Discharge of Contract
Discharge of contract means termination of the contractual relationship between the parties, i.e. when the rights and obligations created by itcome to an end.
Modes of Discharge of Contract : A contract may come to an end in following ways:
- Agreement or consent.
- Impossibility of Performance.
- Lapse of time.
- Operation of Law.
- Breach of contract.
Discharge by Performance has already been explained in previous chapter. Now we discuss about discharge of contacts by other ways, i.e Other than by Performance.
Discharge by Contract between Parties
Contractual obligation may be discharged between parties as expressly agreed by the parties or by their implied conduct.
The contract is discharged as per terms of the contract agreed at the time of formation of contract.
Ex. A sells a car to B on approval, returnable within seven days if not accepted. B may return the car within seven days. Consent to return the car (discharge of contract) is given to B at the time of the formation of the contract. If B returns the Car within 7 days, the contract is discharged.
Ex. A sells his old car to B. B, after driving for a day, returns the car as it does not meet to his expectation. B, without any protest, takes back the Car. B’s acceptance of the return of Car by A, discharges A, by his implied conduct.
A contract may be discharged by agreement between the Parties in various ways:
Discharge of Contract by Novation
The Term Novation means replacement by another. Novation means an existing Contract is substituted by another new contract between the same parties, or a contract between two parties is rescinded in consideration of a new contract being entered into on the same terms, between one of the parties and a third party. The new Contract extinguishes the rights & duties of the Parties under old contract (s.62)
Ex. X agrees to sell an iPhone 5 to Y. Y agrees to sell an iPhone 5 to Z. Now, X, Y & Z, may agree that X sells the iPhone to Z. X, Y & Z now agree that the contract between X & Y and the contract between Y & Z, be replaced by a contract to sell iPhone 5 by X to Z. The old contact between X & Y comes to an end. The old contact between Y & Z comes to an end. A new contract between X & Z emerges.
Rules of Novation of Contract
- New Contract : It occurs when a new contract is substituted for an existing one between the same parties, or a contract between two parties is rescinded in consideration of a new contract being entered into on the same terms between one of the parties and a third party.
- Before the expiry of Performance : Novation should take place before the expiry of the time of the performance of the original contract, otherwise it amounts to breach of the contract. If it is subsequently substituted and the new contract is not enforced, the parties can fall back on the original contract.
Ex. An existing mortgage was discharged by substitution of a new agreement of mortgage. The new agreement was not enforceable for want of registration. Held, the parties could fall back upon the original mortgage.
- Old contract discharged : The old contract is totally discharged and the law cannot be enforced on the terms of old contract.
Discharge of Contract by Rescission
Rescission means abrogation of a contract, effective from its inception, thereby restoring the parties to the positions they would have occupied if no contract had ever been formed (i.e back to the position in which they were, before the contract was formed).
In case of contract entered into without Free consent of any party (e.g Coercion, Undue influence, Fraud or Misrepresentation, Bilateral Mistake etc), the aggrieved may rescind the Contract (s.62)
Rescission amounts to cancellation of a contract from the beginning, as if the contract never existed. So a rescission requires that all parties be brought back to the position they were in before entering into the contract. This means any benefit received as part of the contract, must be returned.
Legal effect of Rescission of Contract
- Voidable contract : In a voidable contract, where consent is not free, the other party may rescind the contract without prejudice to his right for the breach of contract against the other party.
Ex. A enters into a contract with B to deliver certain goods to B by 15th, for which B shall pay on 1st of the next month. A does not supply the goods. B may rescind the contract and need not pay the price.
- Total Rescission : In Total Rescission the entire contract is discharged (e.g when one party fails in the performance of his obligation).
- Partial Rescission : In Partial Rescission, the original contract is modified by rescinding some of the terms of contract or substituting new terms, or adding new terms without rescinding any of the terms of the original contract.
Discharge of Contract by Alteration
Alteration means change in one or more terms of the contract with mutual consent of the parties. A material alteration is one which varies the rights, liabilities or lgal postionof the party, due to the alteration. Like Novation, a material alteration discharges the original contract and creates a new contract between the same parties (s.62).
