DISCHARGE OF CONTRACTS

This article is written by Lithivarshini.C of 7^th Semester of BALLB of Tamil Nadu Dr. Ambedkar Law University, an intern under Legal Vidhiya

ABSTRACT:

In the intricate tapestry of contractual relationships that underpin modern society, the concept of contract discharge emerges as a pivotal juncture that often dictates the trajectory of legal obligations and business interactions. Contracts, as binding agreements, create a structured framework through which parties commit to specific responsibilities and expectations. Yet, the dynamics of commerce, unforeseen circumstances, and evolving needs can reshape the landscape of obligations, leading to a critical question: How do contracts come to an end? As legal practitioners and scholars navigate the complexities of contract discharge, they delve into an array of mechanisms that allow for the release of parties from their obligations. The concept extends beyond the realm of legal jargon; it forms the cornerstone of contractual relationships that businesses, individuals, and institutions rely upon. From the execution of promises to the nuanced realms of breach, frustration, substituted agreements, and changes in legislation, the spectrum of methods through which contracts can be discharged is diverse and multifaceted. In this comprehensive examination of the discharge of contracts, the intricate dance between legal principles and real-world pragmatism comes into focus. The tapestry of contractual relationships is woven with threads of promises and expectations, and the mechanisms of discharge serve as a means to unravel these threads when the journey reaches its destination. Through the lens of contract discharge, the dynamic interplay between law and society, business and justice, obligation and circumstance, reveals itself—a testament to the intricate nature of modern legal frameworks.

Key Words: Contract, Discharge, Termination, Responsibilities, Contractual relationship

INTRODUCTION:

Contracts form the bedrock of modern commerce and legal relationships. They are binding agreements that establish obligations and expectations between parties. However, not all contracts are meant to last indefinitely, and there are various circumstances under which contracts can be discharged, releasing parties from their obligations. The discharge of contracts is a crucial aspect of contract law, encompassing different methods and legal implications that shape the dynamics of business transactions and personal arrangements.

DISCHARGE OF CONTRACTS:

The discharge of a contract refers to the termination of the contractual obligations and responsibilities between parties involved. This can happen through various means such as performance, agreement, frustration, breach, or operation of law.

MODES OF DISCHARGE OF CONTRACT:

After the formation of a contract, the next stage is reached, namely, the fulfilment of the object the parties had in mind. When the object is fulfilled, the liability of either party under the contract comes to an end. The contract is then said to be discharged. But “performance” is not the only way in which a contract is discharged. A contract may be discharged:

1. by Performance; [Ss. 31-67]
2. by Impossibility of Performance; [S. 56]
3. by Agreement; [Ss. 62-67] and
4. by Breach.[1]

1.By Performance

The word ‘performance’ means fulfillment of some promise. Performance includes offer to perform or tender.

1. Performance of contract – SECTION 37:

Sec. 37 of the Act reads ‘the parties to a contract must either perform or offer to perform their respective promises unless such performance is dispensed with or excused as per the provisions of this Act or any other law’. Promises made by the promisors bind their representatives when promisors die before performance unless there is a different intention in the contract in this regard.

TYPES OF PERFORMANCE:

1. Actual performance
2. Attempted performance (Tender)

i. Actual performance:

When a party has fulfilled all his obligations under a contract, then it is called actual performance.

ii. Attempted performance (Tender):

When one of the parties is willing to perform his promise, but the other party refuses to accept the performance then it is called attempted performance.

• DEVOLUTION OF JOINT RIGHTS AND JOINT LIABILITIES – SECTION 42 to 45:

When two or more persons have made a joint promise, then all the persons must jointly fulfill the promise unless contrary intention appears in the contract. If any one of dies, his legal representatives must fulfill the promise jointly with the surviving promisors. If all the parties die, then the legal representatives of all of them must fulfill the promise jointly.

• TIME AND PLACE OF PERFORMANCE – SECTION 46 to 50:

The time and place of a contract is determined by the agreement between the parties. Rules regarding time and place of performance:

1.  If no time for performance is specified in the contract and the promisor is to perform without application by the promisee, then the contract must be performed within a reasonable time. The question of ‘reasonable time’ depends upon specific circumstances of each case. [Sec.46)
2. When a promise is to be performed on a certain day, the promisor may perform the promise at any time during the usual hours of business on such day and at the place where the promise is to be performed. (Sec.47)

e.g.: A promises to deliver goods to B’s warehouse on the 1st January. On that day, A brings the goods to B’s warehouse but after closing hours. A has not performed his promise.

