7

The Indian Contract Act, 1872: Discharge of a Contract

7.1 DISCHARGE OF A CONTRACT

Discharge of a contract means termination of the contractual relations between the parties to the contract. The contract may be discharged in the following six modes as shown in Figure 7.1.

7.2 DISCHARGE OF A CONTRACT ON PERFORMANCE

A contract can be discharged by performance in any of the following ways.

7.2.1 By an Actual Performance

It means the parties to contract have performed their respective promises under the contract.

7.2.2 By an Attempted Performance or a Tender

It means the promisor has made an offer of the performance of promise but it has not been accepted by the promisee.

7.3 DISCHARGE OF A CONTRACT BY A MUTUAL AGREEMENT OR BY AN IMPLIED CONSENT

A contract can be discharged by mutual agreement in any of the following ways.

7.3.1 Novation

The novation means a new contract is entered into in consideration of the old contract. The new contract is entered into between the same parties or the new parties. The novation is valid when all the parties must consent it. The new contract must be valid and enforceable, otherwise the old contract will continue valid.

Example

A owed ₹ 100 to B, under contract. B owed ₹ 100 to C. It was agreed among A, B and C that A would pay ₹ 100 to C.

7.3.2 Alteration

An alteration of a contract means a change in one or more terms of the contract with the mutual consent of the parties. The alteration discharges the original contract and creates a new contract. However, the parties to the new contract remain the same. In case of alteration of the contract, the old terms and conditions need not to be performed while the new terms and conditions must be performed.

Example

A agreed with B to supply 100 TV sets at a certain price by the end of October. Subsequently, A and B mutually agree that the supply be made by the end of November. This is an altercation in the terms of the contract by consent of both the parties.

7.3.3 Rescission

The rescission of a contract means the cancellation of the contract by one or all the parties to contract. It may take place:

1. With the mutual consent of the parties.
2. By a party whose consent was not freely obtained (voidable contract).
3. One party may rescind the contract, if a breach of contract by the other party.
4. The party rescinding the contract must restore the benefit received from the other party.

No partial rescission. The party may rescind the entire contract. The rescission of the contract in part is not possible. Just as a proposal has to be communicated, the rescission should also be communicated. A rescission may be revoked in the same manner as a proposal is revoked.

7.3.4 Remission

The remission means the acceptance of a lesser consideration than what is agreed under the contract. It takes place when the promisee:

1. Dispenses with a part or whole of the performance of a promise.
2. Extends the time for a performance by the promisor.
3. Accepts a lesser sum.
4. Accepts any other consideration, than agreed in the contract.

Example

A owes B ₹ 5000. A pays ₹ 2000 to B and B accepts the amount in satisfaction of the whole debt. The whole debt is discharged.

It may be noted that when a party accepts a lesser sum in satisfaction of a larger sum due under the contract it is called ‘accord and satisfaction’ in the English Law. The promisee accepts a lesser sum than what is due under the contract is known as ‘Accord’ and the actual payment is the satisfaction. This is a valid contract.

7.3.5 Waiver

It means the abandonment (i.e., giving up) of right by the party under the contract. No consideration is necessary for the waiver.

Example

A promises to supply goods to Y. Later on, Y exempts A from carrying out the promise. It amount as waiver of right of performance on part of Y.

7.3.6 Merger

The conversion of the inferior right into superior right is called as merger. It is also called as vesting of rights and liabilities in the same person.

Example

A person holds property under lease, purchases the property. On purchase, his lease agreement is discharged.

7.4 DISTINGUISH BETWEEN A NOVATION AND AN ALTERATION

Matter	Novation	Alteration
Meaning	It means a new contract is entered into in the place of the old contract.	Alteration means a change in one or more terms of the contract with the consent of all the parties.
Different Parties	Novation may involve different parties.	In the case of alteration, parties are the same.
Change in terms and Conditions	Novation may or may not involve changes in the terms and conditions. Generally, novation includes alteration.	Alteration always requires changes in one or more terms and conditions of the contract.

7.5 DISTINGUISH BETWEEN A RESCISSION AND AN ALTERATION

Matter	Rescission	Alteration
Meaning	It means cancellation of the contract.	It means change in one or more terms of the contract with the consent of all the parties.
Mutual consent	Novation takes place with the mutual consent or by aggrieved party or a party whose consent is not free.	Alteration cannot take place without mutual consent.
Effect	On cancellation, the contract comes to an end.	The parties are legally bound to each other under the altered contract.

