Discharge of Contract

What is Discharge of Contract ?

As per the INDIAN CONTRACT ACT
1872 – “Discharge of contract means
the termination of a contractual
relationship between parties”.

A contract is said to be discharged

when it ceases to operate , i.e. when
the rights & obligation created by
it come to an end.
 For Example
e.g. Two parties A & B Make a
contract to build a fly-over in a City.
A is the municipal authority of the
city & B is a construction company.
Due to some reasons the contract
get discharged. Then the both
parties are free from the obligations
of contract, i.e. the rights &
obligations of the parties come to an
end.
 How a Contract can get
Discharged ?
A Contract may be discharged in any of
the following way.
1. By Performance
2. By Agreement or by Consent.
3. By Impossibility of performance.
4. By Promisee failing to offer facilities
for performance.
5. By Death
 How a Contract can get
Discharged ?
6. By Refusing tender of performance.
7. By Unauthorised material alteration
of contract.
8. Discharge by lapse of time.
9. By Operation of Law.
10. By Breach of Contract.
 1.Discharge of Contract
By Performance
According to Sec.37 of Indian
Contract Act 1872 – “ If both parties
to the contract have performed what
they have agreed to do, the contract
is discharged.”

Performance of obligation by parties

to the contract puts an end to the
contract.
e.g. in our previous example A & B had a
contract to build a fly-over. B build the fly-
over in the prescribed manner and A
provides the consideration to B.

Here both parties performed their

obligations & rights , what they promised
to do in the contract. Thus the contract is
come to an end by the performance.
2. By Agreement or by Consent.

According to sec. 62-64 of Indian

Contract Act 1872 –
A Contract can be
terminated or discharged by
mutual express or implied
agreement between the parties
in any of the following ways -
A) By Novation

B) By Accord and Satisfaction

C) By Remission and Waiver

D). By Rescission.
 A) By Novation
According to Sec. 62 of ICA 1872 – “ If
the parties to a contract agree to
substitute a new contract for it , or to
rescind or alter it, the original contract
need not to be performed”.
That means When a new contract is
substituted for an existing contract, either
between the same parties or b/w the
different parties ‘novation’ occurs.
Novation means “the wiping out of
the original contract as well as the
creating of a new valid contract”.
If the new agreement is
invalid it cannot serve as novation,
and the original contract continues
unless the rights thereunder are
expressly abandoned.
Novation may occur in two ways -
I. New party is substituted for the old
one.

e.g. A owes money to B under a

contract. It is agreed b/w A, B and C that
B shall henceforth accept C as his debater
instead of A. The old debt of A to B is at
end and a new debt from C to B has been
contracted.
II. Parties may substituted new
contract for the old one.

e.g. A owes B Rs. 10,000. A enters

into an agreement with B, and gives
B a mortgage of his (A’s) estate for
Rs. 5,000 in the place of the debt of
Rs. 10,000. This is a new contract
which extinguishes the old one.
 Special cases.
In SCC 586, 2000(1) - Lata construction
Vs Dr. Ramesh Chandra Ramnik lal Shah,
The Honorable Supreme Court of India
stated – For novation the terms of the
two contracts are consistence and can
stand together, only then the
subsequent contract is said to be the
substitution of the earlier one.
B) By Accord and Satisfaction
According to Sec. 63 of ICA 1872 “Every
promise may dispense with or remit the
performance of promise made to him and
accept, instead of it, any satisfaction
which he thinks fit.”
In other words “When a lesser sum is
actually paid than what is due under an
existing contract, the new contract is
called ‘accord’ & the actual payment is
called ‘ Satisfaction’.
 e.g. Ramesh has an postpaid mobile
connection of AIRTEL. A bill of his
mobile is of Rs. 1245.00, which he
seems more than the actual bill.
thus he register a complain with
AIRTEL. The AIRTEL officials offers
him to pay Rs. 1200 as a settlement.
Here Rs. 1245.00 is accord & Rs.
1200.00 is satisfaction.
 Exception
In the case no. SCC 248, AIR 1992, Union
Carbide Corporation Vs. Union of INDIA,
Honorable Supreme Court ordered “ An illegal
contract cannot constitute an accord &
satisfaction”.
As in that particular case of Bhopal Gas tragedy,
The Government of India claimed US$ 3.3 billion
from UCC. In 1989, a settlement was reached
under which UCC agreed to pay US$470 million
(the insurance sum, plus interest) in a full and
final settlement of its civil and criminal liability.
Supreme Court declare this agreement void,
because of the contract is illegal,& only 15% of
the original $3.3 billion claimed in the lawsuit &
without the consent of Bhopal Gas Tragedy
Relief and Rehabilitation Department.
C) By Remission and Waiver
Waiver means ‘abandoning’ the
rights. According to Sec. 63 of ICA
1872 – “When a party to the contract
abandons or waiver his rights, the
contract is discharged”.

