Discharge of Contract: By Performance and Impossibility of Performance | Law of Contracts - CLAT PG PDF Download

Discharge of Contracts 

Discharge of a contract occurs when the parties involved have not fully fulfilled their contractual obligations, or when certain events, the behavior of the parties, or legal procedures release them from the obligation to perform. According to the Indian Contract Act of 1872, the discharge of a contract refers to the termination of the contractual relationship between the parties involved. A contract is considered terminated when it ceases to be in effect, and when the rights and obligations established by it come to an end.

There are several modes through which a contract can be discharged:

1.  By Performance:  This mode involves the fulfillment of the contractual obligations by the parties as per the terms of the contract. When both parties perform their duties as agreed, the contract is discharged by performance.
2.  By Frustration or Impossibility to Perform:  Sometimes, unforeseen circumstances may make it impossible for the parties to perform their contractual obligations. In such cases, the contract may be discharged by frustration or impossibility to perform.
3.  By Agreement:  Parties to a contract can mutually agree to discharge the contract by entering into a new agreement. This can happen when both parties decide to modify or terminate the original contract.
4.  By Assignment:  A contract can be discharged by assignment, which involves the transfer of rights and obligations from one party to another.
5.  By Breach:  If one party fails to fulfill their obligations as per the contract, it constitutes a breach. In such cases, the innocent party may choose to discharge the contract due to the breach.

 Discharge of Contract by Performance 

The discharge of a contract by performance refers to the situation where parties fulfill their contractual obligations as agreed upon. This can happen in various ways:

1.  General Contracts:  When parties to a general contract fulfill their obligations as stipulated, the contract is discharged.
2.  Joint Promises:  In cases where multiple parties are involved in a contract, performance by one party can discharge the contract.
3.  Time for Performance:  Contracts may specify a timeline for performance. If parties fulfill their obligations within the agreed timeframe, the contract is discharged.
4.  Reciprocal Promises:  When parties make promises that are interdependent, the discharge of one party's promise may depend on the performance of the other.

 Contingent Contracts (Section 31-36)

Contingent contracts refer to agreements that depend on the occurrence of a specific event. For example, a contract to pay someone a certain amount of money if a particular event happens, like winning a lottery.

General Contracts

Performance in a contract means fulfilling the obligations as agreed upon by the parties involved. Discharge by performance occurs when the parties complete their duties within the specified time and in the manner outlined in the contract. However, if one party fulfills their obligations, they are discharged, but not the other party. The discharged party can take legal action against the other for breach of contract.

The general rule is that parties must perform exactly what they agreed to do.

Offer of Performance (Section 38)

Performance can be actual or attempted. Actual performance occurs when both parties fulfill their obligations exactly as intended in the contract, bringing the contract to an end. If the promisor offers to perform their obligations at the right time and place, but the promisee refuses to accept, it is called 'tender' or 'attempted performance.'

In such cases, it is the promisee's responsibility to accept the performance. If they refuse, the promisor is not liable for non-performance and retains their rights under the contract. A tender of performance is considered equivalent to actual performance.

For a tender or offer of performance to be valid, it must meet certain conditions:

• It must be unconditional. For example, offering less than what is due under the contract is not a valid tender.
• It must be made at the right time and place, allowing the other party a reasonable opportunity to assess the ability and willingness of the tendering party to fulfill their obligations.
• It must be directed to the appropriate person.
• It must relate to the entirety of the obligations outlined in the contract.
• If the tender involves delivering something to the promisee, they must have a reasonable opportunity to verify that the item being offered is what the promisor is obligated to deliver.

 Effect of Refusal of Party to Perform Promise Wholly (Section 39) 

When a party to a contract refuses to perform or becomes unable to fulfill their promise entirely, the promisee has the right to terminate the contract. This is unless the promisee has indicated, through words or actions, that they agree to the contract continuing despite the refusal or inability.

