Various Modes Of Discharge Of Contract

Introduction

What is a Contract?

A contract has been defined under Section 2 (h) of the Indian Contract Act, 1872 as: “An agreement enforceable by law.” According to Salmond, “A contract is an agreement creating and defining obligation between two or more persons by which rights are acquired by one or more acts or forbearance on the part of others”.

A contract is thus, an agreement to create a legal relationship between two competent parties created by an offer and its acceptance involving a lawful consideration and free consent to achieve lawful objectives.

Meaning of Discharge of Contract

The termination of the contractual relationship between the parties is referred to as contract discharge. When the rights and responsibilities resulting from a contract are extinguished, the contract is said to be discharged. A contract may be discharged by the acts of the parties, by the operation of law, or by impossibility of its performance.[1] In other words, when the objectives or obligations of a contract are met, the duty of either party under the contract is said to be discharged.

Types of Discharge

There are three types of discharge of contract, which are briefly explained as follows[2]:

1. Bilateral Discharge – The contract will be mutually discharged if both the parties agree to relieve each other from any further responsibilities arising from the initial contract. Despite the parties’ failure to completely or substantially perform all of their duties, the contract is discharged.

2. Unilateral Discharge – Unilateral discharge happens when one party has finishms d its share of the deal and agrees to release the other party from any remaining contractual obligations. In this, one party fails to fulfill its duties or acts in breach of contract.

3. Accord and Satisfaction – The Doctrine of Accord and Satisfaction refers to the discharge of contractual obligations by the performance of substituted duties. It is a method of discharging one’s contractual duties in which parties to a contract fulfill a new set of responsibilities in place of earlier agreed contractual provisions.[3] As such, the original contract stands suspended.

Modes of Discharge of Contract

A contract can be discharged by various modes, which are elaborated as follows:

Discharge of Contract By Performance (Sections 37-67)

‘Performance’ of primary obligations of a contract is the most common method of discharge. Such performance must be done according to standards specified in the contract and within the prescribed time (if time is the essence of the contract).

According to sections 37 and 38, there are two ways to discharge a contract (by performance), which are:

1. Actual Performance – A contract is regarded to be fulfilled if both parties to the contract have performed their obligations.

2. Refusal of ‘offer of Performance’ or tender – According to section 38, if a party offers to perform and the other party refuses to accept the offer, the party which tendered to perform stands discharged of its obligations.

Discharge of Contract By Agreement or Mutual Consent (Sections 62-67)

Section 62 states, “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.” This means that such contract which have been novated, altered, remitted, rescinded, or waived need not be performed.

A contract may be terminated by mutual consent or agreement in any of the following ways:

1. Novation or Substitution of New Agreement

Novation means “to substitute with a new contract”. By entering and approving a new agreement in place of the original, the parties become discharged of their previous obligations. This has been explained with the illustration: “A owes B 10,000 rupees. A enters into an agreement with B, and gives B a mortgage of his estate for 5000 rupees in place of the debt of 10,000 rupees. This is a new contract and extinguishes the old.”

In Ramdayal v. Maji Devdiji[4], it was held that a contract may be novated by with changing or modifying its terms, or by changing the parties to the contract, wherein the liability may be shifted to another person.  It must be noted that to bind the parties, the new terms must be agreed to by both parties.

Novation by changing parties to the contract can be understood by the illustration:  A is liable to perform an obligation in favour of B. C agrees to fulfill the obligation on part of A. A becomes discharged by novation.

In S.B.I. v. T.R. Seethaverma[5], it was stated that there should be agreement among all three parties, namely, the individual who wishes to be released from the obligation, the individual who agrees to be liable in place of the person released, and the individual in whose favour the contract is to be performed.[6]

However, mere alteration of some terms of a contract does not constitute a ‘novation’. Thus, the parties cease to be discharged from their obligations in such cases.[7] In  Juggilal Kamlapat v N.V. Internationalethe Calcutta HC  held that “For novation to take effect, modification to the contract must go to the root of the original contract and change its essential character”.

