This article is written by Samia Mirza of 1st year of Himachal Pradesh National Law University, Shimla, an intern under Legal Vidhiya.

ABSTRACT

A contract is an agreement between two or more parties for a stipulated task which creates a legal obligation upon parties and is bounded for fixed duration of time or the completion of promises as agreed upon by both the parties. In India, the Indian Contract Act 1872 deals with contracts and other aspects which are related to it. The term ‘contract’ is defined under Section 2(h) of the Act as “agreement which is enforceable by law”. A contract is an important aspect in Business law as it is essential for companies or individuals to have a legal document which readily explains the course of agreement among them. No contract is formulated for an undefined or unlimited time. In simple words, the end of the relevance of a contract or the end of a contractual relationship between two parties is termed as Discharge of contracts.

This article further seeks to elaborates on the topic of discharge of contracts.

Keywords: Agreement, Definition of Contracts, Indian Contract Act 1872, Business law, Discharge

INTRODUCTION

In the modern world, we do not enter into agreement only through the concept of human trust and faith. The modern society is much more complex and vast than earlier times and thus requires more formal initiatives as agreements. In the modern world agreements are done in form of contracts which in simple words are a proper written agreement which contains all the terms and conditions which are to be fulfilled by the parties in the due course of agreed time. But as mentioned earlier that they are not based on truth and faith only, they are certain to come to an end at a stage. Contracts are a binding force for multi-dimensional business activities and as important is their existence and enforcement, discharge of contracts also is a crucial aspect of contract law, discharge has different methods and legal implications that shape the dynamics of business transactions and personal arrangements among the parties and understanding of discharge of contracts plays an important role to navigate and sail through the legal complications related to all aspects of business, contracts and other agreements.

DISCHARGE OF CONTRACTS

Forming a contract is the first step but how does the contract come to an end? The contracts come to an end with the concept of discharge of contracts. ‘Discharge’ refers to the end of something or the elimination or termination of something from its original form. Discharge of a contract refers to the termination or end of relevance of the contractual obligations and responsibilities between the parties involved as no contract is formulated for an indefinite period of time. Discharge of contract can happen through different ways such as performance, frustration, agreement, operation of law or breach of contract as agreed upon by the parties.

METHODS OF DISCHARGE OF CONTRACTS

Once a contract is formulated, it’s dismantling is beyond any doubt and takes place duly at one point of time either with satisfaction or sometimes dissatisfaction of one or both the parties. But dismantle, termination or discharge does not take place only when the promises or obligations are fulfilled by both the parties, There are several other ways by which a contract is discharged among the parties and these ways of discharge are being discussed below one by one: –

1. Discharge by Performance

1. Discharge by Agreement

1. Discharge by Impossibility of Performance

1. Discharge by Operation of Law

• Discharge by Breach

These are being discussed further in detail below-

1.      Discharge by Performance

One of the primary and generally most common way of discharge of contracts is through Performance. When both the parties have fulfilled their obligations and completed their promises as agreed upon in the contract within the stipulated time as agreed, the contract has

reached its conclusion and end or fulfilment. This fundamental principle reflects the Indian contract law’s commitment to the principle of “Pacta Sunt Servanda,” which means that agreements must be honored and respected.

TYPES OF DISCHARGE BY PERFORMANCE

I.      Actual Performance:

When both the parties have concluded and fulfilled their promises under the obligations of the contract it is said to be actual performance. The performance should be completed and precise according to the terms of contract.

II.    Attempted Performance:

In contract law, attempted performance refers to a situation where one party among both the parties makes a genuine effort to complete their contractual obligations but does not fully complete them as outlined or agreed in the contract. Unlike actual performance, where all obligations are met precisely, attempted performance falls short of full execution, and there may be some deficiencies, delays, or failures in meeting the contract’s terms or the second party may refuse to accept the performance.

CASE LAW EXAMPLE-

In the case of Satyabharta Ghose v. Mugneeram Bangur & Co. (1954 AIR 44), the Supreme Court emphasized that when a contract is based on mutual agreement and promises, each party must perform their obligations and non-performance is breach of contract.

III.  Discharge by Agreement

A contract can be dismantled or discharged by an expressed or implied agreement among the parties. When both parties agree to terminate a contract before the requisite conditions are completed, they can also enter into a new agreement that formally discharges the original contract under the Indian Law. Section 62 of the Indian Contract Act,1872 deals with this part.

CASE LAW EXAMPLE-

The case of Alopi Parshad & Sons Ltd. v. Union of India (1960 AIR 588), the Supreme Court held that if the parties have mutually agreed to terminate the contract, such contracts are valid and binding.

Agreement can be done by various methods such as Rescission, Novation, Alteration, Remission, Merger or Waiver.

1. RESCISSION

It refers to complete cancellation of a contract. After the rescission of a contract, the parties are resorted to their original positions before the contract was formulated between them.

Parties mostly rescind from a contract if they are victims of an alien factor such as undue influence, mistake, misinterpretation etc. Rescission can be partial and it can also be complete. Partial means that only some terms and conditions are substituted by new terms in a new contract and total rescission is the discharge of the whole contract.

