law of contract
Image source: https://bit.ly/2Lfb8Z3

This article is written by Anurag Mohan Bhatnagar and Simhadri Bharadwaja.

Introduction

To discharge a contract is to end it. There are therefore as many kinds of the discharge as there are different ways of ending a contractual obligation. Discharge of a contract refers to the way in which it comes to an end.

When the contract is formed by agreement, it may also be discharged or terminated through agreement, subject to the conditions of the contract. The agreement to extinguish or terminate the contract itself becomes a binding contract if supported by consideration or made under seal. The following are three main types of discharges:

  • Bilateral Discharge: The contract will be mutually discharged where the parties agree to release one another from any further obligations existing from the original contract. The contract is discharged despite the parties failing to fully or partially discharge all their obligations.
  • Accord and Satisfaction: Accord and satisfaction occurs where one party accords the release of another party, who is in breach of the original agreement, from its obligations in return for the satisfaction for the performance of another obligation.
  • Unilateral Discharge: Unilateral Discharge occurs where one party has completed its part of the bargain and agrees to release the other party from its outstanding obligations under the contract. The agreement is only binding if supported by consideration or made under seal.

In this article, however, we are going to deal with Discharge of Contract by Agreement in detail.

Types of discharge by agreement or consent

As per Section 62 of the Indian Contract Act, 1872 whose heading is – Effect of novation, rescission, and alteration of contract, “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 6 types through which discharge of contract through agreement or consent could take place are:

  • Novation
  • Rescission
  • Alteration
  • Remission
  • Waiver
  • Merger
  • Accord and satisfaction

Novation

Novation takes place when either a new contract is substituted for an existing one between the same parties, or, a contract between two parties is rescinded in consideration of a new contract being entered into on the same terms between one of the parties and a third party. In the famous case of Scarf v Jardine18 Lord Selborne explained the meaning and effect of novation in the following words:

There being a contract in existence, some new contract is substituted for it either between the same parties or between different parties, the consideration mutually being the discharge of the old contract. A common instance of it in partnership cases is whereupon the dissolution of a partnership the persons who are going to continue in business agree and undertake as between themselves and the retiring partner, that they will assume and discharge the whole liabilities of the business, usually taking over the assets and if in case they give notice of their arrangement to a creditor and ask for his accession to it there becomes a contract between the creditor who accedes and the new firm to the affect that he will accept the liability instead of the old liability and on the other hand that they promise to pay him for that consideration hence novation is of two kinds, namely:

  • A novation involving a change of parties
  • A novation involving the substitution of the new contract in the place of old

Change of Parties

The first illustration to Section 62 is a case of novation by the change of parties. The illustration is, A owes money to B under a contract. It is agreed between A, B and C, that B shall henceforth accept C as his debtor, instead of A. The old debt of A to B is at the end, and a new debt from C to B has been contracted. If A is a debtor and the creditor agrees to accept B in his place as the debtor, the original contract between the creditor and A is at the end.

https://lawsikho.com/course/diploma-advanced-contract-drafting-negotiation-dispute-resolution

Click Above

Substitution of New Agreement

When the parties to a contract agree to substitute a new contract for it, the original contract is discharged and need not be performed. It is necessary for the application of this principle that the original contract must be subsisting and unbroken.

In the supreme court case of Lata Construction v Dr Rameshchandra Ramniklal Shah it was held that “there should be a complete substitution of a new contract. It is in this situation that the original contract need not be performed”.

In other words, it means that if the new contract changes the heart of the contract or the root of the primary contract only then it will be considered Novation. So the question arises what happens if the heart of the contract is not changed but only minor changes are made. Any minor change to the contract which both the parties agree to is called Material alteration to the contract and it is legally binding on both the parties.

In the case of Nagendra Kumar Brijraj Singh v Hindustan Salts Ltd, the defendants advertised that there were vacancies in their company at a certain salary. The petitioner got selected for the job. The day he joined he was offered the job at a lesser pay scale. He consented to this new contract which offered him lesser pay than what was advertised. He later sued the defendants for the advertised pay.

