Professional Documents
Culture Documents
CONTRACT
1
DISCHARGE OF CONTRACT
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. By Performance of the contract ;
2. By breach of the contract ;
3. By impossibility of performance ;
4. By Agreement.
2
1. DISCHARGE BY PERFORMANCE
3
2. DISCHARGE BY BREACH OF CONTRACT
When a party having a duty to perform a contract fails to do
that, or does an act whereby the performance of the contract
by him becomes impossible, or he refuses to perform the
contract, there is said to be a breach of contract on his part. On
the breach of contract by one party, the other party is
discharged from his obligation to perform his part of the
obligation, and he also gets a right to sue the party making the
breach of contract for damages for the loss occasioned to him
due to the breach of contract. The breach of contract may be
either actual, i.e., non-performance of the contract on the due
date of performance, or anticipatory, i.e., before the due date of
performance has come. For example, A is to supply certain
goods to B on 1st January. On 1st January A does not supply
the goods. He has made actual breach of contract. On the
other hand, if A informs B on 1st December that he will not
perform the contract on 1st January next, A has made
anticipatory breach of contract
4
ANTICIPATORY BREACH OF CONTRACT
It means the repudiation of a contract by one party to it
before the due date of its performance has arrived. Section
39, which contains law relating to anticipatory breach of
contract is 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.”
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.
5
ANTICIPATORY BREACH OF CONTRACT
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 .
6
ANTICIPATORY BREACH OF CONTRACT
7
EFFECT OF ANTICIPATORY BREACH OF CONTRACT
8
EFFECT OF ANTICIPATORY BREACH OF CONTRACT
9
(i) ELECTION TO RESCIND THE CONTRACT
11
(ii) ELECTION TO KEEP THE CONTRACT ALIVE
Illustration
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 at the rate of 100
rupees for each night. On the sixth night A
wilfully absents herself. With the assent of B, A
sings on the seventh night. B has signified his
acquiescence in the continuance of the contract,
and cannot now put an end to it, but is entitled to
compensation for the damage sustained by him
through A’s failure to sing on the sixth night
12
(ii) ELECTION TO KEEP THE CONTRACT ALIVE
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.
13
3. DISCHARGE BY IMPOSSIBILITY OF
PERFORMANCE
15
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 :
“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.”
16
2. SUBSEQUENT IMPOSSIBILITY
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.
19
THE DOCTRINE OF FRUSTRATION
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.
20
THE DOCTRINE OF FRUSTRATION
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.
21
CONTRACT NOT FRUSTRATED BY
MERE COMMERCIAL DIFFICULTY
Merely because the procurement of the
goods becomes difficult because of a
strike in the mill, or there is a rise in prices,
or a person will not be able to earn the
expected amount of profits, is not enough
to frustrate the contract.
22
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”
23
RESTORING BENEFIT ON SUBSEQUENT
IMPOSSIBILITY
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:
“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”
24
Illustrations
(a) 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.
(b) A contracts with B to deliver to him 250 maunds of
rice before first of May. A delivers 130 maunds
only before that day, and none after. B retains the
130 maunds after the first of May. He is bound to
pay A for them.
(c) A, a singer, contracts with B, the manager of a
theatre, to sing at his theatre for two nights in every
week during the next two months, and B engages
to pay her a hundred rupees for each night’s
performance. On the sixth night, A wilfully absents
herself from the theatre, and b, in consequence
rescinds the contract, b must pay a for the five
nights on which she has sung.
25
(4) DISCHARGE BY AGREEMENT AND
NOVATION
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:
26
“62. EFFECT OF NOVATION, RESCISSION
AND ALTERATION OF CONTRACT –
28
(ii) CHANGE IN THE PARTIES
TO THE CONTRACT
It is possible that by novation an obligation may be created for one party in
place of another. If under an existing contract A is bound to perform the
contract in favour of B , the responsibility of A is bound to perform the
contract in favour of B, the responsibility of A could be taken over by C.
Now instead of A being liable towards B, by novation C becomes liable
towards B . For example, A owes money to B under a contract. It is
agreed between A, B and C that B shall thenceforth accept C as his
debtor, instead of A. The old debt of A to B is at end and new debt
from C to B has been contracted.
