Term Report

Business Law
Discharge of Contract

Submitted to: Sir Muhammad Zia Kiyani

Submitted by: Mushal Jamil- 9284

Dated: 8th December, 2010

LETTER OF TRANSMITTAL

Sir Muhammad Zia Kiyani Instructor Institute Of Business Management Karachi Dear Sir: I am presenting this report that you had authorized me to write for the Fall Semester 2010 and have worked on this report with the best information and effort possible. I have discussed an important segment of business law that is Discharge of contract and its complete types. It has been a privilege to work on this report for which I am grateful to you. Should you have any query concerning this report, I will be happy to discuss them with you.

Sincerely, MUSHAL JAMIL

ACKNOWLEDGEMENT

It has been a pleasure to be a student of Sir Muhammad Zia Kiyani. I would like to thank Sir Muhammad Zia Kiyani for giving us the guidance and confidence to be able to complete this report. Most importantly his lectures have been very interesting and amazingly he has made Business Law a very interesting subject. We have been lucky to have the opportunity to be his student. His teachings have opened new portals for us in terms of experience, knowledge and professionalism. We have gained a lot of valuable experience in this course which will benefit us throughout our careers. As his student we have had an opportunity to gain insight and exposure into the real business world.

Discharge of Contract

When the rights and obligations arising out of a contract are extinguished, the contract is said to be discharged. A contract may be discharged in any of the following ways:

y y y y y y

By Performance (Actual or Attempted) By Mutual Consent or Agreement By Subsequent or Supervening Impossibility or Illegality. By Lapse of Time By Operation of Law By Breach of Contract

1. DISCHARGE BY PERFORMANCE:
y y y When a contract is duly discharged by both the parties, contract comes to a happy ending and nothing more remains, it is discharge or termination of contract by due performance. But if one party to the contract alone performs his performance he alone is discharged and gets a right of action against the other party who is guilty of breach. Performance of contract is the principal and most usual mode of discharge of a contract. Performance may be Actual or Attempted.

Actual Performance:
y y All the parties to the contract fulfill their obligation within in the time and manner prescribed. Attempted Performance or Tender:

Sometimes it so happens that the promisor offers to perform his obligation under the contract at the proper time and place but the promisee does not accept the performance. This is known as Attempted Performance or Tender, Thus a tender of performance is equivalent to actual performance. It excuses the promisor from further performance and entitles him to sue the promisee for the breach of contract. A valid tender thus discharges the contract.

2. DISCHARGE BY MUTUAL CONSENT OR AGREEMENT (Sec62,63)

Since a contract is created by means of an agreement, it may also by discharged by another agreement between the same parties in any of the following manner: y Novation: Novation occurs when a new contract is substituted for an existing contract, either between the same parties or between different parties, the consideration mutually being the discharge of old contract. However, novation cannot be compulsory, it can only be by mutual consent of all parties. The new contract must be valid and enforceable, else the original contract revives. (Mahabir Prasad vs Satya Narain 1963, AIR, Patna.

y Alteration:
Alteration of a contract means change in one or more material items of contract such as change in amount of money to be paid change in rate of interest etc. If such alteration in written contract is done by mutual consent, the original contract is discharged and in its place comes new altered contract. Immaterial alteration such as correcting a clerical error in figures or spelling of the name, has no effect on the validity of the contract and does not amount to alteration in technical sense. The difference between Novation and Alteration is that in Novation there may be change in parties also while in case of Alteration parties remain the same, only the terms of contract are altered.

y Rescission:
A contract may be discharged before the date of performance, by agreement between the parties to the effect that it shall no longer bind them, and the parties are released from their obligation arising out of the contract. Rescission is thus mutual cancellation of the contract.

y Remission:
Remission may be defined as the acceptance of a lesser sum than what was contracted for or a lesser fulfillment of promise made.

3. DISCHARGE BYSUBSEQUENT /SUPERVENING IMPOSSIBILITY OR ILLEGALITY:

y Impossibility at the time of contract:

E.g. an agreement to discover treasure by magic, to make alive a dead man. In such case there is no contract to terminate because it being an agreement void ab-initio by virtue of Section 56 Para 1.

Subsequent impossibility:

In this case the impossibility supervenes after the contract has been made, which is material to discharge of contract. A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful (Sec 56 Para 2)

Cases and Application of Supervening Impossibility: y Destruction of subject matter:

When the subject matter of the contract, subsequent to its formation, is destroyed without the fault of promisor or promisee, the contract is discharged. Note that it is only when specific property or goods which are destroyed cannot be regained.

