Discharge Of Contract

Discharge of Contract refers to the termination of contractual obligations between parties. When a contract is discharged, it releases all parties from their duties as outlined in the agreement. But what is the discharge of contract exactly? Simply put, it means that the contract has come to an end either by performance, agreement, impossibility, or breach. There are several methods of discharge of contract, such as performance of the contract, mutual consent, frustration, or breach. Understanding these methods is crucial as they lead to different legal consequences of discharge of contract, which can include remedies for breach or damages.

In this article on discharge of contract, we will dive into what it truly means to discharge a contract, explore the different modes of discharge of contract, and uncover the legal consequences that arise when a contract is brought to an end.

What is the Discharge of Contract?

Discharge of contract refers to the termination of the contractual relationship between parties, releasing them from any further legal obligations under the agreement. Contracts can be discharged in several ways, including by performance, agreement, frustration, or breach. Each method carries its own legal implications, making it essential for individuals and businesses to understand how to effectively manage and conclude their contracts.

The Indian Contract Act, 1872 (hereinafter referred to as “The Act”) is the primary legislation that governs the creation, execution, and discharge of contracts in India. Contracts form the foundation of most legal transactions, both in personal and business affairs.

Methods of Discharge of Contract

The different methods by which a contract can be discharged are as follows:

Discharge By Performance (Sections 37-39)

The Performance of a Contract is the most frequent mode of discharge. A Contract is said to be discharged when parties to the Contract perform their various obligations in accordance with the terms of the Contract. Section 37 of the Act requires that parties to a Contract should perform or offer to perform their obligations unless the performance is Excused or waived in accordance with the Act.

Once the parties entirely perform the Contract, the Contract is discharged and there remains no obligation thereafter. Non-Completion or Improper performance may give rise to a Breach of Contract.

Performance can be of two kinds:

• Actual Performance: When the Parties to a Contract Perform their respective promises, the said Contract is discharged by Actual Performance.
• Attempting Performance: When one party is ready or willing to perform, and the other party refuses to accept, the Contract stands discharged by attempted performance. However, the offer must be made as per the Terms of the Contract. For under Section 38, a Valid Tender, when refused, may be treated as performance. The party who made such a tender will be discharged from his performance. The refusing party can be liable for Breach of Contract.

Valid performance of the Contract must meet various conditions. The performance should be in conformance with the terms of the Contract. Where the performance is not in accordance with the Terms of the Contract, the performance may not be valid, which could amount to a breach of Contract.

Discharge By Agreement Or Consent (Sections 62-67)

Parties to a Contract may mutually agree to discharge the Contract. Section 62 of the Act provides that a Contract may be Novated, Rescinded, or Altered by Mutual Agreement:

• Novation: Novation Occurs when a new Contract takes the place of an old Contract between the same or different parties in which one party replaces another Priginal Party. Thus, the old Contract gets discharged and gets replaced by a New Contract. There should be consent on the novation by all parties, including the New Party. When novation occurs, the Original Contract stands void, and the New Contract takes precedence over rights and liabilities.
• Rescission: A Contract is said to be Rscinded when there is a mutual cancellation of the Contract between Parties. This, in effect, places the parties in their respective positions before entering into the Contract as if no such Contract had ever existed. Upon rescission of a Contract, the Rights and Obligations arising under the Contract are Extinguished.
• Alteration: It is also known as the Amendment, which changes the terms of the Contract by Mutual Agreement. It could include Modification, Addition, or Deletion of the terms in a Contract while Retaining the Contract Intact. In case of Alteration, the old Contract continues to exist with Amended Terms. Any changes will be legally binding between the parties. These changes must be mutually agreed upon by them.

These methods allow the parties to vary or bring their Contractual Obligations to an end in a manner that suits their changed circumstances.

Discharge By Impossibility Or Frustration (Section 56)

Section 56 of the Indian Contract Act embodies the Rule of Frustration. Under this section, a Contract may be Frustrated owing to the impossibility of Achievement of an Act. A Contract having a possibility element or subject to an original possibility factor is void if it appears that the act to be performed has, after the contract is made and before the performance under the contract becomes due, become impossible or unlawful, or unless the impossibility or unlawfulness of the Act was not Excluded by the Contract from the possibility of such an event happening. The Impossibility should be:

• Initial Impossibility: If the Performance of a Contract is Impossible, or Unlawful at the time, then the Contract is said to be made, the Contract will be void ab initio (void from the beginning).
• Subsequent Impossibility: If the performance of a Contract is Impossible, or Unlawful after the Contract was made, the Contract will become Void after the Act becomes Void.

