Business laws unit 2

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Business Laws
Mrs. R. Senthil Lakshmi
Assistant Professor
S.B.K.College
Aruppukottai
UNIT- II
Performance of contract – modes of discharge of contract – breach – remedies for the
breach – quasi contracts.
Performance of contracts:
Meaning:
Performance of contracts means the fulfillment of the term of the contract by the
respective parties to the contract.
According to section 37 of the contract Act, “the parties to a contract must either
perform, or offer to perform, their respective promises, unless such performance is
dispensed with or excusedunder the provisions of this act.
Types of performance:
Performance
Actual performance Attempted performance
i).Actual performance:
When the party to the contract has done what he has under taken to do, he is said to
have performance his promise.
ii).Attempted performance or offer to perform:
An offer to perform one’s obligations under a contract is called tender. It is also
called attempted performance. Though the promisor has offered to fulfill his obligation
under the contract at the proper times and place but the promises does not accept the
performance. For example: M contract to find out the lost child of Q for a sum of Rs 10000.
The nature of the contract is such that M should actually perform his part.
M agrees to sell certain goods to N on a fixed date. It is agreed that N will send his
manager for taking delivery of the goods on that date. The nature of the contract requires
that M should first make an offer of performance to N on the fixed date.
Kinds of tender:
Tender may be of two kinds:
1. Tender of the goods:
If tender of performance of the promise by delivery of goods is rejected by the other
party, the offeror of tender shall be discharged from all the consequences of the breach of
the contract. He can also maintain a suit for the same.
2. Tender of money:

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If tender of money to repay loan is not accepted by the creditor, a debtor shall not be
discharged from the liability for the debt. Interest on the debt shall immediately cease to
accrue from the date of rejection of a valid tender of money.
Essentials of a valid tender:
1. It must be unconditional:
A tender with conditions attached to it will not be a valid tender. Mere demand for
the receipt for the amount to be paid will not make the tender conditional.
For example: M offers to pay his creditor N the amount due to him if N sells his car at cost
to him. The tender cannot be termed as a valid tender.
2. It should be an offer to perform in full:
Any offer to perform promise in part cannot be taken as a valid tender.
For example: M has to deliver 100 bags of wheat to N on 1st of July. He offers only 50 bags
to N on the due date. It is not a valid tender. N can refuse to accept delivery of the same.
3. Tender for the performance of the contract must be made at the fixed time and place or at
a proper time and place:
The place of business of the promise shall be the proper place to make tender of the
performance of the contract.
4. Tender should be made to the proper promise:
Tender made to a stranger would be invalid. Tender made to any one of the joint
promises shall be valid and binding upon all of them.
5. Tender for the delivery of goods must be for the quantity and quality agreed upon
6. Reasonable opportunity:
It must be provided to the promises to inspect and satisfy himself that the
performance is in accordance with the terms of the contract. The promisee must be given
reasonable opportunity to ensure that the goods offered are the same as promised in the
contract.
7. In case of payment of money, tender must be of the precise amount and in terms of legal
tender money:
Promise cannot be compelled to accept cheque in discharge of his debts.
8. In case of several promisees a valid tender of performance made to one shall be taken as a
valid tender made to all:
This is true only regarding tender of performance. A payment by a debtor to one of
several joint creditors cannot have the legal effect of discharging the entire contractual
obligations as against the other co-creditors. Because, the right to demand performance
rests with the joint promises jointly and not severally.
Effect of the refusal of a party to perform the promise wholly (section39):
Suppose a party has refused to perform his promise in its entirely. Then the
promisee may put an end to the contract. He can also signify his acquiescence to the
continuance of the contract. But he shall be entitled to compensation for damages sustained
by him. For example: M a singer enters into a contract with N the manger of a theatre. The

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terms of the contract are that M should sing at N’s theatre two nights in every week during
the next two months. N agrees to pay her 5000 rupees for each night’s performance. On the
sixth night M willfully absents himself. With the absent of N, M sings on the seventh night.
N has signified acquiescence to the continuance of the contract. N cannot now put an end to
it. But he is entitled to compensation for damages sustained by him through M’s failure to
sing on the sixth night.
Who can demand for performance?
The general rule is that “a person cannot demand performance of the contract to
which he is not a party”. So a third party cannot demand performance of the contract even
if it was made for his benefit. Performance can be demanded by the following person:
1. Promisee:
The performance can be demanded only by the promisee. A third party cannot
demand performance of the contract evenif it was made for his benefit.
For example: M agrees with N that as desired by N, M will sell his car to Q. If M refuses to
sell his car to Q, only N can bring action against him.
2. Legal representative:
In the event of death of the promisee, the legal representatives of the promisee can
demand performance. If the contract is of personal nature, the legal representatives too
cannot demand performance. For example: M agrees to marry N. After sometime N dies.
The legal representatives of N cannot demand performance of the promise from M.
3. Joint promisees:
Sometimes, a person makes promise to two or more persons jointly. Unless a
contrary intention appears from the contract, the right to claim performance rests.
a). With all the joint promisees jointly. b). in case of death of any of the joint
promisees, with the representative of such deceased jointly with the survivors. c). in case of
death of all joint promisees with the representatives of all jointly.
For example: M in consideration of Rs 30000 lent to him by N and Q promises N and Q
jointly to repay them the sum with interest on a day specified Q dies. The right to claim
performance rests with Q’s representatives jointly with N during N’s life. After the death
of N the representatives of N and Q can jointly claim the performance of the contract.
By whom contract must be performed?
1. The promisor (section 40):
“A contract may be performed by the promisor, either personally or through any other
competent person. But where the personal considerations are the foundation of the
contract, it has to be performed by the promisor himself and in the case of his death or
disablement, a contract will be discharged and the other party would be freed from
liability”. For example: M promises to paint a picture for N. M must perform this promise
personally.
2. The agent:

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The promisor or his representatives may employ a competent person to perform it. The
contracts which do not involve any personal skill or consideration can also be performed
by an agent appointed by the promisor.
3. Legal representation:
In case of deal of promisors before performance, the promises bind the representatives
of the promisors. This holds good when any contrary intention appears from the contract.
If the contract involves any personal skill, the heirs of the deceased promisor are not bound
to perform the contract. So such contracts come to an end on the death of the promisor.
“A personal cause of action comes to an end with the death of the person concerned”.
For example: M promises to paint a picture for N by a certain day at a certain price. M
dies before that date.The contract cannot be enforced either by M’s representative or by N.
M promises to deliver goods to N on a certain day on payment of Rs 30000. M dies
before that day. M’s representatives are bound to deliver the goods to N. N is bound to pay
Rs 30000 to M’s representative.
4. Performance of a promise by a third person:
When a promisee accepts the performance of the promise from a third person, he
cannot afterwards enforce it against the promisor.
5. Performance of joint promises:
Performance of joint promises may take place in any of the following manner:
a. Where several joint promisors make promise with a single promise.
For example: M, N and Q jointly promises to pay Rs 9000 to R.
b. Where a single promisor makes a promise with several joint promisees.
For example: M promises to pay Rs 9000 to N, Q and R jointly.
c. Where several joint promisors make promise with several joint promisees.
For example: M, N and Q jointly promise to pay Rs 9000 to A, B and C jointly.
Who can demand performance of joint promises? (section 45)
“When a promise is made to several persons jointly, then unless a contrary intention
appears from the contract, the right to claim performance rests with all the promisees
jointly and a single promisee cannot demand performance. When anyone of the promisees
dies, the right to claim performance rests with the legal representatives of such deceased
person jointly with the surviving promisees. When all the promisees are dead, the right to
claim performance rests with the legal representatives of all jointly”.
By whom joint promises must be performed?
1. All promisors should jointly full fill the promise (section 42)
Two or more persons might have made a joint promise. Then unless a contrary
intention appears from the contract all such persons, during their joint lives must fulfill the
promise. On the death of any of them, his representative jointly survivor must fulfill the
promise. After the death of the last survivor the representatives of all jointly must fulfill the
promise. Section 42 deals with the liability of joint promisors.
The above rule is subject to the following usual conditions:’

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a. Contracts involving personal skill come to an end on the death of any of the joint
promisors. So the liability of performance does not fall on the legal representatives.
b. Wherever the legal representatives are made liable to perform the promise, they are not
personally liable. Their liability is limited to the assets inherited by them.
2. Any one of joint promisors may be compelled to perform:
In case of joint promise, two or more persons make a joint promise. In the absence of
an express agreement to the contrary, the promisee is entitled to compel any one or more of
such joint promisors to perform the whole promise.
For example: P, Q and R jointly promise to pay M Rs100000. M may compel either P or Q
or R to pay him Rs 100000.
3. Right of contribution inter-se between joint promisors:
If one of several joint promisors is made to perform the whole contract, he may require
equal contribution from the other joint promisors, unless a contrary intention appears
from the contract.
4. Sharing of loss arising from default in contribution:
Sometimes, one of the joint promisors may make default in the contribution. Then the
remaining joint promisors must bear the loss arising from such default in equal shares.
After the death of the single promisor the heirs become joint promisors. The same principle
applies in the case of recovery of a loan by the creditor from such heirs.
For example: M, N and Q are under a joint promise to pay R the sum of Rs 60000. Q is
unable to pay anything. M is compelled to pay the whole sum. M is entitled to receive Rs
30000 from N.
5. Effect of release of one joint promisor: (section 44)
“ In case of joint promise, if one of the joint promisors is released from his liability by
the promise, his liability to the promisee ceases but this does not discharge the other joint
promisors from their liability; neither does it free the joint promisors so released from his
liability to contribute to the other joint promisors”.
If the promisee releases one of the joint promisors from his liability, it will have the
following effect:
i).His liability to the promisee caeases
ii).Other joint promisors are not discharged from their liability.
iii).The joint promisors so released from his liability contribute to the other joint
promisors.
For example: P, G and R jointly owe a debt to C. C releases P from his liability and files a
suit against Q and R for payment of the debt. Q and R are not released from their liability.
P is not discharged from his liability to Q and R for contribution.
6. Devolution of joint rights: (section 45)

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Where there are joint promises the benefit of the promise devolves on the
representatives of the deceased promisees. In other words, on the death of any one or all of
joint promisees, the survivors or the representatives of the deceased promisees are jointly
entitled to claim the performance of the promise.
For example: B and C jointly lends to A Rs 10000. A agrees to repay them that sum with
interest on a certain date. B dies. The right to claim the performance rests with B’s
representative jointly with C during C’s life. After the death of C, the representative of B
and C jointly entitled to claim performance of the promise.
Reciprocal promises: (section 26)
Meaning and definition:
“Promises which form the consideration or part of the consideration for each other
are called reciprocal promises or mutual promises”.
Kinds of reciprocal promises:
Reciprocal promises
Mutual and Mutual and Mutual and
Independent concurrent dependent
1. Mutual and Independent:
When each party has to perform his promise independently without waiting for the
performance or willingness to perform of the other party, the promises are mutual and
independent. Such promises are rare. So, they have not been provided for in the Act.
For example: A and B contract that A shall build a house for B at a fixed price. A’s
promise to build the house must be performed before B’s promise to pay for it.
2. Mutual and concurrent:
Promises are mutual or concurrent where two promises are to be simultaneously
performed. This type of promises is covered by section 51 of the Contract Act and section
32 of the Sale of goods Act.
For example: M agreed to sell contain goods to N. price is to be paid on delivery. The
promises are mutual and concurrent.
3. Mutual and dependent:
In mutual and dependent promises the performance of promise by one party depends
on the prior performance of the promise by the other party.
For example: M agrees to build a house for N. N agrees to supply the necessary material
required for the construction of the house. The promises are mutual and dependent.
Rules regarding performance of reciprocal promises:
1. The simultaneous performance of reciprocal promises (section 51):
Sometimes, a contract consists of reciprocal promises to be simultaneously performed.
Then the promisor need not perform his promise if the promise is not ready and willing to
deliver them on payment. For example: A and B contracted that A shall deliver certain

