Discharge of Contract

Srinivas Atreya Third Semester 0519 August-September 2010

Discharge of Contract
Etymology The word Discharge comes from the old French word which translates to unload, discharge,". The word when used in a legal context means "to exempt, exonerate, or release. This term is generally used in Contract Law, wherein discharge of a contract refers to the act of making a contract or agreement null. A contract that has been discharged ensues when the rights and obligations created by it come to an end and the contracting parties no

more have a responsibility or liability to each other. Plainly put, a discharged contract ceases to bind the parties which were involved in the contract. In modern contract law, there are various modes of discharge most common of which include; By performance of the contract By breach of the contract By impossibility of performance By Agreement o Novation, Alteration or Recession (Sec.62)
o

Remission or Waiver (Sec.63)

By lapse of time, or law.

Discharge by performance and discharge by breach come across as the more common modes of discharge. Also, discharge by breach will generally give rise to secondary obligations to pay damages. Discharge by performance will not give rise to secondary obligations, as the contract will have been successfully completed. Another mode of discharge which does not give rise to secondary obligations is discharge by frustration. Here it gives rise to right to restitution under the statute. In other words, where a contract is deemed to be frustrated, both parties are discharged from the contract. Discharge by Performance Performance in legal context means the doing of that which is required by a contract. Discharge of performance takes place when the parties to the contract fulfill their obligations arising under the contract within the time and in the manned prescribed. In such a case, the parties are discharged and the contract comes to an end. Most contractual obligations are strict in that they require absolute performance but some merely require the existence of reasonable care. Also, clarity must be brought on the fact that 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. In discharge by performance, there are two modes of discharge namely actual performance and attempted performance.

In actual performance, both the parties perform their promises and contract is discharged. Here, the performance must be complete, precise and in accordance with the terms of the contract. Actual performance is illustrated in the case Bunge Corporation v. Tradax Export1 where a contract for the purchase of 15,000 tons of Soya beans was to be shipped in 3 shipments of 5,000 tons. The buyers were to provide a cargo vessel at the port. The buyer was also required to give 15 days notice to the readiness of the ship. On one occasion, they gave this notice four days to late. Here the question arose as to whether this was breach of contract or warranty. Also, in these four days, the value decreased by $60.ton and the sellers sought to repudiate for breach. The House of Lords said that time clauses were so fundamental to the contract that they were in fact conditions as to commercial certainty. Therefore, the seller was entitled to repudiate the contract for breach. Attempted performance, or 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 actual performance, tender is equivalent to actual performance. The effect of a vaild tender is that the contract is deemed to have been performed by the tenderer. The tenderer is discharged from the responsibility of non performance of the contract without in any way prejudicing his rights which accrue to him against the promisee. A tenders requires that there be a few conditionalitys, they include

It must be unconditional It must be made in a proper place a proper time It must be for the entire obligation as contained in the contract The tender must be able and willing to perform it then and there only The tender must be made to the appropriate person Tender of goods must be made in such a manned hat a reasonable opportunity is available to the buyer to inspect the goods If the there are more than one promisee then tender may be made to anyone of them

Bunge Corp v Tradax Export SA [1981] 2 All ER 513

Case Laws Hoenig v Isaacs2 The Plaintiff agreed to decorate flats for 750. However, some of the work was defective. The defendant had already paid 400, and he refused to pay the balance on the grounds of partial defective performance. Here the cost of repair would coast 56. The court of appeal in this case said that the plaintiff was entitled to the 350 (i.e. the defendant was not able to be discharged because there was substantial performance) less the 56 cost of the repair. In contrast to the above case: Bolton v Mahadeva3 The plaintiff agreed to install central heating, costing 560. But the performance was partially defective. The householder discovered the defect, but the plaintiff (plumber) refused to fix it. The repair was valued at 174. However, the defendant refused to pay any of the 560 of the contract. Here the question arises as to whether the plumber was entitled to payment? Or would the householder be able to get away without paying? Here, the court said that the refusal to repair the damage was a more serious breach and the plaintiff was not entitled to any money at all. The householder was discharged from any obligations. The distinction in this case is the relative value of the defect. Also, the non breaching party must have a real choice in the matter. Breach The effect of a breach of contract (at least where the breach consists of non performance or defective performance by the agreed time of performance) depends upon the classification

