This article has been written by Oishika Banerji of Amity Law School, Kolkata. This article provides a detailed analysis of contracts getting discharged as a consequence of the operation of law and lapse of time.
Table of Contents
Introduction
A contract is a legally binding agreement that generates rights and duties for the contracting parties. It is critical that all contract parties fulfil their obligations and duties in accordance with the contract’s conditions. The term ‘discharge of contract’ refers to a situation when a contract’s contractual relationship between the parties comes to an end. It is essentially the end of the parties’ contractual relationship. The duties of the party or parties come to an end when a contract is discharged. This article details out the concept of discharge of contract, highlighting specifically on the discharge of contract by the operation of law and lapse of time.
Discharge of contract : all you need to know
A contract imposes certain obligations on one or more of the parties concerned. When these requirements are fulfilled, the contract is discharged. A contract can be discharged in a variety of ways.
The phrases “discharge” and “termination of contract” are frequently interchanged. A contract can be discharged by the conduct of the contracting parties or by the operation of law. However, there is a narrow line that separates the phrases discharge and contract termination. When the parties to a contract perform or discharge their duties and obligations in accordance with the contract, this is known as the discharge of contract. When contracting parties fail to fulfil their duties or obligations, the contract is terminated.
For example, A threw a party at her house and hired some dancers to perform, promising to pay them their money. The dancers arrived at the gathering to perform. A pays their payments in accordance with the contract’s provisions. Here, the performance of the dancer will amount to the discharge of the contract since the terms of the agreement have been completed. The dancers’ failure to perform will result in contract termination.
Grounds for discharge of contract
- Performance-based discharge
Actual performance or attempted performance might be used to terminate a contract. When each of the contracting parties has completed what they pledged to do under the contract, it is said that actual performance has occurred. When a promisor promises to perform under a contract but the promisee refuses to accept it, it is considered a discharge by attempted performance.
- Discharge by mutual agreement
The contractual parties may agree to terminate the existing contract in one of the following ways:-
- Rescission
Rescission occurs when a contract is declared null and invalid, meaning it is no longer legally binding. The courts have the power to release non-liable parties from their contractual duties and, when practicable, will endeavour to put them back in the position they were in before to the contract’s signing.
- Alteration
When one or more of the contract’s provisions are amended, the contract is said to be altered. If all parties agree to a major change in a written contract, the old contract is discharged by the change and a new contract is formed in its stead.
- Novation
The newly added party becomes accountable with the establishment and enforcement of the new contract, and the party that is so substituted is relieved of its duties under the previous contract. This signifies novation.
- Remission
Accepting a lesser quantity or degree of performance than what was contracted for in full fulfilment of the contract is referred to as remission. There is no need for discussion or a fresh agreement for such a release or guarantee.
- Waiver
Waiver is defined as ‘abandoning’ one’s rights. The contract is dismissed when one of the parties abandons or waives his rights. Here, both the parties mutually agree that they shall no longer be bound by the contract. It’s essentially a release from contractual responsibilities for the parties involved.
- Merger
A contract can also be discharged by a merger, which occurs when an inferior right arising from a contract merges with a superior right ensuing to the same party. The prior rental agreement is no longer valid.
- Discharge by breach
The contract is said to be discharged by breach when a contractual party refuses or fails to perform, hinders themselves from performing, or makes the execution of the contract impossible due to their actions. An actual or anticipatory breach can be used to terminate a contract. An actual breach occurs when the default occurs on the due date of performance, whereas an anticipatory breach occurs when the default occurs before the due date of performance.
- Discharge by lapse of time
When a contract stipulates that it must be completed within a certain amount of time, failing to do so leads to the contract being discharged due to the passage of time.
- Discharge by supervening impossibility
A contract that was legitimate at the time of creation may later become impossible or unlawful to fulfill, and the contract will be dismissed as a result. In any of the following situations, a contract becomes void due to supervening impossibility:-
- Destruction of subject matter.
- Change of law.
- Non-concurrence of circumstances.
- Death or incapacity for personal services.
- The outbreak of war.
- Failure of the ultimate purpose of the contract.
- Discharge by operation of law
In the case of any of the following, a contract will be discharged by operation of law:
- Death or incapacity of the promisor in case of personal services.
- Insolvency.
- Rights and liabilities vest with the same person [merger of rights & liabilities].
- Unauthorised material alteration.
- Loss of sole evidence of the contract.
Exceptional cases when a contract is not discharged by the supervening impossibility
- Performance difficulty
Unexpected circumstances, such as transportation service disruptions, might make it impossible to complete a contract. This issue makes performance difficult, but it does not result in contract termination.
