Discharge of a contract happens when the parties have not completely performed their contractual obligations or when happenings, behavior of the parties or procedure of law releases the parties from performance. Under Indian Contract Act, 1872 discharge of a contract means; termination of the contractual connection between the parties in a contract. A contract is said to be terminated when it stops to perform, when rights and obligations made by it come to an end. Following are the modes of discharge of contract:
Performance of a contract means carrying out of promises and obligations undertaken by the parties according to the terms prescribed in the contract. Discharge by performance occurs when the parties to the contract do their duties arising out of the contract within the stipulated/ reasonable time and in the manner prescribed by the contract. However, even if one party performs or completes his obligations, he only is discharged and not the other party. The party so discharged can bring an action against the other, who is guilty of breach. The general rule is that a party to a contract must perform exactly what he undertook to do.
Performance can be either actual or attempted. When each party performs his obligations exactly in the same manner in which it was intended in the contract. This brings the contract to an end. After that, no claim would remain of one party against another; this is known as actual performance. It may happen that the promisor offers performance of his obligation under the contract at the proper time and place; however, the promise refuses to accept the performance. This is known as ‘tender’ or ‘attempted performance’. It is then for the promisee to accept the performance. If he does not accept, the promisor is not responsible for non-performance, nor does he thereby lose his rights under the contract. Thus, a tender of performance is equivalent to performance. A tender or offer of performance to be valid should satisfy the following conditions:
Startup vs. MacDonald (1843): Facts: The plaintiffs agreed to sell 10 tons of linseed oil to the defendant to the delivered “within the last fourteen days of March”. Delivery as tendered at 8.30pm on March 31, a Saturday. The defendant refused to accept the goods owing to lateness of the hour.
Judgment: Though the hour was unreasonable, the defendant could still take delivery before midnight
When a party to a contract has refused to perform, or disabled himself from performing, his promise in its entirety, the promisee may put an end to the contract, unless he has signified, by words or conduct, his acquiescence in its continuance.
At common law, a performance by a third party did not discharge the liability of the promisor unless the third party was the agent of the promisor, or was acting on his behalf, or the promisor had subsequently ratified the act. But in India according to section 41 when a promisee accepts performance of the promise from a third person, he cannot afterwards enforce it against the promisor.
According to section 42 when two or more persons have made a joint promise, then unless a contrary intention appears from the contract, all such persons must jointly fulfill the promise, if any of them dies, his legal representatives must jointly with the surviving promisor have to fulfill the promise. If all of them die, the legal representatives of all of them must fulfill the promise jointly.But this is subject to do any private arrangement between the parties either expressly or impliedly.In English law where when one of several promisors die the rights and liabilities devolve upon surviving promisors, in case of last surviving promisor it devolves on legal representatives of last surviving promisor. Section 43 of the Act lays down three rules for joint promisors:
Section 44 provides that where two or more persons have made a joint promise, a release of one of such joint promisors i.e the promisee may waive a joint promisors responsibility but this will not discharge the others. Further, the joint promisor who has been released will still be responsible to the other joint promisors for his contribution but not to the promisee since he has been released by the latter. Section 45 deals with joint promises and the devolution of joint rights. If a promise has been made to more than one person jointly, the right to claim the performance of such promise rests between the joint promisees throughout their lives. On the death of a joint promisee, his legal representative will have the right to claim performance along with the surviving joint promisees. After the death of the last survivor, the representatives of all the joint promises will jointly have the right to claim performance of the promise.
What are the rules of law relating to time and place of performance of contract?
Time and place of performance of a contract are matters/rules to be determined by an agreement. Section 46-50 It is for the parties to a contract to decide the time and place for the performance of the contract. The rules regarding the time and place of performance are given in sections 46 to 50 of the Contract Act. These are as follows:
According to Section 46 where the time for performance is not specified in the contract, and the promisor himself has to perform the promise without being asked for by the promisee, the contract must be performed within a reasonable time. The question 'what is a reasonable time' is, in each particular case, a question of fact. Thus, it is clear from this provision that if time for performance is not stated, the contract is not bad for want of certainty.
