MERCANTILE LAW

Meaning and essentials of a valid contract

Contract:
A contract is an agreement, enforceable by law, made between at least two parties by
which rights are acquired by one and obligations are created on the part of other. If the
party, which has agreed to do something, fails to do that, then the other party has a
remedy in the court of law.
S2h defines a contract as “an agreement enforceable by law”.
Thus, a contract essentially consists of two elements:
i. An agreement; ii. Its enforceability by law
There are certain agreements which do not become contracts as the element of
enforceability by law is absent. For example, an agreement to go on a picnic does not
become a contract.
Classification of contracts:
1. A contract may be a) made in writing, b) By words spoken and c) Inferred from the
conduct of parties (known as an implied contract)
Contracts need not be in writing
The terms of a contract may be stated in words.
2. Classification according to validity:
i) Valid, ii) Voidable, and iii). Void. A contract to constitute a valid contract must have
all the essential elements. If one or more elements are missing, the contract is either
voidable or void.
A voidable contract is one which may be repudiated at the will of one or more of the
parties, but not by other parties. Until it is repudiated it remains valid and binding.
A void agreement is a contract which is not enforceable by law. Such agreement is
without any legal effect.
3. Executed and executory contracts: An executed contract is one which has been wholly
performed. Nothing remains to be done in terms of the contract. Where as in case an
executory contract, there remains something to be done. The executory contract becomes
an executed one when it is completely performed.
4. Unilateral and a bilateral contract:
In case of a unilateral contract, still there is an obligation to perform the contract by one
of the parties. For example, A makes payment for bus fare for his journey. He has
performed his promise. It is now for the transport company to perform its promise.
A bilateral contract is one in which there is an obligation on the both to do something. In
this sense, bilateral contracts are similar to executory contracts.

ESSENTIAL ELEMENTS OF A VALID CONTRACT

1. Offer and acceptance. There must be two parties to an agreement i.e., one party
making the offer and other party accepting it.
2. Intention to create legal relationship: agreements of a social or domestic nature do
not contemplate legal relationship.
3. Lawful consideration: The agreement is legally enforceable only when both the
parties give something and get something in return.
 4. Capacity of the parties—competency: Flaw in capacity to contract may arise from
minority, lunacy, idiocy and drunkenness.
5. Free consent: There is absence of free consent if the agreement is induced by
coercion, undue influence, fraud or misrepresentation.
6. Lawful object: It means that the object must not be a) illegal, b) immoral, or c)
opposed to public policy.
7. Agreement not expressly declared as void by law in force in that country.
8. Certainty and possibility of performance: The agreement must be certain and not
vague or indefinite. For example, A agrees to sell to B “a hundred tons of oil”,
there is nothing in the contract about the quality, brand. And the price, hence a
vague agreement.

