Discharge of Contract : Meaning, Modes and Exceptional Cases

Indian Contract Act, 1872 is a central law that validates the Contracts or Agreements between various parties. The act regulates and oversees all the business in case of any dealings or an agreement. The Indian Contract Act, 1872 defines the term Contract under Section 2(h) as “An agreement enforceable by law”. Hence, a contract is anything that is an agreement and enforceable by the law of the land.

The Discharge of a Contract takes place when none of the parties to the contract is left liable under it, and the objective or responsibilities of the contract have been completed. Discharge of contract can also be called Termination of the Contractual Relationship between the parties to the contract and also the rights and obligations of the parties which are created at the time the contract is made come to an end. There are several ways by which a contract can be terminated; i.e., either positively, via performance, or negatively, through breach.

Geeky Takeaways:

• A contract creates certain obligations for the parties involved.
• Discharge of a Contract happens when these obligations terminate.
• It means terminating the contractual relationship between the parties who entered into the contract.
• Hence, when the rights, obligations, and duties of the parties come to an end, it is termed as a Discharge of a Contract.

Various Modes of Discharge of a Contract

According to the provisions of the Indian Contract Act 1872, there are various modes of discharge of contract, which are mentioned below:

1. Discharge of Contract by Performance: Once the parties to the contract fulfill their respective obligations as agreed in the contract within the specific time and the manner as may be agreed, the contract is considered discharged. This is also the general mode of discharge. Discharge of performance can be done by:

• Actual Performance: When all parties to the contract fulfill their agreed-upon responsibilities, it is referred to as an Actual Performance. For example, A and B enter a contract, where B will sell his iPhone to A at an agreed price of ₹15,000. B delivers the phone to A, and A pays the agreed price, hence contract comes to an end by actual performance by both the parties to the contract.
• Attempted Performance (Tender or Offer of Performance): In cases where the promisor performs his obligation but the promisee refuses to accept it, this is known as Tender or Attempted Performance. For example, A and B enter a contract, where B will sell his iPhone to A at an agreed price of ₹15,000. B dispatched the phone to A; however, A refused to accept the delivery. Here contract comes to an end as B attempted the performance but A refused it.

2. Discharge by Mutual Agreement: According to Section 62 of the Indian Contract Act 1872, when parties in a contract mutually decide to substitute the old contract with a new agreement or they agree to modify or rescind the existing contract, in such a case the act states that there is no requirement for the original contract to be performed. There are six ways by which a contract can be discharged by a mutual agreement, which are:

• Novation: When parties to a contract agree to substitute a new contract for the older one, this will be a case of novation. In the case of innovation, the old contract comes to an end, and there is no need for the old contract to be performed as parties have agreed to enter into a new contract in place of the old. For example, Cafe Coffee Day (CCD) owes ₹ 5 lakhs to SBI Bank. CCD and SBI agree to the new contract that, instead of repaying the loan amount of ₹5 lakhs, CCD will supply coffee and snacks to SBI bank.
• Rescission: When the parties to a contract consent to rescind it, the contract shall not be required to be performed. In the case of rescission, only the old contract will be cancelled, and no new contract will come into existence. For example, Amazon India ordered 1000 shirts from Peter England. Peter England manufactured the order and sent it to Amazon India. However, on finding the unsatisfactory quality of the shirts, Amazon India rejected the order, and Peter England admitted the same and cancelled the contract. Here, the contract is rescinded by the consent of both parties.
• Alteration: In a case when the parties to a contract agree to alter it, the old contract will be rescinded, it will not be required to be performed, and also the contract will be discharged by alteration. The terms of the contract can also be altered by mutual agreement, and the alteration will have the effect of substituting a new contract for the old one. In other words, there is a very slight distinction between novation and alteration. For example, Aramco contracted with Reliance to supply them with 10,000L of crude oil for one year; however, after considering the increase in demand, Reliance asked Aramco to increase its supply to 20,000L crude oil, and Aramco agreed to the same. Hence, this is termed as an Alteration.
• Remission: Section 63 of the Indian Contract Act, of 1872 establishes the discharge of a contract via remission. This involves accepting a sum less than the originally owed by the promisor or agreeing to a partial fulfillment of the promise made. The time for the performance can also be extended. For example, Radisson Blu, a famous hotel chain orders 2,000 doughnuts from Dunkin Doughnuts for a party. However, on delivery, it was found that Dunkin Doughnuts had supplied 1,800 doughnuts, and even though less quantity was delivered, Radisson Blu accepted the delivery.
• Merger: A merger happens when a party with lesser rights under a contract obtains superior rights by the same party under a new contract. As inferior and superior rights may coincide in the same party, in such a case both the rights combined lead to the discharge of the contract governing the inferior rights. For example, Zudio rents DLF Ltd.’s building for a tenure of 20 years. 5 years after the contract, DLF Ltd. offered Zudio to buy the building, and Zudio agreed to it. Here, Zudio has two rights; i.e., one accorded by the rent agreement, making them the renter, and the second by the sale agreement, making them the owner. The former being an inferior right merges with the superior one and discharges the rent contract.
• Waiver: Waiver means abandonment of rights. When one party to the contract deliberately abandons their right under the contract, the other party is released from his part of obligations, else binding upon it. Under the waiver, either a few or all the rights can be abandoned. For example, PNB Bank advanced ₹3 lakhs to Nirav Modi. On the due date, Nirav made a default on the payment of the loan amount and only paid ₹2 lakhs instead of 3 lakhs. However, PNB accepted ₹2 lakhs in full as the final settlement and also, waived their right to recover the loan amount.

