Law and You > Business Laws > Indian Contract Act, 1872 > Discharge of Contract
A contract places a legal obligation upon the contracting parties to perform their mutual promises, and it carries on until the discharge or termination of the contract. The most natural and usual mode of discharging a contract is to perform it. A person who performs a contract in accordance with its terms is discharged from any further obligations. As a rule, such performance entitles him to receive the other party’s performance. Exact and complete performance by both the parties puts an end to the contract.
Discharge of Contract:
The term discharge of contract means ending of the contractual relationship between the parties. A contract is said to have been discharged when it ceases to operate i.e. when the rights and obligations created by the parties came to an end. A contract can be discharged if the parties mutually agree to terminate the contract. Also there are different methods through which contracts can be discharged. The different methods of discharge of contract are as follows:
- Discharge by Performance
- Discharge by Agreement or Consent
- Discharge by Impossibility of Performance
- Discharge by Lapse of Time
- Discharge by Operation of Law
- Discharge by Breach of Contract
Discharge by Performance:
Discharge by Performance Performing means doing all those things which are required by a contract. Discharge of performance occurs when the parties to the contract fulfill their obligations set out under the contract within the specified time and in the manner prescribed. In such a case, parties are discharged and contracts come to an end. But if only one of the party performs, he alone is discharged. Such a party gets the right of action against the other party who is guilty. It is called as natural mode of discharge.
Types of Performance:
- Actual Performance: When a promisor has made an offer of performance to the promisee and the offer has been accepted by the promisee, it is called an actual promisee. The contractual obligations are actually performed whereby the liability of a party under the contract comes to an end. For example, A who is indebted to B for Rs. 1,000, promises to repay the amount after two months. A repays the amount on the due date. This is actual performance.
- Substantial Performance: This is where the work agreed upon is almost finished. The court then orders that the money must be paid, but deducts the amount needed to correct minor existing defect. Substantial performance is applicable only if the contract is not an entire contract and is severable. The rationale behind creating the doctrine of substantial performance is to avoid the possibility of one party evading his liabilities by claiming that the contract has not been completely performed. However, what is deemed to be substantial performance is a question of fact to be decided in both the case. It will largely depend on what remains undone and its value in comparison to the contract as a whole. For example, a contractor completes 95% of a building but has not finished the landscaping. If the landscaping is not critical to the use of the building, the contractor may be entitled to payment for the work completed.
- Partial Performance: This is where one of the parties has performed the contract, but not completely, and the other side has shown willingness to accept the part performed. Partial performance may occur where there is shortfall on delivery of goods or where a service is not fully carried out. For example, a contractor only lays the foundation of a building but does not proceed with any further construction. This may not meet the essential terms of the contract, and the contractor might have limited recourse for payment.
- Attempted Performance or Tender of Performance: Where the promisor has made an offer of performance to the promisee, and the offer has not been accepted by the promisee, it is called an attempted performance [Section 38]. Such refusal to accept offer of performance by promisee discharges the party from its liability and from its performance. For example, A. promises to deliver certain goods to B. A takes the goods to the appointed place during business hours but B refuses to take the delivery of goods. Thus, A has done what he was required to do under the contract, It is an attempted performance. In case of an attempted performance, the promisor shall not be held liable for non-performance as an attempted performance or tender is as good as performing the contract.
Difference between Substantial Performance and Partial Performance:
There is a thin line of difference between substantial and partial performance.
