Discharge of Contract
Meaning:
When the rights and obligations arising out of a contract come to an end, the contract is said to be discharged or terminated. A contract may be discharged in any of the following ways:1. Discharge by performance.
2. Discharge by Agreement.
3. Discharge by subsequent impossibility.
4. Discharge by lapse of time.
5. Discharge by operation of law.
6. Discharge by breach of contract.
1. Discharge by Performance:
Performance is the natural mode of discharge. When the parties to a contract perform their shares of the promises, the contract is discharged. If only one of the several parties performs the promise, he alone is discharged. Performance may be:(a) actual performance; or
(b) offer of performance or tender.
2. Discharge by Agreement:
A contract can also be discharged by the fresh agreement between the same parties. A contract may be terminated by agreement in any of the following ways:A) Novation:
Novation of contract means replacement of an existing contract by another contract. In novation the parties may change. If the parties are not changed then the material terms of the contract must be altered in the new contract because a mere variation of some of the terms of a contract is not novation but alteration.Example:
A is indebted to B and B to C. By mutual agreement B’s debt to C and B’s loan to. A are cancelled and G accepts A as his debtor. There is novation involving change of parties.B) Alteration:
Alteration of a contract takes place when one or more of the terms of the contract are changed. If a material alteration in a written contract is made with the consent of all the parties the original contract is discharged by alteration and a new contract takes its place. An alteration may be a change in the amount of money, the rate of interest, or the names of the parties. Alteration results in the discharge of the original contract.The difference between “novation and “alteration” is that in case of novation there may be a change of parties but in case of alteration parties remain the same and only the term o the contract are changed.
Example:
A agrees to supply B. 1000 mounds of salt at Rs.50 a mound within 3 months from date. Later on, A and B alter the agreement in the following way: A agrees to supply 800 mounds of salt at the same rate within 2 months instead of three. The latter agreement puts an end to the former.C) Rescission:
Means cancellation of contract by mutual consent. A contract may be cancelled ‘by agreement between the parties at any time before it is discharged by performance. The cancellation of agreement releases the parties form their obligation arising out of the contract.Example:
A promises to deliver certain goods to B on a certain date. Before the date of performance, A and B mutually agree that the contract will not be performed. The parties have cancelled the contract.D) Remission:
Remission means the acceptance of lesser sum than what was due from promisor. According to the section 63, a person who has a right to demand the performance of a contract may:1. Remit or give up the whole or part of a debt.
2. Extend the time for performance.
Where a promise remits a part of the debt and gives a discharge for the whole debt on receiving a smaller amount, such discharge is valid.
Example:
A owes B Rs.5,000. A pays to B and B accepts in full satisfaction Rs.2000. The whole debt is discharged.3. Discharge by Subsequent Impossibility:
Initial Impossibility:
According to section 56, “An agreement to do impossible act is void ab-initio.” It means agreement which is obviously impossible cannot be binding, e.g., an agreement to discover treasure by magic is void agreement.Subsequent Impossibility:
Sometimes, a contract capable to be performed after formation becomes impossible or unlawful and as a result void.A) Destruction of Subject Matter:
When the parties make a contract for a particular subject matter, the contract is discharged if the subject matter is destroyed without the fault of the promisor or promise.Example:
A, let out a music hall to B for a number of concerts on certain days. The hall was destroyed by fire before the date of first concert. The plaintiff sued the defendant for damages. It was held that the contract has become void and the defendant was not liable.C) Deat or Personal in Capacity:
Where the performance of a contract depends upon the personal skill, or qualification or the existence of a given person, the contract is discharged on the illness or incapacity or the death of that person.In other words the death or illness of a particular person whose action is necessary for the promised performance discharges the duty to render that performance.
Example:
1. A and B contract to marry each other. Before the time fixed for the marriage, A dies. The contract becomes void.2. An artist undertook to perform at a concert for a certain price, but before he could do so, he met with an accident and lost his right arm. Held the artist was discharged due to disablement.
D) Change of Law:
Contracts, which are lawful when made but become unlawful later due to change in law, become impossible to be performed. A subsequent change in law may render the contract illegal and in such cases the contract is deemed discharged. Impossibility created by law is valid excuse for non-performance.Example:
A sold to B 100 bags of wheat at Rs.150 per bag. But before delivery the government banned the sale and purchase of wheat by private traders. The contract was discharged by subsequent change in law.E) Declaration of War:
A contract entered into with an alien enemy during war is illegal and void abinitio. Contract entered into before the commencement of war is suspended during the war. However, such contracts may be revived after the war is over if the nature of the contract so permits.Example:
A contracts to take in cargo for B at a foreign port. A’s Govt. afterwards declared war against the country in which the port is situated. The contract becomes void.4. Discharge by Lapse of Time:
A contract is discharged by lapse of time. The Limitation Act, 1908 laws down that a contract should be performed within a specified period. If the contract is not performed and no legal action is taken by the promise within the period of limitation, he is deprived of his remedy at law, the contract is terminated in such a case.
Example:
A owes Rs.5000 to B. The last date for the repayment of the loan has expired and B does not file a suit against A for three years. B loses the rights to recover the money back.5. Discharge by Operation of Law:
A contract terminates by operation of law in the following cases:A) Insolvency:
The insolvency Act provides for discharge of contracts under particular circumstances. Where the court declares a person as insolvent, the rights and duties of such person are transferred to the officer of court, know as Official Receiver, After the order of the court such person is discharge from his liabilities incurred before his insolvency.Example:
A promises to sell his car to B for Rs.2 lac. Before the performance of the contract A is declared insolvent by court. The contract between A, & B is discharged.B) Merger:
Merger takes place when an inferior right available to a party merges into a superior right available to the same party under, some other contract. As a result of merger the former contract stands discharged automatically.Example:
1. Where a man holds property under a contract of tenancy buys the property. His rights as a tenant are merged into the rights of ownership and the contract of tenancy stands discharged by operation of law.2. Where a part-lime lecturer is made full time “lecturer, the contract of part time, lectureship is discharged by merger.
C) Unauthorized Material Alteration:
Where a party to the contract makes any material alteration in the contract, without the consent of the other party, the contract can be avoided by the other Party. A material alteration is one, which changes the legal identity or character of the contract or the rights and duties of the parties to the contract. An alteration which is not material or which is authorized will not affect the validity of the contract. An alteration even by a stranger will entitle the other party to avoid the contract, but where the alteration is unintentional, contract cannot be avoided.Example:
A executes a promissory note in favour of B for Rs.3,000. B by alteration exceeds the amount from Rs.3,000 to 30,000. A may refuse to pay Rs.3,000.6. Discharge by Breach of Contract:
A contract must be performed according to its terms. But where the Promisor fails to perform the contract according to the terms of the contract, thee is a breach of contract by him. Breach of contract may be of two kinds:1. Actual Breach
2. Anticipatory breach
