DISCHARGE OF CONTRACTS

Synopsis:
1. By Performance
a. Contingent contracts (Section 31-36)
b. General Contracts (Section. 37-41)
c. Joint Promises (Section 42-45)
d. Time for Performance (Section 46-50)
e. Reciprocal Promises (Section 51-54)

2. By Frustration or Impossibility to Perform

Grounds of Frustration
a. Destruction of the subject-matter of the Contract.
b. Non-occurrence of a particular state of things.
c. Change of circumstances.
d. Death or Incapacity of the party.
e. Government, Administrative or Legislative Intervention.
f. Intervention of War

3. By Agreement
a. Novation
b. Rescission
c. Alteration
d. Remission
e. Waiver

4. By Breach
a. Anticipatory breach.
b. Actual or Present breach.

5. By operation of Law
a. Merger
b. Discharge by judgment of a court
c. Alteration or cancellation of a written instrument; and
d. Bankruptcy

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 DISCHARGE OF CONTRACTS

 Discharge of a contract happens when the parties have not completely performed their contractual
obligations or when happenings, behaviour 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:

1. By Performance
2. By Frustration or Impossibility to Perform
3. By Agreement
4. By Breach
5. By operation of Law

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 1) DISCHARGE OF CONTRACT BY PERFORMANCE
a) Contingent contracts (Section 31-36): Has already been dealt under Unit-2.
b) General Contracts (Section. 37-41)
c) Joint Promises (Section 42-45)
d) Time for Performance (Section 46-50)
e) Reciprocal Promises (Section 51-54)

a. Contingent contracts (Section 31-36): Has already been dealt under Unit-2.

b. General Contracts (Section. 37-41)

 A contract being an agreement enforceable by law, the parties are not absolved of their
obligations until the contract has been discharged and the most common way of the discharge
of contractual obligation is by performance of the contract by the parties to it.
 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.

Section 37 says that,-

“that the parties to a contract must perform or offer to perform, their respective promises, unless such
performance is dispensed with or excused under the provisions of this Act or any other law.”

In the case Dumraon Industries Pvt. Ltd. v. State of Bihar,

Facts:

1. The State of Bihar invited tenders for purchase of lanterns for the Adult Education Programme of
the Government. The petitioners submitted tender for supplying lanterns at the rate of Rs. 205/-
per dozen.
2. Subsequently through exchange of letters between the Director of Adult Education and the
petitioner price of Rs. 195/- per dozen was fixed. The petitioner supplied the lanterns though no
formal agreement was entered into.
3. The lanterns were accepted by the Government and part-payment was also made. Later on, it was
argued by the Government that on the basis of the lowest tender which was less (ie., Rs. 144/-)
and after giving benefit of 15 per cent more, payment would be made to the petitioners on this
basis. Moreover, no formal agreement was entered into. The Government therefore refused to
pay the remaining amount (i.e., Rs. 80,000/-).

The petition was filed to recover the remaining amount Rs. 80,000/-

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Decision:

The Court held that "Though the formal agreement may not have been entered between the parties
still through exchange of letters and after accepting the supply of the lanterns at the rate quoted by
the petitioner's company and making partial payment on the basis of the said claim, now it is too late
for the State to say that they will be paying the price at a reduced rate as no formal agreement has
been entered into till today."

Section 38 - Offer of performance

 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:
1. It must be unconditional.
2. It must be created at a proper time and place,
(and under such circumstances that the person to whom it's created could have a
reasonable opportunity of ascertaining that the person by whom it's created is able
and willing to try and do the whole of what he's bound by his promise to do.)
3. If the tender or offer is a proposal to deliver anything to the promisee, the promisee
must have a sensible opportunity of sighting that thing offered is the thing that the
promisor is bound by his promise to deliver.

Section 39 - Effect of refusal of party to perform promise wholly.

When a party to a contract has refused to perform, or disabled himself from performing, his promise the
promisee may put an end to the contract, unless he has signified, by words or conduct, his acquiescence in
its continuance.

a) 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 engages to pay her 100 rupees for each night's
performance. On the sixth night A wilfully absents herself from the theatre. B is at liberty to put an
end to the contract.

