A contract is said to be discharged (or terminated) when the parties to it are freed from their mutual obligations. In other words, when the rights and obligations arising out of a contract are distinguished, the contract is said to be discharged or terminated. A contract may discharge in any of the following ways:-
1. Discharge by performance
2. Discharge by Previous Agreement
3. Discharge by Breach
4. Discharge by Frustration
6. Discharge by Operation of Law
DISCHARGE BY PERFORMANCE
When a contract is duly performed by both the parties, the contract comes to happy ending and nothing more remains. The contract, such a case, is discharged or terminated by due performance. But if one party performs his promise, he alone is discharged. Such a party gets a right of action against the other party who is guilty of breach.
Performance of a contract is the principal and most usual mode of discharge of a contract. Performance may be:
(1) Actual performance; or
(2) Attempted performance or Tender.
1. Actual performance
When each party to a contract fulfils his obligation arising under the contract within the time and in the manner prescribed an amounts to actual performance of the contract and the contract comes to an end or stands discharged
2. Attempted performance or tender
When the promisor offers to perform his obligation under the contract, but is unable to do so because the promise does not accept the performance, it is called ―attempted performance or tender‖. Thus ―tender‖ is not actual performance but is only at ―offer to perform‖ the obligation under the contract. A valid tender of performance is equivalent to performance. For performance to discharge a contract, the general rule is that it must be precise and exact. Circumstances do exist, however, n which a partial performance by one party may not entitle the other party to consider himself as discharged, e.g. in cases of substantial performance or of divisible contracts like those in which delivery of goods is to be done in installments: in these cases the performing party is entitled to payment for what has been done by him under the contract.
The effect of refusal to accept a properly made ‗offer of performance‘ is that the contract is deemed to have been performed by the promisor i.e. tenderer and the promise can be sued for breach contract. A valid tender, thus, discharges contract. However, tender of money does not discharge the contract. The money will have to be paid even after refusal of tender. Where a contract is still executory, i.e. where each of the parties is yet to perform his contractual obligation, the parties may mutually agree to release each other from their contractual obligation: each party‘s promise to release the other is consideration for the other party‘s promise to release him.
Where one party has fully performed his part of the contract, he may agree to release the other party from his contractual obligation. In this case, however, the discharge is effective only if made under seal or where the party being discharged has furnished consideration for it; otherwise the party giving the discharge will not be bound and the other party remains liable .A unilateral discharge, supported by valuable consideration, is known as an Accord and Satisfaction. ―The accord is the agreement by which the obligation is discharged. The satisfaction is the consideration which makes the agreement operative‘
DISCHARGE BY BREACH
Breach of contract by a party thereto is also a method of discharge of a contract, because ―Breach‖ also brings to an end the obligations created by a contract on the part of each of the parties. Of course the aggrieved party i.e. the party not at fault can sue for damages for breach of contract as per law; but the contract as such stands terminated.
A breach of contract may take place when a party:
- Repudiates his liability before performance is due.
- Disables himself from performing his promise.
- Fails to perform his obligations.
DISCHARGE BY FRUSTRATION
A contract is said to be frustrated if an event occurs which brings its further fulfillment to an abrupt end; and upon the occurrence of the frustrating event the contract is immediately terminated and the parties discharged. But the doctrine of frustration only relates to the future. This means that the parties are discharged from their future obligation under the contract but remain liable for whatever rights that may have accrued before the frustration. Thus, goods supplied or services rendered before the frustration must be paid for, although the parties are both excused from further performance of the contract. Parties to a contract are under a duty to fulfill their respective obligations created by the contract.
The fact that an event or events may subsequently occur, introducing hardships or difficulties in the performance of the contract is not in itself sufficient to discharge the contract: It is difficult to determine the frustrating events. Some examples of frustrating events are
- Destruction of subject Matter
―In contracts in which the performance depends on the continued existence of a given person or thing, a condition is implied that the impossibility of performance arising from the perishing of the person or thing excuse the performance‖. This statement of law was made by Blackburn J. in the case given below:-
Taylor V. Caldwell (1862)
A let a music-hall to B in order that B might use it for holding concerts on specified days. Before the concerts could be held the music- hall was accidentally destroyed by fire. B sued A for breach of contract.
Held: The destruction of the music-hall had frustrated the contract and B‘s action could not be maintained.
