DISCHARGE OF CONTRACT COMMERCIAL and LABOUR LAW CONTRACT

DISCHARGE OF CONTRACT (COMMERCIAL and LABOUR LAW)

CONTRACT According to Halsbury , a contract is defined as , “an agreement between two or more parties which is intended to enforceable at law and is constituted by the acceptance by one party of an offer made to him by the other party to do or to abstain from doing some act. ” Discharge Of Contract A contract is said to be discharged or terminated when the rights and obligations created by it are extinguished. A contract may be discharged in many ways. The provisions relating to this are scattered over many sections. The following are the various modes in which a contract may be discharged: -

v Discharge by agreement. v Discharge by operation of law. v Discharge by breach. v Discharge by performance. v Discharge by impossibility. v Discharge by lapse of time.

Discharge by Agreement A contract is created by the parties. Similarly, it can also come to an end by their mutual agreement. The rights and obligations created by an agreement can be discharged without their performance by means of another agreement between the parties which provides for the extinguishment of the earlier rights and obligations. The parties may agree to terminate the existence of contract by any of the following ways: a. NOVATION It means that their being a contract in existence some new contract is substituted for it; the consideration mutually being the discharge of old contract. It is a transaction by which, with the consent of all parties concerned, the old contract is revoked and substituted by a new contract. Thus, where the original debtor is given up by the creditor and another person undertakes the liability, it is a case of novation. Since novation implies a new contract in place of old one, all the parties must

Novation may occur in two ways: 1. New parties substituted for the old one. 2. Parties may substitute new contract for the old one. Example: On an amalgamation of two companies into a new company, the creditors of the old companies can enforce their claims against the new company. The new company is substituted for the old companies. ESSENTIALS OF NOVATION 1. Novation occurs with the consent of all parties. 2. The contract must be one which is capable of being enoforced at law. If new contract is not enforceable, the parties shall be bound by the contract. 3. The agreement to substitute the new contract for the old must be made for the expiry of the time of the performance of the original contract.

b. ALTERATION It means the change in one or more of the term of a contract. Alteration is valid if it is done with the consent of all the parties to the contract. Here, unlike novation, there is change in terms of the contract but no change of the parties. Alteration maid with the consent of all the parties results in the discharge of the original contract. Example: A enters into a contract with B for the supply of a 1000 bales of cotton at his warehouse on 1 st july 1980. Later both A and B agree to postpone the date of delivery to 1 st sept. 1980. This change amounts to alterations of the contract. c. RESCISSION[Sec. 64] If the parties to contract agree to rescind it, the original contract need not to be performed. This is discharged by rescission which requires mutual consent and consideration. Rescission means cancellation of contract. It results in

1. By mutual consent: Parties may enter into a simple agreement to rescind the contract before its breach. 2. By the aggrieved party: Where a party has committed a breach of contract, the aggrieved party can rescind the contract without in any way affecting his right of getting compensation for the breach of contract. 3. By the party whose consent is not free: In the case of a voidable contract, the party whose consent is not free can rescind the contract. d. REMISSION[Sec. 63] It means acceptance of lesser amount or lesser degree of performance than what was actually due under the contract. It is a unilateral act of the promisee discharging at his will and pleasure of the obligation of another. The law in India is diff. from that in England. In England, a person can’t remit unless the fresh promise is supported by a consideration whereas in India, a promisee remit a part of his claim and a promisee to do so is

Example: A owed large sums of money to B. C offered to pay lesser sum in satisfaction of B’s claim on A. B accepted it. It was held that the acceptance was in full satisfaction and B can’t claim balance from A after receiving payment in full satisfaction. e. WAIVER It means the abandonment of right which a person is entitled to. A party to a contract may waive his rights under the contract, whereupon the other party is released from his obligations. To constitute a waiver neither an agreement nor consideration is necessary. Example: A promises to paint a picture for B. B later on forbids him to do so. A is no longer bound to perform the promise. f. ACCORD and SATISFACTION Accepting any other satisfaction than the performance originally agreed is known in English law as accord and satisfaction. Accord means the promise to accept less than what is due under the old contract. Satisfaction means the payment or the fulfillment of the smaller obligation. An accord is enforceable; but an accord followed by

Example: A owes B 1000. B agrees to accept 750 in full satisfaction. The agreement to pay 750 is an accord and the actual payment is the satisfaction. Discharge by Operation of Law a. INSOLVENCY Upon solvency, the rights and liabilities of the insolvent are, with certain exceptions transferred to an officer of the court, known as official assignee in presidency towns and as official receiver in other areas. b. MERGER It occurs when there is acceptance of higher security in the place of the lower. It is an operation of law which extinguishes a right by virtue of its coinciding with another and greater right in the same person. Example: A holds certain property under a lease. Subsequently, he buys the property. His right as a lessee is merged into his right of ownership now acquired.

part. The term “material alteration” refers to the alteration which affects or alters, in a significant manner the rights and liabilities of he parties. Thus, if a bill of exchange for 25000 has been altered to one for 2500, the bill becomes bad in law and the creditor can’t even ask for decree of 2500. d. DEATH Where the performance of a contract is required to be made in person and the personal qualification of the promisor are the considerations for the contract, the death of the promisor discharges the contract. In other contracts, the rights and liabilities of a deceased person pass to his legal representatives.

