Discharge Of Contract
Meaning of Discharge of Contract
- Contract is an agreement enforceable by law and creates rights and obligations on the parties to the contract. It is important that all the parties to the contract perform their obligations and duties as per the terms of the contract. Discharge of contract refers to a situation when the contractual relationship between the parties to a contract comes to an end. It is basically termination of contractual relationship between the parties.
- When a contract is discharged, the obligations of the party/parties come to an end.
- The terms discharge and termination of contract are often confused to be the same. Contract can be discharged either by the actions of the parties to the contract or operation of Law.
- However, there is a thin line of difference between the terms discharge and termination of contract.
Discharge of Contract takes place when the parties to a contract perform or discharge their duties and obligations as per the contract and Termination of Contract takes place when parties to contract do not perform their duties or obligations.
- Illustration: A hosted a party at her place and hired some dancers to perform at the party and promised to pay them their fees. The dancers come and perform at the party. A pay them their fees as per the terms of the contract. Here, the performance of the dancer will amount to discharge of contract as the terms of agreement have been fulfilled. Non performance by the Dancers will amount to termination of contract.
- Basic concepts of Contract- Offer, Acceptance & its Revocation
- Essential elements of a Valid Contract – Indian Contract Act,1872
Modes of Discharge of Contract
There are various ways by which Discharge of Contract takes place. They are as follows:
1. Discharge of Contract by Performance
- The contract can be discharged when parties to the contract perform/ fulfill their obligations or duties as per the terms of the contract.
However, the obligations and duties must be performed within prescribed time and in accordance with the manner prescribed.
Sam enters into a contract with Jordan to sell his watch for 1000 bucks. Jordan is required to pay 1000 bucks upon delivery. Sam delivers the watch and Jordan pays 1000 bucks in return. This is an example of discharge of contract by performance as both parties have fulfilled their obligation according to the terms of the contract.
- Discharge of Performance can be of 2 types :
- Actual Performance : When parties to the contract perform what they have mentioned in the contract, it is called actual performance.
- Attempted Performance : Attempted Promise is when a party to the contract attempts to perform his promise but the other party refuses to accept it.
2. Discharge of Contract by Lapses of Time
- The Limitation Act, 1963 provides a specific period for performance of Contract. If the party to the contract does not perform their duties or obligation within a specified period and if the aggrieved party fails to take any action within specified time, it will lead to discharge of contract by lapses of time.
- Illustration: A gives his house for rent to B on a promise that B will pay his rents every month. After some time, A moves to the US for work and forgets about the rent amount he is entitled to receive. He comes back from the US after 9 years and claims his rent amounts which B refuses to pay. Here, A approaches the court to claim the amount. However, the court rejected his plea as he had crossed the time limit to recover the rent amount.
3. Discharge of Contract by Impossibility of Performance
- Contract can be discharged by impossibility of performance where it is almost impossible for the parties to the contract to fulfill their obligations or duties as per the contract. Usually non performance of a contract takes place due to circumstances beyond the control of the parties i.e. natural calamities, unforeseen circumstances government policies, war/riots, destruction of subject matter etc. If a contract is impossible from the beginning, it is void – ab- initio.
- Illustration: Abc Ltd enters into an agreement with a farmer to supply 100 bags of apple at the prescribed time. The farm gets destroyed by a pest attack and the farmer is unable to perform his obligation. The impossibility of performance leads to discharge of Contract.
4. Discharge of Contract by Mutual Agreement
- A contract is said to be discharged by Mutual Agreement when the parties to the contract agree to replace the contract with a new one or annual or remit or alter it.
- Illustration: Sam enters into an agreement with John to sell his white car for 100000 bucks. Later Sam changes his mind and decides to sell his red car which John agrees to buy. Here the original contract to white car was replaced by a new contract to sell red car.
5. Discharge of Contract by Operation of Law
- A Contract can be discharged by operation of Contract. When obligations of the parties to the contract come to an end because of intervention of law, it is said that the contract is discharged by operation of Law. Discharge of Contract by operation of Law includes Death, Insolvency/Bankruptcy, merger, Judgements of the Court, Unauthorized Alteration of the terms of a written agreement and Rights and liabilities vested in the same person.
- Illustration: Milly enters into a contract with Mr. Smith to buy his house for the agreed amount. However, Mr. Smith died in an accident before both the parties could perform their obligations. The contract will be discharged by Operation of Law.
6. Discharge of Contract by Breach of Contract
- A contract is said to be discharged by breach of contract when the parties to the contract fail to perform their obligations and duties on prescribed time and in prescribed manner as specified in the contract.
- Breach of Contract can be of two types :
- Actual Breach – Actual Breach refers to when the party to contract refuses to perform his duties and obligations of the contract on the due date.
- Anticipatory Breach – Anticipatory Breach refers to when the party to contract refuses to perform his duties and obligations in advance of the due date of performance.
- Illustration: John agrees to rent his house to Peter on a condition that he will not further rent the house, for monetary gain. Peter further rents a few rooms of the rented house as an Airbnb property for tourists and earns monetary benefits from it. This will amount to breach of contract as Peter did not comply with terms of the contract.
7. Discharge of Contract by Remission
- A contract is said to be discharged by Remission when parties to the contract waive or remit performance of promise of a contract, wholly or in part.
- Illustration: Jordan agrees to sell his watch to Adam for $500 which will be paid to him in 3 installments. Jordan receives two installments from Adam and later frees him from the final installment. This is Discharge of Contract by Remission as Jordan waived his right to receive the final installment.
8. Discharge of Contract by Merger of Rights
- A contract can be discharged when an inferior right available to a party merges with a superior available to the same party under another contract. This is called discharge of contract by Merger of Rights.
- Illustration: John agrees to rent his car to Adam for 6 months. After 6 months Adam offers to buy John’s car. John agrees and sells his car to Adam. Here, there are two contracts between John and Adam, contract of lease which makes him the renter and Contract of Sale which makes him the owner. The superior right ie. contract of sale(which makes him the owner) will merge with the inferior right and will discharge the contract.
9. Discharge of Contract by Non – Provisioning of Facilities
- Sometimes, the party/parties to a contract (promisee) agrees to offer reasonable facilities to the promisor for the performance of contract. If the promisee fails to perform that, the promisor can be discharged of all liabilities arising due to non- performance of the contract.
- Illustration: Sam agrees to fix Adam’s watch provided he leaves his watch at Sam’s shop for a week. Adam refuses to leave his watch at the shop for a week even after constantly being asked to do so. Sam fails to offer reasonable facilities to Adam. Under this circumstance, Sam will be discharged of all obligations arising due to non performance of contract.
Author: Shreya Rathor,
Bharati Vidyapeeth Deemed University, Pune, Final Year