DISCHARGE OF CONTRACT

DEFINITION Discharge Termination of contractual relationship between the parties Contract is discharged when it ceases to operate, i.e., when the rights & obligations under the contract ends Contract can be discharged in any of the following modes 1) By performance 2) By agreement or consent 3) By impossibility of performance 4) By lapse of time 5) By operation of law 6) By breach of contract DISCHARGE BY PERFORMANCE Performance Act of doing that which is required in the contract Takes place when the parties fulfill their obligations under the contract, in the manner stipulated & within the given time. Here, parties are discharged & contract ends altogether If only one party performs his promise, he alone is discharged & he also gets the right to sue the other person for breach Performance of contract is usual mode of discharge. Performance may be of 2 kinds
I.

Actual performance When both parties perform the contract, it is discharged. Performance to be complete, precise & according to the terms of the agreement.

II.

Attempted performance or tender Tender is an offer to perform obligations. If the offer made by Promisor is refused by promisee, tender is equivalent to actual performance, except in cases of money. In a valid tender, contract is deemed to be performed & tenderer is discharged from

responsibility of non-performance, without affecting his rights under the contract DISCHARGE BY AGREEMENT OR CONSENT
Eodem Modo Quo Quid Constituitur, Eodem Modo Destruitur A thing may be

destroyed in the same manner in which it is constituted Contractual obligation can be discharged by express or implied agreement, similar to how contracts are created by consent Types of discharge by mutual agreement & consent are
A. Novation [Sec.62] Substitution of old contract for new B. Rescission [Sec.62] Cancellation of whole or part of the contract C. Alteration [Sec.62] Change in the terms of the contract D. Remission [Sec.63] Acceptance of a lesser fulfillment E. Waiver Abandonment of contract F. Merger Rights are merged

NOVATION [Sec.62] Novation happens when o A new contract is substituted for an existing one between the same parties (OR)
o

Contract between 2 parties is rescinded in consideration of a new

contract entered into on same terms, between one of the parties & a 3rd party Consideration for the new contract is the discharge of the old contract It is important that mutual or tripartite consent is present between the parties Novation should take place before the expiry of the original contracts time of performance If it does not, there would be breach of contract If new contract cannot be enforced, parties can seek enforcement of old contracts

E.g. A owes money to B under a contract. It is agreed between A, B & C that B shall accept C as debtor, instead of A. Old debt of A to B ends & new debt from C to B is agreed upon RESCISSION [SEC.62] Rescission takes place when all or some of the terms of the contract are cancelled May occur by Mutual consent of parties (OR) If one party fails in performance of his obligation, the other party may rescind the contract without affecting his right to claim compensation for breach of contract Rescission may be partial or total Partial rescission involves either rescinding some terms of the contract or substituting new terms for the rescinded ones or adding new terms without rescinding any terms of original contract Total rescission is the discharge of the entire contract Sec.66 Rescission of a voidable contract may be communicated or revoked in the same manner as communication or revocation of a proposal Sec.64 Restitution of benefit upon rescinding the contract E.g. A promises to supply certain goods to B 6 months from that date. By the end of 6 months, the goods are out of fashion. A & B may rescind the contract ALTERATION [SEC.62] Alteration may happen when one or more of the terms of the contract are altered by mutual consent of parties Here, old contract is considered discharged E.g. A enters into contract with B for supply of 100 bales of cotton at his godown by first of next month. A & B can alter the terms by mutual consent

REMISSION [SEC.63]

Remission Acceptance of a lesser fulfillment of the terms of the contract (Acceptance of a lesser sum than that contracted for, so as to discharge the whole debt) It is not necessary that there should be some consideration for remission of part of the debt Promisee can dispense with or remit the performance of the promise by the promisor or extend time of performance or accept any other satisfaction instead of performance E.g. A owes B Rs.5000. A pays Rs.2000 in satisfaction of the whole debt & B accepts the same. The whole debt is discharged

WAIVER Waiver Takes place when parties to the contract agree that they shall not be bound by the contractual terms any longer Amounts to mutual abandonment of rights by both parties Consideration is not necessary for waiver

