Discharge by Assignment, Agreement and Breach | Law of Contracts - CLAT PG PDF Download

Government, Administrative, or Legislative Intervention 

A contract can be dissolved when government, administrative, or legislative intervention directly impacts its fulfillment. For instance, in the case of  Metropolitan Water Board v Dick Kerr & Co Ltd,  a contract for constructing a tank was deemed frustrated when the government ordered work to stop during World War I. However, government intervention causing frustration is not limited to wartime. Any legal change that makes contract performance impossible can also frustrate the contract, releasing the parties from their obligations.

 Example:  Imagine a scenario where a new environmental law is enacted that prohibits a specific construction method outlined in a contract.

Intervention of War 

The intervention of war or war-like conditions can lead to the frustration of a contract. In the case of  Tsakiorglou & Co Ltd v Noblee & Thori GMBH,  the defendants were required to ship goods to the plaintiff via the Suez Canal. However, due to war, the canal was closed. While the defendants had the option to ship the goods around the Cape of Good Hope, they did not do so. The court ruled that the doctrine of frustration did not apply because the war did not make performance impossible; an alternate shipping route was available. Moreover, if war-related delays are caused by a party's negligence, the doctrine of frustration is not applicable.

Effects of Frustration

 1. Frustration Shall Not Be Self-Induced: 

• Frustration should not be caused by the actions of the parties involved. For instance, when a company sells shares to its employees and those of its subsidiary through an auction, it does not constitute frustration.

 2. Frustration Operates Automatically to the Extent of Frustration: 

• Frustration applies automatically to the extent of the failure. For example, if a contract specifies the sale of 250 tons of barley to be grown on a particular land, and only 150 tons are produced due to crop failure, the sale remains valid for the available quantity.

 3. Adjustment of Rights: 

• Section 65 of the doctrine of frustration involves the restoration of benefits. For instance, if A, a singer, contracts with B, a theatre manager, to perform for two months at a fee of five hundred rupees per night, and A intentionally misses a performance on the eighth night, B must still pay A for the seven nights she performed.

Discharge by Assignment 

Assignment of a contract involves transferring the rights and liabilities from one party to another. To be valid, this transfer must be done in writing. While the Contract Act doesn't specifically address assignment, the concept is mentioned in the Transfer of Property Act. Contracts that require personal skills or abilities cannot be assigned, meaning the original party must fulfill the contract. However, non-personal contracts can be assigned under certain conditions.

 Assignment by Act of Parties 

When parties themselves decide to assign the contract, the following rules apply:

•  Assignment of Liabilities:  Liabilities under a contract cannot be assigned without consent. For instance, if A owes B money, A cannot force B to accept P as the new debtor. However, A can transfer the liability to P with B's consent. This process is called  'novation'  .
•  Performance by Others:  If the contract allows, parties can agree to have someone else perform the contract, but the original promisor remains responsible for proper performance.
•  Assignment of Rights:  Non-personal rights and benefits under a contract can be assigned. For example, B can assign his right to receive money from A to C. However, the assignee takes the assignment subject to any existing agreements between the original parties. If A has already paid part of the debt to B, he owes C a correspondingly lesser amount.
•  Actionable Claims:  Actionable claims, such as debts or beneficial interests in movable property, can be assigned through a written instrument. Notice of assignment must be given to the debtor. Examples of actionable claims include book debts, money debts, and rights arising from contracts.

Assignment by Operation of Law

 Definition of Assignment by Operation of Law  Assignment by operation of law is a legal concept that refers to the automatic transfer of rights and obligations under a contract due to certain circumstances, such as the death or insolvency of a party to the contract.

 Key Points: 

•  Death of a Party:  When a party to a contract dies, their rights and obligations automatically pass on to their heirs or legal representatives.
•  Insolvency of a Party:  In the event of a party's insolvency, all rights and obligations transfer to an official receiver or assignee.
•  Non-Personal Contracts:  Assignment by operation of law typically applies to contracts that are not of a personal nature.

 Discharge by Agreement 

Discharge by agreement is a legal process through which parties to a contract mutually agree to terminate or modify the terms of the contract. This can occur in several ways:

•  Substituting a New Contract:  If the parties agree to replace the original contract with a new  one  , the original contract is considered discharged.
•  Rescinding the Contract:  If the parties mutually decide to cancel the contract, it is discharged.
•  Altering the Terms:  If the parties agree to change specific terms of the contract, the original contract is no longer binding as per Section 62 of the Indian Contract Act.

 Novation 

The term  'novation'  refers to the process of replacing an existing contract with a new one. This substitution can occur between the same parties involved in the original contract or between different parties. In this situation, the original contract is considered discharged, and the new contract takes its place.

