THE NATIONAL UNIVERSITY OF ADVANCED LEGAL STUDIES

(A State University Est. by Act 27 of 2005 of Kerala State Legislature)

Kalamassery ,Kochi - 683503, Kerala

Semester 3

Project

DISCHARGE OF CONTRACTS BY MUTUAL CONSENT OR

AGREEMENT

Submitted to:
Dr. Balakrishnan K.
Faculty In-Charge
Law of Contracts - I

Submitted By:
Ronsha Roys Anna(1693)
B.A LL.B (Hons.)
The National University of Advanced Legal Studies (NUALS)
TABLE OF CONTENTS

INTRODUCTION
A contract may be defined as an agreement, either written or implied between two or
more parties that creates a legal obligation. The terms of a contract are legally binding with
defined penalties and remedies for the instance where a contract is being breached. A contract is
created when there is an offer, consideration, and acceptance between two or more parties. When
the obligations created by a contract come to an end, the contract is said to be discharged or
terminated. Discharge of contract means “termination of the contractual relationship between the
parties”. This is why the rights and duties in terms of contractual obligations were set up, when
the parties originally entered into the contract. There are various modes of discharge of contract.
This paper will focus on discharge of contracts when there is mutual agreement or consent of the
parties. There are various types of discharge of contracts with mutual agreement as mentioned
under section 62 of the Indian Contract Act, 1872(Act). This article aims to provide an insight
into those various types.

DISCHARGE OF CONTRACT

A contract is said to be discharged when the object or obligations is fulfilled, the liability of
either party under the contract comes to an end. It is when the rights, obligations and duties of
the parties come to an end. Discharge of contract also ceases the legally binding power of the
contract. Therefore, once a contract has been discharged the parties are no more obligated to each
other and the contract becomes void. Following are the various modes by which a contract can
be discharged:
1. By performance
2. By agreement or consent
3. By impossibility of performance
4. By lapse of time
5. By operation of law
6. By breach of contract

DISCHARGE BY AGREEMENT
Discharge by agreement or consent may be by express or implied agreement or consent.
By agreement of all parties, a contract may be cancelled or its terms altered or a new agreement
substituted for it. Whenever any of these things happen, the old contract is terminated. Section 62
states that “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.” The rule of law in this regard is as follows:
“Eodem modo quo quid constituitur, eodem modo destruitur”, i.e., a thing may be destroyed in
the same manner in which it is constituted. 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’.
There are six types through which discharge of contract through agreement or consent
could take place (i) by novation, (ii) by rescission, (iii) by alteration, (iv) by remission, (v) by
waiver and (vi) by merger.

(i) By Novation (Section 62)

It occurs when a contract is substituted for the old contract between the same or new parties.
Novation takes place when (i) a new contract is substituted for an existing one between the same
parties, or (ii) a contract between two parties is rescinded in consideration of a new contract
being entered into on the same terms between one of the parties and a third party. The following
conditions need to be fulfilled for novation to take place as per S. 62 of the Act.
1. To effect a novation, there must be a valid enforceable new substituted contract.
2. Consent of all parties is necessary for novation.
3. Novation should take place before the breach or expiry of old contract.
Novation should take place before expiry of the time of the performance of the original contract.
If it does not, there would be a breach of the contract. If a new contract is subsequently
substituted for the existing contract, it would only be to adjust the remedial rights arising out of
the breach of the old contract. If for any reason the new contract cannot be enforced, the parties
can fall back upon the old contract.
Example of the second type of novation: A common instance is where a creditor at the request of
the debtor agrees to take another person as his debtor in place of the original debtor. The
consideration for the new contract is the discharge of the old contract. It is essential for the
principle of novation to apply that there must be the mutual or tripartite consent of all the parties
concerned.
In the case of Manohur Koyal v. Thakur Das(1888), 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.

(ii) By Rescission
Rescission takes place when the parties in the contract agree to dissolve the contract ie., when all
or some of the terms of the contract are cancelled. In this case, the old contract stands discharged
and no new contract is formed. A promise not to demand performance from each other becomes
the mutual consideration for discharge of contract. It may be noted that if the parties do not take
steps towards performance of a contract for a long time, this will amount to abandonment of the
contract and will bring about its implied rescission.
The court may give rescission due to the following reasons:
1)contract is voidable.
2)contract is unlawful

The court may refuse to rescind if

1)Plaintiff has ratified the contract.
2)Parties cannot be restored to the original position.
3)The third party has acquired for value.
4)When only a part is sought to be rescinded.
The rescission of a voidable contract may be communicated or revoked in the same manner, and
the subject to the same rules, as apply to the communication, or revocation, of a proposal. This is
mentioned in Section 66 of the Indian Contract Act, 1872.