In Salima Janeen v. National Insurance Co. Ltd.,[8] the appellant had taken an insurance for property against fire. The insured amount was Rs. 23 lakhs. Later, the property was set on fire by militants, and the damages so calculated by two assessors stood at Rs. 6,61,772. She accepted and agreed to the assessed amount in place of the insured amount. Later on, she brought an action to recover the insured sum of Rs. 23 lakhs. The courts concluded that the appellant had earlier agreed to the new sum, and wouldn’t be eligible to claim any further reimbursement from the National Insurance Company Ltd.

2. Material Alteration

When one or more of the contract’s provisions are changed or modified, this is referred to as alteration. If a significant change is made to a written contract with the permission and agreement of all parties, the old contract is discharged by the alteration and a new contract is formed in its stead. In simple words, if the same parties agree to new alterations, they would only be bound by the new contract. However, if there is no consensus on the new material alterations,  the new contract can be avoided and the parties would stand discharged. This was also stated in Winchcombe v. Pigot[9], or the ‘Pigot case’ in 1614: “A written contact may be avoided if somebody makes a material alteration to it after it has been signed and without his consent.”

In some cases, instead of annulling the whole contract, the ‘blue pencil doctrine’ is applied, wherein some portions are deemed enforceable and other portions are declared void. This has been observed in Halsbury’s Laws of England, Vol. 11, 3rd Edn., Art. 599 at 368:

“A material alteration is one which varies the rights, liabilities, or legal position of the parties as ascertained by the deed in its original state, or otherwise varies the legal effect of the instrument as originally expressed, or reduces to certainty some provision which was originally unascertained and as such void, or may otherwise prejudice the party bound by the deed as originally executed.

The effect of making such an alteration, without the consent of the party bound, is exactly the same as that of cancelling the deed.” In simple words, a material alteration legally affects the rights and liabilities of the parties to the contract.

If the parties decide to change or amend the terms of the contract, the change must be done either by express agreement or by necessary inference, which would invalidate the use of the doctrine of acceptance sub silentio.[10]

Alteration can be understood with the illustration:  

X agrees to supply Y with 1000 mounds of salt at Rs.50/- a mound within 3 months from the date. Later on, A and B alter the agreement such that A agrees to supply 800 mounds of salt at the same rate within 2 months instead of three. The latter agreement results in the termination of the former.

3. Remission (Section 63)

An agreement in which the parties accept a less quantity of money than agreed upon or only a portion of fulfillment of the responsibility also results in the termination of the initial contract. For example: X owes Y Rs.10,000. X pays to Y and Y accepts in full satisfaction Rs.5,000. The whole debt is said to be discharged.

Remission can be understood as a unilateral act of a contractual party to release the other at his will with satisfaction and pleasure. It may be done by either remitting whole or part of the debt, or by extending the time for its performance, or by accepting anything other than performance as per his requirement. This is stipulated in section 63, which reads as under:

Promisee may dispense with or remit performance of promise — 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.

It must be noted that once the amount or performance is accepted in full satisfaction, the promisee cannot bring any action to claim further performance or sum.

4. Recission

The act of ‘cancelling’ is referred to as rescinding. Based on mutual consent and consideration, the parties to a contract can withdraw or revoke their respective duties prior to its execution. It dissolves the contract.  For example, A promises to deliver certain goods to B for a sum of money on a certain date. Before the date of performance, A and B mutually agree that the contract will not be executed. The parties have rescinded the contract.

5. Waiver

Waiver, also called ‘release’, means to ‘voluntarily abandon legal rights’ vested with the parties to the contract. Here, one party forfeits the claim without the other party being made liable. In Jagad Bandhu Chatterjee v. Nilima Rani[11], it was unequivocally stated, “A waiver is nothing unless it amounts to a release. It signifies nothing more than an intention not to insist upon the right.” It must be noted that no consideration must flowed from the party whose obligations are waived and no legal action can be brought against them to enforce such performance by the party who waives their liabilities.[12]

Waiver is founded on the Doctrine of Promissory Estoppel, which states that when one party indicates to the other party, either via conduct or otherwise, that he would not insist on the enforcement of his/her claim under a contract, and whereby, such other party acts on such representation, the first party is not permitted to withdraw from it.[13]

It must be noted that extension of time is not the same as ‘waiver’, it comes under Remission (as mentioner earlier).

