This article has been written by Shivani Kumari, a first-year law student of Lloyd law college. In this article, the author has done the comprehensive study of contracts and all related categories of discharge of contract i.e. by the act of parties or by the operation of law.
When you sign a big contract, do not have a big celebration. Celebrate when you have successfully delivered the contract.- By Salim Ghauri
We live in a world full of promises. A Promise is not just a word, it is a feeling, an emotion, trust, comfort, respect and even life for many. A contract is an exchange of promise with certain terms and conditions surrounding those promises. The Contract serves as a record of commitments for both the parties and it also helps both sides to avoid the unrealistic expectation of one another.
Indian contracts act, 1872 governs the contract under section 2(h). It defines a contract as an “agreement enforceable by law”. All agreements are, therefore not contracts. Only those agreement which is enforceable i.e., which are capable of being enforced through the court of law, are contracts. In simpler form, a contract is a legally binding promise (oral o written) between the parties to fulfil the terms and conditions in return of some lawful consideration.
For instance, Mr. X offers Mr. Y to sell his car for Rs.2L and Mr. Y agrees for the same. Here, we can clearly see the offer, acceptance and lawful consideration which are the most essential elements of a contract. Hence, it constitutes a contract. A basic binding contract must comprise of certain key elements-
According to section 2(a) of the Indian Contract Act,” a proposal is an expression of willingness to do or not to do anything with a view to obtaining the assent of the other person to such act, he is said to make a proposal. The person who is making a proposal is called “promisor”.
It is defined under section 2(b) of the Indian Contract Act. It is simply giving lawful consent to the actual proposal made.
Intention to create a legal relationship
An offer must be made with the intention to create a legal relationship. An offer is not a valid offer if it does not create a legal obligation upon the other party. Mere trifles do not constitute an offer.
Parties must be competent to contract
Every person who has attained the age of majority and who has not been disqualified i.e, prohibited by law, from entering into a contract is competent to contract.
Some persons are incompetent to contract and if such person is involved in any contract then such contract is said to be void i.e., the contract is not enforceable by law. Following are the Incompetent persons –
- A minor – a person below the age of 18 years. [Mohiri Bibee V. Dharmadas Ghose ]
- A person of unsound mind or insane
- A person disqualified by any law to contract
Consideration is ‘quid pro quo’ which means something for something. Consideration can be in cash or kind, but it must contain some values in the eyes of law. So, consideration cannot be gratuitous. Love and affection cannot be considered as consideration.
Free consent of the parties entering into the contract
Consent is the essence of a valid contract and the contract must be free. It is ‘’consensus ad idem” i.e., meeting of minds. Two or more persons are said to consent when they agree upon the same thing in the same sense.
Consent is said to be free when it is not vitiated by-
- Coercion –It is a committing or a threat to commit an act forbidden by Indian penal code i.e., a violated act.
- Undue influence – It takes place when two person stands in such a relation that one party is in a position to dominate the will of the other. For instance, Family doctor
- Fraud– It is a false statement made knowingly to be untrue with an intention to deceive another party or to induce him to enter into a contract.
- Misrepresentation– It means misstatement or unwarranted statements which are not true though the person believes it to be true.
- Mistake- A mistake is of two types (a) mistake of facts, which is entertained (b) mistake of law, which is not considered as an excuse in our legal system. Mistake simply misleads the parties involved in a contract.
The object of the contract must be lawful
A contract cannot be made and enforced for an unlawful or illegal object like- smuggling, drug-trafficking, killing someone etc. As per the Indian Contract Act, the object and consideration of an agreement is unlawful, if-
- It is forbidden by law
- It is of such nature that, if permitted, it would defeat the provisions of any law
- It is fraudulent
- It involves injury to the person or property of another, and
- The court regards it as immoral or opposed to public policy
Agreements which have been declared by laws as illegal or opposed to public policy.
Contract Act declares certain Agreement to be specifically void. They are-
- Agreements with a minor
- Agreements without consideration
- Agreement in restraint of marriage
- Agreement in restraint of trade
- Agreements in restraint of legal proceedings
- Agreements which is not certain or capable of being made certain
- Wagering agreement
- Agreements to do impossible acts
Discharge of contract
A contract is an agreement containing various terms and conditions and hence create some obligation on one or all parties involved. The discharge of contract happens when these obligations come to an end or extinguished. It is the termination of a contractual relationship between the parties. A contract may be discharged either by the acts of the parties or the operation of law.
