UNIT – I DISCHARAGE OF CONTRACT DEPARTMENT OF MANAGEMENT STUDIES UNIT – I DISCHARAGE OF CONTRACT 4/11/2018 Dr. G. MAHESWARAN/AP

What is Discharge of Contract ? As per the INDIAN CONTRACT ACT 1872 – “Discharge of contract means the termination of a contractual relationship between parties”. A contract is said to be discharged when it ceases to operate , i.e. when the rights & obligation created by it come to an end. 4/11/2018 Dr. G. MAHESWARAN/AP

For Example e.g. Two parties A & B Make a contract to build a fly-over in a City. A is the municipal authority of the city & B is a construction company. Due to some reasons the contract get discharged. Then the both parties are free from the obligations of contract, i.e. the rights & obligations of the parties come to an end. 4/11/2018 Dr. G. MAHESWARAN/AP

How a Contract can get Discharged ? A Contract may be discharged in any of the following way. By Performance By Agreement or by Consent. By Impossibility of performance. By Promisee failing to offer facilities for performance. By Death 4/11/2018 Dr. G. MAHESWARAN/AP

How a Contract can get Discharged ? 6. By Refusing tender of performance. 7. By Unauthorised material alteration of contract. 8. Discharge by lapse of time. 9. By Operation of Law. 10. By Breach of Contract. 4/11/2018 Dr. G. MAHESWARAN/AP Dr. G. MAHESWARAN/AP

1.Discharge of Contract By Performance According to Sec.37 of Indian Contract Act 1872 – “ If both parties to the contract have performed what they have agreed to do, the contract is discharged.” Performance of obligation by parties to the contract puts an end to the contract. 4/11/2018 Dr. G. MAHESWARAN/AP

e. g. in our previous example A & B had a contract to build a fly-over e.g. in our previous example A & B had a contract to build a fly-over. B build the fly-over in the prescribed manner and A provides the consideration to B. Here both parties performed their obligations & rights , what they promised to do in the contract. Thus the contract is come to an end by the performance. 4/11/2018 Dr. G. MAHESWARAN/AP

2. By Agreement or by Consent. According to sec. 62-64 of Indian Contract Act 1872 – A Contract can be terminated or discharged by mutual express or implied agreement between the parties in any of the following ways - 4/11/2018 Dr. G. MAHESWARAN/AP

B) By Accord and Satisfaction C) By Remission and Waiver A) By Novation B) By Accord and Satisfaction C) By Remission and Waiver D). By Rescission. 4/11/2018 Dr. G. MAHESWARAN/AP

A) By Novation According to Sec. 62 of ICA 1872 – “ If the parties to a contract agree to substitute a new contract for it , or to rescind or alter it, the original contract need not to be performed”. That means When a new contract is substituted for an existing contract, either between the same parties or b/w the different parties ‘novation’ occurs. 4/11/2018 Dr. G. MAHESWARAN/AP

Novation means “the wiping out of the original contract as well as the creating of a new valid contract”. If the new agreement is invalid it cannot serve as novation, and the original contract continues unless the rights thereunder are expressly abandoned. 4/11/2018 Dr. G. MAHESWARAN/AP

Novation may occur in two ways - I. New party is substituted for the old one. e.g. A owes money to B under a contract. It is agreed b/w A, B and C that B shall henceforth accept C as his debater instead of A. The old debt of A to B is at end and a new debt from C to B has been contracted. 4/11/2018 Dr. G. MAHESWARAN/AP

II. Parties may substituted new contract for the old one. e.g. A owes B Rs. 10,000. A enters into an agreement with B, and gives B a mortgage of his (A’s) estate for Rs. 5,000 in the place of the debt of Rs. 10,000. This is a new contract which extinguishes the old one. 4/11/2018 Dr. G. MAHESWARAN/AP

Special cases. In SCC 586, 2000(1) - Lata construction Vs Dr. Ramesh Chandra Ramnik lal Shah, The Honorable Supreme Court of India stated – For novation the terms of the two contracts are consistence and can stand together, only then the subsequent contract is said to be the substitution of the earlier one. 4/11/2018 Dr. G. MAHESWARAN/AP

B) By Accord and Satisfaction According to Sec. 63 of ICA 1872 “Every promise may dispense with or remit the performance of promise made to him and accept, instead of it, any satisfaction which he thinks fit.” In other words “When a lesser sum is actually paid than what is due under an existing contract, the new contract is called ‘accord’ & the actual payment is called ‘ Satisfaction’. 4/11/2018 Dr. G. MAHESWARAN/AP

e. g. Ramesh has an postpaid mobile connection of AIRTEL e.g. Ramesh has an postpaid mobile connection of AIRTEL. A bill of his mobile is of Rs. 1245.00, which he seems more than the actual bill. thus he register a complain with AIRTEL. The AIRTEL officials offers him to pay Rs. 1200 as a settlement. Here Rs. 1245.00 is accord & Rs. 1200.00 is satisfaction. 4/11/2018 Dr. G. MAHESWARAN/AP

