2. 2
Discharge of 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.
3. Modes of Discharged of contract
• By performance
• By mutual agreement
• By operation of Law
• By Lapse of time
• By Impossibility of performance
• By Breach
4. 4
Discharge by Performance
A contract can be discharged by performance
A contract is said to be discharged by actual
performance when the parties to the contract
perform their promises in accordance with the
terms of the contract.
Discharge by performance :-
by actual performance
by attempted / tender Performance
5. 5
Discharge by Mutual Agreement
Since a contract is created by mutual agreement, it can also
be discharged by mutual agreement. A contract can be
discharged through
Novation
Rescission
Alternation
Remission
Waiver
6. • Notation means the substitution of a new contract
for the original contract. Such a new contract may
be either between the same parties or between
different parties. The consideration for the new
contract is the discharge of the original contract.
Example
A owes money to B under a contract. It is agreed
between
A, Band C that B shall henceforth accept C as his
debtor,
instead of A. The old debt of A to B no longer exists
and
a new debt from C to B has been contracted.
7. 7
Discharge by Mutual Agreement (Contd.)
Rescission means cancellation of the contract by
any party or all the parties to a contract.
Example
X promises Y to sell and deliver 100 Bales of cotton
on 1st Oct. at his godown and Y promises to pay
for goods on 1st Nov. X does not supply the
goods. Y may cancel the contract.
8. 8
Discharge by Mutual Agreement (Contd.)
Alteration means a change in the terms of a contract with
mutual consent of the parties. Alteration discharges the
original contract and creates a new contract. However,
parties to the new contract must not change.
Example
X promises to sell and deliver 100 bales of cotton on 1st
Oct. and Y promises to pay for goods on 1st Nov.
Afterwards, X and Y mutually decide that the goods shall
be delivered in five equal installments at Z’s godown.
Here, original contract has been discharged and a new
contract has come into effect.
9. 9
Discharge by Mutual Agreement (Contd.)
Remission means acceptance by the promisee of a’
lesser fulfillment of the promise made.
Example
A owes B Rs 5,000. A pays to B, and B accepts, in
satisfaction of the whole debt, Rs 2,000 paid at
the time and place at which Rs 5,000 were
payable. The whole debt is discharged.
10. 10
Discharge by Mutual Agreement (Contd.)
Waiver means acceptance by the promisee of give
clearance for non fulfillment of contract.
Example
A owes B Rs 5,000. A pays to B, and B waive of the
whole amount.
11. 11
Discharge by Operation of Law
A contract may be discharged by operation of law in the
following cases:
(a) By Death of the Promisor A contract involving the
personal skill or ability of the promisor is discharged on
the death of the promisor.
(b) By Insolvency When a person is declared insolvent, he
is discharged from his liability up to the date of his
insolvency.
12. 12
Discharge by Lapse of Time
A contract is discharged if it is not performed or enforced
within a specified period, called period of limitation. The
Limitation Act, 1963 has prescribed the different periods
for different contracts, e.g. period of limitation for
exercising right to recover a debt is 3 years, and to recover
an immovable property is 12 years. The contractual parties
cannot exercise their rights after the expiry of period of
limitation.
Example
On 1st July, 2001 X sold goods to Y for Rs 1,00,000
and Y has made no payment till Aug. 2004. State the legal
position as on 1st Aug. 2004
(a) if no credit period was allowed
(b) if 2 months credit period was allowed.
13. 13
Discharge by Impossibility of
Performance
The effects of impossibility of the performance of a
contract may be discussed under the following two
heads:
(a) Initial Impossibility
(b) Supervening/ Subsequent Impossibility
- destruction of subject matter
-declaration of war
- change of law
- cessation of state of things
14. By Breach
• Actual Breach
– At the due date of performance
– During the performance
• Anticipatory
– By Express Repudiation
– By Implied Repudiation
16. 16
Rescission of the Contract
When the court grants rescission, the aggrieved party is freed
from all his obligations under the contract; and becomes
entitled to compensation for any damage which he has
sustained through the non-fulfillment of the contract.
Example
A contracts to supply 100 kg of tea leaves for Rs 8,000 to B on
15 April. If A does not supply the tea leaves on the
appointed day, B need not pay the price. B may treat the
contract as rescinded and may sit quietly at home. B may also
file a suit for rescission and claim damages.
