This article is written by Neha Dahiya, a law student at Dr. B.R. Ambedkar National Law, University. This article explains the different ways in which a contract can be discharged and focuses particularly on the remission of contract, as covered under Section 63, Indian Contract Act, 1872.
It has been published by Rachit Garg.
A contract creates binding obligations on all the contracting parties. These obligations cease to operate when the contract is finally discharged. There can be many ways through which a contract can be discharged. Remission of the contract is particularly one of them. By remission, the promisee discharges the promisor from his obligations by accepting a lesser amount or lesser degree of performance of the promise. In India, it is covered under Section 63 of the Indian Contract Act, 1872.
Discharge of a contract
A contract is said to be discharged when the contractual relationship between the parties comes to an end. Thus, when the contract ceases to operate, it is called discharge of contract. It is characterised by the end of all the contractual obligations that arose between the parties as per the contract. The contract no longer binds the parties once it is discharged. There are several modes through which a contract can be discharged.
Modes of discharge of a contract
When the parties have fulfilled their respective obligations as per the contract, the contract is said to be discharged by performance. When the promisor tries to fulfil the promise and the promisee refuses to accept the same, the contract is said to be discharged by attempted performance.
By impossibility of performance
When due to a supervening event, the performance of the contract becomes impossible, the contract is discharged by the impossibility. The performance of a contract can become impossible in the following circumstances:
- Destruction of a subject matter
- Alteration of law
- Death or incapacity of the promisor in a case where personal skills are involved
- Outbreak of war
- Failure of the ultimate purpose of the contract.
- Non-concurrence of circumstances
Lapse of time
Where there is a time-bound agreement, when the time is over and the promise as per the contract has not been fulfilled, then the contract is said to be discharged by the lapse of time.
By breach of contract
When the promisor refuses or fails to fulfil the contractual obligations, or makes the performance impossible due to his own conduct, he is said to have breached the contract. A breach that happens at the date of performance is called an actual breach and an anticipatory breach is when it happens before the date of actual performance. Hence, a breach of a contract results in its discharge.
By operation of law
A contract is said to be discharged by operation of law in the following cases:
- Where a contract involves the personal services of the promisor and the promisor dies or becomes incapable of fulfilling the obligations.
- When the promisor is adjudged insolvent.
- The merger of rights and liabilities, i.e. rights and liabilities vest in the same person.
- When the terms of a contract are materially altered by one party without the consent of the other.
- Lapse of time (cases where the contracts are time-bound or become time-barred by the law of limitation).
By mutual agreement
A contract is discharged by mutual agreement when both the parties mutually decide to cancel the contract, alter its terms and conditions, or agree to replace it with a new one. It can happen in the following ways:
- Novation– It happens when both the parties mutually decide to replace the existing agreement with a new one.
- Alteration– It happens when the terms of the contract are changed with the consent of all contracting parties.
- Recission– A contract is rescinded when the parties decide mutually to dissolve the contract and not replace it with a new one.
- Waiver– When one party to the contract decides to ‘waive’ or relinquish the right to the fulfilment of the contract, the other party is discharged from its obligations.
- Merger– When mutually the parties decide to merge the rights and liabilities in one person, the contract stands discharged.
- Remission – A contract is remitted when one party decides to accept the lessor degree of performance or lesser amount. It leads to the full discharge of the contract.
Discharge of a contract by remission
Discharge of contract by remission is covered by Section 63 of the Indian Contract Act, 1872.
As per Section 63, the promisee is empowered to remit or dispense with the performance of the contract. The remission of the performance of promise can be done either wholly or in part. Even the time can be extended, if the promisee so desires. Thus, the promisee can accept any degree of satisfaction of the contract as he thinks fit.
- When there is a contract between ‘A’ and ‘B’ where ‘A’ promises to paint a picture of ‘B’, the contract can be discharged if ‘B’ forbids ‘A’ from doing so. Thus, ‘A’ is no longer bound to fulfil his promise.
- In a case where ‘A’ owes ‘B’ Rs. 5,000 and ‘B’ directs ‘A’ to pay just Rs.2000 instead of the full amount at the time and place where Rs. 5000 were to be paid, ‘A’ is discharged from his obligation by paying just the amount accepted by ‘B’ in satisfaction of the full contract. Here, ‘B’ has remitted the contract by accepting a lower amount.
- Where ‘A’ owes Rs. 5000 to ‘B’ and ‘B’ accepts Rs. 1000 from ‘C’ in full satisfaction of the contract, ‘A’ is discharged of his obligation as ‘B’ has himself remitted the contract.
- In a situation where ‘A’ owes some amount to ‘B’ which is unascertained at present and ‘B’ accepts the sum of Rs. 2000 in satisfaction of the entire contract, ‘A’ is said to be discharged of his liability. Here, again ‘B’ has remitted the contract by accepting the amount given by ‘A’ in place of the unascertained sum which was not ascertained yet.
- ‘A’ owes Rs. 2000 to ‘B’ and is also indebted to some other creditors. ‘A’ makes an arrangement with all the creditors along with ‘B’ to pay a composition of 8 annas in rupee upon their respective demands. Thus, when ‘A’ pays Rs. 1000 to ‘B’ and ‘B’ accepts it in satisfaction of full contract, ‘B’ is said to have remitted the contract by accepting a lower amount.