Offer and Acceptance

S2a. When a person” signifies to another his willingness to do or to abstain from doing
anything, with a view to obtaining the assent of that other person to such act or
absistence”
An offer may be made by express words, spoken or written.
An offer may also be implied from the conduct of the parties. This is known as an
implied offer. Thus, when a transport company runs a bus on a particular route, there is
an implied offer by the transport company to carry passengers for a certain fare.
When an offer is made to a definite person, it is called a specific offer. It can be accepted
only by the person to whom it is made.
Whe
n an offer is made to world at large, it is called a general offer.
Case: Carlill v Carbolic Smoke Ball Company: A company advertised in several
newspapers that a reward of € 1oo would be given to any person who contracted
influenza after using the smoke balls of the company according to its directions.
Accordingly one Mrs. Carlill used the smoke balls as per the directions, but contracted
the influenza. Held, she could recover the amount as by using the smoke balls she has
accepted the offer.
LEGAL RULES AS TO AN OFFER
1. Terms of offer must be definite, unambiguous and certain
2. An offeree must have the knowledge of the offer before he can accept it. The offer
must be communicated to the other party. The communication of the offer is
complete only when it comes to the knowledge of the offeree. Case: Lalman
Shukla v. Gauri Dutt: S sent his servant L, to trace his missing nephew. He then
announced that any body who traced his nephew would be entititled to a certain
reward. L traced the boy in ignorance of this announcement. Subsequently, when
he came to know of the reward, he claimed it. Held, he was not entititled to the
reward.
3. Offer must be made with a view to obtaining the acceptance.
4. An offer may be distinguish from an invitation to make an offer: Display of goods
by a shopkeeper in his window, with prices marked on them, is not an offer but
merely an invitation to the public to make an offer to buy the goods at the marked
price.
 5. An offer cannot contain a term the non-compliance of which may be assumed to
amount to acceptance. An offeror cannot say that if the offeree does not accept the
offer within two days, the offer would be deemed to have been accepted.
6. The offer must be made with the intention of creating legal relationship. An offer
of a purely social or domestic nature is not a valid offer.
7. If no time is prescribed in an offer, then the offer is to be accepted within a
reasonable time.
ACCEPTANCE
A contract emerges from the acceptance of an offer. S2b. When the offeree signifies
his assent to the offeror, the offer is said to be accepted. An offer when accepted
becomes a promise.
Legal rules regarding acceptance
1. It must be absolute and unqualified. For example, A says to B,” I offer to sell my
car for Rs. 50000.” B replies, “I will purchase for Rs. 45000.” This is no
acceptance and amounts to a counter offer.
2. It must be communicated to offeror. Case: Brogden v. Metropolitan Railway
Company: A draft agreement relating to the supply of coal was sent to the
manager of a railway company for his acceptance. The manager wrote the word
“approved” and put the draft in the drawer to send it. By some oversight the draft
remained in the drawer. Held, there was no contract.
3. It must be in the mode prescribed by the offeror or some usual and reasonable
mode.
4. It must be given within a reasonable time.
5. It cannot precede an offer. If acceptance precedes an offer, it is not a valid
acceptance and does not result in a contract.
6. It must show an intention on the part of the acceptor to fulfill terms of the
promise.
7. It must be given by the party or parties to whom the offer is made.
8. It must be given before the offer lapses or before the offer is withdrawn.

Consideration
Consideration is one of the essential elements to support a contract. Subject to certain
exceptions, an agreement made without consideration is void.
Consideration is known to be as something in return.
Definition of consideration:
S2d defines consideration as “When at the desire of the promisor, the promisee or any
other person has done or abstained from doing, or does or abstains from doing, or
promises to do or to abstain from doing something, such act or absistence or promise is
called a consideration for the promise.”
Legal rules as to consideration
1.
2. It must move at the desire of promisor:
If it is done at the desire of a third party or without the desire of promisor, it will not be a
good consideration.
3. It may move from the promisee or any other person:
Consideration may move from the promisee or a third party even if he is a stranger. Case:
Chinaya v. Rammayya: An old lady made a deed of gift in favour of her daughter D,
under the direction that she should pay her aunt ( sister of the old lady) , a certain sum of
money annually. Later D refused to pay the amount on the plea no consideration has
moved from the aunt. Held, the aunt was entitled, as the consideration was moved from
old lady on aunt’s behalf.
4. Kinds of consideration: a. Past consideration: It is one which is paid for a past act
or forbearance. For example, If C pays a cheque of Rs. 1000 to D for returning of
his lost purse.
b. Present or executed consideration: In this case, the promisor receives consideration
simultaneously with his promise. For example, in a sale by cash, there is present
consideration.
c. Future or executory consideration: It is in return of promise which is to be fulfilled
in future. Consideration moves at a future date. For example, A agrees to sell 10
cotton bales after a week, and B agrees to pay for them after the sale.
4. It need not be adequate:
The law simply provides that a contract should be supported by consideration. The
consideration need not necessarily be equal in value to “something given”. The courts
are not made to repair the bad bargains.
5. It must be real and not illusory: There is no real consideration in the following
cases:
a. Physical impossibility
b. Legal impossibility
6. It must not be illegal, immoral or opposed to public policy: The consideration
given for an agreement must not be unlawful. Otherwise, the Courts do not allow
an action on the agreement.