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.
29
(ii) CHANGE IN THE PARTIES
TO THE CONTRACT
The working of the doctrine of novation has been explained by
Lord Selborne in Scarf Vs. Jardine in the following words:
“That, there being a contract in existence, some new contract
is substituted for it either between the same parties or
between different parties, the consideration mutually being the
discharge of the old contract. A common instance of it in
partnership cases is where upon the dissolution of a
partnership the person who are going to continue in business
agree and undertake as between themselves and the retiring
partner, that they will assume and discharge the whole
liabilities of the business, usually taking over the assets : and
if, in that case, they give notice of that arrangement to a
creditor, and ask for his accession to it, there becomes a
contract between the creditor who accedes and the new firm
to the effect that he will accept their liability instead of the old
liability, and on the other hand, that they promise to pay him
that consideration.”.
30
REMISSION OF PERFORMANCE
Section 63 enables the promisee to agree to
dispense with or remit performance of promise.
The section reads as under:
“ 63. Promisee may dispense with or remit
performance of promise – Every promisee
may dispense with or remit, wholly or in part, the
performance of the promise made to him, or may
extend the time for such performance, or may
accept instead of it any satisfaction which he
thinks fit.
31
REMISSION OF PERFORMANCE
Illustrations
a) A promises to paint a picture for B. B afterwards
forbids him to do so. A is no longer bound to perform
the promise.
b) A owes B 5,000 rupees. A pays to B and B accepts,
in satisfaction of the whole debt 2,000 rupees paid at
the time and place at which the 5,000 rupees were
payable. The whole debt is discharged.
c) A owes B 2,000 rupees, and is also indebted to other
creditors. A makes an arrangement with the creditors
including B, to pay them a composition of eight annas
in a rupee upon their respective demands. Payment to
B of 1,000 rupees is a discharge of B’s demand.
32
REMISSION OF PERFORMANCE
The section permits a party, who is entitled to
the performance of a contract, to
33
(I) DISPENSING WITH OR
REMITTING 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.
34
ACCEPTING PERFORMANCE FROM THIRD PARTY
The promisee, if he so likes, may accept performance from a third party, and
while accepting such performance he may agree to forgo his claim in part.
Once the promisee accepts a smaller amount in lieu of the whole of his claim,
the promisor would be thereby discharged. This is clear from the illustration
36
(III) ACCEPTING ANY OTHER SATISFACTION
INSTEAD OF PERFORMANCE
Section 63 permits the promisee to accept any other satisfaction in lieu of agreed
performance, and this would discharge the promisor. For example, a owes B,
under a contract, a sum of money, the amount of which has not been ascertained.
A without ascertaining the amount gives b, and B, in satisfaction thereof, accepts,
the sum of Rs. 2000. This is a discharge of the whole debt, whatever may be its
amount.
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.
37
REMEDIES FOR BREACH OF
CONTRACT
38
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.
1. Damages : Remedy by way of damages is the
most common remedy available to the injured
party. This entitles the injured party to recover
compensation for the loss suffered by it due to
the breach o9f contract, from the party who
caused the breach. Section 73 to section 75
incorporate provisions in this regard.
39
REMEDIES FOR BREACH OF
CONTRACT
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.
40
DAMAGES
Section 73 makes the following provisions regarding the
might of the injured party to recover compensation for the
loss or damage which is caused to him by the breach of
contract.
Section 73. Compensation for loss or damage caused
by breach of contract. – When a contract has been
broken, the party who suffers by such breach is entitled to
receive, from the party who has broken the contract,
compensation for any loss or damage caused to him
thereby, which naturally arose in the usual course of things
from such breach, or which the parties knew, when they
made contract, to be likely to result from the breach of it.
Such compensation is not to be given for any remote and
indirect loss or damage sustained by reason of the breach.
41
DAMAGES
Compensation for failure to discharge obligation
resembling those created by contract. – When an
obligation resembling those created by contract has
been incurred and has not been discharged, any person
injured by failure to discharge it is entitled to receive the
same compensation from the party in default, as if such
person has contracted to discharge it and had broken his
contract.
