This article is written by Amandeep Kaur, a law graduate of Punjab University in Chandigarh, India. The article states the various modes of discharge of contracts under the Uniform Commercial Contract in the United States with the help of illustrations and case laws. The article envisages the different modes and remedies that are available to a party after the contract is discharged.
It has been published by Rachit Garg.
The law of contract may be defined as the branch of law that specifies the circumstances under which a promise becomes legally binding on the person making it. It can be defined as a promise or set of promises for the breach of which the law gives a remedy, and the law recognizes it as a duty to perform. The contract has a major role to play in the economic system. The law of contract involves the free will of the parties to enter into a contract or not. In simpler words, parties are free to determine the nature of the primary obligations they will accept in a contract. These obligations can be termed as contractual relationships between the parties. So, the discharge of a contract can be said to be termination of such contractual relationship between the parties and hence contract comes to an end.
Discharge of contract
The discharge of contract can be termed as the termination of contractual relationship between the parties. It ceases the legally binding power of the parties. On further elucidation, discharge creates a valid termination of contractual duties. The contract may be discharged either by the act of the parties or by the operation of the law. The parties can either fulfill these obligations or discharge them, or they may be exempted by law from their obligations.
For example, A contracts with B to plant 300 flowers in his garden for $1000. B plants the flowers, and A pays the promised amount to B. Since both parties to the contract fulfill their obligations arising under the contract, the contract is said to be discharged by performance.
Now what amounts to the discharge of a contract? As the name suggests, the word discharge implies that the contract has come to an end and the contractual obligations of the parties have come to an end. Discharge can occur in various ways:
- By Performance
- By Agreement
- By Non-Performance
- By Operation of Law
- By Breach of Contract
Relevant factors while discharging a contract
There are various factors that contribute to the discharge of a contract. these can be stated as follows
Lack of Consideration
The word “consideration” refers to something that has value. It is agreed upon by both parties to the contract. Consideration is one of the essential elements of entering into a contract. An agreement without consideration is void. If both parties to the contract have bargained for exchange, the contract shall be deemed invalid. So consideration plays a major role in deciding whether a contract has to be discharged or continued.
Lack of Capacity
The capacity to contract means that both parties to the contract must be competent to enter into a contract. As per the Uniform Commercial Code, minors and people with mental deficiencies are incompetent to enter into a contract. The Restatement Second of Contracts defines that people with mental deficiencies are unable to act in a legal manner, and if they enter into a contract, it is voidable by that person.
Statute of Fraud
The Statute of Fraud is a law principle that states that the contract, in order to be enforceable, must be in writing. Even though some oral contracts are enforceable, contracts of marriage, service, land, and contracts for goods worth $500 or more must be in writing.
There may be a breach of any specific obligation in the contract by a party or a breach of the whole contract. While looking into whether the breach was material enough to discharge a contract, the court sees the following factors:
- What is the extent to which a contract has already been performed?
- What was the reason behind such a breach? Was it intentional, negligent, or due to innocence?
- What is the level of certainty regarding the performance of a breaching party in a contract?
- Did the breaching party receive any unjust benefits as a result of this breach?
- How and to what extent can the innocent party be compensated?
- What is the difficulty faced by a breaching party whether the breach was material or not?
Lapse of time
Generally, when the parties to a contract enter into an agreement, there is a time fixed for the performance of a particular act. Thus, if the act is not performed within the stipulated time, it leads to the discharge of the contract due to a lapse of time or delay in its performance.
The Common Law of Contracts
The American system of law has its origins in English Law. The law of contract has eventually developed from behavior to a judge-made law. Originally, the disputes were brought before a tribunal of judges, who made their decision by analyzing the traditions, behaviors, rules, and customs that prevailed in society. Later on, these customs took the form of precedents and created the legal concept of stare decisis. Under this principle, the judges gave their judgments based on previous decisions in similar situations. But this principle, being dynamic in nature due to the changing needs of society, was not at all successful in delivering justice. So setting and following the present became the foundation of what is known as Common Law.
The Restatements of Contracts
The American Law Institute (ALI) was formed by a group of lawyers, judges, and other professionals due to the huge volume of cases in the country, with the objective of creating a guide for all legal professionals. So one such publication was Restatements, which provides for Restatements in nine areas, including torts, property, and contracts. However, these restatements have never received formal judicial recognition, but they are still acknowledged and used by the courts. At present, ALI has published a Restatement (First) of Contracts and a Restatement (Second) of Contracts. These restatements provide a detailed account of the law of contracts. However, sometimes these restatements are adopted by the state legislature, making them a part of the law, but this is not a rule. In the case of Brewer v. Erwin,(1979), the Hon’ble Supreme Court of Oregon held that although sections from restatements are frequently quoted by the courts, this does not mean that they have a legislative enactment.
The Uniform Commercial Code: The Law of Commercial Transactions
The need for uniformity in such a law was felt due to the vast expansion of businesses across the country. These all resulted in creating impediments to resolving the contractual problems. The Uniform Commercial Code is the result of a number of measures described as follows:
- The National Conference Of Commissioners on Uniform State Laws passed several Acts, such as the Negotiable Instrument Act, 2002 the Sales Act, 2002 and Bill of Lading Act,1993. Since these acts were not able to achieve the objective of commercial marketplace contracts, Uniform Commercial Code(U.C.C.)2002 was enacted. This Act consists of 11 articles and is adopted by all fifty states of the US. This is a statutory law that helps businesses, merchants, and consumers conduct contractual agreements with more certainty and reliability. Thus, U.C.C. is an important source of contract law that governs commercial contract law.
