Discharge by Agreement

Novation (Section 62)

A contract creates binding obligations on the parties. However, parties who mutually entered into a contract are also free to mutually agree to terminate, alter, or substitute it with a new one. The discharge of a contract by agreement or consent of both parties is a fundamental principle. Sections 62 to 67 of the Indian Contract Act, 1872, deal with this mode of discharge. One important method is Novation.

Rule under Section 62

Section 62 of the Indian Contract Act, 1872 states:

"If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed."

This section encompasses three ways in which parties can discharge an existing contract by mutual agreement: Novation, Rescission, and Alteration. We will examine Novation first.

Substitution of new contract for an existing one

Novation occurs when the parties to a contract agree to replace the existing contract with a new one. The new contract substitutes the old one, and the obligations under the old contract are extinguished. Novation can take two forms:

Novation by change of parties: A new contract is entered into where one or more of the original parties are replaced by new parties. This requires the consent of all the original parties and the new party. The original contract is discharged, and a new contract is formed between the remaining original party(ies) and the new party(ies).
Novation by change of terms: The same parties enter into a new agreement with new terms that replace the old terms. The essence is that the original contract is entirely replaced by the new one, not merely modified.

Key requirements for valid Novation:

Existence of a prior contract: There must be an existing contract that is to be substituted.
Agreement of all parties: Novation requires the consent of all the parties involved in both the original and the new contract. If a new party is introduced, the consent of the original parties and the new party is necessary.
Substitution of contract: The new agreement must completely replace the original contract, not just modify some terms. The intention must be to extinguish the old contract and create a new one.
Valid new contract: The new contract must be valid and enforceable. It must have all the essential elements of a valid contract (offer, acceptance, consideration, etc.).

The consideration for the new contract in novation is the mutual discharge of the old contract. Once novation occurs, the rights and obligations under the original contract are extinguished, and parties are bound only by the new contract.

Example 1. Mr. Alok owes Mr. Bhavesh Rs. 10,000/- under an existing contract. Mr. Alok, Mr. Bhavesh, and Mr. Chetan agree that Mr. Chetan will now owe Mr. Bhavesh Rs. 10,000/- instead of Mr. Alok, and Mr. Bhavesh will release Mr. Alok from the debt. Is this a novation?

Answer:

Yes, this is a novation by change of parties. The original contract was between Mr. Alok and Mr. Bhavesh. A new contract is substituted where Mr. Chetan replaces Mr. Alok as the debtor. This requires the agreement of all three parties: Mr. Alok (released from liability), Mr. Bhavesh (accepting Mr. Chetan as debtor instead of Mr. Alok), and Mr. Chetan (assuming the debt). The original contract between Mr. Alok and Mr. Bhavesh is discharged, and a new contract between Mr. Chetan and Mr. Bhavesh is created. Mr. Bhavesh can now only claim the Rs. 10,000/- from Mr. Chetan, not Mr. Alok.

Example 2. Mr. Deepak contracts to supply 100 bags of cement to Mr. Eshan by 1st June for Rs. 50,000/-. Later, they agree that instead of 100 bags of cement, Mr. Deepak will supply 80 bags of cement and 20 bags of lime to Mr. Eshan by 15th June for the same price. They intend this new agreement to replace the old one entirely. Is this a novation?

Answer:

Yes, this is a novation by change of terms. The original contract for cement is replaced by a new agreement involving a different quantity and type of goods and a different delivery date, though the parties remain the same. The intention is to substitute the old contract with the new one. The original contract is discharged, and the parties are bound by the new agreement to supply cement and lime by 15th June.

Rescission (Section 62)

Another way parties can discharge a contract by mutual agreement is through rescission.

Rule under Section 62 (Partial Reference)

Section 62 also mentions rescission: "If the parties to a contract agree ... to rescind or alter it, the original contract need not be performed."

Cancellation of the original contract

Rescission by agreement means that the parties mutually agree to cancel the existing contract. It is essentially an agreement to terminate a prior agreement. The obligations under the original contract are terminated by the new agreement to rescind.

Key requirements for Rescission by Agreement:

Existence of a prior contract: There must be an existing contract.
Mutual agreement to cancel: All parties to the original contract must agree to terminate it. This agreement to rescind must itself be a valid agreement (requiring offer, acceptance, consideration, etc.).

The consideration for the agreement to rescind is the mutual abandonment of rights by each party under the original contract. For example, if A and B had reciprocal promises, A's agreement to release B from his promise is consideration for B's agreement to release A from his promise.