7.6 DISCHARGE OF A CONTRACT BY IMPOSSIBILITY OF PERFORMANCE

Sometimes, the performance of a contract is impossible. In such a case, the contract is discharged. This is based on the principle that law does not recognize what is impossible. The impossibility of performance may be of two types, namely (a) the initial impossibility and (b) the subsequent impossibility.

7.6.1 Initial Impossibility or Pre-contractual Impossibility

It means impossibility exists at the time of making a contract. The initial impossibility may be (i) known or (ii) unknown to the parties at the time of making the agreement.

7.6.2 Known Impossibility

It means one or both the parties have a knowledge that a promise is impossible to perform even though they enter into an agreement.

Example

A agrees with B to bring a dead man to life. It is known to the parties at the time of making the agreement that the performance is impossible. The agreement is void ab initio.

7.6.3 Unknown Impossibility

It means both the parties genuinely believe that the performance of a promise is possible but it is impossible to perform. It can also be said here that there is a bilateral mistake of parties.

Example

A agrees to sell certain goods to B, supposed to be on their way from Mumbai to Kolkata in a certain ship. Unknown to both the parties, the ship had already sunk in the deep sea, and the goods ceased to exist at the time of contract. The contract becomes void when the impossibility of performance is discovered.

7.6.4 Supervening Impossibility or Post-contractual Impossibility

The contract becomes void on account of the subsequent impossibility only if the following conditions are satisfied.

1. The act should have become impossible after the formation of the contract.
2. The impossibility should have been caused by a reason of some event which was beyond the control of the promisor.
3. The impossibility must not be the result of some act or negligence of the promisor himself.

Example

A and B contract to marry each other. Before the time fixed for the marriage, A becomes mad. The contract becomes void.

7.7 SPECIFIC GROUNDS OF SUBSEQUENT IMPOSSIBILITIES

It is also known as the doctrine of frustration under the English law. In the following cases, the contract is discharged on the ground of the supervening impossibility.

7.7.1 Destruction of Subject–Matter

The destruction of the subject–matter after a contract is made without the fault of any party discharge the contract. But if the destruction of the subject matter is due to the fault of any party, he is liable for the damage to the other party.

Example

A music hall and a garden was let out by A to B for a series of concerts on four different days. The hall was burnt-down before the date of the first concert. Held, the contract became void by the supervening impossibility.

7.7.2 Incapacity or Death

Incapacity or death of the promisor and the contract is for personal service or skill. The contracts involving the use of personal skill or ability of the promisor are discharged on the illness, death, or incapacity of the promisor.

Example

A piano player agreed to perform a concert on a particular day. She was not able to give her performance due to her illness. Held, the contract was discharged due to her illness.

7.7.3 Change in Law or Circumstances

Sometimes, certain circumstances arise subsequent to the formation of a contract, which makes the performance of the contract impossible, as contemplated by the parties. In such circumstances, the contract is discharged.

Example

A agreed to sell his land to B. Subsequently, the land was acquired by the government. Held, the contract was discharged.

7.7.4 Declaration of War

The pending contract at the time of declaration of a war is either suspended or declared void. Generally, the contract at the time of the declaration of a war is void, when the government declares it against the public interest or national interest.

Example

A contracts to take in a cargo for B at a foreign port. A’s government, afterwards, declares a war against the country in which the port is situated. The contract becomes void when war is declared.

7.8 CASES WHERE A CONTRACT IS NOT DISCHARGED ON THE GROUND OF SUPERVENING IMPOSSIBILITY

In the following cases, the contract is not discharged on the ground of supervening impossibility. Such excuses are not recognized by the law.

7.8.1 Performance Becomes Difficult

When the performance of the contract becomes difficult, the contract is not discharged. Difficulty is not impossibility. A party can perform it with more effort or hardship.

7.8.2 Commercial Impossibility

The party is not discharged from the performance on the ground that it will be non-profitable for him to perform the contract.

Example

A agreed to sell to B, dhotis manufactured in a particular mill. The mill got into repairs and so, dhotis did not manufacture. Held, the contract was not frustrated as the stipulation as to delivery did not make the delivery by the mills, a condition precedent. It was a breach of the contract.

7.8.3 Impossibility Due to the Conduct of Third Party

If a promisor could not perform the promise because of default of the third party, he cannot make an excuse and claims that it is impossible to perform the promise. The third party’s fault or conduct has nothing to do with the contract. The contract is not discharged because of third party’s default.

Example

A agreed with B to supply certain cloth manufactured by a specified mill. The terms of the agreement stipulated that A could supply goods as soon as they are supplied to him by the mill. The mill failed to supply the goods to A. Held, A was liable to supply as the terms only indicated the process of delivery.

