Tuesday, January 18, 2011
Methods of Discharging the Contract
What are the provisions of Contract Act relating to discharge of contract?
What are the methods of discharging the contract?
When the rights and obligations arising out of a contract cease to exist or are extinguished, the contract is said to be discharged or terminated. A contract may be discharged in any of the following ways:
1. By performance ;(actual or attempted)
2. By mutual consent or agreement;
3. By subsequent or supervening impossibility or illegality;
4. By lapse of time;
5. By operation of law; or
6. By breach of contract.
1.Discharge by performance: When both the parties to a contract discharge their respective obligations arising out of the contract, the contract is discharged by performance. In such an event, both the parties have performed their part in the contract and now there is nothing outstanding to be done by any of the parties. This is a pleasant end of the contract. Most of the contracts are discharged in this way. On the other hand, when only party performs his part under the contract, he alone is discharged. Such a party gets the right to proceed against the other party who has failed to perform his promise or part under the contract.
Performance may be – (a) Actual performance, or (b) Attempted performance or tender.
Actual performance takes place when each party to a contract fulfils his obligation arising under the contract to the satisfaction of the other and as per the terms of the contract.
Attempted performance or tender is where one party is ready and willing to perform his promise as per the contract, but the other party does not accept the performance. In such a case, the contract is discharged by the wrongful refusal to accept performance. Section 38 provides that – ‘where a promisor has made an offer of performance to the promisee, and the offer has not been accepted, the promisor is not responsible for non-performance nor does he thereby lose his rights under the contract.’
Essential of valid tender
1.It must be unconditional: Offer of performance must be unconditional.Conditional tender is no tender. It is only when the party willing to perform its part under the contract offers to perform without any condition that he can claim attempted performance and be discharged upon non-acceptance of such unconditional performance. If the terms of sale stipulate cash payment, payment by cheque is conditional performance.
2. Proper place and time: A tender of performance has to be at the place and time as agreed upon in the contract. If it is not so, it is not a valid tender and the party tendering performance cannot be discharged. Payment of fees sought to be made by a student at the residence of the college cashier is not a valid tender.
3.Whole obligation: The attempted performance must be with respect to the whole of the obligation and not the part of it. In a sale of goods, the buyer cannot decide on his own to pay the price by instalments and therefore the tendering of the first instalment is not a valid tender or performance in the eyes of law.
Effect of refusal to accept a valid tender is that the contract is deemed to have been performed by the promisor i.e. tenderer. A contract is, therefore, discharged by a valid tender of performance.
2.Discharge by mutual consent or agreement: As a contract can be created by an agreement, it can also be terminated or discharged by agreement between the same parties. The parties to a contract may, for whatever reasons decide and agree that the contract entered into by them earlier need not be performed and in such an event the contract is discharged. The Contract Act states the following methods of discharge of contract by mutual consent or agreement: a. Novation: Novation occurs when a new contract is substituted for an existing contract, either between the same parties or between different parties, the consideration mutually being the discharge of the old contract. In Novation, a new contract comes into existence thereby discharging the obligations under the old contract. It is not merely an amendment to the old contract.
b. Alteration: Changing one or more terms of the existing contract and thereby giving rise to a new contract is alteration. In this way, the original contract is discharged and a new contract comes into existence in its place. Alteration has to be done with the consent of all the parties to the contract otherwise it will make the whole contract void. Further, mere correction of any clerical error is not alteration. Alteration must change the legal effect of the contract. For example, where the amount of debt is changed or the rate of interest is changed, there is alteration.c. Rescission: When the parties to the contract simply decide that the contract existing between them shall no longer be binding on them, it is rescission or cancellation of the contract. An agreement of rescission or cancellation discharges the parties from the liabilities arising from the earlier contract. Rescission can be express or implied. Express rescission takes place when the parties expressly agree that the contract shall no longer have any binding effect on them. In implied rescission, there is non-performance of a contract by both the parties for a long time without complaint.d. Remission: It means acceptance of lesser fulfillment of promise made under the contract. When one party gives up, wholly or in part, his right under the contract, there is remission and discharge of contract. Thus, where a banker accepts a lesser amount against a loan, as a complete satisfaction of loan dues, there is remission and the borrower is discharged from the contract. It should be noted that for such remission no consideration is necessary.
e. Waiver: It means the deliberate abandonment or giving up of a right, which a party has obtained under contract. The other party is therefore discharged from his corresponding obligation. Thus, where A saves B’s house from fire and whereupon B promises A a reward of Rs. 100/-, A may waive the right to receive the reward in which case B is discharged from his obligation to give the reward.
