Short Answer Concepts
Definition:
A wagering agreement is a contract where two parties agree that one will pay the other money or consideration based on the outcome of an uncertain event. Neither party has a stake in the event—their interest lies only in the outcome. These agreements are void under Section 30 of the Indian Contract Act, 1872.
Key Features:
The agreement depends on a future uncertain event.
There is a mutual chance of winning or losing.
The event's outcome is not controlled by either party.
Legal Status:
Wagering agreements are void and cannot be enforced in a court of law.
Example:
A bet on whether it will rain tomorrow.
Case Law:
Babasaheb v. Rajaram (1937) – The court reaffirmed that wagering agreements are unenforceable in India.
Definition:
Under Section 23, consideration or the object of an agreement is unlawful if it involves illegal activities, fraud, harm to another person, or actions opposed to public policy. Any contract based on such consideration is void.
When Consideration is Unlawful:
If it is forbidden by law.
If it defeats the provisions of any law.
If it involves fraud or injury to another person.
If it is against public policy.
Examples:
A contract to pay someone for committing theft.
Agreements involving bribery or smuggling.
Effect:
If consideration is unlawful, the entire agreement becomes void.
Case Law:
Gherulal Parakh v. Mahadeodas Maiya (1959) – The Supreme Court ruled that agreements with fraudulent or immoral consideration are unlawful.
Definition:
A contract is discharged by frustration when an unforeseen event makes performance impossible or illegal. Section 56 of the Indian Contract Act, 1872, governs this principle. Restitution ensures parties do not suffer unjust enrichment or losses due to frustration.
Essentials of Frustration:
The event must occur after the formation of the contract.
The event must not be caused by either party.
The event must make performance impossible or radically different from what was agreed.
Examples:
A music concert canceled due to government restrictions during a pandemic.
Destruction of the subject matter, such as a contract for a painting destroyed in a fire.
Effect:
The contract becomes void, and any advance paid must be refunded (restitution).
Case Law:
Satyabrata Ghose v. Mugneeram Bangur & Co. (1954) – The court held that frustration occurs when an unforeseen event fundamentally changes the nature of the contract, discharging the parties from performance obligations.
Definition:
An injunction is a court order that restrains a party from performing a specific act or compels them to perform a particular act. It is an equitable remedy provided when monetary compensation is inadequate.
Types of Injunctions:
Temporary Injunction: Granted to maintain the status quo until the case is decided.
Permanent Injunction: Granted as final relief after the case is resolved.
Examples:
A court may restrain a company from infringing on another’s trademark.
Stopping the construction of a building that violates zoning laws.
Effect:
An injunction enforces the rights of an aggrieved party and prevents irreparable harm.
Case Law:
Kuldip Singh v. Subhash Chander Jain (2000) – The court upheld the issuance of an injunction to prevent further damage to the plaintiff.
Definition:
A doctrine is a legal principle or framework established through judicial precedents that guides courts in interpreting and applying the law.
Key Doctrines in Contract Law:
Doctrine of Privity of Contract: Only parties to a contract can sue or be sued on it.
Doctrine of Frustration: Contracts are discharged when performance becomes impossible due to unforeseen events.
Doctrine of Restitution: Prevents unjust enrichment of one party at the expense of another.
Examples:
A third party cannot enforce a contract between two other parties (privity).
Case Law:
Tweedle v. Atkinson (1861) – Established that a stranger to a contract cannot sue for its performance.
Void Agreement:
An agreement that is not enforceable by law, as defined under Section 2(g) of the Indian Contract Act, 1872.
Key Characteristics:
It has no legal effect from the beginning.
It cannot be ratified.
Examples:
Agreements to commit a crime.
Contracts with minors.
Voidable Agreement:
An agreement enforceable at the option of one party but not the other, as defined under Section 2(i).
Key Characteristics:
It remains valid until rescinded by the aggrieved party.
Usually arises due to coercion, undue influence, fraud, or misrepresentation.
Examples:
A contract signed under threat.
Agreements based on false information.
Case Law:
Mohori Bibee v. Dharmodas Ghose (1903) – Held that a contract with a minor is void.