- The National Conference of Commissioners on Uniform State Laws felt the need to formulate laws addressing electronic transactions, with a special focus on electronic signatures. This law enables merchants to retain only the electronic version of a document instead of the paper document. It is because of Uniform Electronics Transactions Act, 1999 (UETA) that an electronic version of a cheque has the same effect as the original paper one.
- Electronic Signatures in Global and National Commerce Act (E-Sign Act 2000): This law allows companies to validate contracts online and make these contracts legally effective.
- Uniform Computer Information Transactions Act (UCITA) 2000): It is the most controversial one and was designed to sweep the U.C.C. and has not been adopted in the US except in two states, Maryland and Virginia.
- The law of Sales: The law of domestic sales in the US is generally governed by Article 2 of U.C.C. Normally, Article 2 of UCC applies to transactions between a buyer and seller in every state of the USA.
Now the foremost question that needs to be answered is regarding the applicability of laws, i.e., whether the transaction is governed by Common Law or U.C.C. As a general rule, transactions that do not involve a sale of goods use the common law of contracts, which are generally services or sales between non-merchants for example:- if your spouse hires a company to paint your garage, the common law of contracts applies since there is no sale of goods involved. On the other hand, when you purchase a new car from a local dealer, the U.C.C. applies. In TK Power, Inc. v. Textron (2006)), the Court, while determining the issue of whether the common law applies to U.C.C., discussed the attributes of the transaction and found that the contract was service oriented where TK Power had developed a battery prototype for Textron in three phases, with the last phase being the sale and purchase of the battery. Thus, the U.C.C. does not govern the above contract.
Below is a table with a summary of all the laws that apply to commercial transactions:
|Applicable laws to Contract Transactions
|Nature of Law
|It is a judge-made law that is applicable to Non-U.C.C. transactions, usually for services and not sales.
|Uniform Commercial Code (U.C.C.)
|It is a statutory law that applies to commercial transactions. It often modifies the common law of contracts.
|Consumer Protection Laws
|It is a statutory law that protects consumer-based Transactions at both the federal and state levels.
|Uniform Electronic Transactions Act (UETA) and Electronic Signatures in Global and National Commerce Act (E-Sign)
|It is a statutory law that provides legal certainty for many e-transactions such as e-signatures.
Modes to discharge a contract
Discharge of a contract relieves a party of its obligations. The contract may contain certain provisions for its determination. These provisions may be stated as follows:
- The contract between the two parties may state that non-fulfillment of a specified term of contract shall give one of the parties the right to discharge the contract. In the case law of Head v. Tattersall (1871), the buyer of the horse stipulates that he may return the horse within a certain time if the horse does not match its description.
- The contract may also state that upon fulfillment of a condition or occurrence of a certain event, the contract shall be discharged. In Geipel v. Smith (1872), the contract stated that on the occurrence of expected risks for a charter party whereby a voyage becomes impossible, the charter party should discharge the ship owner.
- The contract can also be brought to an end at the option of the parties upon certain terms. For example, in a contract of employment for a definite time, either party can terminate it within the specified time.
The contract can be discharged in various modes, which can be explained as follows:
Discharge by performance
The most common type of discharge of a contract is the complete performance of the contract by both parties. In such a situation, both parties to the contract have fully performed their duties and obligations, and all the rights and duties of the parties stand extinguished now. In simpler terms, all the expectations from each other have been fulfilled, and legal obligations stand completed.
Under modern common law and explicitly under Section 1-203, it is kept in mind while framing the law that in every contract, there is an implied covenant of good faith. This means that parties will have a good-faith duty to perform for each other. It is also assumed that the parties will perform the contract fairly and honestly, keeping each other’s promises and without frustrating each other.
There may also be situations where the parties offer some modifications to the performance of a contract, which the other party accepts in satisfaction of the performance. In case law, it was held by the court that in a contract for sale and delivery of certain goods, the seller may substitute a different mode of delivery with the assent of the buyer. The discharge of a contract by performance involves the following ways in which the contract stands discharged:
The performance of a contract for the delivery of money is called payment. In the judgment of Kimball v. Reclamation Fund Comm’rs (1872), It was held by the Court that when parties to the contract in the case of delivery of payment agree to accept the negotiable instrument in lieu of payment, it is assumed to be a conditional discharge by both parties.
The mere promise to pay shall not be treated as an absolute payment unless both parties have agreed to accept it in such a way. When the promisor makes a proper offer of performance on the promise and the offer has not been accepted in this way, the liability of the promiser stands discharged. The main object of payment in court is to place the tendered money in the court, and the plaintiff is sure to get it. It then becomes the plaintiff’s money, and the right of the defendant to dispute it now becomes irrelevant. The above rule regarding the liability of the promiser was laid in Becker v. Boon (1874)
In the case of Knight v. Abbott (2007), the defendant claimed to have made a tender for payment. The plaintiff appealed against the judgment. The defendant claimed to have made a tender of payment, but the court held that no valid tender was made since the defendant only expressed his willingness to tender the money without specifying the amount or making a formal offer. Since the amount was not specified, the plaintiff couldn’t determine its sufficiency. Therefore, the Court reversed the judgment and awarded the plaintiff the sum, including the interest thereon.
