CHAPTER - VI

DISCHARGE BY AGREEMENT

L Introduction.
2. Indian Contract Act & Discharge by Agreement.
3. By Express Consent.
4. By Implied Consent -
(a) Novation
(b) Rescission
(c) Alteration
(d) Waiver
(e) Accord and Satisfaction
 CHAPTER - VI

DISCHARGE BY AGREEMENT

1. INTRODUCTION

A promisee may agree to waive his right of obtaining the

performance of the contract, either in whole or in part, or he may
agree to allow extension of time for the performance. Such act of
the promise discharges the promisor from the original obligation.
Section 63,^ which permits the promise to dispense with or remit
the performance states that "Every promisee may dispense with or
remit, wholly or in part, the performance of the promise made to
him, or may extend the time for such performance, or may accept
instead of it any satisfaction which he thinks fit."

When the promisee in a promissory note accepts lesser

amount than the amount mentioned in the promissory note, in full
satisfaction of his claim, the promisor is discharged from liability
by such payment, and the promisee cannot claim any further
amount on the same. ^

2. INDIAN CONTRACT ACT & DISCHARGE BY

AGREEMENT :

Modes of discharge of contract :- A contract may be

discharged in many ways. This subject has not been dealt with in
1. Indian Contract Act, 1872.
2. Lata Kapurchand v. Himatani Khan, AIR 1963.
 [219]

a systematic manner by the Act. The provisions relating to this are

scattered over many sections. The study is classified as under :-

1. Discharge by Mutual Agreement i.e. through the same process

which created it (vide Sections 62-63. Section 62 adverts to
novation, rescission and alteration by agreement. Section 63
adverts to waiver in full or part.

2. Discharge by performance i.e. fulfillment of the obligations

under taken by a party or by tender. (Vide Sections 37-38).

3. Discharge by breach (Vide Section 39).

4. Discharge by impossibility i.e. where obligations are impossible

of performance and beyond the power of the party (Section
56).

5. Discharge by operation of law, i.e. by bankruptcy, merger,

alteration of contract, etc. Merger occurs when there is
acceptance of a higher security in the place of the lower. It
is an operation of law that extinguishes a right by virtue of its
coinciding with another and greater right in the same person.

3. BY EXPRESS CONSENT

It may be (a) an agreement of waiver, i.e. that the agreement

shall not bind any of the parties. The agreement need not be
express; it may be inferred from the conduct of the parties. In
waiver there are mutual promise. Abandonment by one of his right
under the contract is a consideration for a similar promise by the
other. Such a waiver in England must be by release under seal, if
the contract is executed on one side only. If not, there must be a
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special consideration. Payment of a small sum in satisfaction of a

larger sum is not a good discharge of the debt in England because
there is no consideration for forgoing the residue; but it would be,
if what is done is different, e.g., giving in kind or a negotiable
instrument.^ The Indian Law on the point differs from the rule of
English Law stated above. S. 63 of the Act empowers the
promisee to dispense with or remit wholly or in part the performance
of the promise made to him and no consideration is required to
support the release or remission of performance. Parties may agree
even at the time of the contract that, on an event happening, one
or both the parties shall be absolved from performance. For
example, it may be open to the parties to say that if it rains on
the fifteenth day after the contract, the contract need not be
performed. Such a condition may be contained in the contract
itself and if the event happens, the parties will be discharged from
performance. Similarly, parties may agree at the time of the
formation of the contract (e.g.) sale of goods, that one of the
parties, may, in certain specified circumstances, return the goods
sold.

In the leading case of Head v. Tattersall,* the contract was

for the purchase of a horse on the understanding that the buyer
may return the same within a couple of days, if the horse had not
been hunted with the Bicester hounds. The horse was returned
within two days, as it had not, in fact, been hunted with the
Bicester hounds. The animal became lame while in the possession
of the purchaser, and the question was whether the buyer was
3. Cutter v. Powel, S.L.C.9.
4. (1871) Ex.7 (Cf.) Chapman v. Withers, (1988) 20 QBD 824.
 [221]

entitled to return the animal. The Court held that it was a contract
subject to rescission in particular circumstances or under given
conditions. It was a condition that the horse should have been
hunted with the Bicester hounds and on failure of the condition,
the contract was determined. The buyer was therefore held entitled
to return the horse; and if the horse; had sustained any injury
meanwhile through no fault of the purchaser, he was not liable
therefore.

