Discharge of a Contract: The Indian Contract Act Notes

 

 

Introduction

In contract law, the term discharge of contract refers to the termination of contractual obligations, meaning the parties involved are released from their respective duties and liabilities under the agreement. The Indian Contract Act, 1872 lays down several provisions and mechanisms for the discharge of contract, ensuring that contracts are not indefinite and can be terminated under certain conditions. Understanding the modes of discharge of a contract is essential for law students, legal professionals, and businesses, as it allows them to navigate the legal process of concluding contracts properly.

This article will cover the various modes of discharge of contract, focusing on key aspects such as discharge by performance, mutual agreement, impossibility, and breach. Relevant sections of the Indian Contract Act will be mentioned throughout, along with key case laws illustrating these concepts.

What is Discharge of Contract?

The discharge of a contract occurs when the contractual obligations are fulfilled or otherwise brought to an end, thus releasing the parties from their commitments. The discharge can take place through several mechanisms, including mutual agreement, performance, impossibility, or breach.

Example: A and B enter into a contract where A agrees to deliver goods to B, and B agrees to pay a certain sum for the goods. If A delivers the goods and B makes the payment as agreed, the contract is said to be discharged by performance.

Mode of discharge of contract Under Indian Contract Law

1. By performance
   • Actual
   • Attempted
2. By mutual agreement(By implied consent)
   • Novation – Sec 62
   • Rescission – Sec 62
   • Alteration – Sec 62
   • Remission – Sec 63
   • Waiver
   • Merger
3. By Operation of law
   • Death
   • Merger
   • Insolvency
   • Unauthorized alteration
4. By lapse of Time
5. By breach of contract
   • Actual
   • Anticipatory
6. By impossibility of performance

Discharge by performance

Fulfillment of obligations by a party to the contract within the time and in the manner prescribed in the contract.

• Actual performance – no party remains liable under the contract. Both the parties performed.

• Attempted performance or tender.:- Promisor offers to perform his obligation under the contract but the promise refuses to accept the performance. It is called as attempted performance or tender of performance
  • But the contract is not discharged.

Example: A agrees to sell a car to B for ₹5,00,000. A delivers the car, and B pays the agreed amount. Both parties have performed their obligations, and the contract is discharged.

Discharge by mutual agreement

• Novation [Sec 62] – Novation means substitution of a new contract in the place of the original contract new contract entered into in consideration of discharge of the old contract.
  
  • The new contract may be:-
    • Between the same parties (by change in the terms and condition)
  • Between different parties (the term and condition remains same or changed)
  • Following conditions are satisfied :-
    • All the parties must consent to novation
    • The novation must take place before the breach of original contract.
    • The new contract must be valid and enforceable.

Example:

1. 1. 1. A owes B Rs.50,000. A enters into an agreements with B and gives B a mortgage of his estate for Rs.40,000 in place of the debt of Rs.50,000. (Between same parties)
      2. A owes money Rs.50,000 to B under a contract. It is agreed between A, B & C that B shall henceforth accept C as his Debtor instead of A for the same amount. Old debt of A is discharged, and a new debt from C to B is contracted. (Among different parties)

• Rescission [62]:- Rescission means cancellation of the contract by any party or all the parties to a contract. X promises Y to sell and deliver 100 bales of cotton on 1^st oct his go down and Y promises to par for goods on 1^st Nov. X does not supply the goods. Y may rescind the contract.

• Alteration [62] :- Alteration means a change in one or more of the terms of a contracts with mutual consent of parties the parties of new contracts remains the same.
  Ex:- X Promises to sell and delivers 100 bales of cotton on 1^st oct. and Y promises to pay for goods on 1^st Nov. Afterwards X and Y mutually decide that the goods shall be delivered in five equal installments at is godown . Here original contract has been discharged and a new contract has come into effect.
• Remission [63]:- Remission means accepting a lesser consideration than agreed in the contract. No consideration is necessary for remission. Remission takes place when a Promisee-

• • dispense with (wholly or part) the performance of a promise made to him.
  • Extends the time for performance due by the promisors
  • Accept a lesser sum instead of sum due under the contract
  • Accept any other consideration that agreed in the contract

Example: A promise to paint a pictured for B. B after words for him to do so. A is no longer bound to perform the promise.

• Waiver:- Intentional relinquishment of a night under the contract.

