Performance and Termination in Contract Law
Introduction
This guide provides an overview of the performance and discharge (termination) of contracts under the Indian Contract Act, 1872, tailored for LLB students. A contract creates obligations; those obligations must ordinarily be performed, and the contract is discharged once they are fulfilled or otherwise brought to an end by law. This chapter explains how contracts are performed and the principal ways in which they are discharged.
Meaning of Performance
Performance means the fulfilment by the parties of the obligations they have undertaken under the contract. Section 37 lays down the general rule: the parties to a contract must either perform, or offer to perform, their respective promises, unless such performance is dispensed with or excused under the Act or any other law.
Obligations may arise from:
- Express terms — the promises explicitly stated in the contract.
- Implied terms — obligations not expressly stated but necessarily understood from the nature of the transaction, trade usage, or the conduct of the parties.
Types of Performance
There are two main forms of performance:
- Actual performance — a party fulfils its obligation exactly as required by the contract. Once both sides render actual performance, the contract is discharged.
- Attempted performance or tender (Section 38) — a party offers to perform but the offer is not accepted by the other party. A valid tender of performance that is refused discharges the offering party from liability for non-performance, and it does not lose its rights under the contract. To be valid, the tender must be unconditional, made at the proper time and place, and give the other party a reasonable opportunity to verify that the thing offered is what was promised.
Reciprocal Promises
Where a contract consists of reciprocal promises (each party promising something in return for the other's promise), Sections 51 to 54 govern the order and manner of performance. For example, where the promises are to be performed simultaneously, one party need not perform unless the other is ready and willing to perform as well.
Discharge of Contracts
"Discharge" of a contract means the termination of the contractual relationship, so that the parties are freed from their obligations. A contract may be discharged in several ways:
- By performance — both parties fulfil their obligations.
- By agreement — the parties mutually agree to end or replace the contract.
- By impossibility or frustration — supervening events make performance impossible or unlawful.
- By breach — one party fails to perform, giving the other the right to treat the contract as at an end.
- By operation of law — such as merger or the discharge of a debt in insolvency.
Discharge by Agreement
Just as a contract is created by agreement, it may be ended or modified by agreement. Section 62 deals with novation, rescission, and alteration:
"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."
- Novation — the substitution of a new contract for the old one, either between the same parties or involving a new party.
- Rescission — the cancellation of the contract by mutual consent, without substituting a new one.
- Alteration — a change to one or more terms of the contract with the consent of all parties.
Section 63 allows a promisee to give up or relax the performance owed to it:
"Every promisee 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 which he thinks fit."
Thus a creditor may voluntarily accept less than what is due, extend the time for payment, or accept some other satisfaction in place of the original promise, and such an arrangement is binding even without fresh consideration.
Discharge by Impossibility and Frustration
Section 56 embodies the doctrine of frustration. An agreement to do an act impossible in itself is void. Further, a contract to do an act which, after the contract is made, becomes impossible or unlawful (by reason of some event the promisor could not prevent) becomes void when the act becomes impossible or unlawful.
Case Study: Satyabrata Ghose v. Mugneeram Bangur & Co. (1954)
The Supreme Court of India explained that the word "impossible" in Section 56 is not confined to literal or physical impossibility. A contract is frustrated when a supervening event so fundamentally changes the situation that the very foundation of the contract is destroyed, even if performance is not literally impossible. The Court made clear that in India the doctrine of frustration is governed by the statutory rule in Section 56 rather than by the English theories of implied terms.
Case Study: Taylor v. Caldwell (1863)
Although an English decision, this case illustrates the same principle and is frequently discussed in Indian textbooks. A music hall that was the subject of a hire agreement was destroyed by fire before the performance dates. The court held that the contract was discharged, because performance depended on the continued existence of the hall, which had ceased to exist without fault of either party.
Discharge by Breach
A breach occurs when a party fails, without lawful excuse, to perform its obligations. Under Section 39, when one party has refused to perform, or has disabled itself from performing, its promise in its entirety, the other party may put an end to the contract, unless it has, by words or conduct, signified its acquiescence in the continuance of the contract.
Breach may be:
- Actual breach — failure to perform when performance is due.
- Anticipatory breach — a party declares, before the time for performance, that it will not perform, or otherwise disables itself from performing.
The gravity of the breach is relevant: a breach going to the root of the contract (a breach of condition) generally entitles the innocent party to terminate and claim damages, whereas a less serious breach may sound only in damages while the contract remains on foot.
Remedies for Breach: Damages
Section 73 provides for compensation for loss or damage caused by breach of contract:
"When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, 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."
The section also provides that such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach.
Case Study: Hadley v. Baxendale (1854)
This English decision, which is reflected in the language of Section 73, laid down the rule on remoteness of damages. Recoverable losses are those arising naturally from the breach in the usual course of things, or those which the parties may reasonably be supposed to have contemplated, at the time of contracting, as the probable result of a breach. Losses outside this contemplation are too remote to be recovered.
Liquidated Damages and Penalty (Section 74)
Where the contract itself fixes a sum payable on breach, or contains a penalty, Section 74 entitles the aggrieved party to reasonable compensation not exceeding the amount so named, whether or not actual loss is proved. The court awards reasonable compensation and does not treat the stipulated sum as automatically recoverable in full.
Conclusion
Performance and discharge lie at the heart of contract law. A contract is normally discharged by the parties performing their obligations, but it may also be ended by agreement (novation, rescission, or alteration under Section 62), by supervening impossibility or frustration (Section 56), or by breach, which gives the innocent party a right to terminate and to claim damages (Sections 73 and 74). Mastery of these provisions, together with leading authorities such as Satyabrata Ghose, Taylor v. Caldwell, and Hadley v. Baxendale, equips students to analyse when a contract comes to an end and what remedies follow.
Always apply these principles to the specific facts before you, and read the statutory text alongside the decided cases when advising on any contractual dispute.