CruxBusiness Laws

Discharge of a contract means the end of the contractual relationship: the rights and duties it created cease, and neither party can any longer be made to perform.

The modes, grouped by what ends the obligations:

Two smaller grounds belong with these: a promisee who fails to give the promisor reasonable facilities excuses the non-performance that results (s. 67), and a party entitled to rescind a voidable contract may end it (s. 64).

Obligation to perform (s. 37). The parties must either perform their promises or offer to perform them, unless the Act or another law dispenses with or excuses performance. If a promisor dies before performing, his representatives are bound, unless the contract shows a contrary intention. A promise that depends on the promisor's personal skill dies with him (s. 37, illustration (b); s. 40).

Actual performance. Each party has done exactly what he undertook, at the time and in the manner the contract requires. The contract ends and nothing remains to be claimed.

Attempted performance (tender). The promisor offers to perform at the proper time and place, and the promisee refuses to accept. Under s. 38 the promisor is then not responsible for the non-performance, and he does not lose his rights under the contract: he may sue the promisee for breach.

Conditions of a valid tender (s. 38):

1. Unconditional. An offer to pay a loan's principal only, holding back the interest, or to deliver only if the buyer signs a new term, is no tender.
2. At a proper time and place. Goods brought to the buyer's warehouse after it has closed for the day are not tendered (s. 47 and its illustration).
3. Of the whole obligation, by a person able and willing. The circumstances must give the promisee a reasonable chance to see that the promisor can and will perform everything he promised, there and then. Part of the goods is no tender of the whole.
4. With a chance to inspect. Where goods are to be delivered, the promisee must have a reasonable opportunity to check that they are the goods contracted for, in quality and quantity.
5. To the right person. A tender to one of several joint promisees counts as a tender to all of them.

Who may perform (ss. 40–41). Where the parties meant the promisor to perform personally (painting a portrait, singing at a concert), only he can. In other cases he or his representatives may engage a competent person to do it; a debt, for example, may be paid through someone else (s. 40, illustration (a)). If the promisee accepts performance from a third person, he cannot afterwards enforce the promise against the promisor (s. 41).

Time and place (ss. 46–50).

• No time fixed and no application needed: perform within a reasonable time, which is a question of fact (s. 46).
• A fixed day and no application needed: perform during the usual business hours of that day, at the place where the promise ought to be performed (s. 47).
• A fixed day but the promisee must apply: the promisee must ask at a proper place and within usual business hours (s. 48).
• No place fixed and no application needed: the promisor must ask the promisee to name a reasonable place, and perform there (s. 49).
• Performance may be in any manner or at any time the promisee prescribes or sanctions (s. 50).

Reciprocal promises (ss. 51–54).

• Promises to be performed at the same moment: neither side need perform unless the other is ready and willing (s. 51).
• Order fixed by the contract is followed; where none is fixed, the order the nature of the transaction requires (s. 52). A builder builds before the owner pays the price.
• A party who prevents the other from performing makes the contract voidable at the other's option, and must compensate him (s. 53).
• A party who fails to perform the promise that has to come first cannot claim the other's performance, and must compensate the other (s. 54).

Time as the essence (s. 55).

What one agreement creates, another can end. Under s. 62, if the parties agree to substitute a new contract, or to rescind or alter the existing one, the original contract need not be performed. Section 63 adds the promisee's power to let the promisor off.

1. Novation (s. 62). A new contract takes the place of the old, between the same parties or with a new party. The old contract is extinguished; the consideration for the new one is the release from the old. Novation needs the consent of everyone concerned, including any new party.
2. Rescission (s. 62). The parties agree to cancel the contract, and nothing takes its place.
3. Alteration (s. 62). The parties agree to change one or more terms. The contract as first made need not be performed; the parties are bound by it in its altered form.
4. Remission (s. 63). The promisee accepts less than was promised, wholly or in part, in full satisfaction. Acceptance of a smaller sum discharges the whole debt, and payment by a third person accepted in satisfaction does the same.
5. Waiver (s. 63). The promisee gives up his right to performance. He may also extend the time for performance, or accept any other satisfaction he thinks fit in place of what was promised.

