Modes of Discharge of Contract
Introduction
The law of contract has the widest application providing the basis of formal cooperation in the society. Even one of the most prevalent theories on the origin of society i.e. the Social Contract Theory propounded by Thomas Hobbes and taken forward by John Locke and Jean Jacques Rousseau was based on the mutual contact between the people of the society. All of us at different occasions must fall in any form of contract. For e.g. the relation between an employer and employee, farmers with grain merchants and students with their educational institution involves a contractual relation. However, Contract is not the sport of an idle hour. For a valid Contract. Thus, for the formation of a contract there must be – (1) an agreement and (2) the agreement shall be enforceable by law. An agreement is an accepted proposal and as per the Section 2(h) of the Indian Contract Act, 1872, if it is enforceable by law it turns into a contract.
After the formation of a contract the next step headed towards the discharge of the Contract. When the object that the parties had in their mind is fulfilled, liabilities of either party under contract comes to an end, the contract is said to be discharged.
Discharge of Contract
Discharge of Contract aims to execute and fulfilment of all the objects that are mentioned in the contract and agreed by the promisor and promise. The consequence of the discharge of the contract is that the contract comes to an end.
Sections 37 to 73 of the Indian Contract Act, 1872 lays down the four ways of discharge of contract;
i. By Performance
ii. By Impossibility of Performance
iii. By Modification, and
iv. By Breach.
1. Discharge of Contract by performance
Section 37 of the Act lays down a mandatory provision that parties to a contract must either perform, or offer to perform, their respective promises and in case of the death of such promisor, promises to bind their representatives. While analysing this Section the apex court in the case of National Insurance Co. Ltd. v. M/S Boghara Polyfeb Pvt. Ltd, 2008[1] held that discharge of contract by performance refers to fulfilment of the contract by performance of all the obligations in terms of the original contract.
The consequences of such a discharged contract as held by apex Court is that nothing remains- neither any right to seek performance nor any obligation to performs.[2]
1.1.Who can perform the Contract
Section 37, 40 and 41 of the Contract Act and Section 15(b) of the Specific Relief Act laid down the provision that apart from the contracting parties, there are other persons who can perform the contractual obligation. A perusal of these Sections, as held by Madras High Court in , would show that contracts could be perform by the promisor or his representatives by employing competent persons to perform the same unless it appears from the nature of the case that it was the intention of the parties that the promise contained in it should be performed by the promisor himself.
Also, in Khardah Company Ltd. v Raymon & Co.(India) Private Ltd., 1962,[3] the apex court held that the rights under a contract are assignable unless the contract is personal in nature or rights are incapable of assignment, either any law or any agreement between the parties.
1.1.1. Personal performance by promisor
This usually happens in cases where the use of the personal skill of the promisor is involved, for example the contract of technical and professional nature, such as contract to paint, sing or marry, requires personal performance.
1.1.2. Performance by legal representatives in case of death
The proviso of Section 37 binds the legal representative of the promisors for performance in case of their death, unless a contrary intention appears from contract. The case of A.R Venkatasami Naicker and Two Ors. v. A.R.V Jaganathan and Six Ors., 1997 is an illustration of this situation, where a revision petition was filed in the Madras High Court against the decision of the District Munsif, Virudhunagar.
Here, one of the original party to the suit, who is first petitioner’s wife had been passed away and District Munsif allows her legal representative to be sued. The same was challenged and the petitioner’s counsel argued that they cannot be made as parties in a specific performance suit, because the agreement was entered into only between the first petitioner’s wife and the respondents.
While dismissing the revision the court quoted the observation of Supreme Court in Bhagwan Swaroop v. Mool Chand[4] held that Section 37 I.C.A and Order 22, Rule 4, C.P.C says that legal heirs can be brought as the legal representatives of the defendant after the death of the defendant.
Also, in a landmark case of Basanti Bai v. Prafulla Kumar Rautrai, 2006,[5] the Cuttack High Court concluded that where one of parties to the contract dies leaving no heir, the persons, who acquired interest over the subject matter of the contract through that deceased party would be bound by the contract and specific performance can be enforced against such person.
1.1.3. Performance by third parties
Section 41 of the contract Act says that when a promisee accepts performance of the promise from a third person, he cannot afterwards enforce it against the promisor.