A CONTRACT WITHOUT CONSIDERATION IS VOID---EXCEPTI0NS

U/S25 of the Act, certain agreements even without consideration are valid:
1. Natural love and affection: An agreement made out of love and affection and
keeping in view the nearness of relationship is enforceable even if there is no
consideration. The essential conditions under this section are:
a).the agreement should be in writing
b). It should be registered
c) It is between parties who are closely related, and
d) It is on account of natural love and affection.
2. Voluntary services: A promise to compensate wholly or in part, a person for an
act voluntarily done is enforceable without consideration. In other words, a
promise to pay for past services rendered is binding.
3. Time barred debt: A debt to which three years time has been expired, is
considered to be a time bar debt under the Law of Limitation. The conditions are:
a) the promise should be in writing
b) it should be signed by the promisor or his agent
c) the debt must be a time barred debt
4. Completed gift
5. Agency:
 CAPACITY TO CONTRACT
S10 of the Indian Contract Act explains that an agreement becomes a contract if it is
made between the parties who are competent to contract. S11 explains that “every person
is competent to contract who is of the age of majority and who is of sound mind, and is
not disqualified from contracting by any law to which he is subject.” Thus, S11, declares
the following persons to be incompetent to contract:
1. Minors
2. Persons of unsound mind
3. Persons disqualified by any law to which they are subject.
1. MINORS
According to S3 of the Indian Majority Act, 1875, a minor is a person who has not
completed 18 years of age. If a guardian of a minor’s person or property has been
appointed under the Guardians and Wards Act, 1890, then age of 21 year is to be
considered as the age of majority.
The rule is that the law protects minors against their own inexperience.
Rules regarding minors agreements:
1. An agreement with or by a minor is void and inoperative ab initio. Case: Mohiri
Bibi v. Dharmodas Ghose: In this case, a minor mortgaged his house in favour of
a money lender to secure a loan of Rs. 20,000 out of which the money lender paid
the minor a sum of Rs. 8,000. Subsequently, the minor sued for setting aside the
mortgage, stating that he was under age when he executed the mortgage. Held, the
mortgage was void and therefore, it was cancelled. Further, the money lender’s
request for the repayment of the amount advanced to the minor as a part
consideration for the mortgage was also not accepted.
2. Contract beneficial to minor: The Indian Contract Act does not prevent a minor
from becoming a promise. A minor can enforce a contract, which is of some
benefit to him. Minority is a personal protection and only a minor can take
advantage of it and bind the other party.
3. No ratification on attaining majority: A minor cannot ratify an agreement
which was made by him during his minority on attaining the majority.
Ratification implies approval or confirmation. In case of a minor’s contract
subsequent ratification cannot take place as the contract with him is void ab initio.
4. Doctrine of Restitution does not apply against minor: If an infant obtains
property or goods by misrepresenting his age, he cannot be compelled to restore
it, but so long as the same is traceable in his possession.
The Court may, where a loan or some property is obtained by the minor by some
fraudulent representation and the agreement is set aside, direct him, on equitable
considerations, to restore money or property to other party. Although, the law gives
protection to minors, it does not give liberty to deceive others. (Under Specific
Performance Act, 1963).
5. Contract of marriage: Under Hindu Marriage Act, 1955 minor’s marriage is
valid for all purposes. Otherwise, children born out of such marriage would be
treated as illegitimate.
6. Minor as an agent: An agent is merely a link between his principal and the third
party. As soon as the third party and the principal are brought together, the agent
 drops out. A minor binds the principal by his acts without incurring any personal
liability.
7. He cannot enter into a contract of partnership. But he may be admitted to the
benefits of already existing partnership with the consent of all partners.
8. Minor as a shareholder: A minor can enjoy the benefits as a shareholder in case
of fully paid up shares held by him. A minor cannot be held liable for payment of
call money.
9. Position of a minor under Negotiable Instrument Act, 1881: he can draw,
endorse, and deliver such instruments so as to bind all other parties except
himself.
Minor’s liability for necessaries
A minor is liable to pay out of his property for necessaries supplied to him. It is only the
property of the minor which is liable for meeting the liability arising out of such
contracts. He is not personally liable.
PERSONS OF UNSOUND MIND
A person who does not satisfy the following two conditions is a person of unsound mind:
i). He should be capable of understanding the contract, and
ii). He should be capable of forming a rational judgment about the effects of the contract.
Unsoundness of the mind may be of two types:
a). Permanent unsoundness of mind
b). Temporary unsoundness of mind: Examples:
Idiots:
An idiot is a person who is devoid of the liability to think. An agreement with an idiot is
absolutely void. The property of an idiot can be made liable for the necessaries supplied
to him.
Lunatics:
Lunatic is a person whose mental power has been damaged. Such a person is sometimes
sane and sometimes an insane. Such a person may enter into a contract when he is of
sound mind.
CONTRACT BY THE PERSONS DISQUALIFIED BY LAW:
1. Alien enemy: An alien enemy is a citizen of a country at war with India.
An agreement with an alien enemy is void. Such persons are disqualified
from suing in Indian Courts.
2. Insolvent: An insolvent is a person who is unable to discharge his
liabilities and therefore has applied for being adjudged insolvent.
However, after the ‘order of discharge’ he is competent to enter into
contracts.
 FREE CONSENT