Frustration ipso facto discharges the contract without any action on the part of the parties. Because the fulfillment of the Contract becomes impossible. Natural calamities, changes in law, and death or incapacity of parties are a few examples where frustration of contract may occur.

Legal Principles Governing Frustration are as under:

• Impossibility: The event should make the performance of the Contract Impossible, not just more difficult or expensive.
• Unforeseen Events: The Frustration event has to be Sudden and Unexpected, not caused by either party's fault.
• Fundamental Change: There must have taken place a Radical change in the Contract due to the change in the event.
• Self-Induced Frustration: If the frustration of the Contract is brought about by a party, then the doctrine does not apply, and the party can be held liable.

Results Of Force Majeure clauses

The force Majeure Clause is a kind of clause excusing performance in cases where extraordinary events or circumstances beyond the parties' control prevent one or both parties from performing. Where a force majeure clause is available in a Contract, the parties may be excused from their performance without necessarily invoking the Doctrine of Frustration. Here, the specific events that are likely to Trigger the Application of the clause are usually listed. Events here include Natural Catastrophes, War, or Pandemics, etc.

Discharge By Breach Of Contract (Sections 39, 73-75)

The Contract may also be discharged in the event of a breach. Where the parties stand in failure in relation to the performance of the Liabilities described by that given Contract, the Contract is said to be breached. As described under Section 39 of the Act, when a party to a contract altogether refuses, or disables himself from Performing, his promise, the opposite party may Rescind the Contract. A breach can be:

• Actual Breach: It means when a party fails to perform the Contract at the time performance is due.
• Anticipatory Breach: It occurs when a party, before the due date of performance, declares his intention not to perform his obligation. The other party can either treat the contract as discharged immediately or wait until the Actual Breach Occurs.
• Minor (partial) Breach: It occurs when one of the parties to a Contract does not perform a small part of their Contractual Obligations - the Contract can continue but the other party may be entitled to damages.

Remedies Available For Breach Of A Contract

The following remedies are available to a party for Breach of Contract Committed by the other party:

• Damages: Damages provides for payment of Monetary Compensation which is awarded to the party who has suffered from that breach. It can include Compensatory Damages, Special Damages, Punitive Damages, Nominal Damages and Liquidated Damages.
• Specific Performance: The Court can direct the defaulting party to carry out the performance as agreed to in the contract.
• Injunction: A Court directs a party not to do something because doing so will amount to a breach of contract.
• Rescission: The rescission of a contract makes the contract void and, therefore releases the parties of the contractual agreement. This places the parties to the contract to their pre-contract status.
• Restitution: Restitution requires returning any benefit or goods traded due to the contract to prevent any party from being unfairly enriched. If one party paid for goods never received, then that party would need to have the payment returned in restitution.

Discharge By Operation of Law

"Operation of law" refers to the circumstances under which a contract is said to be discharged automatically without the need for action on the part of the parties to the contract, owing to some particular legal events. It encompasses the following:

Illegality

A contract is discharged by illegality when the subject matter or purpose of the contract becomes illegal due to changes in the law or other legal prohibitions. The Contract becomes void, and the parties are discharged from their obligations. Neither party can sue for breach of contract in such cases. A contract to sell a product becomes illegal if a new law bans that product.

Discharge Due To Insolvency Or Bankruptcy

A person or organisation is said to be insolvent if they are unable to pay their various debts when and as due. If a party to a Contract becomes Insolvent, then the Contract is Discharged, based on the terms of the Contract and the Insolvency Law. The other party may be forced to file any claim against the Insolvent Party in the Insolvency matter for a debt to recover. In the case of an Insolvent Supplier, Inability to fulfil delivery requirements precipitates discharge of the Contract.

Discharge Because Of Change In Law

Sometimes, after a Contract has been created, changes in the law make performance illegal or it may have a fundamental change in Rights and obligations of parties. Where a new law makes the performance of a contract illegal, then the contract will be discharged. If a law basically alters the Nature of the Contract or the performance of it is impossible, then the Contract might also be discharged.

Examples of change in law can be:

• New Rules: A contract may be regarded as discharged in case new regulations prohibit the exportation of goods to a Foreign Country.
• Tax Laws: With changes in Tax Laws, the financial implications may change, and if these changes make the Original Contract Terms no Longer Viable, either a Renegotiation or Discharge would be in order.

The operation of law can discharge Contracts either through Impossibility, illegality, Insolvency, Bankruptcy, or Changes in the Law. These are some of the important mechanisms in limiting parties from having to perform on an Unfair Contract when circumstances beyond their control occur.