7.8.4 Strikes, Riots or Civil Disturbances

Strikes, riots, or civil disturbances do not discharge the contract. When such an event takes place, the performance of a promise under the contract becomes impossible for the time being. Once a strike is called off or life becomes normal, it is possible to perform the promise.

Example

A agreed to supply certain goods to B which were to be imported from Algeria. The goods could not be imported due to the riots and civil disturbances in that country. Held, A cannot be excused for the non-performance of the contract.

7.8.5 Self-induced Impossibility

If the performance of the contract becomes impossible due to the act of the omission of a party, it is called as self induced impossibility. In such cases, the contract is not discharged.

7.8.6 Failure of Object

The failure of one of the object out of many objects, do not discharge the contract. But, if all the objects of the contract fail, the contract becomes discharged.

7.9 DISCHARGE OF A CONTRACT BY LAPSE OF TIME

Every contract and promise under the contract should be performed within a time limit. The contract is discharged, if it is not performed or enforced within a specified period called as the period of limitation.

Example

The period of limitation for recovering the debt is 3 years and 12 years for the recovery of immovable property.

7.10 DISCHARGE OF A CONTRACT BY OPERATION OF LAW

In the following circumstances, the contract is discharged by the operation of law.

7.10.1 Death

The contract that requires personal skill is discharged on the death of the promisors. However, any benefit received before the performance shall be returned by the legal representative of the deceased party.

7.10.2 Merger

The conversion of the inferior right into superior right is called as merger. It is also called as vesting of rights and liabilities in the same person.

7.10.3 Insolvency

The insolvent is discharged from all the liabilities on all the contracts, entered into, up to the date of insolvency.

7.10.4 Unauthorized Material Alteration

The alteration which changes the nature of the contract is material alteration. If one party makes any material alteration in the terms of the contract without the approval of the other party, the contract comes to an end.

Example

One of the parties without the consent of the other party changes the date of payment or the place of delivery.

7.11 DISCHARGE OF A CONTRACT BY BREACH OF CONTRACT

It means the failure of a party to fulfill his obligation or promise under the contract. When there is a breach of contract, certain remedy or consequences are available to the aggrieved party. The aggrieved party means a party who is not at a fault.

7.11.1 Consequences of Breach of Contract

The aggrieved party is not required to perform his part of the promise. The aggrieved party is having various remedies depending upon the type of breach. The breach of contract is of the following two types:

1. Actual breach
2. Anticipatory breach

7.11.2 Actual Breach of Contract

An actual breach of contract means any party to contract refuses or fails to perform his promise on the due date of performance, or during the performance. The actual breach of contract may take place expressly or impliedly.

Examples

1. A agreed with B to sell 500 TV sets on 21 January. A refuses to deliver the TV sets on the due date. This is a breach of contract on the due date.
2. A agreed with B to supply 3000 computers at a certain price to be delivered in three installments of 1000 each. After 2000 computers had been supplied, B informs A to deliver no more. This is the actual breach of contract during the performance by express refusing, and B can claim damages for the breach.

Following are the consequences of the actual breach of contract:

1. If time is the essence of the contract
   1. The contract is voidable at the option of the aggrieved party.
   2. The aggrieved party can claim the compensation for the loss for non-performance.
   3. The aggrieved party cannot claim compensation when he accepts delayed performance.
2. If time is not the essence of the contract

If time is not the essence, the contract is not voidable but the aggrieved party can claim compensation for any loss caused for non-performance.

7.11.3 Anticipatory Breach of Contract

When any party declares his intention of not performing the contract before the performance is due, it is called as anticipatory breach of contract.

Example

A agrees with B to sell his car on 21 January. Before this date he informs B that he will not sell it. This is an anticipatory breach of contract.

There are two modes of anticipatory breach (a) express repudiation and (b) implied repudiation. The express repudiation means when the party refuses expressly to perform his obligation before the performance due. The implied repudiation means the party acts in such manner that it becomes impossible for him to fulfill his obligation under the contract. In the case of implied repudiation, the party does something which indicates his unwillingness to perform the contract.

Following are the consequence of anticipatory breach.

1. The aggrieved party may treat the contract as alive.
2. The aggrieved party can rescind the contract and claim damages.

Here, the damage will be equal to the difference between the contract price and the price as on the date of communication.

Note:

When a contract becomes void, any benefit received under such contract is bound to restore such benefit or to make compensation for such benefit to the person from whom he received it.

LIST OF LANDMARK JUDGEMENTS

1. Cort vs Ambergate Rly. Co. (1851)

   The actual breach of contract also occurs when during the performance; the party fails to perform his obligation.

2. Krell vs Henri (1903)

   The failure of the object due to non-occurrence of the contemplated event discharges the contract.

