All About Discharge of Contract
Discharge of contract occurs when parties require the contract to cease existing as legally binding. This releases parties from any legal obligations that might be existing.
In this article on the discharge of contract, we will be discussing about types of discharge, breach of contract, and its requirement.
Table of Contents
- What is a Contract?
- About Discharge of Contract?
- Types of Discharge of Contract by:
- Legal Consequences of Discharge
- Remedies for Breach of Contract
- Difference between Discharge, Recission and Termination of Contract
What is a Contract?
A contract is a legal agreement that enforces mutual obligations among the parties that sign it. Whenever parties enter a contract, they are bound to follow the rules until this enforceable legal document exists. Such documents are governed by contract law, which is the field of law of obligations based on principles stating that agreements must be honoured.
Contract laws help in the creation of contracts and enforcement of duties and obligations that are created through his agreement. For a contract to become legally binding, the promise must be exchanged for adequate consideration. Here, two definitions of consideration are taken into account. This includes the Benefit-Detriment theory of Consideration and the Bargain Theory of Consideration.
Must read: What are the Types of Contract?
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What is Discharge of contract?
The discharge of contract means that the contract no longer has legal validity. It is also known as the termination of the contract. This happens whenever the rights and legal obligations of the contract between the parties end. It results in the end of the contract’s legal validity. Discharge of Contract is required to end the legally binding power of the contract when the contract ends. This ensures that parties are no longer obligated to each other, which makes the contract void.
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When is the discharge of the contract possible?
As per the Indian Contract Act 1872, discharge of contract is possible. It can be performed by parties involved based on legal reasons like recession, frustration, or contract termination by giving prior notice or on completion. Such termination may occur by the parties’ mutual consent or law.
What is the definition of Discharge of Contract?
So what is the definition of Discharge of Contract… Discharge of a contract is the end of an arrangement or agreement between two or more parties. It occurs when either any or all the parties fail to perform their obligations that were meant to be fulfilled during the time of making the contract with the free consent of every party. There are different modes of discharge of contract, including performance, agreement, frustration, breach, operation of law and lapse of time.
Types of Discharge of Contract
The following are different modes of discharge of contract with examples. Let us discuss each one of them.
1. Discharge by Performance
This is the most suitable mode of discharge of contract since both parties fulfil their rights and obligation within the contract timeline. If only one party performs the contract properly and only they are discharged. This party has the right of action against those parties to a contract that failed to perform it. Discharge by performance may be actual or attempted performance.
Example: A catering company is contracted to provide food and drinks for a wedding. The company delivers and serves the food on the wedding day as agreed. After the wedding, the contract is considered discharged by performance, as the caterer has fulfilled their contractual obligations.
2. Discharge by Agreement or Consent
This happens when parties decide to end the contract on the fulfillment of terms and conditions. If both parties are not willing to proceed till the due date, then it is changed over to the next party. This is subject to the terms and conditions of the contract.
There are 3 methods of voluntary discharge. These include novation, accord, and satisfaction.
- Novation: This happens when a new party substitutes the original party to fulfil the contract. For this, there should be a unanimous agreement among all parties. After this, a new contract with the same terms and current parties is created.
- Accord: This happens when receiving parties agree to a performance that is different from the one that was originally owed in the contract. Similar to novation, unanimous agreement is a requirement for this voluntary discharge method.
- Satisfaction: For this method, every element mentioned in the accord contract must be performed. This leads to the satisfaction of performance, thus leading to the satisfaction of performance.
- Alteration: It refers to a change in one or more than one term in original contract. This leads to the discharge of contract, thus leading to forming a new one. In United India Insurance Co. Ltd v. M.K.J. Corporation (1996), the Supreme court mentioned that utmost good faith must be maintained by both parties even after the agreement ends.
- Rescission: This type of discharge of contract occurs when parties decide to dissolve the contract. The original contract is terminated without the formation of a new one.
Example: Two businesses have a contract for the delivery of goods with several installments over a year. Midway, they mutually agree to modify the contract because one party is facing supply issues. They agree to reduce the number of deliveries. The original contract is discharged by this mutual agreement, and a new contract takes its place.