Section 41 - Effect of accepting performance from third person.

 When a promisee accepts performance of the promise from a third person, he cannot afterwards
enforce it against the promisor.

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c. Performance of Joint Promises (Section 42-45)

 According to the English law 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.
 But according to Section 42 joint promises must, during their joint lives, fulfil the promise and if any
of them dies, his representatives must, jointly with the surviving promisors, fulfil the promises and so
on. On the death of the last survivor, the representatives of all of them must fulfil the promise.

 But this is subject to do any private arrangement between the parties either expressly or impliedly.
Section 43 of the Act lays down three rules for joint promisors:
1) When a joint promise is created and there is no specific agreement to the contrary, the
promisee could compel any one or more of the joint promisors to perform the complete
promise.
2) A joint promisor who has been compelled to perform the full of the promise could need the
other joint promisors to create an equal contribution of the performance of the promise,
unless a different intention seems from the agreement.
3) If any one of the promisors makes a default in such contribution, the remaining joint
promisors must bear the deficiency in equal shares.

 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.

d. Time and place for performance (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.
 Performance of a promise within a reasonable time
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.

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 Performance of promise where time is specified (Section 47)
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.
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.
 Performance of promise on an application by the promisee (Section 48)
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.
 Performance of promise where no place is specified and also no application is to be made by
promisee
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.
 Performance of promise in the manner and time prescribed or sanctioned by promisee
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.

Time as the Essence of the Contract

 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:
1. Where the parties have expressly agreed to treat it as the essence of the contract.
2. Where the delay operates as an injury to the party and
3. Where the nature and necessity of the contract requires it to be performed within the specified
time.
 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.

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 In the case Bhudra Chand v. Betts

Facts
 This case related to the agreement wherein the defendant undertook the responsibility to deliver an
elephant to the plaintiff for capture of wild elephants. The elephant was to be delivered on October 1,
1910.
 Later on, the defendant requested for extension of date of delivery which was allowed to be till 6th of
October but he failed to deliver even by that time. He ultimately offered to deliver the elephant on
11th October, 1910. But the buyer now rejected to accept.

Decision :
It was held by the Court that in this case time was the essence of the contract and the plaintiff was
therefore justified in refusing to accept the delivery.

e. Performance of Reciprocal Promises

 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.
 Order of Performances of Reciprocal 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.
 Effects of Preventing the Performance of Reciprocal Promises
 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:

 A 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, A 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 the compensation from A for any loss which he has incurred due to its non-
performance.

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2) DISCHARGE OF CONTRACT BY IMPOSSIBILITY OF PERFORMANCE/
FRUSTRATION OF CONTRACT

 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:
1. Agreement to do impossible act: An agreement to do an act impossible in itself is void.
2. Contract to do act after turning into impossible or unlawful.
3. Compensation for loss through non-performance of act known to be impossible or unlawful:
 A contract become void on account of the subsequent impossibility only if the following conditions
are satisfied:
a. The act should have become impossible after the formation of the contract.
b. The impossibility should have been caused by reason of some event which was
beyond the control of the promisor.
c. The impossibility must not be the result of some act or negligence of the promisor
himself.

 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
 The defendants agreed to let the plaintiff have the use of their gardens and music Hall for four
days on payment of £ 100 for each day. The plaintiffs were to give four music concerts in the
Hall.
 After the making of the agreement and before the first day on which the concert was to be
given, the Hall was destroyed by fire without the fault of either party and was so completely
destroyed that the concerts could not be given.
 The court held: "the parties contracted on the basis of the continued existence of the music
Hall at the time when the concerts were to be given; that being essential to their performance"
and hence "both the parties are excused".
[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.]

 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.

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 Grounds of Frustration

1] Destruction of the subject-matter of the Contract.

2] Non-occurrence of a particular state of things.
3] Change of circumstances.
4] Death or Incapacity of the party.
5] Government, Administrative or Legislative Intervention.
6] Intervention of War

1. Destruction of the subject-matter of the Contract

 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.
 In 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.