Exception In the case no. SCC 248, AIR 1992, Union Carbide Corporation Vs. Union of INDIA, Honorable Supreme Court ordered “ An illegal contract cannot constitute an accord & satisfaction”. As in that particular case of Bhopal Gas tragedy, The Government of India claimed US$ 3.3 billion from UCC. In 1989, a settlement was reached under which UCC agreed to pay US$470 million (the insurance sum, plus interest) in a full and final settlement of its civil and criminal liability. Supreme Court declare this agreement void, because of the contract is illegal,& only 15% of the original $3.3 billion claimed in the lawsuit & without the consent of Bhopal Gas Tragedy Relief and Rehabilitation Department. 4/11/2018 Dr. G. MAHESWARAN/AP

C) By Remission and Waiver Waiver means ‘abandoning’ the rights. According to Sec. 63 of ICA 1872 – “When a party to the contract abandons or waiver his rights, the contract is discharged”. e.g. A promise to paint picture for B. B afterwards forbid him to do so. A is no longer bound to perform the promise. 4/11/2018 Dr. G. MAHESWARAN/AP

D). By Rescission. According to sec. 64 of ICA 1872 – “When a person at whose option a contract is voidable rescinds it, the other party thereto need not perform his promise”. He is discharged from his liability under the contract. Rescission may occur by mutual consent of the parties or when one party fails to perform his obligation the other party may rescind the contract. Rescission of a contract cannot be in part only. The entire contract must rescinded. 4/11/2018 Dr. G. MAHESWARAN/AP

e.g. 1. A induces B to enter into a contract by fraud. The contract is voidable at the option of B. He may, therefore, rescind the contract. 4/11/2018 Dr. G. MAHESWARAN/AP

3. By Impossibility of performance. According to sec. 64 of ICA 1872 – “When the performance of a contract becomes subsequently impossible, the contract becomes void”. It means that an agreement to do an act impossible in itself is void. 4/11/2018 Dr. G. MAHESWARAN/AP

According to sec. 23 & 24 of ICA, “An agreement becomes void, if the consideration or object of contract or its part of which is unlawful” As per the honorable Supreme Court of India’s order in the SCC no. 77, 1999(5) – “Impossibility must be physical or legal impossibility” 4/11/2018 Dr. G. MAHESWARAN/AP

e.g. A promises B to sell his horse on 1st June, but before the day, the horse dies. Now its impossible to fulfill the promise due to impossibility of performance. Such type of impossibilities in which at a time of contract, contract was capable of being performed, but subsequently its performance becomes impossible is called “ SUPERVENING IMPOSSIBILITY” . 4/11/2018 Dr. G. MAHESWARAN/AP

4. By Promisee failing to offer facilities for performance. According to sec. 67 of ICA 1872 – “If the promisee neglect or refuses to afford the promisor reasonable facilities for the performance of his promise, the promisor is excused by such neglect or refusal to any non-performance caused thereby”. 4/11/2018 Dr. G. MAHESWARAN/AP

e. g. A contracts with B to repairs B’s house e.g. A contracts with B to repairs B’s house. B neglect or refuse to point out to A the places in which his house requires repair. A is excused for the non-performance of the contract, if it is caused by such neglect or refusal. 4/11/2018 Dr. G. MAHESWARAN/AP

5. By Death According to sec. 37 of Indian contract Act 1872 – “ Where a contract is personal in character, or where personal skill or ability is involved, death of the promisor discharge the contract”. 4/11/2018 Dr. G. MAHESWARAN/AP

e. g. A promises to paint a picture for B by a certain day e.g. A promises to paint a picture for B by a certain day. A dies before the day. The contract cannot be enforced either by A’s representative or by B. 4/11/2018 Dr. G. MAHESWARAN/AP

6. By Refusing tender of performance. According to sec. 38 of Indian contract Act 1872 – “If a party offers to perform his promise and the offer has not been accepted by the other party, the promisor is not responsible for non-performance.” In other words refusal to accept “offer of performance”, discharge the party making the offer. 4/11/2018 Dr. G. MAHESWARAN/AP

7. By Unauthorised material alteration of contract. In cases of material alteration by one party to the contract without the consent of the other party, the contract is discharged. e.g. A and B have a contract of partnership, according to contract the profit share would be distributed in the ratio of 50:50. Without the consent of B, A made an alteration in the contract and change the shares in ratio 60:40 or introduce a new partner C. In this case the contract get discharged & B is free from any type of obligations & has right to sue A. 4/11/2018 Dr. G. MAHESWARAN/AP

8. Discharge by lapse of time. Contract is discharged also by lapse of time. If the creditor does not file a suit to recover his debt amount from a debtor within a period of limitation as laid down under the Limitation Act, his remedy is debarred. The contract is terminated by virtue of the Limitation Act and the creditor cannot recover his debt. 4/11/2018 Dr. G. MAHESWARAN/AP

example For example – the period of limitation to file a money suit is 3 years. If within 3 years the creditor fails to file a suit to recover his amount, the debtor is discharged. 4/11/2018 Dr. G. MAHESWARAN/AP