3. Discharge by Impossibility of Performance
This happens when there are unavoidable circumstances that lead to the termination of the contract. Illness, death, bankruptcy or reasons caused by another party can lead to this impossibility of performance. Let us discuss the different types of impossibility of performance.
- Impossibility at the Time of Agreement: Also known as the Void from the beginning, it occurs if the contract is invalid since its formation. In such a case, there remains no obligation from the beginning.
- Statute of limitations and bankruptcy: In this condition, there are no liabilities to any party involved in the contract. This discharges obligations by operation of law.
- Post-contractual impossibility: This is also known as the Doctrine of Frustration. It occurs when it is impossible to complete the contract after its creation. This makes the contract void and releases every party from legal obligations.
Example: A band is contracted to perform at an outdoor concert. However, a week before the concert, a natural disaster damages the venue beyond repair, making it impossible to hold the event there. The contract is discharged due to impossibility of performance, as the event cannot be held at the agreed-upon location due to unforeseen and uncontrollable circumstances.
4. Discharge by Lapse of Time
Every contract comes with a timeline with specific time for performance. Whenever, parties fail to perform their legal obligations within that time frame, they are no longer deprived of their remedy through law. It leads to the breach of contract and a suit can be filed on the guilty party in regards to The Limitation Act, 1963. If the time period expires as stated in the law, then it will lead to discharge of contract and there will be no possibility to file suit.
Example: A contract states that a certain service must be performed within two years. The service provider fails to perform the service within this period. The contract is automatically discharged after the two-year period lapses, due to the expiration of the time frame specified in the contract.
5. Discharge by Operation of Law
This happens when the contractual duties of parties are terminated due to the involvement of law. This may hold some accountable for certain obligations due to existing legal standards. It can also limit a party’s legal obligation as per the contract. When the contract is not enforceable under such circumstances, it is terminated by the operation of law.
Example: A person enters into a rental agreement, but later they are declared bankrupt. The contract for the rental agreement is discharged by operation of law, as bankruptcy can alter a person's ability to fulfill contractual obligations and can lead to certain contracts being terminated.
6. Discharge by Breach of Contract
Breach of contract occurs when parties do not abide by the conditions and terms of a contract. This may also occur when the performance of a contract cannot be excused by the operation of law, impossibility, mutual consent or tender.
There is an anticipatory and actual breach of contract. Anticipatory breach occurs through the anticipation of parties where parties prepare beforehand for such breach. An actual breach occurs, when the party refuses to abide by the terms of the contract.
Whenever there is a breach of contract, the law ensures that the harmed party is compensated for monetary damages or, in limited circumstances, in specific performance of the promise made.
Example: A software development company is contracted to deliver a custom software solution by a specific date. They fail to deliver the software on time, and the software, when delivered, does not meet the agreed specifications. The client can choose to discharge the contract due to this breach, as the company has failed to fulfill its contractual obligations as per the agreed terms.
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Legal Consequences of Discharge
When a contract is discharged, it means that the contractual obligations have been fulfilled or terminated, and the parties are no longer bound by the terms of the contract. The legal consequences of discharge depend on how the contract was discharged. If the contract was properly performed, then the parties have fulfilled their obligations and there are no further legal consequences. However, if the contract was discharged due to a breach, then the non-breaching party may be entitled to legal remedies.
Remedies for Breach of Contract
Whenever a contract is breached, the non-breaching party is entitled to remedies to compensate for the loss suffered due to the breach. The remedies for breach of contract include:
1. Damages
This is one of the most common remedies for breach of contract. Damages are the sum of money that is paid as compensation for loss or injury. There are several types of damages:
- Compensatory Damages: These are awarded to compensate non-breaching party for loss suffered due to the breach. The aim is to put the non-breaching party in the position they would have been in if the contract had been performed.
- Punitive Damages: These are imposed to punish the breaching party and deter them from committing future breaches. Punitive damages are rarely ever awarded in contract cases and are more common in tort cases.
