Discharge of Contract- Meaning
The term discharge of contract means ending of the contractual relationship between the parties. A contract is said to have been discharged when it ceases to operate i.e. when the rights and obligations created by the parties came to an end. A contract can be discharged if the parties mutually agree to terminate the contract. Also there are different methods through which contracts can be discharged. In this article, we will discuss the different methods of disc
Modes of Discharge of Contract with Examples
A contract is said to be discharged using the following methods:
Discharge by Performance
Discharge by Agreement or Consent
Discharge by Impossibility of Performance
Discharge by Lapse of Time
Discharge by Operation of Law
Discharge by Breach of Contract
Let us understand the discharge of contract methods in brief
Discharge by Performance
Performing means doing all those things which are required by a contract. Discharge of performance occurs when the parties to the contract fulfill their obligations set out under the contract within the specified time and in the manner prescribed. In such a case, parties are discharged and contracts come to an end. But if only one of the party performs, he alone is discharged. Such a party gets the right of action against the other party who is guilty. Discharge of Performance may be:
Actual Performance
Attempted Performance
Actual Performance
When both the parties perform their performance, then the contract is said to be discharged. Performance should be complete and precise according to the terms of the agreement. Majority of the contracts are discharged by performance in this manner.
Attempted Performance
Attempted performance is only an offer to perform the obligation under the contract. When the promisor agrees to perform the contract but the promisee refuses to accept the performance, then in such case, it is termed as discharge of contract by attempted performance or tender.
Example: John contracts with Emma to build a fence around her garden for ₹50,000. The agreement specifies the type of materials and the deadline for completion.
Discharge by Actual Performance:
John completes building the fence exactly as per the agreed terms within the specified time. Emma inspects the work, finds it satisfactory, and pays him ₹50,000. The contract is discharged as both parties have fulfilled their obligations.
Discharge by Attempted Performance:
John brings the materials and starts building the fence on the agreed day, but Emma refuses to allow him to begin without a valid reason. In this case, John has attempted performance and is discharged from his obligation, as Emma’s refusal prevents completion.
Discharge by Agreement or Consent
Novation
The term novation means the substitution of the new contract by the original one. The new agreement may be with the same parties or with the new parties. For a contract to be valid and effective, the consent of all the parties including the new one if any is necessary. Moreover, the second party must be capable of enforcement of law, the consideration for which is the exchange of promise not to carry out the original contract.
Alteration
This refers to change in one or more terms of a contract with the consent of all the parties entered in the contract. Alteration leads to formation of new contracts but the parties to it remain the same.
Remission
This means the acceptance by the promisee of a lesser sum than what was mentioned in the contract, or a lesser fulfillment of the promise made. According to the section 63, every promise may:
May remit or give up with it
Extend the performance time
Accept any other satisfaction rather than performance
Recession
The term recession refers to cancellation of all or some of the material terms of the contract. If the parties entered into the contract, mutually agreed to do so, then in such case the respective contractual agreement of the parties gets terminated.
Example: A and B enter into a contract where A agrees to supply 500 chairs to B within one month. Midway, both parties agree to terminate the contract because B no longer needs the chairs. This mutual decision to end the contract is an example of discharge by agreement or consent.
Novation: A new contract replaces the old one.
Example: A owes B ₹10,000. They agree that C will pay B instead, discharging A’s obligation.
Rescission: Both parties agree to cancel the contract.
Example: A agrees to supply goods, but both A and B mutually decide to cancel the deal.
Alteration: The terms of the contract are changed.
Example: A was to deliver 100 chairs but agrees with B to deliver only 50 instead.
Remission: One party accepts less than what was agreed.
Example: B agrees to accept ₹8,000 instead of ₹10,000 from A to settle the debt.
Waiver
The term waiver means abandonment of rights. When one party deliberately abandons his right under the contract, the other party is released of his obligations, else binding upon it.
Discharge by Impossibility of Performance
If it is impossible for any of the parties entered in the contract to perform their obligations, then the impossibility of performance of contract leads to discharge of contract. If the impossibility of performing the contract exists from the start, then it is termed as impossibility by ab-initio. However, impossibility of performing the contract may also arise later due to:
An unforeseen change in the law
Destruction of subject-matter of the contract
Non-existence or Non-occurrence of a particular state of things.
Outbreak of War
Simple Discharge of Contract Example:
John enters into the contract with this friend Tom to marry his sister within 6 months. Howbere, John met with an accident and became insane. This impossibility of performance leads to discharge of contract.
Discharge of Contract by a Lapse of a Time
According to The Limitation Act, 1963, there is a specific time period for the performance of a contract. If the promisor failed to perform his duties and the promisee failed to take action within this specified period, then the promisee in such a case cannot be deprived of his remedy through law. Here, the contract is said to be discharged due to the lapse of time. For example: John takes a loan from one of his friends and agrees to pay him installments every month for the next five years. However, he does not pay even a single installment. His friend calls him several times but then gets busy and takes no action. After three years, he approaches the court to help him recover his money. However, the court rejects his complaint because he has crossed the time-limit of three years to recover his debts.