4. BY IMPLIED CONSENT

It must be a Novation. It then operates as an implied

discharge; the parties must have been altered or the nature of the
transaction varied so as to imply that the parties clearly intended
to discharge the first agreement (S. 62). The alteration may be not
only an introduction of new parties but also of its material terms.
The implication should be very clear; a mere postponement of
performance for convenience of one of the parties is no discharge.

a) Novation

Novation means substituting a new contract in place of an

existing one. When the parties to a contract agree to replace a
contract and substitute the same by another agreement, the already
existing contract need not be performed, and the new contract,
which has taken is place, becomes binding on the parties. Section
62,^ which deals with the effect of Novation, rescission and
alteration of contract, states that "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."
5. Indian Contract Act, 1872.
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An example of Novation is found in the partnership Act,

which permits a retiring partner to be discharged from the UabiUty,
by an agreement between the parties concerned. Section 32 (2) of
the Act, which incorporates the provision is as under:

"A retiring partner may be discharged from any liabiHty to

any third party for acts of the firm done before his retirement by
an agreement made by him with such third party and the partners
of the reconstituted firm, and such agreement may be impHed by
a course of dealing between such third party and the reconstituted
firm after he had knowledge of the retirement."

When one of the two partners of a firm retires, and

thereafter, the holder of a bill of exchange, which had been signed
by the two partners, surrenders the same, and in lieu thereof takes
a bill which is now signed by only one partner, who now
continues the business, the retiring partner would be thereby
discharged from his liability.* Section 62 applies not only to the
substitution of the complete contract, but also to the variation or
alteration of some of the terms only.'' Novation of a contract, as
contemplated by section 62, could be there even after the breach
of the original agreement.* When the original contract has not been
substituted, rescinded or altered, the original contract continues to
be in force.'

The question whether the parties intended the novation of a

contract, is a question of fact in each case, depending on the
6. Evans v. Drummond, 4 Esp. 89.
7. State of Mysore v. Dasappa Naidu, (1968)
8. Union of India v. Kishorilal Gupta & Bros, AIR 1953.
9. Hakim Kanhaiya Prasad v. Mt. Hamidan, AIR 1938.
 [ 223 ]

circumstances of the particular case^** When the first mortgage

deed is executed jointly by the husband and wife, and thereafter
the second one is executed by the husband alone, that amounts to
the Novation of the contract,"

A person, who is not a party to Novation, continues to be

liable in respect of the original contract, and is not discharged
therefrom. ^^

When there is Novation and the debtor has disabled himself

from performing the promise under the later contract, the creditor
has an option to sue the debtor under the original contract.'^

An agreement between the parties, which does not involve

suppression of the contract immediately, but contemplates that to
be done on a ftiture date, does not amount to novation. "•

A Novation is a substitution of the contract and not a mere

variation of some of its terms. It should rescind or extinguish the
previous contract. A new and independent agreement concerning
the same matter as the previous may be construed agreement to
discharge the former, only if the terms of the latter are so
inconsistent with those of the former that they cannot stand
together. In other words, a contract will be said to be rescinded
by another between the same parties when the latter is inconsistent
with or renders impossible the performance of the former. If their

10. Kedar Nath v. Kripal, AIR 1944.

11. USanYa v. P.R.M.P.S.P.L. Firm, AIR 1936.
12. J.E.Loader v. The Chartered Bank of India Australia & China, LT
171.
13. Firm Guranditta v. Firm Labhu Ram, ILR 2 AIR 1936.
14. Krishnji v. Takuram, AIR 1928 Nag 289.
 [224]

legal effect is the same, though they differ in terms, even then it
will be a mere ratification of the first and they must be construed
together. Whether an agreement entered into is in substitution of an
old contract or not is always a question of fact depending also on
the intention of the parties. The intention of the parties no doubt
may be inferred from the contents of the document, but in order
to gather their intention one should look to the substance of the
matter and not to the mere form.'^ A novation means the
extinguishments of the terms of an earlier contract and the creation
of another between new persons at least one of whom was a
stranger to the original contract and it is essential for the principle
of novation to apply that there must be the mutual consent of all
parties concerned. A contract may also be discharged by consent,
if the party entitled to performance is willing to accept performance
from a third party. In such a case, a fresh contract is substituted
in place of the original contract. This is called novation. The
substitution of a new contract may be as between the same
parties, or as between one of them and a third party though the
word novation is strictly applicable to the latter kind. In particular,
the term signifies the recession of one contract and the substitution
of another in which the same acts are to be performed by
different parties.'* Any novation, rescission or alteration of a
contract is possible only with the agreement of both the parties of
the original contract with a new contract or rescind or alter, but
cannot be done unilaterally.''^ Novation being a substitution of a

