may not be able to perform all the contractual obligations within the stipulated time period as agreed upon in the contract then the debtor is under an obligation under the contract law to inform the creditor promptly as soon as possible. This refers to anticipatory breach and the creditor can then after seek legal remedies as well.
Thus we can easily understand that there is a delicate relationship between the rights and duties of the debtor which go in tandem with each other. Both of them need to be practiced justly and fairly for an effective contractual relationship.
CREDITOR
A creditor is a party that has lend funds to the other party or the debtor. Creditor is the one which creates the debt. In other words, the party to whom the debt is owed is the creditor. Under the contract law, the creditor is known as the ‘promisee’ and is the party against whom the other party knows as the promiser or the debtor owes a debt. The creditor is typically the beneficiary from the contract and is the one who gets the monetary or goods as gains as agreed upon in the contract. Understanding the role, rights and duties of a creditor is fundamental to develop a clear understanding of the contract law. It plays a very crucial role in the understanding of implementation of contracts.
RIGHTS OF PRINCIPLE CREDITOR
- Right to Performance
One of the primary rights of a creditor is the expectation that the debtor or the promiser will fulfil his contractual duties and obligations. In other words it ensures that the creditor can rely on contractual promises made by the debtor in the contract.
2. Right to Specific Performance
The creditors have a right to seek specific performance in cases where the monetary compensation is inadequate. This legal remedy compels the debtor or the promiser to fulfil their contractual relationship as both the parties have agreed upon so that the creditor suffers no harm due to the conduct of the debtor.
3. Right to Security or Collateral
Creditors have the right to ask for some sort of advance payment or security for the performance of debtor’s obligation especially in high value or high-risk contracts to protect himself from any big loss by non fulfilment of the contract by the debtor. This can be taken in the form of deposits, bills of exchange, collaterals, guarantees or letters of credit.
4. Right to Damages
When the contract is breached by the debtor due to any circumstances, the creditor has the authority to claim for damages caused by the actions of the debtor. The act by the debtor causes financial harm to the creditor, thus he is entitled for damages and the damages may aim to restore the creditor to its original position
5. Right to ask for a Surety
A surety is a person who is brought in the contract just to give the guarantee that the debtor will fulfil the contractual obligation and if under any circumstances the debtor is not able to pay the debt the creditor can ask the surety to pay back the debt. Creditors have a right to ask the debtors to have a surety in the contract if the contract is of high risk or if the creditor has any speculation of any risk.
DUTIES OF PRINCIPLE CREDITOR
1. Duty to Accept Performance
The creditor has a duty to accept the performance of the debtor if it is in alignment with the terms and conditions agreed upon in the contract. Refusing to accept the performance done by the debtor without any valid reason is not acceptable and can have legal consequences for the creditor.
2. Duty of Charging Fair Interests only
Creditors have a right to charge interest on debts and charge certain interest if the debtor does not repay the debt upon the fixed period of time. The creditor must charge a fair rate of interest only such which does not exploit the debtor in any form and is reasonable.
3. Duty of Good Faith
Just like debtors, creditors are also bound to act fairly in a contract and do not conduct themselves in such a way which hinders the contractual relationship. They should refrain from any practices which frustrate the contract and do any such this which creates a problem for the debtor. They must act fairly and justly.
4. Duty to perform Anticipatory Breach
It is the duty of the creditor to notify the debtor promptly if any actions of the creditor may lead to breach of the contract. This will ensure that the contract does not frustrates abruptly and minimizes loss for both the parties.
5. Duty to Perform (Conditional Contracts)
In contracts where there is a necessary for performance from the end of creditor for the execution of the contract, the creditor must perform the obligation before expecting the debtor to perform his obligations.
PROVISION OF DEBTOR AND CREDITOR IN THE INDIAN CONTRACT ACT, 1872
The Indian Contract Act does not explicitly mention the words ‘debtors’ and ‘creditors’ but articles provide the coverage of concept in various other forms and terms. Section 2(g) : Defines “promisor” as a person who makes the proposal, and “promisee” as a person to whom the proposal is made. These definitions establish the roles of the parties involved in a contract and can be easily inferred as debtor and creditor. Section 38: Covers the effect of acceptance of an offer of a promise to refrain from doing something. Section 39 : Addresses cases when the promisor does not perform his obligation, and the promisee accepts such non-performance. Section 56 : Discusses the doctrine of frustration of contracts, which may relieve the parties from their contractual obligations under certain mentioned circumstances. Section 73 : Provides for the measure of damages in case of a breach of contract by a promisor. It outlines the rights of the promisee to claim damages. Section 74 : Discusses the provision for compensation for breach of a contract where a sum is named in the contract as the amount to be paid in case of breach. Thus we can easily conclude that the concept of debtor and creditor do have legal validity in contractual law.
CONCLUSION
After dealing extensively with the rights and duties of the debtors and creditors we can easily conclude that they are one of the primary aspects of contract law and understanding of these rights and duties help us to create a better understanding how contracts function. It is necessary for the debtor as well as the creditor to practice their rights and duties justly for the contractual relationship to function smoothly. Balancing the rights and duties justly maintains the integrity of the contractual relationship.
REFERENCES
- Pollock, Frederick. (2017). Pollack and Mulla- The Indian Contract Act and Specific Relief Act. LexisNexis.
- Corbin, A.L., 1923. Rights and duties. Yale LJ, 33, p.501.
- Singh, Avatar. (2018). Law of Contract. Eastern Book Company
- The Indian Contract Act, 1872
- https://indiankanoon.org/ last visited on 17.8.23
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