Legal Aspects of Business

Dr. Kiran Kumar Agrawal

(Associate Professor)
Dr. Kiran Kumar Agrawal , Associate Professor
DISCHARGE
Of
CONTRACT
OVERVIEW :-
Section I. Introduction and Meaning

1. Discharge of Contract : Meaning

and definition
2. Conditions/Modes, when a Contract is
Discharged
Meaning & Definition
Discharge of Contract means Termination of the Contractual
Relationship b/w parties . A Contract is said to be discharged
when it ceases to operate i.e. when the rights and obligations
created by it come to an end . In some cases , other Rights and
Obligations may arise as a result of Discharge of contract , but
they are altogether independent of the original contract .
Definition According to American Institute of Law (A.I.L.)
“ When the Contractual relationship between two parties come
to the Stage of Termination then a Contract is said to be
Discharged ”
 Discharge of Contract
By By By Impossibility of By By By
Perform- Agreem- Performance Oper-
Lapse Breach of
ance ent or ation of
of Law Contract
Consent
Time

A A 1. By Express Consent
c t 2. By Implied Consent
t t
u e Novation Waiver
a m Actual Anticipatory
Remission 1.At the time of
l p the Performance Implied Express
t Alteration Repudiatio Repudiation
2.During the
e Rescission Merger Performance
n
d
 Discharge by Impossibility of Performance

Known to The Unknown to Supervening

Parties The Parties Impossibility

An Excuse Not An Excuse

Destruction of Subject-Matter
Non-Existence of a state of things
Death or incapacity for personal services
Change of Law
Outbreak of War
Difficult to Perform
Commercial Impossibility
Failure of a third party
Failure of one of the objects
Strikes, Lock-outs & Civil Disturbances
Conditions / Modes of Discharge of
Contract
A. DISCHARGE BY PERFORMANCE :-
Performance means the doing of that which is required
by a contract . Discharge of Performance takes place
when the parties to the Contract Fulfill their obligations
arising under the contract within the time and in the
manner prescribed . In such case , Parties are discharged
and the contract comes to an end . But if only one Party
performs the promise , he alone is discharged . Such
party gets a right of action against the other party who is
guilty of breach .
 Discharge By Performance

1. Actual Performance :- When both the Parties perform their

promises , the contract is discharged . Performance should be
Complete , Precise and According to the terms of the agreement
. Most of the Contracts are discharged by performance in this
manner .
2. Attempted Performance or Tender :- Tender is not Actual
Performance but is only an offer to perform the obligation
under the contract . Where the promisor offers to perform the
obligation , but the promisee refuses to accept the performance ,
Tender is Equivalent to Actual Performance , Accept in case of
Tender of Money . The Effect of the Valid Tender is that , the
Contract is deemed to have been performed by the tenderer .
The tenderer is Discharged from his responsibility for non-
performance of the contract without in any prejudicing his
rights which accrue to him against the promisee .
 B. Discharge By Agreement or Mutual Consent

As it is the agreement of the parties which binds them , so by their further

agreement or consent the contract may be terminated . Since a contract is
created by agreement , it may be discharged by another agreement by the
same parties . The Rule of Law in this regard is as Follows “ Eodem modo quo
quid constituitur , eodem modo destruitur ” i.e. A thing may be destroyed in the
same manner , in which it is created .
The Various Cases of Discharge of contract by mutual agreement are dealt with
in sec 62 and 63 and are discussed below :-
A. Novation(sec. 62) :- When a contract is submitted for the Existing contract , it
is called Novation . When the new contract is agreed by ‘Novation’ , the
original contract is discharged and need not to be performed .
For Eg :- A owes money to B under a contract. It is agreed between A, B and C that
B shall henceforth accept c as his debtor, instead of A . The old debt of A to B
is at an end and a new debt from C to B has been contracted.
Discharge By Agreement or Mutual Consent

B. Rescission (sec. 62):- When all or some of the terms of the contract are cancelled rescission of
contract takes place.
For Eg :- A Promises to deliver certain goods to B on a certain date . Before the date of
performance , A and B mutually agree that the contract stands discharged by rescission by
mutual consent

C. Alteration (sec. 62) :- Alteration of a contract may take place when one or more of the terms of
the contract is/are altered by the mutual consent of the parties to the contract . In such a case ,
the old contract is discharged .
For eg :- G enters into a contract with M for the supply of 100 bales of cotton at his godown no. 1
by the first of the next month . G and M may alter the terms of the contract by mutual consent .
Discharge By Agreement or Mutual Consent
D. Remission (sec. 63) :- Remission means acceptance of lesser sum than
what is contracted or lesser fulfillment of the promise . Sec.63 allows
the promisee to dispense with or remit the performance of the
promisee by the promisor , ot to extend the time for performance or to
accept any other satisfaction instead of performance .

