Discharge of ContractDischarge of Contract

What is Discharge of Contract ?What is Discharge of Contract ?

As per the INDIAN CONTRACT ACT As per the INDIAN CONTRACT ACT 1872 – “Discharge of contract means 1872 – “Discharge of contract means the the termination of a contractual of a contractual relationship between parties”. relationship between parties”.

A contract is said to be discharged A contract is said to be discharged when it ceases to operate , i.e. when when it ceases to operate , i.e. when the the rights rights && obligation created by it created by it come to an end. come to an end.

For Example For Example e.g. Two parties A & B Make a e.g. Two parties A & B Make a contract to build a fly-over in a City. contract to build a fly-over in a City. A is the municipal authority of the A is the municipal authority of the city & B is a construction company. city & B is a construction company. Due to some reasons the contract Due to some reasons the contract get discharged. Then the both get discharged. Then the both parties are free from the obligations parties are free from the obligations of contract, i.e. the rights & of contract, i.e. the rights & obligations of the parties come to an obligations of the parties come to an end. end.

How a Contract can get How a Contract can get Discharged ?Discharged ?

1.1. By Performance By Performance

2.2. By Agreement or by Consent. By Agreement or by Consent.

3.3. By Impossibility of performance. By Impossibility of performance.

4.4. By Promisee failing to offer facilities By Promisee failing to offer facilities for performance. for performance.

5.5. By DeathBy Death

A Contract may be discharged in any of A Contract may be discharged in any of the following way.the following way.

How a Contract can get How a Contract can get Discharged ?Discharged ?

6. By Refusing tender of performance. 6. By Refusing tender of performance.

7. By Unauthorised material alteration 7. By Unauthorised material alteration of contract. of contract.

8. Discharge by lapse of time. 8. Discharge by lapse of time.

9. By Operation of Law.9. By Operation of Law.

10. By Breach of Contract. 10. By Breach of Contract.

1.Discharge of Contract 1.Discharge of Contract By PerformanceBy Performance

According to Sec.37 of Indian According to Sec.37 of Indian Contract Act 1872 – “ If both parties Contract Act 1872 – “ If both parties to the contract have performed what to the contract have performed what they have agreed to do, the contract they have agreed to do, the contract is discharged.” is discharged.”

Performance of obligation by parties Performance of obligation by parties to the contract puts an end to the to the contract puts an end to the contract. contract.

e.g. in our previous example A & B had a e.g. in our previous example A & B had a contract to build a fly-over. B build the fly-contract to build a fly-over. B build the fly-over in the prescribed manner and A over in the prescribed manner and A provides the consideration to B. provides the consideration to B.

Here both parties performed their Here both parties performed their obligations & rights , what they promised obligations & rights , what they promised to do in the contract. Thus the contract is to do in the contract. Thus the contract is come to an end by the performance. come to an end by the performance.

According to sec. 62-64 of Indian According to sec. 62-64 of Indian Contract Act 1872 – Contract Act 1872 –

A Contract can be A Contract can be terminated or discharged by terminated or discharged by mutual express or implied mutual express or implied agreement between the parties agreement between the parties in any of the following ways - in any of the following ways -

2. By Agreement or by Consent.2. By Agreement or by Consent.

A) By Novation A) By Novation

B) By Accord and Satisfaction B) By Accord and Satisfaction

C) By Remission and WaiverC) By Remission and Waiver

D). By Rescission. D). By Rescission.

A) By Novation A) By Novation According to Sec. 62 of ICA 1872 – “ If the According to Sec. 62 of ICA 1872 – “ If the parties to a contract agree to substitute a parties to a contract agree to substitute a new contract for it , or to rescind or alter new contract for it , or to rescind or alter it, the original contract need not to be it, the original contract need not to be performed”. performed”.

That means When a new contract is That means When a new contract is substituted for an existing contract, either substituted for an existing contract, either between the same parties or b/w the between the same parties or b/w the different parties ‘novation’ occurs. different parties ‘novation’ occurs.

