DISCHARGE OF CONTRACT
Termination of contract means discharge of contract. It signifies that the parties in a contract are made free from the obligations and rights. When the contract is performed or the obligations of the parties come to end, the contract is termed as terminated or discharged. It means, when any party in a contract is made free from obligation, he is free from the contract, and thus the contract is terminated.
MODES OF METHODS OF TERMINATION
There are several modes/methods/ways for the discharge of contract or say a contract may be terminated in any one of the following ways:
1. Termination by performance of the promise /contract
2. Termination by mutual agreement
3. Termination by subsequent impossibility of the performance
4. Termination by operation of law
5. Termination by material alternation
6. Termination by lapse of time
7. Termination by breach made by one party
1. Termination by performance of the promise/contract
Performance of the promise by the parties in a contract is best and normal mode of termination of contract in which the parties, obligations discharge or terminate or come to end as soon as they perform the promise. Both the parties fulfil their respective promises as mentioned in the contract. Contrary to this, if a party performs his duty as per his promise, and another party does not perform, then, he is not supposed to be freed from the obligation and he can be sued for non performance.
2. Termination by mutual agreement
A contract may be terminated by mutual consent of the parties for which they may cancel the agreement or substitute a new agreement in the place of old one. We know that a contract is created by mutual agreement. Thus, the contract can be discharged by mutual agreement too. According to Contract Act 2056, the parties to a contract may come to an understanding:
§ To change or amend any or all of portions of the work to be performed under the contract, or
§ To extend the time limit for the performance of work, or
§ To suspend the contract by not making it obligatory for some time, or
§ To replace the work mentioned in the contract by another work, or
§ To sign a new contract as a replacement of a original contract.
Similarly, Sec. 62 of the Indian Contract Act 1872 describes that if the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract needs not be performed.
Termination of contract by mutual agreement may occur in any one of the following ways:
(a) NOVATION :
Novation means substitution of a new contract for the original contract. If the parties in a contract agree to create a new contract in the substitution of original contract, then the original contract will be terminated and the obligations of the parties will also be discharged. In novation, even the parties can be changed. The new parties, thus, have to take the obligations of the old parties, whereas, old parties will be freed from the obligations.
(b) ALTERATION:
Alteration of contract means alteration in the terms and conditions of the contract. As is found in the case of novation, alteration also concerns with substitution of a new contract in the place of old one. But, here, in alteration, no parties are changed, but only the terms and conditions are changed. The parties remain the same. The old agreement will go vanished.
(c) REMISSION:
Remission means acceptance of lesser performance than what was actually due under the contract.
According to sec. 63, a party may dispense with or remit, wholly or in part, the performance of the promise made to him, or he may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit.
The remission depends upon the doctrine of ACCORD AND SATISFACTION. According to English Law – a promise to accept less than what is due under an existing contract is ACCORD and the payment or the fulfilment of the smaller obligation is SATISFACTION.
(d) RESCISSION:
Rescission means cancellation of the contract by any of the parties or all the parties to the contract.
Parties may enter into a simple agreement to rescind the contract before its breach. It is called rescission of contract by mutual consent.
Similarly, in a contract where a party has committed a breach of contract, the aggrieved party can rescind the contract. In such a case, his right in the contract will not be affected and enjoys the right of getting compensation for the breach of contract.
In the case of voidable agreement, the party whose consent is not free can rescind the contract.
(e) WAIVER:
A contract may be terminated by agreement between the parties to waive their rights arising from the contract. This is the case of abandonment of a right in which a person, who is entitled to any rights, intentionally relinquishes them without consideration and without a new contract. Virtually it amounts to releasing a person of certain legal obligation under a contract.
(f) MERGER:
If the superior right and inferior right face together, the inferior right merges with superior right. In such a case the inferior right will not exist and superior rights will super shade the inferior right.
Example:
A under a contract takes B's property on a lease. Latterly, A purchases the same property from B. Here the right upon the lease property will merge with right of ownership. No obligation will stand to either party for the contract of lease. The contract is terminated as soon as contract of purchase of property is held between the parties.
3. Termination by subsequent impossibility of the performance
A contract may be terminated if the performance of contract or its objective is impossible. The impossibility of performance of a contract may be of any of the following types:
(i) Impossibility known to the parties at the time of making of the contract:
When the parties, in a contract, know about the fact that the contract cannot be performed, the contract is terminated. This is called absolutely impossible or absolute impossibility. The agreement is void ab initio.
(ii) Impossibility unknown to parties at the time of the making of the contract:
When the parties, in a contract, do not know about the fact that the contract cannot be performed and latterly the fact about impossibility of performance is discovered, the contract immediately terminates, as there exists mutual mistake of a material fact.
Example:
A agrees to sell his cow to B, but unknown to both the parties the cow had already died at the time of making a contract. void contract.
(iii) Impossibility which arises subsequent to the formation of the contract :
Impossibility of performance may arise after making of contract due to several causes. The happening of certain events, which happens but not in the contemplation of the parties and neither the parties are responsible for causing of the performance of the contract impossible. In such a case the contract will be void as soon as such events make the performance of the contract impossible.
The supervening or subsequent impossibility may arise due to any of the following reasons:
(a) By the destruction of the subject matter or object necessary for the performance of the contract:
Examples I
A musical hall was let for a series of concerts on certain days. The hall was burnt down before the date of the first concert. The contract was held to be void as the subject matter is destructed. (Case: TAYLOR vs. CALDWELL (1863))
Examples II
Coupland promised to deliver a part of a specific crop of potatoes of a particular land. The potatoes were destroyed through no fault of the party. Here, the contract was held to be discharged and Howell could not get anything from Coupland as the subject matter was destroyed.