43
DAMAGES
In an action for damages for the breach of contract there
arise two kinds of problems :
1. Firstly, it has to be determined whether them loss suffered
by the p0laintiff is the proximate consequence of the
breach of contract by the defendant. The person making
the breach of contract is liable only for the proximate
consequences of the breach of contract. He is not liable for
damage which is remotely connected with the breach of
contract. In other words, the first problem is the problem of
“Remoteness of Damage.”
2. It is found that the particular damage is the proximate
result of the breach of contract rather than too remote, the
next question arises is : How much compensation is to be
paid for the same? This involves determining the quantum
of compensation. This, in other words, is the problem of
“Measure of Damages.”
44
REMOTENESS OF DAMAGE
The following statement of Alderson B, in case of Hadley Vs.
Baxendale (1854) is considered to be the basis of the law to
determine whether the damage is the proximate or remote
consequence or breach of contract :
45
REMOTENESS OF DAMAGE
The rule in Hadley Vs. Baxendale consists of two parts.
On the breach of a contract such damages can be recovered,
(1) as may fairy and reasonably be considered arising naturally, i.e.,
according to the usual course of things from such breach,
OR
(2) as may reasonably be supposed to have been in the contemplation of
both parties at the time they made the contract.
In either case it is necessary that the resulting damage is the probable result
of the breach of contract.
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.
46
MEASURE OF DAMAGE
After it has been established that a certain consequence
of the breach of contract is proximate and not remote
and the plaintiff deserves to be compensated for the
same, the next question which arises is : What is the
measure of damages for the same, or in other words the
problem is of the assessment of compensation for the
breach of contract.
47
MEASURE OF DAMAGE
In a contract of sale of goods the measure of damages is the
difference between the contract price and the market price on
the date of the breach of contract. For instance, A agrees to
supply B a radio set on January for Rs. 1,000. If A fails to
supply the radio set and the market price of the radio set on that
date is Rs. 1,200, B will be entitled to recover from A Rs. 200
as damages. The reason is that the loss suffered by the buyer
is Rs. 200 because due to the rise in the market price of the
radio set he will have to pay that much extra if he purchases the
radio set from the market. Similarly, if the buyer (B) refuses to
take the radio set on the due Date, the seller will also be entitled
to recover the difference between the contract price and the
market price on 1st January. For instance the market price of
the radio set on that date is Rs. 800, A’s loss is Rs.200 in
respect of the transaction, because from another customer A
can get only Rs. 800 whereas B had promised to pay Rs.
1,000 for the same. A can recover Rs. 200 from B..
48
MEASURE OF DAMAGE
The rule in this regard was stated in Borrow Vs.
Arnaud (1844) in the following words.
“ Where a contract to deliver goods at a certain price is
broken the proper measure of damages in general is the
difference between the contract price and the market
price of such goods at the time when the contract is
broken, because the purchaser having the money in his
hands, may go into the market and buy. So, if a contract
to accept and pay for the goods is broken, the same rule
may be properly applied, for the seller may take his
goods into the market and obtain the current price for
them.”
49
QUANTUM MERUIT
Ordinarily if a person having agreed to do some work or
render some
service has done only a part of what he was required to
do, he cannot claim anything for what he has done. When
a person agrees to complete some work for a lump sum
non-completion of the work does not entitle him to any
remuneration even for the part of the work done. But the
law recognises an important exception to this rule by way
of an action for ‘Quantum Meruit’ Under this section if A
and B have entered into a contract, and A, who has
already performed a part of the contract, is then prevented
by B from performing the rest of his obligation under the
contract, A can recover from B reasonable remuneration
for what ever he has already done.
50
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,
Where one party has absolutely refused to perform, or has
rendered himself incapable of performing, his part of the
contract, he puts it in the power of the other party either to
sue for the breach of it or to rescind the contract and sue on a
quantum meruit for the work actually done.”
51
QUANTUM MERUIT
The essentials of an action of quantum meruit are as
follows :