|Modes of Discharge of a Contract|
Modes of Discharge of Contract are provided in the Contract Act. Discharge of a contract means the end of the contract. The term discharge means coming out, so the discharge of a contract means coming out from the contract. In this article, we will see What is discharge of a contract? and various modes of discharge of contract.
Discharge of Contract Meaning
Discharge of contract meaning is defined as the termination of the contract or agreement by the contracting parties due to failure in the performance of the contractual obligations agreed upon during the formation of the contract.
Hence, the contractual obligations may be contractual or legal or operational or even by the performance itself. So it is important to understand the various modes of discharge of a contract.
Modes of Discharge of Contract
Modes and types of discharge of contract have been provided under sections 62 to 67of the Indian Contract Act, 1872. There are 6 modes of discharge of contracts under the contract Act, Let’s discuss them one by one in detail, a contract may be discharged by;
- Discharge of contract by performance
- Discharge by mutual agreement
- Discharge of contract by impossibility of performance
- Discharge of contract by operation of law
- Discharge by lapse of time
- Discharge by breach of contract
1. Discharge of Contract by Performance
Discharge of contract by performance means when the contracting parties perform their contractual obligations within the stipulated time, then the contract is discharged by performance.
Also, when the contracting parties refused to perform their obligation then the contract is discharged by the non-performance of the contract.
The discharge of contract by performance can be by;
- Actual Performance
- Attempted Performance
1. Actual Performance
When the contracting parties refused to perform their contractual obligations then the contract comes to an end. This is known as the contract discharge by a performance by actual performance.
2. Attempted Performance
And, when the contracting parties complete their contractual obligations then automatically the contract comes to end and there is no need for further performance. This is known as the discharge of a contract by attempted performance.
2. Discharge by Mutual Agreement
Discharge by agreement has been provided under section 62 of the Indian Contract Act, 1872. The section says that “Effect of novation, rescission, and alteration of the contract if the parties to a contract agree to substitute a new contract for it or to rescind it or alter it, the original contract need not be performed.”
7 types of discharge by agreement have been provided under this section. These are;
- Accord and Satisfaction
When the contracting parties mutually agree to cancel, alter, or modify, the contract then the contract is discharged by the mutual agreement between the parties.
In other words, if both the contracting parties are not willing to perform the terms and obligations of the contract then the parties to the contract mutually rescind the contract. This is the discharge of a contract by mutual agreement.
Example – A promised to sell his house to B for a certain amount. Later, B and A mutual cancelled this agreement. This is the discharge of a contract by mutual agreement.
These are the 7 types of discharge by mutual agreement. Let’s discuss them one by one in detail;
The novation took place where either a new contract is formed beside the existing contract between the same parties to the contract or a contract between two parties is rescinded in the consideration of the new contract being entered into on the same terms and conditions between one of the parties and a third party who is not a party to the original contract.
Here, the novation of contract means cancellation of the original contract and replacing the original contract with the new contract between the same contracting parties.
In the case of Lata Construction v/s Dr Rameshchandra Ramniklal Shah, the court explained the meaning and effect of novation as; “there should be a complete substitution of a new contract replacing the original contract. It is the situation where there is no need to perform the original contract.”
Rescission of a contract is also provided under section 62 of the Contract Act, the section permits the contracting parties to rescind (to cancel) their contract.
The parties are allowed to cancel the contract under this section. As per this section, the parties are agreed to cancel the contract with mutual understanding.
Alteration is provided under section 62 of the Contract Act, as “When one or more terms and conditions of the contract are altered by the contracting parties with mutual consent between the same contracting parties, then the old contract is replaced with the new one.”
The contracting parties to the contract can alter the terms and conditions of the contract either wholly or partly with the consent of another contracting party.
Example – The alteration can be made in the amount of money, rate of interest, or date and time of delivery of goods, etc.
In the case of United India Insurance Co. Ltd v/s M.K.J. Corpn, The Court held that the good faith of the contracting parties continues after entering into the contract, and the one party cannot be made an alteration in the terms and conditions of the contract without the consent of another contracting party.
As per section 63, remission means, every promise 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.
Example – A promises B to paint a picture for B. Later, B forbids A to do so. A is no longer bound to perform the promise.
A waiver is nothing until it amounts to a release. It signifies nothing more than an intention not to insist upon the right. The meaning of waiver is defined in Jagad Bandhu Chatterjee v/s Nilima Rani, 1969.
