Introduction
The discharge of a contract refers to the termination of legal obligations between parties, as stipulated in the Indian Contract Act, of 1872. Understanding the various modes of discharge is crucial for ensuring legal compliance and managing contractual relationships effectively. This guide explores the six primary modes through which contracts can be legally terminated.
What is the Discharge of Contract?
Discharge of contract means terminating contractual obligations, effectively ending the legal agreement between parties. This can happen due to various reasons, such as performance, mutual agreement, impossibility, operation of law, lapse of time, or breach.
Also Read: Void Agreements in Indian Contract
Modes of Discharge of Contract
The Indian Contract Act, of 1872, outlines several modes through which a contract can be discharged:
1. Discharge by Performance
Discharge by performance happens when the contracting parties fulfil their contractual obligations, thereby ending the contract.
Actual Performance
This occurs when both parties fulfil all their obligations as agreed, leading to the natural conclusion of the contract. For example, in a sales agreement, once the buyer pays the full amount and the seller delivers the goods, the contract is discharged by actual performance.
Attempted Performance
This takes place when one party makes an effort to fulfil their contractual obligations but is prevented from doing so by the other party. Despite the effort, the contract can still be discharged if the attempt is genuine and reasonable. For example, if a painter arrives to paint a house but is denied access by the homeowner, the contract may be discharged by attempted performance.
2. Discharge by Mutual Agreement
Contracts can be discharged when both parties agree to terminate or modify the terms.
Novation
This involves replacing the old contract with a new one, either between the same parties or including a third party. For instance, if Company A owes money to Company B, and all parties agree that Company C will take over the debt, the original contract is discharged by novation.
Rescission
This is the mutual cancellation of the contract. If both parties decide to abandon the contract, it is rescinded and all obligations cease. An example is if a tenant and landlord mutually agree to terminate the lease before its end date.
Alteration
This occurs when the terms of the contract are changed with mutual consent. Alteration leads to the discharge of the original contract and the creation of a new one. For example, changing the delivery date of goods in a sales contract.
Remission
This is the acceptance of a lesser performance than what was originally agreed upon. For instance, if a creditor accepts a reduced payment from a debtor, the contract is discharged by remission.
Waiver
This is the voluntary relinquishment of a known right. If a party decides not to enforce a part of the contract, it is discharged to that extent. For example, a landlord may waive the late fee for rent if the tenant faces unforeseen circumstances.
Merger
This happens when inferior and superior rights coincide in one person, resulting in the extinguishment of the inferior right. For instance, if a tenant buys the leased property, the lease agreement merges with ownership, discharging the contract.
Accord and Satisfaction
This involves accepting a different performance than what was originally agreed upon. Accord is the agreement to accept the new performance, and satisfaction is the execution of that agreement. For example, a creditor may accept goods instead of cash to settle a debt.
3. Discharge by Impossibility of Performance
A contract can be discharged if it becomes impossible to perform due to unforeseen circumstances.
Destruction of Subject Matter
If the specific subject matter of the contract is destroyed, the contract is discharged. For example, if a car is destroyed before it can be delivered under a sales contract.
Change of Law
If a change in law renders the performance of the contract illegal, it is discharged. For instance, a ban on a particular product after a contract for its sale has been made.
Non-existence of Circumstances
If the circumstances essential to the performance of the contract no longer exist, the contract is discharged. For example, if a concert is cancelled due to a natural disaster.
Incompetent Person
If one of the parties becomes legally incompetent to perform the contract, it is discharged. For instance, if a party is declared bankrupt or mentally incapacitated.
Declaration of War
If war is declared and it impacts the performance of the contract, it is discharged. For example, an export contract may be discharged if war breaks out between the involved countries.
4. Discharge by Operation of Law
Certain legal events can discharge a contract automatically.
Death
If the contract involves personal skills or services, the death of a party will discharge the contract. For example, a contract with an artist to paint a portrait is discharged if the artist dies.
Insolvency
If one party is declared insolvent, their contractual obligations are discharged. For instance, a supplier declared bankrupt is discharged from delivery obligations.
Merger
When a lower right merges with a higher right in one person, the lower right is discharged. For example, a person who was a tenant buying the property they rented.
Alteration
If one party unilaterally alters the terms of the contract without the consent of the other, the contract is discharged. For instance, changing the payment terms without agreement from the other party.
5. Discharge by Lapse of Time
A contract can be discharged if the stipulated time for performance lapses.
When a contract specifies a time within which obligations must be performed, and the parties fail to act within this time, the contract is discharged. For example, if a contractor does not start work by the agreed date, the contract may be discharged by lapse of time.
6. Discharge by Breach of Contract
A breach occurs when one party fails to fulfil their obligations, leading to the discharge of the contract.
Actual Breach
This happens when a party fails to perform their obligations on the due date. For instance, if a supplier fails to deliver goods on the agreed date.
Anticipatory Breach
This occurs when one party indicates they will not perform their obligations before the due date. For example, if a contractor informs the client that they will not be able to complete the project before the deadline.
Conclusion
Understanding the modes of discharge of contract, as provided by the Indian Contract Act, of 1872, is essential for managing contractual obligations effectively. While discharge by performance is the most straightforward and preferred method, other modes like mutual agreement and impossibility provide flexibility. However, discharge by a breach is generally unfavourable and can lead to legal disputes and damages.
Also Read: Limits of Contractual Obligations