3. Discharge by Impossibility of Performance: There can be two instances related to impossibility; one where the impossibility exists from the very start and it is impossible to perform a contract, such contract would be void-ab-initio, and secondly, a contract might be capable of performing in the beginning, but it may supervene later. Supervening impossibility takes place due to:

• An unforeseen change in legislation.
• Destruction of the subject matter is essential to the performance.
• The non-existence or non-occurrence of a specific state of things.
• The declaration of a war.

For example, TATA contracted with Tencent, a China-based company to supply Integrated Circuits(IC). However, during the contract, due to certain restrictions imposed by India on trade with China, Tencent was unable to supply to TATA, hence the contract was discharged.

4. Discharge by Lapse of Time: As per the Limitation Act, 1963 the contract is required to be performed within a specific time. If the contract is not performed, no action is taken by the promisee within the specified time. Such a contract is discharged and will result in nullification of the contract due to a lapse of time.

For example, Anil ordered fruits in bulk quantity from BigBasket and the fruits were to be delivered within 2 days; however, due to logistic issues, BigBasket delivered the fruits after 7 days. Therefore, in this case, the contract will be discharged as the required performance was not completed within the specified time.

5. Discharge by Operation of Law: A contract might get discharged by the operation of law, which includes the death of the promisor, insolvency, etc. Here, in case certain conditions exist, the contract is discharged. For example, Aman contracts with Rajesh to purchase his flat at a price of ₹50 lakhs on 1 April 2023. However, unfortunately, Aman died before executing the purchase. As Aman died, the contract was discharged by the law.

6. Discharge by Breach of a Contract: When a party to the contract refuses or fails to perform or disables themselves from performing or making the performance of the promise as stated in the contract, then the contract is said to be discharged by a breach. A party to a contract may discharge it by either actual or anticipatory breach. When a party defaults in the performance on the due date, then it is called an Actual Breach, and when the party to a contract defaults before the completion of the due date of performance, it amounts to an Anticipatory Breach. For example, Rahul contracted with Shilpi to supply construction material on 1st April 2023; however, on 1st April 2023, Rahul failed to supply and defaulted on the supply of material. This is an actual breach.

Exceptional Cases when a Contract is not Discharged

The Indian Contract Act 1872, has specified some exceptions to the case when a contract is not discharged, such as:

1. Difficult to Perform: In cases, where a situation arises that makes the promise agreed in the contract difficult to be performed, and the situation makes the promise challenging to be fulfilled, the contract will not be discharged.

2. Commercial Hardship: Any sort of commercial hardships make the contract unprofitable and also make it difficult to undergo the performance. However, it does not discharge a contract.

3. Strikes: Strikes, lock-outs, civil disturbances, and riots do not discharge the contract unless there is a clause in the contract specifying that in such event, the contract will be terminated unless the contract contains a clause providing that the contract shall not be performed or that the time of performance will be extended.

4. Self-Induced Incapacity: A contract is not discharged due to the self-induced incapacity of the parties to a contract. When the impossibility is due to the fault of any of the parties to the contract, the doctrine does not apply. For example, Arun booked a car on hire by Zoomcar; however, Zoomcar had to renew the car’s registration, which they failed to do. In this case, Zoomcar cannot avoid the contract since the registration has not been renewed due to their actions.

5. Performance Relied upon Third Party: In a contract where performance is relied upon by a third party and in a case when a third party makes a default, the contract will not be discharged due to the failure or default by the third party. For example, Arun contracts with Rishabh handicrafts to supply 50 handcrafted items. Rishab delegated this order to a third party who shall manufacture the handicrafts, and Rishab markets them. The third party makes a default in manufacturing. This won’t discharge Rishab from the contract.

Conclusion

Discharge of Contract means that the contractual relationship comes to an end when the obligations and duties have been fulfilled by the parties to a contract. In such cases, the parties to the contract are free from the obligations of the contract. There are various modes of discharging a contract, but the general way to do it is by performing the promise within the stipulated time as agreed in the contract as the other modes might incur penal monetary penalties on the defaulting party. However, the act has also specified the exception in cases when the parties will not be discharged from the contract.

Discharge of Contract- FAQs

What is the Discharge of the Contract?

The discharge of a contract takes place when none of the party to contract is left liable under it and the objective or responsibilities of the contract have been completed. Discharge of contract can also be called termination of the contractual relationship between the parties to the contract and also the rights and obligations of the parties which are created at the time the contract is made also comes to an end.

When does a contract get terminated or discharged?

According to the Indian Contract Act, a contract can be discharged by the parties by giving lawful reasons like recession, ending the contract by giving a prior notice, or on completion. Such termination might also take place by the mutual consent of the parties.

What are the modes by which a contract can be discharged?

A contract can be discharged in the following ways:

• Discharge by Performance
• Discharge by Agreement or Consent
• Discharge by Impossibility of Performance
• Discharge by Lapse of Time
• Discharge by Operation of Law
• Discharge by Breach of a Contract

What is discharge by operation of law?

A contract might gets discharged by the operation of law which includes death of the promisor, insolvency etc. Here, in case if certain conditions exists, the contract is discharged.

What are the exceptions where the contract will not be discharged?

The exceptions where the contract will not be discharged are as follows:

• When the contract becomes difficult to perform
• Commercial Hardship
• Strikes, lock-outs, civil disturbances and riots
• Self induced incapacity
• Performance relied upon third party

Note: The information provided is sourced from various websites and collected data; if discrepancies are identified, kindly reach out to us through comments for prompt correction.