DISCHARGE OF CONTRACT

Updated: Jan 31


BY - DEVANGI SHARMA

Let us begin with an example-

· Pixar is an event management company based out of Delhi. It organizes concerts etc. It had a contract with a client to organize a concert. For this Pixar then entered into a second contract with AJ DANCE GROUP, to provide dancers for the concert. AJ DANCE GROUP was paid an advance sum of rupees 50,000/- However soon COVID-19 struck and there was a complete ban on gatherings. As a result, the concert was also cancelled.

· Can Pixar terminate its contract with the dance group, without payment of any damages?

· Is the dance group bound to return the advance made to it by Pixar?

The answer to all these questions lies in the provisions relating to the DISCHARGE OF CONTRACT in the INDIAN CONTRACT ACT. But first, we need to understand

What is a contract?

A contract is nothing but an exchange of promises between 2 or more parties to a contract. These promises represent obligations that each party has to fulfill towards the other party.


What is discharge of contract?

Means release from a contract. it means that nothing further remains to be done by the parties under the contract. No right to seek performance nor any obligation to perform remains.


Modes of discharge of contract can be affected by

· Performance of the contract

· Breach of the contract

· Impossibility of performance of the contract

· Mutual agreement between parties to the contract

· Remission of performance by the promisee

· Operation of law



DISCHARGE BY PERFORMANCE OF CONTRACT

A engages B to whitewash his house over the weekend. For this A agrees to pay B Rs.10,000/- If B manages to whitewash A’s house by Sunday 12 P.M and A pays him Rs.10000/- Both the parties have completed their mutual obligations and the contract stands discharged.

According to section 37The parties must perform /offer to perform their respective

promises, unless such performance is excused either under provisions of Indian contract act or under the provisions of any other law.


What if both/ one of the parties to a contract die before the performance?

According to section 37, a valid contract will bind the representatives of the promisors. However, they will not be personally liable but liable only to the extent of assets of the deceased promisor falling in their hands. Exceptions to this provision include contracts of personal nature. Such as those requiring personal skill, expertise. such as a painter, a singer, a plastic surgeon.


Offer to perform/tender of performance – when the promisor is willing and able to offer the performance of his part of the promise but is prevented from doing so by the promisee without a valid reason. The promisor’s offer to perform, if valid, is equivalent to performance on his part. He can then sue the promisee for non-performance


What are the requirements of a valid offer/tender of performance?

· It must be an unconditional tender, so if A owes Rupees 5000/- to B. But he comes to B with the condition that B accepts Rupees 2000/- for the entire debt. This being conditional is not a valid tender.

· It must be made at the proper time and place, usually during business hours, at the specified place of performance.

· It must give promisee a reasonable opportunity to ascertain if the goods offered are in conformity with the contract.



CASE LAW- DEMBY HAMILTON AND CO. V BARDEN – in this case, the buyer refused to take delivery of the tender of apple juice. The juice subsequently became putrid. The buyer was held liable for loss for not taking delivery when apple juice was tendered.


DISCHARGE BY BREACH OF CONTRACT (section 39)


Amar offers to sell his old fiat car to Biju for rupees 50,000/- He subsequently sells his car to Karan for rupees 75000/-. Hereby not selling his car to Biju, Amar commits a breach of contract. Breach of contract is nothing but a non-performance by the parties of their respective obligations under the contract. Breach of a contract is of 2 kinds-

· Actual breach of contract – failure/refusal to perform happens exactly on the due date of performance

· Anticipatory breach of contract- where the contracting party announces his intention of not performing the contract, before the performance of the contract is actually due.


CASE LAW- FROST V KNIGHT

In this case, the defendant had agreed to marry the plaintiff upon the death of his father. But during the lifetime of his father, he married another woman. By doing so, he by his conduct effectively disabled himself from performing his promise. He had committed an anticipatory breach of contract. Although he could still divorce the woman and fulfill his promise in the future. But the decision to either wait or end the agreement and sue him now lay with the plaintiff.


Effect of breach of contract

A breach of contract/ anticipatory breach does not automatically terminate the contract. The innocent party may either

· choose to end the contract or

· choose to keep the contract alive and subsisting. If the innocent party chooses to terminate the contract, it must convey the decision to the defaulting party. This is called acceptance of repudiation/renunciation of contract by the promisee. Once this happens, the guilty party cannot later change his mind and revoke his renunciation and tender performance, considering the due date of performance has not actually arrived. The promisee gets discharged from his liability to perform and can sue the guilty party at once for damages for breach even when the due date to perform has not arrived.


Can breach of any condition of contract lead to termination?