- Impossibility from a commercial standpoint
Commercial difficulties render the contract’s performance unprofitable or economically unviable. As a result, commercial hardship caused by an increase in the price of inputs (raw materials) or overhead costs will not result in contract termination.
- Riots, lockouts, civil unrest, and strikes
Contracts are not terminated by these circumstances unless there is a condition in the contract that states that the contract will not be completed or that the period for performance will be extended in such situations.
- Failure of one of the objects
When a contract is put into for many objectives, the failure of one of the objects does not result in the contract being terminated.
- Impossibility owing to a third-party failure
When a party’s performance of a contract is contingent on the performance of a third party, the contract is not discharged by the third party’s failure or default.
- Impossibility created by oneself
A contract is not discharged due to any party’s self-inflicted inability.
Section 62 of the Indian Contract Act, 1872
Under the heading, ‘effect of novation, rescission, and alteration of contract’, Section 62 of the Indian Contract Act, 1872 states that “if the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the previous contract need not be fulfilled.” Whether or not a contract has been novated is an issue of fact in each situation. In the case of novation, alteration, or recession, this section needs the consent of both parties. However, unilateral novation, alteration, or recession can proceed if it was either anticipated in the original contract or if the novation, alteration, or rescission is accepted under sub silentio, i.e., inferred approval by silence. The words ‘the original contract need not be fulfilled’ plainly suggest that the old original contract is discharged totally and is not to be performed due to the three situations listed in this section. The ingredients of Section 62 have been explained hereunder:
- The term ‘novation’ refers to when the parties to a contract agree to replace an existing contract with a new one.
- Alteration of a contract occurs when one or more of the contract’s provisions are changed by mutual consent of the contracting parties. In the case of United India Insurance Co. Ltd v. M.K.J. Corporation (1996), it was determined that no major change may be made by one party without the approval of the other, even if both parties are acting in good faith.
- Rescission of a contract occurs when all or portion of the terms of the contract is annulled.
Doctrine of frustration with respect to discharge of contract
The doctrine of frustration is a subset of the law of discharge or contract arising from the inability or illegality of the agreed-upon conduct and hence falls under the ambit of Section 56 of the Indian Contract Act, 1872. It is false to assert that Section 56 of the Indian Contract Act, 1872 only applies in circumstances of physical impossibility and that where this section does not apply, the rules of English law on the issue of frustration must be used. It must also be maintained that to the degree that the Indian Contract Act, 1872 covers a specific issue, it is exhaustive, and it is not admissible to apply English law principles outside of these legislative provisions. The decisions of the English courts have merely a persuasive value and may be useful in demonstrating how the English courts have resolved issues in situations comparable to those before the Indian courts.
The issue before the Calcutta High Court in the landmark case of Mugneeram Bangur and Co. v. Gurbachan Singh (1959) was whether a land-sale contract was discharged and came to an end as a result of intervening or supervening circumstances. The Court had opined that the requisition orders and/or work stoppages that resulted had no effect on or destroyed the foundation or fundamental basis of the contract in question, which cannot be claimed to have been frustrated or discharged as a result. Therefore, the frustration defence was correctly rejected in this case. Due to the lack of a time limit for the construction of roads and other infrastructure, construction may be completed within a reasonable period, which, in light of the foregoing and the circumstances of this case, may well include the requisition period or other periods that, while uncertain, would be temporary.
Contract frustration renders the contract unenforceable and relieves the parties of their contractual duties. Section 65 of the 1872 Act, on the other hand, provides that if an agreement becomes void, the person who obtained any benefit under it is ‘obliged’ to return it or compensate the person from whom he received it. The question is whether this clause applies to contracts that have been rendered invalid due to frustration. The frustration of a contract happens due to circumstances beyond either party’s control or fault, and as a result, a party should not be forced to recompense in such circumstances. However, failing to provide enough compensation may result in the other party suffering a loss.
Discharge of contract by operation of law
Generally speaking, a contract can be discharged by its own terms. The contract is said to be discharged by operation of law when the parties’ contractual duties are terminated due to the involvement of the law.
The term ‘operation of law’ refers to the components of the law that are automatically given. For example, by default, rights and duties might be assigned to or put on a certain individual. When you employ an attorney, your power of attorney forms will almost always include the words ‘operation of law.’ This is a frequent feature that attorneys attach at the conclusion of a power of attorney form to specify when the same will expire. For example, they may state that they are the client’s attorney and that all of their powers will stay in force until the client revokes the power of attorney or the power of attorney expires by law. As it pertains to many contexts, the legal concept of operation of law can take several forms.
