Discharge of a Contract under Indian Contract Act

Introduction

A contract is said to be discharged when the obligations created by it come to an end or ceases to operate, i.e., when the rights and obligations created by it come to an end. In other words, Discharge of Contract means ‘termination of contractual relationship between the parties’.

Discharge of Contract

A contract may be discharged by –

1. Performance
2. Agreement or consent
3. Impossibility of Performance
4. Lapse of Time
5. Operation of Law
6. Breach of Contract

Discharge of Contract by Performance:

When the parties to the contract perform their share of promises, the contract is said to be discharged. It is the natural mode of discharge. Performance may be

• Actual Performance under which all the parties perform their agreed share of promise.
• Attempted Performance (Tender or Offer of Performance) in which the promisor attempts to perform the promise, but the promise refuses to accept the same.
• Performance of Contract by Joint Promisors- Joint promises may take any of the following shapes:
  • i. Where several joint promisor make a promise with a single promise, e.g. A, B C jointly promise to pay Rs.5,000 to D, or
  • ii. Where a single promisor makes a promise with several joint promises e.g. A promises to pay Rs.5000 to B and C jointly, or
  • iii. Where several joint promisor make a promise with several joint promises, e.g. A, B and C jointly promise to pay Rs.3000 to P, Q and R jointly.

Discharge of Contract by Agreement or Consent:

Sec 62 of the Indian Contract Act, 1872 provides that, “if the parties to the contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed”. A contract can be discharged by the fresh agreement between the parties. A contract may be terminated by agreement in any of the following ways by:

Novation

Novation which means replacement of an existing contract by another contract. In novation parties may change and is they not then the material terms of the contract must be altered in the new contract because a mere change or variation of some of the terms of the contract is not novation but alteration. In the supreme court case of Lata Construction v Dr Rameshchandra Ramniklal Shah[1] it was held that “there should be a complete substitution of a new contract. It is in this situation that the original contract need not be performed”.

Example: A is indebted to B and B to C. By mutual agreement B’s debt to C and B’s loan to A. The contracts are cancelled and G accepts A as his debtor. There is novation involving change of parties.

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. (Sec. 62 of Indian Contract Act, 1872). Where a contract is embodied in a deed and the party who has the custody of the deed alters it without the consent of the other in a material particular, the effect would exactly be the same as that of cancelling the deed. Both parties will be discharged from their respective obligations. The meaning of the expression “material alteration” was considered by the Supreme Court in Kalianna Gounder v Palani Gounder[2]

Example: A agrees to supply B 1000 kgs of salt at Rs.50/kg within 3 months from date. Later on, A and B alter the agreement in the following way: A agrees to supply 800 kgs of salt at the same rate within 2 months instead of three. The latter agreement puts an end to the former.

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 terms of the contract are changed.

Recession

Recession which 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 promised 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.

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.

Example: A owes B Rs.5,000. A pays to B and B accepts in full satisfaction Rs.2000. The whole debt is discharged.

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.

Principle of Accord and Satisfaction:

An accord and satisfaction is a legal contract whereby two parties agree to discharge a contract, a tort or claim, or a liability for an amount based on terms that differ from the original amount of the contract or claim. Accord and satisfaction is also used to settle claims prior to bringing them to court. It is a new agreement that suspends the terms of an existing agreement in favour of a new one. It is a settlement of an unliquidated debt.

The accord is the agreement on the new terms of the contract, and the satisfaction is the performance of those terms according to the agreement. When there is an accord and satisfaction, and the performance (or satisfaction) has been executed, all prior claims relating to the matter are extinguished.

Accord and Satisfaction in the Discharge of Debt Obligations:

Accord and satisfaction is a concept from contract law that usually applies to the purchase of a release from debt obligation. An accord and satisfaction may occur in debt negotiations.

In the case of Snow View Properties Ltd v Sindh and Punjab Bank[3], The petitioner floated a loan and mortgaged his property to secure the loan. The petitioner was unable to clear the loan in the given time so the bank authorities seized the mortgaged property. The petitioner after the breach of the contract entered into a contract with the bank to pay a certain amount of money in exchange of his property. The bank authorities agreed to this and later did not release his property even after receiving the promised amount. 

Example: For example, a builder is contracted to build a garage for Rs.50,000. The contract called for Rs.20,000 prior to starting construction, to disburse Rs.10,000 during various stages of construction, and to make a final payment of Rs.20,000 at completion. At completion, the homeowner complained about inferior work quality and refused to make the final payment. After a mutual settlement agreement, the builder accepted Rs.10,000 as full payment. Thereby, a new contract was formed by offer, acceptance, and consideration.

Benefits of Accord and Satisfaction:

An accord and satisfaction can be used as a form of compromise that benefits both parties when the original terms of a contract cannot be upheld for whatever reason. When an accord and satisfaction is reached to discharge a debt, the creditor still receives some payment of the debt, while the debtor benefits from not being held to the full obligation.

Discharge of contract by Impossibility of Performance:

Impossibility of Performance is yet another ground on which the parties are discharged from their obligations under the contract.

• Initial Impossibility – According to Sec.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.

Doctrine of Frustration:

When performance of the contract becomes impossible the purpose is said to be frustrated. Sec. 56 of the Indian Contract Act, 1872 deals with different situations when it becomes impossible to perform the contract. Impossibility may be at the time of making of agreement or may be supervening impossibility or illegality. In the case of Satyabrate Ghosh v. Mugneeram Bangur and Co.[4] where their Lordships of the Supreme Court rejected the plea of frustration of the contract, but, as the said case has been sought to be distinguished on facts and a seemingly new question has also been raised for our consideration and as it his been further argued that this Court, though bound by the Supreme Court’s statement or enunciation of the principle, is not bound by any particular application of that principle, made by it in any particular case, and may make a different application of that principle even to the similar facts before it and reach a different conclusion, it is necessary to examine the whole position and record our views on the same in some detail.