Sometimes, the time for performance is specified in the contract and the promisor has undertaken to perform it without any application or request by the promisee. In such cases, the promisor must perform his promise on that particular day during the usual hours of business and at a place where the promise ought to be performed (section 47).
For example, A promises to deliver goods at B's warehouse on January 1, 1990. On that day A brings the goods to B's warehouse, but after the usual hours of closing and they are not received. A's performance is not valid.
It may also happen that the day for the performance of the promise is specified in the contract but the promisor has not undertaken to perform it without application or demand & by the promisee. In such cases, the promisee must apply for performance at a proper place and within the usual hours of business 1).
When a promise is to be- performed without application or demand by the promisee and no place is specified for performance, then it is the duty of the promisor to apply or ask the promisee to fix a reasonable place for the performance of the promise and to perform it at such place
Sometimes the promisee himself prescribes the manner and the time. In such cases, the promise must be performed in the manner and at the time prescribed by the promisee. The promisor shall be discharged from his liability if he performs the promise in the manner and time prescribed by the promisee
The term 'time as the essence of the contract' means that the time is an essential factor and the concerned parties must perform their respective promises within the specified time. The mere fact that time is specified for the performance of a contract is not by itself sufficient to prove that time is the essence of the contract. Time is generally considered to be the essence of the contract in the following cases:
In mercantile contracts, unless a different intention appears from the terms of the contract, time fixed for the delivery of the goods is considered to be the essence of the contract but not the time for the payment of the price. This is so because the prices of goods keep on fluctuating so rapidly that if punctuality is not observed it may result in heavy losses. But in case of the sale of an immovable property, the time is presumed to be not the essence of the contract. According to Section 55, where time is the essence of the contract and the party fails to perform their promise in time the contract becomes voidable at the option of the other party i.e., if the promisee wants he can rescind the contract. But in contracts where time is not the essence of the contract, if a party fails to perform the contract in time, then the other party cannot rescind the contract but it has the right to claim damages for the delay in performance.
Section 2(f) of the Contract Act defines a reciprocal promise as promises which form the consideration or of the consideration for each other. In such cases there is an obligation on each party to perform his own promise and to accept performance of the others' promises.
Section 52 of Contract Act provides that where the order in which reciprocal promises are to be performed is expressly fixed by the contract, they must be performed in that order and where the order is not expressly fixed by the contract, they shall be performed in that order which the nature of the transaction requires.
Sometimes it may so happen that one party to a reciprocal promise prevents the other from performing his promise, In such a situation, the contract becomes voidable at the option of the party so prevented, and he is also entitled to claim compensation from the other party for any loss suffered due to non-performance of' the contract. For example, G and B contracted that B shall execute certain work for A for Rs. 1,000. B was ready and willing to execute the work accordingly. But, G prevents him from doing so. The contract is voidable at the option of B and if he decides to rescind it, he is entitled to recover from A compensation for any loss which he has incurred due to its non-performance.
According to the Section 56 of the Indian Contract Act 1872, “an agreement to do an act which is impossible in itself, such agreement is declared void”. This section deals with initial impossibility and subsequent impossibility. It is as follows:
The overhead section relies on common law doctrine of Frustration. Some legal systems accept that changes of circumstances could justify modifying a contract wherever to maintain the original contract would produce intolerable results incompatible with justice. Supervening impossibility under section 56(2) means an impossibility which arises subsequent to the formation of the contract shall make the contract void. It is also termed as the doctrine of frustration. A contract become void on account of the subsequent impossibility only if the following conditions are satisfied:
In Paradine v Jane, the common law courts laid this doctrine. The theme of this doctrine was that when the law casts a duty upon a person and he is unable to perform for no fault of his, he is excused for non-performance. in Taylor v Caldwell, Blackburn J., giving the judgment of the Queen’s Bench, held the contract is not to be construed as a positive contract, but as matter to an implied condition that the parties shall be excused in the case, before breach, performance becomes impossible from the destroying of the thing without default of the contractor. The overhead rule is applicable to both physical destruction of subject-matter and as well as failure in object, this can be understood an illustration. In Krell v Henry, the defendant agreed to rent from the plaintiff an apartment for 26th and 27th of June, on which days it had been announced that the coronation procession would pass along that place. A part of the hire was paid in advance. However, the procession having been cancelled owing to the King’s disease, the defendant refused to pay the balance. Since the object of the contract was to have a view of the coronation and the same had been frustrated by the non-happening of the coronation, the plaintiff was not entitled to recover the balance.