| Substantial Performance | Partial Performance |
| Substantial performance occurs when a party fulfills most of its contractual obligations, despite minor deviations or defects. The performance must be close to what was agreed upon, allowing the other party to receive the essential benefits of the contract. | Partial performance refers to situations where a party completes only a portion of the contract obligations. This performance is insufficient to fulfill the contract’s essential purpose. |
| If a party achieves substantial performance, they may still recover the contract price minus any damages for the minor defects. This means that the performance is generally considered acceptable enough to warrant payment, even if it’s not perfect. | In cases of partial performance, the party may not be entitled to the full contract price. They may be able to recover for the value of the work done, but they typically need to demonstrate that the other party received some benefit. |
| Substantial performance, is legally enforceable against the other party. | Partial performance must be accepted by the other party. In other words, the party who is at the receiving end of the partial performance has a genuine choice whether to accept or reject. |
| For example, a contractor completes 95% of a building but has not finished the landscaping. If the landscaping is not critical to the use of the building, the contractor may be entitled to payment for the work completed. | For example, a contractor only lays the foundation of a building but does not proceed with any further construction. |
Types of Tenders:
- Tender of Goods and Services: A contract to deliver goods or render some service is completely discharged when the goods are tendered for acceptance according to the terms of the contract. If the goods or services are refused, they need not be offered again and the promisor is discharged from his liability. At the same time, he may file a suit against the promisee for non-acceptance.
- Tender of Money: Where the debtor (promisor) makes a valid tender i.e., offers to pay the amount to the creditor and the creditor refuses to accept the same, the debtor is not discharged from his liability to pay the amount. In other words, a tender of money does not amount to discharge of the debt. The debtor continues to be liable of the payment of debt. But, the debtor will not be liable for interest from the date of a valid tender i.e., no interest shall become payable from the date of the, rejection of a valid tender of money.
Essentials of Valid Tender:
A valid tender refers to an offer to fulfill a contractual obligation, typically involving payment or performance. For a tender to be considered valid, certain essential elements must be met:
- Unconditional Offer: The tender must be clear and unequivocal, indicating a willingness to fulfill the obligation without conditions. It should not be contingent on additional agreements or approvals. Thus, a conditional offer of performance is not a good tender and the other party is entitled to reject it. For example, A, a debtor, offered to pay B, his creditor, the amount due to him if B sells certain goods to him. It is a conditional tender and therefore, invalid.
- Readiness and Ability: The party making the tender must demonstrate the ability and readiness to perform their obligations. This includes having the necessary means, resources, or materials to complete the contract.
- Time and Place: Generally, the time and place of performance are agreed upon, by the parties and the tender must be made accordingly. Thus, a tender of goods after the business hours or of goods or money before the due date is not a valid tender. For example, if the promisor wants to deliver the goods at 1 a.m. (when office is closed), this is not a valid tender unless it was so agreed.
- Reasonable Time for Ascertaining: In case of tender of goods, it must give a reasonable opportunity to the promisee of ascertaining that the goods offered are the same as the promisor is bound to deliver. Thus, a tender of goods at such time when the other party cannot inspect the goods, is not a valid tender.
- Exactness: In case of payment of money, tender must be of the exact amount due and it must be in the legal tender. It should not be in any other form such as foreign currency or cheque. A payment by cheque is a valid tender provided the person to whom it is made is ready and willing to accept it.
- Whole Obligation: A piecemeal tender of goods or to pay the amount in instalments is not a valid tender. For example. A promises to deliver 100 bags of rice on a certain day. If on the agreed day and place A offers to deliver 😯 bags only. This is not a valid tender and A is not discharged from his obligation. However, a minor deviation from the terms of the contract may not render the tender invalid.
- Proper Manner: The tender should be made in the manner prescribed by the contract. If the contract specifies a particular method of tender (e.g., in writing, verbally, or through a specific channel), this must be followed.
- Acceptance Capability: The tender must be directed to the party entitled to accept it. This means it should be made to the right person or entity as specified in the contract. Thus, a tender to a stranger is not valid. In case there are joint promisees, it is not necessary for the promisor to offer performance to each one of them. A tender may be made to any one of the joint promisees. Thus, a tender made to one of several joint promisees has the same legal effects as a tender to all of them.
- Sufficient Consideration: The tender should offer an amount or performance that is adequate and meets the expectations set forth in the contract. This ensures that the tender is not nominal or insubstantial.
- Clear Identification: The tender should clearly identify what is being offered. This includes specifying amounts, terms, or any other details relevant to the performance or payment.
