Discharge of a Contract under Indian Contract Act | Law Optional Notes for UPSC PDF Download

Introduction

A contract is considered discharged when the obligations outlined in it reach a conclusion, signifying the end of the rights and responsibilities established by the agreement. Put simply, the discharge of a contract refers to the 'termination of the contractual bond between the involved parties.'

Discharge of Contract

A contract can be discharged through various means:

• Performance: This occurs when both parties fulfill their respective obligations as specified in the contract. For instance, when a construction company completes building a house according to the agreed-upon specifications and the client pays the stipulated amount.
• Agreement or Consent: The involved parties may mutually agree to terminate the contract, releasing each other from their contractual duties. An example could be two businesses deciding to end a partnership due to changing market conditions.
• Impossibility of Performance: If circumstances arise that render it impossible to fulfill the terms of the contract, such as a natural disaster destroying the subject matter of the agreement, the contract may be discharged due to impossibility of performance.
• Lapse of Time: When the time period specified in the contract for performance expires, the contract is considered discharged due to the lapse of time. For instance, a contract for a one-year service that ends after the completion of the year.
• Operation of Law: Certain legal events or regulations may lead to the automatic discharge of a contract by operation of law. An example is the bankruptcy of one of the parties, which can result in the automatic termination of certain contracts.
• Breach of Contract: If one party fails to fulfill their obligations without a valid reason, it constitutes a breach of contract. The non-breaching party may choose to terminate the contract due to the breach. For example, a vendor failing to deliver goods as per the agreed-upon schedule.

Discharge of Contract by Performance

When both parties fulfill their respective promises in a contract, it leads to the discharge of the contract. This is considered as the most common way for a contract to end.

Types of Performance

• Actual Performance: This occurs when all involved parties carry out the promises they agreed upon in the contract.
• Attempted Performance (Tender or Offer of Performance): In this scenario, the promisor tries to fulfill their promise, but the promisee rejects the performance.
• Performance of Contract by Joint Promisors: Joint promises can take different forms:
  i. When multiple joint promisors jointly promise to fulfill a single promise. For example, A, B, and C jointly promise to pay Rs. 5,000 to D.
  ii. When a single promisor makes a promise with multiple joint promisees. For instance, A promises to pay Rs. 5,000 to both B and C jointly.
  iii. When several joint promisors make a promise with several joint promisees. For example, A, B, and C jointly promise to pay Rs. 3,000 to P, Q, and R jointly.

It's important to note that the performance of a contract by joint promisors can take various forms, depending on the specifics of the promises made by the parties involved.

Discharge of Contract by Agreement or Consent

Novation

• Novation involves replacing an existing contract with a new one, where parties may change, and if not, the material terms of the contract must be altered in the new contract to constitute novation.
• Example: If A owes B and B owes C, and by mutual agreement, B's debt to C and B's loan to A are canceled, with G accepting A as the debtor, this represents novation involving a change of parties.

Alteration

• Alteration occurs when one or more terms of the contract are changed, leading to the discharge of the original contract if a material alteration is made with the consent of all parties.
• Example: A agrees to supply 1000 kgs of salt to B at Rs.50/kg within 3 months. Later, they agree to alter the contract to 800 kgs of salt at the same rate within 2 months, thereby ending the original agreement.

Rescission

• Rescission refers to the cancellation of a contract by mutual consent before it is discharged by performance, releasing parties from their obligations.
• Example: If A promised to deliver goods to B on a certain date but both parties agree before the deadline that the contract will not be fulfilled, they have rescinded the contract.

Remission

• Remission involves accepting a lesser sum than what was originally due from the promisor, allowing the party with the right to demand performance to remit or extend the time for performance.
• Example: If A owes B Rs.5,000 and pays B Rs.2,000 which B accepts as full payment, the entire debt is discharged through remission.

Principle of Accord and Satisfaction

• An accord and satisfaction is a legal concept where two parties agree to settle a contract, tort, claim, or liability for an amount different from the original.
• It involves creating a new agreement that supersedes the terms of the original one, leading to the discharge of prior claims.
• The accord refers to the agreement on new terms, while satisfaction pertains to fulfilling those terms as agreed upon.

Accord and Satisfaction in Debt Obligations

• Accord and satisfaction commonly applies to resolving debt obligations through negotiations.
• For instance, in the case of Snow View Properties Ltd v Sindh and Punjab Bank, a property owner negotiated with a bank to settle a loan by paying a specific amount in exchange for the property held as collateral.

Example:

• Consider a scenario where a builder agreed to construct a garage for Rs.50,000 but faced disputes over quality with the homeowner.
• After mutual agreement, the homeowner paid Rs.10,000 as final settlement, which was accepted by the builder, forming a new contract based on offer, acceptance, and consideration.

Benefits of Accord and Satisfaction

• Accord and satisfaction serves as a compromise beneficial to both parties when the original contract terms cannot be met.
• It allows the creditor to receive partial payment while releasing the debtor from the full obligation, promoting a fair resolution.

Discharge of Contract by Impossibility of Performance

• Initial Impossibility: As per Section 56, any agreement to do an impossible act is void from the beginning. This implies that an agreement that is obviously impossible cannot be binding. For example, an agreement to find treasure using magic would be considered void.
• Subsequent Impossibility: Sometimes, a contract that was initially capable of being performed becomes impossible or unlawful after its formation, leading to its voidance.
• In contract law, the concept of discharge by impossibility of performance serves as a crucial ground for releasing parties from their contractual obligations. 