e.g. A promise to paint picture for B. B

afterwards forbid him to do so. A is
no longer bound to perform the
promise.
 D). By Rescission.
According to sec. 64 of ICA 1872 – “When
a person at whose option a contract is
voidable rescinds it, the other party
thereto need not perform his promise”.
He is discharged from his liability under
the contract.
Rescission may occur by mutual consent
of the parties or when one party fails to
perform his obligation the other party may
rescind the contract. Rescission of a
contract cannot be in part only. The entire
contract must rescinded.
e.g.

1. A induces B to enter into a

contract by fraud. The contract is
voidable at the option of B. He may,
therefore, rescind the contract.
3. By Impossibility of performance.
According to sec. 64 of ICA 1872 –
“When the performance of a contract
becomes subsequently impossible,
the contract becomes void”.

It means that an agreement to do an

act impossible in itself is void.
According to sec. 23 & 24 of ICA, “An
agreement becomes void, if the
consideration or object of contract or
its part of which is unlawful”

As per the honorable Supreme Court

of India’s order in the SCC no. 77,
1999(5) – “Impossibility must be
physical or legal impossibility”
e.g. A promises B to sell his horse on 1st
June, but before the day, the horse dies.
Now its impossible to fulfill the promise
due to impossibility of performance.

Such type of impossibilities in which at a

time of contract, contract was capable of
being performed, but subsequently its
performance becomes impossible is called
“ SUPERVENING IMPOSSIBILITY” .
 4. By Promisee failing to offer
facilities for performance.
According to sec. 67 of ICA 1872 –
“If the promisee neglect or refuses to
afford the promisor reasonable
facilities for the performance of his
promise, the promisor is excused by
such neglect or refusal to any non-
performance caused thereby”.
e.g. A contracts with B to repairs B’s
house. B neglect or refuse to point
out to A the places in which his
house requires repair. A is excused
for the non-performance of the
contract, if it is caused by such
neglect or refusal.
 5. By Death
According to sec. 37 of Indian
contract Act 1872 – “ Where a
contract is personal in character, or
where personal skill or ability is
involved, death of the promisor
discharge the contract”.
e.g. A promises to paint a picture for
B by a certain day. A dies before the
day. The contract cannot be enforced
either by A’s representative or by B.
 6. By Refusing tender of
performance.
According to sec. 38 of Indian contract Act
1872 – “If a party offers to perform his
promise and the offer has not been
accepted by the other party, the promisor
is not responsible for non-performance.”

In other words refusal to accept “offer of

performance”, discharge the party making
the offer.
 example
e.g.
 7. By Unauthorised material
alteration of contract.
In cases of material alteration by one party to the
contract without the consent of the other party,
the contract is discharged.

e.g. A and B have a contract of partnership,

according to contract the profit share would be
distributed in the ratio of 50:50. Without the
consent of B, A made an alteration in the
contract and change the shares in ratio 60:40 or
introduce a new partner C.

In this case the contract get discharged & B is

free from any type of obligations & has right to
sue A.
8. Discharge by lapse of time.
Contract is discharged also by lapse of
time.
If the creditor does not file a suit to
recover his debt amount from a debtor
within a period of limitation as laid down
under the Limitation Act, his remedy is
debarred.
The contract is terminated by virtue of the
Limitation Act and the creditor cannot
recover his debt.
 example
For example – the period of
limitation to file a money suit is 3
years. If within 3 years the creditor
fails to file a suit to recover his
amount, the debtor is discharged.
 9. By Operation of Law
“A contract is discharged or
terminated by the operation of
law, in the following cases –