• When a promise is to be performed on a certain day, the promisor may perform the promise after application by the promisee to that effect. In such a case, it is the duty of the promisee to apply for performance at a proper place and usual hours. (Sec.48)
• When a promise is to performed without application by the promisee and no place is fixed for its performance, the promisor must apply to the promisee to appoint a reasonable place for performance of the promise (Sec. 49)

e.g.: A contracts with B for supply of 10000 quintals of rice on a fixed day. A must apply to B to appoint a reasonable place for the purpose of receiving it and A must supply him at such place.

• The performance of a promise may be made in manner or at any time which the promisee prescribes. (Sec.50)

e.g: A owes B Rs. 2000/-. B accepts of A’s goods in deduction of the debt. The delivery of goods operates as part payment.

2. By impossibility of performance

A. DOCTRINE OF FRUSTRATION – SECTION 56

The doctrine of frustration is a fundamental concept within contract law that addresses the impact of unforeseen and exceptional events on contractual obligations. In the realm of legal agreements, parties enter into contracts with specific intentions and expectations. However, there are instances where circumstances beyond their control arise, rendering the performance of the contract impossible, impractical, or fundamentally different from what was initially envisioned. This is where the doctrine of frustration comes into play.

When such unforeseen events occur, they can disrupt the very foundation on which a contract is built. The doctrine of frustration serves as a legal principle that allows parties to be released from their contractual obligations when the purpose or nature of the contract is radically altered by these unexpected events. These events must be beyond the control and reasonable anticipation of the parties at the time of contract formation.

This legal doctrine not only addresses the fairness and practicality of holding parties accountable for circumstances they could not have foreseen but also seeks to maintain a balance between the expectations of the parties and the practical realities that might arise. As such, the doctrine of frustration serves as a safety net, ensuring that contracts remain just and equitable in the face of unforeseen and extraordinary occurrences.

Throughout legal history, numerous cases have provided valuable insights into how the doctrine of frustration is applied. These cases help establish precedents and guidelines for determining whether a contract has indeed been frustrated and whether the parties should be relieved from their obligations due to unforeseen events. By examining these cases, legal professionals and scholars gain a deeper understanding of the nuances of this doctrine and how it is applied within the context of real-world scenarios.

1. Taylor v. Caldwell (1863): This landmark case involved the rental of a music hall for the purpose of [2]holding concerts. However, before the scheduled events could take place, the music hall was destroyed by fire. The court ruled that the contract was frustrated due to the unforeseen event of the fire, which made it impossible for the parties to fulfill their obligations. As a result, the contract was discharged.
2. Krell v. Henry (1903)[3]: In this case, a person had rented a room in London to observe the coronation procession of King Edward VII. The main purpose of the contract was to have a view of the procession, but the procession was canceled due to the King’s illness. The court held that the cancellation of the procession due to the King’s illness was an unforeseen event that frustrated the purpose of the contract. As a result, the contract was deemed frustrated, and the person was excused from paying rent.
3. National Carriers Ltd v. Panalpina (Northern) Ltd (1981)[4]: In this case, a carrier was contracted to transport goods from Lebanon to London via Beirut. However, due to civil war in Lebanon, the carrier couldn’t fulfill the contract as originally intended. The court ruled that the outbreak of civil war was an unforeseen event that made the performance of the contract impossible and frustrated its purpose.
4. By Agreement

A contract can be terminated by express or implied agreement. Sec. 62 provides that if the parties to a contract agree to substitute the original contract with a new contract or rescind or alter it, then the original contract need not be performed. This is known as ‘discharge of contract by mutual agreement”. It may be by Novation, Rescission, Alteration, Remission, Waiver or Merger.

1. NOVATION

Novation means substituting a new contract in the place of the original contract. The original contract is discharged and it forms the basis for the new contract.

(E.g.) A owes some money to B under a contract. It is then agreed between A, B & C that B shall henceforth accept C as his debtor instead of A. So, the old debt between A and B comes to an end and a new debt from C to B has been contracted.

Since novation implies a new contract in place of the existing one, all the parties to the existing contract must agree to it.