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goods to B to be paid for by B on delivery. In this case, the promises are mutual and
concurrent and must be performed simultaneously.
2. The order of performance of reciprocal promises (section 52):
Reciprocal promises from the consideration for each other. Such reciprocal promises
are to be performed in the order as expressly fixed by the contract. Where the order is not
expressly fixed by the contract, they must be performed in that order which the nature of
the transaction requires.
For example: A, a furniture-maker contracted B to make certain furniture for him,
provided B agreed to supply necessary timber. B failed to supply timber. Here, A need not
make furniture and B cannot claim the performance. Besides, B is bound to make
compensation to A for any loss caused to A by the non-performance.
3. Effect of one party preventing another from performing promise (section 53):
In case of reciprocal promises, one party to the contract prevents the other from
performing his promise. In such a case, the contract becomes voidable at the option of the
party so prevented. He is also entitled to compensation from the other party for any loss
which he may sustain in consequence of non- performance of the contract.
For example: M and N enter into a contract. As per the contract N shall execute certain
work for M for Rs 2000. N is ready and willing to execute the work accordingly. But M
prevents him from doing so. The contract is voidable at the option of N. If he elects to
rescind it, he is entitled to recover from M compensation for any loss which he has incurred
by its non- performance.
4. Effect of default as to promise to be performed first (section 54):
Sometimes the nature of reciprocal promises is such that one of them cannot be
performed till the other party has performed the promise. If the other party fails to
perform it, he cannot claim the performance of the reciprocal promises from the first
party. In such a case, the first party to the contract may sustain loss by non- performance
of the contract. Then the other party must pay compensation to the first party.
For example: M contracts with N to execute certain builder’s work for a fixed price. N is to
supply necessary material for the work. N refused to furnish any material. So the work
cannot be executed. M need not execute the work and N is bound to make compensation to
M for any loss caused to him.
5. Reciprocal promise to do things legal and also other things illegal (section 57):
The contract may consist of two parts, one part legal and the other part is illegal. The
legal part may be separate from the illegal one. Then the court will enforce the legal part. If
the legal part is inseparable from the illegal part, the whole contract is void.
For example: M and N agreed that M shall sell a house for Rs100000. But if N uses the
house for gambling, he shall pay Rs 200000 for it. The first set of reciprocal promises
namely to sell the house and to pay Rs 100000 for it is a contract. The second set is for an
unlawful object namely that N may use the house as a gambling house is a void agreement.
6. Alternative promise one branch being illegal:

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In alternative promise one branch may be legal and the other illegal. Then the legal
branch alone can be enforced.
For example: M and N agree that M shall pay N Rs 2000 for which N shall afterwards
deliver to M either rice or smuggled opium. This is a valid contract to deliver rice and a
void agreement as to the opium.
Time and place for performance:
Where prescribed by the promise:
If the time and place have been prescribed by the promisee, the performance of the
contract must be made at the specified time and place.
Where not prescribed by the promisee:
If no time and place have been prescribed by the promisee, then the contract must be
performed as follows:
1. Within the reasonable time:
The contract should be performed on a working day within the usual hours of
business. Now the question arises, “what is reasonable time?” No definition is given of
reasonable time. It depends upon the situation and circumstances of each case. So
reasonable time is a question of fact. It depends either on special circumstances of each
particulars case or the usage of trade or the intention of the parties at the time of entering
into contract.
For example: M promises to deliver goods at N’s warehouse on 1st January. On that day M
brings the goods to N’s warehouse but after the usual hour for closing it. So they are not
received. M has not performed his promise.
2. At proper place:
According to the section 49 of the contract Act, the performance of each contract is a
question of fact. It should be performed at that place as mentioned in the contract.
Generally speaking, the promisor must ask the promisee where he would like the contract
to be performed. It should be performed at such place.
For example: M agrees to deliver a thousand bags of rice to N on a fixed day. M must apply
to N to appoint a reasonable place for the purpose of receiving it. He must deliver it to him
at such place.
Effect of failure to perform a contract within the stipulated time:
Section 55 deals with the effect of failure to perform a contract within the stipulated
time. When we say that “Time is the essence of contract” it has a particular effect. That is
the performance of the promise by a party to the contract is essential within the specified
period, in order to entitle him to enforce performance from the other party.
A breach of the condition as to the time for performance will entitle the innocent
party to consider the breach as a repudiation of the contract.
1. When time is of essence?

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Commercial and mercantile contracts provide for performance within a specified
time. So time is of essence of the contract. This is so because businessmen want
certainty. If there is a failure on the part of the promisor to perform his obligation
within the fixed time, the contract becomes voidable at the option of the promisee. But
if the promisee accepts performance of the promise after the fixed time, he cannot claim
compensation for any loss occasioned by the non- performance of the promise at the
agreed time. But at the time of accepting the delayed performance, he can give notice to
the promisor of his intention to claim compensation. He can claim compensation by
severing such notice.
For example: In Mahabir Prasad vs Durga Dutt emphasis was laid on the time of
delivery and payment. There was a contract for the sale or purchase of goods the prices
of which fluctuate rapidly in the market. In such contract the time of delivery and
payment are considered to be of the essence of the contract.
2. When time is not of the essence?
In some contracts time may not be of the essence of the contract. Failure on the part of
the promisor to perform his obligation within the fixed time does not make the contract
voidable. But the promise is entitled to compensation for any loss occasioned to him by
such failure.
For example: General in a contract of sale of immovable property time is not the essence.
But the intention of the parties can be shown that time should be the essence of the
contract.
When is the time the essence of the contract? (section 55)
It is accepted fact in business that “time is the essence of the contract”.
a. If the parties to the contract have expressly agreed to treat it as such, or
b. If the nature of transactions and the intention of the parties were such that the
performance within a limited time was necessary.
In contracts where time is the essence the parties should fulfill their promise within the
specific time. If any party fails to perform his promise within the specified time, the
contract will become voidable at the option of the other party.
Mode of performance: (section 50)
Indian contract Act deals with the mode or manner of performance of the contract.
It states that “The performance of any promise may be made in any manner or at any time
which the promisee prescribes or sanctions”. The promisor must perform the promise in
strict manner in accordance with the terms of the contract. He has no right to substitute for
what he has been directed. Such substitution is against the contract even when it is
beneficial to the promisee.
For example: M owes N Rs 20000. N desires M to pay the amount to N’s account with Q a
banker. M who also banks with Q orders the amount to transferred from his account to N’s
credit. This is done by Q. Afterwards and before N knows of the transfer, Q fails. There
has been a good payment by N.