Ex. X contracts on 1st Jan, with Y to supply goods worth Rs 10000, and Y will Accept a Bill of Exchange payable after 2 months, from delivery of Goods. Later on, on 15th Jan, X & Y makes changes in the Contract that in place of Bill of Exchange, Y will give X, a post dated cheque for 2 months, on the date of delivery. On such alteration, the old original contract (of 1st Jan) gets discharged and a new contract emerges on the date of alteration (15th Jan) on the terms of altered contract.
Discharge of Contract by Remission
Remission means acceptance on part of the promisee through a lesser obligation of the contract (s.63).
Modes of Remission : The party demanding performance of the contract may:
- dispense with it, either wholly or in part,
- extend the time of performance,
- Accept any other satisfaction instead of performance.
Ex. A creditor accepts Rs.3,000 in full satisfaction of a debt of Rs.5,000. This is called as Remission.
Ex. X owes Rs 5000 to Y. Y promises a rebate of Rs 500 in repayment of loan, if X pays up the loan within 30 days. X pays Rs 4500 to Y within 30 days. Y cannot ask for further balance of Rs 500.
Ex. X owed Rs 2000 from Y, payable within 3 months. X extends the time of payment by another 3 months
Ex. A loan of Rs 1 lac is satisfied by accepting the old car of the debtor
Discharge of Contract by Waiver
Waiver means mutual abandonment of the contract by the Parties. Both Parties agree that they are no more bound by the contract (s. 63).
Ex. X owes a Rs 2000 to Y. Y waives off the Debt. Now Y cannot claim the money from X.
Discharge of Contract by Merger
When inferior right merges into a superior right of the Party.
Ex. A Party holding lease / tenancy rights buys the property.
Ex. An employee holding temporary employment contract, takes up permanent employment contract.
Novation of Contract and Alteration of Contract
|New contract : Novation means substitution of a new contract in place of the original one.||Original contract : Alteration means a change in one or more of the terms of the original contract by mutual consent of the Parties.|
|May be different Parties : It may involve different parties.||Same Parties : The parties remain same.|
|Terms may not be changed : The terms and condition of the original contract may not be changed.||Terms changed : It involves variation in terms and conditions of the original contract.|
Rescission of Contract and Alteration of Contract
|Cancellation of contract : Rescission amounts to cancellation of a contract.||Change in terms of contract : Alteration means a change in one or more of the terms of a contract by mutual consent of the parties.|
|Mutual consent not essential: It may be made without mutual consent.||2. Mutual consent only : It is done through mutual consent.|
|Implied rescission : Implied rescission takes place when there is a non-performance of a contract by both the parties for a long period without any complaint.||No Implied rescission : Alteration of contract cannot be implied.|
|Legal obligations come to an end : Legal obligations between the parties come to an end.||Legal obligations continue : Legal obligations between the parties continue.|
Discharge by Impossibility of Performance of Contract
A contract is discharged when performance of the contract becomes impossible (s.56)
Maxims of Rule of Impossibility
- The law does not recognize what is impossible, it is to be decided as matter of fact
- What is impossible does not create an obligation.
Types of Impossibility
- Impossible ab Initio : The agreement was impossible to perform at the time of making contract. Such ageement becomes void ab initio (called Void Agreement) and not enforceable. However, there is subtle difference reagrding compensation to loss occurred to any party, if any.
- Both the parties ignorant : Where at the time of making the agreement, both the parties are ignorant of the impossibility, the agreement is void on the ground of mutual mistake.
Ex. A agrees with B to put life into the dead wife of B, the agreement is void.
- Promisor in Knowledge : If, however, the promisor alone knew of the impossibility at the time of making the agreement, he shall have to compensate the promisee for damages for the non-performance of the promise.
A promises to supply B 10 MT of rice which is to arrive son in a vessel. At the time of making agreement, A knew that the ship had already sunk. The contract to supply rice is void but A must pay damages due to non fulfilment of the agreement.
- Supervening Impossibility : The contract valid at the time of formaton but became impossible to perform later on due to certain events (this is also sometimes referred as ‘Subsequent Impossibility’, ‘Forced Contractual Impossibility’, ‘Doctrine of Frustration’)
Supervening Impossibility of Performance of Contract
Where the impossibility arises subsequent to the formation of a contract (the act becomes impossible or unlawful to perform), it is called as supervening impossibility and the contract becomes void (sec. 56).
Causes of Supervening Impossibility
- Beyond Control : When the impossibility is caused by the circumstances beyond the control of the parties, the parties are discharged from further performance of the obligation under the contract.
