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Discharge, Termination & Remedies for Breach of Contract | B.Com Notes

Study material and explanations for Unit 1

Discharge, Termination & Remedies for Breach of Contract (with Contract Drafting Activity)

1. Concept of Discharge of Contract

Discharge of contract means the termination of the contractual relationship between the parties. The contractual obligations come to an end, and neither party can claim any further performance under the contract.

Six Recognized Modes of Discharging a Contract
1. By Performance (Sec 37-38)
The natural and normal mode:
  • Actual Performance: Both parties perform promises within stipulated time.
  • Attempted Performance (Tender): Offer of performance rejected by promisee.
2. By Mutual Consent (Sec 62-63)
Parties agree to dissolve ties:
  • Novation: Substituting new contract for old.
  • Rescission: Mutual cancellation of contract.
  • Alteration: Changing material contract terms.
  • Remission / Waiver: Accepting lesser satisfaction.
3. By Supervening Impossibility
Doctrine of Frustration (Sec 56): Contract becomes void when performance becomes legally or physically impossible without fault of either party (destruction of subject matter, change in law, outbreak of war).
4. By Lapse of Time
Under the **Limitation Act 1963**, contractual debts must be claimed within 3 years. After expiry of the limitation period, the legal remedy is barred and the contract is discharged.
5. By Operation of Law
Occurs independently of parties' will:
  • Death of promisor in personal contracts.
  • Insolvency of the contracting party.
  • Merger of inferior right into superior right.
  • Unauthorized material alteration of document.
6. By Breach of Contract
Failure or refusal to perform:
  • Anticipatory Breach (Sec 39): Repudiation before the due date of performance.
  • Actual Breach: Refusal on due date or during performance.

2. Remedies for Breach of Contract

When one party breaches a contract, the injured (aggrieved) party is entitled to one or more statutory remedies:

Systematic Taxonomy of Remedies for Breach of Contract
Remedy 1 Rescission of the Contract:
The aggrieved party is discharged from all further obligations and can treat the contract as terminated, suing for any loss suffered.
Remedy 2 Suit for Damages (Sections 73 - 75):
Monetary compensation for actual loss arising naturally in the usual course of things (*Hadley v. Baxendale*). Remote or indirect losses cannot be recovered.
Remedy 3 Suit upon Quantum Meruit:
Literally translates as "as much as is earned". Where work has been partially performed and the other party repudiates or prevents completion, payment for proportionate work done can be claimed.
Remedy 4 Suit for Specific Performance & Injunction:
Discretionary equitable remedies under the Specific Relief Act 1963: ordering the party to perform specific act (e.g. conveyance of unique real estate) or an injunction restraining a negative covenant.

3. Rules Governing Assessment of Damages: Hadley v. Baxendale (1854)

The principles governing contractual damages under Section 73 derive from the landmark English ruling Hadley v. Baxendale:

  1. Ordinary / General Damages: Compensation for losses that arise naturally in the usual course of things from the breach.
  2. Special Damages: Compensation for extraordinary loss caused by unique circumstances, recoverable only if special circumstances were brought to the promisor’s knowledge at the time of making the contract.
  3. Duty to Mitigate: The injured party is under a strict legal duty to take all reasonable steps to mitigate (minimize) their losses. Failure to do so prevents recovery of avoidable losses.

4. Practical Activity: Contract Drafting Guide

In business practice, commercial disputes are avoided through precise, ambiguous-free contract drafting.

Anatomy of a Commercial Agreement (e.g., Lease Deed / NDA / Partnership):

  1. Title & Preamble: Identifies document type (e.g., “NON-DISCLOSURE AGREEMENT”).
  2. Date and Parties: Full names, PAN, CIN, registered office addresses, and defined short names (e.g., “Disclosing Party”, “Receiving Party”).
  3. Recitals (“Whereas” Clauses): Context, background history, and intentions leading up to the transaction.
  4. Operative Clauses:
    • Consideration & Terms: Covenants, obligations, fee/rent, timeline.
    • Confidentiality Scope: Definition of proprietary secrets and non-disclosure duties.
    • Term & Termination: Duration, notice periods, and events of default.
  5. Boilerplate Clauses: Governing law (e.g., “Governed by Laws of India”), Jurisdiction (e.g., “Courts in Indore, MP”), Dispute Resolution (Arbitration clause under Arbitration & Conciliation Act 1996).
  6. Execution & Attestation: Signature of authorized representatives, corporate seals, and two independent witnesses.