Meaning of consent and free consent: (s. 13 and 14):

Consent: “Two or more persons are said to consent when they agree upon the same thing
in the same sense.
S.14 free consent defined--- Consent is said to be free when it is not caused by ---
1) coercion S(15
2) undue influence S16
3) fraud S17
4) Misrepresentation S18
5) mistake .

S15. Coercion defined: “coercion is the committing or threatening to commit, any act
forbidden by Indian Penal Code, or the unlawful detaining, or threatening to detain, any
property, to the prejudice of any person, with the intention of causing any person to enter
into an agreement.
Explanation: It is immaterial whether the I P C is or is not in force in the place where the
coercion is employed.
Cases: by threat of suicide
Detention of property
Examples: A threatens to shoot B if he does not lend him Rs. 5000. B lends the amount.
The threat amounts to coercion.
Case: ranganayakamma v. Alwar Setty: A young girl of 13 years was forced to adopt a
boy whose husband was just died; otherwise the relatives will not carry the body for
cremation. Held, consent was not free and was induced by coercion.
Case: Muthia v. Muthu karuppa: A refused to hand over accounts books of a business
unless the principal released him from all liabilities. Hence, coercion.
Threat to commit suicide---Does it amount to coercion?
S.306 of the Indian Penal Code punishes abetment of suicide. S.309 punishes an attempt
to commit suicide. But, suicide as such is no crime.
Undue influence: Defined: A contract is said to be induced by undue influence where
the relations subsisting between the parties are such that one of the parties is in a position
to dominate the will of the other and uses that position to obtain an unfair advantage over
the other.
A person is in a position to dominate the will of another---
a) Where he stands in a fiduciary position to the other
b) Where a contract is made with a person whose mental capacity is temporarily or
permanently affected by reason of age, illness, or mental or bodily distress.
Examples of fiduciary relation—relationship of solicitor and client, spiritual advisor and
his devotee, doctor and patient, parent and child, creditor and debtor.
Case: Mannu Singh v. umadut Panday: A spiritual Guru induced his devotee to gift to
him the whole of his property in return of a promise of salvation of the devotee. Hence, it
is a case of undue influence.
Case: An illiterate elderly lady made a deed of gift of her property to her nephew who
used to look after the affairs of her.
Undue influence, sometimes called moral coercion.
Burden of proof: The aggrieved party in such a case has to prove i) that the other party
was in a position to dominate his will.
ii) The other party actually used his influence.
iii) The transaction is unreasonable.