Rescission of a voidable contract (ss. 64, 66). Once the party who has the option to avoid a contract rescinds it, the other side is freed from the promises he made under it, and the party rescinding must give back any benefit he received under it. Rescission is communicated or revoked in the same way, and under the same rules, as a proposal.

Section 56 deals with impossibility in two forms.

Initial impossibility (s. 56, first paragraph). An agreement to do something impossible in itself is void from the start: a promise to find treasure by magic, or to sell a horse that, unknown to both parties, had already died. If the promisor knew, or with reasonable diligence could have known, that the act was impossible or unlawful, and the promisee did not, the promisor must compensate the promisee for the loss caused by non-performance (s. 56, third paragraph).

Supervening impossibility (s. 56, second paragraph). A contract that could be performed when it was made becomes void when, afterwards, the act becomes impossible, or becomes unlawful because of an event the promisor could not prevent. It is also called subsequent or post-contractual impossibility. The parties are discharged from further performance.

Grounds on which it arises:

1. Destruction of the subject matter on which performance depends: the hall booked for a concert burns down.
2. Change of law after the contract, making performance unlawful: the government bans the export of the goods sold.
3. Death or personal incapacity in a contract that needs the promisor's own skill: a singer falls seriously ill, or a party to a promise of marriage becomes insane.
4. Failure of the state of things the parties assumed, where performance depended on it: the event for which a venue was hired is called off by official order.
5. Declaration of war: a contract to load cargo at a port in a country against which the promisor's government then declares war.

Effect. The contract becomes void from the moment the act becomes impossible or unlawful. A party who received an advantage under it must restore it or pay for it (s. 65). Where a performer paid in advance falls too ill to perform, the advance is returned, but no compensation is due for the profit the organiser lost.

Section 56 speaks only of an act that has become impossible or unlawful. A contract is therefore not discharged where:

1. Performance is merely more difficult or more onerous than expected.
2. It has become commercially unprofitable: a sharp rise in prices or costs, or the loss of expected profit.
3. Strikes, lockouts or civil disturbances delay or hinder performance without making it impossible.
4. A third person on whom the promisor relied fails him: the supplier, the transporter or a sub-contractor defaults.
5. Only one of several objects fails, and the contract can still serve the others.
6. The impossibility is self-induced: a party cannot rely on an impossibility he brought about himself.

In each case the contract stands, and a party who does not perform is liable for breach.

The law fixes a period within which a suit must be brought (the Limitation Act, 1963). If the promisee does not sue within it, he loses his remedy in court. A suit to recover the price of goods sold, for example, must be filed within three years; after that the debt is time-barred.

A time-barred debt is not wholly extinguished:

• a written promise, signed by the debtor, to pay a time-barred debt is a valid contract (s. 25(3); BL02);
• a creditor who receives a payment without any direction from the debtor may apply it to a time-barred debt (s. 60).

The law itself ends the contract, whatever the parties want:

1. Death of the promisor, where the contract depends on his personal skill or ability (s. 37, illustration (b); s. 40). Other contracts bind his representatives.
2. Insolvency of a party, which brings his affairs under the insolvency law.
3. Merger: where a lower right and a higher right in the same thing come to one person, the lower right merges in the higher and disappears. A tenant who buys the house he rents no longer has a lease.

Promisee's neglect to give facilities (s. 67). If the promisee neglects or refuses to give the promisor reasonable facilities for performing, the promisor is excused for any non-performance that results. A contractor engaged to repair a house is excused if the owner will not show him which parts need repair.

When one party breaks the contract, actually or in advance, the other party gets a right of action for damages and is also released from performing his own part (s. 39, where a party refuses or disables himself from performing the whole of his promise; BL08 for the kinds of breach and the remedies). The contract is discharged at the injured party's option: he may instead keep it alive.

Breach of contract is the failure of a party to perform his obligation under the contract. It takes two forms.