Elements of Section 63, Indian Contract Act, 1872
Acceptance of less sum
As per this, the promisee when accepts a lesser amount than due from the promisor, the promisor is considered to be discharged from his liability. The following case law explains this element better:
- Kapurchand Godha v. Mir Nawab Himayat Ali Khan Azamjah (1963)
Facts– After Hyderabad was taken over, a committee was appointed to look into the related matters, and liability of above 27 lakhs was found. So the creditor was offered 20 lakhs, which he accepted. However, later on, he sued for the balance.
Issue– Can the creditor sue for the balance?
Held– Justice S.K. Das held that the present case fell under the purview of Section 63. Here, the creditor having accepted the payment in full satisfaction of his claim cannot later on demand the full payment. Thus, he was not entitled to sue.
‘Waiver’ simply means renouncing or relinquishing a right or claim. Thus, a contract may be discharged by waiver where a party decides to renounce its claims or rights.
Essentials of waiver
The following are the essentials of a valid waiver:
- It must be a voluntary decision of the party to waive its claim or right.
- It should involve the relinquishment or renouncement of a valid right or claim.
- It could be either expressed or implied.
- The party waiving its right must have complete knowledge about the existing right.
- There must be a clear intention of the party to forego its right.
- The right being waived must be existing at the time of waiver and must be arising from the promise.
The doctrine of promissory estoppel
The concept of waiver is based on the doctrine of promissory estoppel. As per the doctrine, a promise is legally enforceable even when made without any formal consideration, provided the promise was reasonable and the promisee acts on such promise by the promisor to his subsequent detriment. So in case of a waiver, when the promisee represents through his conduct or otherwise that he would forgo his right to complete the performance of the promise through any of the above-mentioned means, he would then not be allowed to withdraw his position later and demand full performance. However, withdrawal can be made within a reasonable time and should not cause any injustice to the promisor. The promisee then would be bound by the waiver.
Extension of time
When a contract is time-bound, both parties are expected to fulfil their obligations within that time frame. If it extends beyond that, the contract is said to be breached. However, the promisee may extend the time period for the fulfilment of contractual obligations. However, as held in Keshavlal Lallubhai Patel v. Lalbhai Trikumlal Mills Ltd. (1958), no promisee can unilaterally extend the time of performance at his own will and for his own benefit. Consent of the other party must also be taken.
The difference between waiver and extension of time was also highlighted in the case of M. Sham Singh v. State of Mysore (1973). In this case, M was granted a scholarship by the State for completing higher studies on the ground that he would serve the State, provided he was offered a good job by the State within 6 months. When he returned to India on a domestic visit, he was again sent back by the State for practical training. Later on, he joined services in the United States. The issue here was whether the sending back of M by the state for training and not giving a job meant a waiver from its side. The court held that here the State merely extended the time of performance of contact and this did not amount to a waiver. Thus, M was liable to refund the money when he joined services in the US as he breached the contract.
Difference between Section 62 and 63 of the Indian Contract Act, 1872
Section 62 of the Indian Contract Act, 1872 defines what is novation. Novation is when the contracting parties mutually decide to substitute an existing contract with a new one. On the other hand, as mentioned above, Section 63 lays down the provisions where a party can remit or dispense with the contract. Both the sections talk about different ways in which a contract can be discharged.
However, they differ from each other significantly. As per Section 62, in order to lawfully discharge a contract by novation, the agreement for it must be made before the actual breach of the original promise. However, under Section 63, there is no such requirement. The promisee may discharge the promisor either before the actual breach or afterward.
Difference between Section 63 of Indian Contract Act, 1872 and ‘Accord and Satisfaction’
The honourable Supreme Court in the case of National Insurance Company Limited v. Boghara Polyfab Private Limited (2009) defined the principle of ‘Accord and Satisfaction’ as the discharge of contract “by reason of the performance of certain substituted obligations.” In Snow View Properties Ltd. v. Punjab & Sind Bank (2010), Calcutta High Court opined that this principle was embodied in Section 63 of the Indian Contract, 1872.
However, there are some major differences in the doctrine of remission or waiver, as embodied in Section 63, and the principle of ‘Accord and Satisfaction’. They are as follows:
- Remission or waiver implies accepting a lesser performance of the contract or complete abandonment of the contractual obligations. However, in accord and satisfaction, the old obligations are replaced by new ones.
- Waiver or remission does not require consideration. However, under accord and satisfaction, when new contractual obligations arise, it contains all the new requirements of a contract including offer, acceptance, and consideration.
Remission of contract discharges the promisor from his obligations merely by paying the lesser amount or lesser performance of the promise. According to Section 63 of the Indian Contract Act, 1872, it contains three essential elements- acceptance of less sum, waiver, and extension of the time. Acceptance of either of them by the promisee shall discharge the promisor from his obligations. This is based on the doctrine of promissory estoppel. Having similar essence, it differs significantly from novation, as covered in Section 62 and the principle of ‘Accord and Satisfaction’. Thus, remission of the contract is an effective way of discharging a contract.
- Avtar Singh, ‘Contract Law’, EBC Publishing (P) Ltd. (2012 ed.)
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