Discharge of a contract | Definition | Methods of discharge

What is discharge of contract?

Discharge of Contract

Discharge of Contract

Discharge of a contract implies termination of contractual obligations. This is because when the parties originally entered into the contract, the rights and duties in terms of contractual obligations were set up. Consequently when those rights and duties are put out then the contract is said to have been discharged. Once a contract stands discharged, parties to it are no more liable even though the obligations under the contract remain incomplete.

A Contract is deemed to be discharged, that is, concluded and no longer binding, in the following circumstances:

  • Discharge by performance.
  • Discharge of Contract by Substituted Agreement.
  • Discharge by lapse of time.
  • Discharge by operation of law.
  • Discharge by Impossibility of Performance.
  • Discharge by Accord and Satisfaction.
  • Discharge by breach.

We shall examine each of them as follows.

Discharge by performance

Where both the parties have either carried out or tendered (attempted) to carry out their obligations under the contract, is referred to as discharge of the contract by performance. Because performance by one party constitutes the occurrence of a constructive condition, the other party’s duty to perform is also triggered, and the person who has performed has the right to receive the other party’ s performance. The overwhelming majority of contracts are discharged in this way.

Discharge of Contract by Substituted Agreement

A contract emanates from an agreement between the parties. It thus follows that, the contract must also be discharged by agreement. Therefore, what is required, inevitably, is mutuality. Discharge by substituted agreement arises when a contract is abandoned, or the terms within it are altered, and both the parties are in conformity over it.

For example, A and B enter into some agreement, and A wants to change his mind and not to carry out his terms of the contract. If he does this unilaterally then he will be in breach of contract to B. However, if he approaches B and states that he would like to be released from his liabilities under the contract then the latter might agree. In that case the contract is said to be discharged by (bilateral) agreement. In effect B has promised not to sue A if he does not perform his part of the contract and the consideration for his promise is A ‘s promise not to sue B. Discharge by agreement may arise in the following ways.

Novation

The term novation implies the substitution of a new contract for the original one. This arrangement may be either with the same parties or with different parties. For a novation to be valid and effective, the consent of all the parties, including the new one(s), if any, is essential. Moreover, the subsequent or second agreement must be one capable of enforcement in law, the consideration for which is the exchange of promises not to enforce the original contract.

Rescission

This refers to cancellation of all or some of the material terms of the contract. If the contracting parties mutually decide to do so, the respective contractual obligations of the parties stand terminated.

Alteration

This refers to a change in one or more of the terms of a contract with the consent of all the contracting parties. Alteration results in a new contract but parties to it remain the same. Here the assumption is that both the parties are to gain a fresh but different benefit from the new agreement. Remission This means the acceptance (by the promisee) of a lesser sum than what was contracted for, or a lesser fulfillment of the promise made. As per Section 63, ‘every promisee may (a) remit or dispense with it, wholly or in part, or (b) extend the time of performance, or (c) accept any other satisfaction instead of performance’.

Waiver

The term waiver implies abandonment or relinquishment of a right. Where a party deliberately abandons its rights under the contract, the other party is released of its obligations, otherwise binding upon it.

Discharge by lapse of time

A contract stands discharged if not enforced within a specified period called the ‘period of limitation‘. The Limitation Act, 1963 prescribes the period of limitation for various contracts. For instance, period of limitation for exercising right to recover an immovable property is twelve years, and right to recover a debt is three years. Contractual rights become time barred after the expiry of this limitation period. Accordingly, if a debt is not recovered within three years of its payment becoming due, the debt ceases to be payable and is discharged by lapse of time.

Discharge by Impossibility of Performance

Sometimes after a contract has been established, something might occur, though not at the fault of either party, which can render the contract impossible to perform, or illegal, or radically different from that originally undertaken.

However, if whatever happens to prevent the contract from being performed

  • has not been caused by either party
  • could not have been foreseen, and
  • its effect is to destroy the basis of the contract

then the courts will, generality, state that the contract has become impossible to perform. If that happens then the contract is discharged and neither party will have any liability under it. Section 56 of the Indian Contract Act clearly provides that an agreement to do an act impossible in itself is void

The performance of a contractual obligation may become subsequently impossible on a number of grounds. They include the following.