For Eg :- D owes F Rs. 5000 . D pays to F and F Accepts , in

satisfaction of the whole debt , Rs. 2000 paid at the time and
place at which Rs. 5000 is payable . The whole debt is Discharged
 Discharge By Agreement or Mutual Consent

.
E. Waiver :- Waiver takes place when the parties to a contract agree that
they shall no longer be bound by the contract . This amounts to a mutual
abandonment of rights by the parties to the contract . Consideration is not
necessary for waiver .
F. Merger :- Merger takes place when an inferior right accruing to the same
party under a contract merges into a superior right accruing to the same
party under the same or some other contract .
For Eg :- C holds a property under a lease . He later buys the property. His
rights as a lessee merge into his rights as an owner .
 C.Discharge by Impossibility of Performance

When the nature of the contract is such that it is not possible to perform the
contract , then it is known as Impossible contract . If the contract contains
an undertaking to perform an impossibility , it is void ab-initio . This rule
is based on the follwing maxims : -
1.The law does not recognize what is impossible ; and
2. What is impossible does not create an obligation
According to the section 56 , impossibility of performance may fall
into either of the following categories :-
 Discharge by Impossibility of Performance
1. Impossibility existing at the time of agreement . The first
paragraph of Sec. 56 lays down that “ a agreement to do an act
impossible in itself is void.” This is known as pre-contractual or
initial impossibility . The fact of impossibility may be –

i. Known to the parties . This is known absolute impossibility . In

case of absolute impossibility , the agreement is void an initio . For
eg :- when D agrees with E to discover treasure by magic , or
undertakes to put life into dead wife of E , the agreement is void .
 Discharge by Impossibility of Performance
ii. Unknown to the parties. When at the time of making the contract
both the parties are ignorant of the impossibility , as in the case of
destruction of subject-matter to the ignorance of both the parties , the
contract is void on the ground of mutual mistake . If , however , the
promisor alone knows of the impossibility of performance at the time
of making the contract , he shall have to compensate the promisee for
any loss which such promisee sustains through non-performance of the
promisee (sec. 56 para 3)
For Eg :- S contracts to marry T , being already married to U , and being
forbidden by the law to which he is subject to practice polygamy . S
must make compensation to T for the loss caused to her by the non-
performance of his promise
 Discharge by Impossibility of Performance
2. Impossibility arising subsequent to the formation of contract :-
Impossibility which arises subsequent to the formation of a contract (
which could be performed at the time when the contract was entered
into) is called Post- contractual or Supervening Impossibility. In such
a case the contract becomes void when the act becomes impossible or
unlawful (sec. 56 para 2). Impossibility of performance of a contract ,
as a general rule , is no excuse for the non-performance of the
contract ; but where this impossibility is caused by the circumstances
beyond the control of the parties , the parties are discharged from
further performance of the obligation under the contract .
 Discharge by Supervening Impossibility
A contract is discharged by supervening impossibility In the following cases :-
1. Destruction of Subject-Matter of contract. When the subject- matter
of a contract, subsequent to its formation , is destroyed without any fault of
the parties to the contract , the contract is discharged . For Eg :- G let a
music hall to T for a series of concerts for certain days . The hall was
accidentally burnt down before the date of the first concert . Held , the
contract was void .
2. Non Existence or Non Occurrence of a particular state of things.
Sometimes, a contract is entered into between two parties on the basis of a
continued existence or occurrence of a particular state of things . If there is
any change in the state of thing which formed the basis of contract , or if the
state of things which ought to have occurred does not occur, the contract is
Discharged . For Eg :- A and B contract to marry each other. Before the time
fixed for the marriage , A goes mad . The contract becomes void .
 Discharge by Supervening Impossibility