Let's delve into this topic in detail:

Initial Impossibility

According to Section 56, any agreement that entails an impossible act is deemed void from the outset. This essentially means that agreements that are evidently impossible to execute cannot hold legal validity. For instance, an agreement to unearth treasure through magical means would be considered null and void.

Subsequent Impossibility

In certain scenarios, a contract that was initially feasible to perform may later become impracticable or illegal, resulting in its invalidation. Understanding these distinctions is vital in comprehending how contracts can be discharged due to impossibility of performance.

Doctrine of Frustration

• When a contract becomes impossible to perform, it is considered frustrated according to Section 56 of the Indian Contract Act, 1872.
• Impossibility can arise at the time of agreement or due to supervening impossibility or illegality.

Destruction of Subject-matter

• If the subject matter of a contract is destroyed without the fault of the promisor or promisee, the contract is discharged.
• For instance, if a banquet hall rented for a party is destroyed by fire before the event, the contract becomes void.

Death or Personal Incapacity

• Contracts depending on personal skill or qualification are discharged if the necessary person dies or becomes incapacitated.
• For example, if a performance contract is disrupted by the illness or death of a key person, the contract is void.

Change of Law

• Contracts that become illegal due to a change in the law are considered impossible to perform and are discharged.
• In a case where prices escalate significantly due to external factors like war, making performance impossible, the contract is frustrated.

Declaration of War

• Contracts with alien enemies during war are void, while contracts made before the war are usually suspended during wartime.
• After the war ends, these contracts might be revived if the nature of the contract allows.

Discharge of Contract by Lapse of Time:

• A contract comes to an end due to the expiration of a specified period for its performance as per the Limitation Act, 1908.
• When the contract is not fulfilled within the stipulated time frame, and the promisee does not take legal action within the period of limitation, the contract is considered terminated.
• Example: A situation where A owes Rs.10,000 to B. The deadline for repayment has passed, and B refrains from filing a lawsuit against A for three years. In this scenario, B forfeits the right to reclaim the money.

Discharge of Contract by Operation of Law

Insolvency

• Insolvency leads to the termination of contracts under specific circumstances as outlined in the Insolvency Act. When a person is declared insolvent by the court, their rights and duties are transferred to the court-appointed officer, known as the Official Receiver. Subsequently, the individual is released from liabilities incurred before their insolvency.
• Example: A promises to sell his house to B for Rs.10 lakhs. Prior to fulfilling the contract, A is declared insolvent by the court, resulting in the discharge of the contract between A and B.

Merger

• Merger occurs when a lesser right held by a party is integrated into a superior right held by the same party under a different contract. This integration automatically nullifies the previous contract.
• Example: A was initially a part-time lecturer at Mumbai University. Later, he was appointed as a full-time lecturer. Consequently, the contract for part-time lecturing is discharged due to the merger of roles.

Unauthorized Material Alteration

• Unauthorized material alteration refers to a situation where one party to the contract makes significant changes to the contract without the consent of the other party. In such cases, the affected party has the right to void the contract. A material alteration fundamentally changes the legal essence or character of the contract or the rights and obligations of the involved parties. Unauthorized alterations can render the contract invalid, while authorized or immaterial alterations do not impact the contract's validity. If a stranger makes an alteration, the affected party can still void the contract. However, unintentional alterations do not provide grounds for contract avoidance.
• Example: A issues a promissory note to B for Rs.3,000. B alters the amount to Rs.30,000 without A's consent. In this scenario, A can refuse to pay the altered amount of Rs.30,000.

Discharge of Contract by Breach

A breach of contract occurs when a party refuses to fulfill their obligations under the contract, either by explicitly renouncing their liability, making performance impossible, or failing to perform part or all of the contract.

Breaches of contract can be categorized into two types:

• Actual Breach: This type occurs during the performance or at the specified time of performance. Example: If A agrees to deliver 10 bags of rice on September 10 but fails to do so, it constitutes an actual breach of contract.
• Anticipatory Breach: This occurs when a party indicates their unwillingness to fulfill their obligations before the performance deadline arrives.
• Express Breach: When a party explicitly communicates their intention not to perform the contract before the due date. Example: A contract to supply wheat to B on March 1 for Rs.10,000, but on February 15, A informs B of their inability to supply the wheat, constituting an express breach.
• Implied Breach: When a party's actions make it impossible to perform the contract. Example: A promises to sell his horse to B on March 1 but sells it to C before that date, leading to an implied breach.

In the case of Fazal Ilahi v. East Indian Railway Co., the plaintiff sent boxes of crackers to the defendant railway company at Kanpur for consignment to Allahabad, required for a festival. However, due to delayed delivery, the crackers reached after the festival, leading to a dispute over claimed profits.

Conclusion

• Discharge in the Law of Contracts often leads to confusion due to the misunderstanding of terms like condition and warranty. The primary and ideal method for discharging a contract is through performance, where both parties fulfill all contract terms before its conclusion. In contrast, discharge by breach is a less favorable way to end a contract, often resulting in damages. 
• Performance-based discharge involves both parties fulfilling their obligations as outlined in the contract. For example, in a contract for the sale of goods, the seller delivers the goods, and the buyer pays the agreed-upon price. 
• Discharge by breach occurs when one party fails to fulfill their obligations under the contract. For instance, if a contractor fails to complete a construction project according to the agreed specifications, it could lead to discharge by breach. This type of discharge can result in legal consequences, such as the payment of damages to the non-breaching party.