There may be times when the performance is not complete. This gives rise to a new concept of substantial performance. Earlier laws either recognized the contract to be fully complete or there had been a material breach, but modern theories recognize the concept of substantial performance, whereby one side has been substantially performed though not completely. As a result of this performance, the other party has received some benefit, and the non-breaching party owes something for this value. Section 237(d) of the Restatement (Second) of Contracts provides for this part.
The parties to the contract have made a slight deviation from the performance of the contract, rendering the contract incomplete. It is left to the court to decide this issue, whether this slight deviation was minor or material to the performance of the contract. If the deviation is minor, the court provides reimbursement to the party who suffered the loss. However, if the deviation is material, the doctrine of substantial performance shall not apply, and it will result in a breach of the contract.
The doctrine of substantial performance was developed in the famous case of Jacob & Youngs (1919), where the plaintiff filed a lawsuit to recover the balance due on a building contract. The plaintiff argued that they had substantially performed the contract but made a minor deviation by using a different manufacturer for a small amount of iron pipe, which caused no damage to the defendant. The trial court entered judgment in favor of the defendant based on a directed verdict. However, on appeal, the Court reversed the judgment and ordered a new trial. The Court determined that the plaintiff should be allowed to prove that they had substantially performed the contract and that the defendant suffered no harm from the minor deviation. The Court emphasized that the defendant had accepted and continued to use the building without raising any issues with the work done by the plaintiff. Therefore, the plaintiff was entitled to recover the balance due as they had provided what the defendant had the right to expect under the contract.
While deciding whether substantial completion was there or not, the following factors are kept in mind by the court.
- Expectation of the non-breaching party: It has to be seen whether the performing party has met the expectations that were agreed to in the contract.
- Compensation for the injured party: The court must see that the injured party’s loss is easily calculable and deviation is not material to the party.
- Willfulness of Act: Substantial performance cannot be allowed when the party acts wilfully, intentionally, or deliberately.
- Delay in performance: Unless time is the essence of the contract, the court must see if the contract was affected by the delay in performance.
Discharge by Agreement of the Parties
This is the most common method of discharging a contract. The parties to the contract have the freedom to enter into the contract or end it. The discharge by agreement absolves both parties from any future obligations. The agreement can be either express or implied. If the contract is not performed by either party, it can be discharged by agreement between the parties. In the case of King v. Gillett (1840), it was held that when two parties are married to each other, they may end their marriage by mutual agreement and rescind it.
Discharge by agreement can be done in the following ways:
It is the mutual agreement of the parties by which both parties agree to rescind their contract and try to reach a position that they were in prior to entering into the contract. This type of rescission can also be termed as, “Mutual Rescission”. Rescission can be done orally or in writing.
The agreement to rescission can be brought into effect even if the parties have partially performed part of their contract. For example, Andy agrees to sow the plants in John’s garden. It is unbearably hot outside, and seeing him struggling to do work in such hot weather, John asks Andy to stop the sowing work. Here, mutually, both have agreed to rescind each other’s parts of work, i.e., John’s duty to pay is discharged, as is Andy’s duty to sow the plants.
In the case of Kidder v. Kidder (1859), it was held by the court that whenever parties to a contract agree to rescind a contract that was performed on one side, it must be without any consideration.
The need for novation arises when both parties to the contract no longer accept the original terms of the contract and agree to substitute a new contractual agreement in place of the existing one. The novation of the contract not only changes the terms but also allows for a change of parties to the contract. All the prior contractual obligations of the parties are discharged by novation. The new terms must only be formulated after both parties agree to eliminate the old contractual obligations and substitute them with the new ones.
For example, A agrees to buy a Mercedes car from B. Later on, A makes a contract to sell his Rolls Royce to B instead of a Mercedes, which is agreed to by both.
In the case of Walker v. Johnson (1877), the Court held that when the parties to a contract make a new contract by changing the terms of the old one, the consideration for the new right extinguishes the liability for the old one.
In the case of Honeywell v. Elliott (1972), it was held that when parties to a contract make a new contract concerning the same matter and the terms of the latter are inconsistent with the new one as they cannot subsist together, the latter will be deemed to discharge the former. It was also held by the court that when a new party is substituted for the previous one by agreement of all three, though the terms may remain the same, it also amounts to a novation.
Accord and Satisfaction
This method is another way to discharge a contract by agreement. This way is used when a dispute arises between the contracting parties. The parties to the contract then agree to terminate the existing rights under the contract and settle the claims and disputes between them through accord and satisfaction. Whatever new terms are created by the parties is called accord, and when parties comply with these obligations, it is called satisfaction. In the case of Bennett v. Hill (1884), it was held by the court that when there is an agreement where there is a promise of something new and satisfaction of a claim is taken, it amounts to Accord and Satisfaction.