(i) By insolvency or bankruptcy

(ii) By merger.
(i) By insolvency or bankruptcy
On a person adjudicated insolvent,
he is released from all his debts &
liabilities probable in the insolvency.
The rights and liabilities are
transferred to an Official Receiver
under the Provincial Insolvency Act.
The insolvent is discharged from all
obligations arising from all his earlier
contract.
 (ii) By merger.
Merger of superior right into an inferior
right.
For example,
(1)when a higher security is accepted in
the place of the lower security. Inferior or
lower security vanishes or merge into a
higher security.
an ordinary debt is merged into a
mortgage, higher security. The right of
lessee is changed into a right of
ownership.
 10. By Breach of Contract
According to sec. 39 of Indian
contract Act 1872 – “When a party to
a contract has refused to perform, or
disable himself from performing his
promise in its entirety, the promise
may put an end to the contract.”
In other words – “Breach of contract
occurs where a party refuses to
perform his part of the promise.
Breach of Contract may be -
(i) Actual breach of contract.

(ii) Anticipatory breach of

contract.
(i) Actual breach of contract.
The actual breach occurs when during the
performance of the contract or at the time when
the performance of contract is due, one party
either fails or refuse to perform his obligation
under the contract.
e.g. A agrees to deliver to B 5 bags of sugar on
1st Jan., He fails to do so on 1st Jan, There is a
breach of contract by A.

In the above example, if A tenders the sugar to

B on the particular day, But B for no valid reason
refuses to accept delivery, this is a breach of
contract by B
 (ii) Anticipatory breach of
contract.
When a party to contract refuse to
perform his part of the contract
before the actual time of the
performance of the contract is due, it
is called an ‘anticipatory breach of
contract’.
Anticipatory breach of contract may
be -
(a) By repudiation of contract
(express renunciation). or

(b) By impossibility of
performance (implied
renunciation).
(a) By repudiation of contract
(express renunciation).

“when a party communicates his

inability to perform his part of the
contract before the time fixed for the
actual performance is due, he is said
to have expressly renunciation.”
(b) By impossibility of performance
(implied renunciation).
When the breach take place by either
party to contract by his own
voluntary act, which makes
performance of contract, Anticipatory
breach of contract is committed by
impossibility of performance. It is a
case of implied renunciation of a
contract.
Example of anticipatory breach of
contract -
A promises to sell his car to be on
before 1st May, but before 1st May, A
sells his car to C. Here A had
performed such a voluntary act that
the performance of his obligation
towards B is impossible and
therefore, “Anticipatory breach by
impossibility” is committed.
 Brief Summary
Discharge of Contract - Discharge of contract means the
termination of a contractual relationship between parties

Sr. Ways to Discharge of Sec. of Description

Contract ICA 1872
1. By Performance Sec.37 If both parties to the contract
have performed what they
have agreed to do, the
contract is discharged
2. By Agreement or by Sec. 62 A Contract can be discharged
Consent. to 64 by mutual express or implied
agreement between the
parties by –
A) By Novation
B) By Accord and Satisfaction
C) By Remission and Waiver
D). By Rescission.
3. By Impossibility of Sec. 64 When the performance of a
performance. contract becomes
subsequently impossible,
the contract becomes void
4. By Promisee failing Sec. 67 If the promisee neglect or
to offer facilities refuses to afford the
for performance. promisor reasonable
facilities for the
performance of his
promise, contract get
discharged.
5. By Death Sec. 37 Where a contract is
personal in character, or
where personal skill or
ability is involved, death of
the promisor discharge the
contract
6. By Refusing tender Sec. 38 Refusal to accept “offer of
of performance. performance”, discharge
the party making the offer.
7. 7. By Unauthorised material alteration by one
material alteration party to the contract without
of contract. the consent of the other
party, the contract is
discharged
8. 8. Discharge by Contract is discharged also by
lapse of time. lapse of time.
9. 9. By Operation of A contract is discharged by
Law. the operation of law, in the
cases –
(i) By insolvency or
bankruptcy
(ii) By merger.
10 10. By Breach of Sec.39 Breach of contract occurs
Contract. where a party refuses to
perform his part of the
promise. Breach of contract
may be –
(i) Actual breach of contract.
(ii) Anticipatory breach