The Supreme Court allowed the parties to rescind under this section a contract for sale of forest
coupes because of substantial variance between the particulars of quantity and quality of timber
held out at the time of the auction and the timber actually available. The contractor was allowed
to refund of his deposit. But no compensation was allowed to him for his loss because the
contract contained a clause against compensation in such circumstances. This was decided in the
famous case law, namely Syed Isar Masood v State of MP.

As per Section 64 of the Act, the party rescinding the voidable contract shall, if he has received
any benefit thereunder from another party to such contract, restore such benefit, so far as may be,
to the person from whom it was received.

A variation of a term or substitution of a new contract between the original parties is not
novation. Where however, the parties to the contract rescind or vary the original contract then,
there is rescission or variation of the contract.

(iii) By Alteration
Section 62 of the Indian Contract Act, 1872 defines alteration. Alteration of a contract may take
place when one or more of the terms of the contract is/are altered by mutual consent of the
parties to the contract. In such a case the old contract is discharged. In the case of United India
Insurance Co. Ltd v. M.K.J. Corporation, it was held that even in good faith also in terms of the
contract, no material alteration can be made by a party without the consent of the other.
Alteration occurs when all of the involved parties agree to making some changes to only the
terms and conditions of the original contract. When this occurs, the previous contract is
discharged. Should there be a lack of full consent among all of the involved parties, however, the
alternation is not considered valid, and the original contract will remain the one by which
everyone is obligated. Some contracts may undergo what are called material alterations, an
example of such being changing the amount of money paid by one party to the other. Even
though the nuts and bolts of the contract are not necessarily being altered, this change does have
an impact on the liability of it.

Where a contract is embodied in a deed and the party who has the custody of the deed alters it
without the consent of the other in a material particular, the effect would exactly be the same as
that of cancelling the deed. Both parties will be discharged from their respective obligations. The
meaning of the expression “material alteration” was considered by the Supreme Court in
Kalianna Gounder v Palani Gounder.

In the particular case, a memorandum of agreement for the sale of land under which Rs. 2000
were paid in advance was with the plaintiff. The defendant refused to convey the land and
pleaded that the plaintiff had alerted the deed by adding the words that the seller shall “clear the
debts and execute the sale deed free from encumbrance.

The plea was dismissed because the alleged alteration could not be proved, but Shah J took the
opportunity to point out: “Even if it be assumed that the sentence regarding encumbrances was
written after the deed was executed it will not invalidate the deed, Ordinarily when the property
is agreed to be sold for a price, it would be the duty of the vendor to clear it of all encumbrances
before executing the sale deed. The alteration, if any, cannot, therefore, be regarded as material.

(iv) By Remission
Remission means acceptance of a lesser fulfilment of the promise made, e.g., acceptance of a
lesser sum than what was contracted for, in discharge of the whole of the debt. This means the
discharge from the due, a release from the penalty, forfeiture or debt, pardon of transgression,
relinquishment of a right, claim or obligation. It is not necessary that there must be some
consideration for the remission of the part of the debt. According to Sec. 63 a party may:
(a) Dispense with or remit performance wholly or in part; or
(b) Extend the time for performance ; or
(c) Accept any other satisfaction instead of performance
For such a release or promise there is no need for consideration or new agreement. The one-sided
concession of remission is given under a mutual agreement between the parties.
Example: A owes B ` 5,000. A pays to B and B accepts in full satisfaction for the whole debt `
2,000. The old debt is discharged.
A promise by the promisee to give concession to the promisor in one or the other form is binding
even if without consideration. In Gopala v. Venkata, it was stated that after the remission has
been communicated to the promisor and accepted by him, the promisee cannot claim the remitted
(sacrificed) amount.