Rescission discharges the contract from the moment of rescission. Unlike novation, which replaces the old contract with a new one, rescission simply cancels the old contract without creating a new one to take its place (in the same subject matter).

Example: A contracts to deliver goods to B next month. Later, A and B mutually agree that A does not need to deliver the goods and B does not need to pay. They simply cancel the agreement. The original contract is discharged by rescission.

Note that this is 'rescission by agreement'. This is different from the right to 'rescind' a voidable contract unilaterally due to factors like fraud or coercion (as discussed under Voidable Contracts).

Example 1. Mr. Farhan agrees to buy Ms. Geeta's used car for Rs. 2 Lakhs, with payment and delivery next week. Before next week, Mr. Farhan finds a better car, and Ms. Geeta decides she doesn't really need to sell her car urgently. They both agree to cancel their contract. Is their contract discharged?

Answer:

Yes, their contract is discharged by rescission. Both Mr. Farhan and Ms. Geeta, who are parties to the original contract, mutually agreed to cancel it. This agreement to cancel is valid, and as per Section 62, the original contract need not be performed. It is terminated by their mutual consent.

Alteration (Section 62)

The third mode of discharge by agreement mentioned in Section 62 is alteration.

Rule under Section 62 (Partial Reference)

Section 62 also states: "If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed."

Change in terms of the contract

Alteration means that the parties mutually agree to change one or more terms of the existing contract. The original contract is not entirely replaced (as in novation), nor is it cancelled (as in rescission). Instead, the existing contract continues to exist, but in a modified form with the altered terms.

Key requirements for Alteration:

Existence of a prior contract: There must be an existing contract.
Mutual agreement to change terms: All parties to the original contract must agree to the changes in the terms.
Changes to terms: The agreement modifies some of the original terms (e.g., price, quantity, delivery date, mode of payment).

The original contract, as altered, remains binding. The consideration for the alteration is the mutual agreement to modify the existing obligations.

Example: A contracts to deliver 100 bags of wheat to B by 1st June for Rs. 2 Lakhs. Later, A and B mutually agree to change the delivery date to 15th June. The original contract for 100 bags of wheat for Rs. 2 Lakhs remains, but the term regarding the delivery date is altered.

Distinction between Alteration and Novation (Change of Terms): The key difference lies in the intention. In Novation, the intention is to completely replace the old contract with a new one. In Alteration, the intention is merely to modify some clauses of the existing contract while the core identity of the contract remains.

Other Modes of Discharge by Agreement:

Remission (Section 63): The promisee may dispense with or remit (give up) 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 which he thinks fit. This is a unilateral act by the promisee, but it discharges the promisor's obligation, and often involves a change agreed upon by both parties.
Waiver: A party may waive a right under the contract. Waiver means intentionally giving up a known right. This can be express or implied by conduct.
Merger: When an inferior right accruing to a party under a contract merges into a superior right concerning the same subject matter. Example: A lease agreement merges when the tenant buys the property from the landlord.

All these modes of discharge by agreement are based on the principle that a contract created by agreement can also be extinguished or modified by agreement.

Example 1. Mr. Harish contracts to supply 50 kilograms of coffee beans to Mr. Iqbal for Rs. 15,000/- by 31st October 2024. Later, due to change in Mr. Harish's source, they mutually agree that the price for the same quantity and delivery date will now be Rs. 16,000/-. Is this a novation or alteration?

Answer:

This is an Alteration. The core of the contract (supply of 50 kg coffee beans by 31st October) remains the same. Only one term, the price, is being changed by mutual agreement. They are not substituting the original contract with a fundamentally new one, but merely modifying an existing term. This falls under the 'alter' provision of Section 62.

Discharge by Performance

Actual Performance

One of the most common ways in which a contract is discharged is by performance. When parties to a contract fulfil their respective promises as agreed upon, the contract is discharged. Section 37 of the Indian Contract Act, 1872 states the general rule that parties "must either perform, or offer to perform, their respective promises".

Meaning of Actual Performance

Actual Performance means that a party has done exactly what they were required to do under the terms of the contract. Both parties have completed their obligations fully and precisely as per the contract.

When both the promisor and the promisee have performed their respective promises, the contract is discharged by mutual performance. Neither party has any further obligations or rights against the other under that contract.

Example: A contracts to sell his car to B for Rs. 5 Lakhs. A delivers the car to B, and B pays Rs. 5 Lakhs to A. Both parties have performed their promises. The contract is discharged by actual performance.

Who can demand Performance (Section 40 - partially)

Performance of a promise must be demanded by the promisee or on his behalf by his authorized agent or legal representative (Section 40 implies this by stating who *must* perform). Only the promisee can demand performance, not a stranger to the contract.

