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A contract is said to be discharged or terminated when the rights and obligations created by it are extinguished.
The following chart shows the various modes in which a contract may be discharged:
1. DISCHARGE BY AGREEMENT: A contract is created by the parties to it. Similarly, it can also come to an end by their mutual agreement. They may terminate in many ways:
i) Novation: It is a transaction by which with the consent of all the parties concerned, the old contract is revoked and substituted by a new contract.
For example: ‘A’ owes money to ‘B’ under a contract. It is agreed between ‘A’, ‘B’ and ‘C’ that ‘B’ shall accept ‘C’ as his debtor instead of ‘A’. the old debt of ‘A’ to ‘B’ is at an end and a new debt from ‘C’ to ‘B’ has been contracted.
ii) Remission: It means acceptance of less amount or lesser degree of performance than what was actually due under the contract. It is a unilateral act of the promise discharging at his will and pleasure of the obligation of another.
For example: ‘A’ owned a large sum of money to ‘B’. ‘C’ offered to pay a lesser sum in satisfaction of B’s claim on ‘A’. ‘B ’accepted it. It was held that the acceptance was in full satisfaction and ‘B’ cannot claim the balance from ‘A’ after receiving payment in full satisfaction.
iii) Rescission: Rescission means cancellation of the contract. If the parties to a contract agree to rescind it, the original contract need not be performed. Rescission results in the dissolution of the contract while novation results in dissolution and replacement of contract.
iv) Alteration: It means a change in one or more of the terms of a contract. Alteration is valid if it is done with the consent of all the parties to the contract. In alteration, unlike novation, there is a change in the terms of the contract but no change of the parties.
For example: ‘A’ enters into a contract with ‘B’ for the supply of a 1000 bales of cotton at his warehouse on 1st July 1980. Later both ‘A’ and ‘B’ agrees to postpone the date of delivery to 1st September 1980. This change amounts to an alteration of the contract.
v) Waiver: A party to a contract may waive his right under the contract, where upon the other party is released from his obligations. To constitute a waiver neither an agreement nor consideration is necessary.
For example: ‘A’ promise to paint a picture for ‘B’, ‘B’ later on forbids him to do so. ‘A’ is no longer bound to perform the promise.
vi) Accord and satisfaction: Accord means the promise to accept less than what is due under the old contract. Satisfaction means the payment or the fulfilment of the smaller obligations.
For example: ‘A’ owes ‘B’ Rs. 1000. ‘B’ agrees to accept Rs 750 is an accord and the actual payment is the satisfaction.
2. DISCHARGE BY OPERATION OF LAW:
i) Insolvency: Upon insolvency, the rights and liabilities of the insolvent are with certain exceptions transferred to an officer of the court, known as official assignee in presidency towns and as an official receiver in other areas.
ii) Merger: It occurs when there is acceptance of a higher security in the place of the lower. It an operation of law which extinguishes a right by virtue of its coinciding with another and greater right in the same person.
For example: ‘A’ holds certain property under a lease. Subsequently, he buys the property. His right as a lease is merged into his right of ownership now acquired.
iii) Alteration: An Alteration of a written contract made without the consent of the other party has the effect of discharging the contract provided the alteration is of a material part. The term ‘material alteration’ refers to that alteration which affects or alters, in a significant manner the rights and liabilities of the parties.
For example: If a bill of exchange for Rs 25,000 has been altered to one for Rs 2,500, the bill becomes bad in law and the creditor cannot even ask for a decree of Rs 2,500.
iv) Death: when the performance of a contract is required to be made in person and the personal qualifications of the promisor are the considerations for the contract, the death of the promisor discharges the contract.
3. DISCHARGE BY PERFORMANCE: When both the parties perform their part of the obligation in a contract, the contract is said to be discharged.
Performance can be
i) Either actual performance; or
ii) Offer of performance i.e. Tender
In both the cases, the contract gets discharged.
4. DISCHARGE BY BREACH: Parties to a contract are expected to perform their respective obligations. If any party fails to perform his obligation, there take place of breach of contract. The breach of contract may be actual or anticipatory.
i) Actual breach: It may take place in the following place in the following ways:
a) When performance is actually due: When a person does not perform his part of the contract at the time when it is due, he will be liable for its breach.
