Discharge of Contract

What is discharge of contract?

Meaning of Discharge of Contract: – The discharge of contract is defined as the termination of a contract or an agreement made by two parties with the fails in performing the obligations mentioned at the time of creating an agreement with the acceptance of both parties like free of consent. Hence the obligations may be contractual or legal or operational or even by the performance itself. So it is important to understand the methods of discharge of a contract.

Discharge of a Contract means to terminate (end) it. Therefore, there are many types of discharges and there are different ways to terminate a contractual obligation. The discharge of a contract refers to the manner in which it ends. Discharge of contract means termination of the contractual relationship between the parties. A contract is said to be discharged when it ceases to operate, i.e., when the rights and obligations created by it come to an end.

What are the modes of discharge of contract?

Contracts can be terminated in the following 6 ways: –

1. By Performance;
2. By Agreement or Consent;
3. By Impossibility;
4. By Lapse of Time;
5. By Operation of Law;
6. By Breach of Contract.

Explanation: –

1. Discharge of Contract by Performance

• A contract is said to be discharged if the parties to the contract fulfill their obligations under the contract within the time and in the prescribed manner. In such a case, the parties are discharged and the contract terminates.
• For Example: – ‘A’ offers to sell his house to ‘B’ for $100000 and ‘B’ accepts the same letter and paid the full amount.  ‘A’ handed over the house to ‘B’. Here the parties have fulfilled their obligations. The contract is discharged from the performance. If only one party fulfills the promise, it is discharged alone. Such a party gets the right to take action against the other party guilty of breach of contract.
• The performance of a contract is the most common method of its discharge.
• This may be the actual performance or attempted performance (tender): –
  • Actual Performance: – When both parties make their promises, the contract is terminated. The performance must be complete, accurate and as per the terms of the agreement. Most contracts are discharged from performance in this manner.
  • Tender or offer of Performance: – At times when the performance becomes due. The promisor is not able to discharge his obligation or perform his duty because he is prevented by the promisee in doing so. This situation where the promisor actually intended to perform his obligation or discharge his duty but is prevented from doing so by an intervening disability is known as the attempted performance of a promise.

2. Discharge of Contract by Agreement or Consent

• A contract stands on the agreement of the parties. As it is an agreement that binds them, they can be discharged by their agreement or consent.
• If either of the person in the contract is not willing to continue the contract till you date then it is converted to the other party whether they may accept or not, the discharge of the contract by the agreement will happen.
• A contract may be terminated by a subsequent agreement.
• The new agreement can be done like this: –
  • Novation: – Section 62 of the Indian Contract Act deals with the principle of novation. When a new contract is exchanged from an existing one, either between the same parties or between the new parties. If the parties to a contract have agreed to substitute a new contract for it or to resume or replace it, the original contract is not required.
  • Alteration: – When one/more terms of the contract are changed by mutual consent of the parties.
  • Recession: – When all or some of the terms of the contract are cancelled.
  • Remission: – Section 63 of the Indian Contract Act, 1872 deals with the discharge of contract by remission. i.e., acceptance of the lesser fulfillment of the promise made.
  • Waiver: – It means the willful relinquishment or giving up of a right granted to the party under a contract.
  • Merger: – When an inferior right to a party under a contract merges into a superior right of the same party under a new contract.

3. Discharge of Contract by Impossibility of Performance

• If the performance is impossible of a contract, it is void. In other words, the impossibility of performance renders the contract void. The provisions relating to the impossibility of performance are followed in Section 56 of the Indian Contract Act 1872.
• An agreement to perform an impossible task in itself is void. “The impossibility that comes after the formation of the contract (which may be demonstrated at the time the contract was entered into) is called subsequent.
• The supervening impossibility includes: –
  • Destruction of the subject matter of the contract;
  • The non-presence or non-occurrence of a particular state of things;
  • Death or disability for personal service;
  • Changes or steps in the law for someone with statutory authority;
  • The outbreak of war. In these cases, the contract is discharged.
• The following cases are not covered by impossibility discharge: –
  • Performance difficulty;
  • Commercial impossibility;
  • The failure of a third person whose work the dependent relied on;
  • Strikes, lockouts and civil disturbances;
  • Failure of one of the items.
  • In these cases, the contract is not discharged.

4. Discharge of Contract by Lapse of Time

• According to the limitation act 1963, it is specified that if the contract is unable to perform within the specified period, it may affect the other party and leads to the cancellation of the entire contract. Then it is treated as a discharge of contract by Lapse of time.
• The Limitation Act 1963, imposed an obligation on the parties about certain contacts to perform within a specified time. If a contract is not done within the period of limitation and if no action is taken as promised in the law court, the contract is discharged.

5. Discharge of Contract by the Operation of Law

• A contract can be discharged by law.
• This includes discharge by: –
  • Death
  • Bankruptcy/Insolvency
  • Unauthorized change of the terms of a written agreement, and
  • Rights and obligations are vested in a single person.
  • Court decision

6. Discharge by Breach of Contract

• Breach of contract means failure by either party to fulfill contractual obligations without any legal excuse. This is a basis for the discharge of the contract.
• Breach of contract refers to the termination of the original contract due to the failure of performing obligations by either of the parties which discourage and affects the other party. It relates to void or terminates the original contract completely. These breach of contracts may be either anticipatory or actual.
•  Breach of Contract may be: –
  • An actual breach of contract can occur at the time when the performance is due or, during the performance.
  • Anticipatory breach of contract occurs when a party refuses to accept its liability or obligation under the contract before the time for the performance.

Case laws

1. D.D.A. vs. Joint Action Committee

Facts of the case: – The appellant, a contracting party, intended to alter or modify the terms of allotment of flats, it was obligatory on its part to bring the same to the notice of the allottee. Having not done so, the D.D.A. relying on or based on the purported office orders which were not backed by any Statute, new terms of the contract could not be thrust upon the allottees.

Judgement of the Case: – In this case, the court held that the levy by the D.D.A. of additional amount of 20% and a surcharge of 20% over the ordinary cost of construction by issuing office order after the allotment of flats was held improper.

2. Amar Nath vs. Bharat Heavy Electricals

Facts of the Case: – The appellant did some construction work for the respondent company. The company made payment to him for the work done by him. The appellant, who was not satisfied with the amount being paid to him, accepted the payment, by making an endorsement on the receipt that he was accepting it under protest.

Judgement of the Case: – Since the payment was accepted under protest, it was held that the contract was not discharged.