Business Regulations - Discharge of contract with proper examples a Contract

Discharge of Contract with Examples

1. Discharge of Contract Syeda Ayesha Tabassum

2. Discharge/Termination of Contract Discharge of a contract means termination of contractual relation between the parties to a contract. In other words, a contract is discharged when it ceases to operate i.e. when the rights and obligations created by it comes to an end. A contract may be discharged in several modes: By performance By agreement or consent By impossibility of performance By lapse of time By operation of law By breach of contract

3. 1) Discharge by performance Discharge by 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 a case, the parties are discharged and the contract comes to an end. But if only one party performs the promise, he alone is discharged. Such a party gets a right of action against the another party who is guilty of breach. Performance of a contract is the most usual mode of its discharge. It may be:   1. Actual performance  

4. Example for Actual Performance Example: Peter agrees to sell his cycle to John for an amount of Rs 10,000 to be paid by John on the delivery of the cycle. As soon as it is delivered, John pays the promised amount. Since both the parties to the contract fulfil their obligation arising under the contract, then it is discharged by performance

5. 2. Attempted performance or tender of performance. This is often done when one party is unable to fulfill their contractual obligation and wishes to offer an alternative solution to fulfill their obligations under the contract.

6. 2) Discharge by agreement or consent As it is the agreement of the parties which binds them, so by there further agreement or consent the contract may be terminated. The general rule of law is a thing may be destroyed in the same manner in which it is constituted . This means a contractual obligation may be discharged by a agreement which may be expressed or implied. The various cases of discharge of a contract by mutual agreement are dealt with in Section 62 and 63 and are discussed below:

7. Novation (Sec.62):- Novation takes places When substitution of a new contract for the original one between the same parties. The consideration for the new contract is mutually being the discharge of old contract. Novation should take place before the expiry of the time of the performance of the original contract.

8. Practical Examples for Novation Assume that John (Buyer) bought a car from Peter (Owner) for 5,00,000 on credit terms, which he plans to clear in the next twelve months. Even before John makes the first monthly installment, John gets a medical emergency and needs immediate cash to settle the bill. Therefore, John decides to sell the car to Mary under the same terms as Peter. John wants to exit the transaction but owes obligations to both Peter and Mary. Therefore, John decides to settle his debt obligation through a novation by talking Peter and Mary into a novation agreement. In a partnership firm, the liabilities of an old firm are taken over by the new firm. A lease agreement, where the tenant gives the lease to another party and makes him responsible for the obligations and responsibility arising from the lease agreement.  Rice and wheat example also we can give

9. Rescission (Sec.62):- Rescission of a contract takes place when all or some of the terms of the contract are cancelled. It may occur: By mutual consent of the parties (or) Where one party fails in the performance of his obligation. In such a case, the other party may rescind the contract without claiming compensation for the breach of contract. In case of recession, only the old contract is cancelled and no new contract comes to exist in its place.

10. For example, If Party A and Party B enter into a contract of polythene bags in which Party A to provide services to Party B, but after the contract is made the Government announces ban of polythene bags so in this case Party A is unable to fulfill their obligations, they may mutually agree to rescind the contract and terminate their duties.

11. Alteration (Sec. 62):- Alteration means a change in one or more terms of a contract with mutual consent of the parties. In such a case the old contract is discharged. Ex: A promises to supply 3000 mtrs of cloth at 10 per mtr to B within 3 months. Later A & B make an alteration that A will Supply 200 mtrs of Superior quality cloth at another price within 4 months. Hence the contract is altered and new contract is made.

12. Remission (Section.63): Remission means acceptance of a lesser fulfillment of the promise made or acceptance of a sum lesser than what was contracted for. For Ex: Paul owes 10 lakh rupees to Peter but due to some unforeseen circumstances Paul can only repay 6 lakh rupees to Peter within the stipulated time period. But if Peter agrees to accept the amount which could be paid by Paul and settle the debt then, Peter’s act of remission discharges the contract.   Example 2: Jerry wants to sell his phone for Rs 15000 to Tom, The offer is accepted by Tom and the contract is already made but due to some circumstances Tom is able to pay only 12000 in stipulated time period so in this case jerry thinks to receive whatever amount Tom is paying to him rather be in total loss and with the mutual consents the contract is terminated

13. Waiver (Sec. 63):- When a contracting party fails to perform his obligation under the contract, the other party may rescind the contract and may waive the promisor or release. This is called as Waiver. It takes place when the parties to a contract agree that they shall no longer be bound by the contract. Example : Hero and Director Merger: Merger takes place when an inferior right accruing to a party under a contract merges into a superior right accruing to the same party under the same or some other contract. Ex: "P" holds a property under a lease. He later buys the property. His rights as a lessee merge into his rights as a owner.