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 banquet hall to B for a party on a certain day. The hall was destroyed by fire before the date of the party. The plaintiff sued the defendant for damages. It was held that the contract has become void and the defendant was not liable.

The authority, in this case, is Taylor v Caldwell[5] in which a contract to lease out a music hall for a certain date was held frustrated due to the destruction of the hall. The performance of the contract became physically impossible due to destruction of the subject-matter hence the contract was held frustrated.

Death or Personal Incapacity –

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: A and B contract to marry each other. Before the time fixed for the marriage, A dies. The contract becomes void.

This has been well-established in the case of Robinson v. Davison[6] where there was a contract between the plaintiff and the defendant’s wife who agreed to perform piano at a concert of the plaintiff on a stipulated date. But due to sudden illness she was unable to perform at the concert and this was informed to the plaintiffs on the morning of the date of performance. This caused the concert to be postponed and caused losses to the plaintiff. 

The plaintiffs filed for breach of contract. The court quashed their claim and said that the contract was frustrated as she became ill without there being any mistake or negligence on her part. The nature of the contract was such that the terms required personal performance and incapacity by the means of illness put the contract to an end.

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. This was recognised in the case of Easun Engineering Co Ltd v. Fertilizers and Chemicals Travancore Ltd.[7] In this case, there was a price hike of 400% of a certain type of oil due to the outbreak of war in the Middle East. The appellants plead that this is a mere case of commercial hardship and hence damages should be awarded for breach of performance.

The court quashed this argument and said that the price escalated out of all proportions making things impossible for the respondents to supply the oil. Commercial Hardship is about not allowing a party to avoid the contract for lack of profitability. But an escalation of 400% in the prices makes the performance of the contract impossible and hence the court held the contract frustrated. In this case had there been mere marginal rise in the prices frustration could not have been availed.

Example: A sold to B 100 bags of sugar at Rs.150 per bag. But before delivery the government banned the sale and purchase of sugar by private traders. The contract was discharged by subsequent change in law.

Declaration of War –

A contract entered into with an alien enemy during war is illegal and void ab initio. 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 government afterwards declared war against the country in which the port is situated. The contract becomes void.

Discharge of Contract 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.10,000 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.

Discharge of Contract by Operation of Law:

A contract terminates by operation of law in the following cases:

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, known 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 house to B for Rs.10 lacs. Before the performance of the contract A is declared insolvent by court. The contract between A, & B is discharged.

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: A was a part-time lecturer at Mumbai University. After some time, he was made a full-time lecturer. Hence, when A, a part-lime lecturer was made full-time lecturer, the contract of part-time lectureship is discharged by merger.

Unauthorised 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.

Discharge of Contract by Breach:

A breach of contract occurs when a party renounces his/her liability under the contract, or by his/her own act makes it impossible that he/she should perform his/her obligations under the contract or totally or partially fails to perform his/her part of the contract. Breach of contract may be of two kinds-

Actual Breach takes place in course of or at the time of performance.

Example: A degrees to deliver 10 bags of rice on 10^th September. He does not deliver the wheat on the day. This is an actual breach of contract.

Anticipatory Breach occurs when promise expressly or implicitly refuses to perform his/her party of obligation, before due date of performance has arrived. This type of breach may happen in two ways:

Express Breach is in which a party to the contract communicates to the other party, his intention not to perform the contract, before the due date of performance has arrived.

Example: A contracts with B to supply 50 bags to wheat for Rs.10,000 on 1^stMarch. On 15^th February, A informs B that he will not be able to supply the wheat. This is express rejection of contract.

Implied Breach is when a party to the contract does an act, which makes the performance of the contract impossible.

Example: A promises to sell his horse to B on 1^st Mrach and before that date he sells the same horse to C.

In Fazal Ilahi v. East Indian Railway Co.[8] , the plaintiff delivered to the defendant railway company at Kanpur boxes of crackers for consignment to Allahabad. The crackers were required for sale at an on-coming festival. However, the same was not communicated to the defendant company. The delivery of boxes were delayed and they reached after the conclusion of festival. It was held that the plaintiff was not entitled to claim the profits which he would have made as the special purpose for which the crackers were being sent was not communicated to defendant company.

Conclusion

In the Law of contracts, there is a great deal of misunderstanding or lack of understanding in regard to certain topics connected with the subject of discharge. It is due to the fact that few people use such terms as condition and warranty in the same sense, the rest is due to faulty reasoning concerning matters that are admittedly difficult. The best way for discharge of a contract is based on performance. As this way both the parties follow all the terms of the contract and afterwards go for its discharge. On the other hand, discharge by the breach is the most unpleasant way to release one from duties. Therefore, discharge by breach results in damages too.

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For law notes, Click Here.

[1] 1999

[2] 1970 AIR 1942, 1970 SCR (2) 455

[3] 1993

[4] 1954 AIR 44, 1954 SCR 310

[5] [1863] EWHC J1 (QB)

[6] (1863) 3 B & S 826

[7] AIR 1991 Mad 158

[8] (1921) ILR 43All 623

Author Details: Smruti Polke [3^rd year LLB (Hons) student at Renaissance Law College (DAVV University)]