Lalman Shukla v. Gauri Dutt (1913) – Clarified aspects of offer and acceptance
Definition:
A general offer is a proposal made to the public at large, allowing anyone who fulfills the specified conditions to accept the offer.
Key Characteristics:
Open to all members of the public.
Becomes a valid contract when the terms are fulfilled by anyone.
Examples:
An advertisement offering a reward for returning a lost pet.
A public notice announcing a prize for solving a puzzle.
Effect:
A general offer creates a binding contract upon fulfillment of its terms.
Case Law:
Carlill v. Carbolic Smoke Ball Co. (1893) – The court held that a general offer is enforceable when the conditions are met by any individual.
Definition:
A contingent contract is a contract that is dependent on the occurrence or non-occurrence of an uncertain future event, as defined under Section 31 of the Indian Contract Act, 1872.
Essentials of a Contingent Contract:
The event must be uncertain.
The event must not depend solely on the will of the promisor.
Performance depends on the occurrence of the specified event.
Examples:
Insurance contracts.
A contract to sell goods if a ship arrives at port safely.
Effect:
The contract is enforceable only when the specified event occurs.
Case Law:
Nathulal v. Phoolchand (1969) – The court emphasized that the performance of a contingent contract depends entirely on the fulfillment of the specified condition.
Definition:
Misrepresentation involves making a false statement of fact without the intent to deceive, but which induces the other party to enter into a contract, as defined under Section 18 of the Indian Contract Act, 1872.
Key Characteristics:
The statement must be false and untrue.
There must be no intent to deceive.
The false statement induces the other party to contract.
Examples:
Selling land while misstating its area due to ignorance.
Incorrectly describing the condition of a product without intent to cheat.
Effect:
The aggrieved party can void the contract or seek damages.
Case Law:
Derry v. Peek (1889) – Distinguished misrepresentation from fraud by highlighting the absence of intent to deceive in the former.
Definition:
A proposal, as defined under Section 2(a) of the Indian Contract Act, 1872, is an expression of willingness to do or abstain from doing something with the intent of obtaining the consent of the other party.
Key Characteristics:
The proposal must be clear, unambiguous, and specific.
It must be communicated to the offeree.
Examples:
A person offers to sell their car for ₹1,00,000.
A job offer made by a company to a candidate.
Effect:
Once the proposal is accepted, it becomes an agreement, binding both parties.
Case Law:
Harvey v. Facey (1893) – A mere inquiry or expression of interest does not constitute a proposal.
Definition:
Consent is said to be free if it is not obtained by coercion, undue influence, fraud, misrepresentation, or mistake (Section 14).
Key Characteristics of Free Consent:
The consent must be given without any external pressure.
It must be voluntary and without duress.
Examples:
Signing a contract willingly without any threats.
A contract made under mutual consent between parties without deception.
Effect:
If consent is not free, the contract becomes voidable at the option of the aggrieved party.
Case Law:
Ranganayakamma v. Alwar Setti (1889) – Held that consent obtained under coercion is voidable.
Definition:
Fraud is an intentional act to deceive another party to enter into a contract, with the aim of causing them harm or gaining an unfair advantage, as per Section 17 of the Indian Contract Act, 1872.
Key Elements of Fraud:
A false representation made knowingly or recklessly.
The intent to deceive.
The representation induces the other party to contract.
Examples:
Selling fake diamonds while knowing they are counterfeit.
A car dealer misrepresenting the condition of a used vehicle to make a sale.
Effect:
Fraudulent contracts are voidable, and the injured party may seek compensation.
Case Law:
Lloyd v. Grace Smith & Co. (1912) – A fraudulent act by an agent was held to bind the principal, and the contract was voidable.
Definition:
A mistake is an error in understanding facts or law by one or both parties.
Types of Mistakes:
Mistake of Fact: When both parties are mistaken about a matter of fact, the contract may be void.
Mistake of Law: A mistake related to the law is generally not excused unless it's a domestic or personal law matter.
Examples:
Selling non-existent goods believing they exist.
A person signing a contract under the wrong assumption about the law.
Effect:
Mistake about an essential fact can make a contract void. A mistake of law does not invalidate a contract, except in certain cases.
Case Law:
Couturier v. Hastie (1856) – The court held that a contract based on a mistaken assumption about the subject matter (non-existent goods) was void.
