Discharge of Contract and Remedies for Breach notes — Unit 5

A contract is 'discharged' when the rights and obligations created by it come to an end.

⇒1.1 Modes of Discharge

• By Performance: The most common method. When both parties fulfill their respective obligations.
• By Breach: When a party refuses to perform, or disables himself from performing.
• By Lapse of Time: If not performed within the period specified by the Limitation Act.
• By Operation of Law: Death, Insolvency, or unauthorized material alteration of the document.
• By Impossibility: Initial or subsequent impossibility (Doctrine of Frustration).
• By Mutual Agreement: (Novation, Rescission, Alteration).

⇒1.2 Discharge by Mutual Agreement (Section 62)

'If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed.'

Section 56 deals with contracts to do impossible acts. Under English law, this is called the Doctrine of Frustration.

• Initial Impossibility: An agreement to do an act impossible in itself is void ab initio. (e.g., A agrees to discover treasure by magic).
• Subsequent Impossibility: 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.

⇒2.1 The Landmark English Case

⇒3.1 Grounds for Frustration

Courts apply Section 56 strictly in the following scenarios:

• Destruction of Subject Matter: Like the music hall in Taylor v. Caldwell.
• Death or Personal Incapacity: If a famous singer contracts to sing and falls severely ill, the contract is frustrated.
• Declaration of War: Contracts with alien enemies become void or suspended.
• Change in Law: A factory owner contracts to supply sugar, but the government suddenly bans the sale of sugar by private factories.

⇒3.2 What is NOT Frustration?

When a contract is broken, the injured party has several remedies available under law and equity.

• 1. Rescission: Treating the contract as cancelled and refusing further performance.
• 2. Suit for Damages: The most common remedy (compensation for monetary loss).
• 3. Suit upon Quantum Meruit: 'As much as is earned'. Claiming payment for the portion of work already done.
• 4. Suit for Specific Performance: An equitable remedy under the Specific Relief Act where the court orders the breaching party to actually perform the promise (granted when monetary damages are inadequate, e.g., sale of a unique painting).
• 5. Suit for Injunction: A court order restraining a party from doing what they promised NOT to do.

Damages are monetary compensation awarded to the injured party to put them in the financial position they would have been in if the contract had been properly performed.

⇒5.1 Types of Damages

• Ordinary Damages: Direct losses (e.g., difference between contract price and market price).
• Special Damages: Indirect losses (like lost profits) which can be recovered ONLY if special notice was given to the other party at the time of contract.
• Vindictive / Exemplary Damages: Given to punish the breaching party. Granted only in two cases: Breach of promise to marry, and wrongful dishonor of a cheque by a bank.

Often, parties write a clause in the contract stating: 'If party A breaches, he will pay Rs. 50,000 to party B.' How do courts treat this pre-decided amount?

⇒Summary of Key Takeaways

• A contract can be discharged by performance, mutual agreement (Novation), or impossibility (Frustration).
• Section 56 covers subsequent impossibility. It applies to destroyed subjects, death, or change in law (Taylor v. Caldwell). It does NOT apply to mere commercial hardship (Satyabrata Ghose).
• Damages are meant to compensate, not punish.
• The rule in Hadley v. Baxendale limits damages to natural losses and foreseeable special losses.
• Under Section 74, Indian courts grant 'reasonable compensation', ignoring the distinction between liquidated damages and penalty.

⇒University Exam Tips for this Unit

• Doctrine of Frustration: This is a guaranteed essay question. Start by defining Section 56. Cite the English origin (Taylor v. Caldwell). Then, crucially, cite the Indian Supreme Court view in Satyabrata Ghose to explain that commercial difficulty is not frustration.
• Calculation of Damages: If a problem asks how much compensation should be paid, you MUST apply the two rules of Hadley v. Baxendale. Specifically mention whether the loss was 'too remote' or not.
• Novation: For short notes, explicitly state that novation requires the mutual consent of all parties and results in the complete extinguishment of the old contract.