17. 17
Suit for Damages
Damages are monetary compensation allowed to
the injured party for the loss suffered by him as a
result of the breach of contract.
The fundamental principle underlying damages is
not punishment but compensation.
18. 18
Kinds of Damages
Damages may be of four kinds:
1. Ordinary or General or Compensatory damages
2. Special damages
3. Exemplary, Punitive or Vindictive damages.
4. Nominal damages.
19. 19
Ordinary Damages
When a contract has been broken, the injured
party can, as a rule, always recover from the
guilty party ordinary or general damages.
These are such damages as may fairly and
reasonably be considered as arising naturally and
directly in the usual course things from the
breach of contract itself.
20. 20
Ordinary Damages (Example)
A contracts to pay a sum of money to B on a
specified day. A does not pay the money on that
day. B, in consequence of not receiving the money
on that day, is unable to pay his debts, and is
totally ruined.
A is not liable to make good to B anything except the
principal sum he contracted to pay, together with
interest upto the date of payment
21. 21
Ordinary Damages (Example)
A agrees to sell to B 5 bags of rice at Rs 500 per bag,
delivery to be given after two months. On the date of
delivery the price of rice goes up and the rate is Rs550 per
bag. A refuses to deliver the bags to B,
B can claim from A Rs 250, as ordinary damages arising directly
from the breach, being the difference between the contract
price (i.e.; Rs 500 per bag) and the market price (i,e” Rs 550
per bag) on the date of delivery of 5 bags.
Notice that if Rs 250 are paid to B by way of damages, then he
will be in the same position as if the contract has been
performed.
22. 22
Ordinary Damages (Example)
A contracts to buy B’s ship for Rs 60,000, but breaks
his promise. As a consequence of breach B sold the
ship in the open market and he could only get Rs
52,000 for the ship.
B can recover by way of compensation Rs 8,000, the
excess of the contract price over the actual sale price.
23. 23
Special Damages
Special damages are those which arise on account
of the special or unusual circumstances affecting
the plaintiff (applicant).
In other words, they are such remote losses which
are not the natural and probable consequences
of the breach of contract.
24. 24
Special Damages (Example)
Mr. A having contracted with B to supply B 1,000 tons of iron
at Rs 100 a ton, to be delivered at a stated time.
Mr. A contracts with C for the purchase of 1,000 tons of iron
at Rs 80 a ton, telling C that he does so for the purpose of
performing his contract with B, C fails to perform his
contract with A, and A could not procure other iron, and
B,in consequence rescinds the contract.
Mr. C must pay to A Rs 20,000 being the profit which A would
have made by the performance of his contract with B.
25. 25
Special Damages (Example)
A,a builder, contracts to erect and finish a house by the first
of January, in order that B may give possession of it at
that time to C, to whom B has contracted to to-let it. A is
informed of the contract between Band C.
A builds the house so badly that, before the first of January, it falls
down, and has to be rebuilt by B, who, in consequence loses
the rent which he was to have received from C, and is obliged
to make compensation for ‘breach of that contract’.
A must pay to B, by way of compensation,
(i) for the cost of rebuilding the house,
(ii) for the rent lost, and
(iii) For the compensation made to C.
26. 26
Exemplary or Vindictive Damages
These are such damages which are awarded
with a view to punishing the guilty party for
the breach and not by way of compensation
for the loss suffered by the aggrieved party.
27. 27
Nominal Damages
Nominal damages are those which are awarded only for the
name sake. These are neither awarded by way of
compensation to the aggrieved party nor by way of
punishment to the guilty party. These are awarded to
establish the right to decree for breach at contract when
the injured party has not actually suffered any real damage
and consist of a very small sum of money
28. 28
Duty to Mitigate Damage Suffered
It is the duty of the injured party to mitigate
damage suffered as a result of the breach of
contract by the other party.
He must use all reasonable means of mitigating the
damage, just as a prudent man would, under
similar circumstances in his own case.
29. 29
Liquidated Damages and Penalty
‘Liquidated damages’ means a sum fixed up in
advance, which is a fair and genuine pre estimate
of the probable loss that is likely to result from
the breach.
‘Penalty’ means a sum fixed up in advance, which
is extravagant in amount in comparison with the
greatest loss that could conceivably be proved to
have followed the breach.