Actual breach happens on or after the date performance is due:

• the party fails or refuses to perform when performance falls due (goods promised for 1 March are not delivered that day); or
• the party fails or refuses to carry on during performance (a builder stops work halfway).

Anticipatory breach happens before the date for performance: the promisor refuses altogether to perform, or disables himself from performing, while the due date is still ahead. It may be:

• express, by words spoken or written ("I will not deliver in June"); or
• implied, by conduct that makes performance impossible (selling to someone else the very thing promised to you).

Effect (s. 39). Where one party refuses to perform the whole of his promise, or makes himself unable to perform the whole of it, the promisee may end the contract, unless he has shown by words or conduct that he accepts its continuance. He need not wait for the due date. He has a choice:

1. Rescind at once and sue for damages immediately; he is then excused from his own performance.
2. Keep the contract alive and wait for the due date. He then keeps it alive for both sides: the promisor may change his mind and perform, and may also take advantage of any supervening impossibility that discharges the contract in the meantime.

If the promisee accepts the contract's continuance, he cannot end it later on that breach, but he may still claim compensation for the loss it caused (s. 39, illustration (b)).

The injured party (the aggrieved party) has these remedies:

Rescission. When one party breaks the contract, the other may treat it as rescinded. He is then released from all his own obligations under it. Whoever rescinds rightfully may claim compensation for the damage he has suffered because the contract was not carried out (s. 75). So rescission and damages go together; choosing to rescind does not mean giving up the claim for loss.

Restoring benefits. A party who rescinds a voidable contract must give back any benefit he received under it (s. 64). Where a contract becomes void, whoever received an advantage under it must restore it or pay for it (s. 65). A singer who sang on five nights and then walked out, so that the manager rescinded, must still be paid for the five nights (s. 65, illustration (c)), while the manager claims compensation for the rest (s. 75).

Section 73 sets out what the injured party may recover when a contract is broken. He gets compensation, from the party in breach, for loss or damage caused by the breach that:

1. arose naturally in the usual course of things from the breach (ordinary or general damages); or
2. both parties knew, at the time of contracting, to be a likely result of its breach (special damages).

Nothing is given for remote or indirect loss.

The rule in Hadley v. Baxendale. A mill's crankshaft broke and was given to a carrier to take to the makers, who were to make a new one. The carrier delayed, and the mill stayed idle for longer. The mill-owner could not recover his lost profits, because the carrier had not been told that the mill would stand still until the shaft came back. Loss of profit was not a natural result of a delay in carrying a broken part, and the special circumstance had not been made known. Section 73 states the same two limbs.

Rules for claiming damages:

1. Natural loss is always recoverable. For goods not delivered, the usual measure is how far the market price on the delivery date exceeds the contract price.
2. Special loss needs prior notice. Loss caused by special circumstances is recoverable only if the party in breach knew of them when the contract was made.
3. No remote or indirect loss. Loss too far removed from the breach is not compensated, even if it was in fact caused by it.
4. Duty to mitigate. The injured party must take reasonable steps to keep his loss down. In estimating loss, the means that existed of remedying the inconvenience must be taken into account (s. 73, Explanation). He cannot recover loss he could reasonably have avoided.
5. Compensation, not punishment. Damages put the injured party, as far as money can, where he would have been had the contract been performed. They are not meant to punish the party in breach.
6. Loss must flow from the breach. The breach must have caused the loss claimed.

The same compensation is available when an obligation resembling a contract (a quasi-contract, BL06) is not discharged (s. 73, second paragraph).

Exemplary damages go beyond loss. In a breach of promise to marry they answer the injury to feelings. For a wrongly dishonoured cheque, a trader whose credit suffers may get them without proving money loss; a person who is not a trader generally recovers substantial damages only if he pleads and proves special loss.

The parties may name in the contract the sum to be paid if it is broken. Two labels are used:

• Liquidated damages: a genuine pre-estimate of the loss a breach is likely to cause.
• Penalty: a sum fixed arbitrarily, far above any likely loss, to frighten the other party into performing (in terrorem).

