What is “Discharge of Contracts?”

 A contracts is discharged when the obligations created by it come to an end. A contract may be discharged in any of the following ways:

1.    By agreement.

2.    By performance of the contract.

3.    By lapses of time.

4.    By operation of law.

5.    By material alteration.

6.    By subsequent impossibility of the performance.

7.    By breach.

1. By Agreement Sec. (62-64)

The parties may agree to terminate the existence of the contract by any of the following ways:- (a)  By Novation (Sec. 62): Substitution of a new contract in place of the old existing one is

known as ‘inovation of contract’. New contract may be either between the same parties or between different parties, the consideration being mutually the discharge of the old contract.

(i)    Substitution of a contract with new terms for an old contract between the same parties.

(ii)  Substitution of a new party for an old one, the contract remaining the same. Promisee will now look to the third party for the performance of the contract. Original promisor is released of the obligations under the old contract.

Examples

(i)    A owes money to B under a contract. It is agreed between A, B and C that B shall henceforth accept C as his debtor, instead of A. The old debt of A to B is at an end and a new debt from C to B has been contracted.

(ii)  A owes B 10,000 rupees. A enters into an arrangement with B, and gives B a mortgage of his (A’s) estate for 5,000 rupees in place of the debt of 10,000 rupees. This is a new contract and extinguishes the old.

(iii)  A owes B 1,000 rupees under a contract. B owes C 1,000 rupees. B orders A to credit C with 1,000 rupees in his books but C does not assent to the arrangement. B still owes C 1,000 rupees, and no new contract has been entered into.

Novation can take place only with the consent of all the parties. It cannot be compulsory. (Appukuthan V. Athapa, 1966).

As a result of novation, old contract is completely discharged and law will not entertain any action based upon the terms of the old contract.

(b)  By rescission (Sec. 64) : Rescission means cancellation of the contract. A contract can be rescinded by any of the following ways :-

(i)    By mutual consent :- Parties may enter into a simple agreement to rescind the contract before it’s breach.

(ii)  By the aggrieved party :- Where a party has committed a breach of the contract, the aggrieved party can rescind the contract without in any way effecting his right of getting compensation for the breach of contract.

(iii)  By the party whose consent is not free:- In case of a voidable contract, the party whose consent is not free can, if so decides, rescind the contract.

A contract may also be taken to be impliedly rescinded wherenone of the parties has performed his part till a long and no party has any complaint against the other.

(c)  By alteration: Alteration means change in one or more of the conditions of the contract.

Alteration made by the mutual consent of the parties will be perfectly valid. But any material alteration in terms of a written contract by the one party without the consent of other party will discharge such party from its obligations under the contract.

In case of novation a new contract replaces an old contract. The parties may also change. While in case of alteration only some of the terms of the contract are changed. Parties also continue to be the same.

(d)  By remission (Sec. 63) : Remission means acceptance of a lesser performance than what was actually due under the contract. According to Sec. 63 a party may dispense with or remit, wholly or in part, the performance of the promise made to him. He can also extend the time of such performance or accept instead of any satisfaction which he deems fit. A promise to do so will be binding even though there is no consideration for it.

Example:

(1)  A owes B Rs. 5,000. A pays to B and B accepts in satisfaction of whole debt Rs. 2,000 paid at the time and place where Rs. 5,000 were payable. The whole debt is discharged.

(ii)  A owes B, under a contract, a sum of money., the amount of which has not been ascertained.

A without ascertaining the amount gives to B, and B, in satisfaction therefore, accepts the sum of Rs. 2,000. This is a discharge of the whole debt whatever may be its amount.

Accord and satisfaction: These two terms are used in English Law. In England, a promise to accept less than what is actually due under the contract is not enforceable, but if this promise has been actually carried out, it will give a valid discharge to the other partly.

ExampleA is B’s debtor for a sum, of Rs. 500. B agrees to accept Rs. 300 in full satisfaction of his claim. This promise is unenforceable. However, if A pays Rs. 300 and B accepts the payment, A will be discharged from his liability for the whole debt.

‘Accord means promise to accept less than what is due under the contract. ‘Satisfaction’ implies the payment or the satisfaction of the lesser obligation. An accord not followed by satisfaction will be unenforceable. Actual performance of the new promise and its acceptance by the other party is essentail to discharge the old obligations by accord and satisfaction. The original cause of action is not discharged so long as the satisfaction, agreed upon, remains executory.

(e)  Owing to the occurrence of an event, on the happening of which it was previously agreed that all rights and liabilities should cease.

(f)   By waiver (Sec. 63) : A contract may be discharged by agreement between the parties to waive their rights arising from the contract. Thus, in case of waiver, the person who is entitled to any right under the contract, intentionally relinquishes them without consideration and without a new agreement. Under English law waiver is possible only by agreement under seal.

ExampleA promises to paint a picture for B.B afterwards forbids him to do so. A is no longer bound to perform the promise.

