Session 4
Discharge of Contract- breach and its remedies
Special Contracts- Contracts of Indemnity and
Guarantee
Discharge of Contract
What is Performance of contract?
Performance of contract means that both the parties -
promisor and the promisee - have fulfilled their
respective obligations, which the contract placed upon
them.
A visits a stationery shop to buy a calculator. The seller
delivers the instrument and A pays the price. The
contract is said to have discharged by mutual
performance.
Discharge of a Contract
This implies the completion of contractual obligations. This is because
when the parties originally entered into the contract, the rights and duties
in terms of contractual obligations were set up. Consequently, when those
rights and duties are put out then the contract is said to have been
discharged.
Once a contract stands discharged, parties to it are no more liable even
though the obligations under the contract remain uncompleted.
Modes of Discharging a Contract
A contract is deemed to be discharged, that is concluded and no longer
binding, in the following circumstances:
• Performance
• Agreement
• Lapse of Time
• Operation of Law
• Impossibility of Performance
• Breach of contract
Modes of Discharging a Contract
1. Discharge by Performance. Where both the parties have
either carried out or tendered (attempted) to carry out their
obligations under the contract, this is referred to as discharge of
the contract by performance. The overwhelming majority of
contracts are discharged in this way.
2. Discharge of Contract by Substituted Agreement. A contract
emanates from an agreement between the parties. Thus it
follows that the contract must also be discharged by
agreement. Therefore, what is required, inevitably, is mutuality.
Discharge by substituted agreement arises when a contract is
abandoned, or the terms within it are altered, and both the
parties are in conformity over it.
Modes of Discharging a Contract
Discharge of Contract by Substituted Agreement may occur through
Novation: (in place of old contract new contract enters into
consideration,
Rescission (Cancellation of contract by any party or all party).
Alteration (Change in one or more terms of contract in mutual
consent).
Remission: (accepting a lesser consideration than agreed). Waiver
(after a party fail to perform, the other party forgoes its right to enforce
the contract).
Merger: (inferior rights gets converted to superior rights-e.g. A took B’s
house on lease but before the end of the lease B purchase the A’s
house. Hence the contract gets terminated)
Modes of Discharging a Contract
3. Discharge of a contract by Lapse of Time:
If the promisor fails to perform and the promisee fails to take
action within this specified period, then the latter cannot seek
remedy through law. It discharges the contract due to the lapse of
time. (Loan repayment)
4. Discharge of contract by operation of law:
The contract is said to be discharged by operation of law when
the parties’ contractual duties are terminated due to the
involvement of the law.
The term ‘operation of law’ refers to the components of the law
that are automatically given.
Modes of Discharging a Contract
5. Impossibility of Performance:
Discharge of contract by impossibility of
performance usually occurs when the contractual duty
cannot be performed because of death, illness, or a
reason caused by the other party.
Breach of Contract and Remedies
What is Breach of Contract
A breach of contract is refusal by one party to abide by its
terms, without lawful excuses such as, impossibility of
performance, defective or even late performance by the
other party etc.
Many commercial agreements contain express provisions
for remedies available to the aggrieved party. For
example, in a contract for the sale of goods, the buyer
may be entitled to ask the seller to make good or replace
defective items. By incorporating such a clause, the
contracting parties, perhaps, intended to displace any
rights and remedies provided by law, which are not
specified in the contract.
Contd.
Remedies for Breach of Contract
A remedy is a relief provided to an aggrieved party
should the other side commit a breach. Once a party
fails to perform or performs inadequately, the other
(non-breaching) party can choose one or more of several
remedies.
The most common remedies available to an aggrieved
party are: Rescission, Damages, Specific performance,
Injunction, and Quantum Meruit.
Remedies for Breach of Contract
Rescission is the revocation of a contract.
When a party to a contract has refused to perform, or disabled
himself from performing in its entirety, the promisee may put an
end to the contract.
In such a case, the other (aggrieved) party can refuse further
performance and is absolved of all of its obligations under the
contract.
A promises to supply a PC for B’s office on a certain date.
However, A fails to deliver the computer on the agreed date. B is
absolved of the liability of paying the price and can rescind the
contract.