Indian law (s. 74). Section 74 makes no distinction between the two. Where a broken contract names a sum payable on breach, or carries any other penalty term, the injured party gets reasonable compensation not exceeding the sum named, whether or not he proves actual loss. The court never awards more than the named sum; it may award less.

Points on s. 74:

• The label the parties use does not decide it. A sum called "liquidated damages" that is extravagant is treated as a penalty.
• A term raising the rate of interest from the date of default may be a penalty (s. 74, Explanation).
• A clause making the whole of an instalment loan fall due on any default is not a penalty when the whole is simply the debt owed. Where the sum that falls due is larger than what was lent, the clause is a penalty (s. 74, illustrations (f) and (g)).
• Exception. A person who gives a bail bond, a recognizance or a similar instrument, or a bond under any law or a Government order for the performance of a public duty, must pay the whole sum named on breach. A contract with the Government does not by itself make the duty a public one.

Quantum meruit means "as much as is earned". Where one person has done work for another in circumstances showing that it was to be paid for, though no price was fixed, the law implies a promise to pay a reasonable amount. It also allows a party who has done part of the work, when the other side breaks the contract, to recover the value of what he has done.

Conditions.

1. The original contract must have been discharged (by breach, or because it turned out void).
2. As a rule, the claim is made by the party not in default. A party who has not completed his own side may still claim where the other party has accepted the benefit of part performance of a divisible contract, or where he completed a lump-sum contract badly (cases 5 and 6 below).

Cases where the claim lies.

1. An agreement is discovered to be void, or a contract becomes void, after work has been done under it (s. 65).
2. Something is done for another not intending to act gratuitously, and the other enjoys the benefit (s. 70).
3. There is an express or implied contract to render services, but nothing is agreed about payment.
4. One party abandons the contract or refuses to perform, or prevents the other from completing.
5. A divisible contract is partly performed and the party not in default has enjoyed the benefit of the part done.
6. An indivisible contract for a lump sum is completely but badly performed: the lump sum is payable, less a deduction for the defects.

Specific performance is an order of the court directing the party in breach to do what he promised, on the terms of the contract, instead of only paying money. It is governed by the Specific Relief Act, 1963.

When it is granted: the law since 1 October 2018. The Specific Relief (Amendment) Act, 2018 rewrote s. 10. The court shall enforce specific performance of a contract, subject only to s. 11(2), s. 14 and s. 16. It is no longer a remedy left to the court's discretion and given only when damages fall short.

When it is not granted.

• Contracts that cannot be specifically enforced (s. 14): (a) where the party has already obtained substituted performance under s. 20; (b) a contract whose performance needs a continuous duty that the court cannot supervise; (c) a contract that rests so heavily on the parties' personal qualifications that the court cannot enforce its material terms, such as personal service: the court will not force a person to sing, act or work for another; (d) a contract that is by its nature determinable.
• Personal bars (s. 16): for example, a party who cannot prove that he has carried out, or has been ready and willing all along to carry out, the essential terms he was bound to perform.
• A trustee's contract made in excess of his powers (s. 11(2)).

The older rule, still in many books. Before 2018 the remedy was at the court's discretion, given mainly where damages would not be an adequate remedy: land, a building, or a unique article such as a rare painting or an heirloom. Many textbooks and past DU answers still explain it this way. In an exam, give the current rule first, then mention the older one.

An injunction is an order of the court that restrains a party from doing an act. In contract, it is used where a party is breaking, or is about to break, a negative stipulation: a promise not to do something. It too is an equitable remedy, given under the Specific Relief Act, 1963.

Positive and negative promises in personal contracts. A contract of personal service often has two promises: a positive one (to perform for X) and a negative one (not to perform for anyone else during the period). The court will not order specific performance of the positive promise, but it may enforce the negative promise by an injunction. The defaulting party is not forced to work for X; she is only stopped from working for the rival.

Lumley v. Wagner. A singer agreed to sing at the plaintiff's theatre for a period and not to sing elsewhere during it. When she agreed to sing for a rival, she could not be compelled to sing for the plaintiff, but she was restrained by injunction from singing at the rival's theatre.