3. Death or incapacity for personal services :- Where the performance

depends on the personal skill or qualification of a party , the contract is
discharged on the illness or incapacity or death of that party . The man’s life is
an implied condition of the contract . For Eg :- An artist undertook to perform
at a Concert for a certain price . Before she could do so , she was taken seriously
ill . Held, she was discharged due to illness .
4. Change of Law or Stepping in of a person with Statutory Authority
: when subsequent to the formation of a contract , change of law takes place , or
the govt. takes some power under some Ordinance or special act , as for eg. , the
Defence of India Act , so that the performance of the contract becomes
impossible , the contract is discharged . For Eg :- D enters into a contract with P
on 1st March for the supply of certain imported goods in the month of September
of the same year . In June by an Act of Parliament, the import of such goods is
banned . The contract is Discharged .
 Discharge by Supervening Impossibility
5. Outbreak of Law :- A Contract entered into with an alien enemy during the war
is unlawful and therefore impossible of performance . Contracts entered into before the
outbreak of war are suspended during the war and may be revived after the war is over
. For Eg :- K contracts to take in cargo for F at a foreign port . K’s govt. afterwards
declares war against the country in which port is situated . The contract becomes void
when war is declared .
Impossibility of Performance – Not an Excuse :
Ordinarily when a person undertakes to do something , he must do it unless its
performance becomes absolutely impossible due to any of the circumstances already
discussed . In the following Cases , A contract is not Discharged on the grounds of
Supervening Impossibility :
1. Difficulty of Performance :- A contract is not discharged by the mere fact that it
has become more difficult of performance due to some uncontemplated events or delays
.
 Discharge by Supervening Impossibility
For Eg :- A Sold Certain quantity of Finland Timber to D to be supplied between July
and September . Before any Timber was supplied , war broke out in the month of August
and transport was disorganized so that A could bring any Timber from Finland . Held,
the difficulty in getting the Timber from Finland did not discharge A from performance .
2. Commercial Impossibility :- A contract is not discharged merely because
expectations of higher profits is not realised ,or the necessary raw material is available at
a higher price because of the outbreak of war , or there is sudden depreciation of currency
. For Eg :- A promised to send certain goods from bombay to antwerp in september .
Before the goods were sent , war broke out and there was a sharp increase in shipping
rates . Held , the contract was not discharged .
3. Impossibility due to failure of a third person :- Where a contract could not be
performance because of the default by a third person on whose work the promisor relied ,
it is not discharged .
 Discharge by Supervening Impossibility
For Eg :- S , a wholesaler, entered into a contract with P for the sale of a certain type of
cloth to be produced by R , a manufacturer of that cloth . R did not manufacture the
cloth . Held, S was liable to P for damages .
4. Strikes , Lock-Outs and Civil Disturbances :- Events such as these do not
discharge a contract unless the parties have specifically agreed in this regard at the time
of formation of the contract . For Eg :- A agreed to Supply to Z Certain Goods to be
procured from Algeria . The goods could not be produced due to riots and civil disturbance
in that country . Held, there was no excuse for the non-performance of the contract .
5. Failure of One of the Objects :- When a contract is entered into for several objects ,
the failure of one of them does not discharge the contract . For Eg :- JK agreed to let out
a boat to J a) for viewing a naval review on th occasion of the Coronation of EdwardVii,
and b) to Sail round the fleet . Owing to King’s illness that naval review was abandoned
but the fleet was assembled . The boat , therefore , could be used to sail round the fleet .
Held, the contract was not discharged .
 D. Discharge By Lapse Of Time
The Limitation Act , 1963 lays down that a contract should be Performed within a
specified period , called Period of Limitation . If it is not performed , and if no
action is taken by the promisee within the period of limitation , he is deprived of
his remedy at law . In other words , we may say that the contract is terminated .
For Eg :- The price of a goods sold without any stipulation as to credit should be
paid within the three years of Delivery of the goods . Where goods sols on credit
to be paid after the expiry of a fixed period of credit should be paid within the
three years of the expiry of Period of Credit . If the price is not paid and creditor
does not file a suit against the buyer for the recovery of price within three years ,
