When the rights and obligations arising out of a contract are extinguished, the contract is said to be discharged or terminated. In other words, discharge of a contract means termination of the relationship between the parties to a contract.
The ways of discharging a contract can be discussed as:-
i) Discharge of Contract By Performance: When a contract is duly performed by both the parties within the specified time and in the manner prescribed, the contract is said to have been performed and discharged. Performance may be: (a) Actual (b) Attempted.
- Actual Performance: When each party to a contract fulfils his obligation arising under the contract within the time and in the manner prescribed, it is called actual performance of the contract and the contract is discharged.
- Attempted Performance – When the promisor offers to perform his obligation under the contract, but is unable to do so because the promise does not accept the performance, it is called attempted.
ii) Discharge BY Mutual Consent Or Agreement: Line a contract is created by an agreement, it may also be discharged by another agreement between the same parties.
The methods of discharging a contract by mutual agreement are:-
- Novation – Novation occurs when a we contract is substituted for an existing contract, either between the same parties or between different parties, the consideration being the discharge of old contract, mutually. E.g.: A is indebted to B & C to C. By mutual agreement B’s debt to C & B’s loan to A are cancelled & C accepts as his debtor.
- Alteration - Alteration of a contract means change in one or more of the material terms of a contract. There lies a difference between ‘novation’ & alteration. In novation’ there may be a well as a change in the parties. But, in alteration the parties. But, in alteration the parties remain the same. Thus the two are not the same
- Rescisson – A contract may be discharged, before the date of performance, by agreement between the parties. Such a agreement accounts. The contract may be cancelled by either both the parties mutual or any one of them, on certain grounds.
- Remission- Remission may be defined “as the acceptance of a lesser sum than what was contracted for or a lesser fulfillment of the promise made”. Eg.: A borrows Rs.2,00 from B. B repays only Rs.1000 which A accepts in will satisfaction of the whole debt.
- By waiver – Waiver means the deliberate abandonment or giving up of a right which a party is entitled to under a contract.
- Merger – Under this an unferior right of one of the parties merges into a superior right of the same party under the same contract or another. E.g: X holds a house on lease. Later he buys this house. Here, his right as a lesse merges into the right of an owner.
- Owing to the occurrence of an event – It is agreed between the parties that a contract will be discharged on the happening of an event ad that even occurs, the contract is discharged.
iii) By Lapse of Time: Every contract must be performed with a specified of reasonable time. If this is not done the contract is discharged. This means that after the lapse of time the contract cannot be enforced in the court of law.
iv) By Operation of Law: A contract termination, by the operation of law in the following cases:-
- Death – where the contract is of personal nature i.e. personal skill or ability is required, the death of the promisor discharges the contract. In other cases, the right & liabilities pass on to the legal representatives.
- Insolvency – when a person is declared insolvent, he is released from his liabilities and the contract is discharged.
- Merger – When an inferior right contract merges with the superior right contract, the former stands discharged automatically.
- Complete loss of evidence – If the evidence providing the existence of the contract is lost, it stands terminated.
- Rights and liabilities vest in one and the same person – In such a case also the contract stands discharged. Eg. If a bill of exchange is accepted by its acceptor, other parties are discharged.
v) By Breach of Contract: Breach means failure of a party to a contract to perform his obligations under a contract. Breach may be of two kinds:
- Actual Breach – It occurs when a party fails to perform his obligation upon the date fixed for performance by the contract. It is committed either at time when performance is due or during performance.
- Anticipatory Breach – It is breach of contract occurring before the time fixed for performance has arrived. It is expressly by words spoken or written when a party to the contract communicates to the other party, before the due date of performance, his intention not the perform it. It is implied by the conduct of the party when a party disables himself from performing the contract.
vi) By Assignment: Assignment of contract means transfer of rights or benefits under a contract in existence.
vii) By Impossibility of Performance: Section 56 states that “An agreement to do an impossible act is void”. Even if such impossibility occurs after the contract has been entered into, the contract will be discharged as and when the impossibility occurs.
viii) By Material Alteration: If one of the parties makes any material alterations i.e. alterations that would affect the rights and liabilities of the parties, without the consent of the other party, the other party can discharge the contract. Thus, in such a case the contract is discharged and cannot be enforced.