For example: Where ‘A’ agrees to deliver to ‘B’ 20 chairs on 1st May and fails to do so on that day there is a breach of contract by ‘A’.
b) When actually performing the contract: Where a party to a contract perform his part of the contract, but the other party alleges that it is not a proper performance, according to the terms of the contract in that case if the breach is of a condition essential to the main purpose of the contract, the contract is discharged.
For example: ‘C’ agreed to supply to a railway company with 3,900 railways chairs had been delivered the company told ‘C’ that no more will be required. There is a breach of contract by the company.
ii) Anticipatory breach: When a party to a contract has refused to perform his promise in its entirely, the promisee may put an end to the contract. A refusal by the promisor to perform his part of the contract, before the due date of performance is known as anticipatory breach of contract.
For example: ‘A’ contracts with ‘B’ on 1st January to sell 500 quintals of wheat and to deliver it on 1st May. On 15th April ‘A’ writes to ‘B’ and says that he is not going to deliver the wheat ‘B’ may immediately treat the contract at an end and file a suit for damages without waiting till 1st may, the scheduled date for performance.
5. DISCHARGE BY LAPSE OF TIME: A contract is discharged by lapse of time. The limitation Act 1940, lays down that a contract should be performed within a specified period. If the contract is not performed and no legal action is taken by the promisee within the period of limitation, he is deprived of his remedy at law. The contract is terminated in such a case.
For example: ‘A’ borrowed Rs 5000 from ‘B’ a moneylender and agreed to repay the loan on 31 March, 1986. On that day ‘A’ failed to repay the loan and ‘B’ remain silent and does not demand payment for the same for three years. ‘B’ cannot recover the amount of loan from ‘A’ as the limitation period for the recovery of loan is three years from the date of default, and has expired. Thus, ‘A’ is discharged from his liability to pay the loan.
6. DISCHARGE BY IMPOSSIBILITY OF PERFORMANCE: Impossibility of performance results in the discharge of the contract. Agreements which are impossible in itself are void because the law does not compel the impossible.
For example: ‘A’ promise ‘B’ that he will raise a mango tree in one hour in B’s garden by invoking some mantras is void.
The following chart shows the various modes in which a contract may be discharged:
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| Modes of Discharge |
1. DISCHARGE BY AGREEMENT: A contract is created by the parties to it. Similarly, it can also come to an end by their mutual agreement. They may terminate in many ways:
i) Novation: It is a transaction by which with the consent of all the parties concerned, the old contract is revoked and substituted by a new contract.
For example: ‘A’ owes money to ‘B’ under a contract. It is agreed between ‘A’, ‘B’ and ‘C’ that ‘B’ shall accept ‘C’ as his debtor instead of ‘A’. the old debt of ‘A’ to ‘B’ is at an end and a new debt from ‘C’ to ‘B’ has been contracted.
ii) Remission: It means acceptance of less amount or lesser degree of performance than what was actually due under the contract. It is a unilateral act of the promise discharging at his will and pleasure of the obligation of another.
For example: ‘A’ owned a large sum of money to ‘B’. ‘C’ offered to pay a lesser sum in satisfaction of B’s claim on ‘A’. ‘B ’accepted it. It was held that the acceptance was in full satisfaction and ‘B’ cannot claim the balance from ‘A’ after receiving payment in full satisfaction.
iii) Rescission: Rescission means cancellation of the contract. If the parties to a contract agree to rescind it, the original contract need not be performed. Rescission results in the dissolution of the contract while novation results in dissolution and replacement of contract.
iv) Alteration: It means a change in one or more of the terms of a contract. Alteration is valid if it is done with the consent of all the parties to the contract. In alteration, unlike novation, there is a change in the terms of the contract but no change of the parties.
For example: ‘A’ enters into a contract with ‘B’ for the supply of a 1000 bales of cotton at his warehouse on 1st July 1980. Later both ‘A’ and ‘B’ agrees to postpone the date of delivery to 1st September 1980. This change amounts to an alteration of the contract.
v) Waiver: A party to a contract may waive his right under the contract, where upon the other party is released from his obligations. To constitute a waiver neither an agreement nor consideration is necessary.
