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Discharge of Contract

What is Discharge of Contract ?


As per the INDIAN CONTRACT ACT
1872 Discharge of contract means
the termination of a contractual
relationship between parties.
A contract is said to be
when it ceases to operate
the rights & obligation
it come to an end.

discharged
, i.e. when
created by

For Example
e.g.
Two parties A & B Make a
contract to build a fly-over in a City.
A is the municipal authority of the
city & B is a construction company.
Due to some reasons the contract get
discharged. Then the both parties are
free from the obligations of contract,
i.e. the rights & obligations of the
parties come to an end.

How a Contract can get


Discharged ?
A Contract may be discharged in any of
the following way.
1.
2.
3.
4.

By Performance
By Agreement or by Consent.
By Impossibility of performance.
By Promisee failing to offer facilities
for performance.
5. By Death

How a Contract can get


Discharged ?
6. By Refusing tender of performance.
7. By Unauthorised material alteration
of contract.
8. Discharge by lapse of time.
9. By Operation of Law.
10. By Breach of Contract.

1.Discharge of Contract
By Performance
According to Sec.37 of Indian
Contract Act 1872 If both parties
to the contract have performed what
they have agreed to do, the contract
is discharged.
Performance of obligation by parties
to the contract puts an end to the
contract.

e.g. in our previous example A & B had a


contract to build a fly-over. B build the flyover in the prescribed manner and A
provides the consideration to B.
Here both parties performed their
obligations & rights , what they promised
to do in the contract. Thus the contract is
come to an end by the performance.

2. By Agreement or by Consent.

According to sec. 62-64 of Indian


Contract Act 1872
A Contract can be
terminated or discharged by
mutual
express
or
implied
agreement between the parties
in any of the following ways -

A) By Novation
B) By Accord and Satisfaction
C) By Remission and Waiver
D). By Rescission.

A) By Novation
According to Sec. 62 of ICA 1872 If
the parties to a contract agree to
substitute a new contract for it , or to
rescind or alter it, the original contract
need not to be performed.
That means When a new contract is
substituted for an existing contract, either
between the same parties or b/w the
different parties novation occurs.

Novation means the wiping out of


the original contract as well as the
creating of a new valid contract.
If the new agreement is
invalid it cannot serve as novation,
and the original contract continues
unless the rights thereunder
are
expressly abandoned.

Novation may occur in two ways I. New party is substituted for the old
one.
e.g.
A owes
money to B under a
contract. It is agreed b/w A, B and C that
B shall henceforth accept C as his debater
instead of A. The old debt of A to B is at
end and a new debt from C to B has been
contracted.

II. Parties may substituted new


contract for the old one.
e.g. A owes B Rs. 10,000. A enters
into an agreement with B, and gives
B a mortgage of his (As) estate for
Rs. 5,000 in the place of the debt of
Rs. 10,000. This is a new contract
which extinguishes the old one.

Special cases.
In SCC 586, 2000(1) - Lata construction
Vs Dr. Ramesh Chandra Ramnik lal Shah,
The Honorable Supreme Court of India
stated For novation the terms of the
two contracts are consistence and can
stand
together,
only
then
the
subsequent contract is said to be the
substitution of the earlier one.

B) By Accord and Satisfaction


According to Sec. 63 of ICA 1872 Every
promise may dispense with or remit the
performance of promise made to him and
accept, instead of it, any satisfaction
which he thinks fit.
In other words When a lesser sum is
actually paid than what is due under an
existing contract, the new contract is
called accord & the actual payment is
called Satisfaction.

e.g. Ramesh has an postpaid mobile


connection of AIRTEL. A bill of his
mobile is of Rs. 1245.00, which he
seems more than the actual bill.
thus he register a complain with
AIRTEL. The AIRTEL officials offers
him to pay Rs. 1200 as a settlement.
Here Rs. 1245.00 is accord & Rs.
1200.00 is satisfaction.

