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.

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: –
7. Discharge of Contract by Performance
8. 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.

9. 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.

10. The performance of a contract is the most common method of its discharge.

11. This may be the actual performance or attempted performance (tender): –

o 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.

o 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.

12. 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.

A contract can be discharged by mutual agreement in any of the following ways.
1. Novation
2. Alteration
3. Remission
4. Merger

Novation
The term novation implies the substitution of a new contract for the original one.

Example: A owed Rs 100 to B, under contract. B owned Rs 100 to C. It was agreed

among A, B and C that A would pay Rs 100 to C.

Alteration
It refers to a change in one or more of the terms of a contract with the consent of all
the contracting parties.

Example: A agreed with B to supply 100 TV sets at a certain price by the end of
October. Subsequently, ‘A’ and ‘B’ mutually agree that the supply can be made by
the end of November. This is an alteration in the terms of the contract by consent of
both the parties.

Remission
Remission means the acceptance (by the promisee) of a lesser sum than what was
contracted for, or a lesser fulfilment of the promise made.

Example: A owes B Rs 5,000. A pays Rs 2,000 to B and B accepts the amount in

satisfaction of the whole debt. The whole debt is discharged.

Merger
The conversion of the inferior right into the superior right is called a merger. It is also
called as the vesting of rights and liabilities in the same person.

Example: A person holds property under lease, purchases the property. On purchase,
his lease agreement is discharged.
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 impossibility of performance may be of two:

• Initial impossibility
• Supervening impossibility

Initial impossibility

• Initial impossibility or Pre-contractual impossibility: It means impossibility

exists at the time of making a contract.

The initial impossibility may be:

• Known or
• Unknown to the parties at the time of making the agreement.

Supervening impossibility
Supervening impossibility or Post-contractual impossibility: The contract becomes
void on account of the subsequent impossibility only if the following conditions are
satisfied:

• The act should have become impossible after the formation of the contract.
 • The impossibility should have been caused by a reason of some event which
was beyond the control of the promissory.
• The impossibility must not be the result of some act or negligence of the
promisor himself.

The supervening impossibility includes: –

o Destruction of the subject matter of the contract;

o The non-presence or non-occurrence of a particular state of things;

o Death or disability for personal service;

o Changes or steps in the law for someone with statutory authority;

o The outbreak of war. In these cases, the contract is discharged.

• The following cases are not covered by impossibility discharge: –

o Performance difficulty;

o Commercial impossibility;

o The failure of a third person whose work the dependent relied on;

o Strikes, lockouts and civil disturbances;

o Failure of one of the items.

o In these cases, the contract is not discharged.

o

13. 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.

Example: The period of limitation for recovering the debt is 3 years and 12 years for
the recovery of immovable property.

14. Discharge of Contract by the Operation of Law

• A contract can be discharged by law.

• This includes discharge by: –

o Death

o Bankruptcy/Insolvency

o Unauthorized change of the terms of a written agreement, and

o Rights and obligations are vested in a single person.

o Court decision

Unauthorized material alteration of a written document

A party can treat a contract discharged (i.e., from his side) if the other party alters a
term (such as quantity or price) of the contract without seeking the consent of the
former.

Death
The contract that requires personal skill is discharged on the death of the promisors.
However, any benefit received before the performance shall be returned by the legal
representative of the deceased party.

Merger
The conversion of the inferior right into the superior right is called a merger. It is also
called as the vesting of rights and liabilities in the same person.

Insolvency
The insolvent is discharged from all the liabilities on all the contracts, entered into,
up to the date of insolvency.
 15. 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: –

o An actual breach of contract can occur at the time when the

performance is due or, during the performance.

o 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
16. 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.

17. 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.