Misrepresentation: --- A statement of fact which one party makes in the course of
negotiations with a view to inducing the other party to enter into a contract is known as a
representation. It must relate to some fact which is material to the contract. A
representation which is wrongly made, but it innocently or unintentionally made, is a
misrepresentation.
Requirements of misrepresentation:
i) It must be a representation of a material fact.
ii) It must be made with a view to inducing the other party to enter into
contract.
iii) It must be wrong but the person who made it honestly believed it to be
true.
iv) It must be made without any intention to deceive the other party.
Misrepresentation results not only from mis-statement of facts but also from
suppression of material facts. .
Types of misrepresentation:
1. Unwarranted statements: When a person positively asserts that a fact is true when
his information does not warrant it to be so, though he believes it to be true.
2. Material facts: a general statement is not regarded as misrepresentation.
3. Expression of opinion: a mere expression of opinion cannot be regarded as a
misrepresentation of facts even if the opinion turns out to be wrong.

Fraud: Intentional misrepresentation of facts is called fraud.

Fraud is an act committed by a party to a contract or by his agent, with intent to deceive
another party to induce him to enter into a contract.

Essential elements of fraud:

1) There must a representation and it must be false. Case: Peek v. gurney: The
prospectus of a company did not refer to the existence of a document disclosing
liabilities. This gave the impression that the company was prosperous. Held, non
disclosure of material facts amount to fraud.
2) The representation must relate to a material fact: A mere opinion, or puffing
expression or flourishing description, is not regarded as representation of fact.
3) The representation or statement must be made with intent to deceive the other
party.
 4) The representation or statement must have been made with a knowledge of its
falsity
5) The other party must have been induced to act upon the representation. A mere
falsehood is not enough to give a right of action.
6) The other party, acting on the representation, must have subsequently suffered
some loss.
A contract induced by fraud is voidable at the option of the party defrauded.
Distinction between misrepresentation and fraud: Misrepresentation and fraud have many
points in common. Still many points of distinction:
1. Fraud is an intentional wrong, whereas misrepresentation may be quite innocent.
2. Fraud in addition to a voidable contract is a cause of action in tort for damages.
3. a person complaining of misrepresentation can be met with the defense that he
had , “the means of discovering the truth with ordinary diligence”.
Cases relating to fraud:
Assertation of facts without belief in their truth. S17(1)
Active concealment S17(2):
Concealment by mere silence is no fraud.
When silence is fraud
1. Duty to speak: Generally in cases of insurance.
2. Where silence is deceptive e.g. a buyer asks the seller whether the horse is sound,
and the seller remains silent. This is fraud if the horse is unsound.
3. Change of circumstances: E.g. a company’s prospectus represented that certain
persons would be the directors of the company. This was true. But before
allotment took place, there were changes in the directorate, some directors having
retired. Held , sufficient ground to entitle an allottee to avoid the allotment.
4. Half truth

Mistake: Defined:
S20. Agreement is void where both parties are under mistake as to matter of fact essential
to the agreement, the agreement is void. E.g. A agrees to buy from B a certain horse. The
horse was dead at the time of the bargain, though neither party was aware of the fact. The
agreement is void.
Types of mistake: It may be i) a mistake of law or ii) a mistake of facts.
S21. Mistake as to law:
Mistake of law may be: I) Mistake of law of the country, or 2) mistake of law of foreign
country.
Mistake of law of the country: A mistake of law is not an excuse and the contract may not
be avoided on this ground.
Mistake of law of other country: Such a mistake is treated as mistake of fact and the
agreement in such a case is void.
Mistake of fact:
Mistake of fact may be 1) a bilateral mistake, 2) a unilateral mistake.
Bilateral mistake: Where both the parties to an agreement are under a mistake as to a
matter of fact essential to the agreement.
The various cases which fall under bilateral mistake are as follows:
1) Mistake as to the subject matter: Mistake as to the subject matter covers the
following cases:
a) Mistake as to the existence of the subject matter: A agrees to buy from B a certain
horse. It turns out that the horse was dead at the time of bargain, though neither
party was aware of the fact. The agreement is void.
b) Mistake as to the identity of the subject matter: it usually arises where one party
intends to deal in one thing and the other intends to deal in another. Case: Raffles
v. Wichelhaus: W agreed to buy from R a cargo of cotton. There were two ships
of the same name coming from Mumbai, one in October and the other one in
December. W meant the former ship and R the later one. Held, there was a
bilateral mistake and there was no contract.
c) Mistake as to the quality of the subject matter:
d) Mistake as to the quantity of the subject matter:
e) Mistake as to price of the subject matter:
Unilateral mistake: According to section 22, a contract is not voidable merely because
it was caused by being under a mistake as to a matter of fact. Example: A offers to
sell his house to B for an intended sum of Rs. 44,000. By mistake he makes an offer
in writing of RS. 40,000. He can not plead mistake as defence
A buys a horse mistakenly believing it is sound. The contract is valid.