2. Discharge of Contract by Impossibility of Performance
Section 56 of the Contract Act says that an agreement to do an act impossible in itself is void. In this regard it is well to quote Lexicon cogit ad impossibilia and Impossibilium nulla obligatio est which means law does not recognise what is impossible and what is impossible does not create an obligation.
This Section in its subsequent paragraph lays down the provisions of initial impossibility of performance (agreement to discover a treasure by magic)[6] and subsequent impossibility of performance (where after making a contract for marriage, one of the parties to contract goes mad, the contract becomes void)[7].
As discussed above, performance is a way by which a contract is discharged and the contract comes to an end, “the doctrine of frustration” is only a special case of the discharge of contract by an impossibility of performance arising after the contract was made and frustration ends a contract automatically. The same observation had made by Viscount Maugham in Joseph Constantine Steamship Line Ltd. v. Imperial Smelting Corpn. Ltd. 1942.[8]
The division bench of Nagpur High Court also observed in the case of Kesari Chand v. Governor General in Council, 1949[9] that the doctrine of frustration comes into play when a contract becomes impossible of performance, after it is made, on account of circumstances beyond the control of the parties. As the frustration of the contract means “occurrence of an intervening event or change of circumstances so fundamental as to be regarded by the law both as striking at the root of the agreement, and as entirely beyond what was contemplated by the parties when they entered into the contract.”[10]
Let’s understand this concept with the help of Taylor v. Caldwell[11] case, where a promise to let out a music hall for the purpose to hold a concert by the plaintiff was held to have frustrated the destruction of the hall by the fire. It was held that performance of the contract depended upon the continued existence of the hall. It was, therefore, “subject to an implied condition that the parties shall be excused in case, before breach, performance becomes impossible from the perishing of the thing without default of the contractor.”
Since, it is difficult to lay down an exhaustive list of situations in which doctrine of frustration is applicable, however in case of the destruction of subject matter (Taylor v. Caldwell,[12] Howell v. Coupland[13]); the change of circumstances (Easun Eng Co Ltd v. Fertilisers and Chemicals Travancore Ltd. 1991);[14] non-occurrence of contemplated event (Krell v. Henry);[15] Death or incapacity of party (Robinson v Davison);[16] or, Government, administrative and legislative intervention (Metropolitan Water Board v. Dick Kerr & Co. Ltd.,[17] Shiam Sundar v. Durga)[18] doctrine of frustration is well established.
3. Discharge of Contract by Modification
Contract is a result of mutual consent, so it can also be modified under section 62 and 63 of the Contract Act either by novation, recission, alteration or remission. Section 62 lays down the provisions of novation, rescission and alteration, while the provision of Remission dealt by Section 63.
As per the provision of Section 62 if the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract needs to be performed.
3.1. Novation
When the parties to a contract agree to substitute the existing contract with a new contract, that is called novation. Novation requires consent of both the parties and cannot be brought unilaterally. For example, if A is a debtor and creditor agree to accept B in his place as the debtor, the original contract between the creditor and A is at an end.[19]
3.2. Substitution
In case of Substitution, the parties to a contract agree to substitute a new contract for it, the original contract is discharged and need not be performed. In the case of Nagendra Kumar Brijraj Singh v. Hindustan Salts Ltd, 2001,[20] the petitioner was appointed in response to an advertisement but placed to a lower scale than that mentioned in the advertisement. Initially he accepted his placement and after some time he claimed the promised pay scale. He was not allowed to do so as the appointment and acceptance at the lower scale substituted the original proposed scale.
3.3. Alteration
According to Section 62, terms of the contract can be altered by the parties by their mutual agreement. The illustration to this situation is the case of Magum Films v. Golcha Properties (P) Ltd.,[21] where the parties had fixed by mutual agreement the rates of hiring a cinema hall, one of them was not allowed subsequently to alter them unilaterally.
3.4. Remission of Performance
Section 63 deals with the remission of performance. The effect of the provision (which is wholly linked with promise’s conduct),[22] is that the party who has the right to demand the performance of contract may –
i. Remit or dispense with it, wholly or in part; or
ii. Extend the time for performance; or
iii. Accept any other satisfaction instead of performance.