Time and Place of Actual Performance

For performance to be effective in discharging the contract, it must generally be made at the time and place specified in the contract or, if not specified, within a reasonable time and at a reasonable place (as discussed under Time and Place of Performance - Sections 46-49). Performance outside the agreed time or place might not be considered valid actual performance, especially if time or place is of the essence.

Effect of Actual Performance

Upon actual and complete performance by both parties, the contract is discharged. All primary obligations under the contract come to an end. Any rights or remedies for breach arising before performance are still available (e.g., claiming damages for a delay if time was not of the essence but caused loss), but the main contractual relationship is concluded.

Example 1. Mr. Kishore contracts to build a wall for Ms. Lata for Rs. 10,000/-. Mr. Kishore builds the wall as per the specifications and Ms. Lata pays him Rs. 10,000/-. Has the contract been discharged?

Answer:

Yes, the contract has been discharged by actual performance. Mr. Kishore has performed his promise (building the wall), and Ms. Lata has performed her promise (paying Rs. 10,000/-). Both parties have fulfilled their obligations under the contract as agreed. Therefore, the contract is discharged by actual performance.

Attempted Performance (Tender of Performance)

Sometimes, a promisor is ready and willing to perform their promise, but the promisee refuses to accept the performance. In such cases, the promisor has made an 'attempted performance' or 'tender of performance'. Section 38 of the Indian Contract Act, 1872, deals with the effect of such tender.

Meaning of Attempted Performance

Section 38:

"Where a promisor has made an offer of performance to the promisee, and the offer has not been accepted, the promisor is not responsible for non-performance, nor does he thereby lose his rights under the contract."

Explanation: An offer of performance (tender) must be:

Unconditional: The offer must be made without imposing any condition.
At Proper Time and Place: The offer must be made at a proper time and place and under such circumstances that the promisee has a reasonable opportunity of ascertaining that the person offering to perform is able and willing then and there to do the whole of what he is bound by the promise to do.
To Proper Person: If the promise is to be performed to the promisee personally, or to his agent, the offer must be made to him or his agent.

Example: A contracts to deliver goods to B's warehouse on a certain day. A brings the goods to B's warehouse at the agreed time, but B refuses to open the warehouse or accept the delivery. A has made an offer of performance.

Essentials of a Valid Tender:

For a tender of performance to be valid, it must meet certain conditions:

It must be made at the proper time and place.
It must be unconditional.
It must be for the whole obligation under the contract, unless agreed otherwise.
The promisee must have a reasonable opportunity to examine the performance offered (e.g., examine the goods tendered).
In case of tender of money, the exact amount must be tendered in legal tender currency.
It must be made to the proper person (promisee or authorized agent).
If there are joint promisees, an offer to one of them has the same legal consequences as an offer to all (Section 45).

Effect of refusal of performance

When a valid offer of performance (tender) is made by the promisor but refused by the promisee, the consequences are significant for both parties (as stated in Section 38):

Promisor is Discharged: The promisor is discharged from their obligation to perform the promise. They are not responsible for the non-performance caused by the promisee's refusal. The contract is considered discharged by attempted performance.
Promisor does not lose rights: The promisor does not lose their rights under the contract. They can sue the promisee for breach of contract (for refusing to accept performance) and claim damages for any loss suffered due to the non-acceptance.

Example: A contracts to deliver 100 bags of rice to B on a certain day at a certain price. A tenders the delivery of 100 bags of rice at the agreed time and place, giving B a reasonable opportunity to inspect. B refuses to accept the delivery without any valid reason. A is discharged from his obligation to deliver the rice. A can sue B for breach of contract and claim damages (e.g., storage costs, loss on resale if any, difference in price if sold at a lower rate).

Attempted performance is as good as actual performance in discharging the promisor's obligation and enabling them to sue the promisee for breach.

Example 1. Mr. Manoj agrees to sell his scooter to Mr. Naveen for Rs. 25,000/-. Mr. Manoj brings the scooter to Mr. Naveen's house at the agreed time and place and offers to hand over the keys upon payment. Mr. Naveen refuses to accept the scooter or pay the money without any valid reason. What is the legal position?

Answer:

Mr. Manoj has made a valid offer of performance (tender) by bringing the scooter and being ready to deliver upon payment. Mr. Naveen has refused to accept this offer of performance. According to Section 38, Mr. Manoj is discharged from his obligation to deliver the scooter. The contract is discharged by attempted performance from Mr. Manoj's side. Mr. Manoj also does not lose his rights under the contract. He can sue Mr. Naveen for breach of contract (for not accepting the scooter and paying) and claim damages for any loss suffered (e.g., costs of taking the scooter back, finding a new buyer, potential loss on resale).