Definition:
Undue influence occurs when one party uses their dominant position to influence the will of another, leading them to act against their interest, as per Section 16 of the Indian Contract Act, 1872.
Key Elements of Undue Influence:
One party holds a dominant position over the other.
The dominant party uses that position to influence the decision of the weaker party.
Examples:
A spiritual leader persuading a follower to transfer property to them.
A business partner coercing the other into an unfavorable contract.
Effect:
Contracts made under undue influence are voidable at the option of the party influenced.
Case Law:
Mannu Singh v. Umadat Pandey (1890) – The agreement was set aside due to undue influence exerted by the stronger party.
Definition:
Liquidated damages refer to a sum pre-determined and agreed upon by both parties in the contract, payable in case of a breach of contract. These are specified in advance as compensation for potential harm caused by the breach.
Key Characteristics:
Liquidated damages are mutually agreed upon during the formation of the contract.
The amount should be reasonable and not excessive.
Examples:
A construction contract where the builder agrees to pay ₹10,000 per day for each day the project is delayed.
An agreement that stipulates ₹50,000 for non-performance of a service contract.
Effect:
Liquidated damages serve as an agreed-upon compensation for the non-performance of contractual duties, simplifying legal proceedings in case of breach.
Case Law:
Dunlop Pneumatic Tyre Co. v. New Garage & Motor Co. (1915) – The court ruled that liquidated damages should reflect the genuine pre-estimate of loss and not serve as a penalty.
Definition:
Public policy refers to the principles and standards that the law follows to promote the public good and welfare. A contract that goes against the public interest or the welfare of society is considered void.
Key Aspects of Public Policy:
Illegal Contracts: Contracts involving illegal activities or that contravene laws are void.
Contracts Harmful to Society: Agreements that harm society, like those promoting gambling or prostitution, are void for being against public policy.
Contracts Restraining Trade: Contracts that unreasonably restrict trade, competition, or freedom of profession may be declared void.
Examples:
A contract to bribe a government official is void as it is against public policy.
A contract to restrain someone from working in their profession without justification may be void.
Effect:
A contract that is against public policy is void and cannot be enforced by law.
Case Law:
Chitty v. St. James (1884) – The court held that agreements promoting illegal activities or harms to the public are void as they violate public policy.
Essay Writing Concepts
In the field of law, a contract is an agreement between two or more parties that is legally enforceable. Not every agreement is a contract, and for an agreement to become a valid contract, it must fulfill certain essential conditions. These conditions ensure that the contract is fair, clear, and legally binding.
A valid contract is an agreement that has legal force and can be enforced by law. If any of the essentials of a valid contract are missing, the agreement cannot be enforced in a court of law.
Essentials of a Valid Contract
According to the Indian Contract Act, 1872, for an agreement to be a valid contract, it must satisfy the following seven essentials:
Offer and Acceptance
An offer is a proposal made by one party to another, which shows willingness to enter into a contract. The second party must accept the offer unconditionally. This mutual agreement between offer and acceptance creates the foundation of a contract.
Example:
If A offers to sell his car to B for ₹2,00,000, and B agrees to buy it at that price, the contract is formed.
Intention to Create Legal Relations
Both parties must have the intention to create legal relations. Social or domestic agreements, like promises made between friends or family, are usually not legally binding.
Example:
A promise to attend a family gathering is not a valid contract because there is no intention to create legal relations.
Lawful Consideration
A contract must have something of value (money, goods, services, etc.) as consideration. Consideration is what each party gives in exchange for the promise of the other.
Example:
In a contract of sale, the buyer pays money (consideration) and the seller delivers the product (consideration).
Capacity to Contract
Both parties involved in the contract must have the legal capacity to do so. They must be of sound mind, not minors, and not disqualified by law from contracting.
Example:
A minor (someone below the age of 18) cannot enter into a valid contract. For instance, if a 16-year-old buys a mobile phone, the contract can be voidable at their discretion.
Free Consent
The consent of both parties must be free and not obtained through coercion, undue influence, fraud, or misrepresentation. If consent is obtained through any of these means, the contract is voidable.
Example:
If a person is forced to sign a contract under threat, the contract is not valid because consent is not free.
