Unit 2: Performance and discharge of contract

1. Performance of Contracts

Performance of a contract is the fulfillment of the legal obligations created by the contract. When the parties to a contract fulfill their respective promises, the contract is said to be performed, and the contractual relationship comes to a satisfactory end.

1.1 Obligation of Parties to Perform (Section 37, Indian Contract Act, 1872)

• The primary obligation of parties to a contract is to perform, or offer to perform, their respective promises.
• This obligation is absolute unless the performance is dispensed with or excused under the provisions of the law (e.g., by mutual agreement, impossibility, etc.).
• Promises bind the legal representatives of the promisors in case of their death before performance, unless a contrary intention appears from the contract (e.g., contracts involving personal skill).

1.2 Who Can Demand and Who Must Perform

Who can demand performance?

1. Promisee: The person to whom the promise is made is the only person who can demand performance.
2. Legal Representative: In case of the death of the promisee, their legal representatives can demand performance unless a contrary intention appears.
3. Third Party: A third party, who is a stranger to the contract, generally cannot demand performance. Exceptions exist, such as a beneficiary in a trust or an assignee of the contract.
4. Joint Promisees: When a promise is made to several persons jointly, the right to claim performance rests with all of them jointly. If one dies, the right rests with the surviving promisees and the legal representatives of the deceased promisee.

Who must perform?

1. Promisor Himself: If the contract involves personal skill, taste, or credit (e.g., a contract to paint a portrait, sing, or marry), the promisor must perform it personally.
2. Agent: In contracts not involving personal skill, the promisor may employ a competent person (an agent) to perform the promise.
3. Legal Representatives: Upon the death of the promisor, the legal representatives are bound to perform the contract unless it was a contract of a personal nature. Their liability is limited to the value of the property they inherit from the deceased.
4. Third Persons: If the promisee accepts performance from a third person, they cannot afterward enforce it against the promisor (Section 41).
5. Joint Promisors: When two or more persons make a joint promise, all must fulfill the promise jointly unless a contrary intention appears. If one dies, his legal representatives must, with the surviving promisors, fulfill the promise.

1.3 Types of Performance

1. Actual Performance: This occurs when both parties have completely fulfilled their respective obligations under the contract within the stipulated time and manner.

2. Attempted Performance (Tender or Offer of Performance): This occurs when the promisor offers to perform their obligation, but the promisee refuses to accept the performance. A valid tender has the following effects:

   • The promisor is discharged from their liability under the contract.
   • The promisor does not lose their rights under the contract; they can sue the promisee for non-performance.

   Essentials of a Valid Tender:

   • Unconditional: It must be an offer to perform the entire obligation without any conditions attached.
   • At the Proper Time and Place: It must be made at the time and place stipulated in the contract. If no time is specified, it must be made at a reasonable time and during business hours.
   • For the Whole Obligation: A tender to perform only a part of the promise is not valid.
   • To the Proper Person: The tender must be made to the promisee or their authorized agent.
   • Reasonable Opportunity: The promisee must be given a reasonable opportunity to inspect the goods or ascertain that the performance is in accordance with the contract terms.
   • In Proper Form: For a tender of money, the exact amount must be tendered in the legal currency.

1.4 Time, Place, and Manner of Performance (Sections 46-50)

• Time Specified: Performance must be within the specified time.
• No Time Specified: Performance must be within a "reasonable time". What is reasonable is a question of fact.
• Application for Performance: When a promise is to be performed on a certain day, but the promisor has not undertaken to perform it without application by the promisee, it is the duty of the promisee to apply for performance at a proper place and within the usual hours of business.
• Place of Performance:
  • If no place is fixed, it is the promisor's duty to ask the promisee where they would like the contract to be performed.
  • If a place is fixed, performance must be at that place.
• Manner of Performance: Performance must be in the manner and at the time prescribed by the promisee.

1.5 Reciprocal Promises (Sections 51-54)

Reciprocal promises are promises that form the consideration for each other.