- Documentation (if required): In some cases, especially in business contracts, relevant documents (like invoices, receipts, or performance guarantees) may need to accompany the tender.
Meeting these essentials helps ensure that a tender is valid and legally enforceable, providing a basis for fulfilling contractual obligations and facilitating the smooth execution of agreements.
Discharge by Agreement or Mutual Consent:
According to Section 62 of the Indian Contract Act 1872, when parties in a contract mutually decide to substitute the old contract with a new agreement or they agree to modify or rescind the existing contract, in such a case the act states that there is no requirement for the original contract to be performed. There are six ways by which a contract can be discharged by a mutual agreement, which are:
Novation:
The term novation means the substitution of the new contract by the original one. The new agreement may be with the same parties or with the new parties. In the case of novation, the old contract comes to an end, and there is no need for the old contract to be performed as parties have agreed to enter into a new contract in place of the old. For example, X owes ₹ 5 lakhs to Y Bank. X and Y agree to the new contract that, instead of repaying the loan amount of ₹5 lakhs, X will supply goods and services to Y.
Novation is of two kinds, namely: a) A novation involving change of parties and b) novation involving substitution of a new contract in place of the old.
Rescission:
Rescission means the revocation, cancellation, or repeal of a law, order, or agreement. When the parties to a contract consent to rescind it, the contract shall not be required to be performed. In the case of rescission, only the old contract will be cancelled, and no new contract will come into existence. For example, X ordered 100 bales of cotton from Y. Y manufactured the order and sent it to X. However, on finding the unsatisfactory quality of the cotton, X rejected the order, and Y admitted the same and cancelled the contract. Here, the contract is rescinded by the consent of both parties.
Alteration:
Alteration means small change. Alteration refers to change in one or more terms of a contract with the consent of all the parties entered in the contract. Alteration leads to formation of new contracts but the parties to it remain the same. In this case the old contract will be rescinded, it will not be required to be performed, and also the contract will be discharged by alteration. The terms of the contract can also be altered by mutual agreement, and the alteration will have the effect of substituting a new contract for the old one. For example, X contracted with Y to supply them with 10,000 kg of wheat for one year; however, after considering the increase in demand, Y asked X to increase its supply to 20,000 kg of wheat, and X agreed to the same. Hence, this is termed as an Alteration.
Remission:
Remission means the acceptance by the promisee of a lesser sum than what was mentioned in the contract. Section 63 of the Indian Contract Act, of 1872 establishes the discharge of a contract via remission. This involves accepting a sum less than the originally owed by the promisor or agreeing to a partial fulfillment of the promise made. The time for the performance can also be extended. For example, X, orders meal for 200 persons from Y for a party. However, on delivery, it was found that Y had supplied meal for 180 persons, and even though less quantity was delivered, X accepted the delivery.
Merger:
A merger happens when a party with lesser rights under a contract obtains superior rights by the same party under a new contract. As inferior and superior rights may coincide in the same party, in such a case both the rights combined lead to the discharge of the contract governing the inferior rights. For example, X rents Y his property for a tenure of 20 years. 5 years after the contract, Y offered X to buy the property, and X agreed to it. Here, X has two rights; i.e., one accorded by the rent agreement, making them the renter, and the second by the sale agreement, making them the owner. The former being an inferior right merges with the superior one and discharges the rent contract.
Waiver:
The term waiver means abandonment of rights. Waiver means abandonment of rights. When one party to the contract deliberately abandons their right under the contract, the other party is released from his part of obligations, else binding upon it. Under the waiver, either a few or all the rights can be abandoned. For example, X advanced ₹3 lakhs to Y. On the due date, Y made a default on the payment of the loan amount and only paid ₹2 lakhs instead of 3 lakhs. However, X accepted ₹2 lakhs in full as the final settlement and also, waived their right to recover the loan amount.