Failure of ultimate purpose:

Where the ultimate purpose for which the contract was entered into fails, the contract is discharged, although there is no destruction of any property affected by contract and the performance of contract remains possible in literate sense.

Death or personal incapacity of promisor:

Where the performance of contract depends upon the personal skill or qualification or existence of a given person, the contract is discharged on the illness or incapacity or death of that person.

Change of Law:

A subsequent change in law may render the contract illegal and in such cases the contract is deemed discharged.

Outbreak of war:

All contracts entered into with an alien enemy during the war are illegal and void ab-initio. Contracts entered before the outbreak of war are suspended during the war and may be revived after the war is

over provided they have not already become time barred. It may be noted that if the war is declared between the countries of contracting parties then only the contract is suspended during war.

4. DISCHARGE BY LAPSE OF TIME:

The Limitation Act lays down that in case of breach of contract legal action should be taken within specified period, called the period of limitation, otherwise the promisee is debarred from instituting a suit in a court of law and the contract stands discharged. For example, the period for limitation for simple contracts is 3 years under the Limitation Act, and therefore on default by a debtor if creditor does not file a suit of recovery against him within 3 years of default, the debt becomes time barred on expiry of 3 years and the creditor will be deprived of his remedy at law. This in effect implies discharge of contract.

5. DISCHARGE BY OPERATION OF LAW:

A contract terminates by operation of Law in following cases:

y Death:
Where the contract is of personal nature, the death of a promisor discharges the contract. In other contracts the rights and liabilities of deceased person pass on to legal representatives.

Insolvency:

A contract is discharged by the insolvency of one of the parties to it when an Insolvency Court pass on order of discharge exonerating the insolvent from liabilities on debt s incurred prior to his adjudication.

Merger:

Where the inferior right contract merges into a superior right contract, the former stands discharged automatically.

Unauthorized material alteration:

A material alteration made in a written document or contract by one party without the consent of other will make the whole of the contract void. Thus where the amount of money to be received is

altered or an additional signature is forged on a promissory note by the creditor, he cannot bring a suit on it and the pro-note cannot be enforced against the debtor even in its original shape. The effect of making such an alteration is exactly the same as that of cancelling the contract. However, the document, though altered, can be used as proof of the transaction and the creditor may be allowed to claim refund of money actually advanced by him.

6. DISCHARGE BY BREACH OF CONTRACT:

Breach of contract by a party thereto is also a method of discharge of a contract, because breach also brings to an end the obligations created by a contract on the part of each of the parties. However, the aggrieved party i.e. the party not at fault can sue for damages for breach of contract as per law, but the contract as such stands terminated.

Types of Breach of Contract:

I. Anticipatory Breach:
An anticipatory breach of contract is a breach of contract occurring before the time fixed for performance has arrived. It may take place in TWO ways: y Expressly by words spoken or written: Here a party to the contract communicates to the other party, before the due date of performance, his intention not to perform. y Impliedly by conduct of one of the parties: Here a party by his own voluntarily act disables himself from performing the contract.

II. Actual Breach:

Actual breach may also discharge a contract. It occurs when a party fails to perform his obligation upon the date fixed for performance by the contract. It is important to note that there cannot be Actual breach of contract by reason of non-performance so long as time of performance has yet not arrived. Actual Breach entitles the party not in default, to elect to treat the contract as discharged and to sue the party at fault for damages for breach of contract.

y Effect of an Anticipatory Breach: Where there is an anticipatory breach of contract, the promisee is excused from performance or from further performance. Further it gives the option to the promisee (the aggrieved party) whereby: He may either treat the contract as rescinded or sue the other party for damages for breach of contract immediately without waiting until the due date of performance.

REMEDIES OF BREACH OF CONTRACT

When a contract is broken the party who suffers from such breach is entitled to the following relieves: 1. Rescission of the contract: He would not be required to perform his promises. Example: A, an advocate promises to plead B s case in the court of law if B gets him (A) a table before the date of hearing. B does not deliver a table to A. A can rescind the contract and becomes free from the obligation of pleading B s case. 2. Suit for Damages: The injured party can also file a suit for compensation for the loss it has suffered because of the breach of the contract. Example: A contracts to buy B s car for Rs. 60,000 but B breaks his promise. B must pay to A, by way of compensation, the excess, if any, of the contract price which B can obtain for the car at the of the breach of promise. 3. Suit upon Quantum Meruit: The expression Quantum Meruit means as much as earned , i.e. reasonable remuneration for the services performed. The rule is invoked where there is no agreement for remuneration for the work done. Thus where a party to the contract has performed part of his promise and is prevented by the act or conduct of the other party, from completing it, he may sue on a Quantum Meruit. Example: A agreed to write a story for B, which B would publish in installments in his weekly magazine. B agreed to pay a lump sum amount for the entire story. After a few instalments were published, B abandoned the magazine. Held A could recover on Quantum Meruit for the work done under the contract. 4. Suit for Specific performance of the contract: Specific performance means the actual carrying out of the contract. In certain cases the court may direct the party in default to fulfill his promise. This remedy may be granted to the injured 161 party instead of or in addition to the awarding of damages. It is usually granted where monetary compensation is not an adequate remedy. But it would not be granted if the court cannot supervise the contract (e.g. mining operations)or if the contract is for personal services. Example: A, a renowned painter agrees to paint a picture for B. Later on he refuses to do so. B

