DISCHARGE OF CONTRACT
GENERAL PRINCIPLES OF LAW OF CONTRACT
Discharge by performance-Section 37
Performance is the obvious mode of discharge of a contract. Performance means the doing of what is required by the contract. Section 37 deals with
(a) Actual performance,
(b) Excused performance.
Discharge by mutual consent or agreement-Section 62
A contract may be discharged by an agreement of all the parties thereto. The consent may be express or implied. Again an express consent may be given at the time of making the contract or subsequently.
Express consent subsequent to making of contract may be given by
- waiver or
(a) Novation-Section 62: Novation occurs when a new contract is substituted for an existing contract, either between the same parties or between different parties, the consideration being the discharge of the old contract. Novation must take place before the expiry of the time of performance of the original contract. If for any reason the new contract cannot be enforced, the parties can fall back upon old contract.
Example: A owes money to B under a contract. It is agreed between A, B and C that B shall thenceforth accept C as debtor instead of A. This is novation. The old debt of A to B is at an end, a new debt from C to B has been contracted.
(b) Rescission-Section 62: Rescission takes place where all or some of the terms of a contract are cancelled. Rescission also takes place where a party to a contract fails to perform his obligations, the other party can rescind the contract without prejudice to his rights to receive compensation for breach of contract. In a voidable contract one of the parties has the option to rescind the contract.
Example: A promises to deliver certain goods to B six months after date. By that time, the goods go out of fashion and A and B agree not to perform the contract. The contract is rescinded by the parties.
(c) Alteration-Section 62: Alteration of a contract takes place when one or more of the terms of a contract are changed.
Example: A holds a property under a lease. Later on he buys such property. His rights as a lessee merges Into a superior rights as an owner.
Discharge by impossibility of performance-Section 56
The law relating to discharge by impossibly of performance of a contract is contained in section 56.
This section deals with a large variety of cases and lays down certain clear rules.
1. Where the impossibility is absolute i.e. inherent in the nature of the things to be done, the contract is discharged as being void, ab initio.
2. Where impossibility is relative i.e. the circumstances or inability of the individual promisor to perform the promise, it does not discharge the contractual duty.
3. Impossibility of performance may be as to matter d & by the rule of law.
4. Impossibility may exist at the time of contracting (a) ‘ (b) without the knowledge of the parties. In the former the agreement is void ab initio whereas in the later case the contract is void on the ground of mutual mistake.
5. Impossibility may arise subsequent’ to the making of the contract. It may be caused by events beyond the control of the parties or by some act of the promisor or promisee
6. Impossibility may affect the promise or consideration for the promise.
Impossibility existing at time of contract-Section 56
Section 56 deals with pre-contractual or initial impossibility by providing that an agreement to do an act impossible In itself is void. The fact of impossibility may be:
(a) known to the parties at the time of contract e.g. promise to ride a horse to the moon, discover a treasure by magic or put life into the dead son of Exe.
(b) unknown to the parties at the time of contractor e.g. destruction of the subject.
In either of the above cases- contract of these cases there is no contract at all to terminate There is excused from performance. If the promisor alone knows of impossibility then existing, he is bound to compensate the promisee for any loss he may suffer through non- performance of the promise.
Subsequent or supervening impossibility-Section 56 Para 2
Impossibility which arises subsequent to the formation of a contract is called post-contractual or supervening impossibility or illegality, in such a case the contract becomes void and is discharged. Such impossibility occurs in a number of ways.
Discharge by supervening impossibility
A contract is discharged by subsequent or supervening impossibility in any of the following ways:
1. Destruction of subject-matter of contract: When the subject-matter of a contract, subsequent to the formation of such contract, is destroyed without the fault of the parties, the contract is discharged.
2. Non-existence or non-occurrence of a state of things: When a contract is made on the basis of continued existence or occurrence of a certain state of things and the state of such things change or cease to exist, the contract is discharged.
Example: A and B contract to marry each other. Before the time fixed for marriage A goes mad. The contract becomes void.
(c) Death or personal incapacity: Where the performance of a contract depends upon the personal qualifications of a party, the contract is discharged by his death or physical disability.
Example: A contracted to act at a theatre for six months in consideration of a sum paid in advance by B. On several occasions A is too late to act. The contract to act on these occasions becomes void.
Discharge by supervening illegality
General law is that the contract which is contrary to law at the time of its formation is void. But if after making a contract the law changes or a person steps in with statutory powers or authority, the performance of such contract becomes impossible. So if any subsequent change of law prevents or prohibits the performance, the contract is discharged.