31. 31
Contract of Indemnity
“A Contract by which one party promises to save the
other from loss caused to him by the conduct of the
promisor himself or by the conduct of any other
person, is called a contract of indemnity”
Example
X lost his baggage receipt. Y & X claim for the some
baggage. Airline asked Y to give ‘indemnity bond’. Y
got that baggage. Here Y is indemnifier and airlines is
the indemnity holder/indemnified. It is also said that
Y has indemnify Airline.
32. 32
Contract of Guarantee
“A contract of guarantee is a contract to perform the promise,
or discharge the liability of a third person in case of his
default”
Example
X advances a loan of Rs. 5,000 to Y and Z promises to X that if
Y does not pay the loan then Z will do so. This is the
contract of guarantee. X is creditor, Y is principal debtor
and Z is surety.
33. 33
Distinction between
Indemnity and Guarantee
• Number of parties
– Two vs three
• Objective
– Reimbursement vs security of debt
• Number of contract
– One vs three
• Nature of liability
– Primary (indemnifier) vs secondary liability(of surety)
• Request by debtor
– Indemnifier act independently vs part becomes surety at the request of
debtor
• Existing debt
– No existing debt (most cases) vs Existing debt in guarantee
• Right to sue
– Indemnifier can sue the third party vs surety can sue the principle debtor
34. Bailment
• According to Sec 148, a bailment is the delivery of
goods by one person to another for some
purpose, upon a contract that they shall, when
purpose is accomplished, be returned or
otherwise disposed off according to the
directions of the person delivering them.
• The person delivering the goods is called the
Bailor.
• The person to whom the goods are delivered is
called the Bailee.
35. Essential Elements of a Bailment
• Agreement
– Express
– Implied
• Delivery of goods
– Actual
– Constrictive
• Purpose
• Return of specific goods
36. Kinds of Bailment
• On the Basis of Reward
– Gratuitous
– Non Gratuitous
• On the basis of benefit
– Bailment for the exclusive benefit of the Bailor
– Bailment for the exclusive benefit of the Bailee
– Bailment for the mutual benefit of Bailor and
Bailee
37. Duties of a Bailor
• Duty to disclose Defects
• Duty to bear Expenses
• Duty to indemnify the bailee in case of
premature termination of Gratuitous Bailment
• Duty to indemnify the bailee against the
defective title of bailor
• Duty to receive back the goods
• Duty to bear the risk of loss
38. Duties of A Bailee
• Duty to take care of goods Bailed
• Duty not to make any unauthorized use of
goods
• Duty not to mix bailor’s goods with his own
goods
• Duty to return the goods
• Duty to return accretions to the goods
39. Rights of Bailor
• Right to claim damages in case of negligence
• Right to terminate the contract in case of unauthorized
use
• Right to claim compensation in case of unauthorized
use
• Right to claim the separation of goods/ compensation
in case of unauthorized mixture
• Right to demand return of goods
• Right to claim compensation in case of unauthorized
retention of goods
• Right to demand accretions to goods
40. Right of Bailee
• Right to claim damages
• Right to claim reimbursement of expenses
• Right to be indemnified in case of premature
termination of gratuitous bailment
• Right to recover loss in case of bailor defective title
• Right to recover loss in case of bailor refusal to take the
goods back
• Right to deliver goods to any one of the joint bailors
• Right to deliver goods to bailor in case of bailor
defective title
• Right to particular lien
41. Finder of Goods
• Finder of the goods is the person who finds
some goods which do not belong to him
42. Rights of a finder of goods
• Right to lien
• Right to sue for reward
• Right to sell
43. Duties of a finder of goods
• Duty to take reasonable care
• Duty not to use for personal purpose
• Duty not to mix with his own goods
• Duty to find the owner
44. Contract of Agency
• Since it is not always possible for a person to do
everything by himself it becomes necessary to
delegate some of the acts to be performed by
another person.
• Such another person is called Agent. &
• The person represented is called the principal.
– The law of agency is based on
• Whatever the principal can do by himself he may get the
same done through an agent, except when the act involved
is of personal nature.
• What a person does by another, he does by himself. Thus,
the act of the agent are the act of principal.
45. Agent
• An agent is a person employed to do any act
for another or to represent another in
dealings with third persons. Thus, an agent
establishes a contract between such another
person and third person.
• As between the principal and third persons
any person whether he has contractual
capacity or not) may become an agent.