• Merger :– conversion of an inferior right into a superior right is called as merger. (Inferior right end)

Basis	Novation	Alteration
1. Meaning	It is substitution of an existing contract with new one.	It is alteration to some of the terms and conditions of the original Contract.
2. Change in parties	It is made by – (a) change in the terms of the contract or (b) change in the Contracting Parties.	Terms of the contract may be altered by mutual agreements by the same contracting parties. So, there is no change in the parties.
3. New Contract	A New Contract comes into existence in place of the old one.	It is not essential to substitute a new contract in place of the old contract.
4. Performance	Old   contract    need   not    be performed New contract must be performed.	Old contract as per the altered terms shall be performed.

Discharge by operation of law

1. Death :- involving the personal skill or ability, knowledge of the deceased party one discharged automatically. In other contract the rights and liability passed to legal represent. Example : A promises to perform a dance in B’s theatre. A dies. The contract comes to an end.
2. Insolvency:– when a person is declared insolvent. He is discharged from his liability up to the date of insolvency.
   Example: A contracts to sell 100 bags of sugar to B. Due to heavy loss by a major fire which leaves nothing to sell, A applies for insolvency and is adjudged insolvent. Contract is discharged.
3. By unauthorized material alteration – without the approval of other party – comes to an end – nature of contract substance or legal effect.
   Example : A agrees upon a Promissory Note to pay Rs.5,000 to B. B the amount as Rs.50,000. A is liable to pay only Rs.5,000.
4. Merger: When an inferior right accruing to a party in a contract mergers into a superior right accruing to the same party, then the contract conferring inferior right is discharged.
   Example: A took a land on lease from B. Subsequently, A purchases that land. A becomes owner of the land and ownership rights being superior to rights of a lessee, the earlier contract of lease stands terminated.
5. Rights and liabilities vest in the same person: Where the rights and liabilities under a Contract vest in the same person, the contract is discharged.
   Example: A Bill of Exchange which was accepted by A, reaches A’s hands after being negotiated and endorsed through 4 other parties. The contract is discharged.

Discharge by Lapse of time

Where a party fails to take action against the other party within the time prescribe under the limitation Act, 1963. All his rights to come end. Recover a debt – 3 Years recover an immovable property – 12 years

Ex.:- On 1^st July 20X1 X sold goods to Y to Rs 1,00,000 and Y had made no payment till August 20X4. state the legal position on 1^st Aug 20X4

• If no. credit period allowed                            
• If 2 month credit period allowed.

Discharge by Breach of contract

Failure of a party to perform his part of contract

1. Anticipatory Breach of contract :- Anticipatory breach of contract occurs when the part declares his intention of not performing the contract before the performance is due .
   1. Express repudiation: – 5 agrees to supply B 100 tunes of specified category of iron on 15.01.2006 on 31.12.2005. 5 express his unwillingness to supply the iron to B.
   2. Party disables himself: – Implied by conduct.
      Ex.:- 5 agrees to sell his fiat car to B on 15.01.2006 on 31.12.05 5 sells his fiat car to T.
2. Actual Breach of contract :- If party fails or neglects or refuses to perform his obligation on the due date of performance or during performance. It is called as actual breach.

During performance – party has performed a part of the contact.
Cosequences of Breach of contract:- The aggrieved party (i.e. the party not at face it ) is discharged from his obligation and get rights to proceed against the party at fault. The various remedial available to an aggrieved party.

Discharge by Impossibility performance

• Effect of Initial Impossibility
• Effect of supervening. Impossibility

1. Initial Impossibility – at the time of making contract
   • Both parties know – put life into deed body – void .
   • Both don’t know – void.
   • One know – compensate to other party
2. Effect of super vanity Impossibility:-
   • Where an act becomes impossible after the contract is made – void
   • Becomes unlawful, beyond the control of promisor – void
   • Promisor alone knows about the Impossibility – compensate loss.
   • When an agreement is discovered to be void or where a contract becomes void

Cases when a contract is discharged on the group of super vent Impossible

• Distraction of subject matter 
  • Failure of the ultimate purpose of contract – king coronate process.

• Death of personal Incapacity        

• Declaration of war                        

• change of Law                            

• Non existence or Non occurrence of a particular state of thing necessary for performance.

No Super Impossibility – does not become void

• Difficulty of performance – coal – transport

• Commercial Impossibility

• Default of a third party

• Strikes, knockout and civil disturbance.

• Partial Impossibility – coronation of king and to sailing around the lake by boat.