The doctrine of impossibility applies with full force where the actual and specific subject matter of the contract has ceased to exist. In Taylor v. Caldwell the promise to let out a music hall was held to have been frustrated on the destruction of the hall. Another example is the case of Howell v Coupland, where the defendant contracted to sell a specified quantity of potatoes to be grown on his farm, but failed to supply them as the crop was destroyed by a disease, the contract became void applying doctrine of frustration.
If a contract envisages performance by a particular individual, as in a contract to paint a portrait, and no substitute is likely to be satisfactory, then the contract will generally be frustrated by the incapacity of the person concerned. In many cases, of course, the identity of the person who is to perform the contract will not be significant. For instance, a garage agrees to service a car on a specific day, but on that day, as a result of sickness, it is short-staffed and cannot perform the service. This will be concerned as a breach of contract, instead of frustration. The contract is only to do the service, and the car owner is improbable to be worried about the identity of the specific individual who carries outs the contract, as long as he or she is competent.
Sometimes, the performance of a contract remains entirely possible, but owing to the non occurrence of an event contemplated by both parties as the reason for the contract, the value of the performance is destroyed. The case of Krell v Henry that has been discussed above is an example for the same. Death or Incapacity of parties A party to a contract is excused from performance if it depends upon the existence of a given person, if that person dies or becomes too ill to perform. In Robinson v Davison, there was a contract between the plaintiff and the defendant’s wife, to play the piano at a concert to be given by the plaintiff on a specified day but was barred from doing so due to her hazardous illness. The suit by the plaintiff claiming compensation was dismissed as the defendant’s wife was incapacitated by performing her promise due to the illness.
A contract will be dissolved when legislative or administrative intervention directly operates on the fulfillment of the contract. In Metropolitan Water Board v Dick Kerr & Co Ltd, in which a contract for the construction of a tank was ordered by the government to cease work during World War I was held to have frustrated the contract. But the government intervention need not be just during a war. Any change in law that will render the contract impossible to perform can also frustrate the contract and free the parties of any liabilities to each other.
Intervention of war or war-like conditions in the performance of contract also amounts to frustration. In the case of Tsakiorglou & Co Ltd v Noblee & Thori GMBH, where the defendants were supposed to ship goods to the plaintiff through Suez Canal but owing to a war the canal was shut down. The defendants could have shipped the goods through the Cape of Good Hope but did not do so. But the court ruled that the doctrine of frustration could not be applied since the war has not made it impossible for the defendants to perform their promise as an alternate route to ship the good existed. Further, if the intervention of war is due to the delay caused by the negligence caused by a party, the doctrine of frustration does not apply.
Frustration shall not be self induced: For example, a sale of shares by a company to its employees and also to the employees of its subsidiary where the employees of the subsidiary company were allowed to buy shares though the same is sold in auction. It cannot be frustration.
Frustration operates automatically to the extent of frustration: For example where a in a contract for sale of 250 tons of barley to be grown in a land, the defendant raised only 150 tons due to crop failure and sold to another. The sale is valid, as the frustration operates only to the extent of failure.
Adjustment of rights: When Section 65 is used to doctrine of frustration, then the effect of it will be restoration of benefits. For example; A, is a singer, contracts with B, the manager of a theatre, to perform at his theatre for three nights in every week during the next two months, and B undertakes to pay her five hundred rupees for each night’s performance. On the eighth night, A intentionally absents herself from the theatre, and B, as a result, cancels the contract. B must pay A for the seven nights on which she had performed.