MERGER Merger Takes place when an inferior right accruing to a party under the contract merges into a superior right accruing to the same party under the same or a different contract E.g. P holds a property for lease. He later buys the property. His rights as lessee merge with his rights as owner of the property DISCHARGE BY LAPSE OF TIME o Limitation Act, 1963 lays down that the contract should be performed within a specified period called the period of limitation

o If the contract is not performed & if no action is taken by the promisee to ensure performance, the promisee is deprived of his legal remedy, i.e., the contract is terminated E.g. Price of goods sold without any stipulation as to credit, should be paid within 3 years from the date of delivery. If goods are sold on credit to be paid after the expiry of a fixed period of credit, then the price should be paid within 3 years from the expiry of the fixed period. If the price is not paid within the given time & if the creditor does not file a suit for recovery against the buyer within the 3 year period, the debt is time barred & unrecoverable DISCHARGE BY OPERATION OF LAW A contract may be discharged independent of the wishes of the parties by operation of law Discharge by operation of law includes a. By death If the contract involves personal skill or ability, contract is terminated by death of the promisor. In other types of contracts, liability is passed on to legal representatives b. By merger Explained under discharge by mutual consent c. By insolvency When a person is adjudged insolvent, he is discharged from all liabilities incurred prior in time d. By unauthorized material (one which changes the legal identity or character) alteration of terms of written agreement If such alteration is made by any party without the others consent, other party can avoid the contract. Any alteration which is not material does not affect the validity of the contract e. By rights and liabilities becoming vested in the same person In this case, the other parties are discharged so as to avoid circuity of action. E.g. bill of exchange in the hands of the acceptor DISCHARGE BY BREACH OF CONTRACT Breach Breaking of obligation imposed by contract

Occurs when a party to the contract does not fulfill his lawful obligation without proper excuse or makes it impossible to perform hi obligation by his own act It confers a right to action for damages on the injured party Breach is of 2 types
1.

Actual Breach This takes place in the following instances: obligation under the contract. If time is not of the essence & defaulting party expresses willingness to perform, the other party may accept the performance subject to being compensated E.g. A agrees to deliver 5 bags of wheat to B on 1st Sep. He does not deliver the same. Here, the contract is breached

o At the time when performance is due, one party fails or refuses to perform his

2.

During the performance of the contract, when one party fails or refuses to perform his obligation under the contract. Refusal to perform may be by
i.

Express repudiation (By word or act) If there has been part performance of contract & the other party by word or deed refuses to perform the remaining part of the contract, the first party can treat this to be a breach & sue for damages Case: Cort V.Ambergate C contracted with railway co. to supply 3000 tons of railway chairs at a certain price, to be delivered in installments. After the supply of about 50%, the railway co. asked C to stop delivery. Held, C could sue for breach of contract

ii.

Implied repudiation (Impossibility created by an act of party) If a party during the course of performance commits such an act so as to make the contract impossible to perform, then the other party is not obliged to perform his obligations under the contract & this is treated as a valid breach. Case: ONeil V. Armstrong P, a British subject, was engaged as a fireman by the Captain of a Warship owned by the Japanese Government. Later, Japan went to war with China & P was informed that performance of contract would penalize him under

the Foreign Enlistment Act. He then left the ship. Held, he was entitled to recover the ages due to him ANTICIPATORY BREACH OF CONTRACT It occurs when a party to an executory contract declares his intention of not performing the contract before the performance is due This can be done by a. Expressly renouncing his obligation under the contract E.g. A undertakes to supply certain goods to B on 1st Jan. Before this date, he informs B that he is not going to supply the goods. b. By doing any act so that performance becomes impossible Case: Lovelock V. Franklyn A promised to assign to B all his interest in a lease for a sum of 140, within 7 years. Before the end of 7 years, he assigned the interest to another person. Held, this was anticipatory breach by implied repudiation Rights of promisee in case of breach are: i. ii. iii. He can treat the contract to be discharged & is absolved of performance He can immediately take legal action or wait till the supposes time of the act Anticipatory breach does not discharge the contract until the promisee chooses to do so If the promisee refuses to accept repudiation by the promisor & treats the contract as alive, the consequences are: Promisor may perform his promise when the time for its performance comes & promisee is bound to accept the same If any event happens during the life of the contract, which makes it legally impossible to perform the contract, promisor may take advantage & discharge the contract. Here, promisee loses his right to sue Case: Avery V. Bowden

B chartered As ship & agreed to load cargo at Odessa within 45 days. When ship reached Odessa, B was unable to load the cargo. A did not accept the refusal & continued to demand cargo. Before the expiry of 45 days, Crimean War broke out rendering performance impossible. Held, contract is discharged & A cannot sue for damages If the contract is ended by the promisee at once, he can sue the promisor for damages & the amount is measured as the difference in price prevailing on date of breach & contract price If the contract is alive till date of performance, damages will be the difference prevailing on the date of performance & the contract date DISCHARGE BY IMPOSSIBILITY OF PERFORMANCE

If an agreement consists of an undertaking to perform impossibility, it is void ab initio.

