Discharge of contract by performance

This article is written by Shashank Singh Rathor. This article mainly discusses what the performance of a contract is and the types of discharge by performance with relevant landmark judgments. Moreover, it concisely elucidates various modes of discharge of the contract.

It has been published by Rachit Garg. 

Contracting is a basic need of society, as in our day-to-day life, we all get into some kind of contract from a vegetable vendor to buy vegetables, to the bank to get a home loan, etc. In simple terms, contracting is a process through which two or more parties promise to discharge their obligations which were discussed while getting into the contract. When parties sign a contract, they are bound to perform their respective promises which they have made to each other while getting into the contract otherwise the contract becomes voidable or else void. In a legally binding contract, discharge of the contract means all the objectives and responsibilities which were legally formed, had been performed. The key responsibilities in a legal contract are the ones that explicitly establish the performance obligations of the involved parties. In a nutshell, the discharge of a contract does not mean the destruction of the whole contractual relationship between the involved parties, it just simply means, the primal obligations have been discharged. There are various ways for the discharge of a contract, this article covers the most common method of discharge of a contract which is via the performance of primary obligations by both parties.

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Discharge of a contract means all the contractual obligations between the contracting parties have been fulfilled. In short, the discharge of the contract is the termination of all the contractual relationships between the involved parties. 

There are numerous ways to discharge the contract, such as:

By performance of a contract

Discharge of contract by performance simply means that all the obligations and terms agreed upon by the parties have been fulfilled. It happens when both parties carry out their respective responsibilities and duties as mentioned in the contract. Once the performance is completed, the contract is considered discharged, and parties are set free from any further obligations. Genuine performance is pivotal for the successful discharge of a contract.

By agreement

Discharge of contract by agreement happens when both the involved parties mutually agree to terminate the contract. The parties reach a consensus to free each other from the contractual obligations. This could be done by a formal agreement or a mutual understanding between the contracting parties. Once the agreement is finalised, the contract between the parties is considered discharged, and parties after that are no longer bound by its terms. 

By impossibility of performance

Discharge of a contract by supervening impossibility happens when unforeseen situations arise that make the performance of that particular contract objectively impossible. Such circumstances or situations must be beyond the control of the involved parties and not anticipated at the time of contract formation. The impossibility must be legitimate and not self-induced. Once the impossibility is established, the contract is discharged, releasing the parties from their obligations. 

By breach of contract

Discharge of contract by breach happens when one of the contracting parties fails to accomplish their contractual obligations without a legitimate excuse. Such failure establishes a breach of the contract. The non-breaching party then has the option to terminate the contract with the other party and seek legal remedies for damages caused by the breach. The breach of contract leads to termination of the contract and discharges the parties from the further performance of the contractual obligations and also may result in liability for the breaching party.

The performance of the contract is the most usual method of discharging any contract. The performance of any contract means that both the promisor (who makes a promise to fulfil certain obligations) and the promisee (the party to whom a promise is made and who is entitled to receive the benefits or performance specified in the contract) fulfilled their respective legal obligations created under the contract within the prescribed time and manner (if any).

For example,  A agrees to sell his bike to B for an amount of Rs 10,000, which is to be paid by B on the delivery of the bike. As soon as it is delivered, B pays the promised amount.

Since both the contracting parties fulfil their duties and obligations arising under the contract, it is referred to as the discharge through performance.

A goes to a stationery shop to buy a pen. The shopkeeper delivers the pen, and in return, A pays the price. The contract is said to be discharged by mutual performance. 

The parties involved in the performance of a contract are the individuals or entities involved in carrying out the obligations and responsibilities as specified in the agreement. Mainly, the performance of a contract involves two parties: the promisor, who is bound to fulfil the terms of the contract, and the promisee, who is authorised to obtain the benefits or performance promised. The parties to the contract must work together to establish that the agreed-upon terms are completed as per the conditions outlined in the contract. Effective communication, cooperation, and adherence to the contractual provisions are pivotal for the successful performance of a contract by the involved parties. 

Section 37 of the Indian Contract Act, 1872 provides that the parties involved in a contract are obligated to either carry out or provide an offer to fulfil their respective subsequent promises. This obligation remains unless the performance is exempted or excused as per the provisions of this Act or any other applicable law.

Furthermore, promises made by a promisor continue to bind their representatives in the event of the promisor’s death before the performance, unless the contract explicitly states otherwise.