Discharge by Breach

Meaning of Breach of Contract

When a party to a contract fails to perform their promise, or acts in a way that shows they do not intend to perform their promise, it amounts to a Breach of Contract. A breach discharges the contract, giving the aggrieved party (the one not in breach) certain remedies.

Meaning

A breach of contract occurs when a party, without lawful excuse, fails or refuses to perform their contractual obligation, or performs defectively, or makes it impossible for themselves to perform, or shows an intention not to perform.

The consequences of a breach depend on the type of breach and the terms of the contract (e.g., whether the breached term is a condition or a warranty). However, generally, a breach releases the non-breaching party from their obligation to perform their part of the contract and gives them the right to pursue legal remedies.

Breach of contract can be broadly classified into two types:

Anticipatory Breach

Anticipatory Breach occurs when a party declares their intention not to perform their obligation under the contract before the performance is due. This declaration can be express or implied by conduct.

Section 39 of the Indian Contract Act, 1872 deals with anticipatory breach:

"When a party to a contract has refused to perform, or disabled himself from performing, his promise in its entirety, the promisee may put an end to the contract, unless he has signified, by words or conduct, his acquiescence in its continuance."

Explanation:

Refusal to Perform: One party clearly states (expressly) or shows by their actions (impliedly) that they will not perform their promise.
Disabling oneself from Performing: One party makes their own performance impossible through their actions.
In its Entirety: The refusal or disablement must relate to the entire promise or a substantial part of it, going to the root of the contract, making it impossible to perform the contract as agreed.
Before Performance is Due: This is the key element of anticipatory breach. It happens before the time fixed for performance.

Example (Express Refusal): A contracts to marry B on 1st December. Before 1st December, A informs B in writing that he will not marry her. This is anticipatory breach by express refusal.

Example (Implied Refusal/Disablement): A contracts to sell his unique antique painting to B on 1st January. Before 1st January, A sells the painting to C. A has disabled himself from performing his contract with B. This is anticipatory breach by implied conduct.

Option for the Aggrieved Party: Upon anticipatory breach, the aggrieved party (promisee) has two options:

Treat the contract as rescinded: They can immediately treat the contract as terminated and sue for damages for breach of contract without waiting for the actual date of performance.
Keep the contract alive: They can choose not to treat the contract as discharged immediately. In this case, the contract remains alive for the benefit of both parties. If, by the time performance is due, something happens that discharges the contract anyway (e.g., the subject matter is destroyed, or the contract becomes illegal due to a change in law), the party who committed the anticipatory breach may escape liability, and the contract will be discharged by frustration/impossibility. If the contract remains alive and the promisor still fails to perform on the due date, it becomes a case of actual breach.

The choice lies with the aggrieved party. They must inform the other party of their decision.

Actual Breach

Actual Breach occurs when a party fails to perform their contractual obligation on the date when performance is due, or during the course of performance.

Actual breach can happen in two ways:

Due Date Performance: Failure to perform the promise on the specific date fixed for performance.
During Performance: A party, during the course of performing the contract, fails to complete performance or performs defectively in a way that amounts to a breach of a fundamental term.

Example (Due Date): A contracts to deliver goods to B on 15th November. A fails to deliver the goods on 15th November. This is actual breach on the due date.

Example (During Performance): A contracts to build a house for B according to specific plans. During construction, A deviates significantly from the plans, constructing a house fundamentally different from what was agreed. This can be treated as a breach occurring during performance, potentially amounting to a fundamental breach justifying termination.

In both anticipatory and actual breach, the aggrieved party is discharged from their future obligations under the contract and is entitled to seek remedies.

Example 1. Mr. Pawan agrees to sell his bicycle to Mr. Qasim for Rs. 10,000/-, delivery and payment on 1st December 2024. On 15th November 2024, Mr. Pawan writes to Mr. Qasim stating, "I have changed my mind and will not sell you the bicycle." What type of breach is this, and what are Mr. Qasim's options?

Answer:

This is an Anticipatory Breach. Mr. Pawan has refused to perform his promise (sell the bicycle) before the due date of performance (1st December 2024). According to Section 39, Mr. Qasim has two options:

He can treat the contract as terminated immediately (on 15th November 2024) and sue Mr. Pawan for damages for breach of contract.
He can wait until 1st December 2024. The contract remains valid until then. If Mr. Pawan still fails to deliver on 1st December, it will become an actual breach, and Mr. Qasim can sue for damages. However, if something happens between 15th November and 1st December (e.g., a law is passed making the sale illegal) that discharges the contract, Mr. Pawan might escape liability.

