CHAPTER 7

DISCHARGE OF CONTRACTS AND REMEDIES FOR BREACH OF

CONTRACT
Discharge of Contracts – Meaning and Definition
The discharge of a contract means that the parties to the contract are no more
liable under the contract. When the rights and obligations created by the contract
come to an end, the contract is said to be discharged.
The discharge of a contract may be defined as the termination of contractual
relationship between the parties to the contract.
Modes of Discharge of a contract
The following are the various modes in which a contract may be discharged:
I. By Performance
II. By Agreement or Consent
III. By Operation of Law
IV. By Lapse of Time
V. By Impossibility of Performance
VI. By Material Alteration
VII. By Breach of contract

I. By Performance
Performance means doing any act that is required by a contract. Discharge by
performance takes place when the parties to the contract fulfil their obligations arising
under the contract within the time and in the manner prescribed. In such a case, the
parties are discharged and the contract comes to an end. But if only one party
performs the contract, he alone is discharged. Such a party gets right of action
against the other party who is guilty of breach.
According to Sec. 37 of the Contract Act, performance may be classified as:
a. Actual performance or
b. Attempted performance or Tender.
a) Actual Performance
When both the parties perform their respective promises, the contract is
discharged. The performance should be complete and it should be according
to the terms of agreement.

b) Attempted performance or Tender.

The promisor who is bound to perform his obligation under the contract, may
make an offer to perform his obligation to the other party. This offer is called
“Attempted performance or Tender”. A valid tender is equivalent to the
performance of the promise. If the promise does not accept the tender of
performance, the proisor is discharged from his liability and the promisor shall
not be responsible for non-performance of the contract.
 Example: A agreed to sell his car to B for Rs. 2 lacs. A offered the car to B at
a proper time and place. But B refused to accept the car. In this case, A is
discharged from further liability.

II.By Agreement or Consent

A contract may be discharged by mutual agreement of the concerned parties.
The parties may enter into a fresh agreement which provides the discharge of their
rights and obligations created by the original contract. A contract may be discharged
by agreement in the following ways:
a. Novation
The term Novation may be defined as the substitution of existing contract for a
new contract. When the parties to a contract agree to substitute the existing
contract by a new contract is known as novation. It may be noted that the
novation must be made by mutual consent of all parties to the contract.
Example: A owes Rs. 2 Lacs to B. It is agreed between A, B and C that C
will pay the amount to B instead of A. Here, the contract between A and B is
discharged and a new contract between B and C substituted. Consideration for
the new contract is the discharge of the old contract.

b. Alteration
The term Alteration may be defined as change in one or more terms of
the contract. The alteration is valid when it is made with the consent of all
parties. The alteration discharges the original contract and the parties become
bound by the new contract, i.e., the contract with altered terms.
Example: A enteres into a contract with B for the supply of 100 bags of sugar
by the first of the next month. Later both A and B want to alter the terms of
the contract and thereby A and B agree that A should supply 50 bags of sugar
on 10th of the next month. In such case, the old contract is discharged.
c. Rescission
The term rescission may be defined as the cancellation of the contract. A
contract may be cancelled by agreement between the parties at any time before
it is discharged. In this case, the original contract need not be performed.
Example: A agrees to supply B certain luxurious goods within 6 months. By
that time the goods go out of fashion. Both A and B agree to cancel the
contract. By such cancellation the contract between A and B is discharged.

d. Remission
The term remission may be defined as the acceptance of lesser sum of money
than what was actually due under a contract. The remission is the valid
discharge of the whole of the liability under the contract.
Example: A owed Rs.5,000 to B. A paid Rs.4,000 to B and B accepted it in
full satisfaction. In this case, A is discharged from the liability of Rs. 5000.
 e. Waiver
The term waiver may be defined as the giving up of the rights by the party who
is entitled to claim performance of the contract. On waiver the other party to
the contract is discharged from the performance.
Example: A promised to paint a picture for B for Rs. 5,000. Later, B forbids A
to do so. In this case B has waived his rights to claim the performance. Thus,
A is no longer liable to perform the promise.