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Appropriation of payments (section 59 to 61):
A debtor owes several distinct debts to the same creditors. When a payment is made,
the question may arise against which debt the payment is to be apportioned.
1. Where the debtor has given express instructions:
The law states that “Appropriation is a right given to the debtor for his benefit”. The
debtor can expressly intimate at the time of actual payment. Then such payment should be
applied towards the discharge of a particular debt. The creditor must do so accordingly.
Otherwise he should not accept the payment.
2. Debtor’s implied intention must also be followed:
In the absence of express instruction, debtor’s implied intention should be gathered. It
can be understood from the circumstances attending the payment. Appropriation must be
done accordingly. The maxim of law is that when is paid it is to be applied according to the
expressedwill of the payer and not of the receiver.
For example: M owes N, among other debts, Rs 5000 upon a promissory note. It falls due
on the 1st June. He owes N no other debt of that amount. On the 1st June M pays to N
Rs5000. The payment is to be applied to the discharge of the promissory note.
3. When principle and interest both due:
When both principle and interest are due, the debtor can stipulate that a particular
payment made by him is to be apportioned to the principle, the interest remaining due. If
the creditor accepts the payment he must also accept the debtor’s appropriation. If he does
not like to do so, he must refuse to accept the payment. When there is no specification as to
whether it is towards interest or principal, payment is to be applied towards interest first
and then the balance to the principal.
4. Appropriation by creditor:
In the absence of express or implied direction by the debtor, the creditor can apply the
payment to any debt lawfully due from the debtor. It may be even a debt which is barred
by the limitation Act.
5. Appropriation by law:
Where neither the debtor nor the creditor has made any appropriation. Payment is to
be applied in discharge of the debts in order of the time. It is immaterial that the debts are
time- barred. If the debts are of equal standing, the payment shall be applied in discharge
of each proportionately.
Rule in Clayton’s case:
Rule in Clayton’s case applies where the parties have current account, that is, they have
an unbroken account between them. In such a case appropriation impliedly takes place in
chronological order. The payment is appropriated in the order in which the receipts and
payments take place. The first debit is cancelled by the first credit.
Rules in Hallett’s estate:
The rule in Hallett’s estate is as follows: “Suppose a man has an account in a bank in
which he keeps his own money as well as some money of which he is a trustee. He makes a

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series of deposits and withdrawals, in the course of which some trust funds are
misappropriated. The withdrawals are to be debited first to his own moneys and then to
the trust fund, and the deposits are to be credited first to the trust fund and next to his own
fund, whatever be the order of withdrawals and deposit’s.
6. Where the debtor does not intimate and the creditor fails to appropriate(section 61):
Where the debtor dose not expressly intimate and where the creditor fails to make any
appropriation, the rule is Clayton’s case will apply. That is, payment shall be applied in
discharge of the debts in chronological order. Chronological order means in order of time.
If the debts are of equal standing, the payment shall be applied in discharge of each
proportionately.
Contracts which need not be performed:
1. If the parties to the contract agree to “Novation” or “Alteration”, the original contract
need not be performed. (Section 62)
2. The promisee may dispense with performance by the promisor in whole or in part; the
promisee may extend the time for performance in lieu thereof;
In these situations the original contract stands discharged. It is called as “Remission”.
(Section 63)
3. The person at whose option a contract is voidable rescinds it. Then the other party need
not perform his promise. (Section 64)
4. The failure of the performance is caused by the promisee’s neglect or refusal. Then the
promisor will be excusedfor the non- performance of the contract. (Section 67)
Discharge of contract
Meaning:
Discharge of contract means termination of the contractual relationship between the
parties. That is, obligation created by the contract come to an end.
Modes of discharge:
1). By performance. 2). By agreement. 3). By subsequent impossible of performance.
4). By lapse of time. 5). By operation of law. 6). By breach. 7). By material alteration.
1. Discharge by performance:
This is the most usual way of discharge of contract. When the parties fulfill their
obligations, the contract is said to have been performed. If one party only performs his
promise, he alone is discharged. He acquires a right of action against the other who is guilty
of breach. Performance may be:
a. Actual performance:
Actual performance means that each party to a contract fulfils his obligation within
the time and the manner prescribed. The contract stands discharged.
b. Attempted performance:

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The promisor offers to perform his obligation. But he is unable to do so because the
promisee does not accept the performance. Therefore, tender is not actual performance. It
is only an offer to perform the obligation under the contract.
2. Discharge by agreement: (Section 62 and 63)
A contract is created by means of an agreement. It may also be discharged by another
agreement between the same parties.
For example: M sells a car to N with the condition that in should be returned within a
fortnight if it is found not functioning well. Consent to return the car is given to M at the
time of the formation of the contract.
i. By novation( Section 62):
Novation creates a new contract in exchange of the old contract. The new contract
may be between the same parties. Alternatively, it may be between different parties the
consideration being mutually the discharge of the old contract.
For example: M owes N Rs 50000. M enters into an agreement with N. M gives N a
mortgage of his estate for Rs 25000 in the place of the debt of Rs 50000. This is new
contract and extinguishes the old.
ii. By alteration (Section 62):
Alteration of a contract means a change in one or more of the terms of contract.
Any material alteration can take place only with the consent of the parties. Discharge of
contract takes place when the alteration. (a). is made by a party to the contract (b). is made
in material part.
For example: A enters into a contract with B for the supply of godown No1 by the first of
the next month. A & B may alter the terms of the contract by mutual consent.
iii. By rescission(Section 62):
Rescission means cancellation of the contract. Before the date of performance a
contract may be cancelled by agreement. So an agreement of rescission releases the parties
from their obligations. A contract may be rescinded by – (a). mutual consent or (b). by the
aggrieved party or (c). by the party whose consent is not free.
For example: A promises to supply certain goods to B 6 months after date. By that time,
the goods go out of fashion. A and B may rescind the contract.
iv. By remission (Section 63):
Remission means acceptance of a lesser sum than what was contracted for or a lesser
fulfillment of the promise made. The promisee may remit or give up a part of his claim.
For example: M owes N Rs 100000 under a contract. N accepts in satisfaction of the whole
debt Rs 45000. The whole debt stands discharged.
v. By waiver:
Waiver is giving up a right which a party is entitled to under a contract. Where a party
to a contract waives his right the other party is releasedfrom his obligations.
vi. By merger:

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Under merger, an inferior right accruing to a party under a contract mergers into a
superior right accruing to the same party under the same or some other contract.
For example: M holds a property under a lease. He later buys the property. M’s rights as a
lessee merge into his rights as owner.
3. Discharge by impossibility of performance:
Impossibility of performance of a contract may be of the following:
i. Impossibility known to the parties at the time of agreement:
Section 56 lays down that “an agreement to do an act impossibility in itself is void”.
This is known as pre- contractual or initial impossibility.
When an impossibility is known to the parties at the time of formation of the
contract, it is known as absolute impossibility. In such a case the agreement is void.
For example: M agrees to pay N Rs 50000 and N promises to bring for M stars from
heaven. The agreement is void.
ii. Impossibility unknown to the parties at the time of making of contract:
In this case both the parties at the time of making of contract are ignorant of the
impossibility. The contract is void on the ground of mutual mistake. If the promisor alone
knows of the impossibility of performance at the time of making the contract, he shall have
to compensate the promisee for any loss occasioned to him.
For example: M agrees to sell his horse to N. But the horse had already died at the time of
making the contract. This fact is not known to both the parties. The contract is void.
iii. Impossibility which arises subsequent to the formation of the contract:
This may be due to happening of certain events. Such event were neither in the
contemplation of the parties when they entered into agreement nor either of the parties are
responsible for causing the performance of the contract impossible. The contract will be
void as soon as such events make the performance of the contract impossible. The
impossibility must be either legal or physical. But it must not be commercial.
This is the impossibility caused by the circumstances beyond the control of the parties.
The parties are discharged from the further performance of the obligation arising under
the contract.
Doctrine of supervening impossibility:
Impossibility caused by the circumstances beyond the control of the parties after the
formation of the contract is known as doctrine of supervening impossibility. This principle
arises due to some reasons.
a).Destruction of the subject matter. b).Non- existence of a state of thing necessary for the
performance. c).Death or personal incapacity of the promisor d).Operation of law.
Discharge of contract by subsequently impossibility:

14
A contract of supervening impossibility is discharged in the following
circumstances.
i. Destruction of subject matter:
The subject matter of the contract is destroyed subsequent to the formation of the
contract without any default of the parties to the contract. The contract is discharged.
For example: A person contracted to deliver a part of specific crop of potatoes. The
potatoes were destroyed through no fault of the party. The contract was held to be
discharged.
ii. Non- existence of a state of things necessary for the performance:
A contract is entered into between two parties on the basis of a continued existence or
occurrence of a particular state of things. If the state of things ceases to exist the contract
stands discharged.
For example: P and Q contract to marry each other. Before the time fixed for the marriage
P goes mad. The contract becomes void.
iii. Death or personal incapacity of the promisor:
The performance of the contract depends upon the personal skill of the promisor. Such
contract is discharged on the illness or incapacity or death of that person. The man’s life is
an implied condition of the contract.
For example: An artist undertook to paint a picture for a certain price. But before he could
do so, he met with an accident and lost his right arm. The artist was discharged due to
disablement.
iv. Change of law:
A subsequent charge in law may render the illegal. The contract is deemed discharge.
Sometimes, the government takes some power under Act.
For example: M sold to N a specific parcel of wheat in a godown. Before the delivery could
be made, the godown was sealed by the government. The entire quantity was requisitioned
by the government under statutory power. The contract was held discharged.
v. Outbreak of war:
An agreement entered into with an alien enemy during the war is unlawful. It is void.
Contracts made before the outbreak of the war suspended during the war. They may be
revived after the war is over and if the nature of the contract so permits. In this connection,
it may be noted that the war is declared between the countries of the contracting parties.
Fro example: A contract to take in cargo for B at a foreign port. A’s Government
afterwards declares war against the country in which the port is situated. The contract
becomes void when the war is declared.
Cases not covered by supervening impossibility:
As a rules, impossibility of performance is not an excuse from performance. He who
agrees to do an act must do it or pay damages for not doing it. The promisor is not relived
from performing his part in all cases. Because there is a positive contract to do a thing. In
the following cases, the doctrine of supervening impossibility will not apply.