Novation means “the wiping out of Novation means “the wiping out of the original contract as well as the the original contract as well as the creating of a new valid contract”. creating of a new valid contract”.

If the new agreement is If the new agreement is invalid it cannot serve as novation, invalid it cannot serve as novation, and the original contract continues and the original contract continues unless the rights thereunder are unless the rights thereunder are expressly abandoned. expressly abandoned.

Novation may occur in two ways -Novation may occur in two ways -

I. New party is substituted for the old I. New party is substituted for the old one. one.

e.g. A owes money to B under a contract. e.g. A owes money to B under a contract. It is agreed b/w A, B and C that B shall It is agreed b/w A, B and C that B shall henceforth accept C as his debater instead henceforth accept C as his debater instead of A. The old debt of A to B is at end and a of A. The old debt of A to B is at end and a new debt from C to B has been contracted. new debt from C to B has been contracted.

II. Parties may substituted new II. Parties may substituted new contract for the old one. contract for the old one.

e.g. A owes B Rs. 10,000. A enters e.g. A owes B Rs. 10,000. A enters into an agreement with B, and gives into an agreement with B, and gives B a mortgage of his (A’s) estate for B a mortgage of his (A’s) estate for Rs. 5,000 in the place of the debt of Rs. 5,000 in the place of the debt of Rs. 10,000. This is a new contract Rs. 10,000. This is a new contract which extinguishes the old one. which extinguishes the old one.

Special cases. Special cases. In SCC 586, 2000(1) - Lata construction Vs In SCC 586, 2000(1) - Lata construction Vs Dr. Ramesh Chandra Ramnik lal Shah, Dr. Ramesh Chandra Ramnik lal Shah,

The Honorable Supreme Court of India The Honorable Supreme Court of India stated – stated – For novation the terms of the For novation the terms of the two contracts are consistence and two contracts are consistence and can stand together, only then the can stand together, only then the subsequent contract is said to be the subsequent contract is said to be the substitution of the earlier onesubstitution of the earlier one. .

B) By Accord and Satisfaction B) By Accord and Satisfaction According to Sec. 63 of ICA 1872 “Every According to Sec. 63 of ICA 1872 “Every promise may dispense with or remit the promise may dispense with or remit the performance of promise made to him and performance of promise made to him and accept, instead of it, any satisfaction accept, instead of it, any satisfaction which he thinks fit.”which he thinks fit.”

In other words “When a lesser sum is In other words “When a lesser sum is actually paid than what is due under an actually paid than what is due under an existing contract, the new contract is existing contract, the new contract is called ‘accord’ & the actual payment is called ‘accord’ & the actual payment is called ‘ Satisfaction’.called ‘ Satisfaction’.

e.g. Ramesh has an postpaid mobile e.g. Ramesh has an postpaid mobile connection of AIRTEL. A bill of his connection of AIRTEL. A bill of his mobile is of Rs. 1245.00, which he mobile is of Rs. 1245.00, which he seems more than the actual bill. seems more than the actual bill.

thus he register a complain with thus he register a complain with AIRTEL. The AIRTEL officials offers AIRTEL. The AIRTEL officials offers him to pay Rs. 1200 as a settlement. him to pay Rs. 1200 as a settlement. Here Rs. 1245.00 is accord & Rs. Here Rs. 1245.00 is accord & Rs. 1200.00 is satisfaction. 1200.00 is satisfaction.

