Discharge of Contracts

Discharge – meaning and modes of

discharge
Meaning –
When the parties are relieved of their contractual
obligations, the contract is said to be discharged. It is
when a contract comes to an end.

Discharge of a contract can happen in following ways

• By performance – s.31 to 67
• By impossibility of performance (frustration) – s. 56
• By agreement – s. 62 to 67
• By breach – s. 39, 73 to 75
• By operation of law
 Performance
• Section 37-58, 62-67 all deal with
performance of contracts.
• Obligation of the parties to perform – s.37; it
says, that the parties to contract, must either
perform or offer to perform (tender of
performance), their respective promises
unless such performance is dispensed with or
excused under the provisions of this act or any
other law.
It also provides for the obligation of the
representatives of the deceased promisors.
 Performance should be exact.
• Performance should be exactly of what one has
undertaken to do.

• There shouldn't be deviations in the acts

promised to be performed.

• Also extends to the quality and standard of the

desired performance.

• Also to the time and place of performance.

 Time and Place of performance
• Stipulations as to time at common law – As a general rule, when
time is fixed for the performance of an undertaking by one of the
parties to a contract, it is treated to be of essence to the contract.
‘Of essence’ means that this particular term of the contract can be
a cause of breach alone, if not met with.

• Stipulations as to time in equity – Where it could do so without

causing injustice to the parties, it decreed specific performance
notwithstanding failure to comply with the limitation as to time.

• Place of performance – It depends upon the express or implied

intentions of the parties as can be inferred from the terms and
circumstance of the contract. If no place is specified even by
implication, under a contract of sale it is the buyer who is to
collect goods from the seller and in contracts to pay money, it is
the debtor’s duty to pay the creditor at his place of business or
residence [ Charles Duval & Co. v Gans (1904) ]
Doctrine of ‘substantial performance’
• This is an exception to the general rule.
• General rule is when the obligation under a
contract is to perform entirely i.e. indivisible
obligation, partial performance is not taken into
account and the party not in default is entitled to
sue for breach, thereby terminating the contract.
• If strictly followed this may lead to injustice and
also unjust enrichment to the other party, hence
this doctrine.
• Is applied in situations of trivial or very minute
inadequacy – de minimis non curat lex
 Performance in ‘alternative’
• A contract may involve performance of one of the
alternative promises.
• Either it may provide for an election out of two
given alternatives, or may provide for one
alternative leaving an option also to choose any
other.
• If not otherwise mentioned, it is implied for the
promisor to have this option to elect. If the
election is to be made by the promisee, he is to
give notice of his election.
 Vicarious Performance
• There may be circumstances which make it
permissible for a contracting party to perform his side
of the contract by getting someone else to do in a
satisfactory fashion, the work for which the contract
provides.

• It differs from ‘assignment of contract’, as in vicarious

performance the liability and right to sue for payments
is retained by the original party to the contract while
only the right to perform is transferred to the
sub-contractor. This is not so in case of assignment.

• Eg of assignments are: copyrights, patents etc.

 Performance of Contingent Contracts
• Contracts to do or not to do something, if some
event collateral to such contract, does or does not
happen – s.31
• If contingent on happening of an event – cannot
be enforced unless and until that event happens;
if the occurrence of that event becomes
impossible, the contract will be void – s.32
• If contingent on not happening of an event – the
contract can be enforced when that event
becomes impossible to occur – s. 33
 Offer of perform – tender
• Relevant provision – s.37 & 38

• Offer to perform is referred as ‘tender’ under the

English law.

• Principle w.r.t the effect of a tender was first laid

down in Startup v Macdonald (1843) – the law
considers a party who has entered into a
contract…as having substantially performed it, if
he has tendered the goods or money to the party
to whom it was to be made provided only…party
had a reasonable opportunity of examining the
goods…
 Effect of refusal to accept offer of
performance – s. 38
If the offer to perform is not accepted by the promisee, the
promisor is not responsible for non performance and can also
bring an action against the promisee for non acceptance.

Conditions to be fulfilled by such an offer –

• It must be unconditional

• Must be made at a proper time and place, and under

circumstances wherein the person to whom it is being made has a
reasonable opportunity to ascertain the ability and willingness of
the other person to perform what he is bound under the promise
to perform.