1. Mutual and Independent: Each party must perform their promise independently, without waiting for the other party to perform.
2. Mutual and Dependent: The performance of one party's promise depends on the prior performance of the other party's promise.
3. Mutual and Concurrent: The promises are to be performed simultaneously (e.g., payment for goods on delivery).

2. Modes of Discharge of Contracts

Discharge of a contract means the termination of the contractual rights and obligations between the parties. A contract can be discharged in the following ways:

2.1 Discharge by Performance

This is the most common and natural mode of discharge.

• Actual Performance: When all parties to the contract have fulfilled their respective obligations.
• Attempted Performance (Tender): When the promisor offers to perform, but the promisee refuses to accept, the promisor is discharged from liability.

2.2 Discharge by Mutual Agreement or Consent (Section 62-63)

A contract can be discharged by a new agreement between the parties.

• Novation (Sec 62): Substituting an old contract with a new one. The new contract may be between the same parties or between different parties. The consideration for the new contract is the discharge of the old contract.
• Rescission (Sec 62): Cancellation of the contract by mutual consent. The parties are restored to their original positions.
• Alteration (Sec 62): Changing one or more material terms of the original contract with the consent of all parties. The original contract is discharged, and a new one is formed with the altered terms.
• Remission (Sec 63): Acceptance of a lesser fulfillment of the promise made. For example, A owes B ₹5,000. A pays B ₹2,000, and B accepts it in full satisfaction. The whole debt is discharged.
• Waiver: An intentional relinquishment or abandonment of a known right under the contract.

2.3 Discharge by Impossibility of Performance (Doctrine of Frustration - Section 56)

Impossibility may be initial or supervening.

• Initial Impossibility: An agreement to do an act impossible in itself is void from the beginning (e.g., an agreement to discover treasure by magic).
• Supervening Impossibility: When performance becomes impossible or unlawful after the contract was made due to unforeseen events beyond the control of the parties. This is known as the Doctrine of Frustration.

Grounds for Frustration:

1. Destruction of Subject-Matter: The contract is discharged if the specific subject matter, essential for performance, is destroyed without the fault of either party. (e.g., a contract to rent a music hall which burns down).
2. Death or Personal Incapacity: In contracts involving personal skill or qualification, the death or incapacity of the promisor discharges the contract.
3. Change of Law: Performance becomes impossible if a subsequent change in law makes it illegal.
4. Non-occurrence of a Particular State of Things: If a contract is based on the happening of a certain event, it is discharged if that event does not occur. (e.g., Krell v. Henry - room hired to watch a coronation procession that was later cancelled).
5. Outbreak of War: War may render performance unlawful or impossible.

Cases Not Covered by Supervening Impossibility:

• Difficulty of performance.
• Commercial impossibility (e.g., contract becomes unprofitable).
• Failure of a third party on whose work the promisor relied.
• Self-induced impossibility.
• Strikes, lock-outs, and civil disturbances.

2.4 Discharge by Lapse of Time

The Limitation Act, 1963 specifies a period within which a party can take legal action to enforce their rights under a contract. If the promisee fails to take action within this period, the contract is terminated, and they are barred from seeking a legal remedy.

2.5 Discharge by Operation of Law

A contract may be discharged by law in the following cases:

• Death: In contracts involving personal skill, the death of the promisor discharges the contract.
• Insolvency/Bankruptcy: When a person is declared insolvent, their rights and obligations are transferred to an official of the court (Official Receiver/Assignee), and the insolvent is discharged from liabilities incurred prior to insolvency.
• Unauthorized Material Alteration: If one party makes a material alteration to a written contract without the consent of the other party, the other party can treat the contract as discharged.
• Merger: When an inferior right accruing to a party under a contract merges into a superior right accruing to the same party.

2.6 Discharge by Breach of Contract

A breach occurs when a party fails to perform their obligation under the contract without a lawful excuse. It gives the aggrieved party the right to sue for damages.