Discharge By Performance of a contract is one of the most usual ways of discharge of contract. The performance of a contract lies in doing what the promisor has promised to do. On the performance of obligation undertaken by parties, The contract is automatically discharged. The contract is terminated when both parties completely perform the exact thing each has agreed to do. When a party has not performed his promise, but offered to perform the said promise in favour of the promisee, he will be deemed to have performed the promise. An adequate offer of performance amounts in law to performance itself, and in case of non-acceptance by promisee, the promisor

Discharge By Impossibility Of Performance Impossibility of performance results in the discharge of contract. Agreements which are impossible in itself are void because law does not compel the possible. If, however the promisor alone knows of impossibility then existing, he is bound to compensate the promisee for any loss he may suffer on account of non-performance of the promise. The doctrine of frustration known to English Law has been recognised under the Indian Law in section 56 of contract act. Acco. to the “Doctrine of frustration” following conditions must be satisfied: 1. The act should have become impossible 2. The impossibility should be by reason of some event which the promisor could not prevent.

3. The impossibility shouldn’t not be self induced by promisor A contract may impossible after date of contract by: 1. Destruction of subject-matter: Where the subject-matter of contract is destroyed, without the fault of parties to contract, the contract is discharged. In Taylor v Caldwell Blackburn J. observed as follows “In contracts in the performance depends on continued existence of given person or thing, a condition is implied that the impossibility of performance arising from perishing of person shall excuse the performance Example: (a) A person contracted to deliver 200 tons of potatoes from a particular field. The potatoes were destroyed by a pest though no fault of party. The contract was held to be discharged. [Howell v. Coupland. (1876)]

2. Death or personal incapacity: A promise may become physically incapable of performance by reason of death or incapacity of some person whose continued life and health are necessary for performance of contract. Example: An artist undertook to sing at a theatre on a particular day. But the artist being too ill couldn’t sing on day fixed for performance. It was held that artist was not liable to pay damages[Robinson v. Davison(1871)] 3. change of law: Contracts which are lawful whenmade but become unlawful later by reason of change in law, become impossible of performance. A subsequent change in law may render the contract illegal.

4. Non-existence of a particular state of thing: Where a state of thing which was basis of contract ceases to exist, the contract is discharged. Example: A and B contract to marry each other. Before the time fixed for marriage A gos to mad. The contract becomes void. (section 56) 5. Declaration of war: A contract entered into before the commencement of war remains suspended during the war. However, such contract may be revived and enforced at the end of war. If performance of contract goes to help the enemy, it becomes void.

Exceptions 1. Difficulty of performance: A contract is not discharged by reason of the fact that the performance is more difficult, more expensive or more burdensome or less profitable than the parties anticipated. Example: D agreed to supply coal within certain time. Due to Govt. restrictions on transport of coal collieries there was a failure of delivery in time. But since coal was available in open market from where D could have obtained it, it was not a case of impossibility of performance. [Keshav Lal v. Dewan Chand AIR 1923] 2. Commercial impossibility: The impossibility contemplated in section 56 is a physical and legal impossibility and not a commercial impossibility. The mere fact the cost has arisen or the expectation of a higher profit is not realised is not an excuse foe the non-performance

Example: There was an agreement b/w D and P to repair machinery. D failed to repairs machinery due to strike of workmen. It was held that a strike of workmen is not a sufficient reason to excuse performance. 3. Impossibility due to failure of a third person on whose work the promisor relied: The doctrine of supervening impossibility does not cover cases where the contract couldn’t be performed because of fault of third person on whose work the promisor relied. Example: D agreed to sell goods to P as and when he got the same from mills with whom he had placed orders. The mills failed to supply. There is no impossibility of performance. 4. Self-induced impossibility: when the impossibility is due to default of contracting party himself. Section 56 would not apply. Thus, a promisor isn’t discharged when his failure to perform is caused by his arrest and conviction for a crime.

