Discharge of contract| Free Law Notes

Discharge of contract- Prolawctor


The parties enter into a contract with their respective obligations to be performed. When the obligations are performed the contract comes to an end and the parties will be discharged from the obligation against each other.

Discharge of contract.

Discharge of contract means termination of contractual relationship between the parties. A contract is said to be discharge when the rights and obligations create t it comes to an end.

A contract is discharged by the following ways.

      1. By performance.

     2. By agreement.

     3. By impossibility of performance.

    4. Lapse of time.

    5. Operation of law.

    6. Breach of contract.

By performance (Ss 37-67)

Performance means doing of that duty which is required by a contract discharge by performance takes place when the parties to the contract fulfill their obligation arises under contract within the time and manner prescribed.

Performance by joint promisor.

Under sec 42 of ICA, 1872 the joint promisors must, during their lives, fulfill their promise. If anyone of them dies, then the legal heirs of the deceased person along with the other surviving promisor have to perform.

Sec 43 allows an action to be brought against anyone of the joint promisors without impeding others as defendants.

Sec 44, the creditor is conferred upon the right to release anyone of the joint promisors from his liability and this doesn’t discharge the other from their liability.

          Performance may be:

(i)  Actual performance: when both the parties perform their promises the contract is discharged. Performance should be complete, precise according to the terms of agreement. This is the most common method of discharge of contract.

(ii) Attempted performance: where the promissory offer to perform his obligations but the promise refuses to accept the performance. It is equivalent to actual performance. The promissory is discharge from the liability of non-performance of contract.

By Agreement (Ss 62-67)

As an agreement binds the parties to perform the contract. Similarly a future agreement is made to terminate the contract. By this agreement the contractual obligation may be discharge.

The various cases of discharge by agreement are

(i) Novation: Sec 62, when the parties to a contract agree to substitute, the existing contracts with the new contract, this is known as novation.

A new contract is substituted for an existing one between the same parties or a contract between two parties is cancel in consideration of a new contract entered between same parties.

Essentials of Novation

1. The parties to a contract must be same

2. A new contract is substituted for an existing one

3. Novation should take place before the expiry of original terms; if it doesn’t there would be a breach of contract.

(ii) Rescission: section 62, rescission of a contract takes place, when all or some of the terms of contract are canceled. It may occur by mutual consent of the parties or when one party fails to perform his obligation, the other party may rescides the contract.

Ex: A promises to supply goods to B after 6 months but the goods goes out of fashion. A&B mutually rescinded the contract.

(iii) Alteration: it may takes place when one or more terms of contract are altered by mutual consent of the parties to the contract in such case the old contract is discharge by alteration.

(iv) Remission: Acceptance of lesser fulfillment of promise made i.e., to say acceptance of lesser sum than what was contracted.

(v) Waiver: Takes place when parties to a contract agree they shall no longer bound by the contract, this amounts to mutual amendment of rights by the parties to contract. Consideration is not necessary for waiver.

(vi) Merger: it takes place when the inferior rights occurring to a party under contract merges into superior rights occurring the same party under same or different contract.

(vi) Accord and satisfaction: according to sec 63, “every promise may dispense with or remit the performance of promise made to him and accept, instead of it, any satisfaction which he thinks fit”. In other words, when a lesser sum is actually paid that what is due under an existing contract, the new contract is called “accord” and the actual payment is called “satisfaction”.

Ex: Ramesh has a postpaid mobile connection of AIRTEL. A bill of his mobile is of Rs. 1245.00, which he seems more than the actual bill. Thus he registers a complaint with AIRTEL. The AIRTEL officials offer him to pay Rs.1200.00 as a settlement. Here Rs. 1245.00 is accord and Rs.1200.00 is satisfaction.

By impossibility of performance (Ss 56)

If an agreement contain an under taking to perform an impossible act, it is void and this rule is based on principle that law doesn’t recognize what is impossible and doesn’t create an obligation.

In English Law it is called as Doctrine of Frustration.

Section 56 of ICA, an agreement to do an impossible act is void, in English law it is known as doctrine of frustration. In Indian law it is known as impossibility of performance.

Impossibility is of two kinds:

(i) Impossibility existing at the time of contract ( pre-contractual impossibility)

Impossibility existing at the time of agreement and an agreement to do impossible act is void and such impossibility existing at the time is known as pre contractual impossibility.

Impossibility may be

a. Known to the parties: when impossibility is known to the parties it is absolute impossibility and such agreement is void.

b. Unknown to the parties: at the time of making contract both the parties are ignorant of the impossibility; the contract is void on the ground of mutual mistake. If the promissory alone knows the impossibility of performance he should compensate the promise.