Discharge by Non-Performance
There are certain risks always involved when parties make a contract. Some of these risks may arise due to the impossibility of performance; for example, the buyer may not be left with any money to pay for goods, there may be a sharp increase in the price of goods, or the manufacturer may not be left with any raw materials to produce the end product. Such events are out of the control of the obligee. So the parties to the contract can include a clause in the contract to deal with such unforeseen circumstances. Thus, the discharge of a contract by non-performance can occur in the following ways:
Impossibility of Performance
This method of discharge of a contract is generally allowed by courts due to its impossibility. This situation arises due to the impossibility of any act or event that makes it impossible for the contract to take place according to the terms and conditions that the parties had agreed upon. The impossibility of performance may arise due to the following factors:
- Destruction of Subject Matter: The impossibility of performance arises when the subject matter of the contract is itself destroyed without any fault of the parties. These unexpected events may include natural disasters such as hurricanes, earthquakes, floods, fires, etc. These clauses relate to acts of God or natural disasters that are out of one’s control and can be termed as “Force Majeure Clauses”. In Dexter v. Norton (1871), it was held by the Court that where a specific thing whose existence is mandatory to the performance of the contract is destroyed without default of promise, it amounts to an impossibility. For example, when a music hall was accidentally destroyed by fire before a day of concert, amount of destruction of the subject matter. Hence here the contract is said to be discharged due to the impossibility of performance.
- Supervening Illegality: This situation arises when some new law is enacted and made applicable. As a result of this new law, the clauses in existing contracts become illegal. Thus, the parties are discharged of their obligations. For example, A contracts with B to be a surrogate mother for his wife, C. But before B is impregnated, the state passes a law making surrogacy illegal. Thus, the contract cannot be performed due to the passing of a law, making the contract illegal. In the case of Baily v. De Crespigny (1869) a piece of land was leased by a party only to erect ornamental buildings, but it was subsequently used by the railroad company by virtue of new powers given by the legislature. Hence, the earlier clauses of the contract have become illegal with the passing of the new law, making the existing contract discharged.
- Death: The parties to the contract can be discharged of obligations when there is death of either party and the contract requires personal services. For example, where a contract was signed by the singer and the management company to perform on a certain day at a concert. But the singer died in a car accident before the concert. The death of a singer discharges the obligations.
- Disability of the party: There may be circumstances where the contract requires personal services to be delivered but the person is unable to perform due to a disability such as illness, injury, or incapacity to perform.
Non Performance due to Impracticability
The new concept of impracticability is directly related to the doctrine of impossibility. The court discharges the performance of one party where, generally, the performance becomes expensive, very time-consuming or impracticable for the other party to perform. This doctrine has been mentioned in UCC Section 2-615(a), which states that the court has to see whether the non-occurrence of such circumstances was reasonably contemplated by the parties when the contract was made. Also, the Restatement (Second) of Contracts, Section 261, states that the duty to discharge the parties from the contract shall not occur later if the parties at the time of making this contract had not assumed that circumstances would not occur.
In the case law Autry v. Republic Productions (1947), Gene Autry, a famous cowboy movie star, contracted to work for Republic Productions. But during World War II, he was inducted into the army. As a result, he was unable to fulfill the obligations of a contract for a movie. In 1945, when he returned after the war, he sued the production company to release him from pre-war commitments. The Court agreed that it would be unfair to force Autry to fulfill his old contract as his career was interrupted by war and the value of the dollar had significantly changed. “War” was understood as an exceptional situation, and it was now Impractical for Autry to fulfill his contract.
While considering this doctrine, the court has to see the difference between “things cannot be done” and “I cannot do them.” The UCC, Section 2-615, talks about commercial impracticability. It states that when performance involves extreme difficulty and high expenses, it might be excused due to commercial impracticability. While considering this factor, the court generally allows for a considerable degree of fluctuation in prices, inflation, weather, and economic conditions. For example, limitations in the supply of materials due to war or a natural disaster.
Non Performance due to Frustration of Purpose
The doctrine of performance comes into the picture when the purpose for which the contract was created gets defeated due to the occurrence of some event. The courts are generally cautious while applying this principle. The court allows the parties to discharge their contractual obligations only after the contractual parties are able to show before the court the unforeseen circumstances.
This doctrine finds its origin in the early 1990s “Coronation Case” (1903). The facts of the case include that Mr. Henry had rented an apartment from Mr. Krell for a very high fee to view Edward VII’s coronation. However, the coronation was postponed. So Mr. Henry wanted his rental money, but Mr. Krell refused. The Court declared that Mr. Henry was not liable since the purpose of the contract was frustrated by the illness of the king, who awarded no money to Mr. Krell.
There can be no general rule to determine the obligations of a contract. Each case depends upon the circumstances that exist therein. The value of the performance of one party becomes worthless. Here, the level of frustration is generally understood by both parties.
Non Performance due to Failure of Condition
This type of situation arises when an express condition has been mentioned in the contract but is still not fulfilled. Either party to the contract has not satisfactorily met the condition, and this results in the discharge of obligations by the parties. The condition may be express, implied, or concurrent in nature. Also, there may be certain conditions, such as precedent and subsequent conditions. When time is the essence of the contract, then time as a condition can be made explicit in the contract. Also, the parties can make a contract to perform to each other’s satisfaction, and a contract can be terminated using this method if the parties do not perform to their satisfaction.
