This article has been written by K. Sri Priya pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution course from LawSikho and edited by Shashwat Kaushik.
This article has been published by Shashwat Kaushik.
Table of Contents
Introduction
A contract is an agreement that is enforceable by law. In today’s world of litigation, contracts form the basis for any association with each other, and at the time of association being at stake, contracts also act as evidence for litigation. The modes of discharge of such contracts can be performance, by agreement, by the impossibility of happening, by lapse of time, by operation of law, or by breach of contract. Discharge of contract is defined under Sections 56 to 63 of the Indian Contract Act of 1872, wherein the agreement is made for the performance of an impossible act and is void. Thereafter, Section 62 deals with the effect of novation, rescission, and alteration of contract, which 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.” The existing research revolves around the basic concept while lacking the in-depth significance of the existing trend of contractual importance, which in turn reaps large monetary losses to contracting parties who need the laws to support them. Broadly, discharge happens in two ways, one being the termination of the contract by the parties themselves and the other being termination as ordered by the court of law. As a whole, discharge of contract refers to a scenario that does not require the termination of contractual obligations.
Types of discharge of contract by way of agreement
Novation
Novation is when an existing contract that is agreed upon by the parties is substituted with a whole new contract between the same or different parties. Novation requires a valid new contract and the consent of involved parties to such a contract, and the existing contract should be a live one and not expired. Intention is the main ingredient in innovation. If the intention to end the previously existing contract is not present, then the new novated contract is not valid at all, and the older contract itself becomes valid. Novation is of two types, one being the change in the terms of the contract and the second being the change in parties to the contract.
Illustration: Suppose A is a party to the contract with B and A owes B an amount of Rs. 10,000. Thereafter, A enters into another arrangement with B, whereby he gives a property as a mortgage to B; the worth of the property is, say, Rs. 5000. This is hereby a novation of contract whereby the old contract is overridden by the new contract.
In Morris vs. Baron & Co. (1918), Morris entered into a contract (contract 1) with Baron for the supply of several cloth pieces. There was a conflict wherein Morris asked for payment for the cloth he supplied, whereas Baron, in turn, claimed damages for the delayed delivery of the remaining cloth. Later, the parties, by way of parole, entered into an arrangement (contract 2) by which they withdrew the proceedings. Morris paid 30 pounds as damages to Baron for delayed delivery of cloth pieces, whereas Baron was to pay the amount for the supplied cloth pieces as well as, if needed, demand the delivery of remaining cloth pieces from Morris. The point of context is whether the parties to Contract 1 rescinded the whole contract and substituted it with Contract 2.
Thereby, it was held by Lord Dunedin that, whether there was a cancellation of the contract or just a change of terms, it solely depends upon the intention of the contracting parties.
In Mrs. Salima Jabeen vs. National Insurance Co. Ltd. (1998), Salima Jabeen has entered into a contract with the insurance company, i.e., an insurance contract against any fire accident. The insurance amount was Rs. 23 lakh. Thereafter, her property was set on fire by militants, causing damage to the property. She claimed the insurance and got a satisfactory amount of Rs. 6,61,772, which was termed to be the final amount and has released the insurance company from the contractual obligations. Therefore, it was held that she is in no way eligible for any further claim of the remaining insurance amount.
In Godan Namboothiripad vs. Kerala Financial Corporation (1997), the Kerala Financial Corporation has issued a loan to one Mr. Gopinath for a vehicle purchase, wherein Gopinath has to pay the money in instalments. After a while, Gopinath failed to pay the installments, and after that, the corporation seized his vehicle. Thereafter, the appellants have issued an equitable mortgage for the payment of the remaining amount. The court held this to be a novation of contract. Hereafter, Gopinath is no longer the debtor, according to the new arrangement through novation.
In the case of Lata Construction and Ors. vs. Dr. Rameshchandra Ramniklal Shah (1999), it was held by the Supreme Court that if there is a novation of contract, then the original contract need not be fulfilled.
In the case of Nagendra Kumar Brijraj Singh and… vs. Hindustan Salts Ltd. (2000), Hindustan Salts Ltd. advertised a few job positions with a wage scale on their website. Nagendra Kumar subsequently joined the office, wherein he signed a contract on his first day that had a different wage schedule and was not the same as displayed on the website. Subsequently, he went to the court of law, stating he was being paid less and not as mentioned on the website. The Gujarat High Court held the company not liable and further, it was held that Nagendra Kumar cannot claim the mentioned amount on the website as he has signed a wholly different contract that amounts to a novation of contract.
Alteration
Alteration is when only certain terms of the contract are altered and the contracting parties to the agreement remain the same, and they must mutually agree to the alteration of the existing contract. The best example is a change in time or a change in date in a contract of sale that is mutually agreed upon by both parties.
In the case of United India Insurance Co. Ltd. vs. M.K.J. Corporation (1996), it is stated that good faith is the main essential ingredient, as no major alteration to any contract can be made without the consent of both parties to the contract.
In the case of Kalianna Gounder vs. Palani Gounder and Anr. (1969), the Supreme Court here referred to the concept of the notion of significant alteration, whereby if there is no significant alteration that is not addressed to the one party by the other, other than this minor alteration, everything monetary and clauses remain the same, then in such a case the contract remains valid.