For instance, when Adam owes money to Brown under a contract, and all parties (Adam, Brown, and Carlos) agree that Carlos will take over Adam's debt, this illustrates novation. Adam's obligation to Brown is terminated, and a new obligation arises between Carlos and Brown.

It's important to note that for novation to occur, all parties involved in the original contract must consent to the change. If a contract is breached, replacing it with a new one through novation is not possible.

 Rescission 

• Rescission refers to the cancellation of a contract. When both parties involved in a contract mutually agree to rescind it, the contract is considered discharged. Rescission can occur even before the contract's performance is due, such as when both parties fail to fulfill the contract for an extended period without any complaints, which implies their intention to rescind.
• Unlike novation, where a new contract replaces the original one, rescission involves the cancellation of the original contract without the creation of a new one.

 Alteration 

Alteration in the context of contracts refers to a situation where the terms of a contract are changed with the consent of all parties involved. This change can involve one or more of the terms of the contract, but it does not involve a change in the parties themselves.

When a contract is altered, it effectively terminates the original contract and establishes a new agreement with the modified terms. It is important to note that alteration does not involve a change in the parties involved in the contract, unlike novation, which may involve a change of parties.

 Key Points about Alteration 

• When a document or contract in writing is altered by adding or removing terms, it is considered discharged, except against a party who created or agreed to the change.
• The principle of alteration is subject to certain rules:
  • The change must be made intentionally by the promisee or by someone acting with the promisee's consent. Even a change made by a stranger while the contract is in the possession of the promisee will have the same effect.
  • The change must pertain to a material part of the contract. What constitutes a material change depends on the specific facts and circumstances surrounding the contract. In most cases, a material change involves an increase in liability for the promisor.

 Remission 

Remission in contract law refers to the acceptance of a lesser amount than what was originally agreed upon or a lesser fulfillment of the promise made. According to Section 63 of the Indian Contract Act, every promisee has the right to remit or dispense with the performance of the contract, either wholly or in part. This includes extending the time of performance or accepting some other form of satisfaction instead of the agreed performance.

For example, if A owes B Rs. 5,000 and A pays B Rs. 3,000, and B accepts this lesser amount in full satisfaction of the debt, the entire debt is considered discharged.

 Waiver

• Waiver refers to the voluntary relinquishment or abandonment of a right specified in a contract.
• When one party waives their rights, it releases the other party from their obligations. For instance, if A agrees to paint a picture for B but later forbids B from doing so, A is no longer obligated to fulfill the promise.
• In the case of M. Sham Singh v. State of Mysore, Sham Singh was offered a scholarship by the State to study in the US with the condition that he would serve the State upon his return if offered a job within six months. If he failed to do so, he would have to refund the scholarship amount.
• Upon his return, Sham Singh requested a six-month extension, which the State granted. He then went back to the US and took a position to serve there.
• In a legal dispute regarding the refund of the scholarship, the court ruled that the State had not waived Sham Singh's liability. Instead, it was merely an extension of the time for him to fulfill his promise.

 Accord and Satisfaction

• Accord and satisfaction is a legal concept where two parties agree to settle a tort claim, contract, or other liability for an amount that differs from the original terms.
• It allows for the resolution of legal claims before they escalate to court.
• The principle involves accepting an alternative form of satisfaction instead of the actual performance outlined in the contract, leading to the discharge of obligations.

Discharge by Breach 

 Breach of Contract: Introduction 

•  Breach  refers to a failure to act as required or promised. In the context of contracts, it means not fulfilling any part of a contract, whether written or oral, without a legal reason. Examples include not completing a task, late payments, delivering incorrect goods, or not providing required guarantees.
•  Breach of contract  is a common reason for legal action, such as suing for damages or seeking specific performance. To establish a breach of contract in court, certain conditions must be met:
• The contract must be valid and include all essential elements.
• The plaintiff must prove the defendant has violated the contract.
• The plaintiff must have fulfilled their part of the contract.
• The plaintiff must give reasonable notice of the breach to the defendant, preferably in writing.

 Types of Breach 

 Anticipatory Breach 

•  Anticipatory breach  occurs when one party indicates they will not fulfill the contract before the performance date. This can be done explicitly or implicitly.
• For example, if  Sam promises to sell a machine to Charlie on August 20  but informs Charlie on August 10 that he will sell the machine to someone else, this constitutes anticipatory breach.
• According to  Section 39 of the Indian Contract Act  , if a party refuses or becomes unable to perform their promise entirely, the other party can terminate the contract, unless they have agreed to continue with it.

 Leading Case: Hochster v De La Tour 

• In the case of  Hochster v De La Tour  , A hired B for a three-month tour starting June 1 at a specific salary. Before the start date, A informed B that he was no longer needed. B sued A before June 1.
• A claimed there was no breach since the start date hadn't arrived, but the court ruled in favor of B. Since A had canceled the contract, B had the right to take legal action before the agreed date.
• This case illustrates that a contract becomes legally binding not only when performance is due but also when it is created.