f. Merger
Sometimes, the inferior rights and superior rights coincide and meet in one and
the same person. In such case, the inferior rights merge into superior rights.
On merger, the inferior rights vanish and are not to be enforced.
Example: A holds a property of B under a lease. A later buys the same
property. In this case, A becomes the owner of the land and his rights as lessee
merge into his rights as the owner. Thus his rights as a lessee vanish and are
not to be enforced.
Accord and Satisfaction
These two terms are used in English Law. ‘Accord’ means the promise to
accept lesser amount than what is due under the contract. ‘Satisfaction’ means the
actual payment of the lesser amount. The old contract is discharged only when the
less sum is actually paid and accepted by the promiseee.
Example: A owed B Rs. 5,000. Later B agreed to accept Rs. 4,000 in full satisfaction
of his claim. When Rs. 4000 is actually paid by A and accepted by B, there is accord
and satisfaction and original debt of Rs. 5,000 is discharged. In this case accepting
Rs. 4,000 is an accord and the actual payment of Rs. 4000 is the satisfaction.
III. By the Operation of Law
In certain circumstances, the contract is discharged by the operation of law, ie., the
law regards the contract as discharged. Following are the circumstances under which
the law regards the contract as discharged.
a) Death of the promisor
A contract which is based on personal skill of the promisor is terminated on the
death of the promisor.
In other contracts the rights and liabilities of deceased person pass to his legal
representatives.
Example: A agrees to paint a picture for B. Before painting, A dies. Now the
contract is discharged because of the death of the promisor.

b) Insolvency
If a person is declared insolvent by the court of law, the insolvent is discharged
from all his rights and liabilities arising from all his earlier contracts. If the
contract is not performed and the aggrieved party does not enforce his rights
within the limitation period, then he is debarred from enforcing the contracts.
IV. By Lapse of Time
As a matter of fact, the contracts must be performed within the period specified
by the Limitation Act. This Act lays down different limitation period for different
kinds of contract. After the expiry of limitation period, the court will not enforce the
contract. And thus, the contract is discharged as the parts can not enforce their
respective obligations through the courts of law.
Example: A borrowed Rs. 1,000 from B and agreed to repay the loan on 31 st
March 1983. A failed to repay the loan on 31 st March 1983. B did not take any
legal action against A till 31st March 1986. In this case, B cannot recover loan
amount from A as the limitation period for the recovery of loan is three years from the
date of default, which has expired. Now, A is discharged from his liability to pay the
loan.

V. By Impossibility of Performance
Sometimes, the performance of contract is impossible. In such a case, the
contract is discharged, because the parties can not perform their respective
obligations. This is based on the principle that the law does not recognise what is
impossible. And what is impossible does not create any obligation.
According to Sec. 56, impossibility of performance may fall into either of the
following catagories.
1. Initial impossibility
It is the impossibility which exists at the time of formation of a contract. It
makes the contract void from the very beginning. This is based on the
principle that, “An agreement to do an act impossible in itself is void.”
Example: A agreed with B to discover a treasure by magic. B agreed to pay
Rs. 1 lac to A for this act. The agreement is void due to initial impossibility.
It is to be noted that initial impossibility may be known or unkown to the
parties at the time of making the contract. In both cases, the agreement is void
and the parties are discharged.

2. Subsequent or supervening impossibility

Sometimes, the performance of the contract is possible when it is made, but
later, some event happens which makes the performance impossible or
unlawful. Such impossibility is called subsequent or supervening
impossibility. The effect of such impossibility is that it makes the contract
void and the parties are discharged from further performance of the contract.
Example: A and B contracted to marry each other. But before the time fixed
for the marriage, A became mad. In this case, the contract becomes void due
to subsequent impossibility and thus discharged.
Specific grounds of Supervening Impossibility
The following grounds of supervening impossibility have become well
established and the contract is discharged in these circumstances.
a) Destruction of the subject matter
If the subject matter of the contract is destroyed after the formation of the
contract, then the contract is discharged. And the parties are no more liable to
perform their obligations. It may be noted that the distruction of the subject
matter should be without any fault of the parties to the contract.
Taylor Vs. Coldwell
A agreed to let a music hall to B for conducting music concert on certain days.
Before the first day of music concert, the music hall was destroyed by fire
without the fault of either party. It was held that on the destruction of the
music hall, the contract became void.

b) Non-occurrence or non-existence of a particular ‘state of thing’

Sometimes, a contract is entered into between two parties on the basis of a
continued existence or occurrence of a particular state of things. If there is any
change in the state of thing which formed the basis of the contract, the contract
is discharged.
Krell Vs. Henry
Henry hired a flat from Krell for two days for witnessing coronation procession
of King Edward VII. The purpose for which Henry hired the flat was known
to Krell. Coronation procession was cancelled due to the illness of the king.
It was held that on the cancellation of coronation procession the contract
became void as the real object of the contract has failed to perform and Henry
was excused from paying rent.

