Discharge of Contract - Discharge of Contract, Business Law | Business Law - B Com PDF Download

Introduction

A contract is a legally enforceable agreement involving two or more parties, where one party commits to doing or not doing something in exchange for consideration. The discharge of a contract refers to the termination of the contractual relationship between the parties involved. It occurs when the rights, obligations, and duties of the parties come to an end, thereby ceasing the legally binding nature of the contract. Once a contract is discharged, the parties are no longer obligated to each other, and the contract becomes void. There are various ways in which a contract can be discharged, which will be discussed in the following article.

Different Ways to End a Contract

1. Ending by Performance
This is the most common way to end a contract. A contract is considered fulfilled when both parties have done what they promised. If only one person fulfills their part, only they are released from the contract. There are two types:

• Actual Performance. Both parties must fulfill their promises unless legally prevented. If one party cannot fulfill their promise due to death or other reasons, their representatives are responsible for completing the contract.
• Attempted Performance. This occurs when the promisor offers to fulfill their part, but the promisee refuses.

2. Ending by Mutual Agreement
Both parties can agree to end the contract and create a new one, replacing the old terms. For example, if 'P' owes money to 'Q' but they agree that 'R' will pay instead, 'P' and 'Q' are released from their contract, and a new one is formed between 'R' and 'Q'.

Novation:
This involves replacing an old contract with a new one, either with the same or different parties. Conditions for novation include:

• Valid reasons for substitution
• Consent from all parties
• Substitution before contract expiration or breach

In the case of Manohur Koyal v. Thakur Das(1888), a new bond was deemed invalid because it was created after the original contract was breached.

Remission: 
Remission occurs when parties agree to accept less than what was initially promised. This can involve:

• Accepting partial performance
• Extending performance time
• Accepting different performance

For instance, if Paul owes Peter 10 lakh rupees but can only repay 6 lakh, and Peter agrees to this, the contract is discharged through remission.

Alteration:

• Alteration involves changing one or more terms of a contract, creating a new one in place of the old. All parties must consent to the changes. In the case of United India Insurance Co. Ltd v. M.K.J. Corporation(1996), the Supreme Court emphasized the need for mutual consent in contract alterations.

Rescission:

• Rescission occurs when parties agree to dissolve a contract, discharging the old agreement without forming a new one.

Waiver:

• Waiver refers to relinquishing a right specified in a contract, which can release the other party from obligations, thereby discharging the contract.

Merger:

• Merger happens when an inferior right of a party regarding a subject matter merges into a newly acquired superior right by the same party concerning the same subject matter, discharging the previous contract conferring the inferior right.

3. Discharge by lapse of time

• A contract can be terminated if the work is not finished within the agreed time frame. 
• This failure to perform may also be considered a breach of contract. 
• In such cases, the affected person can file a lawsuit in court, claiming that their rights have been violated and seeking to enforce those rights. 
• The individual whose rights were harmed has the option to start legal action under the Limitation Act, 1963. 
• For example, if A was supposed to deliver fresh fruits to B's store within two days, but due to A's negligence, the delivery was made two weeks late, the contract would be considered terminated since the promised performance wasn't completed on time. 

4. Discharge by operation of law

• This way of ending a contract does not allow the promise in the contract to be fulfilled according to the law.
• Events like death, bankruptcy, and mergers make it impossible to keep the promise.
• As a result, these situations lead to the termination of the contract.

5. Discharge by supervening impossibility

The discharge of a contract due to supervening impossibility refers to situations where a contract can no longer be performed or has become illegal. In such cases, the contract is considered void. 

This concept is often referred to as the doctrine of frustration. Frustration happens when it becomes clear that, due to changes in circumstances, the contract is impossible to fulfill or has lost its original purpose. 

Here are some ways in which this can occur: 

• If the subject matter of the contract is destroyed, the contract will be considered discharged, and neither party will be held responsible. 
• A contract will be void if fulfilling the promise outlined in it becomes unlawful. 
• The contract can also be discharged if one of the parties dies or becomes incapacitated. 
• Changes in the circumstances around a contract can lead to its discharge as well. 

