Discharge of Contract

Discharge of a contract implies termination of contractual obligations. This is because when the parties originally entered into the contract, the rights and duties in terms of Contractual Obligations were set up. Consequently when those rights and duties are put out then the contract is said to have been discharged. Once a contract stands discharged, parties to it are no more liable even though the obligations under the contract remain incomplete.

A Contract is deemed to be discharged, that is, concluded and no longer binding, in the following circumstances:

  • Discharge by performance.
  • Discharge of Contract by Substituted Agreement.
  • Discharge by lapse of time.
  • Discharge by operation of law.
  • Discharge by Impossibility of Performance.
  • Discharge by Accord and Satisfaction.
  • Discharge by breach

    Discharge by performance

    Where both the parties have either carried out or tendered (attempted) to carry out their obligations under the contract, is referred to as discharge of the contract by performance. Because performance by one party constitutes the occurrence of a constructive condition, the other party’s duty to perform is also triggered, and the person who has performed has the right to receive the other party’ s performance. The overwhelming majority of contracts are discharged in this way.

    Discharge of Contract by Substituted Agreement

    A contract emanates from an agreement between the parties. It thus follows that, the contract must also be discharged by agreement. Therefore, what is required, inevitably, is mutuality. Discharge by Substituted agreement arises when a contract is abandoned, or the terms within it are altered, and both the parties are in conformity over it.

    Novation

    The term Novation implies the substitution of a new contract for the original one. This arrangement may be either with the same parties or with different parties. For a novation to be valid and effective, the consent of all the parties, including the new one(s), if any, is essential. Moreover, the subsequent or second agreement must be one capable of enforcement in law, the consideration for which is the exchange of promises not to enforce the original contract.

    Rescission

    This refers to cancellation of all or some of the material terms of the contract. If the contracting parties mutually decide to do so, the respective contractual obligations of the parties stand terminated.

    Alteration

    This refers to a change in one or more of the terms of a contract with the consent of all the contracting parties. Alteration results in a new contract but parties to it remain the same. Here the assumption is that both the parties are to gain a fresh but different benefit from the new agreement. Remission This means the acceptance (by the promisee) of a lesser sum than what was contracted for, or a lesser fulfillment of the promise made. As per Section 63, ‘every promisee may

  • (a) remit or dispense with it, wholly or in part, or
  • (b) extend the time of performance, or
  • (c) accept any other satisfaction instead of performance’.

    Waiver

    The term waiver implies abandonment or relinquishment of a right. Where a party deliberately abandons its rights under the contract, the other party is released of its obligations, otherwise binding upon it.

    Discharge by lapse of time

    A contract stands discharged if not enforced within a specified period called the ‘ Period of Limitation‘. The Limitation Act, 1963 prescribes the period of limitation for various contracts. For instance, period of limitation for exercising right to recover an immovable property is twelve years, and right to recover a debt is three years. Contractual rights become time barred after the expiry of this limitation period. Accordingly, if a debt is not recovered within three years of its payment becoming due, the debt ceases to be payable and is discharged by lapse of time.

    Discharge by Impossibility of Performance

    Sometimes after a contract has been established, something might occur, though not at the fault of either party, which can render the contract impossible to perform, or illegal, or radically different from that originally undertaken.

    Discharge of operation of law

    A contract stands discharged by operation of law in the following circumstances.

    Unauthorized material alteration of a written document

    A party can treat a contract discharged (i.e., from his side) if the other party alters a term (such as quantity or price) of the contract without seeking the consent of the former.

    Statutes of Limitations

    A contract stands discharged if not enforced within a specified period called the ‘period of limitation’. The Limitation Act, 1963 prescribes the period of limitation for various contracts.

    Insolvency

    A discharge in bankruptcy will ordinarily bar enforcement of most of a debtor’s contracts.

    Merger

    A contract also stands discharged through a merger that occurs when an inferior right accruing to party in a contract amalgamates into the superior right ensuing to the same party.

    Discharge by Accord and Satisfaction

    To discharge a contract by accord and satisfaction; the parties must agree to accept performance that is different from the performance originally promised.

    Discharge of contract by breach

    Breach occurs where one party to a contract fails to perform its contractual obligations, or the performance is defective. A breach of contract does not per se bring a contract to an end. The breach may give to the aggrieved party the right to terminate the contract but it is for the non-breaching side to decide whether or not to exercise that option. The aggrieved party has a right of election; that is to say, it can choose either to affirm the contract or to terminate it. It may be Anticipatory or Actual.

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