3. Discharge by subsequent or supervening impossibility or illegality: If the performance of the contract is impossible at the time when it is entered into, there is no question of discharge of contract because there is no contract in the eyes of law. An agreement to do an act impossible in itself is a void agreement. However, a contract to do an act, which subsequently becomes impossible or unlawful by reason of some event, which the promisor could not prevent, becomes void when the act becomes impossible or unlawful.
This principle is also known as doctrine of frustration. The following conditions must be satisfied for the discharge of contract. (1) The act must have become impossible, (2) the impossibility must be due to reason which the promisor could not prevent, and (3) the impossibility must not be self-induced by the promisor or due to his negligence. It should be noted that if the promisor knows about the impossibility at the time when the contract is entered into, he is bound to compensate the other party for any loss caused due to non-performance.a.Destruction of the subject matter: When the subject matter of the contract is destroyed subsequent to the formation of the contract without any fault of the promisor or the promisee, the contract is discharged. Where a house is agreed to be let out on rent and if the house is destroyed by fire, the contract is discharged.b.Death or personal incapacity of the promisor: Where the performance of a contract depends on the personal skill of the promisor, the contract is discharged on the death or the personal incapacity of the promisor. Thus, where an artist undertakes to paint a picture for a certain price, but meets with an accident and loses his hand, he is discharged due to personal incapacity.c.Change of law: An act, which is agreed to be done under a contract, may become illegal due to change of law applicable to such performance. In such an event, the contract is deemed to be discharged. Thus, a contract for sale of onions from one State to another State is discharged when inter-state sale of onions is subsequently prohibited by law.d. Outbreak of war: All contracts entered into with an alien are automatically suspended when there is outbreak of war with that country. Such contract may be revived after the war is over subject to law of limitation and direction of the Government. It should be noted that in discharge of contracts under this method, the performance must have become absolutely impossible. Increased difficulties in performance which were not thought of at the time of formation of the contract, default of a third person, strikes and lock-outs etc. will not discharge the contract and the promisor will have to carry out his promise under the contract though he may incur heavy expenditure in doing so.
4. Discharge by lapse of time: The law of limitation provides that where there is a breach of contract, legal action must be taken within the specific period. This period is known as period of limitation. After the period of limitation expires, the promisee is debarred from initiating any legal proceedings against the promisor and the promisor is free from the obligations under the contract. For example, the period of limitation prescribed under the Limitation Act for the suits of money recovery is three years. Where the creditor fails to file a suit against the debtor for the recovery of his debt within the said period after the default, the debt becomes time-barred and the creditor loses his remedy to recover the debt. In effect, therefore, the debtor is free from his obligation to repay the debt and thus the contract stands discharged.Another way of discharge of contract due to lapse of time is when time is essence of the contract and if the contract is not performed within the fixed time, the contract comes to an end and the party not at fault need not perform his obligation under the contract. He, however, can sue the other party for compensation.
5. Discharge by operation of law: Upon the death or insolvency of the promisor, the contract is discharged. When the contract is of personal nature, the death of the promisor discharges the contract and in other cases rights and liabilities of the deceased pass on to his legal representatives. Merger is yet another mode of discharge of contract under this category where an inferior right is merged into a superior right. Thus, where a tenant purchases the rented property from the landlord, his inferior right of tenancy is merged into the rights of the owner. Unauthorized material alteration in the written contract (material alteration without the consent of the other party) will make the whole contract void and thus in effect the contract is discharged.
6. Discharge by breach of contract: Breach of contract puts an end to the contract and therefore it is also a mode of discharge of contract. The original obligations created under the contract for both the parties are brought to an end when there is breach of contract. Of course, the aggrieved party is entitled to sue the party at fault for damages, but the contract as such is discharged. Breach of contract may be of two kinds: (1) Anticipatory breach and (2) Actual breach When one party to the contract communicates to the other party, by words spoken or written, and before the due date of performance, his intention not to perform contract, there is express anticipatory breach of contract. When such intention is gathered from the conduct of the party, there is implied anticipatory breach of contract.Section 39 of the Contract Act provides that – “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 his acquiescence in its continuance.”
It may be noted that in both the cases, the breach of the contract takes place before the date due for its performance for the simple reason that now the performance of the contract has become impossible due to the act of the promisor. Hence it is called anticipatory breach of contract.In actual breach of contract, a party to the contract fails to perform his obligation on the due date of performance.