Every contract is followed by certain conditions that must be fulfilled. Each party to the contract has certain duties and obligations. The contract is deemed to be performed upon fulfillment of these duties and obligations. The conditions may either result in the termination of the contract or the parties can continue further with the performance. They can be stated as follows:
- Condition Precedent
- Concurrent condition
- Condition subsequent
- Express condition
- Implied condition
All those things that are necessary for the formation of a valid contract are conditions precedent. The condition must be fulfilled before the contract comes into existence. Such contracts involve the usage of words such as when, if, before,whether, etc. For instance, to say that in order to buy a house, the buyer must be qualified for financing, and only after fulfillment of this condition can the seller sell his house.
In the case of Stone v. Bancroft (1903), it was held by the Court that in ordinary contracts of service, the performance of service is a condition precedent and the employee is not entitled to payment without rendering or offering to render the agreed service.
Concurrent conditions are those conditions to which the parties to the contract apply at the same time. In the above example, when the buyer has the financing to buy a house, he tenders a cheque in favor of the seller, and subsequently, the seller transfers the title of the property to the buyer. It is the fulfillment of the obligation on each party’s part. In case law, Morton v. Lamb (1797), in ordinary contracts for sale of goods, the obligation of the seller to deliver and the buyer to pay are concurrent conditions, and neither can enforce the contract with the other without showing readiness and willingness to perform.
As the name suggests, the condition that is implied after the contract comes into existence. It is a condition imposed on the party that is related to future contractual obligations. For example, such conditions exist in the case of insurance policies where the insurer pays the insured on an event such as an accident and the insurer imposes a subsequent condition that the insured will only be paid the insured amount if he notifies the insurer within the stipulated time of the accident, damage, or loss to the property.
Express condition and implied condition
The express condition is stated in the contract on the face of it. Each party is aware of the obligations and agrees to perform those obligations as per the terms and conditions of the contract. These conditions involve the usage of words such as “Provided that”. For example, the goods will be delivered to the location provided that it does not rain. In Poussard v. Spiers (1875), where a singer was contracted to be a principal part of opera, his failure to perform in the opening and three succeeding nights would frustrate the main object of the contract, and the other party is liable to be discharged of its obligations.
On the other hand, implied conditions are not expressly stated in the contract, but they are presumed to be an inherent part of the contract and are presumed to be understood by the parties. For example, if A hires B to repair his car, it is implied that A’s duty to pay B is conditioned on B’s completion of his job.
Condition of Timeliness
Whenever “time is of the essence” is mentioned in the contract, it becomes an explicit condition. For example, if A has to deliver the wedding dress for B on the 2nd of July, the day of the wedding, and if A fails to deliver the dress in the stipulated time, there is a breach of condition. Since time was of the essence and the dress was to be delivered on time, the contract has not been fulfilled. So time can be a material default in the case of a contract when all things are required to be done by certain dates and times. However, in some cases, depending on the circumstances, it is left to the court’s discretion. For example, when a builder contracts to build a house on a stipulated date but completes it a week or month later, this would not render the contract void. Thus, it has to be completed in a reasonable time, and what constitutes a reasonable time is a question of fact. The builder can be held liable only for the expenses incurred due to late completion; otherwise, the contract stands still.
Condition of satisfaction of the parties
The satisfaction of the party is of prime importance. This can be achieved when the party to the contract is satisfied by the performance of the other party to the extent that was agreed upon in the contract.
Discharge by Operation of Law
Discharge by operation of law can be held in the following ways:
The contract can be discharged when the inferior rights of the party to the contract merge with the superior rights. As a result of this merger, the earlier contract gets terminated. For example, A had taken a property on lease from B. But later on, A acquires this property from B and becomes the owner of it. This ownership discharges the earlier lease contract between A and B. In a case law case, St. Mary’s Parish Credit Union Ltd. v. T.M. Ball Lumber Co. Ltd. (1961), it was held by the court that an old security is merged with a new one when a new security of a higher nature is taken by the same person against the same debt or demand.
Alteration of a Written Instrument
Whenever material alterations are to be made to the contract, it generally requires the consent of both parties. The material alterations are those that have a significant impact on the rights and liabilities of the parties to the contract. However, immaterial alterations may involve mistakes such as clerical errors in a contract. Whenever there are several promisors, those who consent to the alterations are bound by the contract, leaving the rest who do not consent to be discharged. The alteration, which expresses whatever the law implies, is not a material alteration. In case law, the accidental alteration does cause the loss to promise. In Stiles v. Probst (1873), it was held by the court that whenever an alteration is made with the consent of another party, it would amount to a new contract. In Arnold, Barbour Hartshorn v. Jones (1852), an alteration by a stranger does not affect the contract
Statute of Limitations
The party to the contract has a right to move to court to sue the breaching party to seek remedy whenever a breach of contract occurs. However, whenever the obligee claims a right in court, he is bound by the limitation period. Every state has certain statutes where, in order to seek a remedy, one must move to court within the stipulated time. The law of limitation is based on the doctrine of laches, which states that the court does not favor those who are aware of their rights but do not take action within a reasonable period. Thus, the statute of limitations bars a person from filing a suit beyond the prescribed time.