Discharge by Impossibility of Performance:
If it is impossible for any of the parties entered in the contract to perform their obligations, then the impossibility of performance of contract leads to discharge of contract. If the impossibility of performing the contract exists from the start, then it is termed as impossibility by ab-initio. Kinds of impossibility are as follows:
Initial Impossibility: As per section 56 of the Indian Contract Act, 1872 “An agreement to do impossible act is void ab-initio.” It means agreement which is obviously impossible cannot be binding
Subsequent Impossibility: A contract sometimes becomes impossible or unlawful and as a result void when capable to be performed after formation.
Impossibility of performing the contract may also arise subsequent due to:
- An unforeseen change in the law
- Destruction of subject-matter of the contract
- Non-existence or Non-occurrence of a particular state of things.
- Outbreak of War
Example: X enters into the contract with his friend Y to marry his sister within 6 months. However, X met with an accident and became insane. This impossibility of performance leads to discharge of contract.
Discharge of Contract by a Lapse of a Time:
According to The Limitation Act, 1963, there is a specific time period for the performance of a contract. If the promisor failed to perform his duties and the promisee failed to take action within this specified period, then the promisee in such a case cannot be deprived of his remedy through law. Here, the contract is said to be discharged due to the lapse of time. For example, X takes a loan from one of his friends Y and agrees to pay him instalments every month for the next five years. However, X does not pay even a single instalment. His friend Y calls him several times but then gets busy and takes no action. After three years, Y approaches the court to help him recover his money. However, the court rejects his complaint because he has crossed the time-limit of three years to recover his debts.
Discharge of Contract by Operation of Law:
A contract can be discharged by the operation of law in the following circumstance:
- A party can discharge the contract i.e., from his side if the other party changes the terms such as price or quantity of contract without taking any permission from the former.
- By Insolvency
- By Death
For example, X contracts with Y to purchase his flat at a price of ₹1 Cr on 1 April 2024. However, unfortunately, X died before executing the purchase. As X died, the contract was discharged by the law.
Discharge by Breach of Contract:
A contract is obliged to perform according to its terms. But when a promisor fails to perform a contract according to the terms of the contract, then he is said to have committed a breach of contract. The breach of contract is of two types.
Actual Breach:
Actual breach of contract refers to failure to perform the obligation when the performance is due. For example, X contracted with Y to supply 1000 bales of cotton on 1st April 2024; however, on 1st April 2024, Rahul failed to supply and defaulted on the supply of 1000 bales of cotton. This is an actual breach.
Anticipatory Breach:
Anticipatory Breach, also known as Breach by Contradiction, takes place when one party before the arrival of the fixed date for performance states that it cannot or will not able to perform material part of the contractual obligation on the specified date or it aims to perform the contract in a way that is inconsistent with the deeds specified in the contract at the initiation. For example, a software company signs a contract to deliver a custom software application by a certain date. Months before the deadline, they inform the client that they’re reallocating their resources to another project and won’t be able to complete the software on time.
Conclusion:
The discharge of a contract refers to the termination of the contractual obligations of the parties involved. Understanding the various ways a contract can be discharged is crucial for effective contract management and risk mitigation.Contracts can be discharged through several means.
- The most common method of discharge occurs when both parties fulfill their obligations as stipulated in the contract. Once the terms are met, the contract is considered completed.
- Parties may agree to terminate a contract before performance is complete. This can occur through negotiation and mutual consent, often documented in writing to avoid future disputes.
- If one party fails to perform their obligations, the other party may consider the contract discharged due to breach. The non-breaching party may then seek legal remedies, including damages or specific performance.
- Sometimes external factors make it impossible to perform the contract or significantly alter its purpose. In such cases, the contract can be discharged due to frustration.
- If unforeseen circumstances arise—such as natural disasters or legal changes—that render performance impossible, the contract is typically discharged.
- Certain legal events, such as bankruptcy, can automatically discharge a party from their contractual obligations.
In conclusion, the discharge of a contract signifies the end of the parties’ obligations, which can arise from various circumstances. Understanding these methods helps parties navigate their rights and responsibilities effectively. By anticipating potential discharge scenarios, parties can better manage risks and ensure compliance with contractual commitments, ultimately fostering more reliable and productive relationships in business and personal dealings.