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When an agreement, which was binding on the parties to it, ceases to bind
them, the contact is said to be discharged. A contract may be discharged in
the following ways:
1. Discharge by performance
Under a contract each party is bound to perform his part of the obligation.
After the parties have made due performance of the contract, their liability
under the contract comes to an end. In such a case the contract is said to be
discharged by performance.
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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.
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. B’s
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 A’s 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 .
When the promisor has made anticipatory breach of contract, “the promisee
may put an end to the contract, unless he has signified by words or conduct
his acquiescence in its continuance.”
It means that on the breach of contract by one party, the other party has two
alternatives open to him, viz.,
(i) He may rescind the contract immediately, i.e., he may treat the contract as
an end, and may bring an action for the breach of contract without waiting for
the appointed date of the performance of the contract,
(ii) He may not put an end to the contract but treat it as still subsisting and
alive and wait for the performance of the contract on the appointed date.
When the promisee accepts the repudiation of the contract even before the
due date of performance, and elects to treat the contract at an end, he is
discharged from his obligation to perform the contract, and also gets a right to
bring an action for the breach of contract, if he so likes, even before the due
date of performance has arrived.
In Frost Vs. Knight (1872) the defendant promised to marry the plaintiff on
the defendant’s father’s death. While defendant’s father was, still alive, he
renounced the contract. The plaintiff did not wait till the defendant’s father’s
death and immediately sued him, and she was successful in her action.
Anticipatory breach of contract by one party does not automatically put an end
to the contract. It has already been noted above that on the anticipatory
breach by one party the other party can exercise the option either to treat the
contract at an end, or, to treat it as still subsisting until the due date of
performance comes. As pointed out by the Supreme Court in the case of
State of Kerala Vs. Cochin Chemical Refineries, AIR. 1968, “Breach of
contract by one party does not automatically terminate the obligation under
the contract : the injured party has the option either to treat the contract as still
in existence, or to regard himself a discharged. If he accepts the discharge of
the contract by the other party, the contract is at an end. If he does not accept
the discharge, he may insist on the performance.”
When the contract is kept alive by the promisee, the promisor may perform
the same, in spite of the fact that he had earlier repudiated it. If the promisor
still fails to perform the contract on the due date, the promisee will be entitled
to claim compensation on the basis of the breach of the contract on the
agreed date of performance.
Illustration
The case of Avery Vs. Bowden (1855) illustrates the point where the
promisee elects to keep the contract alive, and the promisor in spite of his
earlier repudiation of the contract is discharged from liability because of
supervening circumstances before the date of the performance arrives. In this
case, A chartered B’s ship at Odessa, a Russian port, and undertook to load
the ship with cargo within 45 days. Before this period had elapsed, A failed to
supply the cargo and declined to supply the same. The master of the ship
continued to insist that the cargo be supplied but A continued to refuse to
load. Before the period of 45 days was over, Crimean War broke out between
England and Russia, whereby it became illegal to load cargo at a hostile port.
The question in this case was, whether by declaration of the war A had been
discharged from liability to load the cargo. In this case, on A’s refusal to load
the cargo B could have rescinded the contract and brought an action against
A, but B instead, by insisting that the cargo be supplied, kept the contract
alive. The contact continued to be alive and subsisting for the benefit of both
A and B. By the declaration of war, the performance of the contract having
become unlawful, it was held that A had been discharged from his duty to
supply the cargo, and, therefore, A could not be made liable for non-
performance of the contract.
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.
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
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 :
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:
• 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. A’s 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 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.”
In Taylor Vs. Caldwell (1863) It was held that when the contract is positive
and absolute, but subject to an express or implied condition, e.g., a particular
thing shall continue to exist, then in such a case, if the thing ceases to exist,
the parties are excused from performing the contract. In this case A agreed
with B to give him the use of a music hall and gardens for holding concerts
on four different dates. B agreed to pay a rent of £ 100 for each of the four
days. Before the date of performance arrived, the music hall was destroyed by
fire. B sued A for the breach of the contract. It was held that the perishing of
the hall without any fault on the part of A had made the performance of the
contract impossible and, therefore, A was not liable for the non-performance
of the contract.
In Har Prasad Chaubey Vs. Union of India !973 S.C. the appellant was the
highest bidder for slack coal belonging to the respondents’ railways. The
appellant made full payment for the same. When he applied for the wagons
for transporting the coal to Ferozabad, the same was refused by Coal
Commissioner on the ground that the coal was meant to be consumed locally
only. No such condition existed when the auction of the coal was made. The
appellant then filed suit for the refund of the amount paid by him and also
interest on the amount on the ground that the contract had become frustrated
after the permission to transport the coal was refused. Appellants claim was
accepted and he was allowed the refund of the money. The reason for the
decision was that the refusal of the Coal Commissioner to allow the
movement of the coal to Ferozabad, in spite of the fact that no such condition
was there at the time of the auction, had frustrated the contract.