9. By Operation of Law “A contract is discharged or terminated by the operation of law, in the following cases – (i) By insolvency or bankruptcy (ii) By merger. 4/11/2018 Dr. G. MAHESWARAN/AP

(i) By insolvency or bankruptcy On a person adjudicated insolvent, he is released from all his debts & liabilities probable in the insolvency. The rights and liabilities are transferred to an Official Receiver under the Provincial Insolvency Act. The insolvent is discharged from all obligations arising from all his earlier contract. 4/11/2018 Dr. G. MAHESWARAN/AP

(ii) By merger. Merger of superior right into an inferior right. For example, (1)when a higher security is accepted in the place of the lower security. Inferior or lower security vanishes or merge into a higher security. an ordinary debt is merged into a mortgage, higher security. The right of lessee is changed into a right of ownership. 4/11/2018 Dr. G. MAHESWARAN/AP

10. By Breach of Contract According to sec. 39 of Indian contract Act 1872 – “When a party to a contract has refused to perform, or disable himself from performing his promise in its entirety, the promise may put an end to the contract.” In other words – “Breach of contract occurs where a party refuses to perform his part of the promise. 4/11/2018 Dr. G. MAHESWARAN/AP

Breach of Contract may be - (i) Actual breach of contract. (ii) Anticipatory breach of contract. 4/11/2018 Dr. G. MAHESWARAN/AP

(i) Actual breach of contract. The actual breach occurs when during the performance of the contract or at the time when the performance of contract is due, one party either fails or refuse to perform his obligation under the contract. e.g. A agrees to deliver to B 5 bags of sugar on 1st Jan., He fails to do so on 1st Jan, There is a breach of contract by A. In the above example, if A tenders the sugar to B on the particular day, But B for no valid reason refuses to accept delivery, this is a breach of contract by B 4/11/2018 Dr. G. MAHESWARAN/AP

(ii) Anticipatory breach of contract. When a party to contract refuse to perform his part of the contract before the actual time of the performance of the contract is due, it is called an ‘anticipatory breach of contract’. 4/11/2018 Dr. G. MAHESWARAN/AP

Anticipatory breach of contract may be - (a) By repudiation of contract (express renunciation). or (b) By impossibility of performance (implied renunciation). 4/11/2018 Dr. G. MAHESWARAN/AP

(a) By repudiation of contract (express renunciation). “when a party communicates his inability to perform his part of the contract before the time fixed for the actual performance is due, he is said to have expressly renunciation.” 4/11/2018 Dr. G. MAHESWARAN/AP

(b) By impossibility of performance (implied renunciation). When the breach take place by either party to contract by his own voluntary act, which makes performance of contract, Anticipatory breach of contract is committed by impossibility of performance. It is a case of implied renunciation of a contract. 4/11/2018 Dr. G. MAHESWARAN/AP

Example of anticipatory breach of contract - A promises to sell his car to be on before 1st May, but before 1st May, A sells his car to C. Here A had performed such a voluntary act that the performance of his obligation towards B is impossible and therefore, “Anticipatory breach by impossibility” is committed. 4/11/2018 Dr. G. MAHESWARAN/AP

Brief Summary Discharge of Contract - Discharge of contract means the termination of a contractual relationship between parties Sr. Ways to Discharge of Contract Sec. of ICA 1872 Description 1. By Performance Sec.37 If both parties to the contract have performed what they have agreed to do, the contract is discharged 2. By Agreement or by Consent. Sec. 62 to 64 A Contract can be discharged by mutual express or implied agreement between the parties by – A) By Novation B) By Accord and Satisfaction C) By Remission and Waiver D). By Rescission.

3. By Impossibility of performance. Sec. 64 When the performance of a contract becomes subsequently impossible, the contract becomes void 4. By Promisee failing to offer facilities for performance. Sec. 67 If the promisee neglect or refuses to afford the promisor reasonable facilities for the performance of his promise, contract get discharged. 5. By Death Sec. 37 Where a contract is personal in character, or where personal skill or ability is involved, death of the promisor discharge the contract 6. By Refusing tender of performance. Sec. 38 Refusal to accept “offer of performance”, discharge the party making the offer.

7. 7. By Unauthorised material alteration of contract. material alteration by one party to the contract without the consent of the other party, the contract is discharged 8. 8. Discharge by lapse of time. Contract is discharged also by lapse of time. 9. 9. By Operation of Law. A contract is discharged by the operation of law, in the cases – (i) By insolvency or bankruptcy (ii) By merger. 10 10. By Breach of Contract. Sec.39 Breach of contract occurs where a party refuses to perform his part of the promise. Breach of contract may be – (i) Actual breach of contract. (ii) Anticipatory breach

Thank you! 4/11/2018 Dr. G. MAHESWARAN/AP