Exception Exception In the case no. SCC 248, AIR 1992, Union Carbide In the case no. SCC 248, AIR 1992, Union Carbide Corporation Vs. Union of INDIA, Honorable Corporation Vs. Union of INDIA, Honorable Supreme Court ordered “ Supreme Court ordered “ An illegal contract An illegal contract cannot constitute an accord & satisfactioncannot constitute an accord & satisfaction”. ”. As in that particular case of Bhopal Gas tragedy, As in that particular case of Bhopal Gas tragedy, The Government of India claimed US$ 3.3 billion The Government of India claimed US$ 3.3 billion from UCC. In 1989, a settlement was reached from UCC. In 1989, a settlement was reached under which UCC agreed to pay US$470 million under which UCC agreed to pay US$470 million (the insurance sum, plus interest) in a full and (the insurance sum, plus interest) in a full and final settlement of its civil and criminal liability.final settlement of its civil and criminal liability.Supreme Court declare this agreement void, Supreme Court declare this agreement void, because of the contract is illegal,& only 15% of because of the contract is illegal,& only 15% of the original $3.3 billion claimed in the lawsuit & the original $3.3 billion claimed in the lawsuit & without the consent of Bhopal Gas Tragedy Relief without the consent of Bhopal Gas Tragedy Relief and Rehabilitation Department.and Rehabilitation Department.

C) By Remission and WaiverC) By Remission and WaiverWaiver means ‘abandoning’ the Waiver means ‘abandoning’ the rights. According to Sec. 63 of ICA rights. According to Sec. 63 of ICA 1872 – “When a party to the contract 1872 – “When a party to the contract abandons or waiver his rights, the abandons or waiver his rights, the contract is discharged”. contract is discharged”.

e.g. A promise to paint picture for B. B e.g. A promise to paint picture for B. B afterwards forbid him to do so. A is afterwards forbid him to do so. A is no longer bound to perform the no longer bound to perform the promise. promise.

D). By Rescission. D). By Rescission. According to sec. 64 of ICA 1872 – “When According to sec. 64 of ICA 1872 – “When a person at whose option a contract is a person at whose option a contract is voidable rescinds it, the other party voidable rescinds it, the other party thereto need not perform his promise”. thereto need not perform his promise”. He is discharged from his liability under He is discharged from his liability under the contract. the contract. Rescission may occur by mutual consent Rescission may occur by mutual consent of the parties or when one party fails to of the parties or when one party fails to perform his obligation the other party may perform his obligation the other party may rescind the contract. Rescission of a rescind the contract. Rescission of a contract cannot be in part only. The entire contract cannot be in part only. The entire contract must rescinded. contract must rescinded.

e.g. e.g.

1. A induces B to enter into a 1. A induces B to enter into a contract by fraud. The contract is contract by fraud. The contract is voidable at the option of B. He may, voidable at the option of B. He may, therefore, rescind the contract. therefore, rescind the contract.

3. By Impossibility of performance. 3. By Impossibility of performance.

According to sec. 64 of ICA 1872 – According to sec. 64 of ICA 1872 – “When the performance of a contract “When the performance of a contract becomes subsequently impossible, becomes subsequently impossible, the contract becomes void”.the contract becomes void”.

It means that an agreement to do an It means that an agreement to do an act impossible in itself is void. act impossible in itself is void.

According to sec. 23 & 24 of ICA, “An According to sec. 23 & 24 of ICA, “An agreement becomes void, if the agreement becomes void, if the consideration or object of contract or consideration or object of contract or its part of which is unlawful” its part of which is unlawful”

As per the honorable Supreme Court As per the honorable Supreme Court of India’s order in the SCC no. 77, of India’s order in the SCC no. 77, 1999(5) – “Impossibility must be 1999(5) – “Impossibility must be physical or legal impossibility” physical or legal impossibility”

e.g. A promises B to sell his horse on 1e.g. A promises B to sell his horse on 1stst June, but before the day, the horse dies. June, but before the day, the horse dies. Now its impossible to fulfill the promise Now its impossible to fulfill the promise due to impossibility of performance.due to impossibility of performance.

Such type of impossibilities in which at a Such type of impossibilities in which at a time of contract, contract was capable of time of contract, contract was capable of being performed, but subsequently its being performed, but subsequently its performance becomes impossible is called performance becomes impossible is called “ “ SUPERVENING IMPOSSIBILITY” . SUPERVENING IMPOSSIBILITY” .