- Deliberate : When the impossibility is created by any Party, the contract must be performed
Discharge of Contract by Supervening Impossibility
Instance of Discharge of Contract by Supervening Impossibility
- Subject matter destroyed : When the subject matter is destroyed accidentally without any fault ofany party to the contract (e.g., loss of property due to accidental fire or earthquake), , the contract is discharged.
Ex. X let a bus to Y, for a series of picnic tour. Before the bus could reach the spot where it will pick up the candidates of the first trip, it met with an accident and was destroyed. Held, the contract was discharged.
Ex. A contracts to sell a Horse to B. Before the horse was to be delivered, the Horse died. As the subject matter of the contract (the Horse) destroyed (died), the contract discharged,
Ex. On 1st Jan, A contracts to sell a Horse to B to be delivered on 15th Jan. B would make payment on 31st Jan. The horse was delivered on 15th, but on 20th B dies before he could make payment. In this case, B’ legal representative would be liable for payment to A, as the subject matter (the Horse) was not destroyed before performance of contract.
- Change in state of things : If there is any change in the state of things which is the basis of contract or the state of things which ought to have occurred but does not occur, the contract is discharged.
Ex. H hired a room from K, telling K to see King’s procession. The procession was subsequently cancelled. The contract is discharged.
- Personal incapacity : Personal incapacity (like lunacy, insanity, or incapacity to perform) or death ofa party to the contract.
Ex. A pop singer took some advance from a club for a musical show on a certain day. Before the day of the show she became seriously ill and hospitalisd. Held the club cannot sue the singer for such breach of contract.
- Change in law : When the performance ofcontract becomes unlawful due to the change in the law.
Ex. P delivered 10 barrels of liquor to R, before the delivery could be taken by R; the police seized the liquor under custody on demand. Held, the contract was discharged.
Ex. A agrees to sell some chemicals. Subsequently government bans trading of the chemical. Contract discharged.
- Alien : When the Party to the contract becomes alien enemy (a war is declared with the country to which the Party to the contract belongs).
Ex. K, consigned goods to a foreign country where his agent will receive the goods. Afterwards K’s Government declared war against the country in which his agent is to take delivery of the goods. Held, the contract becomes void when war is declared.
- Contract Void: As the contract is discharged by supervening impossibility, the contract becomes void. (s.46, para 2)
- Restitution of benefits : Any person receiving benefit out of such contract must restore the benefit to the respective person. (s. 65)
Ex . A rents a hall on from B on 1st, for a function to be held on 31st and pays an advance of Rs 5000 to B. The hall is destroyed on 15th, before the function is held. The contract is discharged and B must return the advance money back to A.
- Compensation : When the promisor knew that performance is impossible or unlawful, he shall compensate the promisee for any loss suffered by the promisee due to non-performance. (s. 56, para 3)
Exceptions to Supervening Impossibility of Performance of Contract
In some cases, contract does not become void due to supervening impossibility and remains valid.
- Partial Impossibility: When the contract is made for several purposes, failure of one of them does not terminate the entire contract.
Ex. A agreed to let out a boat to H to – (i) view the naval review at the King’s coronation and (ii) to cruise round the fleet. Owing to King’s illness, the naval review was cancelled, but the fleet assembled and the boat could have been used to cruise round fleet. Held, contract was not discharged.
- Difficulty of Performance: Contract is not discharged merely because its performance has become more difficult, more expensive or less profitable than estimated at the time of entering into contract.
Ex. On 1st May, X agreed to supply 1000kg of onion @ 20/kg to Y on 15th July. In July, the price of Inion skyrocketed to Rs 60 /kg. X denied to supply. Held, X must supply the Onion to Y or make good of the loss to Y.
- Default of Third Party: The Promisor is not exonerated from liability if a third person, on whose work the Promisor relied, fails to perform.
Ex. On 1st, X agreed to supply some goods to Y on 20th. X contracted with Z to supply the goods to X on 15th. Z did not supply to X, so X could not supply to Y. X must supply the goods to Y or make good the loss that Y may suffer dur to non supply.
- Strikes, Lockouts, etc.: Events like Strike, Lock out, Civil Disturbances, etc. do not terminate contracts, unless the contract term provides so.
