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All about discharge of a contract

May 31, 2022

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This article is written by Abanti Bose, studying at Amity University Kolkata, India. The article states the various modes of discharge of contract under the Indian Contract Act, 1872 with the help of illustrations and case laws.

This article has been published by Sneha Mahawar.

Introduction

A contract is a legally binding agreement between two or more parties, where one agrees to do or refrain from doing something in exchange for consideration. Discharge of contract means terminating the contractual relationship between the two or more parties who entered into the contract previously. When the rights, obligations and duties of the parties come to an end it is known as the discharge of contract. Discharge of contract also ceases the legally binding power of the contract. Therefore, once a contract has been discharged the parties are no more obligated to each other and the contract becomes void. The various ways a contract can be discharged are stated in the article below.

Various modes of discharge of contract

Discharge by performance

A contract can be discharged by performance and it is the most common form of discharge of contract. A contract will be discharged if the duty stated in the contract has been fulfilled by the parties. If only one person in a contract performs the promise which is mentioned then he alone is discharged. There are two types of discharge of a contract by performance.

For example; A and B enter into a contract that A will pay B Rs 1,000 if B delivers a package to C’s house. B does the agreed part specified in the contract and upon doing it A pays B the mentioned amount in the contract. Thus, the contract is discharged by performance since both parties performed the specified task in the contract.

Actual performance

In this case both the parties in a contract must perform their promises. Unless the Indian Contract Act, 1872 or any law at the time being prohibits the parties from performing their promises. In case either party dies or is unable to fulfil the promise then the representatives of such party shall be liable to perform the promise laid down in the contract.

Attempted performance

When the promisor offers to give his performance under the contract, but the promisee refuses to accept the same, then it amounts to discharge by attempted performance.

Discharge by mutual agreement

In this case, the parties to a contract do not perform the promise stated in the contract if they arrive at a mutual agreement. This requires substituting or altering the existing contract with a new one.

Illustration: ‘P’ owes a certain sum of money to ‘Q’ under a contract, but they arrive at a mutual agreement that henceforth ‘R’ will pay back the money owed to ‘Q’. This results in a mutual discharge of the contract between ‘P’ and ‘Q’ and a new contract is formed between ‘R’ and ‘Q’.

Novation

It occurs when a contract is substituted for the old contract between the same or new parties. In order to enforce novation, the following conditions must be followed. It is laid down in Section 62 of the Indian Contract Act, 1872.

There must be a valid reason for substituting the contract.
Consent of all the parties is required.
The old contract must be substituted before the expiry or breach of the contract.

In the case of Manohur Koyal v. Thakur Das(1888), the defendant failed to pay the agreed upon sum to the plaintiff on the due date stated in the contract. However, the defendant promised to pay Rs. 400 to the plaintiff and to execute a fresh kistibundi bond. The plaintiff agreed to this but the defendant failed to pay that amount consequently, the plaintiff sued the defendant. The Calcutta High Court stated that since the new bond was created after the breach of the original contract, therefore the contract cannot be discharged by novation but by breach of contract.

Remission

Remission occurs when parties to a contract accept a lesser amount or lesser degree of performance than what was initially agreed upon in the contract. Section 63 of the Act states that a party may;

Remit the performance stated wholly or in part.
Extend the time for performance.
Accept any other kind of performance apart from the one mentioned in the contract.

Illustration: Paul owes 10 lakh rupees to Peter but due to some unforeseen circumstances Paul can only repay 6 lakh rupees to Peter within the stipulated time period. But if Peter agrees to accept the amount which could be paid by Paul and settle the debt then, Peter’s act of remission discharges the contract.

Alteration

It means changing one or more contract terms, thereby discharging the old contract and forming a new one. Alterations to a contract must take place with the consent of all the parties to the contract. In the case, United India Insurance Co. Ltd v. M.K.J. Corporation(1996), the Supreme Court held that utmost good faith must be observed by the contracting parties and the duty of good faith is of a continuing nature even after the completion of the agreement no material alterations can be made to the contract without the mutual consent of the parties.

Rescission

Rescission takes place when the parties in the contract agree to dissolve the contract. In this case, the old contract stands discharged and no new contract is formed.

Waiver

The term waiver means the abandonment of a right. A party to a contract may have their rights specifically stated under the contract which also helps to release the other party from the contract and the contract is discharged.

Merger

When an existing inferior right of a party, in respect of a subject matter, merges into a newly acquired superior right of the same person, in respect of the same subject matter, then the previous contract conferring the inferior right stands discharged by the way of merger.

Discharge by lapse of time

A contract will be discharged if the performance is not completed within the given time period. This might also result in a breach of contract. In that case, a person might file a suit under the court of law stating that his rights have been infringed and also claiming to enforce his rights. The individual whose rights have been breached can file a suit under the Limitation Act, 1963.