4. By Promisee failing to offer 4. By Promisee failing to offer facilities for performance. facilities for performance.

According to sec. 67 of ICA 1872 – “If According to sec. 67 of ICA 1872 – “If the promisee neglect or refuses to the promisee neglect or refuses to afford the promisor reasonable afford the promisor reasonable facilities for the performance of his facilities for the performance of his promise, the promisor is excused by promise, the promisor is excused by such neglect or refusal to any non-such neglect or refusal to any non-performance caused thereby”. performance caused thereby”.

e.g. A contracts with B to repairs B’s e.g. A contracts with B to repairs B’s house. B neglect or refuse to point house. B neglect or refuse to point out to A the places in which his out to A the places in which his house requires repair. A is excused house requires repair. A is excused for the non-performance of the for the non-performance of the contract, if it is caused by such contract, if it is caused by such neglect or refusal. neglect or refusal.

5. By Death5. By Death

According to sec. 37 of Indian According to sec. 37 of Indian contract Act 1872 – “ Where a contract Act 1872 – “ Where a contract is personal in character, or contract is personal in character, or where personal skill or ability is where personal skill or ability is involved, death of the promisor involved, death of the promisor discharge the contract”. discharge the contract”.

e.g. A promises to paint a picture for e.g. A promises to paint a picture for B by a certain day. A dies before the B by a certain day. A dies before the day. The contract cannot be enforced day. The contract cannot be enforced either by A’s representative or by B.either by A’s representative or by B.

6. By Refusing tender of 6. By Refusing tender of performance. performance.

According to sec. 38 of Indian contract Act According to sec. 38 of Indian contract Act 1872 – “If a party offers to perform his 1872 – “If a party offers to perform his promise and the offer has not been promise and the offer has not been accepted by the other party, the promisor accepted by the other party, the promisor is not responsible for non-performance.”is not responsible for non-performance.”

In other words refusal to accept “offer of In other words refusal to accept “offer of performance”, discharge the party making performance”, discharge the party making the offer. the offer.

exampleexample

e.g.e.g.

7. By Unauthorised material 7. By Unauthorised material alteration of contract. alteration of contract.

In cases of material alteration by one party to the In cases of material alteration by one party to the contract without the consent of the other party, contract without the consent of the other party, the contract is discharged. the contract is discharged.

e.g. A and B have a contract of partnership, e.g. A and B have a contract of partnership, according to contract the profit share would be according to contract the profit share would be distributed in the ratio of 50:50. Without the distributed in the ratio of 50:50. Without the consent of B, A made an alteration in the consent of B, A made an alteration in the contract and change the shares in ratio 60:40 or contract and change the shares in ratio 60:40 or introduce a new partner C. introduce a new partner C.

In this case the contract get discharged & B is In this case the contract get discharged & B is free from any type of obligations & has right to free from any type of obligations & has right to sue A. sue A.

8. Discharge by lapse of time. 8. Discharge by lapse of time. Contract is discharged also by lapse of Contract is discharged also by lapse of time. time. If the creditor does not file a suit to If the creditor does not file a suit to recover his debt amount from a debtor recover his debt amount from a debtor within a period of limitation as laid down within a period of limitation as laid down under the Limitation Act, his remedy is under the Limitation Act, his remedy is debarred. debarred. The contract is terminated by virtue of the The contract is terminated by virtue of the Limitation Act and the creditor cannot Limitation Act and the creditor cannot recover his debt.recover his debt.

exampleexample

For example – the period of limitation For example – the period of limitation to file a money suit is 3 years. If to file a money suit is 3 years. If within 3 years the creditor fails to file within 3 years the creditor fails to file a suit to recover his amount, the a suit to recover his amount, the debtor is discharged. debtor is discharged.

9. By Operation of Law9. By Operation of Law

““A contract is discharged or A contract is discharged or terminated by the operation of terminated by the operation of law, law, in the following cases – in the following cases –

(i) By insolvency or bankruptcy (i) By insolvency or bankruptcy

(ii) By merger.(ii) By merger.