Ex. X contacted to supply goods to Y. A strike broke out in the manufacturer’s company. So, X could not get the goods from the manufacturer. X must supply to Y (by arranging the goods from somewhere else) or make good the loss suffered by Y
Ex. X agreed to supply goods to Y. The contract specified that X wl not be responsible for non supply to due to Strike in the factory, Riot or other reasons beyond his control. Later on, a strike broke out in X’s factory and X failed to supply the goods to Y. Held, X may cancel the contract
- Commercial Impossibility: Commercial impossibility like availability of raw materials at higher prices, higher rate of wages, devaluation on currency etc. do not discharge the parties from their obligation under the contract.
Ex. X agreed to supply Potato in Kolkata, which are grown in Punjub. Due to fall in potato crop in Punjub, to check potato price in Punjub, Punjub government regulated movement of potato outside the State. Consequently, price of Punjub potato rose up considerably. X declined to supply. X must supply the Potato to Y or must make good the loss to Y.
- Self-induced impossibility: If the promisor deliberately creates a situation that performance does not become possible, he will not be discharged from his liability.
Ex. X agreed to manufacture & supply some materials to Y, after 3 months. Subsequently, the price of raw materials to manufacture the goods increased considerably. To avoid supply, X intentionally removed a component from the machine. The machine stopped running. X cannot take plea of supervening impossibility for non-supply. X must supply the materials to Y or make good the loss to Y.
Discharge of Contract by Lapse of Time
- Law of Limitation : If a contract is not performed and if no action is taken by the Promisee within the period of limitation, the contract is terminated and he is deprived ofhis remedy of law.
Ex. A debt becomes time barred after 3 years if no action is taken to recover the amount from debtor.
- Time bound contract : In case of time sensitive contract (where time is essence), the contract is discharged on lapse of time.
Ex. X offered to supply Y, upto 400 Tons of potato within Jan 15, against cash payment. Y did not buy any potato from X within Jan 15. Hence the contract lapsed after Jan 15.
Discharge of Contract by Operation of Law
In some situation or happening of events, the contract automatically stands discharged by operation of Law
Instances of Discharge of Contract by Operation of Law
- : In case of death of a party, the contracts involving personal skill, knowledge or ability of the deceased party are discharged automatically. In other contracts, the rights and liabilities of the deceased party pass on to its legal representatives.
Ex. X agreed to make a painting for Y Dec 2015. X died in Nov 2105. The contract was discharged on death of X.
Ex. X agreed to sell his car to Y at Rs 1 Lac. X died. X’s legal representative must sell the Car to Y at Rs 1 Lac
- Insolvency: The insolvent is discharged from liability on all contracts entered into upto the date of insolvency.
Ex. X makes a contract to supply materials to Y within Dec 15. X became insolvent in Nov. The contract was discharged.
- : When a party makes any material alteration in the contract without the consent of the other party, the other party is discharged from liability on such contract and can avoid the contract.
Ex. X agreed to supply Y, materials worth Rs 10,000 on 1st Jan and Accept a Bill of Exchange payable after 2 months. Y changed the contract to issue a post dated cheque for 2 months, instead of accepting a Bill of Exchange, without consent of X. The contract is discharged by X for supply of materials.
- : It means rights and liabilities of a particular contract vesting in the same person (e.g., negotiation back in case of a negotiable instrument). In such case, the contract is discharged.
Ex. X took a house owned by B, on lease for 15 years. Before expiry of lease, X bought the house from B. The agreement of Lease was discharged on purchase of House.
Discharge by Breach of Contract
Breach of contract means non fulfillment ofobligation of the contract (s.39)
Type of Breach of Contract
- Actual Breach ofContract
- Anticipatory Breach of Contract.
Actual Breach of Contract
Actual Breach of contract occurs when one party fails to perform his obligation, or does not perform according to essential terms of the contract.
Incidence of Actual Breach of Contract
- When Performance is due: It occurs when one party fails or refuses to perform the contract when the performance is due.
Ex. A undertakes to supply certain goods to B on 1st January, but does not deliver the goods on that date.
- During Performance: Repudiation of Contract : It occurs when one party fails or refuses to perform his obligation during performance of the contract. It amounts to Repudiation of the contract.
Types of Repudiation of the contract
- Express Repudiation of Actual Breach of Contract: It occurs when some performance has been occurred and one party refuses to continue to perform his obligation. In such case, the other party may treat the contract no longer binding and sue for breach of contract.