For example: ‘A’ promise to paint a picture for ‘B’, ‘B’ later on forbids him to do so. ‘A’ is no longer bound to perform the promise.
vi) Accord and satisfaction: Accord means the promise to accept less than what is due under the old contract. Satisfaction means the payment or the fulfilment of the smaller obligations.
For example: ‘A’ owes ‘B’ Rs. 1000. ‘B’ agrees to accept Rs 750 is an accord and the actual payment is the satisfaction.
2. DISCHARGE BY OPERATION OF LAW:
i) Insolvency: Upon insolvency, the rights and liabilities of the insolvent are with certain exceptions transferred to an officer of the court, known as official assignee in presidency towns and as an official receiver in other areas.
ii) Merger: It occurs when there is acceptance of a higher security in the place of the lower. It an operation of law which extinguishes a right by virtue of its coinciding with another and greater right in the same person.
For example: ‘A’ holds certain property under a lease. Subsequently, he buys the property. His right as a lease is merged into his right of ownership now acquired.
iii) Alteration: An Alteration of a written contract made without the consent of the other party has the effect of discharging the contract provided the alteration is of a material part. The term ‘material alteration’ refers to that alteration which affects or alters, in a significant manner the rights and liabilities of the parties.
For example: If a bill of exchange for Rs 25,000 has been altered to one for Rs 2,500, the bill becomes bad in law and the creditor cannot even ask for a decree of Rs 2,500.
iv) Death: when the performance of a contract is required to be made in person and the personal qualifications of the promisor are the considerations for the contract, the death of the promisor discharges the contract.
3. DISCHARGE BY PERFORMANCE: When both the parties perform their part of the obligation in a contract, the contract is said to be discharged.
Performance can be
i) Either actual performance; or
ii) Offer of performance i.e. Tender
In both the cases, the contract gets discharged.
4. DISCHARGE BY BREACH: Parties to a contract are expected to perform their respective obligations. If any party fails to perform his obligation, there take place of breach of contract. The breach of contract may be actual or anticipatory.
i) Actual breach: It may take place in the following place in the following ways:
a) When performance is actually due: When a person does not perform his part of the contract at the time when it is due, he will be liable for its breach.
For example: Where ‘A’ agrees to deliver to ‘B’ 20 chairs on 1st May and fails to do so on that day there is a breach of contract by ‘A’.
b) When actually performing the contract: Where a party to a contract perform his part of the contract, but the other party alleges that it is not a proper performance, according to the terms of the contract in that case if the breach is of a condition essential to the main purpose of the contract, the contract is discharged.
For example: ‘C’ agreed to supply to a railway company with 3,900 railways chairs had been delivered the company told ‘C’ that no more will be required. There is a breach of contract by the company.
ii) Anticipatory breach: When a party to a contract has refused to perform his promise in its entirely, the promisee may put an end to the contract. A refusal by the promisor to perform his part of the contract, before the due date of performance is known as anticipatory breach of contract.
For example: ‘A’ contracts with ‘B’ on 1st January to sell 500 quintals of wheat and to deliver it on 1st May. On 15th April ‘A’ writes to ‘B’ and says that he is not going to deliver the wheat ‘B’ may immediately treat the contract at an end and file a suit for damages without waiting till 1st may, the scheduled date for performance.
5. DISCHARGE BY LAPSE OF TIME: A contract is discharged by lapse of time. The limitation Act 1940, lays down that a contract should be performed within a specified period. If the contract is not performed and no legal action is taken by the promisee within the period of limitation, he is deprived of his remedy at law. The contract is terminated in such a case.
For example: ‘A’ borrowed Rs 5000 from ‘B’ a moneylender and agreed to repay the loan on 31 March, 1986. On that day ‘A’ failed to repay the loan and ‘B’ remain silent and does not demand payment for the same for three years. ‘B’ cannot recover the amount of loan from ‘A’ as the limitation period for the recovery of loan is three years from the date of default, and has expired. Thus, ‘A’ is discharged from his liability to pay the loan.
6. DISCHARGE BY IMPOSSIBILITY OF PERFORMANCE: Impossibility of performance results in the discharge of the contract. Agreements which are impossible in itself are void because the law does not compel the impossible.
For example: ‘A’ promise ‘B’ that he will raise a mango tree in one hour in B’s garden by invoking some mantras is void.
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