Mr. Qasim must clearly communicate his choice to Mr. Pawan.

Example 2. Ms. Ritu contracts to deliver 50 kg of rice to Ms. Sonali on 10th October 2024. On 10th October, Ms. Ritu fails to deliver the rice. What type of breach is this?

Answer:

This is an Actual Breach. Ms. Ritu failed to perform her promise (deliver the rice) on the date when performance was due (10th October 2024). Ms. Sonali is discharged from her obligation to pay for the rice (unless already paid) and can sue Ms. Ritu for damages caused by the non-delivery.

Consequences of Breach

When a contract is breached, the party not in breach (the aggrieved party) is discharged from performing their obligations under the contract and is entitled to seek remedies from the breaching party. The primary objective of these remedies is generally to put the aggrieved party in the position they would have been in had the contract been performed.

Remedies available to the aggrieved party

Upon breach of contract, the aggrieved party has several remedies available under the Indian Contract Act, 1872, and the Specific Relief Act, 1963:

1. Rescission of the Contract (Sections 39, 53, 55, 64, 65):

The aggrieved party can treat the contract as repudiated and put an end to their obligations under it. This right arises in cases of:

Anticipatory breach (Section 39).
Prevention of performance by the other party (Section 53).
Failure to perform at the fixed time where time is of the essence (Section 55).
Breach of a fundamental term (condition) of the contract.

Upon rescission, the party rescinding must restore any benefit received (Section 64), and the other party must also restore benefits if the contract becomes void (Section 65 - applies if the agreement is discovered void or becomes void).

2. Claim for Damages (Sections 73, 74):

The most common remedy is claiming monetary compensation for the loss suffered due to the breach. Damages are governed by Section 73 and Section 74.

Damages under Section 73: This section lays down the rule for calculating unliquidated damages (damages not pre-agreed). The compensation is for the loss or damage "which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it." It also states that remote and indirect loss or damage is not to be compensated. This principle is famously derived from the English case of Hadley v. Baxendale. The object is to compensate for actual loss, not to punish the breaching party.
Damages under Section 74: This section applies where the contract specifies a sum to be paid in case of breach, either as a penalty or as liquidated damages. The aggrieved party is entitled to receive from the breaching party "reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for". Indian law does not distinguish between penalty and liquidated damages strictly; the court will award only reasonable compensation, up to the stipulated amount.

Example: If a seller fails to deliver goods, the buyer can claim as damages the difference between the contract price and the market price of the goods on the date of delivery (if the market price is higher). They can also claim other losses that naturally flowed from the non-delivery (e.g., loss of profit if it was contemplated by both parties).

3. Suit for Specific Performance (Specific Relief Act, 1963):

In certain cases, where monetary compensation (damages) is not an adequate remedy, the aggrieved party can approach the Court for an order directing the breaching party to actually perform their promise as per the contract. Specific performance is a discretionary remedy granted by courts, usually in contracts involving unique goods or immovable property (where each piece of land is considered unique). It is generally not granted for contracts of a personal nature, or where performance involves continuous supervision by the court.

4. Suit for Injunction (Specific Relief Act, 1963):

An injunction is a court order prohibiting a party from doing something. It can be used to prevent a party from breaching a negative term of the contract (a promise not to do something).

Example: A contracts to sing at B's theatre for one year and not to sing elsewhere during that period. If A threatens to sing at C's theatre, B can seek an injunction restraining A from singing at C's theatre (enforcing the negative covenant), although B cannot compel A to sing at B's theatre (as it's a contract of personal nature).

5. Suit for Quantum Meruit:

Quantum Meruit means "as much as earned". This remedy allows a party who has partially performed a contract, which is subsequently discharged by breach or becomes void, to claim payment for the value of the work already done. This is applicable when the original contract is discharged, but the party has conferred a benefit on the other party through part performance.

Example: A contracts to build a house for B for Rs. 10 Lakhs. A completes half the work when B wrongfully terminates the contract. A can claim on a quantum meruit basis for the value of the work already done.

The aggrieved party chooses the remedy or remedies they wish to pursue, subject to the conditions and limitations imposed by law and the discretion of the Court.

