Termination or Discharge of Contractual Relationship

Meaning of Discharge of a contract:

Discharge of a contract means termination of the contractual relations between the parties to
a contract. A contract is said to be discharged when the rights and obligations of the parties
under the contract come to an end.

Mode of discharge of contract: A contract may be discharged in various modes as follows:

a) Discharge by performance: A contract may be discharged by performance i.e by

fulfilling the respective promises by the parties to the contract.

b) Discharged by mutual agreement: Since contract is created by mutual agreement, it

can also be discharged by mutual agreement. A contract can be discharged by mutual
agreement in any of the following ways:

a. By Novation: Novation means the substitution of a new contract for the original
contract. Such a new contract may either between the same parties or between
different parties. Where the contract is novated the original contract comes to an
end.

b. By Recission: Recission means cancellation of the contract by any party or all the
parties to the contract. Generally recission of contract arises where either party
failed to fulfill his part of the promise and the non-defaulter party can rescind the
contract or the parties may mutually decide to rescind the contract.

c. By alteration: Alteration means a change in the terms of a contract with mutual

consent of the parties. Where contract is altered it discharges the original contract
to the extent of alteration and creates a new contract. However, parties to the new
contract must not change.

d. By Remission: Remission means acceptance of a lesser fulfillment of the promise

made. Such remission may be wholly or in part. The remission may be made by
extending the time for such performance or may accept instead of it any
satisfaction al obligation under a contract which he thinks fit.

e. By waiver: Waiver means intentional relinquishment of a right under the contract.

Thus it amounts to releasing a person of certain legal obligation under a contract.
This amounts to waiving the right of performance on the party who is obligatory to
fulfill the promise.
c. Discharge of operation of law:

a. By death of the promisor: A contract involving the personal skill or ability of the
parties is discharged on the death of the parties.

b. By insolvency: When a person is declared insolvent, he/s is discharged from his

liability up to the date of insolvency.

c. By unauthorized material alteration: If any party makes any material alteration in

the terms of the contracts without the approval of te other party, the contract comes
to an end by operation of law.

d. Discharge by lapse of time: A contract is discharged if it is not

performed or enforced within a specified period, i.e called period of
limimitation.

e. Discharge by supervening impossibility: Supervening impossibility means

impossibility of performance of the contract subsequent to the formation of the
valid contract although the parties to the contract are very much willing to perform.

It is also known as ‘doctrine of frustration’ under English law.

Cases when a contract is discharged on the ground of supervening

impossibility:

a. By destruction of subject matter: The contract is discharged if the

subject matter of the contract is destroyed after the formation of the
valid contract without any fault of either party.

(For example destruction of crops by fire after the contract although there is no fault of
the party, Music Hall destroyed by fire before the date of first concert).

b. By death or personal incapacity: Where it involves personal skill,

knowledge or ability, the contract is discharged on the death or
incapacity or illness of a party.

c. By declaration of war: Where the friendly country turns into an

enemy country subsequent to the formation of the contract, the
pending contracts at the time of declaration of war are either
suspended or declared as void.
 d. By change of law: The contract is discharged if the performance of
the contract becomes impossible or unlawful due to change in law
after the formation of the contract.

e. By non-existence or non-occurace of aparticulr state of things

necessary for performance : The contract is discharged if that
particular state of thing which forms the basis of a contract, ceases to
exist or occur. ( Krell Vs. Henry, 1903)

Cases when the contract is not discharged on the ground of

supervening impossibility

A contract is not discharged by the supervening impossibility in the

following cases:

a. Difficulty of performance: A contract is not discharged simply on the

ground that its performance has become more difficult, more
expensive or less profitable than that agreed at the time its formation.

b. Commercial impossibility: A contract is not discharged simply on the

ground of commercial impossibility i.e. when the contract becomes
commercially unviable or unprofitable.

c. Default of a third party: A contract is not discharged if it could not be

performed because of the default of a third party on whose work the
promisor relied.

d. Strikes, Lockouts and civil disturbances: A contract is not discharged

on the ground of strikes, lockouts and civil disturbances unless
otherwise agreed by the parties to the contract.

e. Partial impossibility: A contract is not discharged simply on the

ground of impossibility of some of the objects of the contract.

f. Discharge by breach: A contract is said to be discharged by breach of

contract if any party to the contract refuses or fails to perform his part of
promise or his act and activities makes it impossible to perform his
obligation under the contract.

A breach of contract may be anticipatory breach or Actual

breach.
 Consequence of breach of contract: the aggrieved party i.e the non-
defaulter party is discharged from his obligation and gets rights to
proceed against the defaulter part. The various remedies available to
an aggrieved party.