Exception
In the case no. SCC 248, AIR 1992, Union
Carbide Corporation Vs. Union of INDIA,
Honorable Supreme Court ordered An illegal
contract cannot constitute an accord &
satisfaction.
As in that particular case of Bhopal Gas tragedy,
The Government of India claimed US$ 3.3 billion
from UCC. In 1989, a settlement was reached
under which UCC agreed to pay US$470 million
(the insurance sum, plus interest) in a full and
final settlement of its civil and criminal liability.
Supreme Court declare this agreement void,
because of the contract is illegal,& only 15% of
the original $3.3 billion claimed in the lawsuit &
without the consent of Bhopal Gas Tragedy Relief
and Rehabilitation Department.

C) By Remission and Waiver


Waiver means abandoning the
rights. According to Sec. 63 of ICA
1872 When a party to the contract
abandons or waiver his rights, the
contract is discharged.
e.g. A promise to paint picture for B. B
afterwards forbid him to do so. A is
no longer bound to perform the
promise.

D). By Rescission.
According to sec. 64 of ICA 1872 When
a person at whose option a contract is
voidable rescinds it, the other party
thereto need not perform his promise. He
is discharged from his liability under the
contract.
Rescission may occur by mutual consent of
the parties or when one party fails to
perform his obligation the other party may
rescind the contract. Rescission of a
contract cannot be in part only. The entire
contract must rescinded.

e.g.
1. A induces B to enter into a
contract by fraud. The contract is
voidable at the option of B. He may,
therefore, rescind the contract.

3. By Impossibility of performance.
According to sec. 64 of ICA 1872
When the performance of a contract
becomes subsequently impossible,
the contract becomes void.
It means that an agreement to do an
act impossible in itself is void.

According to sec. 23 & 24 of ICA, An


agreement becomes void, if the
consideration or object of contract or
its part of which is unlawful
As per the honorable Supreme Court
of Indias order in the SCC no. 77,
1999(5) Impossibility must be
physical or legal impossibility

e.g. A promises B to sell his horse on 1st


June, but before the day, the horse dies.
Now its impossible to fulfill the promise
due to impossibility of performance.
Such type of impossibilities in which at a
time of contract, contract was capable of
being performed, but subsequently its
performance becomes impossible is called
SUPERVENING IMPOSSIBILITY .

4. By Promisee failing to offer


facilities for performance.
According to sec. 67 of ICA 1872
If the promisee neglect or refuses to
afford the promisor reasonable
facilities for the performance of his
promise, the promisor is excused by
such neglect or refusal to any nonperformance caused thereby.

e.g. A contracts with B to repairs Bs


house. B neglect or refuse to point
out to A the places in which his
house requires repair. A is excused
for the non-performance of the
contract, if it is caused by such
neglect or refusal.

5. By Death
According to sec. 37 of Indian
contract Act 1872 Where a
contract is personal in character, or
where personal skill or ability is
involved, death of the promisor
discharge the contract.

e.g. A promises to paint a picture for


B by a certain day. A dies before the
day. The contract cannot be enforced
either by As representative or by B.

6. By Refusing tender of
performance.
According to sec. 38 of Indian contract Act
1872 If a party offers to perform his
promise and the offer has not been
accepted by the other party, the promisor
is not responsible for non-performance.
In other words refusal to accept offer of
performance, discharge the party making
the offer.

example
e.g.

7. By Unauthorised material
alteration of contract.
In cases of material alteration by one party to the
contract without the consent of the other party,
the contract is discharged.
e.g. A and B have a contract of partnership,
according to contract the profit share would be
distributed in the ratio of 50:50. Without the
consent of B, A made an alteration in the
contract and change the shares in ratio 60:40 or
introduce a new partner C.
In this case the contract get discharged & B is
free from any type of obligations & has right to
sue A.

8. Discharge by lapse of time.


Contract is discharged also by lapse of
time.
If the creditor does not file a suit to
recover his debt amount from a debtor
within a period of limitation as laid down
under the Limitation Act, his remedy is
debarred.
The contract is terminated by virtue of the
Limitation Act and the creditor cannot
recover his debt.

example
For example the period of
limitation to file a money suit is 3
years. If within 3 years the creditor
fails to file a suit to recover his
amount, the debtor is discharged.

9. By Operation of Law
A contract is discharged or
terminated by the operation of
law, in the following cases
(i) By insolvency or bankruptcy
(ii) By merger.