Three types of discharge by agreement-

• With mutual consent – When the parties enter into an agreement to rescind the contract before the breach by any one party.
• By the affected – If one of the parties has committed a breach of contract by any means, then the party which has been affected can rescind the contract.
• In cases of Voidable contract – Thee party whose consent is not free and is influenced by some alien factor can rescind the contract.
• NOVATION

It is a concept that refers to the substitution of an existing contract with a new contract, where the transfer or replacement is agreed mutually agreed by both the parties involved. Here the terms of the old contract are generally changed to new terms or sometimes even the parties of the contract are changed depending on the circumstances.

Novation is of four types-

• Among the same parties with the old terms and conditions.
• Among new parties with the old terms and conditions.

• Among the same parties with new terms and conditions.
• Among the new parties with new terms and conditions.

1. ALTERATION

Alteration refers to when the terms and conditions which the parties have agreed upon are altered or changed by mutual consent of the parties. The alteration can be done of one of more terms and conditions depending on the circumstances.

The difference between alteration and novation is primarily that in alteration only the terms and conditions are changed in the new contract whereas in novation the parties can also be changed.

1. REMISSION

It occurs when a party is ready to accept a lessor amount or performance from the other party than what was agreed earlier by both of them. It is valid and remission leads to complete termination of contract. Once a party has agreed to accept a lower amount than stipulated in the contract, it cannot sue the other party later on for not paying the agreed amount in the actual contract. This concept can be readily understood in the case of Kapurchand Godha v. Mir Nawab Himayat Ali Khan Azamjah (1963) where the court readily stated that the other party cannot sue the party if it has agreed to accept a lessor amount earlier.

• WAIVER

The term waiver generally means to renounce any claim or right. A contract may be discharged by agreement between the parties to waive their rights arising from the contract or we can simply say that it is the abandonment of rights created by a contract.

• MERGER

Merger of contract refers to the merger of inferior rights held by a party with a superior right held by the same party by the same contract or another contract depending on the circumstances.

2.  Discharge by Breach

When a party fails or refuses to fulfil its obligations or promises under a contract, it amounts to a breach of contract and the other party may file for damages or compensation in the court of law.

CASE LAW EXAMPLE-

In the case of Maula Bux v. Union of India (1969 AIR 606) Supreme Court held that if a party fails to fulfil its contractual obligations, it amounts to the breach of the contract and the innocent party is entitled to compensation.

It is of two types-

• Actual breach of contract-

An actual breach of contract occurs when one party refuses to fulfil their obligation on the due date or performs their duty or promise incompletely.

• Anticipatory breach of contract-

Anticipatory breach of contract occurs when one party announces or establishes it clearly in advance before the due date for performance of the contract, that the party does not intend to fulfil their obligation.

3.  Discharge by Impossibility of Performance

The discharge of impossibility of performance can be widely synchronized with the DOCTRINE OF FRUSTRATION (SECTION 56). In simple words, it can be understood as when due to some unavoidable circumstances, it becomes impossible for one or both the parties to fulfil their obligations and thus no party is at fault and the contract is terminated or discharged by frustration. The circumstances or the events may be completely unforeseeable at the time of the formation of the contract.

CASE LAW EXAMPLE-

In the case of Raja Dhruv Dev Chand v. Raja Harmohinder Singh (1968 AIR 1024), the Supreme court ruled that if the performance of a contract becomes impossible due to unforeseeable circumstances, then the contract must be discharged by frustration.

4.  Discharge by Operation of Law

Indian contract law also recognises some situations or circumstances where the law steps in and discharges the contract. This usually happens when the contract becomes illegal to perform and thus the court has to declare all contracts relating to the certain act as null.

CASE LAW EXAMPLE-

In the case of Satya Narain v. Ram Ratan (1966 AIR 1177) the Supreme Court held that if a contract becomes illegal due to change in law, then it is automatically discharged by law.

CONCLUSION

Contracts are one of the most essential features of the law of India and one of the most important aspects of the professional world. Thus it becomes important for us to understand the process of proper discharge of contracts and the methods they can be terminated so as to avoid any confusion or loss to any of the party. By being aware about these mechanisms of discharge one becomes proficient in sailing through the complex and deep sea of Law of Contracts.

REFERENCES

1. Pollock, Frederick. (2017). Pollack and Mulla- The Indian Contract and Specific Reliefs Acts. LexisNexis.
2. Kapoor, N.D. (2015). Indian Contract Act. Eastern Book Company
3. Satyabharta Ghose v. Mugneeram Bangur & Co. (1954 AIR 44)
4. Alopi Parshad & Sons Ltd. v. Union of India (1960 AIR 588)
5. Kapurchand Godha v. Mir Nawab Himayat Ali Khan Azamjah (1963)

• Maula Bux v. Union of India (1969 AIR 606)
• Raja Dhruv Dev Chand v. Raja Harmohinder Singh (1968 AIR 1024)
• Satya Narain v. Ram Ratan (1966 AIR 1177)