Breach of Contract and its Legal Remedies

Breach of contract means nonperforming the promises by the either party
to the contract. Breach of contract occurs where any party to the contract
refuses or fails to perform his obligation under the contract or ignores to
perform his part of promise or by his act makes it impossible to perform
his part of promise under the contract.
In case of breach of contract, the aggrieved party i.e the non-defaulter party is
discharged or relieved from performing his obligation and gets rights to proceed
against the defaulter part. The breach of contract may arise in two ways:

a) Anticipatory breach, and b) Actual breach

Anticipatory breach of contract: Anticipatory breach occurs when the party declares
his intention of not performing the contract before the performance is due. Thus when
a party refuses to perform a contract even before it is due to perform, it is called
anticipatory breach.

Option available to aggrieved party: In case of anticipatory breach, the aggrieved

party has the following two options:

a. He can rescind the contract and claim damages for breach of contract without
waiting until the due date for performance, or

b. He may treat the contract as operative and wait till the due date for performance
and claim damages if the promise still remains unperformed.

Consequences of treating contract as operative:

Where the contract is treated as operative (as per the second option) and wait till
the due date of performance, the consequences will be as follows:
 a) The promisor may perform his promise on or before the due date of
performance and the promise will be bound to accept the performance.

b) The promisee will lose his right to sue for damages till the due date of
performance.

Actual Breach of contract: Actual breach of contract may take place in any of the
following two ways:

a. On the due date of performance: If any party to contract refuses or fails to

perform his part of promise at the time fixed for performance, it is called an
actual breach of contract.

b. 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.

Consequenc of Actual breach: The nondefaulter party can rescind the contract
and claim compensation for the loss sustained by him due to the breach of the
contract.

Remedies for Breach of Contract:

Meaning of Remedy: A remedy is a course of action available to an injured party i.e.

non-defaulter party for the enforcement of a right under a contract.

The various remedies available to an injured party can be listed as follows:

a. Rescission of Contract: In case of breach of a contract, the promise may put

an end to the contract. In such case, the aggrieved party is discharged from
all the obligations under the contract and is entitled to claim compensation
for the damage which he has sustained because of the non-performance of
the contract.

b. Suit for damages: Damages are monetary compensation allowed for loss
suffered by the injured party due to breach of a contract. The object of
awarding damages is not to punish the party at fault but to make good the
financial loss suffered by the aggrieved party due to the breach of contract.

Hadley Vs. Baxendale (1854) case

Fact: H’s mill was stopped due to the breakdown of a shaft valve. He
delivered the shaft vulve to B, a common carrier, to be taken to a
manufacturer to copy it and make a new one. H has not made it known to B
that delay would result in a loss of profits. By some neglect on the part of B,
the delivery of the shaft was delayed in transit beyond a reasonable time.

Held: B was not liable for loss of profits during the period of delay of profit
as the circumstances communicated to the B did not show that delay in the
delivery of shaft would entail loss of profit to the mill. In this case
following rule was laid down: ‘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 contract should be such as may fairly
and be reasonably be considered either arising 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 probable result of the breach of it.

Such damage may be ordinary damage or Special damage

Ordinary damage: Ordinary damages are those which naturally arise in

usual course of things from such breach. These damages can be recovered if
the following two conditions are fulfilled:

i. The aggrieved party must suffer by breach of contract, and

ii. The damages must be direct consequence of the breach of
contract and not the indirect consequences.
The measure of ordinary damages are calculated on the basis
of the difference between the contract price and the market
price of such goods or services at the time of breach.
Special damage: Special damages are those which may
reasonably be suppose to have been in the contemplation of
both parties as the probable result of the breach of contract. The
damages can be recovered if the special circumstances which
would result in special loss in case of breach of a contract are
communicated to the promisor, e.g loss of profits on account of
default by the other party to the contract can be claimed only
when an advance notice of such damages has been given before.
c. Suit for Specific Performance: Suit for specific performance
means demanding the court’s direction to the defaulting party to
carry out the promise according to the terms of the contract.
Example: Ram agrees to sell old painting for Rs. 50,000 to Shyam. Subsequently Ram refused to
sell the painting. Here, Shyam may file suit against Ram for the specific performance of the
contract.

However Specific performance is not maintainable in the following cases:

i. Where the damages are considered as an adequate remedy

ii. Where the contract of personal nature. E.g contract to marry

iii. Where the contract is made by a company beyond its MOA/AOA

iv. Where one of the party is a minor

v. Where there is exact substitution of the goods is available in the

market

d. Suit for Injunction: Suit for injunction means demanding court’s

stay order. Injunction means an order of the court which prohibits a
person to a particular act. Where a party to a contract does
something which he promised not to do , the court may issue an
order prohibiting him from doing so
e. Suit for Quantum meruit: Quantum meruit means as much as is
earned. Right to quantum meruit means a right to claim the
compensation for the work already done .
For example: Prem Promise to write articles to be published by instalments in the
magazine. owned by Kanak. After a few instalments were published the pulbation of the
magazine was stopped. It was held that Prem could claim payment for the part already
published.