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Discharge of ContractLegal Environment of Business
Prepared By
Manu Melwin Joy
Assistant ProfessorIlahia School of Management Studies
Kerala, India.
Phone – 9744551114Mail – [email protected]
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Definition
Discharge of contract meanstermination of thecontractual relationshipbetween the parties. Acontract is said to bedischarged when the partiesthereto are freed from thetask of performing theirrespective obligations asarising from the contract.
Definition
When a contract isdischarged, all the rightsand liabilities of thecontracting parties areextinguished and theirrelationship comes to anend.
Various modes of discharge
1. By performance of contract.– Actual Performance.
– Attempted performance.
2. By agreement.– By Novation.
– By alteration.
– By recession.
– By remission.
– By waver.
– By merger.
Various modes of discharge
3. By lapse of time.
4. By operation of law.
– By death.
– By insolvency.
5. By impossibility of performance.
– At the time of contract.
– Subsequent to contract.
6. By breach of contract.
By performance of contract
When persons whohave undertaken theobligations perform itwithin the time and inthe manner prescribed,the contract will beproperly discharged.
By performance of contract
Performance is classified intotwo.
• Actual performance – Section37 states that in order to claimperformance, the parties to acontract must have actuallyperformed their part of thecontract.
• Example – If A agreed to supply20 bags of rice to D, A must haveactually supplied the entire 20bags of rice. Then only it can bestated that the contract hasactually been performed.
By performance of contract
Performance is classifiedinto two.
• Attempted performance – Aperson who is bound toperform a promise will beready to perform hispromise but sometimes theother party refuses toaccept that performance.This is known as attemptedperformance or tender.
By agreement
As contract emergesfrom an agreement ofboth parties, it mayalso be terminated byanother agreement orconsent of bothparties.
By agreement
Contract may bedischarged by agreementin the following ways.
– By Novation.
– By alteration.
– By recession.
– By remission.
– By waver.
– By merger.
By agreement
By Novation (substitutionof a new contract) –Sometimes, the contractingparties may agree tosubstitute a new contract inthe place of the originalcontract betweenthemselves and differentparties. The substitution ofnew contract is called“Novation”.
Example
A owes Rs 5000 to B. It is
agreed between A, B and
C that henceforth, C will
repay the amount of Rs.
5000 to B. Old contract
disappears and new one
is formed.
By agreement
By alteration – Alterationmeans a change in one ormore of the terms of thecontract. By mutualagreement, parties tocontract can alter one ormore terms of thecontract. By suchalteration, the contract isdischarged.
ExampleX enters into a contract with Y
for supply of 100 bags of Sugar
by the first of the next month.
Subsequently, X and Y want to
alter the terms of the contract
and thereby X and Y agree that
X should supply 50 bags of sugar
instead of 100 bags on the 10th
of the next month. In this case,
the old contract is discharged.
By agreement
By recession – Recessionmeans cancellation ofcontract. In that case, theoriginal contract need notbe performed. Both thecontracting parties mayagree, by mutualagreement, to rescind thecontract by cancellingsome or all the terms ofthe contract.
Example
X agrees to supply Y certain
luxurious good within six
months. By the time, the
said goods go out of
fashion. Both X and Y agree
to cancel the contract. By
such cancellation, the
contract between X and Y is
discharged.
By agreement
By remission – Remissionmeans acceptance of alesser performance thanwhat was actually dueunder the contract. It is aunilateral act of promisedischarging at his will andpleasure the obligation ofanother.
Example
X owes Rs. 500 to Y. Y
agrees to accept a lesser
sum namely, Rs 400 instead
of Rs. 500. As soon as Rs.
400 is paid by X, the whole
debt of Rs. 500 is
discharged.
By agreement
By waver – When bothparties by mutualconsent, agree ofabandon their respectiverights, the contract neednot be performed andthe same is discharged. Itis called waiver.
ExampleA agrees to supply B 10 bags
of rice. B, in return agrees to
supply A, 10 bags of wheat.