• If its an offer to deliver anything, the promisee must have a

reasonable opportunity to assure that the thing offered is the
thing promised to be delivered.
 By whom the contracts must be
performed
• S. 40 provides that, if it appears from the
nature of the case that it was the intention of
the parties to any contract that any promise
contained therein be performed by the
promisor alone, then such promise must be
performed by the promisor only.
Otherwise the promisor or his
representatives may employ a competent
person to perform it (vicarious performance).
Devolution of joint liabilities – s.42
• It refers to the case where several persons are
promisor jointly; liability of each of them
under the contract would devolve on their
respective representatives, along with the
surviving promisors.
• Indian position differs from that of England, in
the sense that in England, there is no such
devolution of liability on representatives, but
only on the surviving joint promisors.
 Any one amongst the joint promisors
may be compelled to perform – s.43
• The promisee may compel any one or more, of the
several joint promisors to perform. This is so because,
mere reason of them being joint promisor cannot
delay or vitiate performance.

• Promisor may compel contribution – This provision

also gives room for that promisor to compel other
co-promisors, to give their contribution of
performance.

• Sharing of loss – this provision also talks about sharing

of loss by the joint promisors, if any one amongst
them is at default in his performance (contribution).
Read explanation to s.43 also.
 Contd…
• In the absence of express agreement to the
contrary implies – if the parties to contract
wish so, they’re at liberty to expressly provide
for a contrary provision, but in absence of
such provision, the said provision shall prevail.
 Performance of reciprocal promises
(s. 51 to 54)
• Definition under s.2 (f) – Promises which form the
consideration or part of the consideration for
each other, are called reciprocal promises.

• Promisor not bound to perform, unless reciprocal

promisee ready and willing to perform – when a
contract consists of reciprocal promises to be
simultaneously performed, no promisor need
perform his promise unless the promisee is ready
and willing to perform his reciprocal promise.
 Order of performance of reciprocal
promises (s. 52)
• When the order of performance of reciprocal
promises is expressly fixed by the contract, they
shall be performed in that order; and when the
order is not expressly fixed, they shall be
performed in that order, which the nature of
transaction requires.
• Nature of transaction e.g. – A and B enter into a
contract, wherein A will build a house for B for a
fixed price. A’s promise to build the house must
be performed before B’s promise to pay for it.
 Liability of party preventing event on
which the contract is to take effect
(s. 53)
• If a party to contract prevents the other party
from performance, the contract is voidable at
the option of the party which is so prevented;
he is also entitled for compensation for any
losses incurred in consequence of such non
performance.
 Effect of failure to perform when
• Time is of essence to the contract – the
promisee can invalidate the contract at his
option; defaulting party is also liable to
compensate him for any loss suffered by
reason of such non - compliance.
• Time is not of essence – contract does not
become voidable but the promisee is entitled
to be compensated for loss if any suffered due
to such default.
 Section 39 of the ICA
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 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.
 Breach of contract
Breach – breaking a commitment.
Meaning – when one of the parties breaches an
obligation which the contract imposes, that
party is said to be ‘in breach’ of the contract.
Breach may consist of –
• Non performance of a relevant obligation or,
• Its performance in a manner or at a time,
which fails to comply with the requirements of
the contract.
 Discharge by ‘breach’
• A ‘breach’ in itself does not effect a discharge.
What it may do is, it may justify the innocent
party, if the party so chooses, in regarding
itself as absolved or discharged from further
performance.
• A breach does not automatically terminate
the innocent party’s obligation, since that
party has the option to either treat it still
continuing or to regard itself as discharged.
 Forms of breach which justify
discharge
Right of a party to be treated as discharged
may arise in any one of the three ways, when
the other party;
• Renounces its liabilities (repudiates) under the
contract.
• By his own act, make it impossible to fulfill
them or
• Fails to perform what it has promised.
 Anticipatory breach and present
breach
• Anticipatory breach – when prior to the
promised date of performance, the promisor
absolutely repudiates the contract. It is an
announcement by the contracting party of his
intention not to fulfill the contract and that he
will be no longer bound by it.