Lawful Object
The purpose of the contract must be legal. If the agreement involves illegal activities, it is not enforceable.
Example:
A contract to smuggle goods is illegal and cannot be enforced because the object of the contract is unlawful.
Certainty and Possibility of Performance
The terms of the contract must be clear, definite, and capable of being performed. If the terms are vague or uncertain, or if it is impossible to perform, the contract is void.
Example:
An agreement to deliver goods but without specifying the quantity or the exact items is uncertain and cannot be enforced.
Importance of a Valid Contract
A valid contract ensures that both parties involved are protected by law. It provides a legal framework for resolving disputes if one party fails to fulfill their obligations. Without a valid contract, the parties may not be able to claim legal rights or seek remedies in case of a breach.
Case Study:
One of the most famous cases related to valid contracts is Balfour v. Balfour (1919). In this case, Mr. Balfour, a government officer, and his wife were living abroad. While they were in England, he promised to send her a monthly allowance while she stayed in England. Later, when Mr. Balfour stopped sending money, Mrs. Balfour sued him for breach of contract.
The court ruled that this agreement was not a valid contract because it was a domestic agreement made without the intention of creating legal relations. The court stated that agreements between spouses are usually not intended to have legal consequences unless there is a clear intention to create legal relations.
This case is an important example that shows that while agreements are made in good faith, they may not always be enforceable as legal contracts. It highlights the importance of intention to create legal relations in determining the validity of a contract.
Conclusion:
In conclusion, a valid contract is essential for ensuring that the promises made by the parties are enforceable under the law. For a contract to be valid, it must have an offer, acceptance, lawful consideration, free consent, and a legal object. Contracts that lack any of these essentials will not be legally binding and cannot be enforced in a court of law. Understanding these essentials is crucial, as they protect both the rights of the parties involved and the fairness of the agreement.
In everyday life, we enter into contracts without thinking twice—whether it’s buying a product, signing a job agreement, or even taking out a loan. These contracts rely on the fulfillment of these basic principles to ensure that they are fair and legally valid.
In the field of law, the concepts of contracts and agreements are closely related, yet they are distinct in their legal implications. Understanding the difference between an agreement and a contract is fundamental to grasping the principles of contract law. This distinction is clearly illustrated by the statement: "Every contract is an agreement, but every agreement is not a contract."
What is an Agreement?
An agreement is simply a promise or set of promises that the law recognizes as having the potential to create legal relations. An agreement can be either written or oral and does not necessarily require any formalities like a signed document or witnesses.
In daily life, agreements are made all the time, and they are often informal and non-binding. For example, when two friends agree to meet at a café for a coffee, they have made an agreement, but this is not a legally enforceable contract.
What is a Contract?
A contract, on the other hand, is a special type of agreement that is legally enforceable. For an agreement to become a contract, it must satisfy certain essential elements outlined in the Indian Contract Act, 1872. These essentials include offer, acceptance, lawful consideration, capacity to contract, free consent, and lawful object.
For example, when a person buys a car from a dealership, the agreement to pay a certain price in exchange for the car becomes a contract once it meets the required conditions (like legal capacity, intention to create legal relations, etc.). If either party fails to fulfill their part, the law can enforce the contract through legal remedies.
Key Differences Between an Agreement and a Contract
Enforceability by Law:
An agreement does not have to be enforced by law. In many cases, agreements are informal and made in personal or business dealings without any intention of going to court.
A contract, however, is enforceable by law. If one party does not fulfill their obligations, the other party can seek a remedy through the courts.
Example:
A promise between friends to go to the movies together is an agreement, but it is not a contract because there is no legal obligation to attend.
However, a contract to buy goods from a store, where the seller is legally bound to deliver the goods and the buyer is legally bound to pay, is enforceable by law.
Intention to Create Legal Relations:
For an agreement to become a contract, there must be an intention to create legal relations. If the parties do not intend for their agreement to be legally binding, it remains just an agreement.
In many social and domestic agreements, the parties do not intend to create legal relations, so they are not contracts.
Example:
If a person agrees to give a gift to a friend on their birthday, this is an agreement, but there is no intention to create legal relations. Therefore, it is not a contract.