- Death or Incapacity
Just as the destruction of the subject-matter of the contract terminates it, the death or serious indisposition of a party whose personal services were contemplated by the contract will similarly terminate it. Thus, if A, a doctor, contracts to care for all my medical needs, his death is a frustrating event which automatically terminates the contract. Again, if A contracts to stage a series of shows during the months of June-September but is in May sentenced to imprisonment for one year, or becomes insane permanently or for a substantial part of the period in question, the contract will similarly be discharged by frustration- the frustrating event being constituted by the imprisonment or insanity.
- Frustration of Common Venture
Where both parties contemplate a particular object as forming the basis of their contract, such object constitutes their common venture. The law is that if the common venture subsequently becomes incapable of fulfillment the contract is frustrated:
Krall V. Henry (1903)
The plaintiff agreed to let a room to the defendant for the day when Edward VII was to be crowned. Though not spelt out in the agreement itself, both parties understood that the purpose of the letting was to enable the defendant view the coronation process. The King subsequently became ill and the coronation was cancelled.
Held: The cancellation of the coronation discharged both parties from their contractual obligation, because the process was the foundation of the contract and its cancellation meant that the substantial purpose of the contract could no longer be achieved.
DISCHARGE BY OPERATION OF LAW
A contract may be discharged by operation of law in certain cases. Some important instances are as under:-
- Lapse of Time
If a contract is made for a specific period then after the expiry of that period the contract is discharged e.g. partnership deed, employment contract e.t.c.
The death of either party to a contract discharges the contract where personal services are involved.
If a contract is substituted with another contract then the first contract is discharged.
When a person becomes bankrupt, all his rights and obligations pass to his trustee in bankruptcy. But a trustee is not liable on contracts of personal services to be rendered by the bankrupt.
REMEDIES FOR BREACH OF CONTRACT
Whenever there is a breach of contract, the injured party becomes entitled for some remedies.
These remedies are:-
- Quantums Meruit
- Specific Performance
These are explained below
Damages are a monetary compensation allowed to the injured party of the loss or injury suffered by him as a result of the breach of contract. The fundamental principle underlying damages is not punishment but compensation. By awarding damages the court aims to put the injured party into the position in which he would have been, had there been performance and not breach, and not to punish the defaulter party. As a general rule, ―Compensation must be commensurate with the injury or loss sustained, arising naturally from the breach‖. ―If actual loss is not proved, no damages will be awarded‖. The damages recoverable for breach of contract are governed by the rule in Hadley V. Baxendale (1894) which is as follows:- ―Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contractshould be, either such as may
fairly and reasonably be consideredarising naturally, i.e. according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract, as the possible result of the reach of it‖.
This is the general rule. The plaintiff can only recover for loss arising naturally from the defendant‘s breach or for such loss as was in the contemplation of both parties at the time when the contract was made. In this way, it is sought to do justice to both parties. In fact the above case goes on to explain that where a contract is made under special circumstances it is the duty of the party seeking to rely on those special circumstances to communicate them to the other party; and in the absence of such communication any loss arising from the special circumstances is not recoverable:
Hadley V. Baxendale (1854)
A miller sent a broken crankshaft by a carrier to deliver to an engineer for copying and to make a new one. The miller informed the carrier that the matter was urgent and that there should be no delay. The carrier accepted the consignment on those terms. The miller did not inform the carrier that the mill would be idle and unable to work. The carrier had no reason to believe that the delayed delivery of the crankshaft was an essential mechanism of the mill. The carrier delayed delivery of the crankshaft to the engineer; and as a
consequence, the mill was idle for longer than it need have been.
Held: that the carrier was not liable for the loss of profits during the period of the delay.
The Heron II (1969)
The defendant‘s ship, the Heron II, was chartered by the plaintiff to carry sugar from Constanza to Basrah, and the ship was to take an agreed route. But the defendant deviated and took a longer route and as a result delivery of the sugar was delayed by 9 days. In the
meantime the market price of sugar had fallen and the plaintiff losta profit of # 4,000. Held: The loss of profits was recoverable by the plaintiff, because fluctuations in market prices are in the normal course of things and the loss suffered by the plaintiff must have
been in the contemplation of both parties as a probable result of a breach of the contract.
The third remedy for a breach of contract available to an injured party against the guilty party is to file a suit upon quantum meruit. The phrase quantum meruit literally means ―as much as is earned‖ or ―in proportion to the work done‖. This remedy may be availed of either without claiming damages (i.e. claiming reasonable compensation only for the work done) or in addition to claiming damages for breach (i.e. claiming reasonable compensation for part performance and damages for the remaining unperformed part).