(v) By Waiver
The waiver refers to a voluntary abandonment or surrender of the rights or privilege of the
contract. The waiver is generally in the form of writing. 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. An example of it is the disclaimer, which after its
acceptance becomes a waiver. Sometimes the action of a person also acts as a waiver. Another
example is the waiver of farmer’s bank loan by a bank. The waiver has different other names.
They are releases, exculpatory clauses or a holding of the harmless clauses.
If the same one-sided concession in remission is given by a unilateral declaration of
renunciation, then it is called ‘Waiver’. Strictly speaking, waiver is not a method of discharge by
mutual agreement.
A waiver can happen either deliberately or unexpectedly.
1. Waiver by contract/deed: This happens where a gathering explicitly consents to surrender
their lawful rights. Such an understanding will tie gave the ordinary prerequisites of an
agreement have been met. Instances of this sort of waiver incorporate settlement or
bargain understandings, varieties to a current contract, or another agreement supplanting
a more seasoned one.
2. Waiver by the decision: This applies where a rupture of the agreement has happened and
the “honest party” has a decision between two elective rights or cures. Waiver by race, as
a rule, happens where the agreement contains an express right or alternative to end or
repeal it in specific circumstances, or where one gathering submits a genuine rupture
which gives the “blameless” party the privilege to end the agreement right away. In such
cases, the “honest” party may pick either to end the agreement promptly or to forgo the
rupture and proceed with the agreement.
Waiving one’s right need not always be expressed. In the words of Lord Denning said that the
principle of waiver also applies if one party, by his conduct, leads another to believe that strict
rights arising under the contract will not be insisted upon. In the case of M.Sham Singh v State of
Mysore, M was sent to the United States to pursue higher studies under a scholarship which
entailed the condition that upon his return he would work for the State and that the State would
offer him a job within 6 months of his return. The contract also had the condition that if the state
failed to provide employment within 6 months the contract shall stand waived and if M failed to
comply he would have to return the scholarship amount.

M was selected for further training of one year, on his request, the State complied with his
request of extension of his time. Before the beginning of his new one-year training M had to
come back to India due to domestic reasons and stayed for 6 months and again returned to the
United States with the permission of the State. After the completion of his new one year training
he started working in the United States and the State of Mysore sued for the scholarship amount.

M pleaded that when he was in India he was not hired within the stipulated period of 6months
and that there was conduct on the part of the State to waive their rights. The court held that there
was no waiver whatsoever as the extension was mutually agreed upon by the parties and there
was no conduct on the part of the State showing an intention to waive.

(vi) By Merger
Merger takes place when an inferior right accruing to a party under contract merger into a
superior right accruing to the same party under the same or some other contract. An agreement
additionally stands released through a merger that happens when a substandard right
accumulating to party in an argument amalgamates into the better right resulting than a similar
gathering. For example, contracts an industrial facility premises from B for assembling
movement for a year, yet 3 months in front of the expiry of rent buys that very premises.
Presently since A has turned into the proprietor of the structure, his rights related with the rent
(substandard rights) in this manner converge into the privileges of possession (unrivaled rights).
The past rental contract stops to exist. In certain circumstances, it is conceivable that substandard
and predominant right corresponds in a similar individual. In such cases, both the rights join
prompting a release of the agreement administering the sub-par rights.

Merger is when a superior right and an inferior right coincide and meet in one and the same
person, the inferior right vanishes into the superior right.
Illustration: (i) A man holding property under a lease buys the property. His rights as a lessee
vanish. They are merged into the rights of ownership which he has now acquired.
(ii) A may agree to work as a part-time employee of B. Later, they may decide that A will work
as full-time employee.

CONCLUSION

Thus we can understand that discharge of contract refers to the contractual relationship coming
to an end when the obligations and duties have been fulfilled by the parties to a contract. In this
case, the parties are free from the obligations of the contract. As mentioned earlier there are
various modes of discharging a contract but the best way to do it is by performing the promise
within the stipulated time stated in the contract as the other modes are quite unpleasant ways to
release the parties from duties because it leads to damages.
In the Law of contracts, there is a great deal of misunderstanding or lack of understanding in
regard to certain topics connected with the subject of discharge. As a result, the best way of
discharging a contract is based on performance. As this way both the parties follow all the terms
of the contract and afterwards go for its discharge. On the other hand, discharge by the breach is
the most unpleasant way to release you from duties. Therefore, discharge by breach results in
damages too.
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