15. A.I.R. 1990 Mad. 115 (D.B.).

16. Scarf V. Jardine, (1882) 7 AC 236.
17. cm Bank N.A. v. Standard Chartered Bank, 2003 (7), 618
 [225]

new contract in place of the old contract which would have the
effect of rescinding or completely altering the terms of the original
contract, if the terms of the contracts are inconsistent and they
cannot stand together, the subsequent contract cannot be said to
be in substitution of the earlier contact.'^

b) Rescission

Parties to a contract may stipulate that one or both of them

shall have the power to rescind the contract on the happening of
some specified contingency. Such a stipulation is to be construed
according to its natural meaning subject to the principle of law that
a party shall not take advantage of his own wrong.'^ A contract
need not be rescinded by an express agreement. If the parties
make a new and independent agreement concerning the same
matter, the latter may be said to discharge the former especially
when the latter is inconsistent with the former. Rescission of a
contract, whether written or oral, need not be express. It may be
implied, and it will be implied legitimately, where the parties have
entered into a new contract entirely or to an extent going to the
very root of the first inconsistent with it. Mere alteration or
modification of the terms of a contact do not amount to its
rescission. The modifications are read into and became part and
parcel of the original contract. The original terms also continue to
be part of the contract and are not rescinded and/or superseded
except in so far as they are inconsistent with the modifications.^**

18. LateConstruction v. Ramesh C.R. Shah, AIR 2000 SC 380, (DB)

19. A.I.R. 1925 Pat. 228.
20. A.I.R. 1955 Cal. 65.
 [226]

When a contract may be rescinded : inadequacy of

consideration is not of itself sufficient ground for rescission.
Contracts which are voidable for want of free consent may be
rescinded.^* To entitle one to rescind a contract on the ground of
misrepresentation there must be a false representation made on
some material point as to statement of fact either by words or by
conduct. When a party to a contract refuses to perform or is
disabled from performing his part of the contract, the other side
may rescind. A mortgagor may rescind a contract not frilly
performed by the mortgage. On failure of the promisor to perform
his part of the contract if the promisee can rescind the whole
contract.^^ When time is the essence of the contract, the seller
may rescind it on the failure of the buyer to perform it timely.^^
To enable a party to a contract to be relieved from the fixture
performance by the conduct of the other, the conduct must
amount to a rescission or absolute refiisal to perform the contract.^"*
The repudiation must be total, absolute and clear what amounts to
repudiation.^^ The expression 'terms accepted please remit down
cash 25 thousand by 5th February otherwise acceptance subject to
withdrawal please wire" meant only that if the promisor did not
receive the money he would consider himself at liberty to treat the
contract as broken.^^ Rescission of the substituted agreement for
breach does not revive the original contract. Where the plaintiffs

21. 26 C 381: 3 CWN 468.

22. 1925 PC 188. PC.
23. 6 C 64: 6 CLR 582.
24. 83 IC 260.
25. 1922 (Bom) 303.
26. 39 CWN 174.
 [227]

lawfully rescinds a contract he is entitled to the return of his

advance and to such further damages as were within the
contemplation of both the parties. Where the plaintiffs in pursuance
of a contract to purchase certain properties paid off a prior
mortgage and subsequently the sale did not take place owing to
their default, they were entitled to a refund of the money but not
to a charge on the properties.^'^

Wrongful repudiation : Where a party to a contract decides

to repudiate obligations under the contract. The Contract was not
to be entirely abrogated by such repudiation but only injured party
many be relieved of duty of further fulfilling obligations undertaken
by it in favour of repudiation party. A wrongful repudiation in the
absence of election by the other party leaves both of them with
their rights and liabilities as if no repudiation has taken place. This
applies in cases of anticipatory breach. Therefore, if the other
party still insists on performance of the contract, the repudiation is
what is called 'brutum fiilmen' that is the parties are left with their
rights and liabilities as before. The insurer, if it thinks fit, may
waive the breach of any condition. A waiver can be in writing or
oral. It can also be spelt out from the conduct of the insurer.^*
The Court cannot order specific performance of a contract of
personal service. A person who is guilty of breach of the contain
rescind it. The right to rescind or keep alive a contract vests in
the other party. Since a contract vitiated by misrepresentation or
fraud, is only Voidable^' it may be avoided by that party who has

27. 1927 (Mad) 204.