(ii) Impossibility arising after the forming of contract (post contractual or supervening impossibility):

Impossibility which arises after the formation of contract is called post contractual or supervening. In such case contract becomes void when act becomes impossible. It is discharge by supervening impossibility

a. Destruction of subject matter: where the subject matter of the contract subsequent to its formation is destroyed without any fault of the parties, the contract is void and it gets discharge.

b. Non-existence or non-occurrence of particular state of things: contract is entered into or between two parties on the basis of continued existence or occurrence of particular state of things but if there is any change in the state of things which forms the base of contract, the contract gets discharge.

c. Death or incapacity of personal service: where the performance of the contract depends on personal skill and qualification of party, the contract is discharge on the ground of illness, incapacity or the death of that party.

d. Change of law: when subsequent to the formation of contract any change in law takes place or the government takes under some ordinance so that the performance of contract becomes impossible. The contract gets discharge.

e. Outbreak of war: A contract entered into with an alien enemy during war is unlawful and therefore impossible to perform. Contracts entered before war are to suspended during war and can renewed after the war.

Difficulty of performance cannot be excused:-

A contract is not discharged by mere fact that it is difficult to perform. Difficulty of performance is not an excuse for discharge. In the following cases, contract isn’t discharge because of difficulty.

(i) Difficulty of performance: A contract cannot be discharge by a fact that it has become more difficult of performance due to some contemplated events or delays.

(ii) Commercial impossibility: A contract is not discharge merely because expectation of high profits is not realized or necessary raw materials are available at higher price because of any emergencies.

(iii) Impossibility due to failure of third person: where a contract could not be perform because of default of 3rd party. The contract doesn’t get discharge.

(iv) Failure of one of the object: when a contract is entered into for several objects and the failure of one of them does not discharge the contract.

Ex: A hires a boat from B for two purposes. First, for witnessing the coronation ceremony of king and second to sail around sea and have a naval view. The king’s coronation was abandoned due to his illness. The contract between A & B does not get discharge because of failure of one of the object.

Lapse of time:

The limitation Act 1963 lays down that contract should be perform within a specified period called as period of limitation. If it is not performed and if no action is taken by promisor then he is deprived of his remedy and a contract gets discharge.

Ex: Peter takes a loan from John and agrees to pay installments every month of the next five years. However, he doesn’t pay even a single installment. John calls him a few times but then gets busy and takes no action. Three years later, he approaches the court to help him recover his money. However, the court rejects his suit since he has crossed the time- limit of three years to recover his debts.

Operation of law

A contract may be discharged independently of the wish of parties i.e. by operation. This includes discharge

a. By death: in contracts involving personal skill and ability, the contracts gets terminated on the death of promisor rights and liabilities of deceased promisor will pass on to the legal representative.

b. By insolvency: when a promisor is adjudged insolvent, he is discharge from all liabilities incurred prior to his adjudication

c. By unauthorized alteration of contract: where a party to the contract makes any material alteration in the contract without the consent of other party. The other party can avoid the contract. Material alteration is one which changes legal identity or character of the contract. An alteration which is not material doesn’t affect the validity of the contract.

Breach of contract (Section 39)

Breach of contract means breaking of obligations which contract imposes; it occurs when a party to the contract without lawful excuse doesn’t fulfill his contractual obligation or by his own act makes it impossible, what he should perform.

Breach of contract may be:

(i) Actual breach of contract: it may take place

       a. At the time when performance is due- actual breach of contract occurs when at the time performance is due one party fails or refuses to perform his obligation.

Ex: A agrees to deliver some raw materials to B on 1st of coming month; he doesn’t deliver the goods to B on that day. Here A has done breach of contract.

If time is not the essence of the contract and the party in default expresses his willingness to perform after sometimes, the other may accept the performance subject to the payment of compensation.

        b. During the performance: Actual breach of contract also occurs. When during the performance of contract, one party fails or refuses to perform his obligation under the contract.

Ex:  A contracted with the Railway Company to provide 3000 chairs for certain price to be delivered in installment. After 1500 chairs bee supplied. The railways asked A not to deliver any more chairs. It was held by the court that the railways has done breach of contract and has to compensate A.

(ii) Anticipatory breach of contract:

It occurs when a party to an executor contract declares his intension of not performing a contract before the performance is due

Ex: A undertakes to supply certain goods to B on a certain date, before this date he informed B that he is not going to supply the goods. This is an anticipatory breach by A.

The rights of the promise are:

 a. He can treat the contract as discharge so that he is absolved of the performance of his part.

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

            Anticipatory breach doesn’t necessarily discharge the contract unless the promisee so chooses if the promisee refuses to accept the repudiation of contract by the promisor and treat the contract as alive, the consequences would be:

(i)A promisor may perform his promise, when the time of his performance comes and the promisee will be bound to accept the performance.

(ii) If during the contract, an event happens which discharge contract legally, the promisor may take advantage of such discharge.

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