LEGALITY OF OBJECT
In some cases, consideration for an agreement may be lawful but the purpose for
which the agreement is entered into may be unlawful. In such cases, the agreement is
void. As such, both the object and consideration of an agreement must be lawful.
When the consideration or object is unlawful: S.23:
1) If it is forbidden by law: An act is forbidden by law when it is punishable by the
criminal law of the country. Example: A promises to obtain for B an employment
in the public service and B promises to pay Rs. 10,000to A. the agreement is void,
as the consideration is unlawful.
2) If it is of such a nature that, if permitted, it would defeat the provisions of
any law.
Examples: A’s estate is sold for arrears of revenue under the provisions of an Act, by
which the defaulter is prohibited to purchase the estate. B indirectly understanding
with A purchases the estate for which the price paid by A. So, such an agreement
defeats the provisions of law.
Case: Nand Lal v. Thomas: A was licensed under an Excise Act to run a liquor shop.
The Act forbade the sale of license to any other person or to create a partnership. A
took B into partnership. Held, the agreement was void.
Alexander v. Rayson: A leased a flat to B at a rent for which he was charging a higher
rent and the agreement was made for a lower rent.
3) If it is fraudulent:
Example: A, being an agent of a proprietor (Dealing in properties), agrees for money
without the knowledge of his proprietor to make available a piece of land to B and
charging commission himself. The agreement between A and B is void.
4) If it involves injury to the person or property of another: Case: Smith v.
Clinton: The proprietors of a newspaper agreed with the printers to indemnify the
latter against consequences arising from libels printed in the newspaper. Held, the
agreement was void.
5) If the court regards it as immoral:
Examples: a) Baivijly v. Nansa Nagar: A married woman was given money to enable
her to obtain divorce from her husband and then to marry the lender. Held, the
agreement was immoral and the lender could not recover the money.
b) A let a flat to B, a woman whom he knew to be a prostitute. Held, the agreement
was unlawful since, A new the purpose to let out the house for immoral purposes.
6) Where the court regards it as opposed to public policy:
An agreement is said to be opposed to public policy when it is harmful to the public
welfare. The following agreements:
1. Agreements of trading with an enemy: An agreement made with an alien
enemy during war is illegal on the ground of public policy.
2. b Agreement to commit a crime: Where the consideration in an agreement
is to commit a crime, the agreement is opposed to public policy.
3. Agreements which interfere with administration of justice:
a) Interference with the course of justice: An agreement for using improper
influence of any kind with the judges is unlawful.
b) Stiffing prosecution: It is in public interest that if a person has
committed a crime, he must be prosecuted and punished.
4) Trafficking in public offices and titles: Agreements for the sale of public offices
or sale of a public recognition like Padma Vibhushan or Paramveer s. Charka for
monetary consideration are unlawful. Case: Parkinson v. College of Ambulance
Ltd: A promised to obtain an employment to B in a public office and B promised
to pay Rs. 1,000.
5) Agreements restricting personal liberty: Example: A debtor agreed with his
money lender that he would not without the lender’s written consent, leave his
job, or dispose of his property, or change his residence. Held, the agreement was
void.