2. By performance of the contract (Sec. 37)

When parties fulfil their obligations and promises under a contract the contract is said to have been performed and discharged. Performance should be complete and according to the real intentions of the agreement. Offer of performance shall have the same effect as performance. A party to a contract shall become free from all obligations if it had offered to perform his part of the promise but it was not accepted by the other party.

(3) By Lapse of time

Every contract must be performed either within the period fixed or within a reasonable time of the contract. Lapse of time may discharge the contract by barring the right to bring an action to enforce the contract under the Limitation Act.

4. By operation of Law

A contract is discharged or terminated by operation of other laws in the following cases:

(a)  Merger. Merger implies coinciding and meeting of an inferior and superior right on one and the same person. In such a case inferior right available to a party under an agreement will automatically vanish.

ExamplesA is holding a property under lease. He subsequently buys that property. A’s right as a tenant is inferior to his right as an owner of the property. The right as a tenant and right as owner have coicided and met in one persion i.e. A. Thereofre, A’s rights as a lesee will terminate.

(b)  Death: In case a contract is of a personal nature, the death of the promisor will discharge the contract. In other caes, the rights and liabilities of the deceased person shall pass to his legal representatives.

(c)  By complete loss of evidence of the existence of the contract.

(d)  By insolvency. An insolvent is released from performing his part of the contract by law. Order of discharge, however gives a new lease of life to the insolvent and he is discharged from all obligations arising from all his earlier contracts.

5. By material alternation

Any material alteration made intentionally in a written contract by the promisee or his agent without the consent of the promisor entitles the later to regard the contract as rescinded.

An alternation will be taken to be material if it directly or indirectly affects the nature or operation of the contract or the identity, validity or effect of the document.

6. By supervening impossibility of performance (Sec. 56)

Supervening impossibility arises due to the happening of certain events which were neither in the contemplation of the parties when they entered into the agreement nor either of the parties are responsible for causing the performance of the contract impossible. In such a case the contract will be void as soon as such events make the performance of the contract impossible. The impossibility must be either legal or physical but not commercial. This is called “Doctrine or Supervening Impossibility”. Section 56 of the Indian Contract Act lays down:

“An agreement to do an impossible act is void”.

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, becomes void when the act becomes impossible or unlawful. This is called “Supervening Impossibility”, i.e. impossibility arising subsequent to the formation of the contract. The supervening impossibility may be due to any of the following causes:

(a)  By the destruction of the subject matter. If the subject matter of the contract is destroyed subsequent to the formation of the contract, without any fault of either of the parties, the contract shall become void.

Example(i) A music hall was let for a series of concerts on certain days. The hall was burnt down before the date of the first concert. The contract was held to be void.

(ii)  A person contracted to deliver a part of a specific crop of potatoes. The potatoes were destroyed through no fault of the party. The contract was held to be discharged. Howell V. Coupland,1876).

(b)  By the non-existence of a state of things necessary for the performance. If a contract is made on the basis of continued existence of certain state of circumstances, the contract stands discharged if the state of things ceases to exist.

Example(i) H hired a room from K for two days to witness the coronation procession of King Edward VII. K knew the object of the contract though the contract contained no reference to the coronation. Owing to King’s illness the procession was cancelled. It was held that H was excused from paying rent for the room, as the existence of the procession as the basis of the contract and its abandonment discharged the contract. (Krell V. Henry 1903).

(ii)  A and B contracted to marry each other. Before the time fixed for marriage, A goes mad. The contract become void.

If)  Death or personal incapacity of the promisor. Contracts involving personal skill of the promisor will stand discharged in the case of his death or personal incapacity.

ExampleA contracts to act at a theatre for six months in consideratin of a sum paid in advance by B. On several occasions A is too ill to act. The contract to act on the occasions becomes void.

(d)  Change of law. On account of subsequent change in law, the performance of the contract may become impossible. The object of the contract may be declared to be unlawful.

Example(i) A, who is governed by Muslim law and who already had a wife promises to marry B. Subsequent to this promise and before it is carried out, Special Marriage Act prohibiting polygamy is passed. The contract to marry becomes void.

Example(ii) X sold to Y a specific parcel of wheat in a godown. Before delivery could be made, the godown was sealed by the Government and the entire quantity was requisitioned by the Government under Statutory Power. The contract was held discharged (Re Shipp, Anderson & Co. V. Harrison Brs. and Co’s Arbitration (1915).

(E)  Outbreak of War. A contract entered into with an alien enemy during the war is unlawful and, therefore, void ab initio contracts made before the outbreak of war either suspended or declared void by the Government. If they are suspended, they may be performed after the termination of the war.

Example: A contracts to take in cargo for B at a foreign port. A’s Government afterwards declared war against the country in which port is situated. The contract becomes void when war is declared.

It is worthwhile to not that the word “impossible” under Section 56 has not been used in the physical or literal sense. A contract may not have become literally or physically impossible to perform but if an untoward event has happened which has totally upset the very foundations of the contract will be taken to be impossible to perform.

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