Certainty and Clarity:
A contract must be clear, definite, and capable of performance. If the terms of an agreement are uncertain, it cannot be enforced as a contract.
For instance, an agreement that lacks details on the price, quantity, or time of performance can be unenforceable.
Example:
An agreement where one person promises to buy a house but fails to specify the price or terms is an agreement but not a contract because it lacks clarity.
Daily Life Example to Illustrate the Difference
Example 1: Agreement
A friend asks you to lend them ₹1,000. You agree, but it is not a contract because it was made out of goodwill or friendship, not with the intention of creating a legal relationship. If they do not repay you, you cannot file a case against them for breach of contract.
Example 2: Contract
On the other hand, if you sign a loan agreement with a bank for ₹1,00,000, it is a contract. The bank has a legal right to sue you if you fail to repay the loan according to the agreed terms because the agreement is made with the intention of creating legal relations.
Indian Case Study: Balfour v. Balfour (1919)
In the famous case of Balfour v. Balfour (1919), the English Court of Appeal dealt with a domestic agreement. The husband, Mr. Balfour, promised to send his wife a monthly allowance while she stayed in England, while he worked in Ceylon (now Sri Lanka). However, when he stopped sending the money, Mrs. Balfour sued him for breach of contract.
The court ruled that the agreement was not a contract because it was a domestic agreement made between a husband and wife with no intention of creating legal relations. The court held that agreements of a domestic or social nature are generally not enforceable as contracts.
In Indian law, a similar principle applies. For example, in the case of Moti Lal v. Jagan Nath (1964), the court held that agreements made in a family or social context are usually not enforceable in law unless there is clear intention to create legal relations.
Agreement: A mutual understanding or promise between parties, but it does not have to be legally binding unless specific criteria are met.
Contract: A legally binding agreement that is enforceable by law and must satisfy key legal requirements such as offer, acceptance, intention to create legal relations, lawful consideration, and free consent.
Conclusion:
In conclusion, every contract is an agreement, but not every agreement qualifies as a contract. The primary difference lies in the intention to create legal relations and the fulfillment of the legal requirements set forth by the law. While agreements are common in everyday life, only those that meet the legal criteria become enforceable contracts. Understanding the difference between an agreement and a contract is essential in determining whether an agreement is legally binding or just a mutual understanding between the parties.
In everyday situations, we often make agreements without thinking about their legal implications. However, in business and legal matters, recognizing the difference is crucial for ensuring that the agreement becomes a valid, enforceable contract.
In Indian contract law, the Doctrine of Frustration plays a significant role when an unforeseen event makes the performance of a contract impossible or illegal. The Indian Contract Act, 1872, specifically under Section 56, outlines the principle that an agreement becomes void if its performance becomes impossible due to such events. The doctrine ensures fairness by releasing parties from their obligations when external circumstances hinder the contract's execution.
There are several doctrines under the law of frustration that explain how and when contracts are discharged due to an unforeseen event. Below, we will explore these doctrines with suitable Indian case law examples.
What is Frustration of Contract?
Frustration refers to an event or situation that was not foreseen by the parties at the time the contract was made, making it impossible to perform the contract. This could include physical impossibility, legal changes, or destruction of the subject matter.
Doctrine of Impossibility of Performance
The Doctrine of Impossibility is the most fundamental principle in the law of frustration. It states that if the performance of a contract becomes physically or legally impossible due to an unforeseen event, the contract becomes void.
Example: If a contractor is hired to build a bridge, and before starting, the riverbed where the bridge is to be built suddenly dries up, making construction impossible, the contract becomes frustrated.
Indian Case Law: In Satyabrata Ghose v. Mugneeram Bangur & Co. (1954), the Supreme Court held that if performance of the contract becomes impossible due to an unforeseen event, such as the destruction of the subject matter or a law that renders performance illegal, the contract would be frustrated. In this case, the construction of a building was rendered impossible due to a delay caused by the government.
Doctrine of Illegality
The Doctrine of Illegality applies when an unforeseen change in the law makes the contract illegal. If a contract is based on something that becomes illegal due to a law or government regulation, it is frustrated.
Example: If a contract is made for the export of goods that are later banned by the government, the contract is frustrated as it becomes illegal.