Assignment of contract means transfer of rights and liabilities arising out of a contract to a third party. An assignment to be complete and effective must be effected by an instrument in writing. There are no specific provisions in the Contract Act dealing with assignment. It is a term used in the Transfer of Property Act. Contracts involving personal skill or taste or ability must be performed by the promisor himself. In other words such contracts cannot be assigned. But when the contract is not of a personal nature, it can be assigned subject t o certain conditions. Contracts can be assigned either by the act of parties or by operation of law.
This means that the parties themselves make assignment. The rules in this regard are as under:
Contracts which are not of a personal nature get assigned due to operation of law. Assignment by operation of law takes place in cases of death or insolvency of any party to the contract. Upon the death of a party to the contract his rights and obligations automatically pass on to his heirs or legal representatives. In case of insolvency, all the rights and obligations pass on to the official Receiver or Assignee.
Just as a contract is created by means of an agreement, it can be terminated or discharged by mutual agreement. If the parties to a contract agree to make a fresh contract in place of the original contract, the original contract is discharged. According to Section 62 if the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed. A contract can be discharged by mutual agreement in any of the following ways.
The term 'novation' means the substitution of a new contract for the existing one. This arrangement may be either between the same parties or between different parties. The consideration for the new contract is the discharge of the original contract. Since novation implies a new contract, all the parties to the existing contract must agree to it. For instance, Adam owes money to Brown under a contract. It is agreed between Adam, Brown and Carlos that Brown shall thereafter accept Carlos as his debtor, instead of Adam. The old debt of Adam to Brown is at an end and a new debt from Carlos to Brown has been contracted. When the parties to a contract agree to replace the existing contract with a new contract, it is called Novation. This is novation involving change of parties. When the parties to a contract decide to replace a new contract for it, the original contract is discharged and need not to be performed. The replace of a new contract is impossible after there has been a breach of the original contract.
Rescission means cancellation of the contract. If by mutual agreement the contracting parties agree to rescind the contract, the contract is discharged. A contract can be rescinded before the performance becomes due. Non-performance of a contract by both the parties for a long period, without complaint, amounts to implied rescission. Rescission is different from novation in the sense that in case of novation a new contract is substituted for the original contract whereas in rescission the original contract is cancelled and no new contract is made.
It means a change in one or more of the terms of a contract with consent of all the parties. Alteration has the effect of terminating the original contract. In an alteration there is a change in the terms of a contract but no change of parties to it. In novation there may be change of parties. If a document or contract in writing is changed by addition or elimination, it is discharged, except as against a party creating or agreeing to the change, for no body shall be allowed to take the chance of pledging a fraud, without running any risk of losing by the event, when it is identified. This principle is subject to the following rules:
It means the acceptance of a lesser sum than what was contracted for or a lesser fulfillment of the promise made. According to section 63, every promisee may remit or dispense with it, wholly or in part, or extend the time of performance, or accept any other satisfaction instead of performance.
Illustration: A owes B Rs. 5,000. A pays to B Rs. 3,000 who accepts it in full satisfaction of the debt. The whole debt is discharged.
Waiver means abandonment or intentional relinquishment of a right under the contract. When a party waives his rights under it the other party is released from his obligation. For example, A promises to paint a picture for B. afterwards forbids him to do so. A is no longer bound to perform the promise. In the case of M.Sham Singh v. State of Mysore, Sham Singh was offered scholarship by the State to study in the US upon the condition that on his return to India, he would serve the State if the State offered him a job within six months of his return failing which he would have to refund the scholarship amount. On his return he requested for an extension of a period of 6 months which was granted by the State. Sham Singh went back to the US and assumed a position to serve the latter. In a suit for claim of refund of scholarship by the State, the court held that it could not be said that the State had waived the liability of Sham Singh and that it was merely an extension of time for performance of his promise.
An accord and satisfaction is a legal contract whereby two parties agree to discharge a tort claim, contract, or other liability for an amount based on terms that differ from the original amount of the contract or claim. Accord and satisfaction is also used to settle legal claims prior to bringing them to court. Accepting some other satisfaction instead of actual performance is known as the principal of “accord and satisfaction” under English Law, and this results in the discharge of obligation under the contract.