Hoenig v Isaacs [1952] 2 All ER 176

Bolton v Mahadeva [1972] 2 All ER 1322 (177)

of the term which has been breached as either a condition, warranty or innominate. The right to repudiate and treat the primary obligations as discharged arises in the case of the conditions but not warranties, and may arise in the case of innominate terms depending upon the seriousness of the breach. When a party having a duty to perform a contract fails to do that, or does an act whereby the performance of the contract by him becomes impossible, or he refuses to perform the contract, there is said to be a breach of contract on his part. On the breach of contract by one party, the other party is discharged from his obligation to perform his part of the obligation, and he also gets a right to sue the party making the breach of contract for damages for the loss occasioned to him due to the breach of contract. The breach of contract may be either actual, i.e., non-performance of the contract on the due date of performance, or anticipatory, i.e., before the due date of performance has come. For example, A is to supply certain goods to B on 1st January. On 1st January A does not supply the goods. He has made actual breach of contract. On the other hand, if A informs B on 1st December that he will not perform the contract on 1st January next; A has made breach of contract. Here, there are two distinctions which arise namely Actual breach of contract or Anticipatory/constructive breach of contract. The distinction here being Actual Breach of Contract may take place at the time when the performance is due. Actual breach occurs, when at the time when the performance is due, one party fails or refuses to perform his obligation under the contract. Also, actual breach of contract happens during the performance of the contract when one party fails or refuses to perform his obligation under the contract. The refusal may happen by Express repudiation or implied repudiation. Anticipatory breach occurs when a party to an executory contract declares his intention of no performing the contract before the performance is due. This may happen by expressly renouncing his obligation under the contact or by doing some act so that the performance of his promise becomes impossible It means the repudiation of a contract by one party to it before the due date of its performance has arrived. Section 39, which contains law relating to anticipatory breach of contract, is 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 to the contract, unless he has signified, by words or conduct, his acquiescence in its continuance. Anticipatory breach of contract could be made by promisor, either by refusing to perform the contract, or disabling himself from performing the contract in its entirety, before the due date of performance has arrived. When the refusal to perform the contract in its entirety is not there, it is not to be considered to be a case of anticipatory breach within the meaning of section 39. Case Law West Bengal Financial Corporation Vs. Gluco Series In West Bengal Financial Corporation Vs. Gluco Series AIR 1973 Cal., A granted a loan to B amounting to Rs. 4,38,000 and also agreed to grant a further loan of Rs. 1, 62,000 at its discretion, provided that B made the repayment of the loan in accordance with the agreement at the rate of Rs. 60,000 every year. B failed to make the repayment as agreed. B insisted that A should grant further loan of Rs. 1, 62,000 to him, but A did not grant further loan because B did not make the repayment of loan as agreed. Bs contention was that A had failed tom perform the contract by not advancing further loan, which should be considered to be breach of contract. It was, however, held that A had already advanced some loan, which B had accepted, there cannot be said to be a refusal on As part to performance of the contract in its entirety. B was therefore not entitled to put an end to the contract on the ground of breach of contract on the part of A. The position is further explained by illustration (b) to section 39, which is under: A, a singer, enters into a contract with B , the manager of a theatre to sing at his theatre two nights in every week during the next two months, and B agrees to pay her 100 rupees for each nights performance. On the sixth night A willfully absents herself from the theatre. B is at liberty to put an end to the contract. The above illustration to section 39 may create a misapprehension that in this Case absenting on one of the nights is only partial refusal to perform the contract and not failure to perform the contract in its entirety. In Sultan Chund Vs. Schiller (1879) it was observed that even absence on one night

In this illustration is breach of the contract in its entirety. Both under the English and Indian law a contract the performance of which is impossible the same is void for that reason. Discharge by impossibility of performance Both under the English and Indian law a contract the performance of which is impossible the same is void for that reason. Section 56, which deals with this question, mentions two kinds of impossibility. Firstly, impossibility existing at the time of the making of the contract and Secondly, a contract which is possible of performance and lawful when made, but the same becomes impossible or unlawful thereafter due to some supervening event. 1. Initial Impossibility An agreement to do an act impossible in itself is void. The object of making any contract is that the parties to it would perform their respective promises. If a contract is impossible of being performed, the parties to it will never be able to fulfill their object, and hence such an agreement is void. For example, A agrees with B to discover treasure by magic. The performance of the agreement being impossible, the agreement is void. Similarly, an agreement to bring a dead man to life is also void.