(Case: HOWELL vs. COUPLAND (1876))
(b) By the non existence of a state of things, the continued existence of which formed the basis of the contract.
The contract is discharged if the very state of thing which form the basis of a contract, ceases to exist or occur.
Case: KRELL vs. HENRY (1903) 2 K.B. 740
Henry hired a room from Krell for two days to witness the coronation procession of King Edward VII. The term of contract (hiring room) was to witness the coronation that was known to Krell. Coronation was cancelled due to illness of King. It was held that Henry was excused from paying rent for the room, as the existence of the procession was the basis of the contract and thus contract was terminated.
(c) Change of Law :
On account of a subsequent change in law, the performance of the contract may become impossible. The object of the contract due to change of law may be declared to be unlawful.
(d) Death or personal incapacity of the promisor :
Contracts involving personal knowledge, ability, skill and capacity of the promisor will stand discharged in the case of death or personal incapacity of promisor.
(e) Outbreak of war :
An agreement entered into with an alien enemy during the war is unlawful and, therefore, void ab initio. However, contracts made before the outbreak of war are either suspended or declared void by the government. If they are suspended, they may be performed after the termination of war.
Virtually the termination of contract due to impossibility depends upon the doctrine :
"LEX NON COGIT AD IMPOSSIBILIA. IMPOSSIBILIUM NULLA OBLIGATIO EST".
The law does not recognise what is impossible. What is impossible does not create an obligation.
4. Termination by operation of law :
The contract may be discharged or terminated by operation of law in the following cases :
(a) By the death of the promisor :
The contract, in which personal ability and skill is required for the performance, is discharged on the death of the promisor. The legal rights and obligations also come to end as the promisor dies. It signifies that the contract terminates due to the death of promisor by the operation of law.
(b) By insolvency :
When a person is declared insolvent by the court of insolvency, he is discharged form his liability upto the date of his insolvency not afterwards.
(c) By unauthorized material alteration :
If any party of the contract makes any material alteration in the terms of the contract without the consent and approval of another party, the contract is said being terminated.
(d) By the identify of promisor and promisee :
when the promisor becomes the promisee, the other parties are discharged from all obligations in the contract.
Example :
Harish draws a bill receivable on Yamesh and Yamesh accepts the same. Harish endorses this bill in favour of Zeinith, who in turn endorses in favour of Yamesh. Here, Yamesh is both promisor and promisee and hence the other parties are discharged.
(e) Merger :
If for the same subject matter, two contract are made between the same parties one being of inferior right and another being of superior right, then inferior right, due to operation of law, will merge with superior right .
Case :
Contract of lease of property will merge with contract of sale of property.
5. Termination by material alteration :
Any material alteration made intentionally in a written contract by the promisee or his agent without the consent of the promisor, entitles the promisor to regard the contract as terminated or it may be treated as rescinded.
Material alteration may be related to alteration of subject matter, place of performance, nature of work, amount to pay, the parties or person for the performance.
If a promissory note containing the amount Rs. 5000 is changed to 50000 it may cause termination due to material alteration. Even the creditor can not ask for the payment of Rs. 5000.
6. Termination by lapse of time :
Time factor for the performance of contract is very important. No contract can stand effective and alive for its performance for a indefinite period. Every contract must be performed either within the prescribed time or fixed period or within a reasonable time. Lapse of time may discharge or terminate the contract by barring the right to bring an action to enforce the contract under the Limitation Act 1963 of
7. Termination by breach of contract :
As per sec. 39, a contract may be terminated by breach. Here, breach means and refers to fail to perform. When any party fails to perform his or her obligation under the contract, the contract is said to be discharged by breach of contract. A breach of contract may arise or occur in two ways :
(a) Actual breach of contract
(b) Anticipatory breach of contract
(a) Actual breach of contract
If a party does not perform or denies to perform the contract who is supposed to perform, it is called actual breach of contract. Actual breach of contract may take place in any of the following ways :
(i) On due date of performance
If a party to contract refuses or fails to perform his part of the contract at the time when the performance is due, it is called an actual breach of contract on the due date of performance.
Example :
X agreed to sell Y 10 tons of wheat @ Rs. 8,000 per ton to be delivered in two equal instalment on 20th and 21st October. On 20th October, X refused to deliver the goods. It is actual breach of contract on due date of performance.
(ii) During the course of performance
If any party has performed a part of the contract and then refuses or fails to perform the remaining part of the contract, it is called an actual breach of contract during the course of performance.
Example :(a) CORT vs. AMBERGATE RAILWAY Co. (1851)
Cort agreed to supply 3900 tons of railway chairs to Ambergate railway company. After the delivery of 1787 tons of railway chair, railway company told cort that no more chairs will be required. It is the case of breach of contract during the course of performance.
(b) X agreed to sell Y 10 tons of wheat @ Rs. 8000 per ton to deliver in two equal instalments on 20th October and 21st October. On 20th October, X delivered 5 tons of wheat and refused to deliver remaining 5 tons. It is actual breach of contract during the course of performance.
(b) Anticipatory breach of contract :
Anticipatory breach of contract occurs when the party declares his intention of not performing the contract before the performance is due. According to sec. 39, repudiation of an integral part of the contract by the promisor before the actual due time for the performance of the contract is called an anticipatory breach of contract. Here, the contract is repudiated before the time fixed for the performance arrives and thus is so discharged. This anticipatory breach of contract is also called as constructive breach of contract and it may take place because of any of two causes :
(i) Express repudiation of the contract by any party before the date of performance, and
(ii) The act of any party making the performance of contract impossible
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