Novation is of four types:

1. Between the same parties with the same old terms and conditions.
2. Between the same parties with change of terms and conditions.
3. With change of parties with the same old terms and conditions
4. With change of parties and change of terms and conditions.
5. RESCISSION

It means cancellation of the contract. Here, all or some of the terms of the contract are cancelled. It is of three types:

1.  By mutual consent – parties enter into a simple agreement to rescind the contract before its breach.
2. By the affected – if a party has committed a breach of contract, then the affected party can rescind the contract.
3. In voidable contract – the party whose consent is not free can rescind the contract.

Rescission may be total or partial. Total rescission is the discharge of the entire contract. Partial rescission is the variation of the original contract by rescinding some of the terms of the contract or substituting new terms for old terms which are rescinded or adding new terms without rescinding old terms. The rescission of a voidable contract may be communicated or revoked in the same manner as per rules of communication or revocation of proposal.

• ALTERATION

It takes place when one or more of the material terms of the contract are altered by the mutual consent of the parties to the contract. The old contract is discharged.

E.g.: A enters into a contract with B for the supply of 100 bales of cotton at his godown by a certain date. By mutual consent, A and B may very the terms of the contract.

In alteration, there is a change in the terms of the contract between same parties but in novation, there may be change of parties also.

• REMISSION

It means acceptance of a lesser consideration than the one promised i.e. for lesser sum of money. The promisee can dispense with the performance of the promise partly or wholly.

Rule in Pinnel’s Case[5]:

In English law, till 1947 consideration was essential for formation of contract and also for discharge of contract. Even in the year 1947, the Pinnel’s case had three exceptions where part payment could be accepted as full satisfaction of a debt.

1.  When a debtor was unable to pay the debts in full to all his creditors, then he could enter into compromise with all debtors for proportionately less payment of debt to be treated as full discharge of debt. This was called composition with the creditors which was considered as legally valid agreement.
2. When the debt was discharged by the third party for a lesser amount than what is due from the debtor and when it was treated by the creditor as full discharge of debt, then it was considered as a legal agreement. This is called rule in Cook Vs. Lister.
3. The rule of quasi estoppel that the creditor is estopped from denying his acceptance of lesser amount as full satisfaction of the debt was used as a defence in all actions brought by the creditor.

Even in England after 1947, the rule in Pinnel’s case was not recognised and hence not followed. In India, as per Sec. 63 of Indian Contract Act which recognises ‘accord and satisfaction’, the rule in Pinnel’s case is no longer valid.

Accord and Satisfaction:

The liability arising out of breach of contract may be discharged by accord and satisfaction. Thus accord is an agreement made after the breach of contract. Here the party not in fault accepts some consideration other than his legal remedy from the defaulting party and performance of other terms by such defaulting party. The validity of accord and satisfaction is judged by the general law of contract.

Accord is thus an agreement and satisfaction is the consideration offered. Accord without satisfaction does not discharge the existing liability after breach and it can be enforced for claiming damages, if it is breach by one of the parties when the other party is willing to perform the terms of the agreement. The amount in the substitution of a new agreement comes under Section 62. The acceptance of any other satisfaction than performance comes under Section 63.

• WAIVER OF CONTRACT

It is an agreement between the parties to contract that they shall no longer be bound by the contract. In other words, it is a mutual abandonment of rights. To constitute a waiver, neither an agreement nor consideration is necessary.

• MERGER

The inferior rights accruing to a party under a contract merge with a superior right belonging to the same party by the same or some other contract.

4.By Breach

A. ANTICIPATORY BREACH OF CONTRACT – SECTION 39

    A contract is discharged if one party fails or refuses to perform his duties/obligations under the contract. This is known as ‘discharge by breach of contract.

The discharge by breach of contract is of 2 types: 

1. Actual breach of contract
2. Anticipatory breach of contract

                    A. Actual breach of contract:

This is divided into two types:

1. Breach of contract when performance is due:

The breach of contract occurs at the time when the performance is due, when one party fails or refuses to perform his obligation under the contract.

e.g.: D agrees to deliver 5 bags of sugar on 1 June. He does not deliver the bags of sugar on 1 June. This is a breach of contract.

• Breach of contract during the performance of the contract:

The breach of contract also occurs during the performance of the contract, when one party refuses to perform obligation under the contract. This is called repudiation of contract. It may be

1. Express Repudiation:

If one party by his word or act refuses to perform his obligation, the other party can treat the contract as discharged.

Court Vs. Amperget Rly Co.,[6]

C contracted with a Railway Co., to supply 3000 tons of railway chairs to be supplied in installments. After supply of some chairs, the Railway Co., asked C not to deliver more. Held C could bring an action for breach of contract.