A contract can be discharged by any of the following ways-
1. Discharge by Performance
A contract is known to be discharged by performance when the parties involved complete their obligation within the prescribed limits.
It is classified into two parts-
2. Actual Performance
Actual performance of a contract arises when the parties to a contract do what they had agreed for, under the original contract. It is the discharge of all the obligation of the parties involved.
For instance– X agrees to sale his car to Y for an amount of Rs. 3,00,000 to be paid by Y on the delivery of the car. As soon as the car delivered, Y pays the amount promised.
3. Attempted Performance
Attempted performance of a contract arises when one party attempts to perform his promise made in actual contract, but the other refuses to accept it.
For instance- X agrees to sale his car to Y for an amount of Rs. 3,00,000 to be paid by Y on the delivery of the car. When X went for delivery, Y refuses to pay.
4. Discharge of a Contract by Lapse of Time
According to the limitation act,1963, the limitation period for a contract starts when the cause of action arises, that is, when a party becomes entitled to bring a claim. Most claims under contract have a limitation period of 3 years. So, discharge of a contract by lapse of time arises when the promisor fails to perform, his obligation and the promisee fails to take action, then the later cannot seek a remedy through law after the specified time.
For instance, X purchased to plot from Y for 20lakhs. X paid 5lakhs and agrees to pay instalments every month for the next six years. However, after giving a few instalments he stopped paying the money back. Y approached him a few times but then gets busy and takes no action. Three years later, Y approaches the court to help him recover his money, but the court denied as he has crossed the time-limit of three years to recover his debt.
5. Discharge by Mutual Agreement
Mutual means common. Discharge by mutual agreement arises when the parties to the contract mutually agree (expressly or impliedly) to terminate the obligation of the contract.
For instance– X buys a laptop from Y with a condition that if it’s working is not found satisfactory, he will return it within a week. After using the product X was not satisfied with the performance of the laptop and returns it to Y within a week. The contract is discharged by mutual consent.
There are various ways in which the discharge of a contract takes place. Some of these are as follows-
- Alteration: Alteration simply means modification. Alteration in a contract means modification or change in one or more of the terms and conditions i.e., an obligation of a contract. It is only valid when all the parties to the contract give their free consent regarding the same. In such a case the old contract is discharged.
- Novation: Novation simply means substitution. In this case the old contract i.e., the original contract, get discharged with its substitution with a new contract. Novation can take place between the old parties or can include new parties, but with the consent of all the old parties.
- Remission: under section 63 of the Indian contract Act, every promise may dispense with or remit, wholly or in part, the performance of the promise made to him, or may extend the time for such performance, or may accept instead of it any satisfaction he thinks with.
- Rescission: In contract law, rescission has been defined as, the unmaking of a contract between parties. It helps the parties involved to get out of all the obligations of the contract.
- Discharge by operation of law
A contract may be discharged by operation of law. In other words, the law itself discharges the contract in the following circumstances.
- By death: Without a promisor or a promisee, a contract is incomplete. So, if anyone of the two faces this situation of life (death), the obligations arising out of contract gets discharged.
- By insolvency: When a person is adjudged insolvent, all the obligation arising out of contract gets discharged.
- Discharge by impossibility of performance
Impossibility is an unforeseen event in anyone’s life. If it is impossible for any of the parties to the contract to perform their obligation, then the impossibility of performance leads to a discharge of the contract. Some of the reasons for the impossibility of the obligation are-
- An unforeseen change in the law.
- Destruction of the subject matter essential to the performance.
- A declaration of war
- Internal disturbance within a nation
- Any pandemic situation
For instance, X and Y are traders in different countries. X promised to send 50 cars to Y within 10 days. Meanwhile, a war broke between the two countries and as a result of this X was not able to deliver the cars. Here, the obligation of X is discharged because of the war.
6. Discharge by Breach of Contract
A breach of contract arises when one party in an agreement fails to deliver according to the terms of the agreement.
Also if a party acts as breaking a contract before the deadline of meeting a contractual obligation, then it is termed as anticipatory breach of contract.
In both cases, the obligation to the parties are not fulfilled, hence it constitutes a discharge by breach of contract.
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