Subject- Business Law

Topic- Discharge of contract

Kushagra Pareek
School of law
 Meaning

• Discharge of contract means termination of the

contractual relationship between the parties.
• The rights and obligations created by the contact
come to an end.
Modes of discharge
 Termination or Discharge of contract

Methods of Termination:
When the obligations created by a contract come to an end, the
contract is said to be discharged or terminated. A contract may be
discharged or terminated in any of the following ways:
(i) By performance of the Promise;
(ii) By mutual consent cancelling the agreement or
substituting a new agreement in place of the old;
(iii)By subsequent impossibility of performance;
(iv) By operation of law-i.e. death, insolvency, or merger.
(v)By lapse of time;
(vi)By material alteration without the consent
of the other parties;
(vii)By breach made by one party.
 Discharge by performance

• Discharge by performance takes place when

the parties to a contract fulfill their obligations
arising under the contract within the time and in
the manner prescribed.
• Performance may be actual performance or
attempted performance.
 By Novation

• By Novation – Novation takes place when –

• A new contract is substituted for an existing
one between the same parties Novation occurs
with the consent of the contracting parties.
Novation occurs when the contract is subsisting
and alive and is not discharged.
 By Waiver

By Waiver – Waiver means ‘abandoning the rights’. Waiver

takes place when the parties to a contract agree that they
shall no longer be bound by the contract. • For eg. A an actor
promised to make a guest performance in the film made by
B. Later B forbids A from making the guest appearance. B is
discharged of his obligation.
Rescission – Rescission of a contract takes place when all or
some of the terms of the contract are cancelled. • It may
occur by mutual consent or where one party fails in the
performance of his obligations, the other party may rescind
the contract.
 By Alteration

• By 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.
• By Remission – Remission means acceptance of
a lesser fulfillment of the promise made.
Eg. Acceptance of a lesser sum than what was
contracted for, in discharge of the whole of the
debt.
 By Merger

• By Merger – Merger takes place when an

inferior right accruing to a party under a contract
merges into a superior right accruing to the same
party under the same or some other contract. For
eg. P holds a property under a lease. He later
buys the property. His rights as a lessee merge
into his rights as an owner.
 BY SUBSEQUENT IMPOSSIBILITY Or SUPERVENING
IMPOSSIBILITY-
•Pre-contractual Impossibility: A contract which at the time it was entered into was
impossible to perform, is void ab initio and creates no rights and obligations, e.g., a
promise to ride a horse to the sun.
•Post Contractual Impossibility: A contract, which at the time it was entered into,
was capable of being performed may subsequently become impossible to perform or
unlawful. In such cases the contract becomes void. This is known as the doctrine of
supervening Impossibility. It is also known as the Doctrine of Frustration.
•Section 56, para-2:
A contract to do an act which, after the contract is made, becomes impossible,
or, by reason of some event which the promisor could not prevent, unlawful,
becomes void when the act becomes impossible or unlawful.
 GROUNDS OF FRUSTRATION/GROUNDS OF
SUPERVENING IMPOSSIBILITY:

(i). Destruction of Object/Subject Matter

Example- A musical hall was let for a series of concerts on certain
days. The hall was burnt down before the date of the first concert.
The contract becomes void.[Taylor vs. Caldwell]
(ii).Change of Law: Example-M sold to N a specified parcel of
wheat in a warehouse. Before delivery, the wheat was requisitioned
by the Government under statutory powers. The delivery being
now legally impossible, the contract was discharged.[Howell vs.
Coupland].
(iii).Failure of Pre-Conditions: Example: A & B contract to
marry each other. Before the time fixed for the marriage, A goes
mad. The contract becomes void.
(iv). Death or Incapacity for personal services:
Example: G contracts to act at a theatre for six months in
consideration of a sum paid in advance by H. On several occasions
G is too ill to act. The contract to act on these occasions becomes
void.
(v).Outbreak of War: A contract entered into during war with an
alien enemy is void ab initio.
 Effects of Supervening Impossibility

• Effects of Supervening Impossibility:

(i).Section 56(para-2) provides that when the performance of a
contract becomes subsequently impossible or illegal, the contract
becomes void.
(ii).Section 65 provides that when a contract becomes void, any
person who has received any advantage under it must restore it, or
make compensation for it, to the person from whom he received it.
(iii). Section 56(para-3) provides that, where one person has promised
to do something which he knew, or with reasonable diligence, might
have known, and which the promise did not know to be impossible or
unlawful, such promisor must make compensation to such promise for
any loss which such promise sustains through the non-performance of
the promise.
 Discharge by Lapse of Time

Discharge by Lapse of Time

• The Limitation Act, 1963 lays down certain specified
periods within which different contracts are to be
performed and be enforceable.
• If a party to a contract does not perform, action can be
taken only within the time specified by the Act. Failing
which the contract is terminated by lapse of time.
• For eg. A sold a gold chain to B on credit without any
period of credit, the payment must be made or the suit to
recover it, must be instituted within three years from the
date of delivery of the instrument.
 Discharge by Operation of Law

Discharge by Operation of Law

• A contract may be discharged independently of the wished
of the parties i.e. by operation of law.
• a) By death – In contract involving personal skill or ability,
the contract is terminated on the death of the promisor. In
other contracts the rights and liabilities of a deceased person
pass on to the legal representatives of the deceased person.
• b) By insolvency – When a person is declared insolvent, he
is discharged from all liabilities incurred prior to such
declaration.
c) By unauthorized material alteration of the terms
of a written agreement – Any material alteration made
by a party to the contract, without the prior permission
of the other party, the innocent party is discharged.
 Discharge by Breach of Contract

A breach of contract occurs when a party thereto without

lawful excuse does not fulfill his contractual obligation or by
his own act makes it impossible that he should perform his
obligation under it. A breach to a contract occurs in two
ways :-
• a) Actual Breach – When a party fails, or neglects or refuses
or does not attempt to perform his obligation at the time fixed
for performance, it results in actual breach of contract. • For
eg. A promises to deliver 100 packs of icecream to B on his
wedding day. A does not deliver the packs on that day. A has
committed actual breach of the contract.
• b) Anticipatory Breach – Anticipatory Breach is a
breach before the time of the performance of the
contract as arrived.
• This may take place either by the promisor doing an
act which makes the performance of his promise
impossible or by the promisor , in way showing his
intention not to perform it.
 TERMINATION/DISCHARGE OF CONTRACT BY BREACH OF
CONTRACT

• TERMINATION/DISCHARGE OF CONTRACT BY BREACH

OF CONTRACT: When a contract is broken by one party, the
other party or parties are freed from the obligation of
performing the contract. They can also take the remedial
measures to which they are entitled. Breach of contract may
arise in two ways: (i) By anticipatory breach of contract and (ii)
By actual breach or present breach. (i). Anticipatory breach of
contract : Anticipatory breach of contract: It occurs when a party
repudiates his liability under the contract before the time for
performance is due or when a party by his own act disables
himself from performing the contract.
• Example: C enters into a contract to supply B with certain
articles on the 1st of June. Before 1st June, he informs B that he
will not be able to supply the goods. Actual Breach of Contract:
Actual breach of contract occurs when during the performance
of the contract or at the time when the performance of the
contract is due, one party either fails or refuses to perform his
obligations under the contract. Example: D agrees to deliver B,
5 tons of sugar on 1st June. He fails to do so on 1st June. There
is a breach of contract by D.
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