c) Change of law or change of government policy

Sometimes, the contracts are valid and lawful when they are made. But they
become unlawful due to subsequent change in the law or change in the
government policy. Then the contract is discharged as their performance
becomes impossible.
Example: A entered into a contract to sell some imported goods to B for Rs. 2
lacs. Before the supply of goods, government passed a law which banned the
sale of imported goods. It was held that the contract was discharged due to
change of law.

d) Out break of war

On the declaration of war, the performance of the pending contract with
citizens of other country becomes impossible. Such contracts are either
suspended or declared as void by the government. However, all the contracts
entered into with alien enemy during the war, are unlawful and void, ab initio.
Example: A, an Indian citizen agreed to supply 100 machines to B, a foreigner
at his port for Rs. 10 lacs. Before the supply of machines, a war was declared
between the two countries. In this case, the contract becomes void on the
declaration of war. Thus the contract between A and B is discharged.
Doctrine of Frustration
The term ‘frustration’ is the concept used in English law, which is the parallel
concept of ‘Supervening Impossibility’. Frustration means that in the case of
subsequent impossibility, the court of law may declare the contract as void. The
Indian law regarding the doctrine of frustration is codified and is contained in sec. 56
of the Indian Contract Act.
Frustration may be defined as pre-mature termination of the contract owing to
the change of circumstances which are entirely beyond the control of parties to the
contract. In some cases, the performance of the contract will be discharged due to
the happening of some events beyond the control of contracting parties.
On the ground of frustration the contract becomes void in the following
circumstances:
a) When the performance of the contract becomes physically impossible.
b) Where the basic object or purpose of the contract has failed and it can no
longer be carried out.

VI. Material Alteration

The term ‘material alteration’ may be defined as change in one or more terms
of the contract. It is important to note that in case of written contract, the material
alteration by one party without the consent of the other party, then the other party can
avoid the contract and thus the contract is discharged.
Material alteration is one which changes the legal identity or character of the
contract or the rights and liabilities of the parties of the contracts.

VII. Discharge By Breach of Contract.

In case of valid contract, the parties to the contract are legally bound to perform
their respective obligations. If any party fails to perform his obligations, there occurs
a breach of the contract. ‘Breach of contract’ means the failure of a party to perform
his obligations, under the contract.
The party who fails to perform his obligations, is said to have committed
breach of contract. Breach of contract discharges the aggrieved party from
performing his obligations.
The breach of contract is of the following two types:
i) Actual Breach
ii) Anticipatory Beach

i) Actual Breach
a) Actual Breach of Contract on the due date of performance: Actual
breach of contract occurs when on the due date of performance, a party
fails to perform his obligations. In such cases, the other party is
discharged from the performance of his obligations and he can hold the
guilty party liable for breach of contract.
 Example: A agrees to supply B, 100 bags of cement on 1 st June. In
this case the performance is due on 1 st June. On 1st June A fails to
supply cement. This is actual breach of contract on the due date of
performance.

b) Actual breach of contract during its performance: Actual breach of

contract also occurs when during the performance of the contract, one
party fails or refuse to perform his obligation under the contract.
Example: A agrees to sell 1000 bags of cement to B for Rs. 1 lac on 1 st
January. On the due date A supplies 700 bags of cement and does not
supply the balance. Here, there is actual breach of contract during the
performance of the contract.

ii) Anticipatory Breach of Contract

When a party to a contract refuses to perform his obligation before the due
date of performance, it is called ‘anticipatory breach of contract’. In other
words, it is a declaration by one party of his intention not to perform his
obligation under the contract.
Example: A agreed to marry B. But before the agreed date of marriage, A
married C. This is anticipatory breach of contract by A’s conduct which
has made the performance impossible.

