What is Discharge of Contract? Modes: Performance, Mutual

What is Discharge of Contract?

Discharge of contract means the termination of a contractual relationship between parties. A contract is said to be discharged when it ceases to operate, i.e. when the rights & obligations created by it come to an end.

Discharge of Contract Meaning

Discharge of a contract means termination of contractual relation between the parties to a contract.

Modes of Discharge of Contract

The contract may be discharged in the following six modes of discharge of contract discussed as follows:

1. Discharge by performance
2. Discharge by mutual consent or agreement
3. Discharge by impossibility of performance
4. Discharge of a contract by lapse of time
5. Discharge of a contract by operation of law
6. Discharge by breach of contract

Discharge by performance

Performance of a contract is the principal and most usual mode of discharge of a contract.

Discharge by performance may be:

1. Actual performance
2. Attempted performance or a tender

Actual Performance

Actual performance means the parties to a contract have performed their respective promises under the contract.

Attempted Performance or a Tender

Attempted performance or a tender means the promisor has made an

Discharge by Mutual Consent or agreement

A contract can be discharged by mutual agreement in any of the following ways.

1. Novation
2. Alteration
3. Remission
4. Merger

Novation

The term novation implies the substitution of a new contract for the original one.

Example: A owed Rs 100 to B, under contract. B owned Rs 100 to C. It was agreed among A, B and C that A would pay Rs 100 to C.

Alteration

It refers to a change in one or more of the terms of a contract with the consent of all the contracting parties.

Example: A agreed with B to supply 100 TV sets at a certain price by the end of October. Subsequently, ‘A’ and ‘B’ mutually agree that the supply can be made by the end of November. This is an alteration in the terms of the contract by consent of both the parties.

Remission

Remission means the acceptance (by the promisee) of a lesser sum than what was contracted for, or a lesser fulfilment of the promise made.

Example: A owes B Rs 5,000. A pays Rs 2,000 to B and B accepts the amount in satisfaction of the whole debt. The whole debt is discharged.

Merger

The conversion of the inferior right into the superior right is called a merger. It is also called as the vesting of rights and liabilities in the same person.

Example: A person holds property under lease, purchases the property. On purchase, his lease agreement is discharged.

Discharge by Impossibility of Performance

Sometimes after a contract has been established, something might occur, though not at the fault of either party, which can render the contract impossible to perform, or illegal, or radically different from that originally undertaken, which leads to discharge of contract.

The impossibility of performance may be of two:

1. Initial impossibility
2. Supervening impossibility

Initial impossibility

Initial impossibility or Pre-contractual impossibility: It means impossibility exists at the time of making a contract.

The initial impossibility may be:

• Known or
• Unknown to the parties at the time of making the agreement.

Supervening impossibility

Supervening impossibility or Post-contractual impossibility: The contract becomes void on account of the subsequent impossibility only if the following conditions are satisfied:

• The act should have become impossible after the formation of the contract.
• The impossibility should have been caused by a reason of some event which was beyond the control of the promissory.
• The impossibility must not be the result of some act or negligence of the promisor himself.

Discharge of a contract by lapse of time

Every contract and promise under the contract should be performed within a time limit. The contract is discharged if it is not performed or enforced within a specified period called the period of limitation.

Example: The period of limitation for recovering the debt is 3 years and 12 years for the recovery of immovable property.

Discharge of a contract by operation of law

In the following circumstances, the discharge of contract by the operation of law.

• Unauthorized material alteration of a written document
• Death
• Merger
• Insolvency

Unauthorized material alteration of a written document

A party can treat a contract discharged (i.e., from his side) if the other party alters a term (such as quantity or price) of the contract without seeking the consent of the former.

Death

The contract that requires personal skill is discharged on the death of the promisors. However, any benefit received before the performance shall be returned by the legal representative of the deceased party.

Merger

The conversion of the inferior right into the superior right is called a merger. It is also called as the vesting of rights and liabilities in the same person.

Insolvency

The insolvent is discharged from all the liabilities on all the contracts, entered into, up to the date of insolvency.

Discharge by breach of contract

Breach occurs where one party to a contract fails to perform its contractual obligations, or the performance is defective, which leads to a discharge of contract.

A Breach may be:

1. Anticipatory
2. Actual breach

Anticipatory

Anticipatory is also known as ‘breach by repudiation’. Where a person repudiates a contract before the stipulated due date.

For instance, A, after agreeing to sell his car to B on a fixed date, sells it to C. This is an anticipatory breach.

Actual breach

Actual breach refers to the failure to perform contractual obligations when performance is due.

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Business Law Notes

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Business Law Book References

1. Goel, P. K. (2006). “Business Law for Managers” Wiley
2. Sheth, T. (2017). “Business Law” (2ed.) Pearson.
3. Kuchhal. M.C. & Prakash. “Business Legislation for Management” (2ed.) Vikas Publishing.

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