  • Objective impossibility of performance
  • Commercial impracticability
  • Frustration of purpose
  • Temporary impossibility

Discharge of operation of law

A contract stands discharged by operation of law in the following circumstances.

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.

Statutes of Limitations

A contract stands discharged if not enforced within a specified period called the ‘period of limitation’. The Limitation Act, 1963 prescribes the period of limitation for various contracts. For instance, limitation period for exercising right to recover an immovable property is twelve years and right to recover a debt is three years. Contractual rights become time barred after the expiry of this limitation period. Accordingly, if a debt is not recovered within three years of its payment becoming due, the debt ceases to be payable and is discharged by lapse of time.

Insolvency

A discharge in bankruptcy will ordinarily bar enforcement of most of a debtor’s contracts.

Merger

A contract also stands discharged through a merger that occurs when an inferior right accruing to party in a contract amalgamates into the superior right ensuing to the same party. For instance, A hires a factory premises from B for some manufacturing activity for a year, but 3 months ahead of the expiry of lease purchases that very premises. Now since A has become the owner of the building, his rights associated with the lease (inferior rights) subsequently merge into the rights of ownership (superior rights). The previous rental contract ceases to exist.

Discharge by Accord and Satisfaction

To discharge a contract by accord and satisfaction; the parties must agree to accept performance that is different from the performance originally promised. It may be studied under the following sub-heads.

Accord

An accord is an executory contract to perform an act that will satisfy an existing duty. An accord suspends, but does not discharge, the original contract.

Satisfaction

Satisfaction is the performance of the accord, which discharges the original contractual obligation.

If the obligor refuses to perform

The obligee can sue on the original obligation or seek a decree for specific performance on the accord.

Discharge of contract by breach

Breach occurs where one party to a contract fails to perform its contractual obligations, or the performance is defective. A breach of contract does not per se bring a contract to an end. The breach may give to the aggrieved party the right to terminate the contract but it is for the non-breaching side to decide whether or not to exercise that option. The aggrieved party has a right of election; that is to say, it can choose either to affirm the contract or to terminate it. However, once that decision has been taken, it is, in principle, irrevocable.

A Breach may be anticipatory or actual.

Anticipatory Breach

Also known as ‘breach by repudiation’, anticipatory breach occurs when one party states, before the arrival of the date fixed for performance, without justification that it cannot or will not carry out the material part of the contractual obligations on the agreed date or that it intends to perform in a way that is inconsistent with the terms of the contract. This may also occur where one party by some action makes performance impossible. For instance, A, after agreeing to sell his car to B on a fixed date, sells it to C. This is anticipatory breach.

Effect of anticipatory breach

Where there is an anticipatory breach, the non-breaching party may either

  • rescind the contract, or
  • treat the contract in force and wait for the time of performance. In first case, it can immediately sue for damages, i.e., it is not required to wait for the time for performance to expire.

For example, [D agreed to employ P] as a courier for three months commencing on June 1. Before the said date D told P that his services would not be required. This was to be an anticipatory breach of contract and it entitled P to sue D for damages immediately. If the non-breaching party elects to treat the contract operative, it waits until the time of performance and then holds the other party liable for the non-performance. Thus, by doing so the non-breaching party is giving an opportunity to the breaching party to still perform, if it can, in order to get a valid discharge.

Actual Breach

Actual breach refers to the failure to perform contractual obligations when performance is due. Failure to perform obligations is the most common form of breach, wherein a seller fails to deliver the goods by the appointed time, or where, although delivered, the goods are not up to the mark in respect of quality or quantity specified in the contract.

Effect of actual breach

Breach is described as a method of discharge although it may not automatically discharge the contract. Breach of contract leads to two main remedies, namely breach of condition, and breach of warranty.

Breach of a condition This is a major term, known as material breach, which entitles the injured party to damages, and gives it an option to treat the contract as subsisting or discharged.

Breach of a warranty This is a minor term, known as non-material breach, which entitles the non-breaching party to damages. It does not have the right to repudiate the contract, although a non-material breach can give it the right to defer performance until the breach is made good. However, once the breach is remedied, the non-breaching party must go ahead and render its performance, minus any damages caused by the breach.

Thus, it is clear from the above that not every breach entitles the injured party to treat the contract as discharged. It must be shown that the breach has affected a vital part of the contract, and that it is a breach of condition rather than breach of warranty.

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