(i) By insolvency or bankruptcy (i) By insolvency or bankruptcy

On a person adjudicated insolvent, On a person adjudicated insolvent, he is released from all his debts & he is released from all his debts & liabilities probable in the insolvency.liabilities probable in the insolvency.The rights and liabilities are The rights and liabilities are transferred to an Official Receiver transferred to an Official Receiver under the Provincial Insolvency Act. under the Provincial Insolvency Act. The insolvent is discharged from all The insolvent is discharged from all obligations arising from all his earlier obligations arising from all his earlier contract. contract.

(ii) By merger.(ii) By merger.Merger of superior right into an inferior Merger of superior right into an inferior right.right.For example, For example, (1)when a higher security is accepted in (1)when a higher security is accepted in the place of the lower security. Inferior or the place of the lower security. Inferior or lower security vanishes or merge into a lower security vanishes or merge into a higher security. higher security.

an ordinary debt is merged into a an ordinary debt is merged into a mortgage, higher security. The right of mortgage, higher security. The right of lessee is changed into a right of lessee is changed into a right of ownership. ownership.

10. By Breach of Contract10. By Breach of ContractAccording to sec. 39 of Indian According to sec. 39 of Indian contract Act 1872 – “When a party to contract Act 1872 – “When a party to a contract has refused to perform, or a contract has refused to perform, or disable himself from performing his disable himself from performing his promise in its entirety, the promise promise in its entirety, the promise may put an end to the contract.” may put an end to the contract.” In other words – “Breach of contract In other words – “Breach of contract occurs where a party refuses to occurs where a party refuses to perform his part of the promise. perform his part of the promise.

Breach of Contract may be - Breach of Contract may be -

(i) Actual breach of contract.(i) Actual breach of contract.

(ii) Anticipatory breach of (ii) Anticipatory breach of contract. contract.

(i) Actual breach of contract.(i) Actual breach of contract.The actual breach occurs when during the The actual breach occurs when during the performance of the contract or at the time when performance of the contract or at the time when the performance of contract is due, one party the performance of contract is due, one party either fails or refuse to perform his obligation either fails or refuse to perform his obligation under the contract. under the contract. e.g. A agrees to deliver to B 5 bags of sugar on 1e.g. A agrees to deliver to B 5 bags of sugar on 1stst Jan., He fails to do so on 1Jan., He fails to do so on 1stst Jan, There is a breach Jan, There is a breach of contract by A.of contract by A.

In the above example, if A tenders the sugar to B In the above example, if A tenders the sugar to B on the particular day, But B for no valid reason on the particular day, But B for no valid reason refuses to accept delivery, this is a breach of refuses to accept delivery, this is a breach of contract by B contract by B

(ii) Anticipatory breach of (ii) Anticipatory breach of contract. contract.

When a party to contract refuse to When a party to contract refuse to perform his part of the contract perform his part of the contract before the actual time of the before the actual time of the performance of the contract is due, it performance of the contract is due, it is called an ‘anticipatory breach of is called an ‘anticipatory breach of contract’. contract’.

Anticipatory breach of contract may Anticipatory breach of contract may be - be -

(a) (a) By repudiation of contract By repudiation of contract (express renunciation). (express renunciation). or or

(b) (b) By impossibility of By impossibility of performance (implied performance (implied renunciation). renunciation).

(a) (a) By repudiation of contract By repudiation of contract (express renunciation).(express renunciation).

““when a party communicates his when a party communicates his inability to perform his part of the inability to perform his part of the contract before the time fixed for the contract before the time fixed for the actual performance is due, he is said actual performance is due, he is said to have expressly renunciation.”to have expressly renunciation.”

(b) (b) By impossibility of performance By impossibility of performance (implied renunciation). (implied renunciation).