 Example 1: Performance Refusal 

• A, a singer, agrees to perform at B's theater twice a week for two months for 100 tupees per night. If A deliberately misses her performance on the sixth night, B can choose to end the contract.

 Example 2: Performance with Assent 

• If A misses the sixth night but B agrees to let her perform on the seventh night, B has shown his willingness to continue the contract. In this case, B cannot terminate the contract but is entitled to compensation for the loss caused by A's absence on the sixth night.

 Effect of Accepting Performance from a Third Person (Section 41)

When a promisee accepts the fulfillment of a promise from a third party, they cannot later enforce the promise against the original promisor.

 Performance of Joint Promises

In English law, when one of several promisors dies, the rights and liabilities pass to the surviving promisors. If the last surviving promisor dies, the rights and liabilities go to the legal representatives of the last surviving promisor. However, under Section 42 of the Indian Contract Act, joint promisors must fulfill the promise during their joint lives. If one dies, their representatives must fulfill the promise jointly with the surviving promisors. After the death of the last survivor, the representatives of all promisors must fulfill the promise, unless there is a private arrangement between the parties.

 Section 43 of the Act: Rules for Joint Promisors

• When a joint promise is made without a specific agreement stating otherwise, the promisee can require any one or more of the joint promisors to fulfill the entire promise.
• If a joint promisor is forced to fulfill the entire promise, they can ask the other joint promisors to share the performance equally, unless the agreement suggests otherwise.
• If any of the joint promisors fails to contribute to the performance, the remaining joint promisors must share the shortfall equally.

 Section 44: Release of Joint Promisors

Section 44 states that when two or more people make a joint promise, if the promisee releases one of the joint promisors from responsibility, it does not discharge the others. The released joint promisor is still responsible to the other joint promisors for their share of the contribution, but not to the promisee.

 Joint Promises and Devolution of Joint Rights (Section 45)

• If a promise is made to multiple people jointly, the right to enforce the promise remains with the joint promisees during their lifetimes.
• When a joint promisee dies, their legal representative can claim performance of the promise alongside the surviving joint promisees.
• After the death of the last surviving joint promisee, the legal representatives of all joint promisees have the right to jointly claim performance of the promise.

 Time and Place for Performance (Sections 46-50) 

It is the responsibility of the parties involved in a contract to determine the time and place for fulfilling the contract. The rules governing the time and place of performance are outlined in sections 46 to 50 of the Contract Act.

 Performance of a Promise within a Reasonable Time 

According to Section 46, if the contract does not specify a time for performance and the promisor is required to perform the promise without being prompted by the promisee, the contract must be fulfilled within a reasonable time. The determination of what constitutes a "reasonable time" is a factual question that varies in each case. This provision indicates that a contract is not invalid due to a lack of certainty in the time of performance.

 Performance of Promise when Time is Specified 

 Definition of Performance of Promise:  Performance of promise refers to the fulfillment of a contractual obligation by the parties involved. It is the act of carrying out the terms and conditions agreed upon in a contract.

•  Performance of Promise where Time is Specified:  Contractual Obligation:  When a contract specifies a particular time for performance, the promisor is obligated to fulfill the promise on that specific date. The promisor must perform the promise without any application or request from the promisee. For example, if A promises to deliver goods to B's warehouse on January 1, 1990, A must do so on that exact day.  Usual Hours of Business:  The performance should take place during the usual hours of business. If A delivers the goods after the usual closing hours, the performance is considered invalid.  Place of Performance:  The promise should be performed at the designated place, where the promise is expected to be fulfilled. If A brings the goods to B's warehouse but outside of business hours, the performance is not valid.
•  Performance of Promise on Application by the Promisee:  Contractual Agreement:  In some cases, the contract specifies a day for the performance of the promise, but the promisor does not undertake to perform it without a request from the promisee.  Proper Application:  In such situations, the promisee must make an application for performance at a suitable place and within the usual hours of business. It is the responsibility of the promisee to initiate the request for performance.

