This article is written by Anurag Mohan Bhatnagar, here he has discussed on the discharge of contract by agreement.
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. Contracts can come to an end in the following ways:
- By Performance
- By agreement or by consent
- By promise failing to offer facilities for performance
- By breach of contract
- By impossibility of performance
- By death
- By refusing tender of performance
- By unauthorized material alteration of the contract
- Discharge by lapse of time
- By operation of law
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 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.
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. The substitution of a new contract is not possible after there has been breach of the original contract. An early illustration is Manohur Koyal v Thakur Das Naskar, the plaintiff sued to recover the sum of Rs. 1173 due on a bond. After the due date of the bond, the plaintiff agreed to accept Rs. 400 in cash and a new bond of Rs. 700 payable by instalments. Subsequently, the defendant neither gave Rs. 400 nor the bond.
The plaintiff thereupon sued him on the original bond. The Calcutta High Court held that the original contract was discharged, not by novation, but by breach, and the plaintiff was entitled to sue for the breach of the original contract.
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.
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 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 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.
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 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.
- 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.
- 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.
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.
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.