Damages
A breach of contract entitles the non-breaching or injured
party to sue for monetary damages besides rescinding
the contract. Damages are designed to compensate the
aggrieved party for the loss sustained in the bargain.
When a contract has been broken, the aggrieved party
is entitled to receive, from the breaching party such
damages.
Specific Performance
Specific performance is a decree issued by the court, which orders the
party accused of breaching a contract to perform his obligations under
the contract. Where damages represent inadequate/unjust remedy (for
example, where the subject matter of the contract is unique or where
there are no standards to ascertain the quantum of loss) the non-
breaching party may approach the court for the grant of an order for
specific performance of the contract.
The court exercising its discretion it takes into account factors such as:
Whether the person seeking performance is prepared to perform his
side of the contract (Chappell vs Times Newspapers Ltd)
Whether the person against whom the order is sought would suffer
hardship in performing it.
The difference between the benefits that the (court) order would give
to one party and the cost of performance to the other (Tito vs
Waddell).
Injunction
An injunction is a court order directing a person to do or
refrain from doing some specified act, which, of course, has been
the subject matter of a contract. Like specific performance, an
injunction is an equitable remedy and is awarded in circumstances
where damages would not be an adequate remedy to compensate
the claimant.
For example, A factory begins to allow noxious fumes to
escape from its chimney, affecting the health of people in the
neighbourhood. Damages would be inadequate, as the residents
would want the emission of fumes to stop altogether. This can
therefore be remedied by an injunction order.
Quantum Meruit
Quantum Meruit is a Latin term meaning, 'as much as is merited' or 'as
much as earned'. In the context of Contract Law, it means something along
the lines of ‘reasonable value of services rendered’.
The concept of quantum meruit applies to the following situations:
When a person employs (impliedly or expressly) another person to do
work for him, without any agreement as to his compensation, the law
implies a promise from the employer to the workman that he will pay for
the services, as much as the workman may deserve or merit.
When there is an express contract for a stipulated amount and mode of
compensation for services, the plaintiff cannot abandon the contract and
resort to an action for a quantum meruit. However, if there is a total
failure of consideration, the plaintiff has a right to elect to repudiate the
contract and then seek compensation on a quantum meruit basis.
Contd.
Quantum Meruit
If a contract is divisible and a party to a contract is prevented from
fulfilling its contractual obligations by the other party then obviously
he will not be in default. For example, in a building contract, if should
the owner prevent the builder from completing, like not allowing him
to enter the construction site, the builder can recover a reasonable
price for the work done on a quantum meruit basis.
If an indivisible contract is completely executed, but badly, the
person who has performed will be entitled to a lump sum less
deduction to make good the defect in the performance.
In all the above cases, the claim is not based on the original
contract, but on the implied promise by the other party arising from
the acceptance of an executed contract.
Quasi Contract: Other Remedies
• The word ‘Quasi’ means pseudo. Hence, a
Quasi contract is a pseudo-contract.
• Quasi Contract are the contracts which are not
founded on actual promises
• Sections 68 – 72 of the Indian Contract Act,
1872 detail five circumstances under which a
Quasi contract comes to exist. Remember,
there is no real contract between the parties
and the law imposes the contractual liability
due to the peculiar circumstances.
• Example ?? Contd.
Quasi Contract: Other Remedies
Requirements
Certain aspects must be in place for a judge to issue a quasi
contract:
•One party, the plaintiff, must have experienced a loss as a
result of a transfer.
•The defendant must have or acknowledged receipt of and
retained the item of value, but made no effort or offer to
pay for it.
•The plaintiff must then demonstrate through burden of
proof why the defendant receive an unjust enrichment.
•The item or service cannot have been given as a gift.
•The defendant must have been given a choice to accept or
deny the benefit.
Special Contract
Contract of Indemnity
The term 'indemnity' indicates protection against some loss or
damage.
When a person compensate the party which has suffered some
loss, a contract of indemnity results in between the two.
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.’ [Section 124]
For example- A promises to deliver certain goods to
B for Rs. 2,000 every month. C comes in and
promises to indemnify B's losses if A fails to so
deliver the goods. This is how B and C will enter
into contractual obligations of indemnity
Contract of Indemnity
Essentials of a Valid Contract of Indemnity
1. Under a contract of indemnity, the indemnifier promises to make
good the loss or to compensate the party (indemnified) who has
suffered some loss.