 Performance of Promise Without Application or Specified Place 

• When a promise is to be fulfilled without any request or demand from the promisee, and no specific place is mentioned for the performance of the promise, it becomes the responsibility of the promisor to either make a request or ask the promisee to determine a reasonable place for fulfilling the promise. Once a place is agreed upon, the promisor must perform the promise at that location.

 Performance of Promise as Prescribed by the Promisee 

• In certain situations, the promisee specifies how and when the promise should be performed. In such cases, it is crucial for the promisor to carry out the promise exactly in the manner and at the time dictated by the promisee.
• If the promisor adheres to the instructions given by the promisee regarding the manner and timing of the performance, they will be released from their obligation.

 Understanding Time as a Fundamental Aspect of Contracts

 What Does "Time as the Essence of the Contract" Mean?  Time as the essence of the contract signifies that the timing of performance is critical, and the parties involved must fulfill their obligations within the stipulated timeframe. However, merely specifying a timeframe in a contract does not automatically establish time as its essence.

 When is Time Considered the Essence of the Contract?  Time is generally deemed to be the essence of the contract in situations such as:

• When both parties explicitly agree to treat time as a crucial aspect of the contract.
• When a delay in performance would cause harm to one of the parties.
• When the nature of the contract necessitates completion within a specific timeframe.

In mercantile contracts, unless stated otherwise, the timeframe for delivering goods is typically considered essential, while the timing for payment is not. This is because the prices of goods can fluctuate significantly, and failing to adhere to the delivery schedule may lead to substantial losses. In contrast, with the sale of immovable property, time is generally not regarded as the essence of the contract.

According to  Section 55  , if time is deemed essential and a party fails to perform their part within the specified time, the contract becomes voidable at the option of the other party. In such cases, the promisee has the right to cancel the contract. However, if time is not essential and a party fails to meet the deadline, the other party cannot cancel the contract but can claim damages for the delay in performance.

 Performance of Reciprocal Promises 

A reciprocal promise, as defined in Section 2(f) of the Contract Act, refers to promises that serve as consideration for each other. In such agreements, both parties are obligated to fulfill their respective promises and accept the performance of the other party's promises.

 Order of Performances of Reciprocal Promises 

Section 52 of the Contract Act outlines the order in which reciprocal promises should be performed. If the contract explicitly specifies the order, the promises must be fulfilled accordingly. If not, they should be performed in an order that aligns with the nature of the transaction.

 Effects of Preventing the Performance of Reciprocal Promises 

• When one party in a reciprocal promise stops the other from  fulfilling their part,  the contract can become voidable at the choice of the party being prevented.
• This means the prevented party has the option to cancel the contract and can also seek  compensation  for any losses caused by the non-performance of the contract.
• For instance, if  G and B agree that B will do some work for A for Rs. 1,000, and B is ready to do the work, but G stops him, then:
  • B has the right to cancel the contract with G.
  • If B cancels, he can ask A for compensation for any losses incurred because the work was not done.

Discharge of Contract By Impossibility of Performance/ Frustration of Contract

According to Section 56 of the Indian Contract Act 1872, an agreement to do an act that is impossible in itself is considered void. This section addresses both initial and subsequent impossibility. Let's break down the key points:

•  Agreement to do impossible act:  If a party agrees to perform an act that is inherently impossible, the agreement is void from the outset.
•  Contract to do act after becoming impossible or unlawful:  If a contract becomes impossible or unlawful after it has been formed, it may be discharged under this section.
•  Compensation for loss due to non-performance of an act known to be impossible or unlawful:  If one party fails to perform an act that was known to be impossible or unlawful at the time of the agreement, compensation may be claimed.

 Initial Impossibility vs. Subsequent Impossibility: 

• Initial impossibility refers to situations where the act is impossible from the beginning, making the contract void ab initio.
• Subsequent impossibility occurs when an unforeseen event makes the performance of the contract impossible after its formation. In such cases, the contract may be discharged under the doctrine of frustration.

