Discharge of a Contract

Lecture Delivered
By
Dr. MUHAMMAD MANSOOR JAVED

PhD. Islamic Banking & Finance

Fellow Member of ACCA, UK

1
Discharge of a Contract
• A contract is said to be discharged when the parties to it are absolved from the performance of
their respective obligations arising from it.
• The following are the various modes in which a contract may be discharged by:
• Agreement
• Performance
• Operation of Law
• Breach of Contract
• Impossibility of Performance

2
Agreement
• The rights and obligations created by an agreement can be discharged without their performance
by means of another agreement between the parties which provides for the extinguishment of
the earlier rights and obligations. This is called ‘novation’ and means that there being a contract
in existence some new contract is substituted for it, either between the same parties or between
different parties; the consideration mutually being the discharge of the old contract (s.62).

3
Performance
• Performance of a contract is a common way of discharge of a contract. The performance of a
contract lies in doing or causing to be done what the promisor has promised to do. On the
performance of the obligation undertaken by the parties, the contract is automatically
discharged. Where a party has done what it undertook to do there is nothing left for it to do. If
only one party performs its promise, it alone is discharged and acquires a right of action against
the other which is guilty of breach.

4
Operation of law
• Discharge by operation of law normally occurs in the instances of insolvency, merger, alteration
and death.
• Upon insolvency, the rights and liabilities of the insolvent are, with certain exceptions transferred
to an officer of the court.
• Merger is an operation of law, which discharges a right by virtue of its coinciding with another
and greater right in the same person. For instance, if Abid holds a certain property under lease
but subsequently he buys the same then his rights as a lessee are merged into his right of
ownership.
• Alteration of a written contract made without the consent of the other party has the effect of
discharging the contract provided the alteration is of a material part. An alteration which is not
material or authorised will not affect the validity of the contract.
• Death of the promisor discharges the contract if performance of a contract is required to be made
in person and the personal qualifications of the promisor are the considerations for the contract.

5
Breach of Contract
• The parties to a contract are expected to perform their respective obligations. If any party fails to
perform its obligation, a breach of contract occurs which would result in discharge of the
contract.
• A party is said to be in breach of contract where, without lawful excuse, he does not perform his
contractual obligations precisely.

6
Impossibility of performance
• Impossibility of performance, results in the discharge of the contract. Impossibility referred to
here must be in existence at the time when the contract is made and may or may not be known
to both the parties at that time. If, however, the promisor alone knows of the impossibilities then
existing, he is bound to compensate the promisee for any loss he may suffer on account of the
non-performance of the promise.