Indian Case Law: In K.K. Verma v. Union of India (1954), the court held that when an agreement is made for the export of goods, and the government suddenly imposes a ban on the export of those goods, the contract becomes void due to the change in law. This makes performance of the contract impossible and illegal, thus frustrating the contract.
Doctrine of Destruction of Subject Matter
If the subject matter of the contract is destroyed or ceases to exist, the contract becomes frustrated, as there is no longer any basis on which the contract can be performed.
Example: A contract to sell a specific car becomes frustrated if the car is destroyed in an accident before the delivery.
Indian Case Law: In Kalyani (Smt) v. Naresh Kumar (2005), the court held that a contract of sale was frustrated when the subject matter (the property) was destroyed. The destruction of the specific subject matter makes the performance of the contract impossible.
Doctrine of Delay
This doctrine states that when an unreasonable delay occurs, making the contract’s performance impossible or defeating its purpose, the contract may be considered frustrated.
Example: A contract to supply perishable goods becomes frustrated if a major delay occurs due to unforeseen circumstances, and the goods perish.
Indian Case Law: In Alopi Parshad v. Union of India (1960), the court held that delays caused by circumstances like floods that make it impossible to perform the contract may lead to frustration. In this case, the delay in the delivery of goods was caused by unforeseen events, and it was held that the contract was frustrated.
Doctrine of Non-Occurrence of Condition Precedent
A condition precedent refers to an event that must happen before a contract becomes effective. If such an event does not occur, the contract may be frustrated.
Example: A contract for the purchase of land is contingent upon the buyer obtaining financing from a bank. If the bank denies the loan, the contract may be considered frustrated.
Indian Case Law: In Nathulal v. Phoolchand (1969), the contract was contingent on the government’s approval of a business venture. Since the government did not grant approval, the court ruled that the contract was frustrated as the condition precedent was not fulfilled.
When a contract is frustrated, it is automatically discharged without the need for either party to take legal action. The parties are excused from their obligations under the contract. However, the Indian Contract Act, 1872 provides for restitution to ensure that no party is unjustly enriched. If one party has received a benefit from the other before the frustrating event, the aggrieved party may seek restitution to recover that benefit.
Case Study:
A well-known Indian case illustrating the Doctrine of Frustration is Energy Watchdog v/s Central Electricity Regulatory Commission (2017). In this case, the petitioner argued that an electricity contract was frustrated due to changes in law that rendered the contract uneconomical. The Supreme Court held that the contract could be discharged due to the frustration caused by unforeseen changes in law, making it impossible for the petitioner to continue with the terms.
Another case that is relevant is Indian Oil Corporation Ltd. v. Amritsar Gas Service (1991). In this case, the Supreme Court applied the doctrine of frustration when a contract to supply gas was rendered impossible due to a government order prohibiting the supply of gas to a particular area. The court held that the contract was frustrated due to the unforeseen legal change, and the parties were excused from performing their obligations.
The Doctrine of Frustration ensures that parties are relieved from their contractual obligations when performance becomes impossible or illegal due to unforeseen events. The various doctrines of frustration, including the impossibility of performance, illegality, destruction of subject matter, delay, and non-occurrence of a condition precedent, all serve to protect parties from unfairly being bound to contracts that cannot be fulfilled due to factors beyond their control.
Frustration of contracts is a fundamental principle in Indian contract law, helping to maintain fairness and justice in contractual relationships. It ensures that neither party is unjustly penalized for non-performance when circumstances have changed in such a way that fulfilling the contract is no longer possible.
A contract can be discharged in several ways. Discharge of a contract means the termination of the legal obligations of the parties involved. When a contract is discharged, the parties are no longer bound by its terms, and they are free from any further obligations. The Indian Contract Act, 1872 defines the different modes through which a contract can be discharged. These include performance, agreement, frustration, breach, and operation of law.
Here’s an explanation of each mode of discharge, along with examples:
This is the most common way a contract is discharged. A contract is discharged when both parties fulfill their respective obligations under the contract. When both parties perform their promises in full, the contract is considered to be discharged by performance.
Example:
A contracts to sell a car for ₹1,00,000 to B. If A delivers the car and B pays the agreed sum, the contract is discharged by performance, as both parties have performed their duties as per the contract.
