What is Discharge of Contract? Meaning Definition Types, Example

Discharge of contract refers to the way in which a contract comes to an end. Today in this article, we have shared what is the discharge of contract and its types, and modes of discharge of contract.

► What is the Discharge of the Contract?

Discharge of contract is the state of termination of the contractual relationship between the parties. A contract is said to be discharged when the obligation created by it comes to an end.

◉ Discharge of Contract Meaning

  • Discharge of contract means termination of contractual duties or dissolution of contracts.
  • Discharge literal meaning is to remove liability or to be released from liability. Whatever causes a binding contract ceases to be binding is a discharge of the contract.
  • A discharge can take place generally by performance, agreement, the lapse of time, frustration, and breach.

Definition of Discharge of Contract

As per the Indian Contract Act 1972,

“Discharge of contract has been defined as the termination of the contractual relationship between the parties. A contract is said to be discharged when it ceased to operate and when the rights & obligations created by it come to an end.”

The various modes of discharge of contract or the different ways of discharge of contract are explained below.

► Modes of Discharge of Contract (Types)

The various ways or modes of discharge of a contract are as follows; 

  • By Performance
  • By Agreement or consent
  • By Impossibility of performance
  • By Lapse of time
  • By Operation of Law
  • By Breach of contract

✔ Discharge of Contract by Performance

Performance of the contract is the act of performing an obligation. It occurs when the parties to the contract fulfill their obligations arising under the contract within the time and in the manner prescribed.

Section 37, of the Indian Contract Act 1872, lays down that the parties to a contract must either perform or offer to perform their respective promises unless such performance is dispensed with or excused. Performance of the contract is known as one of the most usual modes of discharge of a contract.

Discharge by performance may be of two types; Actual and Attempted.

Actual

  • Actual performance simply means when both parties involved in the contract perform their promises, then the contract is discharged.

Attempted

  • Where the promiser offers to perform his obligation, but the promisee refuses to accept the performance.

Discharge by Agreement or Mutual Consent

This is one of the common ways by which the discharge of a contract occurs between the parties. It can be executed by mutual consent of both parties involved in the contract. The consent can be of two types that are by express and implied consent.

Discharge of Contract by agreement or mutual consent is categorized into the following types;

  • Novation
  • Rescission
  • Alteration
  • Remission
  • Waiver
  • Merger

Novation

Novation occurs when a new contract is substituted for an existing one, either between the same parties or between new parties, the consideration mutually being the discharge of the old contract.

When the parties to a contract agreement for novation. The original contract is discharged by novation and need not be performed.

The following condition comes along with novation.

  • (a) Novation cannot be compulsory.
  • (b) The New contract must be valid and enforceable by the law.

Rescission

The contract is discharged by rescission when all or some of the terms of the contract are canceled.

By Rescission, A contract may be discharged before the date of performance and by agreement between the parties to the effect that it shall no longer bind them.

Such an agreement amounts to the rescission or cancellation of the contract, the consideration for mutual promises being the abandonment by the respective parties of their rights under the contract. An agreement of rescission releases the parties from their obligations arising out of the contract.

Alteration

The contract is discharged by Alteration when one or more of the terms of the contract is altered.

Discharge of contract by Alteration means a change in one or more of the material terms of a contract by mutual consent. When an original contract is discharged by alteration and then new contract in its altered form takes its place.

In case of discharge of contract by alteration, the number of parties remains the same, only the terms of a contract are altered.

Remission

The contract is discharged by Acceptance of a lesser fulfillment of the promise made.

Remission may be defined as the acceptance of a lesser sum than what was contracted for a lesser fulfillment of the promise made.

Waiver

The contract is discharged by Waiver when Intentional relinquishment or giving up of a right by a party entitled thereto under a contract.

Waiver means the deliberate abandonment or giving up of a right of the party which is entitled to under a contract, whereupon the other party to the contract is released from his obligation.

Merger

The contract is discharged by Merger when an inferior right accruing to a party under a contract merges into a superior right accruing to the same part under the new contract. 

Discharge by Impossibility of Performance

1. Impossibility at the time of the contract (Known to the parties)

If the impossibility is not obvious and the promisor alone knows of the impossibility or illegality then existing or the promisor might have known as such after using reasonable diligence.

In such case, Promisor is bound to compensate the promisee for any loss he may suffer through the nonperformance of the promise, in spite agreement being void ab-initio (Section 56).

2. Subsequent impossibility (Unknown to the parties)

Here Initial impossibility is unknown to the parties. In this case, an agreement to do an act impossible in itself is void.

When the performance of the Contract becomes impossible after the contract is made. impossible due to some event that the promisor could not prevent, and that the impossibility should not be self-induced by the promisor or due to his negligence.

3. The Doctrine of Supervening impossibility

An impossibility that arises subsequent to the formation of a contract.

Cases where the impossibility of performance is an excuse:

  • Destruction of subject matter
  • Nonexistence of a state of things
  • Death or incapacity for personal services
  • Change in law
  • Outbreak of war

Cases where the impossibility of performance is not an excuse:

  • Difficulty of performance
  • Commercial impossibility
  • Failure of a third party
  • Strikes, lock-outs, and civil disturbances
  • Failure of one of the objects

Discharge by Lapse of Time

Discharge of contract by Lapse of Time occurs if a contract is not performed within the period of limitation and if no action is taken by the promisee in a law court, the contract is discharged.

In certain cases, the lapse of time may also discharge a contract where time is of the essence in a contract.

If the contract is not performed at the fixed time, the contract comes to an end, and the party not at fault need not perform his obligation and may sue the other party for damages.

Also Read : Types of Contract

Discharge by Operation of Law

  • Death
  • Merger
  • Insolvency
  • Unauthorized alteration of terms of the contract
  • Rights and liabilities vesting in the same person or party

A contract terminates by operation of law in the following cases.

Death

Where the contract is of a personal nature, the death of the promisor discharges the contract.

Insolvency

A contract is discharged by insolvency occurs when one of the parties involved in the contract becomes insolvent.

Merger

The contract may be discharged by the merger where an inferior right contract merges into a superior right contract, the former stands discharged automatically.

Unauthorized Material Alteration

A material alteration made in a written document or contract by one party without the consent of the other will make the whole contract void.

Discharge by Breach of Contract

Discharge of contract by the Breach of contract occurs when one of the parties involved in the contract breach the contract. Breach of contract also brings to an end the obligations created by a contract on the part of each of the parties.

The aggrieved party, (party not at fault) can sue for damages for breach of contract may be of two kinds.

◉ (1) Anticipatory breach:

An anticipatory breach of contract occurs when the breach of the contract takes place before the time fixed for performance has arrived.

  • By an act of the promisor making performance impossible, he rejects before
  • By renunciation of the obligation such as Express Repudiation

◉ (2) Actual breach:

An Actual breach occurs when a party fails to perform his obligation upon the date fixed for performance by the contract.

  • At the time when performance is due
  • During the performance

Also Read : Remedies for Breach of Contract