• Anticipatory Breach: A party repudiates the contract and their obligations under it before the due date of performance has arrived.
  • How it occurs:
    • Expressly: By words, written or spoken.
    • Impliedly: By the conduct of one of the parties which makes performance impossible.
  • Rights of the Aggrieved Party:
    1. Treat the contract as immediately rescinded and sue for damages without waiting for the due date.
    2. Ignore the breach, keep the contract alive, and wait for the due date of performance.
• Actual Breach: A party fails to perform their obligation on the due date of performance or during the course of performance.

3. Remedies for Breach of Contract

When a contract is breached, the aggrieved party (the party not in default) has one or more of the following remedies available to them.

3.1 Rescission of the Contract

When one party breaches the contract, the other party may treat the contract as rescinded or cancelled. In such a case, the aggrieved party is absolved from all their obligations under the contract and can claim compensation for any damages suffered.

3.2 Suit for Damages

Damages are monetary compensation awarded to the aggrieved party for the loss or injury they have suffered due to the breach. The fundamental principle is to place the injured party in the same financial position they would have been in if the contract had been performed.

The Rule in Hadley v. Baxendale
This landmark case established the rules for measuring damages. The aggrieved party can recover:

1. General/Ordinary Damages: Losses that arise naturally and directly in the usual course of things from the breach.
2. Special Damages: Losses that the parties knew, at the time they made the contract, would be the likely result of a breach. To claim special damages, the special circumstances must have been communicated to the party in breach.

Types of Damages:

• Ordinary or Compensatory Damages: As explained above, these are damages for direct loss.
• Special Damages: For losses arising from special circumstances (e.g., loss of a specific profitable contract).
• Exemplary or Punitive Damages: Awarded to punish the defendant and not just to compensate the plaintiff. They are rarely awarded in contract cases, except in:
  • Breach of a promise to marry.
  • Wrongful dishonor of a customer's cheque by a bank.
• Nominal Damages: Awarded when the aggrieved party has not suffered any actual monetary loss but their legal right has been infringed. The amount is very small (e.g., one rupee).
• Liquidated Damages and Penalty:
  • Liquidated Damages: A genuine and fair pre-estimate of the probable damages from a breach, agreed upon by the parties at the time of contracting. This amount is enforceable.
  • Penalty: A sum that is disproportionate to the likely damages and is stipulated to terrorize the party into performing. The court will not award the full penalty amount but will award reasonable compensation, not exceeding the stipulated amount.

3.3 Suit upon Quantum Meruit

The phrase "Quantum Meruit" literally means "as much as is earned" or "in proportion to the work done". This remedy allows a party to claim a reasonable remuneration for the part of the contract they have already performed.

Claims for Quantum Meruit arise when:

1. A contract is discovered to be void.
2. One party abandons or refuses to perform the contract.
3. A contract is divisible, and the party has enjoyed the benefit of the part performed.
4. An indivisible contract for a lump sum is completely performed but badly. The person who performed can claim the lump sum, less a deduction for the bad work.

3.4 Suit for Specific Performance

This is an equitable remedy granted by the court, directing the party who breached the contract to perform the specific promise they made.

Specific performance is generally granted when:

• Monetary compensation is not an adequate remedy.
• The contract is for the sale of a unique item (e.g., a specific piece of art, rare antique) or immovable property (land).

Specific performance is NOT granted when:

• Damages are an adequate remedy.
• The contract is of a personal nature (e.g., a contract to sing or marry).
• The contract requires constant supervision by the court.
• The contract terms are uncertain or inequitable.

3.5 Suit for Injunction

An injunction is a court order restraining a party from doing a particular act. It is a form of specific performance for a negative term in a contract (a promise not to do something).

• Purpose: To prevent a threatened breach of contract.
• Example: A famous singer agrees to sing exclusively at B's theatre for a year and not to sing anywhere else. If she then contracts to sing at C's theatre, B can get an injunction to restrain her from singing for C. The court cannot compel her to sing for B (specific performance of a personal contract), but it can prevent her from breaking her negative promise.