Example 1. Mr. Umesh contracts to sell a unique antique vase to Mr. Varun for Rs. 5 Lakhs. On the date of delivery, Mr. Umesh refuses to sell the vase to Mr. Varun because someone else offered him Rs. 7 Lakhs. What remedy is most appropriate for Mr. Varun?

Answer:

While Mr. Varun can claim damages (the difference between the market price/resale price and the contract price, which is Rs. 2 Lakhs in this case), the vase is described as 'unique'. In contracts involving unique items or immovable property, damages may not be an adequate remedy because a monetary amount cannot compensate for the loss of that specific item. Therefore, the most appropriate remedy for Mr. Varun would be to file a Suit for Specific Performance under the Specific Relief Act, 1963. The Court may, in its discretion, order Mr. Umesh to specifically perform the contract and sell the unique vase to Mr. Varun as agreed.

Example 2. Mr. Wasim contracts to supply 100 bags of sugar to Mr. Yusuf for Rs. 50,000/-. The contract specifies that if Mr. Wasim fails to deliver, he must pay Rs. 10,000/- as liquidated damages. Mr. Wasim fails to deliver. The market price of 100 bags of sugar has increased, and Mr. Yusuf has to buy them for Rs. 65,000/-, suffering a loss of Rs. 15,000/-. What compensation can Mr. Yusuf claim?

Answer:

The contract contains a clause specifying a sum (Rs. 10,000/-) to be paid in case of breach, which is termed liquidated damages. According to Section 74, Mr. Yusuf is entitled to receive from Mr. Wasim reasonable compensation not exceeding the amount so named. While his actual loss is Rs. 15,000/- (difference between market price and contract price), the stipulated amount in the contract is Rs. 10,000/-. Therefore, Mr. Yusuf can claim a maximum of Rs. 10,000/- as compensation. The Court will award what it considers reasonable, up to the limit of Rs. 10,000/-.

Discharge by Impossibility of Performance (Section 56)

Doctrine of Frustration

While parties are generally bound to perform their contractual obligations, the law recognizes that sometimes unforeseen events can occur after the contract is made that make performance impossible or unlawful. In such cases, the contract may be discharged under the Doctrine of Frustration, as codified in Section 56 of the Indian Contract Act, 1872.

Meaning and Scope

Section 56 deals with two scenarios of impossibility:

First Paragraph: Initial Impossibility

"An agreement to do an act impossible in itself is void."

This covers agreements that are impossible to perform from the very beginning, at the time they are made (as discussed under Void Agreements - Section 56). This is not strictly 'discharge' because a void agreement never creates obligations to be discharged.

Second Paragraph: Supervening Impossibility (Doctrine of Frustration)

"A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful."

This second paragraph embodies the Doctrine of Frustration. It applies when a contract was valid and possible to perform when entered into, but due to the happening of an event beyond the control of the parties, the performance becomes:

Impossible: The physical or practical possibility of performance is removed.
Unlawful: Performance becomes illegal due to a change in law or government action.

The event causing the impossibility or illegality must be one that the promisor could not prevent. It must be an unforeseen event that fundamentally alters the circumstances under which the contract was to be performed, making performance something radically different from what was originally contemplated.

The 'impossibility' referred to here is not just physical impossibility, but also includes situations where the object of the contract is defeated, or the performance becomes useless from the perspective of the parties.

When a contract becomes impossible or unlawful after it is made, it is said to be 'frustrated', and it becomes void at the moment the impossibility or unlawfulness arises. This discharges the parties from their obligations under the contract.

Example 1. Mr. Ajay agrees to sell his house to Mr. Binod for Rs. 1 Crore. After the agreement is made, but before the sale deed is executed, the house is completely destroyed by a massive earthquake, without any fault of Mr. Ajay. Is Mr. Ajay still bound to sell the destroyed house to Mr. Binod?

Answer:

No, Mr. Ajay is not bound to sell the destroyed house. The contract was valid when made, but the subject matter (the house) was destroyed by an event (earthquake) that neither party could prevent. This makes the performance of the contract (selling the house) impossible. This is a case of supervening impossibility leading to frustration of the contract. According to Section 56, the contract becomes void when the act becomes impossible. The contract between Mr. Ajay and Mr. Binod is discharged by frustration.

When does Supervening Impossibility arise?

The Doctrine of Frustration can apply in various situations where performance becomes impossible or unlawful after the contract is entered into. Common instances include:

Destruction of the subject-matter

If the specific subject matter of the contract (an essential thing whose existence is contemplated for performance) is destroyed or ceases to exist after the contract is made, without the fault of either party, the contract may be frustrated.

Example: Contract for the hire of a specific music hall for a concert on a particular date. The hall is destroyed by fire before the date of the concert. The contract is frustrated.

