Discharge of Contract

The meaning of Contract according to the Indian Contract Act is an agreement between two parties on acceptance of an offer from one party to the other. A contract is enforceable by law. The main ingredient of a contract is the mutual promise between two parties to perform an act as decided in the agreement. In a contract, the promises which are made by both parties in an agreement are bound for the parties to follow.

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This Story also Contains

1. Essential Conditions to be fulfilled for a contract:
2. Discharge of contract
3. Modes of Discharge of Contract
4. Types of Breach of Contract
5. Novation
6. Remissions
7. Merger
8. Conclusion

Essential Conditions to be fulfilled for a contract:

For the formation of a valid contract, there are some essential conditions which must be fulfilled, they are given below-

• There must be two parties to an agreement. And there should be valid acceptance and offer between the two parties.

• Both the parties entering into the contract should be competent enough to enter into a contract.

• In a valid contract, there should be law full consideration and a lawful object.

• Free consent is essential for a valid contract. Neither party to a contract should be forced.

• The contract will be termed invalid when the contract is expressly declared to be invalid in the initial process of the agreement.

Discharge of contract

In the discharge of the contract, a contract is an agreement between two parties when a valid offer and acceptance is made by both parties. When an agreement is formed between two parties the promises and obligations made in a contract are enforceable by law. A contract is binding on both parties and when both parties perform their part of the contract it is said to be a discharge of the contract.

Modes of Discharge of Contract

A contract is a mutual agreement between two parties which is followed by promises and obligations. And the promises and obligations made in a contract are enforced by law and the parties to the contract are bound to perform their part of the contract. There are different ways through which a Discharge of the contract. The way through which a contract is discharged is given below.

1. Discharge of contract by performance of the contract

Discharge of the contract when the contract consists of promises and obligations that parties are bound to perform by the parties to a contract. The liability of the parties to perform comes to an end after the performance of the contract. When the parties to the contract perform their part in a contract the contract is said to be discharged. Every contract brings the obligations of reciprocal promises between the parties and the law makes the parties to a contract bound to perform their part.

Section 37 of the Indian Contract Act 1872 says that the parties to a contract must perform their part of the promise or offer to perform their part within the stipulated period as decided between the two parties during a contract.

Section 38 of the Indian Contract Act 1872 lays down that just like actual performance, an offer to perform by the promisor to the promisee hence discharges a promisor from his obligations.

• Illustration - X and Y enter into a contract and X offers to perform his part of the contract, but Y refuses to perform his part made in the contract in such a case X will be discharged from his duty and obligations from the contract, as X has already offered to perform his part as decided in the contract.
• Exceptions to the performance of a contract- There are two exceptions to the performance of the contract as provided by the law. Under which in some circumstances this exception applies. Firstly, if such promises are dispensed and secondly, if such performance or promises made in the contract are excused by the provision established by law.

2. Discharge of contract by Breach of contract

Discharge of the contract occurs when both parties agree to the terms and conditions and promises made in a mutually agreed agreement when the contract takes effect. The promises made in a contract are bound for the parties to follow as a valid contract is enforceable by law. When either party to the contract fails to perform or refuses to perform the promises made in a contract the breach of contract takes place.

Types of Breach of Contract

A Breach of contract generally occurs when either party to the contract fails or refuses to perform or neglects the promises made in the contract. Breach of the contract is of two types depending on the parties' performance or non-performance of the contract.

1. Actual Breach of Contract:

When there is a contract between two parties and as decided in the agreement by both parties, the parties are bound to perform their duties and obligations as made in the contract. And in circumstances when either party to the contract fails, refuses or neglects to obligations and promises made in the contract the Actual breach of contract takes place.

2. Anticipatory breach of contract:

Section 39 of the Indian Contract Act deals with Anticipatory breach of contract, which says that when either party to the contract refuses to perform their part of the obligations or promises as made in the contract anticipatory breach of contract takes place.

In an anticipatory breach of contract, there is a valid offer and acceptance but when the promises do not perform the promises due to refusal to perform, neglecting the promises, or disabling himself from performing before the date has arrived when the promises needed to be fulfilled it is said to be an anticipatory breach of contract.

Effects of anticipatory breach of contract:

An anticipatory breach of contract is when one party refuses to perform the promises made in a contract. In such a case the contract is brought to an end.

There are two alternatives for either party if the other party to the contract fails to perform their part of the contract. Firstly, The affected party can bring an end to the contract or bring an action against the non-performing party for breach of contract. Secondly, the other party to the contract also has the choice to not end the contract and wait for the date on which the contract was meant to be executed.

3. Discharge of contract due to the impossibility of the performance

Discharge of the contract when Section 56 of the Indian Contract Act 1872 says that when an agreement or promise made in a contract is impossible to act on or impossible to perform the contract itself is void.

Discharge of the contract when Section 56 lays down that a contract becomes void when the promises that were made in the contract during an agreement, the promises which were made are impossible to act on or perform for various reasons or events which the promisor couldn’t ignore or prevent then in such circumstances the contract will be void as established by the law.

Discharge of the contract when any promises or obligations or acts upon which the contract is based if the act or the promise or obligation mentioned in the contract are impossible to follow or unlawful to follow such a contract will be void as given under section 56 of the Indian Contract Act 1872.