(i) By insolvency or bankruptcy


On a person adjudicated insolvent,
he is released from all his debts &
liabilities probable in the insolvency.
The rights and liabilities are
transferred to an Official Receiver
under the Provincial Insolvency Act.
The insolvent is discharged from all
obligations arising from all his earlier
contract.

(ii) By merger.
Merger of superior right into an inferior
right.
For example,
(1)when a higher security is accepted in
the place of the lower security. Inferior or
lower security vanishes or merge into a
higher security.
an ordinary debt is merged into a
mortgage, higher security. The right of
lessee is changed into a right of
ownership.

10. By Breach of Contract


According to sec. 39 of Indian
contract Act 1872 When a party to
a contract has refused to perform, or
disable himself from performing his
promise in its entirety, the promise
may put an end to the contract.
In other words Breach of contract
occurs where a party refuses to
perform his part of the promise.

Breach of Contract may be (i) Actual breach of contract.

(ii) Anticipatory breach of


contract.

(i) Actual breach of contract.


The actual breach occurs when during the
performance of the contract or at the time when
the performance of contract is due, one party
either fails or refuse to perform his obligation
under the contract.
e.g. A agrees to deliver to B 5 bags of sugar on 1 st
Jan., He fails to do so on 1st Jan, There is a breach
of contract by A.
In the above example, if A tenders the sugar to B
on the particular day, But B for no valid reason
refuses to accept delivery, this is a breach of
contract by B

(ii) Anticipatory breach of


contract.
When a party to contract refuse to
perform his part of the contract
before the actual time of the
performance of the contract is due, it
is called an anticipatory breach of
contract.

Anticipatory breach of contract may


be (a) By repudiation of contract
(express renunciation). or
(b) By impossibility of
performance (implied
renunciation).

(a) By repudiation of contract


(express renunciation).
when a party communicates his
inability to perform his part of the
contract before the time fixed for the
actual performance is due, he is said
to have expressly renunciation.

(b) By impossibility of performance


(implied renunciation).
When the breach take place by either
party to contract by his own
voluntary act, which makes
performance of contract, Anticipatory
breach of contract is committed by
impossibility of performance. It is a
case of implied renunciation of a
contract.

Example of anticipatory breach of


contract A promises to sell his car to be on
before 1st May, but before 1st May, A
sells his car to C. Here A had
performed such a voluntary act that
the performance of his obligation
towards B is impossible and
therefore, Anticipatory breach by
impossibility is committed.

Brief Summary
Discharge of Contract - Discharge of contract means the
termination of a contractual relationship between parties
Sr. Ways to Discharge of
Contract

Sec. of
Description
ICA 1872

1.

By Performance

Sec.37

2.

By Agreement or by Sec. 62
to 64
Consent.

If both parties to the contract


have performed what they
have agreed to do, the
contract is discharged
A Contract can be discharged
by mutual express or implied
agreement between the
parties by
A) By Novation
B) By Accord and Satisfaction
C) By Remission and Waiver
D). By Rescission.

3. By Impossibility of
performance.

Sec. 64

4. By Promisee failing
to offer facilities
for performance.

Sec. 67

5. By Death

Sec. 37

6. By Refusing tender Sec. 38


of performance.

When the performance of a


contract becomes
subsequently impossible,
the contract becomes void
If the promisee neglect or
refuses to afford the
promisor reasonable
facilities for the
performance of his
promise, contract get
discharged.
Where a contract is
personal in character, or
where personal skill or
ability is involved, death of
the promisor discharge the
contract
Refusal to accept offer of
performance, discharge
the party making the offer.

7. 7. By Unauthorised
material alteration
of contract.

8. 8.
Discharge
lapse of time.
9. 9. By Operation
Law.

by
of

10 10. By Breach of Sec.39


Contract.

material alteration by one


party to the contract without
the consent of the other
party, the contract is
discharged
Contract is discharged also by
lapse of time.
A contract is discharged by
the operation of law, in the
cases
(i) By insolvency or
bankruptcy
(ii) By merger.
Breach of contract occurs
where a party refuses to
perform his part of the
promise. Breach of contract
may be
(i) Actual breach of contract.
(ii) Anticipatory breach

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