14. 3) Discharge by impossibility of performance If an agreement contains an undertaking to perform an impossibility, it is void. This rule is based on the following: The law does not recognize what is impossible. What is impossible does not create an obligation. According to Sec. 56, impossibility of performance may fall into either of the following categories:

15. Impossibility existing at the time of agreement :- Sec. 56{1} lays down that an agreement to do an act impossible in itself is void. This is known as pre-contractual or initial impossibility. For Example: A Magician is promising to B that he will make him immortal if he pays him one crore rupees, B being educated he is willing to try and accepts the offer. In this case both the parties know that it is impossible.

16. Impossibility arising subsequent to the formation of contract ( post-contractual ):- Impossibility which arises subsequent to the formation of contract (which could not be perform at the time when the contract was entered into) is called post-contractual or supervening impossibility. Example: A & B are making a contract in which A is offering a race horse for some amount to B, both the parties agree and sign the contract. But unknowingly the horse will be stolen from its place. So once both the parties come to about the issue the contract will be discharged by their mutual consent.

17. 4) Discharge by lapse of time The Limitation Act, 1963 lays down that a contract should be perform within a specified period called period of limitation . If it is not perform & 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 if the obligations are not fulfilled within the stipulated time period.

18. 5) Discharge by operation of law: The automatic termination of a contract without any action or agreement by the parties involved. A contract may be discharged by operation of law which takes place in the following conditions: By Death : If contracts involving personal skill or ability of the promisor , the contract is discharged/terminated on the death of the promisor . It means if one party dies before the performance of a obligation then the contract will be discharged without any agreement.

19. By insolvency : When a person is adjudged(declared) insolvent, he is discharged from all liabilities incurred prior to his adjudication. Example: A & B made a contract but due to Bankruptcy A is unable to continue the contract with B, So the Contract is discharged. But A has to legally prove that he is completely insolvent.

20. 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 contract. By rights and liabilities becoming vested in the same person : When the rights and liabilities under a contract vests in the same person, the other parties are discharged. Here what happens is promisor himself becomes the promisee and the other party gets discharged Ex: A has made a contract with B but after certain period of time A feels like he alone can fulfill the obligations and liabilities by himself then in this case also the contract can be dischared .

21. 6) Discharge by breach ( Break ) of contract Breach of contract means promisor fails to perform the promise or breaking of the obligations which a contract imposes. It occurs when a party to the contract without lawful excuse does not fulfill his contractual obligation or by his own act makes it impossible that he should perform his obligation under it. Breach of contract may be of two types: 1. Actual breach of contract. ( On Date) 2. Anticipatory breach of contract. ( Before Date)

22. Actual breach of contract : Actual breach means promisor's failure to perform the promise on due date of performance. When a promisor fails or refuses to perform the promise upon the due date for performance then it is called actual breach of contract. Anticipatory Breach of contract : It occurs when a party to executory contract declares his intention of not performing the contract before the performance is due. It may take place in two ways. a) Expressly by words b) Implied by the conduct Ex: A person contracts to sell a particular horse to another on 1st of June and before the due date he sells the horse to somebody else.

23. Remedies for breach of contract Parties to a lawful contract are bound to perform their respective promises but when one of the parties terminates the contract by refusing to perform his promise, he is said to have committed a breach of contract. Breach of contract is not an unlawful act because the Contract Act accommodates it. It is quite likely that a defaulting party ( promiser ) may not keep his promise but the act has made provisions for remedies for the injured party.