EXPRESSLY DECLARED VIOD AGREEMENTS

1. Agreements in restraint of marriage
2. Agreements in restraint of trade
3. Agreements in restraint of legal proceedings
4. agreements the meaning of which is uncertain
5. Agreements by way of wager
6. Agreements contingent on impossible events

Agreements in restraint of marriage: S.26: This is because; the law regards

marriage and married status as the right of every individual. Case Lowe v. Peers: P
promised to marry L only and none else and to pay L a sum of Rs. 2,0000If he
 married someone else. P married X. Held; L could not recover the sum, as the
agreement was in restraint of marriage.
Agreements in restraint of trade: S.27: It is in the interest of community, that every
man should be at liberty to engage him in any trade, profession or business and use
his skill to the best of his capacity, skill or ability.
Example: Sheikh Kalu v. ram Saran Bhagat: Out of 30 makers of combs in the city of
Patna 29 agreed with R to supply him and no one else all their output. Held, the
agreement was void.
Exceptions:
i) Sale of goodwill:
ii) Partners’ agreement:
Agreements in restraint of legal proceedings: S. 28
Agreements the meaning of which is uncertain: S29: Example: A agrees to sell to
B “100” tons of oil.
Wagering agreements: S30:
A wager is an agreement between two parties by which one promises to pay money on
the happening of some uncertain event.
Essentials of a wagering agreement:
i. Promise to money or money’s worth
ii. Uncertain event
iii. Each party stands to win or loose
iv. No control over the event
Note: Wagering agreements have been declared to be void in India. In the State of
Maharashtra and Gujarat they have been declared to be illegal.

DISCHARGE OF CONTRACT
Discharge of contract means termination of the contractual relationship between
parties. A contract may be discharged:
1. By performance
2. By agreement or consent
3. By impossibility
4. By lapse of time
5. By operation of law
6. By breach of contract
1. Discharge by performance
Discharge by performance takes place when the parties to the contract fulfill obligations
arising under the contract within the time and the manner prescribed. In such a case, the
parties are discharged and the contract comes to an end.
2. Discharge by agreement or consent
As it is the agreement of the parties which binds them, so by their further consent the
contract may be terminated.
3. Discharge by impossibility of performance
If an agreement is made to perform impossible thing, it is void ab initio.
Types of impossibility of performance:
 a. Impossibility existing at the time of agreement: For example, when A agrees with
B to discover treasure by magic.
A undertakes to put life into the dead wife of B; the contract is void, ab initio.
Impossibility unknown to the parties: For example: A sold to B certain goods
supposed to be on a voyage. The goods had ceased to exist due to the perils of the sea.
Held, both the parties were at mistake hence, it is a void contract.
b. Impossibility arising subsequent to the formation of contract: it is known to be
supervening impossibility. In such a case, the contract becomes void when the act
becomes impossible or unlawful.
4. Discharge by lapse of time
Law of limitation, 1963: time barred debts.
5. Discharge by operation of law
A. By death: In contracts involving personal skill or ability, the contract is terminated on
death of the promisor. In other contracts, the rights and liabilities of a deceased person
are passed on to the legal representatives of the deceased person.
B. By insolvency: When a person is adjudged insolvent, he is discharged from all
liabilities incurred prior to his adjudication.
C. By unauthorized alteration of the terms of a written agreement: Where a party to a
contract makes any material alteration in the contract without the consent of the other
party, the other party can avoid the contract.
D. By rights and liabilities becoming vested in the same person: For example, When a
bill gets into the hands of the acceptor, the other parties are discharged.
6. Discharge by breach of contract
Breach of contract means breaking of the obligation which a contract imposes. It occurs
when a party to the contract without lawful excuse does not fulfill his contractual
obligation.
Breach of contract may be:
i. Actual breach of contract
ii. Anticipatory breach of contract
Actual breach takes place at the time when the performance is due.
Anticipatory breach of contract:
It occurs when a party to an executory contract declares his intention of not performing
the contract before the performance is due.
Rights of promisee in case of anticipatory breach:
He can treat the contract as discharged and he can take immediately a legal action for
breach of contract or wait till the time the act was to be done.
Measure of damages in anticipatory breach of contract:
If the contract is ended by the promisee at once, he can sue the promisor for damages.
The amount of damages will be the difference between the price prevailing on the date of
breach and the contract price.
If the contract is kept alive till the date of performance of the contract, the damages will
be the difference between the price prevailing on the date of the performance and the
contract price.