the debt becomes Time-Barred and hence Irrecoverable .
 E. Discharge By Operation of Law
A Contract may be discharged independently of the wishes of the parties , i.e. by
Operation of Law . This includes Discharge –
a. By Death :- In contracts involving personal skills or ability , the contract is
terminated on the death of the promisor . In other contracts , the rights and
liabilities of a deceased person pass on to the legal representatives of the
deceased person .
b. By Merger :-
When an inferior right contract is merged into superior right contract , the
former is discharged automatically . For eg:- Where a part time lecturer is
made full time lecturer , the contract of part time lectureship is Discharge by
Merger .
c. By Insolvency :- When a Person is adjudged insolvent , he is discharged from
all liabilities incurred prior to his adjudication .
 Discharge By Operation of Law
d. By unauthorized alteration of the terms of a written Agreement :-
Where a party to a contract makes any material alteration in the contract without
the consent of the other party , the other party can avoid the contact . A material
alteration is one which changes , in a significant manner , the legal identity or
character of the contract or the rights or liabilities of the parties to the contract . An
Alteration which is not material or which is made to carry out the common
intention of the parties does not affect the validity of the contract .
e. By Rights and Liabilities becoming vested in the same person :-
Where the rights and liabilities under a contract vest in the same person for eg :-
When a bill gets into the hands of the acceptor , the other parties are discharged .
This is to avoid circuity of action .
 Discharge By Breach Of Contract
When the Promisor neither performs his contract nor tender his performance or
where the performance is defective, there is a breach of Contract . It
occurs when a party to the contract does not fulfill his contractual
obligation or makes it impossible the aggrieved party (i.e. the party who is
not at fault) can sue for damages , but the contract as such stands
terminated .
Breach of Contract may be :-
1. Actual or ,
2. Anticipatory
 1. Actual Breach of Contract
The Actual Breach may take place either at the time when performance is due
or when actually performing the contract .
a. At the time of performance :- when a party fails to perform his
obligation on the date fixed for performance by the Contract , it is known a
actual breach of Contract.
For Eg :- R agrees to deliver to S 5 Bags of wheat on 1st Jan . He does
not deliver the wheat on that day , there is breach of contract .
b. During the performance of the Contract :- Actual breach of
Contract also occurs when one party fails to perform his obligation during
his performance of the contract .
For Eg :- J Contracted with a Railway Co. to supply it 3000 tons of
Railway Chairs at a certain price, to be delivered in installments after 1787
tons had been supplied , the Railway co. asked J to deliver no more . Held ,
J could bring an action for Breach of Contract .
 2. Anticipatory Breach Of
Contract
Breach of Contract may occur before the time for performance is due . This may
happen when one of the parties expressly renounces the contract and shows his
attention not to perform the contract or does something which makes performance
impossible .
a. By Expressly Renouncing his Obligation under the contract :-
When one party to the contract communicates to the other party , before the due
date of performance that he has not intention to perform it .
For Eg :- P undertakes to supply certain good to R on 1st Jan . Before this date , he
informs R that he is not going to supply the goods . This is anticipatory breach of
contract by express Repudiation .
b. By Doing some Act so that the performance of his promise becomes impossible .
Here a party disables himself from performing the contract by his own act or
Implied Repudiation . It is also called Implied Repudiation .
 2. Anticipatory Breach Of Contract
For Eg :- 1. A person contract a particular horse to another on 1st Jan and before
that date he sells the horse to somebody else ;
2. D agrees to marry M but before the agreed date of marriage she marries
P.
In both the above cases there occurs an anticipatory breach of contract brought
about by the conduct of one of the parties .
Effect Of Anticipatory Breach :- In case of Anticipatory breach , the promisee is
excused from performance , further , it gives an option to the promisee where by –
i. He may either treat the contract rescinded and sue the other party for breach of
contract without waiting for due date of performance ; or
ii. He may elect not to rescind but to treat the contract as still operative , wait for
the time of performance and then hold the other party responsible, here it is
important to note that the contract will keep alive not only for his own benefit but
for the guilty party also .
THANK YOU!
Dr. Kiran Kumar Agrawal , Associate Professor