ICA, 1872 : DISCHARGE OF CONTRACT
9.1 INTRODUCTION
A valid contract gives rise to rights and obligations between the parties. A contract is deemed to be discharged when rights and obligations arising out of the contract are extinguished. Thus, the term discharge means the termination of the contractual relationship. The various modes of discharge of a contract shown in the figure are being discussed as under :
9.2 MODES OF DISCHARGE OF CONTRACT
By performance By impossibility By lapse By operation of
Actual of performance of time law
Attempted
By mutual consent
Initial Impossibility
Subsequent Impossibility
Death
Material Alteration
Merger or agreement
Insolvency
By Express consent By breach
By Implied consent of contract
(a) Novation
(b) Alteration
Actual breach
Anticipatory
(c) Rescission breach
(d) Remission
(e) Waiver
FIGURE 5
9.3 DISCHARGE OF CONTRACT BY PERFORMANCE
A contract is said to be discharged by performance when both the parties to the contract fulfil their respective obligations created under the contract within the specified time and as per the manner prescribed. Performance is the usual mode of a discharge of a contract. Performance may be : (i) Actual performance; or (ii) Attempted performance or tender.
(i) Actual Performance. A contract is said to be actually performed when both the parties fulfil their respective obligations arising out of the contract according to the terms of the contract.
(ii) Attempted Performance. It is an offer of performance by the promiser in accordance with the conditions laid down under Sec. 38. This section states that if the offer of performance has not been accepted, the promisor is not responsible for non-performance, nor does he thereby lose his right under the contract.
9.4 DISCHARGE OF CONTRACT BY AGREEMENT (SEC. 62)
The general rule of law is that a thing may be destroyed in the same manner in which it is constituted. Thus a contractual obligation may be terminated by an agreement which may be express or implied.
Discharge by implied consent may take the following shapes :
(a) Novation. The term ‘Novation’ implies substitution of a new contract in place of existing one. It may involve a new contract between the same parties or there could be change of parties.
EXAMPLE
A owes money to B under a contract. It is agreed between A, B and C, that B shall henceforth accept C as his debtor, instead of A. The old contract of A and B comes to an end and the new contract between B and C comes into existence.
Essentials of Valid Novation. There must be
(i) Mutual consent of the parties.
(ii) The new contract must be capable of enforcement at law.
(iii) Novation must take place before the expiry of the time of performance of the original contract.
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b) Alteration. It occurs when one or more of the terms of the contract are altered by the mutual consent of the parties to the contract. Alteration may be bilateral or unilateral. The difference between novation and alteration is that novation may result in change in the terms or change in the parties while in case of alteration, the parties remain the same. Thus novation is wider term than alteration.
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c) Rescission. When the parties cancel all or same of the terms of contract by mutual consent, it is called rescission of the contract. Similarity in case of breach of a contract, the aggrieved party can rescind the contract and file a suit against the guilty party for compensation. The right of rescission is also available to the aggrieved party whose consent was not free, in case of voidable contract. Rescission may be total or partial.
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d) Remission. It means acceptance of a lesser performance than what was contracted for. Accord and satisfaction is one of the ways in which a contract gets discharged under English Law. When the promisee accepts lesser sum than what is due under the existing contract, is known as accord and the actual payment made by the promisor is the satisfaction. It may be noted that accord must be followed by satisfaction to discharge the contract.
According to Sec. 63 the promisee is allowed :
(i) To dispense with or remit (wholly or in part) the performance of the promise, or
(ii) To extend the time for performance, or
(iii) To accept any other consideration than agreed to in the original contract.
EXAMPLES
1. A owes B ` 5,000. A pays to B ` 2000 and B accepts in satisfaction of the whole debt. Here an agreement to pay ` 2000 is accord and actual payment is the satisfaction. The whole debt is discharged.
2. A owes B ` 10,000 payable after one month. A is unable to discharge his obligation on the due date and as such makes a request to B for the extension of time for payment by one week. B entertains A’s request. The promise without consideration is binding and no suit can be brought before the expiry of the extended credit period.
CASE LAW : *Harichand Madan Gopal vs. State of Punjab (1973)
Facts : A owed ` 30,000 to B. C, a friend of A paid ` 20,000 to B who accepted the same in full satisfaction of his claim against A. Subsequently, B filed a suit for the recovery of the balance amount of ` 10,000. Held : where a promisee accepts lesser personance from a promisor or a third person, promisor is discharged from his liability. A, therefore, was discharged from his liability.