To “dispense with” means that the party entitled to claim performance may waive it. In Jagad Bandhu Chatterjee v. Nilima Rani,[23] the Supreme Court held that a waiver is nothing unless it amounts to release and is an intention not to insist upon right. For example, if A promises to paint a picture for B. B may forbids to do so.[24]
Section 63 also permits the party to extend the time of performance and for that as held by the apex court in the case of Keshavlal Lallubhai Patel v. Lalbhai Trikwalal Mills[25] promise also requires the consent of the party. Thus, unilateral extension of the time is not allowed.
Further, in the case of Jitendra Chandra Roy Chowdhury v. S.N Banarjee,[26] it has been observed that section 63 empowers the promise that he may before breach gratuitously release the promisor from the obligation to perform the promise.
4. Discharge of Contract by Breach
A breach of contract occurs when a party thereto renounces his liability under it, or by his own act makes it impossible that he should perform his obligation under it or totally or partially fails to perform such obligations.[27] The breach is of two type –
4.1. Anticipatory Breach
Section 39 of the Contract Act deals with the doctrine of anticipatory breach. Anticipatory breach implies that prior to the performance of the contact, the promisor absolutely repudiates the contract. Here the party to a contract disables himself from performing his promise in entirety.
An illustration of the anticipatory breach is the case of Ford v. Tiley,[28] where it has been observed that if a man contract to execute a lease on and from a future day for a certain term, and before that executes a lease to another person for the same term, he may be immediately sued for breaking the contract. Thus, it cannot be argued that there is no breach of the agreement before the day when the performance is due.
However, in the case of State of Kerala v. Cochin Chemical Refineries Ltd,[29] the Supreme Court observed that the breach of contract by one party does not automatically terminate the obligation under the contract. The injured party either can trat the contract still in existence or be discharged. If he does not accept the discharge, he may insist on performance.
4.2. Actual Breach
Actual breach occurs when time to performance of the contract comes. It happens by non-performance or refusal to discharge the contractual obligation at the time when it is due as per the contract. In the case of Foram v. Wight,[30] it has been observed that if non-acceptance of anticipatory breach continues till the time of performance, then “at that point, the failure to perform to perform become an actual and not an anticipatory breach and the remedies available are actual, rather than anticipatory, breach.”
Conclusion
The Indian Contract Act, 1872 thoroughly details the ways in which contracts can be discharged, encompassing complete fulfilment of obligations, impossibility of performance, mutual changes, or breaches. Each method offers clear guidelines on when and how contractual relationships can cease, establishing the boundaries of legal enforceability and protecting the interests of parties involved. Adherence to these principles fosters trust and accountability within contractual agreements, promoting fairness and equity in both commercial and personal transactions. Understanding these discharge mechanisms is crucial for legal professionals and individuals involved in contracts, emphasizing the fundamental role of contract law in governing civil relations.
[1] National Insurance Co. Ltd. v. M/S Boghara Polyfeb Pvt. Ltd
[2] Ibid.
[3] AIR 1962 SC 1810.
[4] AIR 1983 SC 355.
[5] 101 Cut Lt 686 (Ori).
[6] Illustration (a) to Section 56 of the Indian Contract Act.
[7] Illustration (a) to Section 56 of the Indian Contract Act.
[8] 1942 AC 154.
[9] ILR 1949 Nag 718.
[10] Crickelwood Property & Investment Trust Ltd. v. Leighton’s Investment Trust Ltd., 1945 AC 221 (HL).
[11] (1863) 3 B&S 826.
[12] Bid.
[13] (1876) LR 1 QBD 258 (CA).
[14] AIR 1991 Mad 158.
[15] (1903) 2 KB 740 (CA).
[16] (1871) LR 6 Exch 269.
[17] 1918 AC 119 (HL).
[18] AIR 1966 ALL 185.
[19] Illustration (a) to Section 66 of the Indian Contract Act.
[20] (2001) 1 GCD 532.
[21] AIR 1984 Del 162.
[22] CIT v. Shantilal (P) Ltd, (1983) 3 SCC 561.
[23] (1969) 3 SCC 445, 446.
[24] Illustration (a) to Section 63 of the Indian Contract Act.
[25] AIR 1958 SC 512.
[26] AIR 1943 Cal 181, 184 and 187.
[27] Associated Cinemas of America Inc v. World Amusement Co, (1937) 201 Minn 94 (Minnesota SC).
[28] 6 B&C 325.
[29] AIR 1968 SC 1361.
[30] 1989 HCA 51.