28. PLD 1983 Karachi 263.
29. Armstrong v. Jackson (1971) 2KB 822, (830).
 [228]

entered into the contract relying on the assertion, which has turned
out to a be misrepresentation.

It is of course, open to such party to affirm the contract, if

he so chooses. An election to so affirm may be inferred from
conduct as by exercising the rights of a shareholder of a
company, after discovery of the misrepresentation in the prospectus.^"
An election once made cannot be revoked.^' This right of avoidance
of contract on the ground of is considered fraud so important that
the law provides that no party can contract himself out of such
right. Again, mere lapse of time does not destroy the right to
avoid a contract on the ground of fraud; because limitation starts
not from the date of fraud, but only from the date of its
discovery by the plaintiff ^^

c) Alteration

It is well settled that a party who has custody of any

instrument for his benefit is bound to preserve it in its original
state. If any alteration is made which affects the substance of the
contract expressed in the document, it will indeed be material and
the party from whose custody it is produced cannot rely on it
either as plaintiff or as defendant.^^

Where the interpolation in an agreement was a material

alteration whereby the possessor title was conveyed to enable the
purchaser to acquire part performance under S. 55 (I) (f) of the

30. Paget V. Marshall, (1884) 28 Ch.D. 255.

31. Beale v. Kyte, (1970) 1 Ch. 564.
32. Depenham v. Sawbridge, (1901) 2 Ch. 98.
33. A.I.R. 1957 Andh. Pra. 784.
 [229]

Transfer of property Act, 1882, held, the plaintiff could not

enforce his right under the agreement.^* Alterations made in good
faith in a document in order to give effect to the real intention of
the parties cannot be said to be a material aheration so as to
render the document void altogether.''^ It would always be open to
the parties to alter or vary the terms of a contract, verbal or
written, by mutual consent. But no party has a right to alter or
vary the terms of a written documents without the knowledge and
consent of the other party. Variation or alteration of a contract is
different from rescission. The latter puts an end to the contract; in
the former it continues to exist albeit in an altered form. When
new terms and conditions are added in the contract altering the
original contract, a party is not entitled to seek relief on the basis
of the old contract as the same is deemed to have been
discharged in view of rescission and substitution of new contract.'^
Whether it is rescission or only a variation is a question of the
intention of the parties.^'^

d) Waiver

Where the time is of the essence of the contract and one

party waives the right to insist on performance by the stipulated
time and allows an extension, his act does not operate as an entire
waiver of the essential condition as to time: but merely has the

34. A.I.R. 1992 Mad. 80 (D.B.).

35. A.I.R. 1978 Cal. 153.
36. Nagendra Kumar B. Singh v. Hindustan Salts Limited, 2001 (1)
GCD 532 (Guj)
37. United Dominions Trust Jamaica Ltd, v. Shoucair (1969) 1 AC
340.
 [230]

effect of substituting the extended time for that originally fixed.''*

In Morris v. Baron & Co.,^^ Lord Dunedin elucidated the
distinction thus:" The distinction between variation and rescission
is a real one, and is tested, to my thinking by this; in the first
case there are no such executory clauses in the Second agreement
as would enable you to sue upon that alone if the first did not
exist; in the second you could sue on the second agreement alone,
and the first contract is got rid of either by express words to that
effect, or because the second dealing with the same subject matter
as the first but in a different way, it is impossible that the two
should be both performed." If the changes made do not go" to
the very root of the contract there is merely a variation.'*"
Acceptance of payment after the expiry of the time fixed operates
as a waiver of the limitation as to time in the contract. Where time
was not of the essence of the contract or the stipulation as to the
time fixed for completion has, by waiver, ceased to be applicable,
the revision of the contract would amount to a breach of contract
and there could be no forfeiture of security.'** Performance of
contract is deemed to have been waived where the party entitled
for performance by doing or abstaining from doing something
rendering the contract incapable of being performed. But, the said
condition where a contractor having accepted the extension of time
for the performance of the contract after the original period,
alleged ftmdamental breach of condition on the part of the State