3. Shiam Sunder vs Durga (1966)

   The contract is discharged if the performance becomes impossible due to a change of law or a change in the government policy after the formation of the contract.

4. Jacob vs Credit Lyonnais (1884)

   The strikes lock-out and civil disturbances is not the impossibility for the performance of a contract and therefore, the contract is not discharged.

5. Shankar Lal Damodar vs A. Ajaipal (1946)

   In the case of novation of a contract if the new contract is not enforceable by law the existing contract is received and the parties are bound by it.

6. Manohar Koyal vs Thakur Dass Naker (1888)

   The novation must take place before the breach of the original contract.

7. Loonkaran Sethia vs Ivan E. John (1977)

   Where one party, without the consent of the other party, changes the date of payment or delivery of goods or substitutes, such words which change the meaning and affect the contract, such changes are material alterations to the contract.

8. Robinson vs Davidson (1871)

   The contract involving the use of personal skill or ability of the promisor is discharged on the illness, death or incapacity of the promisor.

9. Shanty Vijay and Co. vs Princess Fatima Fouzia (1980)

   The injunction order or stay order is in force, the performance of a contract may be stayed. The contract cannot be enforced.

10. Blackburn Bobbin Co. vs T. W. Allen and Sons (1918)

    If the performance of a contract becomes difficult, in such a case, the contract is not discharged.

11. H. B. Steamboat Co. vs Hutton (1903)

    Where there are several objects for which a contract is entered into, the failure of one of the objects will not discharge the contract.

TEST YOUR KNOWLEDGE

1. State the various methods of termination of a contract.

   (Ref. Para-7.1)

2. How is the contract discharged on the performance of a promise?

   (Ref. Para-7.2)

3. Explain with examples, the principle of novation, alteration and rescission, where the contract need not to be performed.

   (Ref. Para-7.3)

4. Novation means entering into a new contract in place of the old contract. Explain.

   (Ref. Para-7.3)

5. Write a short note on the novation of the contract.

   (Ref. Para-7.3)

6. Write a short note on the alteration of the contract.

   (Ref. Para-7.3)

7. What do you understand by ‘accord’ and ‘satisfaction’? Write a short note on the novation of a contract.

   (Ref. Para-7.3)

8. Explain the meaning of the term ‘remission’. Write a short note on the novation of a contract.

   (Ref. Para-7.3)

9. Remission may be part or full. Is it correct statement?

   (Ref. Para-7.3)

10. Distinguish between a novation and an alteration.

    (Ref. Para-7.4)

11. Distinguish between a rescission and an alteration.

    (Ref. Para-7.5)

12. The law does not compel the impossible. Comment.

    (Ref. Para-7.6)

13. Discuss the impossibility of performance as the mode of discharge of a contract, stating the difference between the initial and supervening impossibility.

    (Ref. Para-7.6)

14. Does the frustration discharge the contract in all cases? If not, then specify the circumstances in which the contract is not discharged on the ground of frustration.

    (Ref. Para-7.7,7.8)

15. When may a contract be discharged by the operation of law?

    (Ref. Para-7.10)

16. Explain the meaning of the breach of contract.

    (Ref. Para-7.11)

17. Write a short note on the breach of contract.

    (Ref. Para-7.11)

18. Write the difference between the actual breach and the anticipatory breach of contract.

    (Ref. Para-7.11)

19. What remedy is available to party on the breach of contract?

    (Ref. Para-7.11)

20. What are the consequences for the actual breach of contract?

    (Ref. Para-7.11)

21. Write a short note on the anticipatory breach of contract.

    (Ref. Para-7.11)