Discharge of the contract when the word impossibility used in this section may bring many meanings impossibility does not only mean physical impossibility to perform an act or purpose or obligation. The scope of the word impossibility also covers the restrictions to perform something that has been put out by the law. If any contract leads to a performance of an act and the act is unlawful then such a contract will be void.

Discharge of the contract when the impossibility of performing is inspired by the legal maxim,”les non cogit ad impossiblia” which means that the law cannot compel any man to do something which he cannot possibly perform.

Discharge of the contract when Section 56 is based on the legal maxim,”les non-cogit ad impossible.” which means the law does not compel a man to do what he cannot possibly perform.

Doctrine of Frustration

The doctrine of Frustration is mentioned under section 56 of the Indian Contract Act 1872 which means a promise made in a contract which is impossible to perform for the contract is frustrated. The promisor is excused from performing the promise made in a contract when the performance becomes impossible to perform. This situation is known as the Doctrine of Frustration.

In the case of Taylor v. Caldwell.

• In this case, the performance of a contract becomes impossible and the parties to a contract are excused from the obligations when the contract is negative and not absolute if the thing on which the contract was based ceases to exist anymore. In the following case, A the owner of a music hall permitted B to his hall for a music concert which was to be held for four days. B agreed to the agreement and paid the rent for the music hall, but before the date of execution arrived due to a fire in the music hall the hall was destroyed and after this B filed a suit against A for breach of contract.
• The court in this case held that the contract that was made between A and B is void as A couldn't execute the promise as the hall was destroyed by fire. And therefore the court didn’t hold A liable for the breach of contract.

4. Discharge of contract by Agreement and novation

• Section 62 and Section 63 of the Indian Contract Act 1872 describe a situation under which the obligations and promises of a contract come to an end with the consent of the parties. This can also be termed as discharge by mutual agreement. If the parties to a contract mutually decide to end the promises and obligations made in a contract it will lead to the end of the contract.
• Illustration - X owes rupees ten thousand from Y under a contract formed between the two parties, but X and Y both after negotiations mutually conclude that Z a third party who was initially not in the contract will pay back the money to X on behalf of Y then in such a case it will lead to discharge of a contract by mutual agreement between the two parties to a contract.

Novation

When an existing contract is substituted with a new contract it is called Novation. Novation means a mutual negotiation between two parties leading to an agreement under which a new contract replaces the existing contract, in such a case the parties to a contract will be discharged from their obligations as soon as the new contract replaces the old one.

Kinds of Novation

There are two kinds of Novation, they are-

1. By change of terms and conditions that were mentioned in the contract

Both parties to a contract are allowed to alter the terms and conditions that were mentioned in the contract through mutual agreement between the two parties involved in a contract. After the terms and conditions of a contract are altered the parties are discharged from the old terms and conditions that were mentioned in the agreement and have to perform as per the new terms and conditions mentioned in the contract.

In the case of Salima Jaheen v. National Insurance Co. Ltd.

• In this case, the appellant’s house was set on fire by militants causing substantial damages to her house and the appellant was involved in a contract with an insurance company for a sum amount of 23 lacs.
• After her hose was burnt down by the militants the two surveyors were sent by the insurance company to look into the damages and decide the amount to be paid as insurance to the appellant the appellant was paid 6 lacs rupees of compensation and the appellant was satisfied with the compensation paid by the insurance company.
• The court in this case held that as the appellant was satisfied with the compensation that was paid to her the terms and conditions of the insurance contract had changed and it would not lead to a breach of contract.

2. By a change in the parties who were involved in the contract.

• In a contract, both parties to a contract can mutually decide and reach an agreement and involve a third party. The involvement of a third party means the obligations of the contract will be transferred to the third party.
• In the case of Satish Chandra Jain v. National Small Industries Corporation
• In this case, the appellant was a guarantor to deal for funding done to a business venture owned by his son. The appellant’s son then converted the business into a private limited company.
• The court in this case held that due to changes in the terms and conditions of the company, it amounted to novation and the appellant was discharged from his role as a guarantor.

Remissions

According to Section 63 of the Indian Contract Act, 1872 remissions means when either party to a contract agrees to accept the amount of money which is lesser than the amount of money based on which the contract was based.

Section 63 of the Indian Contract Act 1872 a party is entitled to firstly, dispense or remit whether or fully or in part the performance as decided in the contract. Secondly, either party to a contract can increase the time of performance. Thirdly, the parties to the contract can mutually decide on accepting any other object or money replacing the original performance as was mentioned in the contract.

Merger

When in a contract a new superior right replaces the old right which happened to be inferior to the new right or the existing one in such a case, the old right or the inferior right or obligations that were decided in a contract remains discharged and is merged with a new superior right.

Conclusion

A contract is a mutual agreement between two parties and the obligation and the rights mentioned in a contract come to an end when the obligations are fulfilled or performed by both the parties within stipulated time. Then this can be termed as discharge of contract. Different ways of discharging of contract has been mentioned under the Indian Contract Act 1872 relating to the discharge of a contract. Also, this act provides remedies and compensation to the injured party or the party who has sustained a loss.