(e) Waiver. It means abandonment of rights by the parties to the contract. No consideration is required for the waiver.
EXAMPLE
A promises to paint a picture for B. B afterwards forbids him to do so. Waiver of right on the part of B results in discharge of contract.
9.5 IMPOSSIBILITY OF PERFORMANCE
Sec. 56 provides two types of impossibility :
(1) Initial impossibility or Pre-contractual Impossibility. An agreement to do an act which at the time of the contract is impossible in itself, such an agreement is void. It may be (i) known to the parties (e.g., agreement to make the dead person alive) or (ii) Unknown to the parties at the time of making the agreement (e.g., Bilateral mistake as to existence of the subject matter).
(2) Subsequent (supervening) Impossibility or Post-contractual Impossibility. 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. In such a case both parties are discharged from their respective obligation. It is also known as the doctrine of frustration under the English Law.
EXAMPLE
A and B contract to many each other. Before the time fixed for the marriage, A goes mad. The contract becomes void.
Applicability of the Doctrine of Subsequent Impossibility. It applies in the following cases :
(i) Destruction of the subject-matter. Where the subject-matter of the contract is destroyed without the fault of any party before the contract
is performed, the contract is discharged. But if the subject-matter is destroyed due to the fault of any party, he is liable for the compensation to the other party.
CASE LAW : Taylor vs. Caldwell (1863)
Facts : C agreed to let out his musical hall to T for a series of concerts. The hall was accidentally burnt down before the date of the first concert. T (the plaintiff) sued C (the defendant) for damages for breach of contract. Held, the contract had become void and C was not liable.
(ii) Change of Law. Any subsequent change in law or a change in the Government policy may render the contract illegal and in such cases contract is deemed discharged or terminated.
CASE
LAW : Shipton Anderson and Co. vs. Reshipto (1918)
Facts : A agreed to sell B a specific parcel of wheat in a warehouse. Before the delivery was given, the wheat was requisitioned by the Government under statutory power. Held, both parties were discharged from performance of such contract.
(iii) Non-existence or non-occurrence of contemplated state of things. Where a contemplated state of things, which was the sole basis of the performance of the contract changes or ceases to exist, the contract, is discharged.
CASE LAW : Krell vs. Henry (1903)
Facts : H hired a flat from K for two days to witness the coronation procession of the king in 1902. Due to illness of the king the procession had to be abandoned. K filed a suit against H for the recovery of the rent due. Held, H (Hirer) was under no obligation to pay the rent as the existence of the procession was the sole basis of the contract and its cancellation discharged the contract.
(iv) Declaration of war. ‘Alien friend can contract but alien enemy cannot’. A contract entered into during peace time remain suspended during the continuance of war. However, such contracts may be resumed and enforced at the end of the war.
EXAMPLE
A contracts to take in Cargo for B at a foreign port. A’s Government afterwards declares war against the country in which the port is situated. The contract becomes void when war is declared.
(v) Death or personal incapacity of the promisor. In case of personal contracts, performance of which depends upon the skill and qualification of the promisor, the contract is discharged on the illness, death or incapacity of such person [Robinson vs. Davison (1871)]
EXAMPLE
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 owing to A’s illness.
EXCEPTIONS TO THE DOCTRINE OF SUBSEQUENT IMPOSSIBILITY
Subsequent impossibility does not discharge a contract or provides no excuse from performance in the following cases :
(i) Difficulty of performance. Unexpected difficulty or more expensive or less profitable performance as a rule, is no excuse from performance. It may be noted that impossibility is different from difficulty. In the former case performance is not possible but in the latter case the promisor can perform it with more cost or effort
CASE LAW : Blackburn Bobbins Co. Ltd. vs. Allen & Sons (1918)
Facts : A sold certain quantity of Finland timber to B to be supplied between July and September. Before any timber could be supplied, war broke out and transport got disorganized so that A could not bring any timber from Finland. Held, difficulty of getting the timber from Finland did not discharge the contract as B was not concerned with the way in which A was going to get timber from Finland. In this case performance was possible with more cost or effort.
(ii) Self-Induced Impossibility. The provisions of Sec. 56 do not apply where impossibility of the performance of the contract arises from the act or omission of the party. In such case, performance is not excused. Thus if a person is held guilty of a crime and therefore he fails to perform his part of obligation, he is not discharged.