15
i. Difficulty of performance:
A contract will not be discharged by the mere fact that it has become more difficult of
performance. For example: A contracted with B to send certain goods from Madras to
Delhi in October. In September transport companies went on strike. Transport was
available at very high rates. The increase in freight rates did not excuse performance.
ii. Commercial impossibility:
A contract will not be discharged merely because of expectation of higher profits.
For example: M agrees to supply certain goods to N. Due to outbreak of war the price of
goods suddenly shoots up. M is not discharged from his liability to supply goods to N.
iii. Impossibility due to behavior of third person:
The promisor relies on the work of a third person for the performance of the contract.
If such third party creates impossibility, the contract cannot be performed.
For example: M enters into a contract with N for the sale of certain goods to be produced
by P. If does not manufacture the goods M is liable to N for damages.
iv. Strikes, lock- outs and civil disturbances:
Strikes, lock- outs and civil disturbances will not discharge a party from performing his
part of the contract. Strike is manageable as labour can be made available otherwise. Lock-
outs can be tackled. So impossibility is not absolute. So these events will not discharge a
contract. For example: M agreed to supply certain goods to N. the goods were to be
procured from Algeria. Due to riots and civil disturbances in that country goods could not
be procured. It was held that there was no excuse for the non- performance of the contract.
v. Partial impossibility:
A contract is entered into for several objects. The following of one of such objects does
not discharge the contract.
A company agreed to let a boat to H to view (a). the naval (ship) view at the coronation
and (b). to cruise round the fleet. Due to the illness of the king the naval review was
cancelled but the fleet was assembled. The boat, therefore, could sail round the fleet. Held
the contract was not discharged.
4. Discharge by lapse of time:
Sometimes, the lapse of time may also discharge a contract. The Indian Limitation Act,
1963 states as follows:
“A contract should be performed within a specified period, called period of limitation.
If it is not performed and if no action has been taken by the promisee in a Law Court
within the period of Limitation, he is deprived of his remedy at law”.
For example: Goods are sold without any stipulation as to credit. The price of goods sold
should be paid within three years of the expiry of period of credit. If the price is not paid
the creditor can file a suit against the buyer for the recovery of the price. If he does not do
so within three years, the debt becomes time- barred. If becomes irrecoverable.
5. Discharge by operation of law:
A contract terminates by operation of law in the following circumstances:

16
a. By death:
The performance of a contract is of personal nature. The death of the promisor
discharges the contract. In other types of contract, the rights and liabilities of the deceased
person pass on to the legal representatives of the dead man.
b. By insolvency:
When a person is adjudged insolvent he is discharged from all liabilities incurred
prior to his adjudication.
c. By merger:
Merger means that an inferior right contract merges into superior right contract.
The inferior right contract stands discharged automatically.
For example: A part time lecturer is made full time lecturer. Then the contract part time
lectureship is discharged by merged.
d. By unauthorized material alteration of the terms of a written agreement:
A material alteration made in a written contract will makes the whole contract void.
A material alteration changes the legal character of a document and the liabilities of the
parties to the contract.
For example: The amount to be received is altered on a promissory note by a creditor.
Then the pro note cannot be enforced against the debtor.
e. By rights and liabilities becoming vestedin the same person:
It has been observed by the learned judges that “where the rights and liabilities
under a contract vest in the same person, the contract stands discharged”.
For example: When a bill gets into the hands of the acceptor, the other parties are
discharged.
6. Discharged by breach of contract:
Breach of contract causes an end to the contract. Breach means failure of a party
to perform his or her obligation under a contract. So obligations created by a contract on
the part of each parties come to an end.
Kinds of breach of contract:
Breach of contract may be of two kinds:
a. Anticipatory breach or constructive breach: (Section 39)
Anticipatory breach means repudiation of an integral part of the contract by the
promisor before the actual due date of performance.
For example: M enters into a contract to supply N with certain articles on 1st June. Before
June 1, he informs N that he will not be able to supply the goods.
Causes of anticipatory breach:
i. Express repudiation of the contract:
A party to the contract communicates to the other party before the due date of
performance his intention not to perform.

17
For example: M agrees to employ N from 1st March. On 1st February, he writes to N that
he need not join the service. The contract has been express repudiated by M before the date
of its performance.
ii. Conduct one of the parties:
A party by his own voluntary act disables himself from performing the contract.
For example: A person contracts to sell a particular cow to another on 1st August. Before
the date he sells the cow to somebody else.
b. Actual breach of contract:
Actual breach of contract occurs under the following two circumstances:
i. At the time when the performance is due:
At the time when the performance is due, one party may fail to perform his obligation.
Then it is said that actual breach of contract occurs.
For example: M agrees to deliver to N 100 quintals of rice on 1st April. He does not deliver
rice on 1st April. There is a breach of contract.
ii. During the performance of the contract:
During the performance of the contract, one party may refuse to perform his
obligation. Then actual breach of contract occurs. This type of refusal may be:
a. Express: words/ act.
b. Implied: Impossibility created by the act of a party to the contract.
For example: A contracted with a Railway company to supply 5000 tons of railway chairs
at a certain price to be delivered in installments. After 2500 tons of chairs had been
supplied, Railway Company asked A to deliver no more. It was held that A could bring an
action for breach of contract.
Remedies for breach of contract:
What is a remedy?
A remedy is the means given by law for the enforcement of a right. A right will be of
no value if there were no remedy to enforce that right in the law court. Whenever is an
infringement of right, remedy is available.
What types of remedies are available? (or) kinds of remedies for breach of contract:
Remedies for breach of contract
Rescission Damages Quantum meruit Specific performance Injunction
I. Rescissionof the contract:
Meaning:
Rescissionmeans the setting aside or cancelling of the contract. The aggrieved party
may be allowed by the court to treat the contract at an end. He, thereby, terminates all the
liabilities under the contract.
For example: M promises N to supply 20 bags of rice on certain date. N agrees to pay the
price after the receipt of the goods. M does not supply the goods. N need not pay the price.