Contract not frustrated by mere commercial difficulty
In Ganga Saran Vs. Ram Charan, (AIR 1952 S.C.) the defendant agreed to
supply 61 bales of cloth of certain specifications manufactured by the New
Victoria Mills, Kanpur, to the plaintiff. The agreement by the defendant stated:
“We shall continue sending goods as soon as they are prepared to you upto
17-11- 47. We shall go on supplying goods to you of the Victoria Mills as soon
as they are supplied to us by the Mill.” As the Mills did not supply the goods
to the defendant, he did not supply any cloth to the plaintiff. In an action by the
plaintiff for damages for the non-performance of the contract, the defendant
contended that the contract had been frustrated by the circumstances beyond
his control. It was held the delivery of the goods was not contingent on the
supply of goods by the Victoria Mills, and therefore, the contract had not been
frustrated by the non-supply of goods to the sellers, by the particular Mills. It
was observed:
“The agreement does not seem to us to convey the meaning that delivery of
the goods was made contingent on their being supplied to the respondent firm
by the Victoria Mills. We find it difficult to hold that the parties ever
contemplated the possibility of goods not being supplied at all. The words
“prepared by the Mill” are only a description of the goods to be supplied, and
the expressions “as soon as they are prepared” and “as soon as they are
supplied to us by the said Mill” simply indicate the process of delivery …. That
being so, we are unable to hold that the performance of the contract had
become impossible”
It has already been noted above that when, due to the happening of some
event, the performance of the contract becomes impossible or unlawful the
contract becomes void. Each party is discharged from its obligation to perform
the contract. It is just possible that before the contract becomes void, one of
the parties may have already gained some advantage under the contract.
Such benefit received by a party has to be restored to the other. The relevant
provision contained in section 65, which permits such restoration of the
benefit, is as under:
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:
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 (A’s) 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.
It may be noted here that in such cases there should be consent of all the
three persons, viz., the person who wants to be discharged from the liability,
the person who undertakes to be liable in place of the person discharged, and
the person in whose favour the performance of the contract is be liable to be
made. Thus, if A and B agree that in place of A, now C will be liable, but C
does not consent to it, there would be no novation. For example, A owes B
1,000 rupees under a contract. B owes C 1,000 rupees. B orders A to credit
C with 1,000 rupees in his books, but C does not assent to the agreement. B
still owes C 1,000 rupees and no new contract has been entered into.
The working of the doctrine of novation has been explained by Lord Selborne
in Scarf Vs. Jardine in the following words:
Illustrations
(i) Dispense with or remit, either wholly or in part, the performance of the
contract, or,
(ii) accept any other satisfaction instead of performance.
The promisee has been authorised, by the above stated provision, to remit or
dispense with the performance of the contract without any consideration. He
may fully forgo his claim, or may agree to a smaller amount in full satisfaction
of the whole amount. Thus, if A promises to paint a picture for B, B may
forbid him to do so, or if A owes Rs. 5,000 to B, B may accept from A only
Rs. 2,000 in satisfaction of the whole of his claim. In such cases A is
discharged so far as the performance of that contract is concerned. It means
that if B agrees to accept Rs 2.000 in lieu of Rs 5,000 from A, he cannot
thereafter ask a to pay the balance of Rs. 3,000.
In Lala Kapuchand Vs. Mir Nawab Himayatali, Khan the position was
considered by the Supreme Court to be similar to that contained in illustration
(c) to section 63. In this case the plaintiff had a claim of Rs. 27 lakhs against
the defendant, the Prince Of Berar In 1949 there was a Police action and
Hyderabad was taken over by the military. The Princes Debt Settlement
Committee set up by the Military Governor decided that the plaintiff be paid
Rs. 20 lakhs in full satisfaction of his claim of Rs. 27 lakhs. The plaintiff
accepted the sum of rupees 20 lakhs from the Government in full satisfaction
of his claim. He thereafter brought an action against the defendant to recover
the balance of Rs. 7 lakhs. It was held that the position was fully covered by
section 63, and the plaintiff having accepted the payment from a third person,
i.e., the Government, in full satisfaction of his claim had no right to bring an
action against the defendant for the balance.
If the promisee pays less than the amount claimed and the promisor does not
consider it to be in full and final satisfaction of his claim, the promisee’s
liability under the contract is not discharged, and the promisor is free to sue
for the balance. In Union of India Vs. Babulal Uttamchand, AIR 1968
Bom. Some goods belonging to the plaintiffs were lost during transit due to
the negligence of the railway administration. The Plaintiffs’ made various
claims and the railway administration sent cheques along with printed letters
mentioning that the said payments were in full and final satisfaction of the
plaintiffs’ claims. The plaintiffs, however, informed the railway administration
that this payment was being accepted only as part payment of their claims. In
an action to recover the balance of the amount of claims, the defendants
pleaded that the plaintiffs could not sue for the balance as the payment
already made was in full and final satisfaction of the claims. It was held that
the plaintiffs’ suit for the balance of the amount was maintainable, as the
amounts were not accepted in full satisfaction of the claim.
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.
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.
1. DAMAGES
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 :
(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.
In an action for damages for the breach of contract there arise two kinds of
problems :
“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
the probable result of the breach of it”.
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
arise 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.
2. MEASURE OF DAMAGE
The rule in this regard was stated in Borrow Vs. Arnaud (1844) in the
following words.
2. QUANTUM MERUIT
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,
2. The party injured by the breach of the contract, who 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.
In De Bernardy Vs. Harding, (1853) the defendant, who was to erect and
le 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.