Discharge of contract means termination of the contractual relationship between the parties. When the rights and obligations arising out of a contract are extinguished, the contract is said to be discharged. A contract may be discharged either by the acts of the parties of the operation of law. Act of parties may take different forms like performance, agreement, breach, etc. While operation of law includes death, insolvency, etc. It is also enshrined in Section 62 of Indian Contract Act.
Various modes of discharge
Discharge by Performance:
Performance is that the natural modes of discharge. When the parties to a contract perform their shares of the guarantees, the contract is discharged. If just one of the several parties performs the promise, he alone is discharged. Performance of contract is the most usual mode of its discharge. Performance can also be,
a) Actual performance b) Offer of performance or tender.
Discharge by Agreement/Consent:
A contract could also be discharged by the new agreement between like minded parties. It can also be terminated by agreement in any of the subsequent ways:
Novation of contract means replacement of an existing contract by another contract. In novation the parties may change. If the parties are not changed then the fabric terms of the contract must be altered by the new contract because a mere variation of a number of the terms of a contract isn’t novation but alteration.
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.
In the supreme court case of Lata Construction v Dr Rameshchandra Ramniklal Shah, it was absolutely held that “there should be a whole substitution of a replacement contract. it’s during this situation that the initial contract needn’t be performed”. In other words, it means if the new contract changes the center of the contract or the basis of the first contract only then it’ll be considered Novation. Now that the question arises what happens if the center of the contract isn’t changed but only minor changes are made. Any minor change to the contract which both the parties conform to is named Material alteration to the contract and it’s legally binding on both the parties.
Alteration of a contract takes place when one or more of the terms of the contract are changed. If a cloth alteration in an exceedingly written contract is formed with the consent of all the parties the initial contract is discharged by alteration and a brand new contract takes its place. An alteration could also be a change within the amount of cash, the speed of interest, or the names of the parties. In such cases, the old contract could also be discharged.
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.
Where a contract is embodied in a very deed and also the party who has the custody of the deed alters it without the consent of the opposite during a material particular, the effect would exactly be the identical as that of cancelling the deed. Both parties are discharged from their respective obligations. The meaning of the expression “material alteration” was considered by the Supreme Court in Kalianna Gounder v Palani Gounder.
In the particular case, a memorandum of agreement for the sale of land under which Rs.2000 were paid prior to was with the plaintiff. The defendant refused to convey the land and pleaded that the plaintiff had alerted the deed by adding the words that the vendor shall “clear the debts and execute the sale deed free from encumbrance.
Difference between Novation and Alteration:
In novation the change is that the existing contract is substantial and in alteration it’s but that. In novation parties may change but in alteration they might remain the identical.
Remission means the acceptance of lesser sum than what was due from promise made in consonance with the section 63, an individual who features a right to demand the performance of a contract may:
i) Remit or hand over the full or a part of a debt
ii) Extend the time for performance
iii) Discharge by Subsequent Impossibility: Initial Impossibility: in line with section 56, “An agreement to try and do impossible act is void ab-initio”. It means agreement which is obviously impossible can’t be binding, e.g. an agreement to find treasure by magic is void agreement.
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.
Subsequent Impossibility : Sometimes, a contract capable to be performed after formation becomes impossible or unlawful and as a result void.
Discharge by lapse of your time-
A contract is discharged by lapse of time. The Limitation Act, 1908 lays down that a contract should be performed within a specified period. If the contract isn’t performed and no legal proceeding is taken by the promise within the amount of limitation, he’s empty his remedy at law; the contract is terminated in such a case.
Example: The period of limitation for recovering the debt is 3 years and 12 years for the recovery of immovable property.
Discharge by Operation of Law-
A contract terminates by operation of law within the following cases:
The insolvency Act for discharge of contract under particular circumstances. Where the court declares an individual as insolvent, the rights and duties of such person are transferred to the officer of court, called Official Receiver, after the order of the court such person is discharged from his liabilities incurred before his insolvency.
Merger takes place when an inferior right available to a celebration merges into a superior right available to the identical party under another contract. As a result of the merger the previous contract stands discharged automatically.
Example: A person holds property under lease, purchases the property. On purchase, his lease agreement is discharged.
Discharge by Breach of Contract–
A contract must be performed in keeping with its terms. But where the Promisor fails to perform the contract consistent with the terms of the contract, there’s breach of contract by him. Breach of contract is also of two kinds:
a) Actual Breach: It occurs when a party fails to perform a contract, when performance is due. But, if a party who has didn’t performed the contract at the appointed time, subsequently expresses his willingness to perform, he can do so after paying compensation, if time isn’t the essence of the contract.
b) Anticipatory Breach: It occurs when a celebration to an executor contract declares his intention of not performing the contract before the performance is due.
In the Law of contracts, there’s an excellent deal of bewilderment or lack of understanding in reference to certain topics connected with the topic of discharge. It is thanks to the very fact that few people use such terms as condition and warranty within the same sense. The most effective way of discharging a contract is predicated on performance, and in this manner both the parties follow all the terms of the contract and afterwards opt for its discharge. On the other hand, discharge by the breach is the most undesirable thanks to releasing you from duties. Therefore, discharge by breach leads to damages too. Where there’s no instrument which will be considered the requirement, there’s great difficulty in proving the execution of a deed, for the requirement itself, can not be physically delivered. But the surrender or cancellation of evidential documents may even in these latter cases prevent proof of the duty or is also given evidence of mutual recession. But the recession and substitution are interwoven into one body and one breath neither one having power or separate existence. On pleading such a discharge the defendant must allege the exact same things that have to be alleged by a plaintiff who sues upon a contract except that it’s to indicate a breach. The defendant isn’t seeking a remedy and hence he doesn’t must establish the existence of any secondary obligation. He must allege merely the agreement, showing that it includes a recession of the previous obligation, no technical language is required.