Contract Law – Unit III – Revision Study Notes for LL.B First Year

Study Notes on Contract Law: UNIT – III

---

Discharge of Contracts and Its Various Modes

1. By Performance

Discharge by performance occurs when all parties to a contract fulfill their respective obligations as specified. Performance must be exact and complete to discharge the contract.

Time and Place of Performance

• Time of Performance:
  • Contracts may specify when performance is due.
  • If no time is specified, performance must be within a reasonable time.
  • Example: A contract to deliver goods “within one week” requires performance within a week from the date of the contract.
• Place of Performance:
  • Contracts often specify where performance should occur.
  • If not specified, performance should be at the location where the contract was made or where the promisee expects it.
  • Example: A contract for the sale of a car might specify delivery at the seller’s premises.

Performance of Reciprocal Promises

• Reciprocal Promises:
  • Each party’s promise is dependent on the performance of the other.
  • Performance must be simultaneous or in a sequence as specified by the contract.
  • Example: A contract for the sale of a house where the seller agrees to transfer the title upon receiving payment from the buyer.
• Order of Performance:
  • If no order is stipulated, promises are to be performed concurrently.
  • Performance must be tendered in accordance with the agreed terms.
  • Example: In a contract for painting a house in exchange for payment, the painter must complete the painting before payment is required.

Appropriation of Payments

• Definition:
  • Appropriation involves applying payments made by one party to a particular debt or obligation.
• Rules:
  • The payer can direct the application of payments.
  • If no direction is given, the receiver can choose how to apply the payment, usually towards the earliest due debt.
  • Example: If a debtor makes a partial payment and specifies it is for a particular invoice, the creditor must apply it to that invoice.

2. Discharge by Agreement

Contracts can be discharged by mutual agreement between the parties involved. Various methods include:

• Novation:
  • Replacing an existing contract with a new one, which may involve a new party.
  • Example: A contract to supply goods is replaced by a new contract with a different supplier.
• Rescission:
  • The contract is canceled, and parties are restored to their pre-contractual position.
  • Example: A contract for the sale of a car is rescinded if the sale is found to be based on fraudulent representations.
• Accord and Satisfaction:
  • An agreement to accept performance different from what was originally agreed upon.
  • Example: A creditor agrees to accept a lesser amount in full settlement of a debt.

3. By Operation of Law

Discharge by operation of law happens automatically due to legal circumstances.

• Insolvency:
  • When a party becomes insolvent, contracts may be discharged under insolvency proceedings.
  • Example: A debtor’s obligations might be discharged through bankruptcy proceedings.
• Merger:
  • When a contract is absorbed into a higher legal obligation or contract.
  • Example: A lease agreement merging into a sale agreement where the lease is terminated.

4. By Frustration (Impossibility of Performance)

A contract is discharged if it becomes impossible to perform due to unforeseen circumstances.

• Definition:
  • Frustration occurs when a contract becomes impossible to perform due to a change in circumstances that was not anticipated by the parties.
• Types:
  • Impossibility of Performance:
    • Performance becomes physically or legally impossible.
    • Example: A contract for the performance of a musical concert becomes void if the performer dies.
  • Change in Law:
    • A contract becomes impossible to perform due to a change in law.
    • Example: A contract for importing goods is discharged if new laws ban the import of those goods.
  • Destruction of Subject Matter:
    • The subject matter essential to performance is destroyed.
    • Example: A contract for the sale of a specific painting becomes void if the painting is destroyed before delivery.

5. By Breach (Anticipatory and Actual)

Contracts can also be discharged due to breach by one of the parties.

Anticipatory Breach

• Definition:
  • Occurs when one party indicates before the performance is due that they will not perform their obligations.
• Rights of the Non-Breaching Party:
  • They may treat the contract as discharged and seek remedies for breach.
  • Example: A supplier indicates they will not deliver goods on the agreed date, allowing the buyer to seek alternate suppliers.

Actual Breach

• Definition:
  • Occurs when a party fails to perform their obligations on the due date.
• Types:
  • Partial Breach:
    • When performance is incomplete or defective.
    • Example: A contractor completes 80% of the work, leaving the project incomplete.
  • Total Breach:
    • When performance is entirely missing or not in accordance with the contract.
    • Example: A seller fails to deliver the goods at all.
• Consequences:
  • The non-breaching party can seek damages or terminate the contract.
  • Example: A buyer whose goods are not delivered can sue for damages or terminate the contract.