Remission
Remission is when contracting parties agree to accept a lesser sum or lesser performance of what was actually agreed upon while entering into the contract. This can happen for a variety of reasons, such as if one party is unable to pay the full amount or if the parties agree that the original terms of the contract are no longer fair or reasonable.
Remission can be either partial or full. In a partial remission, the parties agree to accept a lesser sum or lesser performance than what was originally agreed upon. In full remission, the parties agree to cancel the contract entirely.
Remission is a common way to resolve disputes between contracting parties. It can be a more cost-effective and efficient way to resolve a dispute than going through the courts. However, it is important to note that remission is not always possible. If one party is unwilling to accept a lesser sum or lesser performance, then the parties may have to go through the courts to resolve the dispute.
There are a few things to keep in mind when considering remission:
- First, it is important to make sure that all parties are in agreement with the terms of the remission.
- Second, it is important to get the remission in writing. This will help to avoid any confusion or misunderstandings later on.
- Finally, it is important to note that remission does not always extinguish the original debt. If the parties later decide to enforce the original terms of the contract, the creditor may still be able to collect the full amount of the debt.
For example, if A has promised to pay only Rs. 2000 for his existing debt with B of Rs. 5000, B accepts it in full satisfaction and accord (satisfaction and accord as stated in the England Law). Such a kind of agreement refers to remission, whereby B cannot further make any claim on A to pay the remaining amount.
Rescission
Rescission is defined under Section 62 of the Indian Contract Act of 1872. Rescission is the dissolution of the contract by the contracting parties having a mutual agreement. In such a scenario, there is a complete shutdown as the old contract is dissolved and no new contract comes in place of the dissolved one. For example, A enters into a contract with B stating that he will make delivery of certain goods to B on a certain date and time. But before the agreement comes into play itself, they decide not to move forward with the terms of the agreement, thereby rescinding the contract.
Waiver
Waiver is when one of the contracting parties relinquishes the right of the other party, and the other party is relieved from his obligation as promised in the contract. For example, A and B are good friends and A has said to B that if B sings a song for A, then A would buy a shirt for B. B eventually sings a song for A but B thereafter forbids taking the shirt from A, which A accepts and gives his consent to. Such an instance is called discharge of contract by waiver.
In M. Sham Singh vs. State of Mysore (1972), M was sent to the US on a scholarship by the state, which stated that if he came to India for work, he would be given work by the state in six months; otherwise, the contract would remain voided. The state failed to provide work to M within six months and the state had to surrender its rights as claimed by M.
Merger
Merger is when a part of an inferior right initially promised in the contract now shifts into a superior right, and the inferior right is now merged and vanishes.
For example, if you own a house and you take out a mortgage on the house, the mortgage is a superior right to your ownership interest in the house. This means that if you default on the mortgage, the lender can foreclose on the house and sell it to recoup their losses. In this case, your ownership interest in the house is extinguished because it is inferior to the mortgage.
Another example of a merger is when you buy a car and take out a loan to finance the purchase. The loan is a superior right to your ownership interest in the car. This means that if you default on the loan, the lender can repossess the car and sell it to recoup their losses. In this case, your ownership interest in the car is extinguished because it is inferior to the loan.
A merger can also occur when two or more contracts are combined into one. This can happen if the contracts are related to the same subject matter and if they are executed at the same time. For example, if you sign a contract to buy a house and a contract to take out a mortgage on the house, the two contracts can be merged into one. A merger can have a number of legal consequences. For example, if two contracts are merged, the terms of the merged contract will be controlled. This means that if there is a conflict between the terms of the two contracts, the terms of the merged contract will prevail.
Mergers can also affect the rights of third parties. For example, if you merge two contracts, a third party who has a right under one of the contracts may not be able to enforce that right under the merged contract.
Merger is a complex legal doctrine with a number of potential consequences. It is important to consult with an attorney if you are considering merging two or more contracts or if you are involved in a legal dispute that involves a merger.
Conclusion
Discharge of a contract means completion of that particular contract. When the rights and duties of the parties are established, the contract is discharged. Due to the elasticity of the use of contracts and the varied language used to frame clauses, contracts are sometimes not vivid, which may lead to uncertainty or a lack of knowledge and understanding of the contract law. Most of the contracts today are subjected to erroneous understanding, thereby leading to nonperformance and litigation. Contracts, being the sole documentation of promises on a regular as well as commercial basis, need more customisation and standardisation. The looping law of the ages needs a touch of today’s emerging development, with an increased aid of research on the discharge of contracts.
References
- https://www.taxmann.com/post/blog/what-is-discharge-of-a-contract-under-indian-contract-act-1872-featuring-case-studies/#1111
- https://www.vedantu.com/commerce/discharge-of-contract
- https://www.patnalawcollege.ac.in/econtent/Discharge%20of%20Contract%20by%20Prabhat%20Kumar.pdf
- https://www.ddegjust.ac.in/2019/1/CP-302%20Additional%20Lessons_21012019.pdf
- https://www.ijlmh.com/wp-content/uploads/Discharge-of-Contract-by-Agreement-.pdf
- https://indiankanoon.org/
- https://shodhganga.inflibnet.ac.in/bitstream/10603/296376/14/14_chapter%209.pdf