Consequently, it can be deduced from Section 37 of the Act that it is the primary obligation of both contracting parties to either perform or offer to perform their promises. For effective performance of the contract, the performance of their promises should be exact and complete, i.e., the same must comply with the contractual obligations of the contract. In certain circumstances, the performance of a contract can be excused or dispensed with under the provisions of the Contract Act or other applicable laws. This means that there are legal provisions that provide relief or exemption from the obligation to perform the contract. These provisions may include situations such as the impossibility of performance, the frustration of purpose, or other valid reasons recognised by the law. When such circumstances arise, the party affected by these provisions is relieved from the duty to perform the contract, and their non-performance is considered justified and permissible under the law. The parties are absolved from such responsibility.

The terms, “must either perform, or offer to perform”, stated in the opening sentence of the first paragraph of Section 37 provides for two kinds of performance, namely;

  1. Actual performance; 
  2. Attempted performance or offer of performance or tender;

Actual performance in the contract

When a party to a valid contract actually performs all his obligations pertaining to that contract, he is said to have indeed performed his promise. Likewise, when the other party to the contract fulfils his part of the obligation, he is said to have actually performed the contract. And that is how the actual performance by both contracting parties leads to the end of the contract, thereby discharging it.

Illustration: A consented to deliver 100 lunch boxes to B’s office, and B promised A to pay the price for delivery of the 100 lunch boxes. A delivers the lunch boxes on the due date as contracted and B makes the payment. This is the actual performance.

Attempted performance or tender in the contract

Criminal litigation

The offer of performance is called attempted performance or tender in the contract. When one of the contracting parties is inclined to perform the contract and offers to perform the same, the other contracting party has an obligation to accept the performance of the contract. If the promisee refuses to accept the offer of performance, the promisor cannot be held liable for the non-fulfilment of the contract, and his rights under the contract remain unaffected. This can be clearly inferred from Section 38 of the Indian Contract Act, 1872 which states:

“Where a promisor has made an offer of performance to the respective promisee, and the offer has not been obtained, the promisor is not held responsible or liable for non-performance, nor does he thereby lose his right under the contract.”

Every offer must comply with the following conditions:

  • Section 38(1) of the Indian Contract Act, 1872 states that the offer must be unconditional;
  • Section 38(2) of the Act mentions that the offer must be made at an appropriate place and time, and under such kind of circumstances that the person to whom the offer is made might have a reasonable chance or opportunity of determining that the person by whom it is made is able and willing there and then to do the whole of what he is bound by his promise to do.
  • Last but not least Section 38(3) of the Act clears that In the case of an offer to deliver something to the promisee, it is crucial to provide the promisee with a fair opportunity to verify that the specific item offered is the one that the promisor is obligated to deliver. Additionally, if there are multiple joint promises, an offer extended to one of them carries the same legal implications as an offer made to all of them.

Example – A offers to deliver a brand new laptop to B as part of their contract. To ensure transparency and allow B to verify the offered item, A arranges a meeting where B can inspect the laptop’s brand, model, and specifications before accepting the offer. This opportunity gives B a fair chance to confirm that the laptop being offered is indeed the one that A is bound to deliver under their agreement. Moreover, if A had made the same offer to B and his business partner, C, the offer extended to either of them would have equal legal consequences, providing both parties with the same rights and obligations.

In contract law, there are two types of tender in the performance of a contract:

Tender of goods and services

This occurs when the party responsible for delivering goods or providing services presents them to the other party for acceptance according to the contract’s terms. If the receiving party does not accept the tendered goods or services, the offering party can reclaim them, thereby releasing themselves from liability.

Tender of money

This type of tender occurs when a debtor offers the exact amount of money owed to the creditor. However, if the creditor refuses to accept the money, the debtor remains obligated to repay the debt. Hence, a tender of money alone does not absolve the debtor from the liability to repay the debt.

It’s worth noting that these distinctions play a vital role in contract law to determine the discharge of obligations and liabilities in specific circumstances.

Essentials of valid attempted performance or tender

A valid tender must fulfil the following conditions listed below:

The respective tender must be unconditional  

The offer to perform the respective tender must be unconditional. For example, in the scenario where X, a debtor, proposes to pay Y, the creditor, the outstanding amount by suggesting the purchase of Y’s farmhouse at the specified price, the tender made by X is regarded as unconditional.

The tender money must be of the exact sum due and must be in legal tender money and not by way of promissory notes or cheques. In one of the landmark judgments of the Allahabad High Court, Navin Chandra v. Yogendra Nath Bhargava, (1967), the Hon’ble Allahabad High Court held that “the parties involved were not the businessmen, nor debt arose was due to the business transaction, and also there were no custom or agreement allowing the payment of the respective house rent by cheque.” The owner of the house (landlord) was held empowered to reject the payment made by cheque on the valid ground that it was not a valid tender.                                                                                                            

The tender must be made at the proper time and place

The respective tender must be made at the proper time and place, and moreover, the promisee must be provided with an adequate opportunity to determine that the promisor will fulfil the contractual obligations appropriately. The promisee should be granted a fair opportunity to verify and ensure that the promisor will execute the performance in accordance with the agreed-upon terms. This enables the promisee to evaluate and verify that the promisor’s performance aligns with the specified standards and requirements. For example, if a tenant makes an offer to pay the money (rent) to the landlord at a marriage function, the landlord can reject the offer of payment as the tender of money is not at the proper place.