2. Subsequent impossibility The performance of the contract may be possible when the contract is entered into but because of some event, which the promisor could not prevent, the performance may become impossible or unlawful. Section 56 makes the following provision regarding the validity of such contracts: A contract to do an act which after the contract is made, becomes impossible, or by reason of some event which the promisor could not prevent, unlawful, becomes void when the act, becomes impossible or unlawful.

It means that every contract is based on the assumption that the parties to the contract will be able to perform the same when the due date of performance arrives. If because of some event the performance has either become impossible or unlawful, the contract becomes void. Section 56 explains this point with the help of following illustrations: Illustrations A and B contract to marry each other. Before the time fixed for marriage, A goes mad. The contract becomes void. A contracts to take in cargo for B at a foreign port. As Government afterwards declares war against the country in which the port is situated. The contract becomes void when war is declared. A contracts to act at a theatre for six months in consideration of a sum paid in advance by B. On several occasions A is too ill to act. The contract to act on those occasions becomes void. The Doctrine of Frustration When the performance of the contract becomes impossible, the purpose which the parties have in mind is frustrated. Because of a supervening event when the performance becomes impossible, the promisor is excused from the performance of the contract. This is known as doctrine of frustration under the English law, and is covered by section 56 of the Indian Contract Act. The basis of the doctrine of frustration was explained by Mukerjea J. in the Supreme Court decision of Satyabrata Ghose Vs. Mugneeram (1954) m in the following words: The essential idea upon which the doctrine (of frustration) is based is that of impossibility of performance of the contract; in fact impossibility and frustration are often used as interchangeable expressions. The changed circumstances make the performance of the contract impossible and the parties are absolved from the further performance of it as they did not promise to perform an impossibility .. The doctrine of frustration is really an aspect or part of the law of discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done and hence comes within the purview of section 56 of the Contract Act. Discharge by Agreement

Discharge by Agreement and Novation Section 62 and 63 deals with contracts in which the obligation of the parties to it may end by consent of the parties. Novation Novation means substitution of an existing contract with a new one. When, by an agreement between the parties to a contract, a new contract replaces an existing one, the already existing contract is thereby discharged, and in its pace the obligation of the parties in respect of the new contract comes into existence. Section 62 contains the following provision in this regard: Effect of novation, rescission and alteration of contract If the parties to a contract agree to substitute a new contract for it or rescind or alter it, then original contract need not be performed, Novation is of two kinds: (i) Novation by change in the terms of the contract, and (ii) Novation by change in the parties to the contract. (i) Change in the terms of the contract Then parties to a contract are free to alter the contract which they had originally entered into. If they do so, their liability as regards the original agreement is extinguished, and in its place they become bound by the new altered agreement. For example, A owes B 10,000 rupees. A enters into an agreement with B , and gives B a mortgage of his (As) estate for 5,000 rupees in place of the debt of 10,000 rupees. This is a new contract and extinguishes the old. In this illustration the parties to the contract remain the same but there is a substitution of a new contract with altered terms in place of the old one. It may be noted that novation is valid when both the parties agree to it. As the parties have a freedom to enter into a contract with any terms of their choice, they are also free to alter the terms of it by their mutual consent.

(ii) Change in the parties to the contract It is possible that by novation an obligation may be created for one party in place of another. If under an existing contract A is bound to perform the contract in favor of B, the responsibility of A is bound to perform the contract in favor of B; the responsibility of A could be taken over by C. Now instead of A being liable towards B, by novation C becomes liable towards B. The working of the doctrine of novation has been explained by Lord Selborne In Scarf vs. Jardine in the following words: That, there being a contract in existence, some new contract is substituted for it either between the same parties or between different parties, the consideration mutually being the discharge of the old contract. A common instance of it in partnership cases is where upon the dissolution of a partnership the person who are going to continue in business agree and undertake as between themselves and the retiring partner, that they will assume and discharge the whole liabilities of the business, usually taking over the assets: and if, in that case, they give notice of that arrangement to a creditor, and ask for his accession to it, there becomes a contract between the creditor who accedes and the new firm to the effect that he will accept their liability instead of the old liability, and on the other hand, that they promise to pay him that consideration. Remission of performance Section 63 enables the promisee to agree to dispense with or remit performance of promise. The section reads as Promisee may dispense with or remit performance of promise Every promisee may dispense with or remit, wholly or in part, the performance of the promise made to him, or may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit. Illustrations (a) A promises to paint a picture for B. B afterwards forbids him to do so. A is no longer bound to perform the promise. (b) A owes B 5,000 rupees. A pays to B and B accepts, in satisfaction of the whole debt 2,000 rupees paid at the time and place at which the 5,000 rupees were payable. The whole debt is discharged.