(iii) Commercial Impossibility. It occurs when the performance of a promise becomes costlier, less profitable and more dangerous, performance is not excused in such cases. Commercial impossibility may arise due to sudden change in the price level, economic policies of the
Government, availability of raw material at a higher cost, devaluation of rupee and declaration of war etc.
(iv) Impossibility due to the Conduct of a Third Person. Where a contract could not be performed because of the conduct or default of a third person, the doctrine of subsequent impossibility does not excuse the performance.
CASE LAW : Fulchand vs. Pragdas (1923)
Facts : X, a wholesaler entered into a contract with Y for the sale of a certain type of cloth to be manufactured by Z, a manufacturer of cloth. Z did not manufacture the goods. Held, X was not discharged from the contract and was liable to Y for damages.
(v) Strikes, Lockouts and Civil disturbances. Unforeseen events like strikes, lockouts and civil disturbances do not excuse performance unless there is a specific clause in the contract providing that in such cases contract need not be performed or that the time is to be extended for the performance of the contract. Once such event is over, performance of the contract is possible.
CASE LAW : Jacob vs. Credit Lyonnais (1884)
Facts : X agreed to supply certain goods to Y, which was to be imported from Algeria. Due to riots and civil disturbance in that country goods could not be imported. Held, Y was not excused for the non-performance of the contract.
(vi) Failure of one of the objects. Where the contract is entered into for several objects, failure of one of the objects does not excuse the performance of the whole contract.
Effects of Subsequent Impossibility
(a) Contract becomes void. Sec. 56 para 2 lays down that “A contract to do an act which, after the contract is made becomes void when the act becomes impossible or unlawful”. Thus it covers all those cases where performance is excused on the ground of subsequent impossibility.
(b) Compensation for loss through non-performance of act. Sec. 56 Para 3 lays down :
“Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know to be impossible or unlawful, such promisor must make
compensation to such promisee for any loss which such promisee sustains through the non-performance of the promise”.
EXAMPLE
A contracts to marry B, being already married to C, and being forbidden by the law to which he is subject to practice polygamy. A must make compensation to B for the loss caused to her by the non-performance of his promise.
(c) The principle of restitution applies. Sec. 65 provides that “when an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it to the person from whom he received it.”
EXAMPLE
A pays B 1,000 rupees, in consideration of B’s promising to marry C, A’s daughter C is dead at the time of the promise. The agreement is void, but B must repay A the 1,000 rupees.
9.6 DISCHARGE OF CONTRACT BY LAPSE OF TIME
Contract must be performed within stipulated time or reasonable time. Where “time is of essence of a contract.” If the contract is not performed within time period, the contract is discharged and the innocent party need not perform his promise and may institute a suit for a damages against the other party.
The Law of Limitation Act, 1963 provides that “A contract should be performed within a specified period (period of limitation). If the promisee does not enforce his rights within time prescribed by the Act, he is deprived of his remedy at law”. In the case of contracts, the period of limitation is three years. After the expiry of this period the court debars the promisee from taking legal action. Thus, lapse of time discharges a contract.
EXAMPLE
X buys voltas Air conditioner on credit basis from Y where the price is to be paid after one month. If X fails to perform his obligation and Y does not institute a suit against X for the recovery of price within three years, the contract terminates by lapse of time.
9.7 DISCHARGE BY BREACH OF CONTRACT
When a party to the contract without lawful excuse fails to perform the obligation imposed upon him, he is said to have committed breach of contract. In case of breach of contract, the injured party has a right of action for damages against the defaulter party.
Note. For details refer to Chapter 10 ‘Breach of Contract.’
9.8 DISCHARGE OF CONTRACT BY OPERATION OF LAW
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a) Death. In contracts where personal qualifications of the promisor such as skill, knowledge or ability are the considerations for the contract and in such cases contracts need to be performed in person, the contract stands terminated on the death of the promisor.
In other contracts, promises bind the representatives of the promisors in case of the death of such promisors before performance, unless a contrary intention appears from the contract (Sec. 37).
Death of the promisor terminates the contract in case it requires use of personal skill e.g., singing, acting or dancing, etc.
EXAMPLES
1. A promises to deliver goods to B on a certain day on payment of ` 1,000. A dies before that day. A’s representatives are bound to deliver the goods to B, and B is bound to pay ` 1,000 to A’s representatives.
2. A promises to paint a picture for B by a certain day, at a certain price. A dies before the day. This contract of personal nature cannot be entered either by A’s representatives or by B. The contract gets terminated automatically on the death of A.