2. Being a kind of contract, a contract of indemnity must have all
the essentials of a valid contract such as offer, acceptance,
competency of parties etc.
3. A contract of indemnity may be express or implied. In an auction
sale, there is an implied promise to indemnify the auctioneer for
any loss, which he may suffer on account of defective title of the
owner of the goods.
4. A contract of indemnity is primarily a contingent contract. The
liability of the indemnifier arises only in the occurrence of the
contingency i.e., when the indemnity holder suffers a loss.
5. The liability of an indemnifier commences as soon as the liability
of the indemnity holder to pay becomes clear and certain.
Rights of an Indemnity Holder
The indemnity holder, acting within the scope of his authority, is
entitled to recover from the indemnifier the following amounts:
1. All damages which he may be compelled to pay in any suit in
respect of any matter to which the promise to indemnify applies.
2. All costs which he may be compelled to pay in any such suit if, in
bringing or defending it, he did not contravene the orders of the
promisor, and acted as it would have been prudent for him to act
in the absence of any contract of indemnity.
3. All sums which he may have paid under the terms of any
compromise of any such suit, if the compromise was not contrary
to the orders of the promisor, and was one that was prudent for
the promisee to make in the absence of any contract of indemnity,
or if the promisor authorized him to compromise the suit.
Contracts 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.
for example, pay a debt.
‘A contract of guarantee is a contract to perform the promise, or
discharge the liability, of a third person in case of his default. [S
126]
The person who gives the guarantee is called the 'surety',
the person in respect of whose default the guarantee is given is
called the 'principal debtor', and the person to whom the
guarantee is given is called the 'creditor'.
A guarantee may be either oral or written. [S 126]
A applies for shares in a public limited company and B assures the
company that if A does not pay the calls, he (B) will. This is a
Incapacity of the Principal Debtor
It is true that the parties to a contract of guarantee should
be competent to contract. However, the incapacity of the
principal debtor does not affect the validity of a contract
of guarantee.
A principal debtor may be a minor, in such a situation the
surety would be regarded as the principal debtor and he
will become personally liable to pay.
In that case the contract between the creditor and the
surety is treated as a primary and independent one, and
not a collateral. Therefore, the requirement is that the
creditor and the surety must be competent to contract.
Differences between Contract of
Guarantee and Contract of Indemnity
S. Point of Contract of Indemnity Contract of Guarantee
No. Differenc
e
1. Parties A contract of indemnity A contract of guarantee is a
requires the concurrence of tri-partite agreement,
only two parties, viz., the which contemplates three
indemnifier and the persons, the principal
indemnity-holder debtor, the creditor, and
the surety.
2. Object The object of a contract of The object of a contract of
indemnity is to make good guarantee is to enable a
the loss or to compensate person to obtain a loan,
the party that has suffered goods on credit, or even
some loss. employment.
Differences between Contract of
Guarantee and Contract of Indemnity
S. Point of Contract of Indemnity Contract of Guarantee
No Differenc
. e
3 Nature of The contract of indemnity The contract of guarantee is for
Contract is for the re-imbursement the security of the creditor. The
of the loss. The indemnifier surety undertakes to discharge
promises to save the the existing liability of the
indemnity-holder from a principal debtor, which is not
contingent risk. contingent, but is subsisting.
4 Nature of The indemnifier undertakes The surety undertakes to be
Liability an independent liability. liable when the principal debtor
fails to pay. That is, the liability
of the surety is collateral.
Differences between Contract of Guarantee and
Contract of Indemnity
S. No. Point of Contract of Indemnity Contract of Guarantee
Difference
5. Independe Indemnifier acts The surety gives guarantee
nce of the independently. only at the request of the
promisor principal debtor.
6. Right to The indemnifier cannot If the principal debtor fails to
sue third sue third parties in his pay, the surety, after he has
parties own name unless there discharged the debt, can
be an assignment in proceed against the principal
indemnifier's favour. He debtor in his own right.
may sue in the name of
the indemnified.