REMEDIES FOR BREACH OF CONTRACT

In case of valid contract, the parties are bound to perform their respective
obligations. If any party fails to perform his obligations, there occurs a breach of
contract. The ‘breach of contract’ means the failure of a party to perform his
obligations. Breach of contract confers a right of action upon the party injured. This
right of action is the remedy available for the injured party against the party
committing breach of contract.
A remedy is the means given by law for the enforcement of a right.
When the contract is broken, the injured party or aggrieved party has one or
more the following remedies:
i. Suit for Rescission ii. Suit for Specific performance
iii. Suit for Injunction iv. Suit for Quantum Merit
v. Suit for Damages
i. Suit for Rescission
The term ‘rescission’ may be defined as the cancellation of the contract. In
other words, putting an end to the contract. Where a party commits a breach,
ie., refuses to perform his obligation under the contract, the other party
becomes entitled to put an end to the contract. He can bring an action for the
rescission of the contract. On the rescission of the contract, the aggrieved
 party or injured party (ie., party not in fault) is discharged from all
obligations under the contract.
Example: A agrees to sell his car to B for Rs. 2 lacs. If A does not sell the
car on the due date, B is discharged from his liability to pay the price.
The court may grant rescission where the contract is voidable at the
option of the aggrieved party. If the party rightfully rescinds the contract, he
is also entitled to receive compensation for the damages sustained due to the
non-fulfilment of the contract.
Example: A agrees to sell his car to B for Rs. 2 lacs. If A does not sell the
car on the due date, B is discharged from his liability to pay the price.
The court may grant rescission where the contract is voidable at the
option of the aggrieved party. If the party rightfully rescinds the contract, the
is also entitled to receive compensation for the damages sustained due to the
non-fulfilment of the contract.

ii. Suit for Specific Performance

The term ‘specific performance’ may be defined as the actual carrying out the
respective obligations of both the parties. Sometimes, the damages are not an
adequate remedy for breach of contract, then the aggrieved party may bring an
action for specific performance of the contract. And the court may direct the
defaulting party to carry out his obligations according to the terms of the
contract. The Courts are always at discretion to grant the relief by specific
performance.
Specific performance will be granted by the court in those cases where
money compensation will not be an adequate remedy or actual damages can
not accurately be assessed.
Specific performance will be allowed by the court where the subject
matter is of special value or consists of goods which are not easily available in
the market. Examples, sale and purchase of unique and precious articles such
as antiques, art painting, old furniture etc. The specific performance may
also be granted in contracts connected with the sale of immovable property
like land and building.
Example: A agrees to sell his land to B. Later if A refuses to sell the land, B
can file a suit for specific performance and the court can compel A to sell
land to B as per the contract.

iii. Suit for Injunction

The term ‘Injunction’ may be defined as an order of the court restrining a
person from doing something which he promised not to do. It is usually
issued in cases where money compensation is not an adequate remedy for
breech of contract. Injunction is a mode of securing the performance of the
negative terms in the contract.
Sometimes a party to a contract does something which he had promised
not to do. In such cases, the aggrieved party may file a suit for injunction.
 Then the court may, at their discretion, issue an order restraining such person
from doing what he promised not to do.
Lumely Vs Wagner
A, a singer, agreed to sing at B’s theatre for certain period. She further
agreed that during that prescribed period she will not sing at any other threatre.
Later, A made a contract with C to sing at his theatre; and refused to sing at B’s
theatre. B filed a suit restraining A from singing at C’s theatre.
iv. Suit for Quantum Meruit
Literally, the expression ‘Quantum Meruit’ means, “as much as earned” or as
much as is merited”. In legal sense, Quatum Meruit means the ‘payment in
proportion to the work done’. The general rule is that where a party to the
contract has not fully performed what the contract demands, he can bring no
action for payment for which he has done. However, in certain cases, a
person may recover compensation on the basis of ‘Quantum Meriut’. He can
recover compensation where he has performed some work under a contract,
and is prevented by the act of the other party from completing the full work.
He may also recover the value of the work done where the further
performance of the contract becomes impossible.
Example: A, a singer, agreed to sing at B’s theatre for two months every
evening for Rs. 1 lac. After singing for one month, A wilfully absented
herself from the theatres and in consequence, B rescinded the contract.
Here, though A is guilty but she can recover compensation for the
performance for one month.

v. Suit for Damages

The term ‘damages’ may be defined as the monetary compensation payable
by the defaulting party to the aggrieved party for the loss suffered by him.
The aggrieved party may bring an action for damages against the party who is
guilty of the breach of contract. Then the party, guilty of breach, is liable to
pay damages to the aggrieved party. The object of awarding damages is to
put the aggrieved party in the same financial position, had the contract been
performed. It is to be noted that the damages are given by way of
compensation for the loss suffered by the aggrieved party, and not for
punishing the defaulting party.