2. Non-occurrence of a particular state of things

 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.

3. Change of circumstances

 If the change of circumstances makes the performance of the contract impossible, the contract will
frustrate and parties will be discharged from their obligations under the contract. If, however, despite
the change of circumstances, the performance is still possible, the contract will not be deemed to
have been discharged.

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 4. Death or Incapacity of the party

 Where the performance of a contract depends upon the personal services of a party, the death or
incapacity of such a party may be treated to be a valid ground for frustration of contract.
 Robinson v. Davison ,
 In this case, the defendant's wife was a famous pianist (Piano-player). She contracted
for performing a concert but could not fulfil her promise because of a serious illness.
The plaintiff brought an action to claim damages for non-performance (breach) of
contract.
 The Court held that in this case the continued health of the pianist was a condition
attached to the agreement. Her serious illness was a valid ground on the basis of
which she was discharged from her obligation under the contract.

5. Government, Administrative or Legislative Intervention

 A contract will be dissolved when legislative or administrative intervention directly operates on the
fulfilment 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.

6. Intervention of War

 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.

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3) DISCHARGE BY AGREEMENT

 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.
f. Novation
g. Rescission
h. Alteration
i. Remission
j. Waiver

1. Novation
 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.

2. Rescission
 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.

3. Alteration
 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.

4. Remission
 It means the acceptance of a lesser sum than what was contracted for or a lesser fulfilment 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.

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5. Waiver
 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.

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4) DISCHARGE BY BREACH

 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.
 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:-
1. The contract must be valid. It must contain all the essential elements of the contract so that it can be
heard by a court. If all the essentials are not present, the contract is not considered as a valid contract;
hence no suit shall lie in the court.
2. The plaintiff must show that the defendant has broken the contract.
3. The plaintiff did everything required for the performance of the contract.
4. The plaintiff must have given a reasonable notice to the defendant of such breach. If the notice is in
writing, this will prove to be better than an oral notification.

Types of breach

A. Anticipatory breach.
B. Actual or Present breach.

A. Anticipatory 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 Dela 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.

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 In Frost v. Knight,
 The defendant promised to marry the plaintiff on the death of his father. While the father
was still alive, the defendant announced his intention to not fulfil the promises to marry
and broke of the engagement.
 The plaintiff without waiting for the death of the defendant‟s father brought an action for
the breach. The court dismissed the contention of the defendant that the breach could only
arise on the happening of the contingency and awarded damages to the plaintiff.

B. Actual Breach

 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 instalment contracts such as, sale of goods, delivery by instalments,
payment by instalments etc.

Difference between Anticipatory Breach and Actual Breach

 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 fulfil 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 fulfil 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.

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5) DISCHARGE BY OPERATION OF LAW

The instances of the discharge by operation of law are as follows:

(1) Merger
(2) Discharge by judgment of a court
(3) Alteration or cancellation of a written instrument; and
(4) Bankruptcy

(1) Merger:
 If in the place of a lower security, a higher security is accepted, the lower security will be
deemed to be merged in the higher security and the party concerned shall be discharged from
its obligations in respect of the lower security.
 It may, however, be noted that this rule will apply only in the absence of a contrary intention
of the parties to the same effect.

(2) Discharged by the judgment of a court:

 A contract may also be discharged by the judgment of a court of competent and
appropriate jurisdiction in favour of the plaintiff.

(3) Alteration or cancellation of a written instrument:

 A contract may also be discharged by alteration or cancellation of a written instrument.
 It may, however, be noted that alterations here is different than provided under Section
62 of the Contract Act. In Section 62, the alteration is made with the consent of the
parties so as to discharge them. But alteration here is unauthorised alteration such as
addition or erasure of the contract in writing. If a party erases or alters the written
instrument, the other party is discharged from its obligations under the contract.

(4) Bankruptcy:
 When a person is adjudged a bankrupt by the court, he is thereby discharged from his
debts and other obligations. Thus bankruptcy may also operate to discharge the
obligations of a party to a contract. These instances are simply illustrative and are by no
means exhaustive.

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