A legally enforceable agreement between two or more parties is known as a contract. In a contract, each party commits to performing or refraining from doing something in return for payment. Discharge of contract refers to ending the legal connection between the two or more parties that originally signed the agreement. Discharge of contract refers to the termination of the parties’ rights, obligations, and duties. Contract discharge also ends the agreement’s ability to be used as legal precedent. Therefore, the parties are no longer committed to each other after a contract has been discharged, and the agreement is void.

Various modes of discharge of contract

Discharge by performance

A contract may be terminated by performance, which is also the most typical way to do so. If the parties have performed their obligations under the contract, the contract will be discharged. If a contract is exclusively performed by one party, that individual is the only one who is released from liability. There are two different ways to terminate a contract through performance.

For example; A and B enter into a contract that A will pay B Rs 1,000 if B delivers a package to C’s house. B does the agreed part specified in the contract and upon doing it A pays B the mentioned amount in the contract. Thus, the contract is discharged by performance since both parties performed the specified task in the contract. 

Actual performance 

In this case both the parties in a contract must perform their promises. Unless the Indian Contract Act, 1872 or any law at the time being prohibits the parties from performing their promises. In case either party dies or is unable to fulfill the promise then the representatives of such party shall be liable to perform the promise laid down in the contract.

Performance of a contract is the most usual mode of its discharge. It may be Actual Performance or attempted Performance (tender)

(a) Actual performance:  When both the parties perform their promises, the contract is discharged. Performance should be complete, precise and according to the terms of the agreement. Most of the contracts are discharged by the performance in this manner.

(b) Tender or Offer of Performance:  Tender or offer of performance means “offer made by the promisor to promisee expressing his willingness to perform his part of the obligation under the contract. It is also known as attempted performance.

Example-

       ‘A’ offers to sell his house to ‘B’ for $100000 and ‘B’ accepts the same letter ‘B’ paid the amount in full and ‘A’ handed over the house to ‘B’. Here the parties have fulfilled their obligations.The contract is said to be discharged by performance. If only one party performs the promise, he alone is discharged. Such party gets a right of action against the other party who is guilty of breach of Contract.

Discharge by mutual agreement

In this situation, if the parties to the agreement reach a consensus, they do not carry out the obligation set forth in the contract. This necessitates replacing or changing the current contract with a new one.

Illustration: ‘P’ owes a certain sum of money to ‘Q’ under a contract, but they arrive at a mutual agreement that henceforth ‘R’ will pay back the money owed to ‘Q’. This results in a mutual discharge of the contract between ‘P’ and ‘Q’ and a new contract is formed between ‘R’ and ‘Q’.

Novation

It occurs when a contract is substituted for the old contract between the same or new parties. In order to enforce novation, the following conditions must be followed. It is laid down in Section 62 of the Indian Contract Act, 1872. There must be a valid reason for substituting the contract.Consent of all the parties is required, old contract must be substituted before the expiry or breach of the contract.

In the case of Manohur Koyal Vs. Thakur Das (1888)  ILR 15 Cal 319., the defendant failed to pay the agreed upon sum to the plaintiff on the due date stated in the contract. However, the defendant promised to pay Rs. 400 to the plaintiff and to execute a fresh kistibundi bond. The plaintiff agreed to this but the defendant failed to pay that amount consequently, the plaintiff sued the defendant. The Calcutta High Court stated that since the new bond was created after the breach of the original contract, therefore the contract cannot be discharged by novation but by breach of contract. 

Remission

Remission occurs when parties to a contract accept a lesser amount or lesser degree of performance than what was initially agreed upon in the contract. Section 63 of the Act states that a party may;

• Remit the performance stated wholly or in part.
• Extend the time for performance.
• Accept any other kind of performance apart from the one mentioned in the contract.

Illustration: Paul owes 10 lakh rupees to Peter but due to some unforeseen circumstances Paul can only repay  6 lakh rupees to Peter within the stipulated time period. But if Peter agrees to accept the amount which could be paid by Paul and settle the debt then, Peter’s act of remission discharges the contract.  

Alteration

It means changing one or more contract terms, thereby discharging the old contract and forming a new one. Alterations to a contract must take place with the consent of all the parties to the contract. In the case, United India Insurance Co. Ltd Vs. M.K.J Corporation (1996)6 SCC 428, the Supreme Court held that utmost good faith must be observed by the contracting parties and the duty of good faith is of a continuing nature even after the completion of the agreement no material alterations can be made to the contract without the mutual consent of the parties.

Rescission

Rescission takes place when the parties in the contract agree to dissolve the contract. In this case, the old contract stands discharged and no new contract is formed.

Waiver

The term waiver means the abandonment of a right. A party to a contract may have their rights specifically stated under the contract which also helps to release the other party from the contract and the contract is discharged.

Merger

When an existing inferior right of a party, in respect of a subject matter, merges into a newly acquired superior right of the same person, in respect of the same subject matter, then the previous contract conferring the inferior right stands discharged by the way of merger.

Discharge by lapse of time

A contract will be discharged if the performance is not completed within the given time period. This might also result in a breach of contract. In that case, a person might file a suit under the court of law stating that his rights have been infringed and also claiming to enforce his rights. The individual whose rights have been breached can file a suit under the Limitation Act,1963.

For example; A had to deliver fresh fruits to B’s storehouse within a period of two days but due to A’s irresponsibility, he delivered the fruits after two weeks. Therefore, in this case, the contract will be discharged as the required performance was not completed within the specified time. 

Discharge by operation of law

This mode of discharge of contract does not allow the fulfillment of the promise laid down in the contract by the provisions of law. Situations such as death, insolvency, merger, etc. do not enable the fulfillment of the promise, hence it results in the discharge of the contract.

A contract may be discharged by operation of law. It includes discharge by

a) Death

b) Merger

c) Insolvency/ Bankruptcy

d) Unauthorized Alteration of the terms of a written agreement, and

e) Rights and liabilities becoming vested in the same person.

f) Judgement of Court

Discharge by supervening impossibility(doctrine of frustration).

Discharge of a contract by supervening impossibility is a contract that has become impossible or illegal to perform. In these cases the contract becomes void. It is also known as the doctrine of frustration. Frustration occurs when it is established that due to subsequent changes in circumstances, the contract has become impossible to perform or it has been deprived of its commercial purpose. The ways in which it occurs are mentioned below;

• On the destruction of subject matter, a contract will be discharged and no party will be held liable.
• If the performance of the promise mentioned in the contract becomes unlawful then the contract will be void.
• A contract tends to be discharged on accounts of death or personal incapacity.
• When the circumstances surrounding a contract change then it will be discharged.

Discharge by breach

When a contracting party refuses or fails to perform or disables himself from performing or makes the performance of the promise stated in the contract impossible by his conduct, then the contract is said to be discharged by breach. A party to a contract may discharge it by actual breach or anticipatory breach.

Breach of contract may be –

1) Actual breach, or 2) Anticipatory breach.

1) Actual breach of contract may occur a) at the time when the performance is due, or b) during the performance of the contract.

2) Anticipatory breach of contract occurs when a party repudiates his liability or obligation under the contract before the time for performance arrives

CONCLUSION

Discharge of contract refers to a situation when there is a need to terminate the contractual obligations.Discharge of contract means termination of the contractual relationship between the parties. A contract is said to be discharged when it ceases to operate, i.e., when the rights and obligations created by it come to an end..