DISCHARGE OF A CONTRACT

Written By :- Rishika Singh (Amity Law School)

Discharge of a contract means the termination of contractual obligations. When the parties originally entered into the contract, they are bound by the rights and duties in terms of contractual obligations. Consequently, when these rights and duties are put out then the contract is said to have been discharged. Once a contract is discharged, parties to it are no longer liable even though the obligations under the contract remain incomplete. It mainly implies that –

When an agreement, which was binding on the parties to it, ceases to bind them, the contract is said to be discharged. A contract may be discharged in following ways:

  • Discharge by performance of contract
  • Discharge by breach of contract
  • Discharge by impossibility of contract
  • Discharge by agreement and novation

1. Discharge by performance

Each party to a contract is bound to perform his part of the obligation. After the parties have made due performance of the contract their liability under the contract comes to an end. In such case, the contract is said to be discharged by performance.

2.Discharge by breach of contract

If a party to a contract fails to perform his obligation according to the time and place specified, then he is said to have committed a breach of contract. Also, if a party repudiates a contract before the agreed time of performance of a contract, then he is said to have committed an anticipatory breach of contract. On the breach of contract by one party, the other party is discharged from his obligation to perform his part of the obligation.

The breach of contract may be either be actual i.e., non-performance of the contract on the due date of performance, (ii) anticipatory before the due date of performance

  • Anticipatory breach of contract

Section 39, Indian contract act 1872, which contains law. relating to anticipatory breach of contract, reads as

“When a party to contract has refused to perform or disabled himself from performing, is promise in its entirety, the promise may put an end to the contract, unless he has signified, by cons or conduct, his acquiescence in its continuance”.

In West Bengal Financial Corporation v. Gluco Series, granted a loan to B amounting to Rs. 4,38,000 and also agreed to grant a further loan of Rs. 1,62,000 at its discretion, provided that B made the repayment of the loan in accordance with the agreement at the rate of Rs. 60,000 every year. B failed to make the repayment as agreed. B insisted that A should grant further loan of Rs. 1.62.000 to him, but A did not grant further loan because B did not make the repayment of loan as agreed. B’s contention was that A had failed to perform the contract by not advancing further loan, which should be considered to be breach of contract. It was, however, held that A had already advanced some loan, which B had accepted, there cannot be said to be a refusal on A’s part to the performance of the contract in its entirety B was therefore not entitled to put an end to the contract on the ground of breach of the contract on the part of A.

3.Discharge by impossibility of performance

Section 56, Indian contract act,1872 implies:

  • Initial impossibility

“An agreement to do an act impossible in itself is void”.

Illustration- A agrees with B to discover treasure by magic. The performance of agreement being impossible, the agreement is void.

Section 56 is based on maxim, “les non cogit ad impossibilia” which means law does not compel to do what cannot be performed.

Both physical and legal impossibility in implied in this section. Legal impossibility is implied in Section 23, Indian contract act 1872. Sometimes, the fact that the performance of the contract is impossible or unlawful may be within the knowledge of the promisor, but the promisee may not be knowing about the same, such a promisor must compensate the promisee for the loss sustained by the promise resulting from the non-performance of the contract.

Section 56 (para 3) which read as under “Where one person has promised to do something which he knows or, with reasonable diligence might have known, and which promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non-performance of the promise.”

  • Subsequent impossibility

This implies that performance of contract was possible when contract was entered into but because of some event the performance may subsequently become impossible or unlawful. Section 56(para 2) Indian contract act 1872 read as under-

“A contract to do an act which after the contract is made, bet impossible or, by reason of some event which the premises and o present, unlawful, becomes void when the act he impossible or unlawful”.

Illustrations-

i) A and B contract to marry each other. Before the time is fixed for the marriage, A goes mad. The contract become void,

ii) A contracts to take in cargo for B at a foreign port. A’s Government afterwards declares war against the country in which the port is situated. The contract becomes void when war is declared.

In Punj Sons Pvt. Ltd Union of India, the promisors, M/s Punj Sons Pvt. Ltd, New Delhi entered into a contract with the Union of India for the supply of 8,420 milk containers of 20 litres each duly coated with hot dip coating. The parties well knew that such coating has to be made with tin ingots, which was a canalized item, not available in the market without a release order of Director General of Supplies and Disposals. In spite of reasonable efforts on the part of the petitioners to obtain the release of necessary quota of tin ingots, the same was not done. It was held that the performance of the contract became impossible due to the non-availability of the tin ingots and the contract had become void due to impossibility of performance, and the promisors could not be made liable to pay damages for the breach of contract.

  • Doctrine of frustration

Frustration means when the contract is rendered impossible of its performance by the external causes which are beyond the contemplation of the parties concerned. It includes both:

  1. Impossibility of the performance of the contractual obligation and
  2. Impossibility of the fulfilment of the ulterior purpose for which the contract was entered into.

In other words, Frustration occurs, when the performance of a contract becomes impossible i.e., the purpose which the parties had in mind is frustrated. If the performance becomes impossible because of a supervening or unexpected and unforeseen event, then the promisor is excused from the performance.

4.Discharge by agreement and novation (Section 62)

Effect of novation, rescission and alteration of contract-

“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 be performed”.

Novation means substitution of an existing contract with a new one. when by agreement between the parties new contract replaces an original contract, the already existing contract is said to be discharged, and in its place the new contract comes into place with its obligation.

Novation is of two kinds-

  1. Novation by change in terms of contract
  2. Novation by change in parties to the contract

A. Change in terms of contract

When parties alter the terms of contract their liability with regards to original agreement is extinguished and, in its place, they become bound by new altered agreement.

Illustration-A owes 10.000 rupees. A enters into an agreement with B and gives B a mortgage of his (A’s) estate for 5,000 rupees in place of the debt of10, 000 rupees. This is a new contract and extinguishes the old.

In this illustration, the parties to the contract remain the same but there is substitution of a new contract with altered terms in place of the ne. It may be noted the novation is valid when both the parties agree to it i.e., ad idem

In Salima Jabeen v. National Insurance Co. Ltd., the appellant entered into a contract of insurance of her property against fire, with Respondent company. The insured sum was Rs. 23 lacs. Her property was set on fire by the militants causing substantial damage the property. The assessment of damages was made by two surveyors. The appellant accepted the compensation of Rs. 6,61,772 by way of full final satisfaction of her claim on the basis of the report submitted he second surveyor. The said amount was paid by the insurance company and received by the appellant. It was held that by accepting the said amount of compensation and agreeing not to make any further claim, the appellant has leased the insurance company from contractual obligations. She Therefore, was not entitled to claim any further compensation from the insurance company.

B. Change in Parties To Contract

By novation, an obligation may be created for one party in place another.

Illustration- A owes money to B under a contract. It is agreed between A, B and C that B shall thenceforth accept Cas his debtor, instead of A. The old debt of A to B is at an end and new debt from C to B has been contracted.

There must be consent of all the parties involved.

In Godan Namboothiripad v. Kerala Financial Corpn., the respondent corporation granted a loan of Rs. 1,26.900 to one Gopinath Menon for the purchase of a bus. Gopinath Menon defaulted in payment of instalments. As a consequence of that, the bus was seized by the respondent corporation Thereafter, the appellants requested the respondent corporation to release the vehicle and undertook to pay the balance of the amount due from be debtor, i.e., Gopinath Menon. It was held that there was novation in this case as a result of which the liability of the original debtor had come to an end and the liability of the appellants had come into existence to pay the outstanding dues.