For example; A had to deliver fresh fruits to B’s storehouse within a period of two days but due to A’s irresponsibility, he delivered the fruits after two weeks. Therefore, in this case, the contract will be discharged as the required performance was not completed within the specified time.

Discharge by operation of law

This mode of discharge of contract does not allow the fulfilment of the promise laid down in the contract by the provisions of law. Situations such as death, insolvency, merger, etc. do not enable the fulfilment of the promise, hence it results in the discharge of the contract.

Discharge by supervening impossibility

Discharge of a contract by supervening impossibility is a contract that has become impossible or illegal to perform. In these cases the contract becomes void. It is also known as the doctrine of frustration. Frustration occurs when it is established that due to subsequent changes in circumstances, the contract has become impossible to perform or it has been deprived of its commercial purpose. The ways in which it occurs are mentioned below;

On the destruction of subject matter, a contract will be discharged and no party will be held liable.
If the performance of the promise mentioned in the contract becomes unlawful then the contract will be void.
A contract tends to be discharged on accounts of death or personal incapacity.
When the circumstances surrounding a contract change then it will be discharged.

Discharge by breach

When a contracting party refuses or fails to perform or disables himself from performing or makes the performance of the promise stated in the contract impossible by his conduct, then the contract is said to be discharged by breach. A party to a contract may discharge it by actual breach or anticipatory breach.

When a default is committed by a party on the due date of performance it amounts to an actual breach and when the party commits a default before the due date of performance it amounts to an anticipatory breach.

Suit for specific performance

In this case, where the damage or loss suffered cannot be measured in terms of money the court, in such cases directs the defaulting party to perform the contract specifically where the ordinary remedy by a claim for damages is not adequate compensation. It is a discretionary remedy. The instances where the court orders discretionary remedy:

Where the act in itself is such that monetary consolation for its non-performance is not adequate.
Where it is not probable that monetary compensation will be available.
Where no standard is available to ascertain the value of the actual harm caused by non-performance.

Suit for quantum meruit

In the legal sense, the term quantum meruit means ‘payment in proportion to the work done’. In other words, quantum meruit means that a person can recover compensation in proportion to the work done or service rendered by him. It is known as a quasi-contractual remedy. The claim on quantum meruit arises in the following cases:

When a party performs a part of the contract, but the other party breaks it in between, then the injured party can claim compensation for the work done or the service rendered.
When something has been done non-gratuitously.
Where some work has been done and accepted under a contract that is subsequently discovered to be void, then in such case, the person who has performed the part of the contract is entitled to recover the payment for the work done.

Exceptional cases when a contract is not discharged

The doctrine of frustration or supervening impossibility does not apply to the following cases mentioned below.

When in any case a situation arises that makes the performance of the certain promise mentioned in the contract very difficult to be performed, then in that situation, it makes the promise challenging to be fulfilled but the contract is not discharged.
Commercial hardships make the contract unprofitable but it does not discharge a contract.
Strikes, lock-outs, civil disturbances and riots do not discharge the contract unless there is a clause in the contract specifying that in such event the contract will be terminated.
A contract is not discharged due to the self-induced incapacity of the parties to a contract.
In a contract where performance is relied upon by a third party, it will not be discharged due to the failure or default of the third party.

Difference between discharge, rescission and termination of a contract

Discharge of contract takes place when the parties to a contract have fulfilled and performed their obligations as stipulated and negotiated in the contract. It is an ideal course of action as the parties to the contract have attained the obligations and performed the agreed upon duties.

When a contract is formed under fraudulent circumstances, the party who was defrauded will not be expected to fulfil the obligations stated in the contract. The fraud may involve overt, intentional fraud, a misrepresentation of facts or circumstances, or a material omission. Despite the type of fraud, the party may end the contract without any consequence. This kind of termination of a contract is known as rescission.

A contract can be terminated by discharge or rescission however, certain circumstances outlined in the contract may enable the parties to a contract to terminate the said contract even if all the duties and obligations stated in the contract have not been fulfilled. Further, sometimes a contract can be terminated due to a change in circumstances thus making it impossible to fulfil.

Conclusion

Thus we can understand that discharge of contract refers to the contractual relationship coming to an end when the obligations and duties have been fulfilled by the parties to a contract. In this case, the parties are free from the obligations of the contract. As mentioned earlier there are various modes of discharging a contract but the best way to do it is by performing the promise within the stipulated time stated in the contract as the other modes are quite unpleasant ways to release the parties from duties because it leads to damages.

References

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All about discharge of a contract

Introduction

Various modes of discharge of contract