Discharge of Contract

 

When an agreement, which was binding on the parties to it, ceases to bind the contract is said to be discharged

A contract may be discharged in following ways

  • By performances of the contract.
  • By breach of the contract
  • By impossibility of performance
  • By agreement and Novation

DISCHARGE BY PERFORMANCE:

In a contract each party to it is bound to perform his part of the obligation. After the parties have made due performance of the contract, their liability under the contract comes to an end. In such a case the contract is said to be discharged by performance.

DISCHARGE BY BREACH

When a party having a duty to perform a contract falls to do that, or does an act whereby the performance of the contract by him becomes impossible, or he refuses to perform the contract, there is said to be breach of contract on his part. On the breach of contract by one party, 

  1. the other party is discharged from his obligation to perform his part of the obligation,
  2. he also gets the right to sue the party making the breach of contract, for damages for the loss occasioned to him due to the breach of contract.

The breach of contract may be either actual i.e. non- performance of the contract on the due date of performance or anticipatory, i.e. before the due date of performance has come.

Anticipatory breach of contract:

It means repudiation of a contract by one party to it before the due date of its performance has arrived. Section 39, contains the law relating to anticipatory breach of contract and provides.

“When a party to a contract has refused to perform or disabled himself from performing his promise in its entirety, the promise may put an end to the contract, unless he has signified, by words or conduct his acquiescence in its continuance”.

Anticipatory breach of contract could be made by promisorin 2 ways, (1) either by refusing to perform contract, or (2) disabling himself from performing the contract in its entirety, before the due date of performance has arrived.

Effects of anticipatory breach of contract

 Under section 39, on the anticipatory breach of contract by one party, the other party has two alternatives open to him, i.e.

  1. He may rescind the contract immediately, i.e. he may treat the contract at an end, and may bring an action for the breach of contract without waiting for the appointed date of the performance of the contract.
  2. He may not put an end to the contract but treat it as still subsisting and alive and wait for the performance of the contract on the appointed date.

DISCHARGE BY IMPOSSIBILITY OF PERFORMANCE

If the performance of a contract is impossible, the same is void, both in India and England.

Section 56, mentions two kinds of impossibility. Firstly, impossibility existing at the time if the making of the contract. Secondly a contract which is possible of performance and lawful when made, but the same becomes impossible or unlawful thereafter due to some supervening event.

  1. Initial impossibility:

An agreement to do an act impossible in itself is void. If a contract is impossible of being performed, the parties to it will never be able to fulfill their object, and hence such an agreement is void. Impossibility here means physical impossibility as well as legal impossibility. If there is no possibility of the performance of the contract because it would be unlawful to do that, the agreement is void.

Promisor’s duty to compensate:

Sometimes, the fact that the performance of the contract is impossible or unlawful may be within the knowledge of the promisor, but the promisee may not be knowing about the same, such a promisor, must compensate the promisee for the loss sustained by the promisee resulting from non- performance of the contract

  1. Subsequent impossibility:

The performance of the contract may be possible when the contract is entered into but because of some event, the performance may be subsequently become impossible or unlawful. Section 56 (para2) says “a contract to do an act which after the contract is made, becomes impossible or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful”.

It means that every contract is based on the assumption that the parties to the contract will be able to perform the same when the due date of performance arrives. If because of some event, the performance has either become impossible or unlawful, the contract becomes void.

DISCHARGE BY AGREEMENT AND NOVATION

Sec 62 and 63 deal with contracts in which the obligation of the parties to it may end by the consent of the parties.

Novation:

Novation means substitution of an existing contract with a new one. When by an agreement between the parties to a contract, a new contract replaces an existing one, the already existing contract is thereby discharged, and in its place the obligation of the parties in respect of the new contract comes into existence.

Section 62 says – Effect of novation, rescission and alteration of contract. If the parties to a contract agree to substitute a new contract for it or to rescind or alter it, the original contract need not be performed”.

Novation is of two kinds

  1. Novation by change in the terms of the contract, and
  2. Novation by change in the parties to the contract.

Novation by change in terms of the contract:

The parties to a contract are free to alter the contract, which they have originally entered into. If they do so, their liability as regards the original agreement is extinguished, and in its place they become bound by the new altered agreement.

Novation by change in the parties to the contract:

 It is possible that by novation an obligation may be created for one party in place of another.

REMISSION OF PERFORMANCE:

Section 63 enables the promisee to agree to dispense with or remit performance of promise. It says “Promisee may dispense with or remit performance of promise. Every promise may dispense with or remit, wholly or in part, the performance of the promise made to him, or  may extend the time for such performance or may extend the time for such performance or may accept instead of it any satisfaction which he thinks fit.

This section permits a party, who is entitled to the performance of a contract, to,

  • Dispense with or remit, either wholly or in part, the performance of the contract or,
  • Extend the time of performance, or,
  • Accept any other satisfaction instead of performance.

Dispensing with or remitting performance –

The promises has been authorized, by Sec 63 to remit or dispense with the performance of the contract without any consideration. He may fully forego his claim, or may agree to a smaller amount in full satisfaction of the whole amount. The promisee, if he so likes, may accept performance from a third party, and while accepting such performance, he may agree to forego his claim in part. Once the promisee accepts a smaller amount in lieu of the whole of his claim, the promisor would be thereby discharged.

Extending the time of performance

Section 63 permits the performance to grant extension of time for the performance of the contract, and no consideration is needed for the same. The extension of time must be by mutual understanding between the parties. A promisee cannot unilaterally extend the time of performance for his own benefit. For valid extension of time, the agreement between the two parties should be there.

Accepting any other satisfaction instead of performance

Section 63 permits the promisee to accept any other satisfaction in lieu of agreed performance, and this would discharge the promisor. For example A owes B, under a contract, a sum of money, the amount of which has not been ascertained. A without ascertaining the amount gives B, and B, in satisfaction thereof, accepts the sum of 2,000 rupees. This is discharge of the whole debt, whatever may be its amount.

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