The court quashed this claim and said that since the plaintiff agreed to the new contract which offered lesser pay the contract had been novated and hence it is valid. Pay scale is the heart of the contract and changes to that novates the contract. Hence defendants were held not liable.

In another case of Juggilal Kamlapat v N.V. Internationale, the Calcutta High Court also held that “For novation to take effect, modification to the contract must go to the root of the original contract and change its essential character”

In another similar case of Manohar Koyal v Thakur Das Nasker, the defendants owed the plaintiff a sum of Rs 1173 due on a bond. But the amount was not paid in due time and the plaintiffs after the passing of the due date agreed to accept Rs 400 in cash and a new bond of Rs 700 payable in instalments. The defendant defaulted again and neither paid Rs 400 in cash nor the Rs 700 bond. 

The Plaintiffs sued for the original bond of Rs1173. The court held that the original contract was voided not because of novation but because of breach of the contract by the plaintiff and the plaintiff was entitled to sue for breach of contract. When a breach of contract occurs the contract becomes void and the plaintiff can sue for damages.

The court further observed that the second agreement the parties entered into is not valid as novation can happen only to an already existing contract. Since the first contract became void it cannot be novated.

Rescission

Section 62 of the Indian Contract Act also permits the parties to rescind their contract. The Supreme Court allowed the parties to rescind under this section a contract for sale of forest coupes because of substantial variance between the particulars of quantity and quality of timber held out at the time of the auction and the timber actually available. The contractor was allowed to refund of his deposit. But no compensation was allowed to him for his loss because the contract contained a clause against compensation in such circumstances. This was decided in the famous case law, namely Syed Isar Masood v State of MP.

Where an old contract is rescinded and is replaced by a new one, the old one will not revive only for the reason that has been a failure to keep the new promise. The parties may, however, by mutual consent, restore the original and then the original will revive and become binding on the parties.

Mode of Communicating or Revoking Rescission

The rescission of a voidable contract may be communicated or revoked in the same manner, and the subject to the same rules, as apply to the communication, or revocation, of a proposal. This is mentioned in Section 66 of the Indian Contract Act, 1872.

As per Section 64 of the Act, the party rescinding the voidable contract shall, if he has received any benefit thereunder from another party to such contract, restore such benefit, so far as may be, to the person from whom it was received.

Alteration

Section 62 of the Indian Contract Act, 1872 defines alteration. Alteration of a contract may take place when one or more of the terms of the contract is/are altered by mutual consent of the parties to the contract. In such a case the old contract is discharged.

In the case of United India Insurance Co Ltd v M.K.J. Corpn it was delivered in the judgement that “Good faith is a continuing obligation inasmuch as even after entering into the contract, no material alteration can be made by a party in the terms of the contract without the consent of the other.

Where a contract is embodied in a deed and the party who has the custody of the deed alters it without the consent of the other in a material particular, the effect would exactly be the same as that of cancelling the deed. Both parties will be discharged from their respective obligations. The meaning of the expression “material alteration” was considered by the Supreme Court in Kalianna Gounder v Palani Gounder.

In the particular case, a memorandum of agreement for the sale of land under which Rs. 2000 were paid in advance was with the plaintiff. The defendant refused to convey the land and pleaded that the plaintiff had alerted the deed by adding the words that the seller shall “clear the debts and execute the sale deed free from encumbrance.

The plea was dismissed because the alleged alteration could not be proved, but Shah J took the opportunity to point out: “Even if it be assumed that the sentence regarding encumbrances was written after the deed was executed it will not invalidate the deed, Ordinarily when the property is agreed to be sold for a price, it would be the duty of the vendor to clear it of all encumbrances before executing the sale deed. The alteration, if any, cannot, therefore, be regarded as material.