Discharge of Contract By Operation of Law
A contract can be discharged by the operation of law in the following circumstance:
Unauthorized Material Alteration of Written Document: A party can discharge the contract i.e from his side if the other party changes the terms such as price or quantity of contract without taking any permission from the former.
By Insolvency
By Death
Discharge by Breach of Contract
A contract is obliged to perform according to its terms. But when a promisor fails to perform a contract according to the terms of the contract, then he is said to have committed a breach of contract. The breach of contract is of two types
Actual Breach
Anticipated Breach
Actual Breach: Actual breach of contract refers to failure to perform the obligation when the performance is due. For example, if a seller fails to deliver the goods by the appointed time, or the goods are delivered but not upto the mark in terms of quality or quantity specified in the contract.
Anticipatory Breach: Anticipatory Breach, also known as Breach by Contradiction, takes place when one party before the arrival of the fixed date for performance states that it cannot or will not able to perform material part of the contractual obligation on the specified date or it aims to perform the contract in a way that is inconsistent with the deeds specified in the contract at the initiation.
Conclusion
The discharge of a contract marks the end of the obligations between parties. It can happen through performance, mutual agreement, impossibility, breach, or operation of law. Understanding the types of discharge helps ensure fairness and clarity in legal and business dealings. By fulfilling terms or addressing issues responsibly, parties can avoid disputes and maintain trust, ensuring smooth resolution when a contract ends.
FAQs on Discharge of Contract: Meaning and Types
1. What is meant by the term 'discharge of contract' in business law?
In business law, the discharge of a contract refers to the termination of the contractual relationship between the parties involved. It signifies the point where the rights and obligations created by the contract come to an end, and the parties are released from their respective duties under the agreement.
2. What are the primary modes through which a contract can be discharged as per the Indian Contract Act, 1872?
A contract can be discharged in several ways, each with distinct legal implications. The primary modes are:
- Discharge by Performance (actual or attempted)
- Discharge by Mutual Agreement or Consent (e.g., novation, rescission)
- Discharge by Impossibility of Performance (frustration)
- Discharge by Lapse of Time
- Discharge by Operation of Law (e.g., death, insolvency)
- Discharge by Breach of Contract (actual or anticipatory)
3. Can you provide an example of discharge of contract by performance?
Certainly. Discharge by performance occurs when parties fulfil their obligations. For example, if 'A' contracts to deliver 100 bags of cement to 'B' for ₹50,000, and 'A' delivers the cement and 'B' pays the amount, the contract is discharged by actual performance. If 'A' offers to deliver the cement on the due date but 'B' refuses to accept it, the contract is discharged by attempted performance (or tender), and 'A' is no longer liable.
4. How does discharge by 'mutual agreement' work, and what are its forms?
Discharge by mutual agreement happens when all parties to a contract agree to cancel or modify it. This can take several forms:
- Novation: Replacing an existing contract with a new one, either between the same or different parties.
- Rescission: Cancelling all or some of the terms of the contract.
- Alteration: Changing one or more material terms of the original contract. The parties remain the same.
- Remission: The promisee agrees to accept a lesser fulfilment of the promise than what was originally contracted.
5. Why is 'impossibility of performance' considered a valid reason for discharging a contract?
The law does not compel anyone to do an act that is impossible. This principle is known as the Doctrine of Frustration or supervening impossibility. A contract is discharged if its performance becomes impossible after it was made, due to reasons beyond the control of the parties. For instance, if a contract is made to rent a hall for an event, but the hall is destroyed by fire before the event date, the contract is discharged due to the destruction of the subject matter.
6. What is the difference between an actual breach and an anticipatory breach of contract?
Both types of breach lead to the discharge of a contract, but they differ in timing. An actual breach occurs when a party fails to perform their obligation on the due date. An anticipatory breach occurs when a party indicates their intention not to perform the contract *before* the due date of performance has arrived. The innocent party can then treat the contract as discharged immediately.
7. In what real-world situations can a contract be discharged by the 'operation of law'?
A contract is discharged by operation of law automatically in specific legal situations, without any consent from the parties. Key examples include:
- Death: In contracts involving personal skill or ability, the death of the promisor discharges the contract.
- Insolvency: When a person is declared insolvent, their rights and obligations under existing contracts are transferred to an official receiver, discharging the original contract.
- Unauthorised Material Alteration: If one party makes a significant change to a written contract without the other party's consent, the contract can be voided by the other party.
8. What happens if a contract is not performed within the time specified by the Limitation Act, 1963?
If a promisor fails to perform and the promisee fails to take legal action within the period specified by the Limitation Act, 1963, the contract becomes legally unenforceable. The promisee loses their legal remedy. For instance, the period to recover a debt is three years. If no action is taken within this time, the contract is discharged by lapse of time.
9. From a business perspective, why is it crucial to understand the different ways a contract can be discharged?
Understanding the methods of contract discharge is crucial for businesses to manage risk and liabilities. It helps in knowing when legal obligations end, avoiding potential disputes over termination, and ensuring that any conclusion to a contract is legally sound. This knowledge allows businesses to end commercial relationships formally and fairly, protecting them from claims of breach and preserving business reputation.