Discharge of Contract By Operation of Law

A contract may stand discharged by ‘operation of law’ in the following events:

1. By Insolvency/ Bankruptcy

When a court declares a person insolvent, his or her rights and responsibilities are transferred to an official of the court known as the Official Receiver, and the person is freed from any liabilities accrued prior to the bankruptcy. The insolvent is prohibited from dealing with his property or paying any of his creditors, thereby discharging him/her from contractual obligations.

2. By Merger of Rights

A contract can also be discharged by a merger, which occurs when an inferior right arising from a contract merges with a superior right arising from the same party. This can be understood with the example: Preet offers to let Geet use his vehicle on lease for six months. Geet offers to buy Preet’s vehicle after six months. Preet accepts Geet’s offer and sells his automobile to him. There are two contracts between Geet and Preet here: a lease agreement that makes him a tenant, and a sale agreement that makes him the owner. The higher right, i.e., the contract of sale, will combine with the lower right, resulting in the contract being discharged.

3. By Death –

Contracts involving personal talent or aptitude are dismissed or ended when the promisor dies. This can be explained with illustration (b) to Section 37: A promises to paint a picture for B by a certain day, at a certain price. A dies before the day. The contract cannot be enforced either by A’s representatives or by B.

In some contracts, however, a deceased person’s rights and obligations transfer to the deceased person’s legal representatives. This can be explained with illustration (a) to Section 37: A promises to deliver goods to B on a certain day on payment of Rs.1,000. A dies before that day. A’s representatives are bound to deliver the goods to B, and B is bound to pay the Rs. 1,000 to A’s representatives.

4. By Judgment of Court –

A contract can also be discharged by an order or judgment of court.

Discharge of Contract By Lapse of Time

A contract becomes discharged if the performance of contractual obligations ceases to be completed within the given time period. In other words, if the obligations are not fulfilled before the expiration of such time as per the Limitation Act, 1963, it results in a breach of contract, inviting legal action.

In Saraswat Trading Agency v. Union of India[14], the court stated that in cases where no time was specified for the performance of the promise, performance must be offered within ‘reasonable’ time. The period of 3 years as prescribed in Article 54 of the Limitation Act, 1963, can be treated as reasonable time.

Discharge of Contract By Impossibility of Performance or Frustration (Section 56)

A contract becomes discharged if its performance becomes impossible or the object of the contract itself is impossible or unlawful, making it void-ab-initio. This is explained as under:

1. Initial Impossibility

Section 56 first lays down the simple principle that “an agreement to do an act impossible in itself is void”. For example, an agreement to discover a treasure by magic, being impossible to perform, is void.

2. Subsequent Impossibility

Section 56 says: “…A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.”According to it, if the performance of contract becomes ‘impossible’ subsequently, the parties would be discharged.  Some examples of events which cause impossibility of performance are: war, change of circumstances, non-occurrence of contemplated or contingent event, death or incapacity of Party, and change of law.

Frustration – The doctrine of Frustration is a theory based on the maxim- Lex non cogit ad Impossibilia (the law does not force the impossible). Thus, the doctrine regards that every contract is impliedly conditional upon possibility. Subsequent Impossibility of carrying out contractual obligations due to a supervening or unforeseen circumstance ultimately results in frustration of such a contract. There are three essentials to frustrate an agreement:

  1. There must be an unforeseen situation or change in circumstances,
  2. The performance must become impossible, and
  3. The fault must not be ‘self-induced’ or caused by the party’s own fault. In Ganga Saran v. Firm Ram Charan[15], it was held that due to subsequent event, if performance becomes onerous, the party would be held responsible and cannot claim any benefit of Section 56. Simply put, you yourself are liable for your self-created problem.Hence, impossibility cannot be used as a ground to discharge contract in the following cases:
  • difficulty of performance;
  • commercial impossibility;
  • failure of a third person on whose work the promisor relied;
  • strikes, lockouts and civil disturbances; and
  • failure of one of the objects.

Note: To frustrate the contract, the clause of force majeure must not be stipulated in the contract.  [Force Majeure refers to a clause included in contracts to omit liability for unforeseen and unavoidable calamities that interrupt the regular course of events and prevent parties from fulfilling their obligations. It is a French term, literally meaning “greater force”. It can be used to absolve parties from their liabilities in performing obligations.]