Example: Contract for the sale of specific goods which are lost at sea before delivery, unknown to the parties.

Illegality

If, after the contract is made, its performance becomes unlawful due to a change in law or some action by a competent public authority, the contract is frustrated.

Example: A contracts to supply certain goods to B in a foreign country. Subsequently, a new law is enacted in India prohibiting the export of those goods. The contract becomes unlawful and is frustrated.

Example: A licenses B to operate a restaurant in a building. The government requisitions the building for public purposes. The license agreement is frustrated.

Death or incapacity of a party in personal contracts

If the contract is of a personal nature, depending on the personal skill, ability, or qualifications of a party, the death or incapacitation (by illness, insanity, etc.) of that party after the contract is made frustrates the contract, as personal performance becomes impossible.

Example: A contracts to sing at B's theatre. A falls seriously ill and is unable to sing. The contract is frustrated.

This does not apply to contracts where performance can be done by someone else (e.g., delivery of goods, payment of money).

Non-happening of a specified event

Sometimes, the performance of the contract, although not explicitly contingent under Section 31, is based on the assumption that a particular event will occur or a state of affairs will continue. If that event does not happen, and its happening was the foundation of the contract, the contract may be frustrated because the object of the contract is defeated.

A classic example (English case, applied in India) is Krell v. Henry (1903) 2 KB 740. A contracted to hire a flat from B for two days at a high rent to watch the coronation procession of King Edward VII. The contract did not explicitly mention the procession, but both parties understood this was the purpose. The procession was cancelled due to the King's illness. The Court held that the contract was frustrated. Although hiring the flat was still physically possible, the non-happening of the procession (the underlying purpose known to both parties) defeated the object for which the contract was made.

Declaration of war

If a contract is made between parties from different countries, and war breaks out between those countries, existing contracts may be frustrated due to supervening illegality (trading with the enemy becomes unlawful) or impossibility (intercourse becomes impossible).

Events that Generally Do NOT Cause Frustration:

Difficulty of performance (mere increase in expense or labour).
Commercial impossibility (loss of profitability).
Strike or lockout (unless the contract specifically makes it a frustrating event).
Failure of a third party on whom the promisor relied (if the third party's performance wasn't a condition of the main contract).
Self-induced frustration (impossibility caused by the deliberate act or negligence of a party).

Example 1. Mr. Chetan agrees to export 1,000 kg of a specific chemical to Mr. Deepak in a foreign country by 30th September 2024. On 15th September 2024, the Indian government passes a law banning the export of that chemical. Is the contract discharged?

Answer:

Yes, the contract is discharged. The contract was valid when made, but its performance (exporting the chemical) has become unlawful due to a supervening event (the new government law) which Mr. Chetan could not prevent. This is a case of supervening illegality leading to frustration. According to Section 56, the contract becomes void on 15th September 2024 when the act becomes unlawful.

Effects of Frustration

When a contract is frustrated, it becomes void. Section 56 lays down this primary effect. However, there are other consequences as well, particularly concerning benefits received or expenses incurred before the moment of frustration.

Contract Becomes Void

The principal effect of frustration is that the contract becomes void at the moment the impossibility or unlawfulness arises (Section 56, second para). It is not void from the beginning, but from the date of the frustrating event.

Key consequences:

Discharge of Obligations: The parties are released from their obligation to perform their future promises under the frustrated contract.
Effect on Past Performance: Obligations that were due and should have been performed *before* the frustrating event occurred generally remain enforceable. However, Section 65 of the Contract Act and Section 56 (third paragraph) read with Section 65, address the consequences of the contract becoming void.

Restoration of Advantage or Compensation (Section 65 & 56)

Section 65 deals with agreements discovered to be void or contracts that become void:

"When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it."

Section 56 (Third Paragraph):

"Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non-performance of the promise." (This covers initial impossibility known to the promisor but not promisee).

Applying Section 65 to frustrated contracts:

If a party has received any advantage or benefit under the contract *before* the frustrating event occurred, they are bound to restore it or make compensation for it to the other party.
This prevents unjust enrichment. For example, if advance payment was made for a service that is later frustrated, the advance payment must be refunded.
Section 65 does not generally allow recovery for expenses incurred by a party in preparing for performance unless those expenses resulted in a tangible 'advantage' to the other party. The legal position on recovery of expenses in India might be different from English law (Law Reform (Frustrated Contracts) Act, 1943), which allows apportionment of losses and expenses. In India, recovery is typically limited to advantages conferred.