MULTIPLE-CHOICE QUESTIONS

1. A contract is discharged by the breach when a party to a contract
   1. refuses to perform his promise.
   2. fails to perform his promise.
   3. disables himself from performing his part of the promise.
   4. all of the above.
2. A agrees with B to bring back the life of the dead patient for ₹ 50,000. The agreement is
   1. void.
   2. voidable.
   3. unenforceable.
   4. illegal.
3. The breach of a contract may be
   1. an actual breach.
   2. an anticipatory breach.
   3. either (i) or (ii).
   4. neither (i) nor (ii).
4. The doctrine of impossibility of performance, rendering a contract void, is based on
   1. a commercial impossibility.
   2. a supervening impossibility.
   3. just and reasonable ground.
   4. an unjust enrichment.
5. The third party’s failure to perform a promise, on whose performance your performance of promise depends upon. In this case, the contract
   1. is not discharged.
   2. is discharged.
   3. becomes void.
   4. becomes voidable.
6. When the contract is made for several purposes, a failure of one of them
   1. terminates the entire contract.
   2. does not terminate the entire contract.
   3. makes the contract unlawful.
   4. renders the object illegal.
7. Which of the following is incorrect?
   1. Contracts are discharged by lapse of time.
   2. The discharge of a party and the discharge of a contract are one and the same thing.
   3. The cancellation of contract discharges the contract.
   4. All of the above.
8. Where performance has become more difficult than estimated at the time of entering into a contract, the contract
   1. is not discharged.
   2. is discharged.
   3. becomes void.
   4. becomes voidable.
9. An obligation under a contract stands discharged by
   1. dispensing with the performance.
   2. impossibility of performance.
   3. death of the party and contract is personal in nature.
   4. all of the above.
10. A contract stands discharged
    1. by performance of the contract.
    2. by breach of the contract.
    3. by agreement.
    4. all of the above.
11. In which of the ways can a contract be discharged by the operation of law?
    1. Death of the promisor.
    2. Insolvency of the promisor.
    3. Merger of rights.
    4. All of the above.
12. In which of the ways can a contract be discharged by the operation of law?
    1. Unauthorized material alteration contract.
    2. Vesting of rights and liabilities in the same person.
    3. Neither (i) nor (ii).
    4. Both (i) and (ii).
13. In which of the ways can a contract be discharged by agreement between the parties?
    1. Novation.
    2. Rescission.
    3. Alteration.
    4. All of the above.
14. The original contract need not to be performed, if there is
    1. rescission of contract.
    2. novation of contract.
    3. alteration of contract.
    4. all of the above.
15. If a new contract is substituted in the place of an existing contract, it is called
    1. alteration.
    2. rescission.
    3. novation.
    4. waiver.
16. For a valid novation, a new contract must be made
    1. before making of the original contract.
    2. during the continuance of the original contract.
    3. after the conclusion of the original contract.
    4. all of the above.
17. Rescission of a contract means
    1. the termination of the contract.
    2. the renewal of the contract.
    3. the alteration of the contract.
    4. the substitution of the new contract in the place of the earlier one.
18. A contracts with B to deliver goods to B on 1st July. A does not deliver goods on 1st July. B may rescind the contract. The contract is rescinded due to
    1. mutual decision.
    2. A’s failure to perform.
    3. impossibility of performance.
    4. revocation of proposal.
19. If a person accepts a lesser sum of money, than what was contracted for, in the discharge of the whole debt, it is known as
    1. a waiver.
    2. a remission.
    3. an alteration.
    4. a rescission.
20. A owes B ₹ 50,000. Due date for the payment is 25th March. A pays to B ₹ 30,000 on 25th March, who accepts it in full satisfaction of the debt. The debt is discharged on account of
    1. remission.
    2. extension time of performance.
    3. novation.
    4. all of the above.
21. In case of novation, there is
    1. a change to some of the terms and conditions of the original contract.
    2. a substitution of an existing contract with the new one.
    3. either (i) or (ii).
    4. neither (i) nor (ii).
22. In case of alteration,
    1. old terms and conditions need not to be performed.
    2. new terms and conditions must be performed.
    3. both (i) and (ii).
    4. neither (i) nor (ii).
23. Actual breach may take place
    1. expressly.
    2. impliedly.
    3. either (i) or (ii).
    4. neither (i) nor (ii).
24. A agreed to supply certain goods to B, which were to be imported by C. But C failed to import the goods. In this case, the contract is
    1. discharged.
    2. not discharged.
    3. voidable.
    4. impossible to perform.
25. In case of an anticipatory breach, the promisee can
    1. put an end to the contract.
    2. elect to keep the contract alive till the date of performance.
    3. either (i) or (ii).
    4. neither (i) nor (ii).
26. Where a party to contract transfers his rights under the contract to another person, it is legally known as
    1. novation of a contract.
    2. rescisson of a contract.
    3. waiver of a contract.
    4. assignment of a contract.
27. A contracts to buy B’s scooter for ₹ 10,000 but breaks the promise. What compensation must A pay to B?
    1. The excess amount of the contract price, over the price which B can obtain for the scooter at the time of breach of promise.
    2. The contract price of ₹ 10,000.
    3. The price which B demands.
    4. None of the above.

ANSWER KEYS

1. iv
2. i
3. iii
4. ii
5. i
6. ii
7. ii
8. i
9. iv
10. iv
11. iv
12. iv
13. iv
14. iv
15. iii
16. ii
17. i
18. ii
19. ii
20. i
21. ii
22. iii
23. iii
24. ii
25. iii
26. iv
27. i