by Asok Nadhani,
8.1 Discharge of
Contract
a. Discharge of
contract means termination of the contractual relationship between the parties,
i.e. when the rights and obligations created by it come to an end.
b. A contract may
come to an end on account of following reasons:
-
Performance. (discussed in chapter 7)
-
Agreement or consent.
-
Impossibility of Performance.
-
Lapse of time.
-
Operation of law.
-
Breach of contract.
8.2 Discharge by
Agreement between Parties
i. Contractual
obligation may be discharged between parties as expressly agreed by the parties
or by their implied conduct.
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 is
given to B at the time of the formation of the contract.
ii. A contract may
also be discharged by agreement between the Parties through:
a.
Novation,
b.
Rescission,
c.
Alteration,
d.
Remission,
e.
Waiver,
f.
Merger.
8.2.1 Modes of Discharge of Contract by Agreement
A contract may
also be discharged by agreement between the Parties through:
a. Novation (sec.62):
i. 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contract between two parties is rescinded in consideration of a new contract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.
ii. 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.
iii. The old contract
is totally discharged and the law cannot be enforced on the terms of old
contract.
b. Rescission (sec.62):
i. Rescission of a
contract takes place when all or some of the terms of the contract are
cancelled. It may occur by mutual consent of the parties, or when one party
fails in the performance of his obligation. Consequently, 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.
ii. A party may
rescind a voidable contract where consent is not free.
iii. Rescission may
be total or partial.
-
In Total Rescission the entire contract is
discharged.
-
In Partial Rescission, the original contract is
modified by rescinding some of the terms of contract or substituting new terms
which are rescinded or adding new terms without rescinding any of the terms of
the original contract.
c. Alteration: It means change
in one or more terms of the contract with mutual consent of the parties. An
alteration discharges the original contract and creates a new contract between
the parties. However the parties to the new contracts remain the same.
d. Remission: It means acceptance on
part of the promisee through a lesser fulfillment of the contract (s.63).
Ex. A creditor
accepts Rs.3,000 in full satisfaction of a debt of Rs.5,000. This is called as
Remission.
The party demanding
performance of the contract may:
i. dispense with
it, either wholly or in part,
ii. extend the time
of performance,
iii. accept any other
satisfaction instead of performance.
e. Waiver: It means mutual abandonment of the contract
by the Parties. Both Parties agree that they are no more bound by the contract.
(Sec. 63)
f. Merger: When inferior right merges
into a superior right of the Party. For example, a Party holding lease rights
buys the property.
8.2.2 Distinction
between Novation and Alteration
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Novation
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Alteration
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|
1.
Novation means substitution of a new contract in
place of the original one.
|
1.
Alteration means a change in one or more of the
terms of the original contract by mutual consent of the Parties.
|
|
2.
It requires entering into a new contract.
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2.
It does not require entering into a new contract.
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|
3.
It may involve different parties.
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3.
The parties remain same.
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4.
The terms and condition of the original contract
may not be changed.
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4.
It involves variation in terms and conditions of
the original contract.
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8.2.3 Distinction
between Rescission and Alteration
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Rescission
|
Altertaion
|
|
1.
Rescission amounts to
cancellation of a contract.
|
1.
Alteration means a
change in one or more of the terms of a contract by mutual consent of the
parties.
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|
2.
It may be made without
mutual consent.
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2.
It is done through
mutual consent.
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3.
Implied rescission
takes place when there is a non-performance of a contract by both the parties
for a long period without any complaint.
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3.
Alteration of contract
cannot be implied.
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4.
Legal obligations
between the parties come to an end.
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4.
Legal obligations
between the parties continue.
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8.3 Discharge by
Impossibility of Performance
(Sec. 56)
(a) The ‘Rule of
Impossibility’ is based on following two maxims:
- Lex on cogit ad impossibilia: It means
“The law does not recognize what is impossible”.
- Impossibilium nulla obligation est: It means
“What is impossible does not create an obligation”.
(b) An agreement to
do an impossible act in itself is void.
Ex.
A agrees with B to put life into the dead wife of B, the agreement is void.
i. Where at the time
of making the contract, both
the parties are ignorant of the
impossibility, the contract is void on the ground of mutual mistake.
ii. If, however, the promisor alone knew of
the impossibility 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.
8.3.1
Supervening Impossibility
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). 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, otherwise the contract must be performed [Supervening
Impossibility is referred as ‘Doctrine of
Frustration’ in English Law].
8.3.2 Discharge
of Contract by Supervening Impossibility
i.