24. Remedies available to the aggrieved( Promisee ) party In the case of breach of contract, the following remedies are available to the aggrieved party: Rescission of the contract/ Cancellation/Exoneration Damages Quantum meruit Specific performance of the contract Injunction

25. 1) Rescission of the contract When there is breach of contract by one party, the aggrieved party may rescind the contract & need not perform his part of the contract. The aggrieved party has to file a suit for rescission & when rescission is granted, the aggrieved party is absolved from all his obligations under the contract. Ex: A promises to deliver a table to B on 5 Feb & B promises to make the payment on delivery. If A does not deliver the table on the fixed date, B need not make the payment.

26. 2) Damages Damages are the monetary compensation allowed to the aggrieved party for the loss or injury suffered by him by the breach of contract. The fundamental principle underlying damages is not punishment but compensation for the pecuniary (having to do with money) loss which naturally flows from the breach. The primary purpose of awarding damages is to put the aggrieved party in the same position in which he would have been had the contract been perform. "If actual loss is not proved, no damages will be awarded“.

27. Types of damages Ordinary or General damages :- Ordinary damages are generally the difference between contract price and market price in sale of such damages which arise naturally in usual course of things from the breach of contract. Special damages:- These are damages which the aggrieved party may claim besides general damages for any loss he has suffered owing to special circumstances known to both the parties at the time of contracting.

28. Cont… Vindictive or exemplary damages:- They are quite heavy in amount and are awarded by way of punishment only in the following two cases: Breach of contract to marry Dishonor of a customer’s cheque by the bank without any proper reason. Nominal damages:- They are awarded in cases where there is a technical breach but the injured party has not suffered any loss. In order to establish the rights of the injured party, such damages are awarded. The amount may be even a rupee.

29. Cont… Damages for inconvenience and discomfort : Damages can be recovered for physical inconvenience and discomfort. If, how ever the inconvenience or discomfort caused by a breach is substantial, the damages can be recovered on the ground of fairness. Mitigation of damages : It is the duty of the injured party to take all reasonable steps to mitigate the loss caused by the breach. He cannot claim compensation or loss which is really due not to the breach but due to his own neglect.

30. 3) Quantum Meruit The word quantum meruit literally means “as much as earned” or “according to the quantity of work done”. When the person has begun the work & before he could complete it, if the other party terminates the contract or does something which makes it impossible for the other party to complete the contract, he can claim for the work done under the contract. This claim arises in the following two ways: Based on contract Based on quasi contract

31. a) Based on contract Where one party leaves the contract midway or refuses to perform it: In such a case the other party who has made part performance, can claim payment on quantum meruit . Where a contract is not divisible & there is part performance: In such a case the party who has done part performance cannot get payment from the party who has enjoyed the benefit. When a indivisible contract is completed but badly: In such a case the person who has completed the work can claim payment but the other party can make a deduction as he is not fully satisfied.

32. Cont… Express or implied contract without mentioning remuneration: Where there is an express or implied contract to render some service but no remuneration is fixed then some reasonable amount is payable. What is reasonable shall be determined by the principle of quantum meruit . When a contract becomes void : A contract may become void midway with part performance by some party. He is entitled to receive payment for his part performance.

33. b) Based on quasi contract Where a person receive something from another person: Not gratuitously, then the person receiving such benefit must pay the party from whom he has receive it. Where there is a breach of contract: Where one party breaks the contract, the injured party may claim payment from his part performance.

34. 4) Specific performance of the contract In some cases where damages are not an adequate remedy or actual damages cannot be measured , the court may direct the party who has broken the contract to actually perform his promise. Specific performance of the contract may be directed by the court in the following circumstances:

35. Cont… Where damages are not an adequate relief. This happens in cases where the subject matter of the contract is unique or rare & no substitute is available in the market. Where it is not possible to ascertain the amount of damages , specific performance may be ordered. In contracts for sale of land & rare articles, court generally order for specific performance of the contract.

36. 5) Injunction Where a party is in breach of a negative term of the contract i.e. where he is doing something which he promise not to do. The court may by issuing an order restrain him from doing what he promised not to do. Ex: N, a film actor agreed to act exclusively for W for a year & for no one else. During the year, he contracted to act for Z. It was held that he could be restrain by injunction from doing so.