Remission

A promisee can forgo or transmit the execution of guarantee of an agreement, completely or to some degree. He can likewise expand the time concurred for the execution of the equivalent.

A remission is ordinary when it comes to fruition through an express concede to the account holder by a bank. It is inferred when the leaser makes a willful surrender of the first title to the indebted person under private mark comprising the commitment.  The term remission is additionally utilized in reference to the absolution or approbation of damage or offence, or the demonstration through which a Forfeiture or punishment is excused.

Reduction implies acknowledgement of a lesser exhibition that what was in reality due under the agreement. As per area 63, a gathering may shed or transmit, entirely or to a limited extent, the execution of the guarantee made to him. He can likewise broaden the season of such execution or acknowledge, rather than it, any fulfillment which he considers fit. A guarantee to do as such will tie despite the fact that there is no thought for it.

Waiver

Waiver signifies “Surrendering” the rights. At the point when involved with the agreement relinquishes or postpones his rights, the agreement is released. Here, both the gatherings commonly concur that they will never again be bound by the agreement. It adds up to an arrival of gatherings from their legally binding commitments.

What is a Waiver?

Waiver implies an individual surrendering a few or the majority of their legitimate rights under an agreement. There is more than one path by which a privilege might be postponed, and a waiver can happen either deliberately or unexpectedly.

  1. Waiver by contract or deed:

This happens where a gathering explicitly consents to surrender their lawful rights. Such an understanding will tie gave the ordinary prerequisites of an agreement have been met. Instances of this sort of waiver incorporate settlement or bargain understandings, varieties to a current contract, or another agreement supplanting a more seasoned one.

  1. Waiver by the decision:

This applies where a rupture of the agreement has happened and the “honest party” has a decision between two elective rights or cures. Waiver by race, as a rule, happens where the agreement contains an express right or alternative to end or repeal it in specific circumstances, or where one gathering submits a genuine rupture which gives the “blameless” party the privilege to end the agreement right away. In such cases, the “honest” party may pick either to end the agreement promptly or to forgo the rupture and proceed with the agreement.

Waiver in simple words is the voluntary abandonment of one’s right. For example let’s say A owes B 1000 rupees. A has the right to claim this amount from B but due to some circumstances he voluntarily releases B of his obligation. Here A waived his right of 1000 rupees from B.

Waiving one’s right need not always be expressed. In the words of Lord Denning said that the principle of waiver also applies if one party, by his conduct, leads another to believe that strict rights arising under the contract will not be insisted upon.

In the case of M.Sham Singh v State of Mysore, M was sent to the United States to pursue higher studies under a scholarship which entailed the condition that upon his return he would work for the State and that the State would offer him a job within 6 months of his return. The contract also had the condition that if the state failed to provide employment within 6 months the contract shall stand waived and if M failed to comply he would have to return the scholarship amount. 

M was selected for further training of one year, on his request, the State complied with his request of extension of his time. Before the beginning of his new one-year training M had to come back to India due to domestic reasons and stayed for 6 months and again returned to the United States with the permission of the State. After the completion of his new one year training he started working in the United States and the State of Mysore sued for the scholarship amount. 

M pleaded that when he was in India he was not hired within the stipulated period of 6months and that there was conduct on the part of the State to waive their rights. The court held that there was no waiver whatsoever as the extension was mutually agreed upon by the parties and there was no conduct on the part of the State showing an intention to waive.

In the case of Charles Richards Ltd v Oppenheim , the contract was to provide a car frame on which a body was to be built within a certain period of time, time being of the essence. The contractor could not deliver the frame of the car within the due date. Yet the buyer very liberally granted the contractor an extension in time of 4 weeks, he also gave notice that beyond this time there will be no acceptance. 

When the delivery was made well beyond 4 weeks the buyer did not accept performance. The defendants pleaded that the buyer through his conduct waived his right of performance in due time by leniently giving time extension. The court held that the buyer reclaimed his right to make time of essence when he gave a notice. Hence he was allowed to rescind the contract.