Remedies for Breach of Contract When one of the parties to the contract makes a breach of the contract the following remedies are available to the other party. 1. Damages Remedy by way of damages is the most common remedy available to the injured party. This entitles the injured party to recover compensation for the loss suffered by it due to the breach o9f contract, from the party who caused the breach. Section 73 to section 75 incorporate provisions in this regard. 2. Quantum meruit When the injured party has performed a part of his obligation under the contract before the breach of contract has occurred, he is entitled to recover the value of what he has done, under this remedy. 3. Specific Performance and Injunction: Sometimes a party to the contract instead of recovering damages for the breach may have recourse to the alternative remedy of specific performance of the contract, or an injunction restraining the other party from making a breach of the contract. Provisions regarding these remedies have been contained in the Specific Relief Act, 1963. Damages Section 73 makes the following provisions regarding the might of the injured party to recover compensation for the loss or damage which is caused to him by the breach of contract. Section 73 Compensation for loss or damage caused by breach of contract. When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such

breach, or which the parties knew, when they made contract, to be likely to result from the breach of it. Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach. The section has been explained with the help of the following illustrations (a) A contracts to sell and deliver 50 maunds of saltpetre to B, at certain price to be paid on delivery. A breaks his promise, b is entitled to receive from A, by way of compensation, the sum, if any, by which the contract price falls short of the price for which B might have obtained 50 maunds of saltpetre of like quality at the time when the saltpetre ought to have been delivered. (b) A contracts to let his ship to B for a year from the first of January, for a certain price. Freights rise, and on the first of January, the hire obtainable for the ship is higher than the contract price. A breaks his promise. He must pay to B, by way of compensation, a sum equal to the difference between the contract price and the price for which B could hire a similar ship for a year on and from first January. (c) A contracts to repair Bs house in a certain manner, receives payments in advance. A repairs the house but not according to contract. B is entitled to recover from A the cost of making the repairs conform to the contract. Remoteness of Damage The following statement of Alderson B, in case of Hadley vs. Baxendale (1854) is considered to be the basis of the law to determine whether the damage is the proximate or remote consequence or breach of contract: Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may be fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such as may reasonable be

supposed to have been in the contemplation of both parties, at the time they made the contract, as he probable result of the breach of it. The rule in Hadley v. Baxendale consists of two parts. On the breach of a contract such damages can be recovered, (1) As may fairly and reasonably be considered arising naturally, i.e., according to the usual course of things from such breach, or (2) As may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract. In either case it is necessary that the resulting damage is the probable result of the breach of contract. The principle stated in the two branches of the rule is virtually the rule of reasonable foresight. The liability of the party making the breach of contract depends on the knowledge, imputed or actual, of the loss likely to rise in case of breach of contact. The first branch of the rule allows damages for the loss arising naturally, i.e. in the usual course of things from the breach. The parties are deemed to know about the likelihood of such loss. The second branch of the rule deals with the recovery of more loss which results from the special circumstances of the case. Such loss is recoverable, if the possibility of such loss was actually within the knowledge of the parties, particularly the party who makes a breach of the contract, at the time of making the contract. QUANTUM MERUIT Ordinarily if a person having agreed to do some work or render some service has done only a part of what he was required to do, he cannot claim anything for what he has done. When a person agrees to complete some work for a lump sum non-completion of the work does not entitle him to any remuneration even for the part of the work done. But the law recognises an important exception to this rule by way of an action for Quantum Meruit Under this section if A and B have entered into a contract, and A, who has already performed a part of the contract, is then prevented by B from performing the rest of his obligation under the contract, A can recover from B reasonable remuneration for whatever he has already done. It may be noted that this action is not an action for compensation for breach of contract by the other side. It is an action which is alternative to an action for the breach of contract. This action in essence is one of restitution, putting the party injured by the breach of contract in a position in which he would have been had the