This reasonable period of limitation under most of the statutes ranges between two and six years. As per UCC Section 2-725, the period of limitation is four years. The period begins from the day on which a suit could have been filed before a court; for instance, in a case of breach of contract, it would be from the moment there was a breach of the contract. Thus, if the obligee brings the suit before the court after the reasonable time has run, he is barred from moving to the court. However, the law has provided certain exceptions where a person can move to court even after the prescribed period, for example, due to incapacity due to infancy. The effect of this is that the obligee has no legal remedy available after the prescribed time has passed.
The obligation of the parties to the contract is discharged when a court declares a debtor to be bankrupt. The Bankruptcy Act, 1996 provides for certain circumstances under which the contractual obligations of the parties can be discharged. The creditors are not provided with much recourse whenever they approach the court to seek protection against the debtor. The bankrupt will be discharged from all the debts and liabilities provable against his estate in bankruptcy.
Discharge by Breach of Contract
A breach of contract occurs when a party fails to perform its contractual obligations. The non-breaching party treats the obligations as terminated. While considering whether there was a breach of contract, the court considers whether the breach was material or not. Also, if the promisor makes it clear before the time of performance that he can no longer perform it, it is said to be an anticipatory breach. The non-breaching party then moves to court to claim damages and discharges the obligee of his obligations.
The discharge of contract by breach was recognized in the famous case of Hochster v. De La Tour, 2 Ellis & Blackburn (1852), Mr. De La Tour had agreed to hire Mr. Hochster as a courier and travel companion in Europe starting on June 1, 1852. However, on May 11, 1852, De La Tour informed Hochster that he no longer needed his services. Hochster then filed a lawsuit seeking compensation for the breach of contract before the agreed-upon start date of the contract. The Court held that when a contract involves a promise for future actions and the party refuses to fulfill the agreement, it amounts to a breach of contract. Also in such contracts, there is also an implied promise that both parties will not hinder each other’s performance. If one party renounces their duty to perform a contract for future actions, it releases the other party from their obligation to perform the contract.
The other type of breach consists of voluntary acts by parties that destroy the party’s ability to perform them. For example, A agrees to sell a piece of land to B but instead sells this land to C. Here, A has committed an anticipatory breach. The non-breaching party can move the court to seek a legal remedy as soon as the breach occurs. These rules are mentioned under contracts for the sale of goods under UCC, Section 2-610. Under Section 2-609(1), it has been stated that a contract imposes an obligation on each party that the other’s expectation of receiving performance will not be impaired. The demand to perform such an obligation must be in writing.
Whenever there is a breach of contract, the injured party gets the right to compensation. It is also not mandatory that every breach will discharge the party of its obligations. In case law, Frost v. Knight (1872), where a contract was that a man who was engaged was to marry a woman upon the death of his father, but he broke the engagement while his father was alive, this was a breach of contract. In the case law Dingley v. Oler (1886), it was held by the court that if the expressions of the clause are not absolute and the refusal is unequivocal, then the contract cannot be held to be renounced In the case of Cort V. Ry. Co. (1851) the renunciation of the contract can be made during the course of the performance of the contract. Here, the contract was made to manufacture and supply goods of a specific kind to be delivered in certain quantities monthly, and the buyer, after accepting a portion of the goods, gave notice to the seller that he had no occasion for more and would not accept or pay for them. It was held that the seller might claim breach of contract without manufacturing or tendering the rest of the goods.
Figure: Summary of Discharge of Contract
The following figure summarizes the various ways in which a contract can be discharged:
Figure: Summary of Discharge of Contract (Source: The Law of Contracts by Pamela R. Tepper).
Difference between Discharge, Rescission and Termination of a contract
Discharge of a contract takes place when the parties to the contract have fulfilled the obligations that were agreed upon in the contract. It means the end of a contractual relationship. A typical example of discharge may involve an artist whose management agrees to sign a contract to perform at a concert. Now, when the artist performs and is paid according to the terms of the contract, the contract is said to be discharged. The terms of the contract are fulfilled, and each party is discharged from contractual obligations.
Rescission of contract means that when the contract is formed under fraudulent circumstances, the party who has defrauded does not fulfill the obligations in the contract. So the other party is not obliged to continue with the contract. Thus, the process of ending the contractual relationship as a result of fraud and misrepresentation is known as rescission. For example, A signs a contract with a consultant named B, who represents himself as a certified public accountant. As B was engaged in providing the services, A finds some inconsistencies in the statements and advice provided by B. Later on, A finds that B has misrepresented himself as a CPA. So A rescinds the contract with B To protect his interests due to fraud committed by B.
However, termination, as the word suggests, means bringing an end to the contract. When both parties to the contract do not perform their agreed duties and obligations, it may result in termination. In the above example, if the artist does not perform or does not wish to perform, the management has the option to terminate the contract. Termination of the contract can also occur when both parties agree to terminate it. This situation may arise when frustrating conditions, such as the passing of some government regulations, affect the agreement, and then both parties agree to terminate it. Sometimes there is an impossible situation under which both parties to the contract are unaware of the circumstances due to which it becomes impossible to fulfill the contractual obligations. For example, the massive fire burns down the entire wedding venue, which was booked by both parties. Thus, both parties make a mutual decision to terminate the contract and rebook it for a later date.