Key Point: If performance is incomplete, the contract is not discharged, and the party failing to perform may be liable for breach of contract.
A contract may also be discharged by mutual agreement between the parties involved. The parties may decide to end the contract or modify its terms through a new agreement. This can happen in several ways, such as by novation, rescission, or alteration.
a) Novation
Novation is the substitution of an existing contract with a new contract. It requires the agreement of all parties involved.
Example:
A owes ₹50,000 to B, and C agrees to pay this amount to B instead of A. A, B, and C agree that C will take over the debt. This discharge is done by novation.
b) Rescission
Rescission means canceling the contract and returning the parties to their original position, as if the contract never existed.
Example:
If a contract was made based on a misrepresentation, the parties may agree to rescind it, i.e., cancel the contract, and return any benefits received.
c) Alteration
Parties may agree to change or modify the terms of the contract. The original contract continues, but the terms are altered with mutual consent.
Example:
A and B agree to extend the timeline for the completion of a project. The original contract is altered to reflect the new deadline.
A contract is discharged by frustration when an unforeseen event occurs that makes the performance of the contract impossible or illegal. Such an event must occur after the formation of the contract and should not be caused by either party.
Example:
A agrees to transport goods from Mumbai to Kolkata, but the ship they are supposed to use sinks before the goods can be loaded. The contract is discharged by frustration, as it has become impossible to perform.
Case Law:
In Satyabrata Ghose v. Mugneeram Bangur & Co. (1954), the Supreme Court held that a contract is discharged by frustration when an event occurs that makes performance impossible.
Key Point: The event must be unforeseen, and the contract must be impossible to perform due to the event.
A contract may be discharged if one of the parties fails to perform their obligations under the contract. This failure is known as a breach of contract. When a breach occurs, the non-breaching party may either terminate the contract or sue for damages.
a) Actual Breach
Actual breach occurs when a party fails to perform their duty at the time of performance.
Example:
A agrees to deliver 100 bags of rice to B by 5th of the month, but fails to do so. This is an actual breach, and B can either sue for damages or cancel the contract.
b) Anticipatory Breach
Anticipatory breach happens when one party indicates that they will not perform their obligations before the performance is due.
Example:
A agrees to sell a house to B by the 10th of June, but on the 1st of June, A informs B that they will not be able to sell the house. This is an anticipatory breach.
Key Point: A breach of contract allows the non-breaching party to seek a remedy in court, which could include damages or specific performance.
A contract can also be discharged by the operation of law. This means that a contract is discharged automatically due to certain events prescribed by law. These events include:
a) Death of a Party
If a contract involves the personal performance of one of the parties, and that party dies, the contract may be discharged unless the contract specifically allows the performance to be carried out by a legal representative.
Example:
If A contracts to perform a service for B, and A dies before performing, the contract is discharged by operation of law.
b) Insolvency
When a party becomes insolvent, meaning they are unable to pay their debts, the contract may be discharged by the operation of law.
Example:
If a business goes into bankruptcy and can no longer pay creditors, the contracts of the business may be discharged due to insolvency.
c) Merger
A contract may be discharged by the merger of rights. This happens when a party’s rights under the contract merge with a higher right.
Example:
If A lends ₹50,000 to B and later buys the property that B owns, the loan contract may be discharged because the debt is "merged" into the ownership of the property.
A contract can be discharged when the time period prescribed for its performance lapses. In India, the Limitation Act, 1963 sets time limits within which a party must file a suit for breach of contract. After the time limit, the contract is no longer enforceable.
Example:
A has a contract with B to repay ₹50,000 by a certain date. If A fails to pay and B does not take any legal action within the time limit specified by law, the contract is discharged by the lapse of time.
In conclusion, contracts can be discharged in various ways, such as by performance, mutual agreement, frustration, breach, operation of law, or lapse of time. The mode of discharge depends on the circumstances surrounding the contract. Whether a contract is discharged due to the performance by the parties, an unforeseen event making performance impossible, or a failure to perform, understanding the modes of discharge is crucial in recognizing when the legal relationship between the parties comes to an end.
Each mode of discharge has its own significance, and the application of these principles ensures the fair enforcement and termination of contracts as per the law.