• Present breach – when the repudiation takes

place during or after the time of performance.
 Effects upon the rights of parties
• Innocent party is excused from further performance;
obligation under contract is replaced by the obligation
to pay damages.
• Some of the effects of anticipatory breach on the
parties:
a) Innocent party excused from further performance
b) immediate right of action – Hochester v De La Tour
(1853)
c) Immediate right of action also extends in case of a
contingent contract – Frost v Knight (1872)
d) The party repudiating the contract, may choose to
perform when the time comes, and the promisee will
be bound to accept the same.
 Damages for breach
• Damages – it refers to the compensation in
terms of money for the loss suffered by the
injured party.

• Liquidated damages – which are

certain/fixed/calculable/predetermined.
• Unliquidated damages – when they are not
fixed or certain.
 Hadley v Baxendale (1854) Rule
• “…damages should be such as may be fairly and
reasonably be considered either arising naturally, or
such as may reasonably be supposed to have been in
the contemplation of both the parties, as the probable
result of the breach of that contract…”
• The defendants in this case were held not liable, as in
the great multitude of cases of millers sending off
broken shafts for repair, it does not follow that in the
ordinary circumstance that the mill is stopped.
• If the stopping of the mill was actuated because of the
want of shaft, it was a special circumstance and should
have been pointed out to the defendants in clear
terms.
 To categories of damages may
therefore arise
• General damages – those which arise naturally in
the usual course of things from the breach itself.
• Special damages – those which arise on account
of unusual circumstances. They are not
recoverable unless the special circumstances are
brought to the knowledge of the defendant, so
that the possibility of the special loss is in
contemplation of the parties.
• Also refer Horne v Midland Railway C o (1873).
Consequences of breach of contract in
the ICA
• Compensation for loss or damage caused by
breach of contract – 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. Such compensation
should be of the loss or damage which naturally
arose in the usual course of things from such
breach, or that which was known to the parties
while entering into the contract.
• No compensation for any remote and indirect loss
sustained by the breach.
 Discharge by Agreement
The parties to a contract are free to rescind
the contract i.e. bringing an end to the
contract, to alter some of its terms or to
substitute the old contract with an entirely
new contract. This is known as ‘discharge by
agreement’. As here the parties get absolved
of their contractual obligations through
mutual agreement (in consensus with each
other).
Modes of discharge by agreement
Therefore, a discharge by agreement may
take place in following three ways:

• Novation

• Rescission

• Alteration
 Rescission
• Abrogation of a contract / Unmaking of a contract
/ Bringing the parties back to the position they
were in, prior to entering into the contract.
• Parties are free to rescind the contract they
entered into, but only with agreement.
• An agreement fixing dates on which the original
contract would stand terminated is also a way to
rescind. The consideration in such agreements, if
at all required, is the promise by the parties to
give up their respective rights and benefits under
the old contract.
• Also refer s. 75.
 Novation
It can occur in two ways, viz;
• A new contract being substituted between the same parties
or
• A new contract being substituted between different parties.

Essential elements of Novation:

• Done with agreement of both or all the parties to that
contract.
• It is a substitution of the old with a new contract and not
mere variation of some of its terms.
• It should rescind or extinguish the previous contract.
• Rights under the original or the old contract are replaced
with rights under the new contract.
• Relevant case – Scarf v Jardine (1882).
 Alteration
Parties to a contract may vary some of the terms of
the original contract, with a subsequent contract.

Essentials:
• The modifications must become a part of the original
contract
• Original terms continue to be in force, except those
which are inconsistent with the altered terms, i.e.
original terms are not rescinded.
• An alteration may be made at the instance of one
party alone, and there is nothing repugnant to the law
of contracts in having such a term express in the
contract – Benode Behary Roy v General Assurance
Society Ltd (1950).
 Relevant provisions of the ICA
• Effect of novation, rescission and alteration (s.62)
– the effect of novation, rescission and alteration
is that the original contract need not be
performed.
• Promisee may dispense with or remit the
performance of the promise (s.63) – the promisee
may dispense with or remit, wholly or in part
(waiver), the performance of the promise, or may
extend the time for such performance or may
accept any satisfaction instead of the promise.