The individual making the tender must be able and willing to perform

It is essential that the person who is making the tender must be able and willing to perform the contract there and then do the entire thing for what he is bound by his promise to do. The respective goods are not required to be in possession of the delivering party; mere control over goods is enough.

The reasonable opportunity for the inspection must be given

The promisee must be provided with a reasonable opportunity to inspect the thing which has been offered by the promisor. Suppose the promisor has offered to deliver anything to the promisee, in this scenario, the promisee must have the appropriate chance of determining that the particular thing offered is the thing which the promisor is bound to deliver as per his promise. It is the receiving party’s duty to verify the same.

Example – On the 1st of March 1873, A and B entered into a contractual agreement in which A agreed to deliver 100 bales of cotton, meeting specific quality requirements, to B’s warehouse. For A’s performance to be considered valid according to the terms stated in this section, A is required to bring the designated cotton to B’s warehouse on the specified day as outlined in the contract. It is necessary for A to provide suitable circumstances that afford B a reasonable opportunity to inspect the cotton and ensure that it matches the quality parameters mentioned by B at the time of contract signing. Additionally, A must ensure that the delivery consists of exactly 100 bales of cotton.

The offer to one of the joint-promisees is valid

Joint promisees refer to multiple individuals or entities who collectively receive the benefit or rights under a promise made in a contract. It is to be understood that an offer to one of the joint promisees holds the same legal consequences as an offer to all of them. Therefore, an offer to perform one of the several joint promises is a valid offer of performance.

The tender must be given in respect of the whole of the obligation

The person making the tender must be able and willing to perform the whole of his obligations of what he is legally bound by his promise to do. For example, a tender of part of the sum due, or a tender that is less in quantity than the contract is not a valid tender.

According to Section 39 of the Indian Contract Act, 1872, if one of the parties to the contract refuses to perform his part, or somehow disabled himself from performing, his promise in its entirety, such contract is voidable at the end of the promisee, unless the promisee has indicated, through words or actions, his acceptance or agreement to the continuation of the contract.

Example – A and B enter into a contract where A agrees to deliver a custom-made piece of furniture to B’s house within two weeks. However, on the delivery date, A informs B that he will not be able to fulfil his promise due to unforeseen circumstances. In this situation, B has the right to terminate the contract since A has refused to perform his promise entirely. However, if B explicitly states that he is willing to continue with the contract despite A’s non-performance, either through written or verbal communication, the contract will still be valid and binding.

Section 51 of the Indian Contract Act, 1872 states about the circumstances when contracts between the parties require simultaneous performance. In a contract involving reciprocal promises that are meant to be performed simultaneously, the promisor is not required to fulfil his promise unless the promisee is prepared and willing to fulfil his corresponding promise.

Example – A and B enter into a contract, where A promises to deliver a painting to B, and in return, B promises to pay him Rs. 500. According to the terms of the contract, both the delivery of the painting and the payment of Rs. 500 should occur simultaneously.

If, on the agreed-upon date, B is ready and willing to pay Rs. 500 but A fails to deliver the painting, B is not obligated to make the payment. Similarly, if A delivers the painting but B refuses to pay, A is not required to fulfil his promise of delivering the painting.

In this scenario, the performance of each party’s promise is dependent on the willingness and readiness of the other party to fulfil their reciprocal promise.

A valid contract is a contract that could be fulfilled legitimately, adhering to all the terms outlined in the contract. However, there could be circumstances beyond the control of the parties due to the impossibility of carrying out the contract. In such a scenario, the contract is deemed cancelled or terminated due to the impossibility of performance. As per Section 56 of the Indian Contract Act, 1872, a promise to perform any act that is impossible from the beginning itself is considered void. This principle is truly based on the notion that the law does not recognise the impossible, and that’s why, impossible obligations don’t establish legal obligations.

Contract to perform an act that later becomes impossible or unlawful 

A contract between the parties to do a certain act, after its formation, if becomes unlawful or impossible due to any reason beyond the promisor’s control then such contract is declared to be void when the act itself becomes unlawful or impossible due to any reason beyond the control of the promisor. 