Discharge By Accord And Satisfaction

Accord and satisfaction refer to the discharge of a Contract whereby parties agree to accept something different, usually less than what was agreed upon. The "Accord" is the new agreement, while "Satisfaction" refers to its execution.

Accord and satisfaction discharge the original obligation. Where there is an accord and subsequently satisfaction, the original contract is considered to be entirely discharged. In case of failure of performance of the accord, the original contract can be enforced.

Legal Consequences Of Discharge Of Contract

The discharge of a contract leads to several legal consequences for the parties of the contract. Generally, it includes the following:

• Discharge Of Obligation: Discharge of the contract discharges the parties from continuing their obligations as provided by the Act.
• Remedies for breach: In cases where the contract stands discharged due to the breach committed by one of the parties, the other party is entitled for a remedy for that breach.
• Restitution: Where the contract becomes discharged and another party might have the right to restitution if there is any benefit conferred upon him under the contract. Additionally, restitution takes place where one party has received some benefit under the contract. The party receiving the benefit has to return it to the other party.
• Litigation: A dispute regarding the proper discharge of the contract might lead to potential litigation between the parties.

In order to protect the rights and liabilities of the parties, it is important for them to understand these implications.

Conclusion

To sum up, the Act provides for Several ways for the discharge of a Contract. It includes performance of the Contract, mutual agreement to discharge the Contract, Impossibility to perform the Contract, Breach of the Contract, and change in law. The Changes in the Act and Judicial Interpretation related to the relevant provision will be important to make the Act relevant and effective for Governing the Contract.

FAQ

Q1. What is Section 37 of the Indian Contract Act?

Section 37 of the Indian Contract Act, 1872, outlines the obligations of parties to a contract. It states that the parties to a contract must perform their respective promises, unless such performance is dispensed with or excused under the provisions of the Act. This section emphasizes the necessity of fulfilling contractual obligations as a primary duty of the contracting parties.

Q2.what is discharge by breach of contract

Discharge by breach of contract occurs when one party fails to perform their contractual obligations, thereby releasing the other party from their obligations under the contract. A breach can be either minor or material, but if it is material, it gives the non-breaching party the right to terminate the contract and seek damages for any loss incurred due to the breach.

Q3.What are the common ways through which a contract can be discharged?

A contract can be discharged in several ways, including:

Performance: When both parties fulfill their contractual obligations.
Mutual Agreement: When both parties agree to terminate the contract.
Breach: When one party fails to perform their obligations.
Frustration: When unforeseen events make performance impossible.
Impossibility of Performance: When the obligations cannot be performed due to circumstances beyond control.
Operation of Law: Discharge can occur due to legal provisions, such as insolvency or the expiration of the contract's term.

Q4.What are the exceptions where the contract will not be discharged?

Some exceptions where a contract will not be discharged include:

Substantial Performance: If a party has substantially performed their obligations, the contract may not be discharged.
Waiver of Breach: If a non-breaching party waives their right to enforce a breach, the contract remains in force.
Agreed Variations: If the parties agree to variations in the contract terms, the original contract remains in effect unless terminated.
Estoppel: A party may be prevented from denying the validity of a contract due to their prior conduct.

Q5. Can parties mutually agree to discharge a contract?

Yes, parties can mutually agree to discharge a contract. This is often done through a formal agreement, where both parties consent to terminate the contract. Such mutual discharge can take place at any point before the obligations are fully performed, provided it complies with legal requirements and does not contravene any statutory provisions.

Q6. What are the sections of discharge a contract?

The discharge of contracts is primarily covered under various sections of the Indian Contract Act, 1872, including:

Section 37: Obligations of the parties to perform their respective promises.
Section 39: Consequences of the breach of contract.
Section 62: When a contract can be discharged by mutual agreement.
Section 75: Compensation for loss or damage caused by the breach of contract.
Section 56: Discharge by impossibility of performance.

About The Author:

Adv. Rajeev Kumar Ranjan, practicing since 2002, is a renowned legal expert in Arbitration, Mediation, Corporate, Banking, Civil, Criminal, and Intellectual Property Law, along with Foreign Investment, Mergers & Acquisitions. He advises a diverse clientele, including corporations, PSUs, and the Union of India. As founder of Ranjan & Company, Advocates & Legal Consultants, and International Law Firm LLP, he brings over 22 years of experience across the Supreme Court of India, High Courts, tribunals, and forums. With offices in Delhi, Mumbai, Patna, and Kolkata, his firms provide specialized legal solutions. Adv. Ranjan is also Government Counsel in the Supreme Court and has earned numerous national and international awards for his expertise and dedication to clients.