Exceptions to Discharge of a Contract
There are certain exceptions under which the contract cannot be discharged.
- There exists an exception to general rules of consideration known as the Mutual Release Exception. As per this exception, whenever a party agrees to discharge obligations under a contract, a separate contract agreement must be made.
- When a contract is to be performed, there may be a situation under which only one party has performed its part but the other party hasn’t. So in such cases, a regular agreement to discharge obligations will not be considered valid. Here, the parties can only be discharged from their obligations after they enter into an agreement by deed.
- In case law, Compagnie Noga D’Importation et D’Exportation v. Abacha (2003), parties, instead of discharging their obligations, can replace those obligations with a totally new separate contract. So here, only a new contract will aid the parties in discharge from previous obligations in the old contract.
- There may be certain situations after the parties enter into a contract, such as commercial hardships, strikes, lockouts, and riots. The contract cannot be terminated in any of the above situations unless there is a clause specifying such conditions.
- Incapacity of the party to contract or a position where performance is done by the third party and the third party does not perform will also not result in the discharge of contract.
Remedies for Discharge of Contract
The terms of the contract define the promises of the parties that are binding on each other. A contract can either be void, voidable, or valid. A contract can be said to be valid when it is performed according to the obligations mentioned in it. However, if the party does not perform the contract as agreed, then the breaching party can be held liable for damages. The non-breaching party can seek a remedy for the losses that occurred. The remedies generally fall into two categories:
The legal remedy is monetary damage that the injured party can claim for the losses that occurred. These remedies are generally called damages, and the party is liable to get the compensation in terms of money since it is determinable in nature.
It is a non-monetary remedy or equitable in nature since an adequate amount of loss cannot be compensated by money.
Under the Uniform Commercial Code, the major objective of granting a remedy in cases of discharge of contract is to put the aggrieved party in a better position. According to Article 74 of the UCC, the injured party can seek a remedy from the court by suing the breaching party, and the party who has breached the contract is liable to pay for damages. However, the amount of damages that can be paid to the injured party would only be the amount that was reasonably expected at the time of the formation of the contract. Both the seller and the buyer have the option to seek remedies under this code.
For instance, the seller, as per Article 2-703 of the UCC, has the following options:
- Withhold the delivery of goods
- Resell and recover damages
- Reclaim the goods due to insolvency of buyer
- Recover the price
Similarly, under Articles 45-51 of the UCC, the buyer of goods has the following options to seek remedy:
- He may cancel the contract if the goods are not received or in an acceptable form.
- He is entitled to recover the price of goods.
- He can claim damages for non-delivery of goods.
- The damages can either be compensatory or complementary.
However, equitable remedies can only be claimed when monetary remedies are insufficient and cannot be determined. The equitable remedies that an injured party can seek are:
Suit for Specific Performance
It is an equitable remedy by which the court requires the party who has breached a contractual obligation to perform what was promised under the original contract. Generally, specific performance is ordered by the court when monetary damages are insufficient to compensate the injured party. This type of remedy is mostly used in real estate laws. It is at the discretion of the court to provide for this remedy; however, in order to claim this remedy, the burden of proof lies on the party to show the uniqueness of the subject matter of the contract and that the substituted performance will be appropriate to compensate for the loss that occurred.
Suit for Injunctive Relief
An injunction is a very common type of equitable remedy available in civil litigation. The court grants the injunction to the injured party after considering the following factors:
- Money is insufficient compensation
- Irreparable harm and injury have occurred to the party
- It is essential to maintain the status quo to serve the interests of the party since a permanent resolution cannot be reached.
The injunction order is a temporary restraining order that orders the other party to refrain from doing something that causes injury to the other party. Often, such orders are ex-parte in nature and effective for a period of 10 to 14 days. After this process, a temporary injunction is granted after a notice is issued to all parties. The order of temporary injunction remains valid until the final hearing of the case. Then the final stage of injunctive relief results in a permanent injunction. The permanent injunction permanently restrains the party from doing certain acts.
Rescission is a voluntary agreement between the parties to set aside the contract. Here, the obligations of the parties are discharged, and in most contracts, rescission takes place at the initial stages of the contract when neither party has begun the performance. Sometimes, rescission can be unilateral, where one party can cancel the contract because of a breach caused by the other party. Usually, the injured party moves to court to cancel the contract and restore the consideration. This type of remedy is mostly granted in cases of mistake, fraud, or misrepresentation.
As the name suggests, the word reformation means to rewrite and modify the contract. Generally, the court does this for the parties to reflect the true intention and meaning of the contract.
The word “restitution” means to restore the benefits received by the party that were unjustly obtained. The main object of granting this remedy is that the wrongdoer should not profit from the wrongful act. While granting the restitution, the court generally considers the following questions:
- Was the breach material enough?
- Was there a partial performance by a non-breaching party?
- Did the breaching party receive any benefit from the partial performance?
The doctrine of Quantum Meruit means “payment in proportion to the work done”. It is a quasi-contractual remedy. Under this remedy, the court awards a specific amount to the party who has been damaged because of unjust benefits to the other party. The claim for this remedy arises in the following situations:
- When the contract has not been fully performed and the breaching party breaks the contract in between, the injured party can ask for compensation for the amount of work done.