 Supervening Impossibility (Section 56(2)): 

• Supervening impossibility refers to situations where the impossibility arises after the contract has been formed.
• For a contract to be rendered void due to subsequent impossibility, certain conditions must be met:
• The act must become impossible after the contract is formed.
• The impossibility must result from an event beyond the control of the promisor.
• The promisor's own actions or negligence should not be the cause of the impossibility.

 Legal Precedents: 

• In the case of Paradine v Jane, the courts established the doctrine of frustration, excusing a party from non-performance when they are unable to fulfill their duty due to no fault of their own.
• In Taylor v Caldwell, the court ruled that a contract should not be viewed as an absolute obligation but rather as subject to an implied condition. If performance becomes impossible due to the destruction of the subject matter without the contractor's fault, they are excused from liability.

 Illustration of Frustration: 

•  Krell v Henry:  In this case, the defendant rented an apartment from the plaintiff for specific dates to witness the coronation procession. When the coronation was canceled due to the King's illness, the defendant refused to pay the remaining balance. Since the purpose of the contract was frustrated by the non-occurrence of the coronation, the plaintiff could not claim the balance.

 The Rule of Frustration: 

• The rule of frustration applies to both the physical destruction of the subject matter and the failure of the object of the contract.
• It acknowledges that parties may be excused from performance when unforeseen events render the contract impossible to fulfill.

 Grounds of Frustration 

Frustration of a contract can occur under two main grounds:

1.  Destruction of Subject Matter:  When the specific subject matter of the contract is destroyed or ceases to exist, the doctrine of impossibility applies. For example, in the case of  Taylor v. Caldwell  , the contract to rent out a music hall was frustrated when the hall was destroyed. Similarly, in  Howell v. Coupland  , a contract to sell a specific quantity of potatoes became void when the crop was destroyed by disease.
2.  Change of Circumstances:  When a contract requires performance by a specific individual, such as in a contract to paint a portrait, the incapacity of that person can frustrate the contract if no satisfactory substitute is available. However, in many cases, the identity of the person performing the contract is not crucial. For instance, if a garage agrees to service a car on a specific day but is short-staffed due to sickness, it would be a breach of contract rather than frustration, as the car owner is unlikely to be concerned about the specific individual performing the service, as long as the task is completed competently.

 Non-occurrence of Contemplated Event 

Sometimes, even though it is possible to fulfill a contract, the value of that fulfillment can be significantly diminished if an event that both parties anticipated as a key reason for the contract does not happen. A relevant example of this is the case of  Krell v Henry  , where the core of the contract was based on an event that ultimately did not take place.

 Krell v Henry 

In 1903, the case of Krell v Henry involved a contract for the hire of a room to view the coronation procession of King Edward VII. The contract was based on the anticipated event of the coronation procession. However, when the coronation was postponed due to the King's illness, the event that both parties had contemplated as the reason for the contract did not occur. As a result, the value of the performance was destroyed, leading to the conclusion that the contract could not be fulfilled as originally intended.

 Death or Incapacity of Parties 

If a contract relies on the continued existence of a specific person, that person is excused from fulfilling the contract if they die or become too ill to perform. A notable example of this principle can be seen in the case of  Robinson v Davison  . In this case, there was an agreement between the plaintiff and the defendant's wife for her to play the piano at a concert organized by the plaintiff on a particular date. However, the defendant's wife was unable to fulfill her commitment due to a serious illness. As a result, the plaintiff's claim for compensation was dismissed because the defendant's wife was incapacitated and unable to uphold her promise due to her health condition.

 Robinson v Davison 

In the case of Robinson v Davison, the contract was contingent on the defendant's wife's ability to perform, and when she fell ill, the performance could not be carried out as agreed. This illustrates how the death or incapacity of a party can impact the enforceability of a contract.