 Effects on Anticipatory Breach Upon Rights of Parties 

When a party anticipates a breach of contract, it significantly impacts the rights and obligations of the parties involved. The innocent party has the option to either terminate the contract or wait for actual performance, depending on the circumstances.

 Innocent Party's Options: 

The innocent party has two main options when faced with an anticipatory breach:

 1. Treating Anticipatory Breach as Actual Breach 

• The innocent party can treat the anticipatory breach as if it were  an actual breach  and declare their intention to do so. This allows them to initiate legal action against the guilty party based on the assumed actual breach.
• In such cases, the  date of damages  is set based on the date of anticipatory breach. The aggrieved party has the option to take action immediately or at a later date.
• For instance, in the case of  Hochster v De La Tour  , the aggrieved party chose to treat the anticipatory breach as actual and acted accordingly.

 2. Ignoring Anticipatory Breach 

• Alternatively, the innocent party may choose to ignore the anticipatory breach and wait until the actual performance date, hoping that the promisor might change their mind.
• If this option is chosen, the contract continues as usual, with both parties remaining liable for their respective obligations.
• If the promisor fails to perform as per the contract terms, the aggrieved party can take action for actual breach.
• However, this option carries a risk. If, during the waiting period, an event occurs that makes the contract impossible to perform, the aggrieved party will have no remedy since the contract becomes void as per Section 56 of the Indian Contract Act.
• In the case of  Avery v Bowden  , the claimant chose to wait for the defendant to supply cargo. Unfortunately, the outbreak of the Crimean War rendered the contract impossible to perform, and the claimant lost the right to sue for breach. Had they acted immediately, they would have had a valid claim.

 Repudiation and Performance: 

The party repudiating the contract has the option to perform when the time comes, and the promisee will be bound to accept the performance. If the repudiation is followed by an affirmation of the contract, the repudiating party can avoid liability.

 Damages Assessment in Anticipatory Breach: 

In the case of anticipatory breach, damages are assessed at the time of repudiation. For example, in  Ramgopal v. Dhanji Jadhavji Bhatia  , the defendants, owners of a ginning mill, contracted with the plaintiff, a cotton merchant, to use half the mill's capacity for ginning cotton. When the defendants repudiated the contract before any cotton was supplied or ginned, the plaintiff was entitled to recover estimated lost profits at the time of repudiation.

 Extent of Breach or Repudiation 

•  Breach of contract refers to a situation where one party fails to fulfill their obligations as stipulated in the contract. However, not every minor irregularity constitutes a breach serious enough to terminate the contract. The overall impact of the breach on the contract must be considered.
• For instance, consider a scenario where A agrees to deliver 1,000 bales of cotton to B in installments. If the 16th installment falls short of the agreed-upon standards, B may feel justified in wanting to terminate the contract. However, if A's intention was not to repudiate the contract and the substandard goods do not represent a significant breach, B cannot legally terminate the agreement.
•  In order for one party to terminate the contract due to breach, the defaulting party must demonstrate a complete refusal to perform the contract, and this refusal must pertain to the entirety of the contract. If the breach is minor and does not affect the overall contract, termination may not be justified.

 Actual Breach 

•  Actual or present breach of contract occurs when one party fails to fulfill their obligations on the agreed-upon date or performs incompletely or not in accordance with the terms of the contract. When a party does not perform what they promised, it is considered an actual breach.
• Actual breach can happen at the time when performance is due or during the execution of the contract. For example, if a seller fails to deliver goods on the specified date or if a buyer refuses to accept the delivery, an actual breach has occurred. Refusal of performance can be explicit or implied.
•  This type of breach is commonly seen in installment contracts, such as sale of goods, delivery by installments, or payment by installments.

 Difference between Anticipatory Breach and Actual Breach 

Breach of contract can be categorized into two types:  anticipatory breach  and  actual breach  . Both types of breaches can cause significant problems for the parties involved, leading to wasted time and money and causing frustration.

 Actual Breach:  An actual breach occurs when one party fails to fulfill their obligations under the contract on the due date or performs incompletely. This type of breach is straightforward and happens when the agreed-upon terms are not met as expected.

 Anticipatory Breach:  An anticipatory breach, on the other hand, happens when one party informs the other, before the performance due date, that they do not intend to fulfill their obligations. This type of breach indicates that one party is unwilling or unable to meet the contractual terms even before the deadline arrives.

In both cases, the innocent party has the right to seek remedies and can pursue an action for damages resulting from the breach. The key difference lies in the timing and manner of the breach—whether it occurs on the due date (actual breach) or is announced in advance (anticipatory breach).