This rule is based on the following maxims

o

Lexicon cogit ad impossibilia Law does not recognize that which is impossible Impossibilium nulla obligata est What is impossible does not create an obligation

Sec.56 Impossibility of performance can be of 2 types

1) Impossibility existing at the time of agreement An agreement impossible to do

in itself is void. This is called pre-contractual or initial impossibility. Fact of impossibility may be known to parties (Absolute impossibility, making agreement void ab initio) OR unknown to parties (at the time of contract, both parties are unaware as to destruction of subject matter, etc) 2) Impossibility arising subsequent to formation of contract This is called postcontractual or supervening impossibility. The contract becomes void when the act becomes impossible or unlawful. Impossibility beyond the control of the parties discharges the parties from further performance of obligations under the contract

DISCHARGE BY SUPERVENING IMPOSSIBILITY o This type of discharge happens in the following instances
1.

Destruction of subject matter of contract When subject matter is destroyed without any fault of the parties to the contract, contract is discharged

Case: Howell V. Coupland A contracted to sell a specified quantity of potatoes grown on his farms. The crop failed largely. Held, contract is discharged

2.

Non-existence or non-occurrence of a particular state of things A contract is entered into between 2 parties on the basis of the continued existence of a state of things. If there is a change of state of things or that which should have occurred did not occur, then the contract is discharged. This failure of the object of a contract is called as Frustration of the contract E.g. A & B contract to marry each other. Before the marriage A goes mad. The contract is void

3.

Death or incapacity for personal service When there is death or incapacity of an individual who has entered into a contract of personal skill or service, then the contract is discharged Case: Robinson V. Davison An artist undertook to perform at a concert for a certain price. She becomes terminally ill before she could do so. Held, she was discharged due to illness

4.

Change of law or stepping in for a person with statutory authority If there is a change of law or passing of some special Ordinance or Act subsequent to contract formation, the performance of contract becomes impossible & it is discharged Case: Shipton Anderson & Co., Re

A sold a specific parcel of wheat in a warehouse to B. Before delivery, the wheat was requisitioned by the Government under statutory power. Held, the contract was discharged
5.

Outbreak of war A contract with an alien enemy at times of war is unlawful & impossible to perform. Contracts which are entered into before the outbreak of war are suspended during war & may be revived after the war E.g. A contracts to take cargo for B at a foreign port. As Govt. declares war against the country in which the port is situated. Contract is void when war is declared

IMPOSSIBILITY OF PERFORMANCE NOT AN EXCUSE Impossibility cannot be provided as an excuse for non-performance In the following situations, impossibility does not discharge a contract
1.

A contract is not discharged by the mere fact that it has become more difficult to perform Case: Blackburn Bobbin Co. V. Allen & Sons A sold certain quantity of Finland timber to B to be supplied between July & September. War broke out in Europe in the month of August & transport was disorganized so that A could not bring any timber from Finland. Held, difficulty in getting the timber did not discharge the contract

2.

A contract is not discharged merely because expectations of higher profits are not realized or price of raw material has increased or there is depreciation of currency

3.

When a contract could not be performed due to default of a 3rd person on whose work the promisor relied, it is not discharged Strikes, lock outs & civil disturbance do not discharge a contract, unless specifically agreed upon by the parties Case: Jacobs V. Credit Lyonnais

4.

A agreed to supply certain goods to B, to be procured from Algeria. Goods could not be procured due to riots & civil disturbances in that country. Held, there was no excuse for non-performance of the contract
5.

When the contract is entered into for several objects, failure of one of the objects does not discharge the contract Case: Herne Bay Steamboat Co. V. Hutton HB agreed to let out a boat to H for viewing the naval review on the coronation of King Edward VII & to sail around the fleet. As the king abdicated, the naval review was abandoned but the fleet was assembled & the boat could be used to sail around the fleet. Held, the contract was not discharged

EFFECT OF SUPERVENING IMPOSSIBILITY When the performance of a contract becomes impossible or unlawful subsequent to formation, contract becomes void (Sec.56, Para 3) Where one person has promised to do something which he knew to be impossible & the promisee was not aware of the same, the promisor must compensate the promisee for the same for any loss sustained (Sec.66, Para 3) Where an agreement is discovered to be void, any person who has received any benefit under the agreement has to return the same (Sec.65) DOCTRINE OF FRUSTRATION In English Law, doctrine of frustration is parallel to supervening impossibility After a contract is made, the common object due to change of circumstances beyond the control of the parties Comes within the purview of Sec.56 as it is a part of the law of discharge by reason of supervening impossibility or illegality Impossibility of performance & Frustration are used as interchangeable expressions

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