DISCHARGE OF CONTRACT

 DISCHARGE OF CONTRACT

Discharge of contract means termination of the contractual relationship between the parties. A contract is said to be discharged when it ceases to operate, i.e., when the rights and obligations created by it come to an end.

A contract may be discharged

I. By performance.

II. By agreement or consent.

III.By impossibility of performance.

IV. By lapse of time.

V. By operation of law.

VI. By breach of contract.

I.DISCHARGE BY PERFORMANCE

Performance means the doing of that which is required by a contract. Discharge by performance takes place when the parties to the contract fulfill their obligations arising under the contract within the time and in the manner prescribed. In such a case, the parties are discharged and the contract comes to an end. But if only one party performs the promise, he alone is discharged. Such a party gets a right of action against the other party who is guilty of breach.

Performance of a contract is the most usual mode of its discharge. It may be

1. Actual performance.

When both the parties perform their promises, the contract is discharged. Performance should be complete, precise and according to the terms of the contract. Most of the contracts are discharged by performance in this manner.

2. Attempted performance or tender.

Tender is not actual performance but is only an offer to perform the obligation under the contract. Where the promisor offers to perform his obligation, but the promisee refuses to accept the performance, tender is equivalent to actual performance, except in case of tender of money. The effect of a valid tender is that the contract is deemed to have been performed by the tenderer. The tenderer is discharged from the responsibility for non-performance of the contract without in any way prejudicing his rights which accrue to him against the promisee.

II. DISCHARGE BY AGREEMENT OR CONSENT

As it is the agreement of the parties which binds them, so by their further agreement or consent the contract may be terminated. The rule of law in this regard is as follows: Eodem modo quo quid constituitur, eodem modo destruitur, i.e., a thing may be destroyed in the same manner in which it is constituted. This means a contractual obligation may be discharged by agreement which may be express or implied.

The various cases of discharge of a contract by mutual agreement are dealt with in Sec. 62 and 63 are as under.

1. Novation (Sec. 62):

Novation takes place when (a) a new contract is substituted for an existing one between the same parties, or (b) 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. A common instance is where a creditor at the request of the debtor agrees to take another person as his debtor in place of the original debtor. The consideration for the new contract is the discharge of the old contract. It is essential for the principle of novation to apply that there must be the mutual or tripartite consent of all the parties concerned.

2. Rescission (Sec. 62)

Rescission of a contract takes place when all or some of the terms of the contract are cancelled. It may occur

(1) By mutual consent of the parties, or

(2) Where one party fails in the performance of his obligation. In such a case, the other party may rescind the contract without prejudice to his right to claim compensation for the breach of contract.

3. Alteration (Sec. 62)

Alteration of a contract may take place when one terms of the contract is/are altered by the mutual consent of the parties to the contract. In such a case, the old contract is discharged.

4. Remission (Sec. 63)

Remission means acceptance of a lesser fulfillment of the promise made, e.g. acceptance of a lesser sum than what was contracted for, in discharge of the whole of the debt. It is not necessary that there must be some consideration for the remission of the part of the debt. Sec. 63 allows the promisee to dispense with or remit the performance of the promise by the promisor, or to extend the time for performance or to accept any other satisfaction instead of performance.

5. Waiver.

Waiver takes place when the parties to a contract agree that they shall no longer be bound by the contract. This amounts to a mutual abandonment of rights by the parties to the contract. Consideration is not necessary for waiver.

6. Merger.

Merger takes place when an inferior right accruing to a party under contract merges into a superior right accruing to the same party under the same or some other contract

III. DISCHARGE BY IMPOSSIBILITY OF PERFORMANCE

If an agreement contains an undertaking to perform an impossibility, it is void ab initio. This rule is based on the maxim which states that the law does not recognize what is impossible, and what is impossible does not create an obligation.

According to Sec. 56, Impossibility of performance may fall into either of the following categories:

1. Impossibility existing at the time of agreement.

The first paragraph of Sec. 56 lays down that "an agreement to do an act impossible in itself is void." This is known as pre contractual or initial impossibility. The fact of impossibility may be

(a) Known to the parties:

This is known as absolute impossibility. In case of absolute impossibility, the agreement is void ab initio.

(2) Unknown to the parties:

Where at the time of making the contract both the parties are ignorant of the impossibility, as in the case of destruction of subject matter to the ignorance of both the parties, the contract is void on the ground of mutual mistake. If, however, the promisor alone knows of the impossibility of performance at the time of making the contract, he shall have to compensate the promisee for any loss which such promisee sustains through the non-performance of the promise.

2. Impossibility arising subsequent to the formation of contract.

Impossibility which arises subsequent to the formation of a contract (which could be performed at the time when the contract was entered into) is called post-contractual or supervening impossibility. In such a case, the contract becomes void when the act becomes impossible or unlawful. Impossibility of performance of a contract, as a general rule, is no excuse for the non-performance of the contract; but where this 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.

Discharge by Supervening Impossibility

Supervening impossibility is also known as doctrine of frustration. It means the impossibility of performance due to subsequent unexpected event. A contract is discharged by supervening impossibility in the following cases:

1. Destruction of subject matter of contract.

When the subject matter of a contract, subsequent to its formation, is destroyed without any fault of the parties to the contract, the contract is discharged.

2. Non-existence or non-occurrence of a particular state of things.

Sometimes, a contract is entered into between two parties on the basis of a continued existence or occurrence of a particular state of things. If there is any change in the state of things which formed the basis of the contract, or if the state of things which ought to have occurred does not occur, the contract is discharged.