Merger

An agreement additionally stands released through a merger that happens when a substandard right accumulating to party in an argument amalgamates into the better right resulting than a similar gathering. For example, contracts an industrial facility premises from B for assembling movement for a year, yet 3 months in front of the expiry of rent buys that very premises. Presently since A has turned into the proprietor of the structure, his rights related with the rent (substandard rights) in this manner converge into the privileges of possession (unrivaled rights). The past rental contract stops to exist. In certain circumstances, it is conceivable that substandard and predominant right corresponds in a similar individual. In such cases, both the rights join prompting a release of the agreement administering the sub-par rights.

Accord and satisfaction

Accord refers to an agreement whereby a person after there has been a breach of the contract agrees to accept some valuable consideration in lieu of the right of action that he has against the other party. And satisfaction refers to the discharge of the obligation formed under the new agreement after the breach has occured. Discharge of a contract by accord and satisfaction means the discharge of the original contract by reason of performance of the new substituted obligations. 

The liability arising out of breach of contract can be discharged by accord and satisfaction. Unlike Novation, Accord and Satisfaction is only possible after there has been a breach of the original contract. Consensus is also a requirement to settle a contract under Accord and Satisfaction.

 In the case of Snow View Properties Ltd v Sindh and Punjab Bank, The petitioner floated a loan and mortgaged his property to secure the loan. The petitioner was unable to clear the loan in the given time so the bank authorities seized the mortgaged property. The petitioner after the breach of the contract entered into a contract with the bank to pay a certain amount of money in exchange of his property. The bank authorities agreed to this and later did not release his property even after receiving the promised amount. 

The court held that the bank must give him his property back stating that the doctrine of accord and satisfaction applies fully in this situation. Since the new contract was floated to satisfy the breach of the original contract and the banks voluntarily agreed to it so they cannot go back on their new terms.

Another illustration of accord and satisfaction is the case of  Kapurchand Godha v Mir Nawab Himayatalikhan Azamjah, the plaintiff though initially protected to accept the new agreement later expressed readiness to accept the amount sent if full satisfaction of his claim and discharge the promissory note. It was held by the Supreme Court of India that this circumstance was completely covered by Section 63 of the Contracts Act. 

No matter what were the respective rights of parties under the original agreement, they are abandoned in consideration of the acceptance of a new agreement. The consequence is that when such an accord and satisfaction takes place the prior rights of the parties are extinguished. They have, in fact, been extinguished by the new rights. 

Conclusion

In the Law of contracts, there is a great deal of misunderstanding or lack of understanding in regard to certain topics connected with the subject of discharge. It is due to the fact that few people use such terms as condition and warranty in the same sense, the rest is due to faulty reasoning concerning matters that are admittedly difficult. The best way of discharging a contract is based on performance. As this way both the parties follow all the terms of the contract and afterwards go for its discharge. On the other hand discharge by the breach is the most unpleasant way to release you from duties. Therefore, discharge by breach results in damages too.

Where there is no instrument that can be regarded as the obligation, there is great difficulty in proving the execution of a deed, for the obligation itself, cannot be physically delivered. But the surrender or cancellation of evidential documents may even in these latter cases prevent proof of the obligation or may be given evidence of mutual recession .but the recession and substitution are interwoven into one body and one breath neither one having power of separate existence . in pleading such a discharge the defendant must allege the very same things that must be alleged by a plaintiff who sues upon a contract except that it has to show a breach . The defendant is not seeking a remedy and hence he does not have to establish the existence of any secondary obligation. He must alleged merely the agreement, showing that it includes a recession of the former obligation. No technical language is required. The facts must be so stated that the court can determine whether or not there was an agreement and what were its terms.


LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join:

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.

 

1 COMMENT

LEAVE A REPLY

Please enter your comment!
Please enter your name here