(b) Material Alteration. Unauthorised material alteration results in termination of contract. Material alteration is one, which varies the rights and liabilities or legal position of the parties to the contract e.g., alteration of amount or rate of interest. Non-material or authorized alteration does not affect the validity of the contract.
(c) Merger. When a contract with an interior right gives rise to another contract with superior right, the former contract stands discharged by merging in the latter.
EXAMPLE
X is appointed as guest lecturer in the college. After some time there is a vacancy in the same college and he is appointed as Assistant Professor in the college. The earlier contract for the guest lecturer is discharged by merger.
(d) Insolvency. The insolvent is discharged from liability on all the contracts entered upto the date of insolvency. An order of discharge releases the insolvent from earlier obligations. Upon insolvency, the rights and liabilities of the insolvent are transferred to the official assignee or official receiver, an officer appointed by the Court.
TEST QUESTIONS
1. State the different modes in which a contract may be discharged. (Ref. Para 9.2)
2. Explain different ways in which a contract is discharged by mutual consent or agreement. Give suitable examples. (Ref. Para 9.4)
3. “Impossibility of performance is a rule, not an excuse for non-performance of contract”. Discuss. (Ref. Para 9.5) (2005, 2009)
4. Discuss the ‘Novation and Remission’ as a mode of discharge of contract, giving the suitable examples. (2006) (Ref. Para 9.4)
5. What is meant by supervening impossibility of performance ? Under what circumstances the contract is discharged on the ground of supervening impossibility ? (2008) (Ref. Para 9.5)
6. What do you understand by supervening impossibility ? Does it excuse the promisor from performing the contract in case of commercial impossibility ? Explain. (2010) (Ref. Para 9.5)
7. Discuss the effect of subsequent impossibility on the performance of the contract. (Ref. Para 9.5)
8. Distinguish between :
(a) Accord and satisfaction (Ref. Para 9.4)
(b) Novation and Alteration (Ref. Para 9.4)
(c) Initial and supervening impossibility (Ref. Para 9.5)
9. Write short notes on :
(a) Material alteration (Ref. Para 9.8)
(b) Novation (Ref. Para 9.4)
(c) Discharge of contract by lapse of time. (Ref. Para 9.6)
(d) Merger. (Ref. Para 9.8)
10. A agrees with B to give her classical dance performance at B’s theatre on a particular day. A fractures her arm in an accident and is advised complete rest by the doctor. Is the contract discharged ?
[Hint. Yes, in this case personal qualifications are forming consideration of the contract. Hence, contract gets discharged due to personal incapacity of A]
11. A hall in Mehfill Banquet was agreed to be let out on certain day for celebration of Birthday but before that event the hall was destroyed by fire. What will be the status of the contract ?
[Hint. Destruction of hall will result in termination of the contract.]
12. A agreed to supply certain goods to B. As a result of an increase in the raw material costs, its no longer profitable for A to supply them at the agreed rate. A refused to perform his obligation under the contract on the ground of impossibility. Is ground of A justifiable ?
[Hint. No, commercial impossibility does not excuse the promisor from performing his obligation under the contract.]
TRUE OR FALSE STATEMENTS
State with reasons whether the following statements are true or false :
(i) A contract cannot be discharged on account of strikes, lock-outs and civil disorders. (Sem. I, 2011)
(ii) Supervening impossibility does not include the difficulty of performance. (Sem. I, 2012)
(iii) Supervening impossibility is an excuse for the non-performance of a contract in all cases.
(iv) In case of post-contractual impossibility, the contract becomes voidable when impossibility arises.
(v) Novation means substitution of a new contract in place of existing one.
(vi) Declaration of war is not an excuse for non-performance of a contract.
(vii) The alteration with the consent of the party discharges the contract.
(viii) Rescission of the contract means termination of the contract.
(ix) Novation can be made by a change in the terms of the contract or a change in the contracting parties.
(x) The breach of a contract means failure of a party to perform his obligation. Hints to True or False Statements
True Statements : (i), (ii), (v), (vii), (viii), (ix) and (x)
False
Statements :
(iii) Supervening impossibility is not an excuse for the non-performance of a contract in all cases. The doctrine of subsequent impossibility is not applicable in certain cases (e.g., Difficulty of performance, commercial impossibility etc.)
(iv) In case of post-contractual impossibility, the contract becomes void and not voidable when impossibility arises.
(vi) Declaration of war is an excuse for non-performance of a contract. A contract entered into during peace time remains suspended during the continuance of war.