not been entered into. It merely entitles the injured party to be compensated for whatever work he may have already done, or whatever expense he may have incurred. In the words of Alderson, B, Where one party has absolutely refused to perform, or has rendered himself incapable of performing, his part of the contract, he puts it in the power of the other party either to sue for the breach of it or to rescind the contract and sue on a quantum meruit for the work actually done. The essentials of an action of quantum meruit are as follows: 1. One of the parties makes a breach of contract, or prevents the performance a part of it by the other side. 2. The party injured by the breach of the contract, which has already performed a part of it, elects to be discharged from further performance of the contract and brings an action for whatever he has already done. For instance, if A agrees to deliver B 500 bags of wheat and when A has already delivered 100 bags B refuses to accept any further supply, A can recover from B the value of wheat which he has already delivered. In De Bernardy v. Harding, (1853) the defendant, who was to erect and The seats to view the funeral of the Duke of Wellington, appointed the plaintiff as his agent to advertise and sell tickets for the seats. The plaintiff was to be paid commission on the tickets sold by him. The plaintiff incurred some expense in advertising for the tickets but before any tickets were actually sold by him his authority to sell tickets was wrongfully revoked by the defendant. It was held that the plaintiff was entitled to recover the expenses already incurred by him under an action for quantum meruit. Contingent Contracts A contingent contract is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen (Sec 31) Illustrations: A contracts to pay B Rs 10,000 if Bs house is burnt. This is a contingent contact. Meaning of Contingent Contract

A contract may be unconditional or absolute on the one hand and conditional or contingent on the other. The absolute or unconditional contract is one without any reservations or conditions and is to be performed under any event. On the other hand, conditional or contingent contract is one in which a promise is conditional and the contract shall be performed only on the happening or not happening of some future uncertain event. The event must be collateral to the contract. The condition may be precedent or subsequent. A collateral event is defined as one which is neither a performance directly promised as part of the contract, nor the whole of the consideration for a promise. The event, therefore independent of the contract and does not form part of consideration to it. The performance of such a contract depends on contingency and such contingency is uncertain. The test of determining whether the contract is contingent or not, is uncertainty. If contingency is certain it is not a contingent contract. Essential characteristics of a Contingent Contract: a) There should be existence of a contingency; happening or non-happening of some event in future. b) Contingency must be uncertain. c) The event must be collateral, for example incidental to the contact.

Rules Regarding Contingent Contracts: Enforcements of contracts contingent on happening of a future uncertain event: (Sec32) Contingent contracts to do or not to do anything if an uncertain future event happens cannot be enforced by law unless and until that event has happened. If the event becomes impossible such contracts become void. Illustrations: (a) A makes a contract with B to buy Bs houses if A survives C. This contract cannot be enforced by law unless and until C dies in As life time.

(b) A makes a contract with B to sell a house to B at a specified price, if C to whom the house has been offered refuses to buy. The contract cannot be enforced by law unless and until C refuses to buy the house. (c) A contracts to pay B a sum of money when B marries C. C dies without being married to B. The contact becomes void. Contracts so contingent become void when the event becomes impossible. Performance of such contract becomes impossible as the event on which the contract was contingent becomes impossible for example, imposition of government restrictions. Enforcement of contracts on the non-happening of a future uncertain event: (Sec 33) Contingent contracts to do or not to do anything if an uncertain future event does not happen can be enforced when the happening of the event becomes impossible and not before. Illustration: A agrees to pay B a sum of money if a certain ship does not return. The ship is sunk. The contract can be enforced when the ship sinks. Contracts contingent on future conduct of a living person: (Sec 34) If future event which a contract is contingent is the way in which a person will act at an unspecified time, the event shall be considered to become impossible when such person does anything which renders it impossible that he should so act within any definite time, or otherwise than under future contingencies. Illustration: A agrees to pay B a sum of money if B marries C, C marries D. The marriage of B to C must now be considered impossible although it is possible that D may die and that C may afterwards marry B. Contracts contingent on a specified event happening within a fixed time: (Sec 33(1)) Contingent contracts to do or not to do anything if a specified uncertain event happens

within a fixed time become void if, at the expiration of the time fixed, such event has not happened or if before the time fixed, such event becomes impossible.

Illustrations: A promises to pay B a sum of money if a certain ship returns within a year. The contracts may be enforced if the ship returns within the year, and becomes void if the ship is burnt within the year.