Ex. A undertakes to supply 1000 quintals of Wheat to B on 1st January. But after having delivered only 600 tons, B asks A not to deliver any more. This is an express repudiation of Contract. A now can sue B for breach of contract.
- Implied Repudiation of Actual Breach of Contract: It occurs when some performance has been occurred and the act of one party renders performance of the contract impossible, the other party is discharged from performance of the contract.
Ex. X agreed to let his truck on hire to Y for 3 months. But after 1 month, X sold the truck to Z. This is an implied repudiation by X of the contract to let the truck on hire to Y.
Legal Effects of Actual Breach of Contract: In actual breach of contract, the party not in breach may treat the contract no longer binding and can sue for breach of contract.
Anticipatory Breach of Contract
Anticipatory Breach of Contract means refusal to perform obligation to the Contract by one Party, before the performance is due.
Ex. A undertakes to supply certain goods to B on 1st January. But before that date, he informs B that he is not going to supply the goods. This is anticipatory breach of contract.
Types of Anticipatory Breach of Contract
- Express Repudiation of Anticipatory Breach of Contract : The Party expresses in advance his intention of not performing the contract
Ex. A undertakes to supply certain goods to B on 1st February. But on 15th January, he tells that he will not deliver the goods. This is express repudiation of anticipatory breach of contract.
- Implied Repudiation of Anticipatory Breach of Contract : The Party does an act so that the performance becomes impossible
Ex. A promised to sell his house to B after 1 year. But within 3 months, A sold the house to C. This is implied repudiation of anticipatory breach of contract.
Legal Implication of Anticipatory Breach of Contract
Treat Contract Discharged : The promisee can treat the contract as discharged so that he is absolved of the performance of his part of the promise. Anticipatory breach does not discharge the contract, unless the aggrieved party so chooses. In this case, the aggrieved party can claim damages for the loss (actual loss suffered).
Ex. A engaged B as employee on 15th April and the employment was to commence on 1st June. On 15th May A wrote to B telling him that his services would no longer be required. B immediately brought an action for damages (immediately on receiving the letter), although the time for performance had not yet arrived. Held, he was entitled to do so.
Refusal of Repudiation of Contract
Promisee refuses to Accept the repudiation of the contract by the promisor
- Promisee treats the contract as alive: The promisor may perform his promise when the time for its performance comes and the promisee will be bound to Accept the performance.
Ex. X promised to supply 10 Tons of Rice to Y to be delivered in Dec. In Nov, X wrote to Y that X would not supply the rice to Y. Y did not take action against X and waited till Dec. Now if X supplies the Rice in Dec, Y is bound to Accept the delivery of Rice by X and pay for it to Y as per contract.
While the contract is alive, if an event (say, a supervening impossibility) happens which discharges the contract legally, the promisee loses his right to sue for damage.
Ex. B chartered A’s ship and agreed to load it with a cargo at a specified port within 45 days. When the ship reached that port, B was unable to supply the cargo. A did not Accept the refusal and continued to demand the cargo. Before the expiry of 45 days, a war broke out rendering the performance impossible. Held, the contract was discharged and A could not sue for damages.
- Legal action : The promisee can immediately take a legal action for breach of contract or wait till the time the act was to be done.
Ex. On 1st July, A promises to supply 100 Tons of wheat @ 2000 / Ton to B by 15th Aug. On 1st Aug, A in forms B denying to supply the goods by 15th Aug. On 1st Aug, the market price of Wheat was 2100 / Ton and on 15th Aug, the market price of Wheat was 2200 /Ton
- Does not wait till date of performance : Promisee may treat the anticipatory breach as actual breach and sues the promisor. B may treat the anticipatory breach of A as actual breach and on 1st Aug, B may claim A to pay damages for the loss (e.g. difference of market price, i& contract price on the date of breach, i.e @ Rs100 per Ton for 100 Tons), without waiting for the date of performance to come (i.e. waiting till 1th Aug.
- Promisee waits till the date of Performance : Promisee waives his right of repudiation and waits till the date of performance. If B waits till the date of performance (i.e till 15th Aug) and if A does not perform, damages will be paid as per loss between the price prevailing on date of breach of contract and the contracted price (i.e @ Rs 200 per MT for 100 Tons).
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