5. Failure of one of objects: When a contract is entered into for several objects, failure of one of objects does not terminate the contract. Example: X agreed to let out a boat to Y for purpose of viewing a naval review to be held on occasion of coronation of Edward VII and to cruise round the fleet. Owing to king illness the naval review abandoned but the fleet was assembled and boat could have been used to cruise round the fleet. It was held that contract wasn’t terminated. 6. Strikes, Lock-outs and civil disturbances: These events don’t discharge a party from performing his part of contract unless there is a clause in contract providing that in such cases the contract isn’t be performed or that the time of performance is to be extended.

Effect Of Impossibility (i) Contract becomes void: Section 56(1) provides that an agreement to do an act impossible in itself is void. And Section 56(2) enacts a contract to do an act which after the contract is made becomes void when the act becomes impossible. It provides for those cases where contract becomes void on account of supervising impossibility. (ii) Benefit to be restored: Under Section 65, any person who has received any advantage under an agreement which is discovered to be void is bound to restore it or to make compensation for it to the person from whom he received it.

(iii) Compensation for non-performance: Section 56(3) provides that, “where a person has promised to do something which he knew or with reasonable diligence he might have known to be impossible or unlawful and which the promisee didn’t know to be impossible or unlawful, such promisor must make compensation to promisee for any loss which the promisee sustains through non-performance of promisee. Example: A contracts to marry B. A is already married to C. Being forbidden by law to which he is subject to practice polygamy. A must make compensation to B, for the loss caused to her by non-performance of his promise.

DISCHARGE BY BREACH • Parties to a contract are expected to perform their respective obligations. If any party his obligation, there takes place a beach of contract. Breach of the contract operate as a discharge of the contract. • Beach of the contract may be actual or anticipatory.

ACTUAL BREACH – It may take place in the following ways: • Breach of contract when performance is actually due: When a person those not perform his part of the contract at the time when it is due, he will be liable for its breach. Thus, where A agrees to deliver to B 20 chairs on 1 st May, and fails to do so no that day there is a breach of contract by A. • Breach during the performance of the contract: Where a party to a contract performs his part of the cotract, but the other party alleges that it is not a proper performance, according to the term of contract, in that case if the breach is of a condition essential to the main purpose to the contract, the contract is discharged. But if the breach is only of a colateral term, will not entitle the other party to rescind the contract, but he can only claim damages.

ANTICIPATORY BREACH OF CONTRACT • When a party to a contract has refused to perform his promise in its entirely, the promisee may put an end to the contract. A refusal by the promisor to performhis part of the contract, before the due date of performance is known as anticipatory breach of contract • Example: P was engaged as D’s courier on a continental tour to last from June 1 for 3 months. Before June 1, D, cancelled the appointment and informed P of the same. It was held that it was a clear case of anticipatory breach of contract and P may sue D for damages without waiting till June 1.

CONSEQUENCES OF ANTICIPATORY BREACH • Section 39 provides that where a party to a contract refuses to perform his part of the contract, before the due date of performance, the promisee has the option, either • to treat the whole contract as broken and to break damages againt the other party although the time for the performance of the contract has not yet arrived, or • To treat the contract as still operative and wait for the time of the performance and then hold the other party responsible for all the consequences of the performance. But if he elects to take this course, the contract still remains operative for the benefit of both parties. The party who has previously repudiated may still perform it if can. He can also take advantage of any supervening circumstances which would justify him in declining to complete it.

AVERY V. BOWDEN (1856) • Point decided is If while the contract is still open some event happenes which discharges the contract, otherwise than repudiation, the promisser would also be entitled to take the advantageof the circumstances. • Facts of the case are The defendant by acharacter party contracted to load on the plaintiff ship at Odessa a cargo of wheet. After the arrival of the ship the defendant agent refuged to lord a cargo. Before the last date on which the defendant was entitled to load, war broke out between England Russia and the contract was thereby dissolved. The ship owner having elected to treat the contract as still opretive, it was kept open for the benefit of both the parties untill dissolved by the diclaration of war. There was consequently no breach and the plaintiff was held to have no cause of action.

DISCHARGE BY LAPSE OF TIME • A contract is discharge by lapse of time. The Limitation Act 1940 lays down that a contract should be performed within a specified period. If the contract is not performed and no legal action is taken by the premisee within the period of limitation, he is deprivedm of his remedy at law. The contract is terminated in such a case. For instnace, the period of limitation to file a money suit to recover the amount the debtor is discharged. • Example: A borrowed Rs. 5, 000 from B a moneylender and agree to repay the loan on 31 st March, 2002. On 31 st March, 1986 A failed to repay the loan. B does not demand payment for the same for the period of three years. B can not recover the amount of loan from A as the limitation period for the recovery of loan is the three years from the date of default, and has expired. Thus A is discharged from his