Subsequently, both A and B
agree to abandon their
respective rights. Accordingly
A need not supply rice to B.
Likewise B need not supply
wheat to A. Now contract is
discharged.
By agreement
By merger – Sometimes,both parties, who havealready entered into acontract within inferiorrights, may entersubsequently new contractand the new contractcreates superior rights.Now the previous contractwith lesser right is said tobe merged withsubsequent contract withsuperior rights.
Example
Y is the owner of the house
in which X is residing as a
tenant. Subsequently X
buys the property from Y. In
such case, X’s lesser rights
as leasee will be merged
into his superior rights as
an owner.
By lapse of time
Every contract must beperformed within specifiedperiod and it is called theperiod of limitation. If thecontract is not performedand the promise fails totake any action within theperiod of limitation, thenthe contact is terminated ordischarged by lapse oftime.
ExampleX borrows Rs. 500 from Y through
a promissory note. If X does not
pay any amount, Y must file a suit
to recover the amount in a court
of law within three years from
the date of execution of the
promissory note. If no action is
taken by Y within three years, the
promissory note is completely
barred by limitation and Y can’t
recover the amount from X.
By operation of law• A contract may be discharged
by operation of law. In otherwords, law itself dischargesthe contract in the followingcircumstances.– By death – An contract which is
based upon personal skill andqualification of the promisor isterminated on the death of thepromisor. In other contracts,the rights and liabilities ofdeceased person pass of hislegal representatives.
ExampleX agrees to paint a picture
for Y. Subsequent to the
agreement X dies. Now the
contract of X with Y
discharged because of the
death of the promisor.
By operation of law
– By insolvency – If a personis adjudicated insolvent bya competent court, all hisrights and liabilities arevested with the officialreceiver and the insolventis discharged from all hisrights and liabilities arisingfrom all his earliercontracts.
By impossibility of performance
Contract will bedischarged when theperformance of contractbecomes impossible.Impossibility ofperformance of acontract may exist either
By impossibility of performance
At the time of contract –when both the contractingparties are aware ofimpossibility ofperformance of thecontract even at the time offormation of the contractitself, then the agreementbecomes void. If they arenot aware, contractbecomes void when suchimpossibility is discovered.
ExampleX agrees to pay Y Rs. 10,000
and Y, in return promises to
bring the moon from heaven
for X. In such a case, the
impossibility is known for
the parties.
By impossibility of performanceSubsequent to contract – As ageneral rule, the impossibilityof performance will notexcuse the promisor and incase of non performance, thepromisor is liable to paydamages to the promise. Butthere may be some cases inwhich non – performance ofthe contract may be due tosome even beyond the controlof the parties. In such cases,performance of contract willbe discharged. This is called“Doctrine of Superveningimpossibility’.
ExampleA and B contracts to marry
each other. Before the time
fixed for marriage, A goes
mad. This supervening factor
renders the contract
impossible. So the contract
becomes void.
By breach of contract
Breach means failure of aparty to perform hisobligation under acontract. When apromisor has failed toperform his part ofcontract, he hascommitted a breach ofcontract. Breach ofcontract is of two kinds.
By breach of contract
Actual breach of contract– Actual breach ofcontract may take placeat the time when theperformance becomesdue and in such cases,one party, fails or refusesto perform his obligation.
ExampleX agrees to supply Y, 10 bags
of sugar on the 1st of March.
In this case, performance is
due on 1st March. On the 1st
march, he fails to supply
sugar. This is actual breach
of contract at the time when
the performance is due.
By breach of contract
Anticipatory breach ofcontract – When a partyto a contract refuses toperform his obligationbefore the due date ofperformance, it is calledanticipatory breach ofcontract.
ExampleX agrees to supply Y, 10 bags
of sugar on the 1st of March.
But before this date, say in
the second week of
February, he informs B that
he is not going to supply the
sugar. This is anticipatory
breach of contract by
express repudiation.
• Discharge of contract.