When the breach take place by When the breach take place by either party to contract by his own either party to contract by his own voluntary act, which makes voluntary act, which makes performance of contract, Anticipatory performance of contract, Anticipatory breach of contract is committed by breach of contract is committed by impossibility of performance. It is a impossibility of performance. It is a case of implied renunciation of a case of implied renunciation of a contract. contract.

Example of anticipatory breach of Example of anticipatory breach of contract - contract -

A promises to sell his car to be on A promises to sell his car to be on before 1before 1stst May, but before 1 May, but before 1stst May, A May, A sells his car to C. Here A had sells his car to C. Here A had performed such a voluntary act that performed such a voluntary act that the performance of his obligation the performance of his obligation towards B is impossible and towards B is impossible and therefore, “Anticipatory breach by therefore, “Anticipatory breach by impossibility” is committed. impossibility” is committed.

Brief Summary Brief Summary

Discharge of Contract - Discharge of Contract - Discharge of contract means the Discharge of contract means the termination of a contractual relationship between parties of a contractual relationship between parties

Sr.Sr. Ways to Discharge of Ways to Discharge of ContractContract

Sec. of Sec. of ICA 1872ICA 1872

DescriptionDescription

1.1. By Performance By Performance Sec.37Sec.37 If both parties to the contract If both parties to the contract have performed what they have performed what they have agreed to do, the have agreed to do, the contract is dischargedcontract is discharged

2.2. By Agreement or by By Agreement or by Consent. Consent.

Sec. 62 Sec. 62 to 64to 64

A Contract can be discharged A Contract can be discharged by mutual express or implied by mutual express or implied agreement between the agreement between the parties by –parties by –

A) By Novation A) By Novation

B) By Accord and Satisfaction B) By Accord and Satisfaction

C) By Remission and WaiverC) By Remission and Waiver

D). By Rescission. D). By Rescission.

3.3. By Impossibility of By Impossibility of performance. performance.

Sec. 64Sec. 64 When the performance of a When the performance of a contract becomes contract becomes subsequently impossible, subsequently impossible, the contract becomes voidthe contract becomes void

4.4. By Promisee failing By Promisee failing to offer facilities to offer facilities for performance. for performance.

Sec. 67Sec. 67 If the promisee neglect or If the promisee neglect or refuses to afford the refuses to afford the promisor reasonable promisor reasonable facilities for the facilities for the performance of his performance of his promise, contract get promise, contract get discharged. discharged.

5.5. By DeathBy Death Sec. 37Sec. 37 Where a contract is Where a contract is personal in character, or personal in character, or where personal skill or where personal skill or ability is involved, death of ability is involved, death of the promisor discharge the the promisor discharge the contractcontract

6.6. By Refusing tender By Refusing tender of performance. of performance.

Sec. 38Sec. 38 Refusal to accept “offer of Refusal to accept “offer of performance”, discharge performance”, discharge the party making the offer. the party making the offer.

7.7. 7. By Unauthorised 7. By Unauthorised material alteration material alteration of contract. of contract.

material alteration by one material alteration by one party to the contract without party to the contract without the consent of the other the consent of the other party, the contract is party, the contract is dischargeddischarged

8.8. 8. Discharge by 8. Discharge by lapse of time. lapse of time.

Contract is discharged also by Contract is discharged also by lapse of time. lapse of time.

9.9. 9. By Operation of 9. By Operation of Law.Law.

A contract is discharged by A contract is discharged by the operation of law, in the the operation of law, in the cases – cases –

(i) By insolvency or (i) By insolvency or bankruptcy bankruptcy

(ii) By merger.(ii) By merger.

1010 10. By Breach of 10. By Breach of Contract. Contract.

Sec.39Sec.39 Breach of contract occurs Breach of contract occurs where a party refuses to where a party refuses to perform his part of the perform his part of the promise. Breach of contract promise. Breach of contract may be –may be –

(i) Actual breach of contract.(i) Actual breach of contract.

(ii) Anticipatory breach(ii) Anticipatory breach