Discharge of Contract

P.S.Swathi SSIM Secunderabad

Meaning

Termination of contractual relationship between the parties and the rights and duties of the contracting parties will come to an end.

Types\Reasons

1.
2. 3. 4. 5. 6.

A contract may be discharge By Performance, By Agreement, By Impossibility, By lapse of time By Operation of Law By Breach of Contract

Discharge by Performance

1. 2.

It takes place when the parties to the contract fulfill their obligations according to the terms and agreements. Discharge by Performance is of two types: Actual Performance Attempted of performance

Actual Performance

When both the parties fulfill their promises completely the contract is discharged. Most of the contracts come to an end in this manner. Attempted Performance also known as offer to perform. Where the promisor offers to perform his obligation but the promisee refuse to accept it, it is known as attempted performance. It is equalent to actual performance the promisor is discharged from the responsibility of performance.

Discharge by Agreement or Consent

As it is agreement which creates contract, again it is agreement which discharges contract. The agreement to discharge a contract may be express or implied. By Express agreement :The express agreement may be oral or written. By Implied agreement: The discharge of agreement is understood from the circumstances.

Discharge by Implied Agreement

Discharge by implied agreement may take place in the following methods: (a) Novation (b) Rescission (c) Alteration (d) Remission (e) Waiver (f) Merger

Novation

Novation means substituting a old contract with a new contract. A new contract may be created with the same parties or with the third party. Ex. A owes Rs.1,00,000 to B and has to pay before 30th June, 2008 On 29th June A and B agreed to create a new contract substituting the old one and according to the new contract C will pay Rs.1,00,000 to A for which C gave his consent. The original contract between A and B is substituted with the new contract between A,B and C. Novation should always takes place before the expiry of the date of performance of the original contract.

Rescission: It takes place by the cancellation of terms and conditions by parties. It may also take place by cancellation of terms and conditions one of the party Ex: A is suppose to supply some ready made garments to B , but A failed to do so by the time of performance the stock became out of fashion B may rescind the contract without exercising his rights for breach of contract. Rescission may be total or partial all the terms or some of the terms of the contract may be cancelled.

Alteration

When some of the terms and conditions of the contract are changed the original contract is discharged. Ex: A agreed to sell some goods to B for Rs.15,000 and B agreed to pay that amount upon the supply of goods. However before the supply of goods, B requested A to allow him to make the payment in three installments for which A agreed. Contract is discharged by alteration of terms. ( Lumsum Payment into Installments).

Remission
Acceptance of lesser amount to the amount promised . Ex: A has to repay a debt of Rs.10,000 to B but requested to accept Rs.8,000 for which B agreed. Contract is discharged by remission.

Waiver
Waiver takes place by mutual abandonment of rights by the parties to the contract. Merger takes place when inferior right merges into a superior right. Ex: A holds some property on lease later he purchased the same property his rights as lessee merges into owner.

Discharge by Impossibility of Performance

1. 2. 3.

4.

Discharge by Impossibility of Performance: Where there is impossibility of performance the contract is discharged it may take place in a following manner. Existence of the impossibility at the time of formation of the contract: It may be known or unknown to the parties Known impossibility means parties have knowledge of impossibility but enters into contract with greed. Such contracts are void ab initio Ex: A entered agreement with B who is a Saint to pay him Rs.25,00,000 if B converts sand into gold. A paid an advance of Rs.5,00,000 and B failed to perform the promise A cannot recover the money. Impossibility arising after the formation of the contract.

Impossibility Unknown to the Parties

If parties to the contract enters into a agreement without knowing the impossibility of the performance it is known as impossibility unknown to the parties. Ex: X agreed on 1st June 2008 to supply 1000 bales of cotton to Y. But the cotton bales were destroyed in a fire accident that occurred on midnight of 31st may 2008 which was not informed to X. The contract is discharged by unknown impossibility of performance.

Impossibility arising after formation of contract

It is also known as supervening impossibility or post contractual impossibility. As a general rule impossibility of performance is not excused. However, if the impossibility is because of the circumstances beyond the control of the contracting parties it is excused.

Where impossibility of performance is excused

1.

2.
3. 4. 5.

Destruction of Subject Matter Non-Existence of a thing Death or incapacity of the parties Change of Law Outbreak of war

Where Impossibility is not excused

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2.
3. 4. 5.

Difficulty of performance Commercial Impossibility Failure of a third party Strikes, Lock-outs or civil disturbances Failure of one of the objects

Discharge by Lapse of Time

Where time is the essence of a contract, one of the parties has not performed his obligations within the stipulated time, and the aggrieved party do not file a suit for remedy, contract is said to be discharged by lapse of time. Ex: Provisions of Limitation Act for Promissory note and its payment.

Discharge by Operation of Law

1.

2.
3.

4.

5.

By death of contracting party/parties By insolvency of Contracting party/parties By Merger of inferior rights with superior rights (already explained) By unauthorized alteration of terms of contract unilaterally by one of the contracting parties Where the promisee also becomes promisor.

Discharge by Breach of Contract

Breach of contract may be of two types: Actual Breach of Contract Anticipatory Breach of Contract Actual Breach of Contract may take place in two forms Breach at the time when the performance is due Breach during the performance of the contract

Anticipatory Breach of Contract

It occurs when one of the parties declares his intention of non performing the contract before the performance is due. The rights of the promisee\aggrieved party for anticipatory breach of contract are as follows: He can cancel the contract and thereby releasing himself from his obligations. He can take legal action immediately or waits till the due date of performance and takes action after the actual breach. He is entitled to select any of the above whichever is most beneficial to him.

Conclusion

Discharge of Contract will take place by performance ,agreement, impossibility, lapse of time ,operation of law and breach of contract.