• Implied Repudiation:

If a party makes the performance of the contract impossible by his own act, the contract is discharged. This is inferred by the conduct of the parties, who act in a manner indicating breach of contract.

• Anticipatory breach of contract:

When a party to the contract declares his intention of not performing the contract when it is due, it is called anticipatory breach of contract.

Anticipatory breach of contract is of the following ways:

1. By Renunciation (Express repudiation):

Here one party renounces his liabilities under the contract expressly before the performance of the contract. E.g.: A contracts with B to supply certain quantity of rice on 1 June. Before this date, he informs B that he is not going to supply the goods. This is express anticipatory repudiation.

• By Implied Repudiation:

Before the time of performance arrives, the promisor makes the performance of his promise impossible by doing some act.

Lovelock Vs. Franklyn:[7]

A promise to assign to B within 7 years all his interest in a lease for the sum of $ 140. Before the end of 7 years. he assigns his interest to another person. This is anticipatory breach of contract by implied repudiation.

5.By Operation of Law

A contract may be discharged by operation of law Independently of the wishes of the parties. The following are five ways in which the contract is discharged by operation of law.

1. By Death:

In contracts involving personal skill or ability, the death of promisor discharges the contracts. In other contracts, the rights and liabilities pass on to their legal representatives.

• By merger:

The promisor and the promisee become a party by means of merger of rights. For eg. A is a lessor and B is his lessee of some property. B buys the property from A. Now the contract of lease is terminated.

• By Insolvency:

When a person is adjudged as insolvent, he is discharged from all liabilities incurred by him before the adjudication.

• By unauthorized alteration of the terms of a written agreement:

When a party to a contract makes any material alteration in the contract without the consent of the other party, the other party can avoid the contract. The alteration. should change the legal identity or character of the contract.

• Rights and liabilities vest with the same person:

When rights and liabilities under a contract vest with the same person, then the other party has no rights and liabilities and as such the contract gets discharged. For e.g. When a bearer cheque comes to the possession of the maker of the cheque, the contract gets discharged with the original bearer of the cheque.

Implications of Contract Discharge:

The discharge of a contract has far-reaching legal and commercial implications. It marks the end of contractual obligations and, in turn, may trigger various consequences:

1. Legal Recourse: Discharge due to breach of contract may result in legal actions to seek damages or compensation for losses suffered.
2. Release from Liability: Parties discharged from a contract are generally released from any further liability arising from non-performance.
3. Freedom to Pursue New Agreements: A discharged party gains the freedom to enter into new contracts without the constraints of the previous one.
4. Risk Management: Discharge mechanisms protect parties from uncontrollable events, fostering fairness in contractual relationships.
5. Business Certainty: Clear methods of discharge provide predictability and stability, vital for business planning and risk assessment.

CONCLUSION:

In conclusion, the discharge of contracts is a vital aspect of contract law that accommodates changing circumstances and ensures fairness in agreements. Whether through performance, mutual agreement, frustration, breach, substituted agreement, or legal operation, the discharge of contracts reflects the dynamic nature of commercial and personal interactions. Understanding the methods and implications of discharge is essential for both legal practitioners and individuals engaging in contractual relationships, contributing to a more just and functional legal framework for modern society.

REFERENCE:

1. https://www.srdlawnotes.com/2017/11/discharge-of-contract-law-of-contract.html?m=1
2. Avtar Singh, Contract & Specific Relief, Page- 433, 12th Edition, EBC Publishing (P) Ltd.
3. Avtar Singh, Contract & Specific Relief, Page- 433, 12th Edition, EBC Publishing (P) Ltd.
4. https://blog.ipleaders.in/contract-discharge/
5. https://www.srdlawnotes.com/2017/11/discharge-of-contract-law-of-contract.html?m=1
6. lawtimesjournal.in/discharge-of-contract/

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[1] Ss. 39 and 73. Expiry of the period of limitation for enforcement of rights and obligations under a contract is not a mode of discharge recognised by the Contract Act. Lapse of time does not put an end to rights and obligations under the contract, Mahadeo Nathuji Patil v Surjabat Khushalchand Lakkad, (1994) Mah LJ 1145.

[2] 122 Eng.Rep. 309 (1863).

[3] 2 KB 740

[4] National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675

[5] Pinnel’s Case [1602] 5 Co. Rep. 117a, also known as Penny v Cole

[6]  117 E.R. 1229 QUEEN’S BENCH.

[7]  115 E.R. 916 QUEEN’S BENCH