Failure to perform on-time stipulated for performance can be a ground for termination of contract only when time is of the essence in a contract. With regard to other terms, every minor irregularity in performance cannot be used as an excuse to terminate the contract.

A and B enter into an agreement, wherein B agrees to construct a house for A. upon its completion A notices that B has tiled his floor in red granite, whereas he was asked to do so in black granite, however, all other specifications have been performed by B, here this will amount to a minor irregularity, it will not terminate the contract, as there has been a substantial although not exact/literal performance. B will get paid his price albeit deductions for the cost to change the flooring.

DISCHARGE BY IMPOSSIBILITY OF PERFORMANCE (SECTION 56)

A asks B, who is a painter, to paint A’s portrait. B agrees to do so for Rs. 7000/-. B however demands Rs. 3000/- as an advance, which A agrees to give. B however soon contracts covid-19 and dies because of it. Here the contract stands discharged on account of the death of B, rendering performance impossible. B’s representatives will not be liable to perform the obligation as the contract is one of personal skills. As far as the advance of Rs 3000 is concerned, as per section 56 of the Indian contract act, such contracts become void, on the ground of impossibility, and as per section 65 of the Indian contract act, any advantage received under a contract which becomes void must be restored. To apply the doctrine of impossibility following conditions must apply-

· the frustrating event must not have happened on account of the fault of either party to the contract, it must be an unforeseen /external event, beyond the control of the parties.

· The frustrating event must have affected the performance of the contract to such an extent that it either became physically impossible to perform it or it became extremely difficult or hazardous or useless from point of view of the object of contract OR illegal

· Examples of such events include- wars, death or incapacity of the parties, a change in the law, destruction in the subject matter of the contract

· Frustration puts an end to the contract, automatically.

· Limitations to the doctrine of impossibility include- the presence of a special clause called force majeure that deals with consequences of such events as well as self-induced frustration.

· Existence of a FORCE MAJEURE CLAUSE- in such cases section 56 of the Indian contract act will not apply rather provisions of the clause will determine the consequences, in event of the occurrence of a supervening impossibility.


DISCHARGE BY AGREEMENT (section 62)

By Novation - when parties to a contract agree to substitute the existing contract for a new contract, this is termed as novation. Its essentials are

· The original existing contract was never broken, it was alive and subsisting

· Novation can be affected by changing the parties to the new contract

· A loans B Rs. 20,000/-. Here A is the creditor while B is the debtor. C owes B Rs.30,000/-. A, B and C enter into an agreement, that from now onwards, A will accept C and not B as his debtor for Rs. 20,000/-. The old contract between A and B is now extinguished and a new contract between A and C comes about.

· Novation can occur by altering material terms of the old contract, however, minor alterations do not constitute a novation.

· All the parties, old as well as new must agree to novation- so in the above example if C refuses to assent to the new agreement, no new contract will come about


By Rescission/Cancellation of the old contract by agreement - The parties to an existing contract may mutually agree between themselves that they will no longer be bound by it. However, no new contract is substituted in place of the original contract. A promise not to demand performance from each other becomes mutual consideration for the discharge of the contract.


DISCHARGE BY REMISSION (SECTION 63)

· The party who has the right to demand performance may either choose to dispense with it altogether or abandon it in part. He may accept less than what is due to him under the contract. no new consideration needs to be furnished in such cases.

· He may also choose to extend the time for performance

· Or he may accept any other satisfaction in lieu of agreed performance.

· Example if A owes B Rs. 10,000/-. B may accept in satisfaction of the whole debt Rs. 2000/-. The whole debt will stand discharged.

· If A owes B Rs. 2,00,000/- to be paid by A in cash. But later B accepts from A, an antique idol in return for it. The debt will stand discharged.


DISCHARGE BY OPERATION OF LAW

· in case of a lapse of time to take legal action as specified by the limitation act. For simple contracts, the limitation period is 3 years.

· in case of insolvency of a party to a contract

· in case of an unauthorized alteration of material alteration in a written document by one party without the consent of the other party.

· In case of merger of an inferior right into a superior right under a contract – a tenant for example may become the owner of a property so his tenancy right will merge with ownership right.


REFERENCES-

· THE INDIAN CONTRACT ACT, 1872

· www.legalserviceindia.com- frustration of contracts

· web.iima.ac.in – working paper on the doctrine of frustration under section 56 of Indian contract act

· contract and specific relief act- Avatar Singh

CASE LAWS CITED-

· DEMBY HAMILTON AND CO. LTD. V BARDEN [1949]

· FROST V KNIGHT [1872]















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