1. General or Ordinary Damages

When a contract has been broken, the aggrieved party may sustain some
damages or loss due to breach of contract. Ordinary damages are the damages
which are payable for the loss arising naturally and directly from the breach of
contract. These damages constitute the actual loss suffered by the aggrieved
party due to breach of contract.
Example: A hired B’s ship under a contract for Rs. 20,000 for the purpose of
carrying his goods from Bombay to Goa. On the due date B refused to make
 his ship available for the purpose. A made an alternative arrangement for
transporting his goods by road for Rs. 30,000, as no other ship was available
on that day.
In this case, the excess expenses of Rs. 10,000 incurred by A are the
ordinary damages. A is entitled to receive a compensation of Rs. 10,000 from
B.
2. Special Damages
The damages which are payable for the loss arising due to some special
or unusual circumstances is known as special damages. In other words, he
special damages are not due to the natural and direct consequences of the
breach of the contract. In some cases there are special circumstances where
the party to the contract expects to make specially large profit, but he would
sustain a special loss.
Special damages can be claimed and recovered only if it is stipulated in
the contract. Special damages are granted only when the parties know at the
time of making the contract that the special loss or damages would result from
the breach of contract.
Simpson Vs. London and N.W. Railway Co.
Simpson sent some goods for agricultural exhibition. After the show he
entrusted some of the goods to London and N.W. Rly co for carriage to another
exhibition at New Castle. On the consignment note, simpson wrote “Must be
at New Castle Monday certain”. Owing to a default on the part of the Railway
co., goods arrived late for the exhibition.
It was held that Simpson was entitled to claim special damages for the loss of
profit at the exhibition.
3. Nominal Damages
The damages which are very small in amount are known as nominal
damages. Such damages are awarded simply to establish the right of the party
to claim damages for the breach of contract even though, the party has suffered
no loss.
Example: A contracted to buy a car from B for Rs. 80,000. Later A refused
to buy the car. B sold the car to C for Rs. 90,000. Eventhough B has suffered
no loss but he could recover nominal damages for breach of contract.
4. Exemplary or Vindictive Damages
The damages which are awarded with a view to punish the defaulting
party are known as Exemplary or Vindictive Damages. The general rule is that
damages are awarded to compensate the injured party for the loss suffered and
not for punishing the defaulting party. Vindictive damages are awarded with a
view to punish the defaulting party.
Court may award vindictive damages only in the following two cases:
 a) Where there is a breach of promise to marry. In such cases, the damages will
include compensation for loss to the feeling and reputation of the aggrieved
party.
b) When a banker wrongfully dishonours cheques of a customer, ie., bank
dishonours the customer’s cheque when the banker has sufficient funds to the
credit of the customer. In such cases vindictive damages are awarded taking
into consideration the loss to the prestige and good will of the customer. The
general rule is that the smaller the amount of cheque dishonoured the greater is
the insult and thus greater, the amount of damages.
In case of mercantile contract, vindictive damages are not recoverable. If the
customer is not a tradesman, he can recover only normal damage.

5. Liquidated Damages and Penalty

Sometimes, at the time of formation of the contract, the parties fix the
amount of damages that will be payable in case of breach of contract.
According to English Law a sum so fixed may fall in any of the
following two kinds:
(i) Liquidated Damages: If the amount of damages fixed for the breach of
contract is fair and genuine pre-estimate of the probable damages, such
an amount is known as Liquidated Damage.
Example: A borrows Rs. 500 from B and A agrees to pay Rs. 50 as
damages, in case the amount of Rs. 500 is not repaid by A to B within a
particular date.
This is fair and genuine amount of damage. This is called liquidated
damages.
(ii) Penalty: If the amount of damages fixed for the breach of contract is
not fair and genuine and not proportionate to loss due to breach of
contract, such an amount is called penalty.
Example: A agrees to pay Rs. 500 to B on a particular date and further
agrees in case Rs. 500 is not paid within the particular date, A should
pay Rs. 3000 to B. It is penalty because Rs. 3000 is disproportionate to
the loss.
QUESTIONS
Short answer questions (2 mark)
1. What do you mean by discharge of contract?
2. What is novation?
3. What is reseission?
4. What is remission?
5. What is waiver?
6. What is breach of contract?
7. What is doctrine of frustration?
8. What is discharge by breach of contract?
9. What is quantum meruit?
Short answer questions ( 5 mark)
1. What are the remedies that an aggrieved party have on breach of contract?
2. What are exemplary and nominal damages?
3. What are liquidated damages and penalty?
Essay questions (20 Mark)
1. Explain the modes of discharge of contract.
2. What are the various kinds of damages on breach of contract?