The operation of law, in its most basic form, indicates that someone can be held accountable for certain responsibilities or obtain certain rights as a result of existing legal standards, independent of their intentions or desires. Law can also place prohibitions or limits on someone, limiting what they can and cannot do. If a contract cannot be enforced, it will be terminated by the operation of law. This can include cases where one or more of the contracting parties were not of sound mind, were under the influence of drugs or alcohol or were not of legal age. Furthermore, if one party was intimidated or compelled to engage in a contract, the contract’s duties or responsibilities can be terminated by the operation of law, if this can be shown.
While termination by operation of law implies that the duties or obligations have been ended as a result of the contract’s termination, discharge signifies that an individual or party has been released or emancipated from certain obligations. For example, when someone files for bankruptcy, any debt that a person has is discharged by law when they apply for bankruptcy. This does not indicate that the obligation to return the money was completed or cancelled, but rather that the individual is no longer legally obligated to pay their creditors. In a nutshell, the debt has been cancelled by law.
Death
When it comes to contracts requiring personal talent or aptitude, death terminates the contract. In other instances, the rights and responsibilities of the deceased person are transferred to his or her legal representatives.
Insolvency
When a person is declared insolvent, he/she is released from any obligations committed previous to the date of his/her declaration. With certain exceptions, the insolvent’s rights and obligations are transferred to an officer of the court known as the Official Assignee/Receiver upon insolvency.
Merger
When a contract’s rights and obligations are vested in the same individual, the contract is discharged and no further performance is necessary.
Lapse of time
A contract can be cancelled due to the passage of time. Contractual responsibilities and liabilities are barred by limitations in civil litigation. The law’s provisions are detailed in the Limitation Act, 1963.
Unauthorised material alteration
If one party to a contract significantly changes the terms without the approval of the other parties, the contract is dismissed and no longer remains enforceable.
Loss of evidence of the contract
In the event that the only proof of the contract’s existence is lost, the contract is dismissed by operation of law.
Discharge of a contract by lapse of time
If the performance is not accomplished within the specified time, the contract will be discharged. This will also result in a breach of the said contract. In this instance, the person can bring a lawsuit in court to vindicate their contract rights. The Limitation Act of 1963 allows a person to file a lawsuit in court. If the time limit specified in the Act ends, the contract is discharged, and the promisee is unable to enforce the promisor. Put simply, if the promisor fails to fulfill his/her obligations and the promisee fails to act within the prescribed time frame against the same, the promisee cannot be deprived of his/her legal recourse. Here, the contract is said to be discharged due to the lapse of time.
Take for example, Peter borrows money from John and pledges to pay it back in monthly installments over the following five years. He, on the other hand, does not pay a single installment. John called him a few times before getting busy and subsequently took no action on the same. Three years later, he approaches the court for assistance in reclaiming his funds. The court, however, dismisses his claim since he has crossed the time limit of three years to recover his debts.
We can also take an example of A and B who get into a contract where A promises to sell 20 packages of surgical masks to B and B in return agrees to pay Rs 500 for the same. The contract between A and B is set to be executed on 10th June 2021. On 5th June 2021, A informs B that it will not be possible for her to carry out the conditions in the contract entered with B. The type of breach that A commits in thai scenario is anticipatory in nature. The two options that are open to B, the affected party are:
- Election to cancel the contract, or
- Election to keep the contract alive which happens when performance of contract holds relevance over compensation to be paid to the affected party.
Legal provisions encompassing discharge of a contract by lapse of time
Section 2(j) of the Limitation Act, 1963 describes the term “period of limitation” as the period imposed by the Schedule for any action, appeal, or application and “prescribed period” as a period of limitation computed in accordance with the provisions of the 1963 Act. The Limitation Act of 1963 stipulates that a contract must be completed within a certain time frame, known as the term of limitation. If it is not executed, and the promisee does not take action within the time limit, the promisee loses his/her legal recourse.
Conclusion
The concepts of discharge of contract by the operation of law and lapse of time both are technical and clarified by nature. They as legal terminologies are transparent enough for a common individual to understand them. Both these types of discharge of contract hold significance with respect to day-to-day activities.
References
- https://www.taxmann.com/post/blog/what-is-discharge-of-a-contract-under-indian-contract-act-1872-featuring-case-studies/?amp.
- https://www.indiafilings.com/learn/discharge-of-contract/.
- https://lawtimesjournal.in/modes-of-discharge/.
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