38. A.I.R. 1989 Andh. Pra. 276.

39. (1978) AC 1.
40. British and Beningtons Ltd. v. Cachar Tea Co. Ltd., (1923) AC 48,
62, 68.
41. A.I.R. 1979 SC 720.
 [231]

by not handing over the whole site of construction the said

condition is deemed to have been waived by him and the
contention is not tenable. In P.C, Rajput v State," a contractor
entered into a contract with the State Govt, of M.P. for the
construction of masonry structures on the right bank of canal of
Kolar project. The initial period of contract was 12 months, which
was extended on the request of the contractor, and the contract
remained for 29 months. The High Court held that the contractor
having accepted the extension and the State having openly stated
that the extension is granted subject to the right of the State to
impose penalty clearly means that the contractor very well knew
the nature of the order Passed. He should not have been in any
doubt that the State had in any way admitted the defaults. On the
other hand the action of the contractor in accepting the extension
amounted to waiver and the fundamental breach ascribed to State
becomes meaningless, as the effect of extension under the contract
cannot be taken into consideration.

(e) Accord and Satisfaction

Discharge of a contract in return for a consideration which

consists in some satisfaction other than the performance of the
original obligation is termed as 'accord and satisfaction."*^

In British Russian Gazette and Trade outlook Ltd., v.

Associated News Papers Ltd.,** Scrutton L.J. pointed out, "Accord
and Satisfaction is the purchase of a release from an obligation,

42. AIR 1990 MP 107, 116.

43. Anson's Law of contract, Reprint 1977 P. 465.
44. (1933) 2 K.B. 616.
 [232]

whether arising under contract or tort by means of any valuable

consideration, not being the actual performance of the obligation
itself. The accord is the agreement by which the obligation is
discharged. The satisfaction is the consideration which makes the
agreement operative.''^

In Lata Kapurchand Godhra and others v. Mir. Nawab

Himayatali Khan,^^ the fact of the case discloses that the
defendant, the Prince of Berar, had executed in 1937, a promissory
note in favour of the plaintiff for a sum of 13 lacs and odd
rupees due on account of purchase of jewellery from the plaintiff.
After the military occupation of Hyderabad, the Prince Debt
Settlement Committee set up by the Military Governor decided that
the plaintiff should be paid a sum of Rs. 20 lacs in full
satisfaction of his claim of Rs. 27 lacs under the note. The
Government also made it clear that unless full satisfaction was
recorded payment would not be made. The plaintiff after some
initial protests agreed to accept the sum of Rs, 20 lacs in ftill
satisfaction of his claim and duly discharged the promissory note
by endorsement of ftill satisfaction and received the payment. He
then brought a suit against the defendant for recovery of the
balance of Rs. 7 lacs.

S.K. Das J. (on behalf of himself and M. Hidayatullah and

J.C. Shah) pointed out that, "The legal position is clear enough.
Section 63 of the Indian contract Act reads : "Every promisee
may dispense with or remit, wholly or in part, the performance of

45. (1933) 2 K.B. 616 at p. 446.

46. AIR 1963 SC 250.
 [233]

the promise made to him, or may extend the time for such
performance, or may accept instead of it any satisfaction which he
thinks fit."

Illustration (c) to the section says :

"A owes B 5,000 rupees. C pays to B 1,000 rupees and B

accepts them in satisfaction of his claim on A. This payment is a
discharge of the whole claim."

It was held that the case was completely covered by Section

63 and illustration (c) thereof. The appellants having accepted
payment in full satisfaction of their claim are not now entitled to
sue the respondent for the balance. A reference may also be made
in this cormection to Section 41 of the contract Act under which
when a promise accepts performance of the promise from a third
person, he cannot afterwards enforce it against the promisor.
There is some English authority to the effect that discharge of a
contract by a third person is effectual only if authorized or ratified
by the debtor. In India, however, the words of Section 41 of the
contract Act leave no room for doubt and when the appellants
have accepted performance of the promise from a third person,
they cannot afterwards enforce it against the promisor, namely, the
respondent.'''^

Thus Under the Indian contract Act, 1872 a contract may be

discharged under the following manner, A contract can be discharged
by actual performance or attempted performance. Actual performance
occurs when parties to the contract fiilfiU their obligations precisely

47. AIR 1963 SC 250 at p. 254.

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and completely in accordance to the contract. Attempted

performance or tender is offering to perform. (Except for tender
of money), when the promisor offers to perform, and the promise
refuses to accept, then tender is equivalent to actual performance.
"Things may be destroyed in the same manner in which it is
constituted." It is necessary for the parties to the contract to
mutually agree to discharge the contract by agreement. The grounds
for discharge by agreement are: Waiver, Alteration, Recession,
Novation, Remission, accord and Satisfaction.