When the subject matter is destroyed accidentally
without any fault of any
party to the contract (e.g., loss of property
due to accidental fire or earthquake).
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 void.
ii.
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.
iii.
Personal incapacity or death of a 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. Held the club cannot sue the singer
for such breach of contract.
iv.
When the performance of contract 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.
v.
Outbreak of
war.
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.
8.3.3 Effect of
Supervening Impossibility
i.
Contract becomes void: As the contract is
discharged by supervening impossibility, the contract becomes void. (Sec. 46,
para 2)
ii.
Restitution effect: Contract becomes void due
to the supervening impossibility, any person receiving benefit out of such contract must restore the
benefit to the respective person. (Sec. 65)
iii.
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. (Sec. 56, para 3)
8.3.4 No
Supervening Impossibility in certain cases
However, in the
following cases, contract does not become void due to supervening impossibility
and remains valid.
i. 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.
ii. 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.
iii. Default of Third Party: The Promisor is not exonerated from
liability if a third person, on whose work the Promisor relied, fails to
perform.
iv. Strikes, Lockouts, etc.: Events like Strike, Lock out,
Civil Disturbances, etc. do not terminate contracts, unless the contract term
provides so.
v. 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.
vi. Self-induced
impossibility: If the
promisor fails to perform the contract, he will not be discharged from his
liability.
8.4 Discharge by
Lapse of Time
i.
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 of his
remedy of law.
Ex. A debt becomes
time barred after 3 years if no action is taken to recover the amount from
debtor.
ii.
The different period of limitation specified by the
Limitation Act for enforcement of some of the important contract/rights are as
follows:
|
Type of Suit
|
Time from which the
period begins
|
Period of
Limitation (Years)
|
|
1.
Recovery of money
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Loan is made
|
3
|
|
2.
By surety against principal debtor
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Surety pays
the creditor
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3
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3.
For declaration
|
Right to sue
first accrues
|
3
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4.
By mortgagor to redeem or recover possession of
immovable property
|
Right to
redeem or recover possession accrues
|
30
|
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5.
Enforce payment of money secured by a mortgage
|
Money sued
become due
|
12
|
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6.
By landlord to recover possession from a tenant
|
Tenancy is
determined
|
12
|
8.5 Discharge by
Operation of Law
1. Death: 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.
2. Insolvency: The insolvent is discharged from liability on all
contracts entered into upto the date of insolvency.
3. Unauthorised Material Alteration: 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.
4.
Merger
of Rights: 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.
8.6 Discharge by
Breach of Contract
i. Breach of contract means non fulfillment of obligation of the contract, amounting to:
-
Actual Breach of Contract (Sec. 39)
-
Anticipatory Breach of Contract. (Sec. 39)
ii. Consequently,
the injured party may take action for damages.
8.6.1 Actual
Breach of Contract
a. Actual breach of
contract occurs when one party fails to perform his obligation in any of the
following situations:
i. When Performance is due: 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. This is actual breach of contract.
ii. During Performance: When one party
fails or refuses to perform his obligation during performance of the contract.
It amounts to repudiation of the contract and may entail:
a. Express Repudiation of Actual
Breach of Contract: 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. A now can sue B for breach of
contract.
b. Implied Repudiation of Actual
Breach of Contract: 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.
b. 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.
8.6.2 Anticipatory
Breach of Contract
a. It occurs when a
party, before the performance is due, expresses in advance his intention of not
performing the contract (Express Repudiation) or does an act so that the performance becomes impossible (Implied
Repudiation).
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.
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.
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.
b. In case of
anticipatory breach, the following rules apply :
i.
The promisee can treat the contract as discharged
so that he is absolved of the performance of his part of the promise.
ii.
The promisee can immediately take a legal action
for breach of contract or wait till the time the act was to be done.
iii.
Anticipatory breach does not discharge the
contract, unless the aggrieved party so chooses.
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 although the time for
performance had not yet arrived. Held, he was entitled to do so.
iv.
If the promisee refuses to accept the repudiation
of the contract by the promisor and :
a. treats the
contract as alive:
i. The promisor may
perform his promise when the time for its performance comes and the promisee
will be bound to accept the performance.
ii. 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.
iii. If the contract
is alive, till the date of performance, damages will be measured by the
difference between the price prevailing on the date of breach and the contract
price.
b. lf the contract
is not alive, the damages will be measured by the difference between the price
prevailing on the date of breach and the contract price.
For more details, refer to
Mercantile law, by Asok Nadhani, BPB Publications, www.bpbonline.com, bpbpublications@gmail.com