- When the work has been done non-gratuitously
- When the work has been done and was accepted under contract but subsequently declared void, the party that performed its part is entitled to receive payment for the work done.
Consequences for not discharging the contract
Discharging a contract means fulfilling the contractual obligations of the parties to the contract. In these cases, the contract is discharged when both parties perform their parts and agree to the terms of the contract. This results in the termination of their contractual relationship. However, there are various modes by which the contractual relationship is not terminated as a result of breach, impossibility, or frustration of purpose. So the parties to the contract may face the following consequences:
When the contract is frustrated
The frustration of a contract results in the preservation of legal rights and liabilities at the time of frustration. The primary legal obligations of the parties are no longer binding on them.
When the contract is not frustrated
Since one of the parties to the contract has not performed, it results in a breach of contract. This will give rise to a situation where the injured party can sue the breaching party and claim damages, or the injured party can exercise the right to terminate the contract.
The other impact of discharging a contract may be that the contract can be void or voidable at the option of another party.
Discharge just excuses future performance and has no retrospective effect. There are certain options for the obligor, such as continuing with the part performance of the contract and claiming damages for the non-performing part. Also, he has the option to terminate the contract.
Other Modes of Discharge of a Contract
Apart from the above-mentioned modes by which a contract can be discharged, there are various other modes by which a contract can be discharged:
The party to a contract may discharge the other party by canceling, destructing, or surrendering the written contract. The law specifies no particular method of discharging a contract by cancellation. All the processes of cancellation, destruction, and surrendering can be done in an informal way, even by handing the document to another party or by tearing it into pieces.
Power of Avoidance
The obligor can avoid the contract. The contract is either void or can be made voidable at the option of another party. It is voidable due to lack of capacity, such as infancy and insanity. The contract can also be avoided if it was made under duress, undue influence, misrepresentation, mistake, etc. Whenever one party exercises this option, the other party is discharged from its obligations.
The performance of contractual obligations leads to the discharge of a contract. Although the contract is discharged when performed, there are various other ways, such as novation, alteration, rescission, and remission, by which the contract can be discharged. The contract also stands discharged by agreement of the parties, lapse of time, or non-performance. When the party to a contract fails to perform it according to the conditions, it may result in a breach of contract. The breach can be an actual or anticipatory breach. Nonetheless, there are certain ways to discharge the contract, but one must follow the one that is more efficient. Hence, the most efficient way to discharge a contract is through performance. Since the other ways of discharging a contract are not as efficient as the mode of discharge by performance, the parties to the contract are at a loss and liable to pay damages for the loss caused to the other party.
Frequently Asked Questions (FAQs)
What do you mean by discharge of contract? Broadly explain the different ways by which a contract can be discharged.
The discharge of a contract can be termed the termination of the contractual relationship between the parties. The legal binding power of the parties comes to an end and creates a valid termination of contractual duties. The contract may be discharged either by the act of the parties or by operation of the law. The parties can either fulfill these obligations or discharge them, or they may be exempted by law from their obligations.
Distinguish between a condition precedent and condition subsequent with respect to the discharge of a contract.
All those things that are necessary for the formation of a valid contract are conditions precedent. The condition must be fulfilled before the contract comes into existence, whereas a condition subsequent is a condition that is implied after the contract comes into existence. It is a condition imposed on the party that is related to future contractual obligations.
Specify the ways by which a contract stands discharged by agreement.
This is the most common method of discharging a contract. The parties to the contract have the freedom to enter into it or end it. The discharge by agreement absolves both parties from any future obligations. The agreement can be either express or implied. The contract can be discharged by agreement by rescission, novation, or accord and satisfaction.
How can a contract be discharged by operation of law?
Discharge by operation of law can occur in the following three ways:
- Merger: The contract can be discharged when the inferior rights of the party to the contract merge with the superior rights.
- Alteration of a Written Instrument: Whenever material alterations are to be made in the contract, it generally requires the consent of both parties.
- By Statute of Limitations: The party to the contract has a right to move to court to sue the breaching party to seek remedy whenever a breach of contract occurs. However, whenever the obligee claims a right in court, he is bound by the limitation period.
- By Bankruptcy: The obligation of the parties to the contract is discharged when a court declares a debtor bankrupt.
Can a contract be discharged by impossibility of performance? Briefly explain.
Yes, a contract can be discharged by the impossibility of performance. This method of discharge of a contract is generally allowed by courts due to its impossibility. This situation arises due to the impossibility of any act or event that makes it impossible for the contract to take place according to the terms and conditions that the parties had agreed upon. The impossibility may arise due to the death of the party, Supervening illegality or either the destruction of the subject matter.
What are the remedies available with a party when there is a breach of contract?
If the party to a contract does not perform the contract as agreed, then the breaching party can be held liable for damages. The non-breaching party can seek a remedy for the losses that occurred. The remedies generally fall into two categories:
- Legal remedy
- Equitable remedy
Further, to get an equitable remedy, the following suits can be filed such as suit for specific performance, a suit for injunctive relief, a suit for rescission and reformation of contract, or a suit for Quantum Meruit.
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