Outbreak of war
A contract made with an alien enemy during the war is void being unlawful ab initio. Again a contract made before the outbreak of war is suspended during the war or discharged depending upon the nature of the contract. Such a contract may or may not be revived after the war.
Discharge by lapse of time (Limitation Act, 1908)
Under the Limitation Act, 1908, action against the non performance of a contract must be taken by the promisee within the period of limitation. In case of delay he is deprived of his remedy at law.
Example: A took a loan from a bank repayable on an agreed date. If the bank does not file a suit within 3 days from such date. A is discharged of his liability.
Discharge by operation of law
A contract may be discharged by operation of law in a number of ways.
(a) By merger: Where the parties make a new contract providing a higher security, the original contract merges in the new contract and is discharged.
(b) By insolvency: Under the insolvency law when a person is adjudicated insolvent he is discharged from his liabilities and contracts.
(c) By unauthorized alteration: Where a party to a contract makes an unauthorized alteration, i.e. without the knowledge and consent of the other party, the contract can be avoided by the other party.
Discharge by breach of contract
Meaning of breach: Breach of a contract means a situation when a promisor, has neither performed his part of the contract nor tendered performance nor the performance is excused by consent, express or implied, or when the performance is defective.
So breach of contract occurs when a party to a contract does not, without any lawful excuse, fulfil his contractual obligation or by his own act makes impossible the performance of contract.
Consequences of breach: Where there is a breach of the contract the injured party becomes entitled to legal action against the party at breach.
Where the contract is unilateral, the injured party can only claim relief for the breach. Where the contract is bilateral, the innocent party can (a) claim relief for the breach and also (b)
released from liability to perform by part of the contract.
Types of breach
Breach of contract may be:
a. actual breach of contract.
b. anticipatory breach of contract.
Actual breach of contract: Actual breach may take place
(a) at the time when performance is due,
(b) during the performance of the contract
(c) express repudiation.
1. Breach at time of performance is due: Actual breach takes place wh re a party to a contract fails or refuses to perform his part of the obi Ration under the contract when the performance is due. The part not in breach can treat the contract as no longer binding on him and sue for breach of contract.
Example: A agreed to deliver 100 bales of cotton on 30th June to B. He does not deliver the cotton on that date. This is a b. each of contract.
The time mentioned in the contract may or may not be the essence of the contract depending upon the circumstances of each case. Where the time is not the essence of the contract and the defaulting part/ subsequently expresses his willingness to perform the contract, the other party may accept the performance subject to damages for non- performance at the appointed time. The party accepting performance after due date should give notice while accepting that he intends to claim compensation.
2. Breach during performance of the contract: Actual breach of a contract also occurs when during the performance one party either expressly or impliedly repudiates the contract. The party not in breach can treat the contract as no longer binding on him and sue for breach of contract.
(a) Express breach occurs where one party to a contract communicates to the other parly his intention either not to perform the contract or after accepting part performance from the other party refuses to accept the remaining performance.
(b) Implied breach occurs where a party to the contract, during performance, by his own act makes the completion of performance impossible. So the other party is discharged from further performance of the contract.
Anticipatory (or constructive) breach of contract
Meaning: Anticipatory breach of contract occurs, when, party to a contract repudiates the contract before the time fixed performance has arrived or when a party by his own act disables himself from performing the contract, or does some act which makes the performance impossible or may definitely renounce the contract.
Law: When there is anticipatory (or constructive) breach the promisee has the following options:
a. promisee may treat the anticipatory breach equivalent to actual breach.
b. promisee may elect to keep the contract alive.
Equivalent to actual breach: When the promisee treats the anticipatory breach as actual breach he may rescind the contract and sue the other party at once for damages and the promisee is excused from performance. The party putting an end to the contract must restore any advantage he may have received.
Contract kept alive: When the promisee instead of bringing immediate action, treats the contract, act or notice of the promisor as inoperative and waits for the time of performance to arrive and then hold the promisor responsible for all consequences of non-performance, in such a case the consequences are:
a. promisee keeps the contract alive for the benefit of the promisor and also remains liable under it.
b. Promisor may perform his promise when the time comes for its performance and the promisee will be bound to accept performance.
c. If the happening of any subsequent event discharges the contract legally, the aggrieved party shall lose his right to sue for damages.