The aggrieved party may file a suit upon quantum meruit and may claim payment in proportion to work done or goods supplied.
The court must then determine a reasonable sum to be paid for those goods or services; and the plaintiffs is said to have broughthis suit on a quantum meruit. In the case of contracts for the sale of goods, this remedy has been codified by the Sale of Goods Act. It provides; ―where the price is not determined, the buyer must pay a reasonable price. What is a reasonable price is a question of fact dependent on the circumstances of each particular case‖. The plaintiff may also sue on a quantum meruit where the original contract has been replaced by a new one and work has been done by him under the new one. As Lord Atkin has said: ―If I order from a wine
merchant twelve bottles of whisky and two of brandy, and i accept them i must pay a reasonable price for the brandy‖: Steven V. Bromley & Son (1919).
A claim under quantum meruit sum does not apply, however, where the contract requires complete performance as a condition of payment e.g. a contract to do one piece of work in its entirety in consideration for lump-sum payment.
Sumpter V. Hedges (1898)
S agreed to build a house for a certain sum on H‘s land. When the house was half finished S ran out of money and could not complete. H refused payment, and S brought an action on a quantum meruit for the value of materials used and the labour he had expended.
Held: that the claim must fail. The contract was to do certain work for a lump sum which was not payable until completion. H had no choice but to accept the work.
This is an equitable remedy. Specific performance means the actual carrying out of the contract as agreed. Under certain circumstances an aggrieved party may file a suit for specific performance, i.e. for a decree by the court directing the defendant to actually perform the promise that he has made. A decree for specific performance is not granted for contracts of all types. Itis only where it is just and equitable so to do i.e. where the legal remedy is inadequate or defective, that the courts issue a decree for specific performance.
Specific performance is not granted as a rule, in the following cases:-
- Where monetary compensation is an adequate relief. Thus the courts refuse specific performance of a contract to lend or to borrow money or where the contract is for the sale of goods easily procurable elsewhere.
- Where the court cannot supervise the actual execution of the contract, e.g. a building construction contract. Moreover, in most cases damages afford an adequate remedy.
- Where the contract is for personal services, e.g. a contract to marry or to paint a picture. In such contracts ―injunction‖ (i.e. an order which forbids the defendant to perform a like personal service for other persons) is granted in place of specific performance.
- Where one of the parties to the agreement does not possess competency to contract and hence cannot be sued for breach of contract. Thus a minor cannot succeed in an action for specific performance.
―Injunction‖ is an order of a court restraining a person from doing a particular act. It is a mode of securing the specific performance of the negative terms of the contract. To put it differently, where a party is in breach of negative term of the contract (i.e. where he is doing something which he promised not to do), the court may, by issuing an injunction, restrains him from doing, what he promised not to do. Thus ―injunction‖ is a preventive relief. It is particularly appropriate in cases of ―anticipatory breach of contract‖ where damages would not be an adequate relief.
Illustration: A agreed to sing at B‘s theatre for three months from 1 st April and to sing for no one else during that period. Subsequently, she contracted to sing at C‘s theatre and refused to sing at B‘s theatre. On a suit by B, the court refused to order specific performance of her positive engagement to sing at the plaintiff‘s theatre, but granted an injunction restraining A from singing elsewhere and awarded damages to B to compensate him for the loss caused by A‘s refusal (Lumley vs. Wagner).
When there is a breach of contract by one party, the other party may rescind the contract and need not perform his part of obligations under the contract and may sit quietly at home if he decides not to take any legal action against the guilty party. But in case the aggrieved party intends to sue the guilty party for damages for breach of contract, he has to file a suit for decision of the
contract. When the court grants rescission, the aggrieved party is freed from all his obligations under the contract; and becomes entitled to compensation for any damage which he has sustained through the non-fulfillment of the contract.
Illustration: A contracts to supply 100 kg of tea leaves for sh. 1,500 to B on 15 th April. If A does not supply the tea leaves on the appointed day, B need not pay the price. B may treat the contract as rescinded and may sit quietly at home. B may also file a ―suit for rescission‖ and claim damages.
Thus, applying to the court for ―rescission of the contract‖ is necessary for claiming damages for breach or for availing any other remedy. In practice a ―suit for rescission‖ is accompanied by a ―suit for damages‖.