Example: A contracts to let his music hall to B for a concert for Rs. 1 Lakh, payable in advance. B pays Rs. 1 Lakh. The hall is destroyed by fire before the concert. The contract is frustrated. A must refund the Rs. 1 Lakh advance payment to B under Section 65 as an advantage received under a contract that became void.

Example: A contracts to transport goods for B for a certain price. A incurs significant expenses in arranging the transport. Before the goods are loaded, the contract is frustrated due to a government order. A cannot generally claim reimbursement for his expenses from B under Section 65, as those expenses did not result in any advantage conferred *on B*. (This area has some complexity and judicial nuances).

Example 1. Mr. Eshan contracts to provide catering services for Ms. Fatima's event on 10th October 2024, for a total price of Rs. 2 Lakhs, with Rs. 50,000/- payable in advance. Ms. Fatima pays the advance. Due to unexpected severe flooding on 8th October 2024, the venue becomes inaccessible, making it impossible to hold the event or provide catering. What happens to the contract and the advance payment?

Answer:

The contract is discharged by frustration due to supervening impossibility (venue becoming inaccessible due to flooding). The contract becomes void on 8th October 2024 (Section 56). Mr. Eshan is discharged from his obligation to provide catering, and Ms. Fatima is discharged from her obligation to pay the remaining Rs. 1.5 Lakhs. Regarding the advance payment of Rs. 50,000/-, since Mr. Eshan received this advantage under a contract that became void, he is bound to restore it to Ms. Fatima under Section 65. Ms. Fatima is entitled to a full refund of the advance payment.

Distinction between initial impossibility and supervening impossibility

Section 56 covers both initial impossibility (agreements void from the start) and supervening impossibility (contracts that become void). The distinction is important for understanding the legal effect and consequences.

Comparison Table: Initial vs. Supervening Impossibility

Basis	Initial Impossibility	Supervening Impossibility (Frustration)
Time of Impossibility	Exists at the time the agreement is made.	Arises after the contract is made.
Provision	Section 56 (first paragraph).	Section 56 (second paragraph).
Effect on Agreement/Contract	Agreement is void ab initio (void from the beginning).	Contract becomes void at the time the impossibility/unlawfulness arises.
Prior Validity	Never a valid agreement.	Was a valid and enforceable contract before the impossibility/unlawfulness occurred.
Applicability of Section 65 (Restitution)	Generally not applicable to agreements void ab initio, unless specific provision like Section 56 (third para - promisor knew of initial impossibility) or Section 33 of Specific Relief Act applies.	Applicable. Advantages received under the contract before it became void must be restored (Section 65).
Promisor's Knowledge	Agreement is void whether the impossibility is known to the parties or not (Section 56, first para implies this by contrast with third para). However, if promisor knew and promisee didn't, promisor may have to compensate promisee (Section 56, third para).	Knowledge of impossibility at the time of the original contract is not relevant for it becoming void later due to supervening impossibility. It's about unforeseen events.
Underlying Principle	Law does not enforce promises to do the impossible.	Law releases parties from obligations when circumstances change so fundamentally that performance is radically different or impossible/unlawful.
Example	Agreement to bring treasure by magic. Agreement to marry a person who is dead.	Contract to sell goods destroyed by fire after contract. Contract to perform at venue destroyed by flood. Contract becoming unlawful due to new law.

Example 1. Mr. Gopal contracts to buy a specific antique statue from Mr. Hari, both believing the statue exists. Unknown to them, the statue was destroyed in a fire two years before the contract was made. Is this a case of initial or supervening impossibility, and what is the effect on the agreement?

Answer:

This is a case of Initial Impossibility. The subject matter of the agreement (the statue) was impossible to deliver because it had already ceased to exist at the time the agreement was made. The act (delivering the existing statue) was impossible in itself from the start. According to Section 56 (first paragraph), the agreement is void ab initio. It is also a case of bilateral mistake of fact essential to the agreement (Section 20), which also renders the agreement void.

Example 2. Mr. Iyer contracts to buy a specific machine from Mr. Javed to be imported from Country X. After the contract is made, but before import, a new law is passed in India banning the import of that type of machine from Country X. Is this a case of initial or supervening impossibility, and what is the effect on the contract?

Answer:

This is a case of Supervening Impossibility (specifically, supervening illegality). The contract was valid and possible to perform when it was made. However, after the contract was made, its performance (importing the machine) became unlawful due to a new law. According to Section 56 (second paragraph), the contract becomes void when the act becomes unlawful (when the new law is passed). This is an instance of the Doctrine of Frustration discharging the contract.