In other words, waiver means “Surrendering” the rights. When one party to the agreement postpones his rights, the agreement is released.
Here, the merger means coinciding and meeting inferior rights and superior rights in one and the same person. In such a case, the inferior right available to a party under the contract will automatically vanish.
g) Accord and Satisfaction
The accord refers to the agreement where there is a breach of contract and the other party accepts some valuable consideration instead of the right of action against the other contracting party.
Whereas, satisfaction refers to the discharge of the obligation that is formed under the newly formed contract after the breach of contract.
Therefore, discharge by the accord and satisfaction means discharge of the original contract due to a newly agreed obligation between the contracting parties.
3. Discharge of Contract by Impossibility of Performance
The contract comes to an end when there is an impossibility for the contracting parties to perform the obligations agreed upon in the contract. Therefore, the impossibility to perform the contractual obligations by the parties leads to the discharge of a contract by the impossibility of performance.
The impossibility to perform the contractual obligations may arise due to;
1. Destruction of Subject Matter
When the subject matter of the contract is destructed then the contract becomes impossible for the contractual parties to perform it.
2. Change of Law
The parties are unable to perform the contractual obligations when there is a change of law and that change might affect the performance of the contractual obligations agreed in the contract.
3. Non-existence of Circumstances
The contract is coming to an end when the essential thing relating to the contract is not in existence. Therefore, it becomes impossible for the contractual parties to perform the contractual obligations.
4. Incompetent Person
The contract comes to an end when one of the parties to the contract is incompetent to perform the contractual obligations. Therefore, it becomes impossible for the other party to perform the contractual obligation in the contract.
5. Declaration of War
The contract becomes impossible to perform when there is a declaration of war between the two countries and due to this the other party from that country could perform his obligations. Hence, the contract is impossible to perform.
4. Discharge of Contract by Operation of Law
Discharge of contract by operation of law. A contract can be discharged by the operation of law that includes the death of the contracting party or insolvent party, or the original contract merges into a new contract, or there is an alteration in the original contract. Let’s discuss;
When the contractual obligations of the parties are based on personal talent or skills then by the death of one of the parties, the contract is discharged as it becomes impossible to perform the obligations of the contract.
But, when the contractual obligations of the parties are not based on the personal talent or skills of the party, then by the death of the party the obligation may lie on the legal representatives of the dead person.
When one of the parties to the contract becomes insolvent. Therefore, the party could not perform the contractual obligations and hence the contract becomes impossible to perform.
Here, the merger means coinciding and meeting of inferior rights and superior rights in one and the same person. In such a case, the inferior right available to a party under the contract will automatically vanish.
When the terms and conditions of the contract are altered by one of the contracting parties without the consent of the other contracting party, then the contract becomes impossible to perform and the contract is discharged.
5. Discharge by Lapse of Time
When the contract is to be performed within the stipulated time as agreed by the contracting parties during the formation of the contract. And, if one of the parties could not perform the contractual obligations within the prescribed time then the contract is discharged.
This is known as the discharge of a contract by the lapse of time.
6. Discharge by Breach of Contract
Discharge by breach of contract means termination of the original contract or the contract comes to an end because of the failure of the performance of the contractual obligations in the contract. This breach of contract may be an actual or anticipatory breach of contract.
1. Actual Breach of Contract
If the contracting party fails to perform his contractual obligations according to the time and place specified in the contract, then he is said to have committed an actual breach of contract.
2. Anticipatory Breach of Contract
Also, if the contracting party discards a contract before the agreed time of performance of a contract, then he is said to have committed an anticipatory breach of contract.
Modes of discharge of contract have been provided under the Indian Contract Act, 1872. The best way the discharge a contract is based on the performance of the contractual obligations agreed by the contracting parties during the formation of a contract. In this way, both the parties follow all the terms of the contract and afterwards go for its discharge.
On the other side, discharge of a contract by the breach is the most unpleasant way to release the contracting parties from their duties and obligations. Therefore, discharge by breach results in damages too.
- Law of Contract – Bare Act 2021 Edition Professional
- The Indian Contract Act 1872 Bare Act 2021 Edition
- Law of Contract & Specific Relief Dr Avtar Singh Latest Edition-2020
- Pollock & Mulla – The Indian Contract Act, 1872
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- CONTRACT Paper-II – By R. K. Bangia
- NOTES ON INDIAN CONTRACT ACT 1872: BEST NOTES FOR LAW STUDENTS