pleads with the court that he cannot get such a painting with any amount of money. Even if court is satisfied with the plea of B, it cannot grant specific performance because A cannot be compelled to paint a picture. 5. Suit for Injunction: Injunction is the specific performance of the negative terms of the contract. It is an order of the court prohibiting a party from doing something. Example: A agrees to do a musical program at the theatre of B on the eve of the Christmas and also agrees not to perform in any other theatre on that day. Later on A agrees to perform in the theatre of P.B cannot enforce a specific performance of A s musical program in his theatre. (Because court cannot effectively supervise it) but he can ask the court to restrain A from performing in P s theatre.

KINDS OF DAMAGES
(1) General or Normal Damages: The amount of general or ordinary damages is restricted to only that loss which arises :(a) naturally and (b) in the usual course of things from such breach (Sec. 73) (2) Special Damages means loss which would result not in the ordinary course, but because of special circumstances and the parties know, at the time 163 when they entered into the contract, that this is likely to result from the breach of it. (3) Liquidated Damages: (Sec. 74) When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for . Example: A contracts with B to pay B Rs.10000, if he fails to pay B Rs. 9000 on a given day. A fails to pay B Rs.9000 on that day. B is entitled to recover from A such compensation, not exceeding Rs. 10000, as the court considers reasonable. (4) Vindictive or exemplary Damages: As explained earlier, damages for breach of contract are granted to compensate for the loss suffered by the plaintiff and not with a view to punish or penalize the wrong done by the defendant. Hence the damages granted are not vindictive, exemplary or punitive . However there are following two exceptions to this general rule. (i) In case of a breach of promise to marry. (ii) In case a banker, wrongfully, dishonoring the cheque of a customer having sufficient funds to his credit. The rule of damages . A stipulation for increased interest from the date of default may be a stipulation by way of penalty [Sec.74].

(5) Nominal Damages: Where the aggrieved party does not suffer any monetary loss, sometimes the Courts grant a nominal amount like cost etc. just to establish that the plaintiff has won the case against the defendant.

RULES REGARDIG DAMAGES

Damages under Contract act are awarded by way of compensation for loss to the plaintiff only and not by way of punishment to the guilty party. Following are the rules for the damages: (1) When a contract is broken, only those damages which naturally arose in the usual course of things from such breach can be recovered. These are known as general or ordinary damages. (2) In certain cases even special damages can also be recovered. Special damages are those which the parties knew, when they made the contract to be likely to result from the beach of it. (Sec. 73) 162 (3) Compensation for the breach of quasi contract would be the same as the compensation for the breach of contract. (4) In estimating the loss of damage, arising from a breach of contract, the means which existed of remedying the inconvenience caused by the nonperformance of the contract must be taken into account . (5) Under a contract for the sale of goods the measure of damages is the difference between the contract price and the market price at the date of breach. (6) Damages are not awarded with a view to punishing the defendant except (a) For a breach of promise to marry and (b) for a wrongful dishonor by the banker of cheque of the customer. These are known as Exemplary or Vindictive Damages. (7) In case the court finds that though the defendant has been guilty of a breach of contract, the breach has not caused any appreciable loss to the plaintiff, it awards only nominal damages, like costs of the suit etc. (8) Even if the parties agree about damages for breach of contract, only actual damages, not exceeding the agreed amount, can be recovered. These are known as liquidated damages (Sec.74) (9) Plaintiff would not be denied damages for the loss suffered on the ground that the assessment of damages is difficult. (Sec.75). (10) Mitigation of loss: it is the duty of the plaintiff to take steps to minimize the loss resulting from breach.

(11) Cost of suit: The plaintiff can recover not only damages for the loss sustained but also costs of getting the decree of damages. (12) Interest as damages: As regards breach of contract of sale, the court is empowered to award interest, at such rate as it thinks fit, on the amount of the price.