In general sense, breach is a failure to act in a required or promised way. Breach of contract is failing to perform any term of a contract, written or oral, without a legal excuse. This may include not completing a job, not paying in full or on time, failure to deliver all the goods, substituting inferior or significantly different goods, not providing a bond when required, being late without excuse, or any act which shows the party will not complete the work. Breach of contract is one of the most common causes for filing suits for damages or suit for “specific performance” of the contract in the court. In order to uphold a case of breach of contract the court must satisfy itself of all the following requirements:-
Thus, breach is of two kinds’ namely anticipatory breach, and actual or present breach.
It takes place even before the date for performance of contract that is fixed by the parties. The breach may be committed by the party either expressly by making a communication to the promisee about this intention or in an implied manner by disabling himself for the performance of the contract. For example, Sam had promised to sell a machine to Charlie on 20th August. On 10th August, Sam contracts to sell the same machine to Rainer and lets Charlie know about it. Theoretically, Sam may break the contract with Rainer and sell the machine to Charlie on 20th August. But, Charlie is entitled to conclude that there is anticipatory breach on 10th August. Section 39 of Act, provides for the concept of anticipatory breach as follows: When a party to a contract has refused to perform, or disabled himself from performing, his promise in its entirety, the promisee may put an end to the contract, unless he has signified, by words or conduct, his acquiescence in its continuance. In Hochster v De la Tour, is the leading case on anticipatory breach. A appointed B to accompany him on a tour for three months from 1st June at a certain salary. Before 1st June, A told B that B was no more required by him. B sued A, without waiting for 1st June. A argued that there was no breach because 1st June had not arrived yet. But, the court said that since A had renounced the contract, B was not required to wait till 1st June to initiate any legal action. This shows that a contract becomes a legal entity not from the moment the performance becomes due but from the moment it is made.
The obligation under the original contract comes to an end and is replaced by operation of law by another obligation, namely to pay damages. The anticipatory breach would give to the aggrieved party two options:
Hence if the repudiation of the contract is followed by affirmation of the contract, the repudiating party would escape liability.
In the case of Ramgopal v. Dhanji Jadhavji Bhatia, the defendants, the owners of a ginning mill, contracted with the plaintiff, a cotton merchant, to use half the mill’s working capacity for ginning his cotton. But the defendant repudiated the contract before any cotton was supplied or ginned. The plaintiff was entitled to recover the estimated loss of profits at the time of repudiation.
Every minor irregularity is not repudiation so as to put an end to contract. The effect of the breach upon the contract as a whole be considered. For example, A contracts to deliver 100 bales of cotton in installments to B. The 16th installment of delivery was below the standard. B wanted to repudiate But it was not the intention of A to repudiate the contract as sub standard goods did not amount to breach in entirety and hence B could not repudiate the contract. The party in default must have refused altogether to perform the contract and the refusal must go to the whole of the contract, otherwise the other party would not be justified in putting an end to the contract.
Actual or present breach means where one party refuses to perform his part of the obligation on the due date or performs incompletely or not according to the terms of the contract. A party may fail to perform what he has promised, then he is said to make actual breach. Thus Actual breach may take place at the time when the performance is due, or during the performance of the contract. For example, where on the appointed day the seller does not deliver the goods or the buyer refuses to accept the delivery. Refusal of performance maybe express or implied. This type of breach of contract occurs in the case of installment contracts such as, sale of goods, delivery by installments, payment by installments etc.
Basically, breaches of contract fall into one of these two categories. Both anticipatory and actual breaches of contract are bad news for the parties to the contract. They can waste both time and money, and certainly lead to frustration for the parties to the contract. An actual breach occurs when one person refuses to fulfill his or her part of obligation on the due date or performs incompletely and anticipatory breach occurs when one party announces that he intends not to fulfill his or her part of obligation, before the due date for performance. This doesn’t mean there aren’t remedies in either case. A breach of contract, no matter what form it may take, entitles the innocent party to maintain an action for damages.