6. Discharge by breach

• When one party in a contract refuses or fails to do what they promised, or if they make it impossible to fulfill their promise by their actions, the contract is considered discharged by breach. 
• A contract can be ended through an actual breach or an anticipatory breach. 
• An actual breach occurs when a party fails to meet their obligations on the agreed date. 
• An anticipatory breach happens when a party does not perform their duties before the deadline. 

Suit for Specific Performance

In situations where the damage or loss incurred cannot be quantified in monetary terms, the court may direct the defaulting party to perform the contract specifically. This remedy is applicable when the ordinary remedy of claiming damages is insufficient compensation. It is important to note that this is a discretionary remedy.

The court may order discretionary remedy in the following instances:

• When the act itself is such that monetary compensation for its non-performance is inadequate.
• When it is unlikely that monetary compensation will be available.
• When there is no standard available to determine the value of the actual harm caused by non-performance.

Legal Action for Quantum Meruit

Quantum meruit, in legal terms, refers to "payment in proportion to the work done." It signifies that an individual can seek compensation based on the amount of work or service they have provided. This concept is considered a quasi-contractual remedy.

Claims for quantum meruit typically arise in the following situations:

• Partial Contract Performance: When one party fulfills a portion of the contract, but the other party breaches it, the injured party can claim compensation for the work or service rendered.
• Non-Gratuitous Actions: When a task is performed without the expectation of payment.
• Void Contracts: If work is done and accepted under a contract that is later found to be void, the person who performed part of the contract is entitled to recover payment for the work completed.

Exceptional Cases When a Contract is Not Discharged

The doctrine of frustration or supervening impossibility does not apply in the following situations:

• Difficulty in Performance: When a situation arises that makes the performance of a specific promise in the contract very difficult, the contract is not discharged. While the promise may be challenging to fulfill, the contract remainsBinding.
• Commercial Hardships: If commercial hardships make the contract unprofitable, it does not discharge the contract. The parties are still obligated to fulfill their obligations.
• Disruptions: Events such as strikes, lock-outs, civil disturbances, and riots do not discharge the contract unless there is a specific clause in the contract allowing for termination in such events.
• Self-Induced Incapacity: Contract is not discharged due to the self-induced incapacity of the parties involved. If a party creates their own inability to perform, it does not release them from the contract.
• Reliance on Third Parties: If the performance of a contract depends on a third party, the contract is not discharged due to the failure or default of that third party. The parties are still obligated to fulfill their responsibilities.

Discharge of Contract: Meaning and Implications

• Discharge of Contract refers to the situation where the parties involved in a contract have successfully fulfilled and performed all the obligations as per the terms negotiated in the contract.
• This is considered the ideal outcome, as it signifies that both parties have met their responsibilities and completed the agreed-upon duties.

Rescission of Contract: When Fraud is Involved

• Rescission of a contract occurs when one party is defrauded during the formation of the contract.
• Fraud can take various forms, such as intentional deception, misrepresentation of facts, or material omission.
• Regardless of the type of fraud, the defrauded party has the right to terminate the contract without facing any consequences.
• Rescission allows the defrauded party to void the contract due to the fraudulent circumstances under which it was formed.

Termination of Contract: Discharge vs. Rescission

• A contract can be terminated either by discharge or rescission.
• However, there may be specific circumstances outlined in the contract that allow for termination even if all duties and obligations have not been fulfilled.
• Additionally, a contract can sometimes be terminated due to a change in circumstances that makes fulfillment impossible.

Conclusion

In simple terms, the discharge of a contract means that the agreement between the parties comes to an end because they have fulfilled all the obligations and duties specified in the contract. Once this happens, the parties are no longer bound by the terms of the contract. While there are various ways to discharge a contract, the most preferable method is by performing the promise within the agreed-upon timeframe. This is because the other modes of discharge, such as breach or frustration, can lead to unpleasant consequences and damages.