Discharge of Contract By Breach of a Contract

“A breach of contract occurs when a party thereto renounces his liability under it, or by his own act makes it impossible that he should perform his obligations under it or totally or partially fails to perform such obligations.”[16]

A contract requires parties to carry out certain duties, or fulfill reciprocal promises. Failure to perform contractual obligation in entirety by either party (or their legal representative after death) by refusal or renunciation may result in breach of contract and invite a legal cause of action.

There are two types of breaches of contract, namely:

1. Actual Breach

Actual Breach takes place when either the time of performance of the contract is due or when there is a failure on part of a party to do or not to do certain thing(s) before the specified time.

2. Anticipatory Breach

Anticipatory breach of contract occurs when a party repudiates the contract before the time fixed for its performance or when a party by his own act disables himself absolutely from performing the contract.

The impact of anticipatory repudiation on the parties’ rights are as follows:

  1. The other party is excused from performing or continuing to perform, as applicable.
  2. The damaged party has the choice of filing a lawsuit right away or waiting until the deadline for performance has passed.

Conclusion

There are various ways in which a contract may be discharged. These may either be positive, i.e., by mutual consensus and agreement, or negative, i.e., by breach of contract. Either ways, the contract stands discharged, however, in the latter cases, the defaulter can be sued for breach for damages, injunction, quantum meruit or specific performance. The law is just and equitable in its dealings with ‘discharge’ of contract, as it unequivocally allows such contract to be discharged which becomes “impossible” to be performed, but not those that merely appear “onerous” to the defaulting party.

[1] Discharge of Contract under Indian Contract Act, 1872, available at: https://www.ourlegalworld.com/discharge-of-contract-under-indian-contract-act-1872/  (last visited on July 4, 2021).

[2] Discharge of Contract, available at: https://advocatespedia.com/DISCHARGE_OF_CONTRACT (last visited on July 4, 2021).

[3] India: Treatment of the Doctrine of ‘Accord and Satisfaction’ by the Indian Judiciary: Protecting the Unwary, available at: https://www.mondaq.com/india/arbitration-dispute-resolution/980030/treatment-of-the-doctrine-of-accord-and-satisfaction39-by-the-indian-judiciary-protecting-the-unwary (last visited on July 4, 2021).

[4] AIR 1956 Raj 12

[5] AIR 1995 Ker 31

[6] Novation as a means to Discharge under Indian Contract Act, available at: https://lawtimesjournal.in/novation-as-a-means-to-discharge-under-indian-contract-act/ (last visited on July 4, 2021).

[7] Sasan Power Ltd. V. North American Coal Corporation India Pvt. Ltd., A.I.R. 2016 SC 3974.

[8] AIR 1999 J K 110

[9] [1614] 11 Co Rep 266

[10] Contract Alteration: a detailed study of its effects, available at: https://blog.ipleaders.in/contract-alteration-detailed-study-effects/ (last visited on July 5, 2021).

[11] (1969) 3 SCC 445, 456

[12] Dr. Avtar Singh, Contract & Specific Relief 441-443 (EBC Publishing (P) Ltd., Lucknow, 12th edition, 2017).

[13] -Waiver under Contract Act-When Effective-Doctrine of Promissory Estoppel, available at: https://acumenjuris.com/article-single.php?id=35 (last visited on July 5, 2021).

[14] AIR 2002 Cal 51

[15] AIR 1952 SC 9

[16] Associated Cinemas of America, Inc. v. World Amusement Co., (1973) 201 Minn 94 (Minnesota SC)

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Tazeen Ahmed

Tazeen Ahmed is a first-year law student at Jamia Millia Islamia, New Delhi, inquisitive about Constitutional Law, Family Law, Corporate Law, Human Rights Law, and Criminal Law. She is a proficient writer, skilled in conducting legal research and organizing her articulations on social-legal and political issues. She holds a sound academic record, having scored 93.80 % in AISSE and 95% in both Political Science and English Language in AISSCE. She has held prestigious positions in the Student Council and been adjudged the ‘Student of the Year 2016, Gurgaon’ by UnivQuest. She has formerly served as a legal intern at ubadvocate, where her performance was marked “outstanding” by the team and is an Editor at The Wall of Justice blog. She is also an avid reader, a poet, and a political enthusiast. Above all, she is a dedicated and dynamic soul, ever-prepared to undertake challenging roles in the legal battlefield, and treats constructive criticisms as stepping stones towards progress.

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