3. Death or incapacity for personal service.

Where the performance of a contract depends on the personal skill or qualification of a party, the contract is discharged on the illness or incapacity or death of that party. The man's life is an implied condition of the contract.

4. Change of law or stepping in of a person with statutory authority.

When, subsequent to the formation of a contract, change of law takes place, or the Government takes some power under some Ordinance or Special Act, as for example, the Defence of India Act, so that the performance of the contract becomes impossible, the contract is discharged.

5. Outbreak of war.

A contract entered into with an alien enemy during war is unlawful and therefore impossible of performance. Contracts entered into before the outbreak of war are suspended during the war and may be revived after the war is over.

In the following cases the rule of Supervening impossibility does not apply.

1. Difficulty in performance.

2. Commercial hardship.

3. Impossibility due to the conduct of a third person.

4. Strikes, lockouts and civil disobedience.

5. Failure of one of the several objects.

IV. DISCHARGE BY LAPSE OF TIME

The Limitation Act, 1963 lays down that a contract should be performed within a specified period, called period of limitation. If it is not performed, and if no action is taken by the promisee within the period of limitation, he is deprived of his remedy at law. In other words, we may say that the contract is terminated. For example, the price of goods sold without any stipulation as to credit should be paid within three years of the delivery of the goods. Where goods are sold on credit to be paid for after the expiry of a fixed period of credit, the price should be paid within three years of the expiry of period of credit. If the price is not paid and creditor does not file a suit against the buyer for the recovery of price within three years, the debt becomes time-barred and hence irrecoverable.

V. DISCHARGE BY OPERATION OF LAW

A contract may be discharged independently of the wishes of the parties, law. This includes discharge ie., by operation of law. This includes discharge

1. By death.

In contracts involving personal skill or ability, the contract is terminated on death of the promisor. In other contracts, the rights and liabilities of a deceased person pass on to the legal representatives of the deceased person

2. By merger.

3. By insolvency.

When a person is adjudged insolvent, he is discharged from all liabilities incurred prior to his adjudication.

4. By unauthorized alteration of the terms of a written agreement.

Where a party to a contract makes any material alteration in the contract without the consent of the other party, the other party can avoid the contract. A material alteration is one which changes, a significant manner, the legal identity or character of the contract or the rights and abilities of the parties to the contract.

5. By rights and liabilities becoming vested in the same person.

Where the rights and liabilities under a contract vest in the same person, for example, when a bill gets into the hands of the acceptor, the other parties are discharged. This to avoid multiplicity of action.

VI. DISCHARGE BY BREACH OF CONTRACT

Breach of contract means breaking of the obligation which a contract imposes. It occurs when a party to the contract without lawful excuse does not fulfill his contractual obligation or by his own act makes it impossible that he should perform his obligation under it. It confers a right of action for the injured party. Breach of contract may be

1. Actual Breach of Contract: It may take place

(a) At the time when the performance is due.

Actual breach of contract occurs, when at the time when the performance is due, one party fails or refuses to perform his obligation under the contract. If time is not of the essence of the contract and the defaulting party expresses his willingness to perform the obligation after the appointed time, the other party may accept the performance subject to the payment of compensation for failure to perform the obligation at the appointed time. A prior notice shall have to be given to the party in default by the party not in default if compensation is to be claimed.

(b) During the performance of the contract

Actual breach of contract also occurs when during the performance of the contact, one party fails or refuses to perform his obligation under the contract. This refusal to perform may be by

(i) Express repudiation (by word or act).

Where there has been some performance of the contract and one party by his word or act refuses to continue to perform his obligation in some essential respect, the other party can treat the contract as no longer binding on him and sue for breach of contract.

(ii) Implied repudiation (impossibility created by the act of a party to the contract)

If a party, during the performance, makes by his own act the complete performance or the contract impossible, the effect is as if he has breached the contract, and the other party is discharged from the further performance of the contract.

In both cases (i) and (ii) the party not in breach can treat the contract as no longer binding on him and sue for breach of contract.

2. 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. He may do so

(a) By expressly renouncing his obligation under the contract

(b) By doing some act so that the performance of his promise becomes impossible.

The rights of the promise (the party not in breach or the aggrieved party) in case of anticipatory breach are as follows:

(a) He can treal the contract discharged so that he is absolved of the performance of his part of the promise.

(b) He can immediately take a legal action for breach of contract or wait till the time the act was to be done.

Anticipatory breach does not necessarily discharged the contract, unless the promisee (the aggrieved party) so chooses.

If the promisee refuses to accept the repudiation of the contract by the promisor and treats the contract as alive, the consequences are as follows:

(a) The promisor may perform his promise when the time for its performance comes and the promisee will be bound to accept the performance.

(b) If, while the contract is alive, an event (say, a supervening impossibility) happens which discharges the contract legally, the promisor may take advantage of such discharge. In such a case, the promisee loses his right to sue for damages.

Measure of damages in anticipatory breach of contract:

If the contract is ended by the promisee at once, he can sue the promisor for damages. The amount of damages will be measured by the difference between the price prevailing on the date of breach and the contract price.

If the contract is kept alive till the date of performance of the contract, the measure of damages will be the difference between the price prevailing on the date of the performance and the Contract price.

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Redrafted for Educational Purpose.

Deekshith Kumar,
Assistant Professor of Commerce

Book Reference:

1. Elements of Mercantile Law by N. D. Kapoor
2. Principles of Mercantile Law by Avtar Singh
3. A Textbook of Business Law by Dr. Umesh Maiya
4. Business Law by B.S. Raman