In the landmark judgement of Taylor v. Caldwell (1863), the defendant (Caldwell) entered into a contract with the plaintiff (Taylor) to utilise the music hall belonging to the defendant for the concert over a specific period of time. However, before the concert, the music hall was destroyed due to fire without any fault of either party. The plaintiff filed a case against the defendant seeking compensation for their loss. The Court in this case dismissed their claim, stating the reasoning that the performance of the contract became physically impossible due to the destruction of the music hall due to fire, which was the pivotal subject matter in this case. This case is also known for the depiction of the doctrine of impossibility in a contract for the very first time.  

Compensation for loss arising from the non-performance of an impossible or unlawful act

If one of the contracting parties promised to do something that they knew or could have reasonably known to be impossible or unlawful, and the other party was totally unaware of this fact, in such case the promisor is liable to compensate the promisee for any loss incurred to the party due to the non-performance of the promise.

Basanti Bai v. Sri Prafulla Kumar Routrai (2006)

In this case, the Court held that if a person dies without nominating any legal representative then in such a scenario the liability to perform the promises made by the deceased person will lie upon the person who acquires the interest over the subject matters of the contract through that deceased person. 

P.L.S.A.R.S., Sabapathi Chetty (Deceased) vs. Krishna Aiyar (1925)

In this particular case, the Court held that, in general, the parties to the tender of performance fix the time and place. The tender of performance must be made in accordance with the time and place as outlined in the contract. If the performance is made within the stipulated time as mentioned in the contract then the promisor is under no further obligations.

Startup v. Macdonald (1843)

In this case, the defendant purchased ten tons of linseed oil to supply it to the plaintiff within the last fourteen days of the month of March. The plaintiff tendered the defendant at night on the fourteenth day. However, the defendant citing the lateness of the tender rejected the acceptance of the tender. The Court held that the defendant should be held liable for the breach of the terms and conditions of the contract and the argument made by him that the late acceptance of the tender was made could not be entertained because, although the acceptance was made late, still the acceptance was made before midnight.    

Dixon v. Clark (1847)

In this case, the Court held that merely because the payment was tendered and refused, it doesn’t mean that the debtor is discharged from the liability to pay the debt.

Vidya Vati v. Devi Das (1977)

The Supreme Court upheld the principle stated in Dixon v. Clark (1847) case and the apex Court said that the debtor won’t be discharged of his obligation to pay merely because his tender was refused. 

Hungerford Investment Trust Ltd. v. Haridas Mundhra & Ors. (1972)

The Court held that if the contract doesn’t mention any specific time for the performance of the contract then in such a case the law will imply that the parties intended that the obligations mentioned under the contract should be performed within a reasonable time, and the question ‘what is a reasonable time’ is in each specific case is a question of fact.

Saraswat Trading Agency v. Union of India (2002)

In this particular case, the Court held that if a promise has to be performed within a certain time period as outlined in the contract then it should be performed any day before the lapse of the time.

Narayandas Shreeram Somani v. Sangli Bank Ltd. (1965)

In this case, the Supreme Court held that to support a plea of payment, it is not necessary to show that cash passed. For instance, the payment can also be made by means of transfer entries in the books of account.

The most common or natural way of terminating a contract is to perform it. The performance of a contract can be actual or attempted (also known as Tender). The expression performance in its true sense means the performance of a task or action. When a party to a contract offers to perform his promise as stipulated in the contract, and the other party refuses to accept it, the contract is discharged. Attempted performance or tender is equivalent to actual performance. The party who offered to perform is discharged from his obligation. The tender to be valid must be unconditional, made at the proper time, place and manner, made to the promisee or his authorised agent, and must be for the whole obligation. 

What are the different modes of discharge of a contract?

The different modes of discharge of a contract are as follows:

  • Discharge by performance;
  • Discharge by the impossibility of performance;
  • Discharge by agreement;
  • Discharge by breach.

The above-mentioned are the modes of discharge of a contract.

What do you understand by the performance of a contract? 

The performance of the contract is the most common method of discharging any contract. The performance of a contract means that both the promisor and the promisee accomplished their respective legal obligations created under the contract within the prescribed time and manner (if any).

Who can demand the performance of the contract?

The performance of a contract can be demanded by the promisee only. In case of his death, his representatives can demand performance. Just in case of contracts of a personal nature, they should be performed by the promisor. In other scenarios, it may be performed by his agent, and in case of his death by his legal representatives.  

What are the different kinds of discharge of contract by performance?

Discharge of performance may be:

  • Actual performance
  • Attempted performance

What is the difference between actual and attempted performance of a contract?

When both parties accomplish their performance, then such a contract is said to be discharged. It must be taken into account that performance should be complete and precise according to the terms of the agreement. Most of the contracts are discharged by performance in this manner. 

Attempted performance is only an offer to perform the obligation under the contract. When the promisor agrees to perform the contract but the promisee refuses to accept the performance, then in such case, it is termed as the discharge of contract by attempted performance or tender.

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