- Nominal Damages: These are awarded when a breach occurred, but the non-breaching party did not suffer any actual loss. Nominal damages are usually a small amount.
- Liquidated Damages: These are damages that were previously identified and agreed upon by the parties in the contract itself, in the event of a breach.
2. Specific Performance
This is an order by court requiring breaching party to perform their obligations under the contract. Specific performance is usually only granted when damages are inadequate to compensate the non-breaching party, such as in cases involving unique goods or properties.
- Injunction: This is an order by the court either restraining a party from doing something (prohibitory injunction) or ordering a party to do something (mandatory injunction). In contract law, injunctions are often used to prevent a party from breaching the contract, or to stop them from continuing with their breach.
- Quantum Meruit: This is a Latin term meaning “as much as he has earned”. It is used when a person has provided a service under a contract, but the other party breaches the contract. The person who provided the service can claim payment on the basis of quantum meruit, i.e., as much as they have earned for the work done.
Difference between Discharge, Recission and Termination of Contract
| Aspect | Discharge of Contract | Rescission of Contract | Termination of Contract |
|---|---|---|---|
| Definition | Discharge refers to the conclusion or fulfillment of all contractual obligations, rendering the contract void or completed. | Rescission involves the cancellation or annulment of a contract, treating it as if it never existed. | Termination is the premature ending of a contract due to a specific event or condition outlined in the contract itself or by law. |
| Timing | It occurs at the end of the contract when all parties have performed their obligations. | Rescission typically takes place when there is a defect or mistake in the contract from the beginning, and it’s canceled retroactively. | Termination can happen during the contract’s term if specific conditions are met, or upon mutual agreement or default by one party. |
| Parties’ Agreement | Generally, it requires mutual agreement or fulfillment of all contract terms by both parties. | Typically, both parties must agree to rescind the contract, especially if there’s a defect or mistake. | Termination may require mutual agreement but can also be unilateral, depending on the contract terms. |
| Effect on Obligations | Discharge signifies that all parties have fulfilled their contractual duties, and no further obligations exist. | Rescission erases the contract’s legal existence, returning both parties to their original positions before the contract. | Termination ends the contract but may leave some obligations, such as compensation for work already performed. |
| Legal Consequences | It usually signifies successful contract performance and compliance with the terms. | Rescission acknowledges that the contract was fundamentally flawed or invalid from the beginning. | Termination can result from various circumstances, including breach of contract, expiration of terms, or a specified event. |
| Common Examples | Completion of a construction project as per the contract specifications. | Rescission may occur if a contract was signed due to fraudulent misrepresentation. | Termination can happen when an employee is fired for violating company policies or when a lease agreement expires. |
Discharge of Contract Conclusion
We hope that you have understood what discharge of contract is, how one can cause a breach of contract, and why we need this method. While this may be necessary in unavoidable circumstances, it is advisable to abide by the legal obligations and fulfil the contract within the stipulated time frame.
FAQs
Explain discharge of contract by frustration?
When any unfortunate circumstance beyond the control of the parties occurs. The circumstance disallows the fulfilment of contract as required. This leads to discharge of contract by frustration.
What does the Section 37 of Indian Contract Act say?
As per the section 37, the parties must either perform or offer to perform their promises. This must be done till the time a performance is dispensed with or excused under provision of the act.
Explain the different modes of discharge of contract.
Different modes of discharge of contract include performance, agreement, frustration, breach, operation of law and lapse of time.
What are the common ways through which a contract can be discharged?
Contracts can be discharged by performance, agreement or consent, impossibility of performance, lapse of time, operation of law, or breach of contract.
How does performance leads to discharge of a contract?
Performance is when all parties involved fulfill their obligations as stipulated in the contract. Once these obligations are completely met, the contract is discharged.
Can parties mutually agree to discharge a contract?
Yes, parties can mutually agree to discharge a contract. This agreement can involve altering the terms, prematurely ending the contract, or substituting it with a new agreement.
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