18
Where rescission is not allowed?
The court will not allow rescission of the contract in the following cases:
a. The party wishing to set aside the contract has expressly or impliedly ratified the
contract.
b. Without the fault of either party there is a change in the circumstances since the
making of the contract.
c. Only a part of the contract is sought to be set aside.
d. During the subsistence of the contract third parties have acquire rights in the
subject matter of the contract in good faith and value.
II. Damages:
What is damages?
Damages mean monetary compensation payable by the defaulting party to the
aggrieved party in the event of the breach of a contract.
Rule says that “compensation must be commensurate with the injury or loss sustained,
arising naturally from the breach”.
For example: Hadley vs Baxenfale. X’s mill was stopped by the breakdown of a shaft. He
delivered the shaft to Y, a common carrier. The common carrier was to deliver the shaft to
a manufacture to copy it and make a new one. X did not make known to Y that delay
would result in a loss of profits. By some neglect on the part of Y the delivery of the shaft
was delayed in transit. The delay was beyond a reasonable time. Consequently the mill was
idle for a longer period.
Types of damages:
Damages may be of four types-
1. Ordinary damages:
Ordinary damages arise in the ordinary course of events from the breach of
contract. These damages constitute the direct loss suffered by the aggrieved party. They
are estimated on the basis of circumstances prevailing on the date of the breach of the
contract. Subsequent circumstances tending to change the quantum of damages are
ignored.
For example: M contracts to pay a sum of money to N on a specified day. He does not pay
the money on that day. N in consequence of not receiving the money on that day, is unable
to pay his debts. He is totally destroyed. M is liable to make good to N only the principal
sum he contracted to pay with interest up to the day of payment.
2. Special damages:
These damages result from the breach of the contract under special circumstances.
They constitute the indirect loss suffered by the aggrieved party on account of breach of
the contract. They can be recovered only when the special circumstances, responsible for
the special losses were made know to the party at the time of making of the contract.
For example: P contract with Q to deliver a machine to Q on a fixed day for a specified
price. P does not deliver the price of machine as agreed upon. In consequence of this Q is

19
obliged to procure another at a higher price. P must pay to Q by way of compensation.
Such compensation is the difference between the contract price of the machinery and the
sum paid by Q for another.
3. Exemplary or vindictive damages:
Exemplary damages are heavy in amount. They are awarded only by way
punishment in the following cases:
a). Breach of a contract to marry. b). Dishonor of a cheques by a banker when there are
sufficient funds to the credit of the customer.
4. Nominal damages:
Nominal damages are quite in small in amount. They are not granted by way of
compensation for loss. They are awarded only for name sake. They are awarded simply to
recognise the right of the party to claim damages for the breach of the contract.
For example: In a contract of sale of goods, the contract price and the market price are
almost the same at the date of breach of the contract. Then the aggrieved party is entitled
to a nominal damages.
Liquidated damages and penalty:
What is liquidated damages?
Liquidated damages mean “a sum fixed up advance, which is a fair and genuine
pre-estimate of the probable loss that is likely to result from the breach”.
What is penalty?
Penalty means the amount named in the contract at the time of its formation. It is
disproportionate to the damages likely to accrue in the event of breach. Thus penalty does
not loss. It is a sort of pressure on the party used to prevent him from committing breach of
the contract.
Forfeiture or earnest money or security deposit:
What is earnest money?
“Earnest money is that money which is deposited as a security for the due
performance of a contract”.
Earnest money is deposited by the one party with the other party so as ensure the
former’s seriousness about the contract.
Earnest money is part of the purchase price when the transaction goes forward. It is
forfeited when the transaction falls through by reason of the fault or failure of the
promisor”. Security deposit is not appropriated towards the payment of price. It is kept by
promisee as security. Earnest money can be forfeited but security deposit cannot as its
forfeiture will amount to penalty.
For example: M agreed to sell a plot of land and a bungalow to N for a sum of Rs 112500.
As per terms of agreement the buyer paid Rs 1000 as earnest money and later paid Rs
24000 on obtaining the possessionof the bungalow. It was further provided in the
agreement that on failure of the buyer to pay the balance and getting the bungalow

20
registered in his name by a fixed date the sum of Rs 25000 paid so far would stand
forfeited. The agreement would be cancelled and the possessionwould be given back to the
seller. The buyer defaulted. The sellerforfeited the money. He brought action against the
buyer.
The Supreme Court allowed the sellerto forfeit Rs 1000 being earnest money. It also
allowed the sellerto retain Rs 24000 as a compensation for occupation and use of the
bungalow by the buyer.
3. Quantum meruit (Section 65 and 70):
What is quantum meruit means as much as merited or as earned or in proportion to the
work done.
This principle provides for payment of compensation under certain circumstances. It is
availed by a person who has rendered goods or services to another person who has
rendered goods or services to another person under a contract which could not be fully
performed.
The aggrieved party may file a suit and claim payment in proportion to work done.
Circumstances:
i. Where the work has been done in pursuance of a contract and which has been
discharged by the default of the tenant. For example: P agreed to write a volume of ancient
India to be published in a magazine owned by Q. For this he was to receive 1000 pounds on
completion. When he had completed part but not the whole Q abandoned the magazine. P
was entitled to damages for the breach of the contract. Quantum meruit is payable for the
part already completed.
ii. Where in pursuance of a contract the work has been done but it becomes void or is
discovered void. For example: P contract with Q to repair his house at a piece rate. After a
portion of the house was repaired the house is destroyed by lightening. The contract
becomes void and stands discharged because of the destruction of the house. P can claim
payment for the work done on a “quantum meruit”.
iii. Where a person enjoys benefit of non-gratuitous Act although there exists no express
agreement between the parties.
When services are rendered or goods are supplied by a person-
a. Without any intention of doing so gratuitously, and
b. The benefit of the same is enjoyed by the other party the latter must compensate the
former or restore the things so delivered.
For example: P, a trader leaves certain goods at Q’s house by mistake. Q treats the goods
as his own. He is bound to pay P for them.
i. A party who is guilty of breach of contract may also sue on a quantum meruit:
A party who is guilty of breach of contract can sue on a quantum meruit under the
following circumstances:

21
a. The contract must be of divisible nature.
b. The other party must have enjoyed the benefit of the part which has been performed.
For example: A common carrier has failed to take a complete consignment to the agreed
destination. He may recover pro-rata freight. He will of course be liable for breach of the
contract.
Limitations of the doctrine of quantum meruit:
a. There may be a contract which is not divisible into parts and a lump sum of money is
promised to be paid for the complete work. Part performance will not entitle the party to
claim any payment.
b. A person who himself in guilty of breach of contract cannot be allowed to claim any
payment under the doctrine of quantum meruit.
c. Any claim on quantum meruit can be entertained only when there is an evidence of an
express or implied promise to pay for the work.
4. Suit for specific performance:
Specific performance means “the actual carrying out of the contract as agreed”.
Under certain circumstances, a person aggrieved by a breach of contract can file a
suit for specific performance. Particularly speaking performance is allowed where
monetary compensation is not an adequate remedy.
For example: In contracts for the sale of a particular house monetary compensation is not
enough. Because, the injured party will not be able to get an exact substitute in the market.
In such a case, specific performance may be directed.
Exceptions:
In the following cases, specific performance will not be directed:
a. The monetary compensation is an adequate relief:
The courts refuse specific performance of a contract to lend or to borrow money or
where the contract is for the sale of goods easily procureable elsewhere.
b. The court cannot supervise the actual execution of the contract:
For example: A building construction needs supervision. In most cases, damages afford an
adequate remedy.
c. The contract is for personal service:
In contracts to marry or to paint a picture injunction order is granted in place of
specific performance.
d. One of the parties to the agreement does not possess competency to contract:
A minor cannot succeedin an action for specific performance. Because he cannot
himself he sued for breach of contract.
5. Injunction:
What is injunction?
The injunction is a preventive relief. It is mostly appropriate in cases of anticipatory
breach of contract where damages would not be an adequate relief.

22
Indian contract Act has stated that injunction is an order of a court restraining a
person from doing a particular act.
It is a mode of securing the specific performance of the negative terms of the contract.
For example: M agrees to sing at N’s theatre and to sing no where else for a certain period.
After wards M contracted with P to sing at P’s theater. M refuse to sing at N’s theater. The
court refused to order specific performance as the contract was of a personal nature. But it
granted an injunction against M to restrain him from singing any where else. (Wather Bros
Vs Nelson)
Quasi - Contract
Meaning:
An agreement forms the very basis of a contract. But in certain cases evenwhen
there is no agreement, the law imposes obligations of contractual nature on one party and
confers rights in favour of the other. These contracts are constituted by law. Therefore,
they are termed as Quasi – Contracts.
Features of a Quasi – contract:
The salient characteristics or features of a Quasi - contract, are as under:
1. It is imposed by law and does not arise from any contract.
2. It is not a true contract but an obligation imposed by law.
3. It arises from a duty of a party and not by promise of any party.
4. It always gives rise to right in personam, not in rem.
5. It rests on the principle of equity that a person should not be allowed unjustly to
enrich himself at the expense of another.
6. The right under it is always a right to money. Generally, though not always, to a
liquidated sum of money.
7. A suit for its breach may be filed in the same way as in the case of a complete
contract.
Distinction between Quasi – contract and contract:
Basis Quasi – contract Contract
1. Obligation Obligation is imposed by law Obligation is mutually created
by the parties
2. Essentials of contract It does not possess all the essentials
of a contract
It possess all the essentials of
contract
3. Basis It is found upon the principle of
equity
It is founded upon the law of
contract
4. Formation The law imposes upon the parties It is intentionally formed by
the parties.
Types of Quasi – Contracts:
There are five kinds of quasi – Contractual obligations. They are-
1. Claims for necessaries supplied:(Section 68):

23
An incapable person is one who is incapable of entering into a contract or whom he is
legally bound to support. If an incapable person is supplied by another person with
necessaries, he is entitled to be reimbursed from the property of such incapable person.
For example: P supplies Q, a lunatic with necessaries suitable to his condition in life. P is
entitled to be reimbursed from Q’s property.
2. Payment by an interested person:(Section 69):
“A person who is interested in the payment of money which another is bound by law to
pay and who therefore pays it, is entitled to be reimbursed by the other”.
For example: Hazari Lal vs Naurang Lal , B holds land in Bengal on a lease granted by A,
a zamindar. The revenue payable by A to the government was in area. Consequently the
land was advertised for sale by the government. Under the revenue law, the consequence of
such sale will be annulment of B’s lease. B in order to prevent the sale of the land pays to
the government the sum due from A. A bound to make good to B the amount so p[aid.
The claim under this section will be valid only when the following conditions are satisfied:
a. Interest in making payment:
It is essential that the person making the payment must have interest in such payment.
b. Obligations:
Existence of obligation to pay the money is necessary. The obligation may be contractual.
c. Payment to another.
d. Bonafide payment.
3. Benefit of non- gratuitous acts (Section 70):
“Where a person lawfully does anything for another person, or delivers anything to him
not intended to do so gratuitously, and such other person enjoys the benefit thereof, the
later is bound to make compensation to the former in respect of, or to restore, the thing so
done or delivered”. For example: A saves C’s property from fire. A is not entitled to
compensation from C, if the circumstances show that he intended to act gratuitously.
4. Responsibility of a finder of goods (Section 71):
A finder of goods means a person who finds goods belonging to another and takes them
in his custody.
a. Liability of finder of goods:
The finder of goods must try to find out the real owner of the goods. He must not
appropriate the property to his own use. If the real owner of the goods is traced out, he
must restore the goods to him on demand.
Till the goods are in possessionof the finder, he must take reasonable care of the goods.
b. Rights of the goods:
i. Till the true owner is found, the finder can retain possessionof the goods.
ii. He is entitled to receive from the true owner all expenses incurred by him for preserving
the goods or finding the true owner.
iii. He has a lien on the goods for the money so spent. That is, he can refuse to return the
goods to the real owner until these moneys are paid. He is not entitled to file a suit for the

24
recovery of such sums. But he has a right to file a suit against the owner to recover any
reward. Recovery of reward is possible only when the finder came to know the offer of the
reward before finding out the goods.
5. Money paid or things delivered by mistake or under coercion: (Section 72)
“A person to whom money has been paid or anything delivered, by mistake or under
coercion, must repay (or) return it.For example: M pays some money to N by mistake. It is
really due to Q. N must refund the money to M. Q cannot recover the money as there is no
privity of contract between N and Q.

Business laws unit 2

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