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Discharge of Contracts under Indian Contract Act, 1872

Updated: Feb 12, 2022

Meaning

Discharge of Contracts under Indian Contract Act, 1872

Any contract is entered into between two parties for the subsequent fulfilment of the terms of the contract by the contracting parties. Any contract is only said to be discharged when the rights and obligations created by such agreement cease to exist.

However, such cessation of contracts between two parties can occur in more than a single obvious manner. Therefore, we have discussed the various modes, as to how a contract can be discharged under the Indian Contract Act, 1872.



Modes of Discharge of Contract

When an agreement that was binding on the party to it ceases or stops to bind them, the contract is said to be discharged. There are several ways of discharging a contract. They are discussed as below-

Discharge of Contracts under Indian Contract Act, 1872

1. Discharge by Performance:


Each party to contract will undoubtedly play out his piece of the commitment. After the party have made due execution of the agreement, their responsibility under the agreement concludes.

The contract is deemed to be discharged by performance. Concerning such discharged contract, there cannot be any dispute.


2. Discharge by Breach of Contract:

Discharge of Contracts under Indian Contract Act, 1872

When a party having a duty to perform a contract, fails does that or does an act whereby the performance of the agreement by him becomes unimaginable, or he won't play out the agreement, there is supposed to be a breach of contract on his part.

When one party commits a breach of contract, the other party is discharged from his obligation to perform under the contract.


Classification of Breach of Contract-


Actual i.e. the non-performance of the contract on the due date of performance.

Anticipatory i.e. before the due date of performance has come.


  • Anticipatory Breach of Contract

This is covered under Section 39 of the Indian Contract Act, 1872. It implies the repudiation of a contract by one party before the due date of his performance has arrived.

When the refusal to perform the contract in its entirety is not there, it is not be considered a case of anticipatory breach under Section 39.


Effects of anticipatory breach of contract


When the promisor has made an anticipatory breach of contract, “ the promisee may put an end to the agreement, except if he has signified by words or direct his quiet submission, in its continuation."

It means that on the anticipatory breach of contract by one party, the other party has two alternatives open to him:-

The other party may rescind the contract i.e. he has the right to treat the contract as if it has come to an end, even though the due date of performance has not yet arrived.


Anticipatory breach by one party does not automatically put an end to the contract. On anticipatory breach by one party, the other party can exercise either treat that the contract has come to an end or treat the contract as if it is still alive and continuing until the due date of performance comes.


CASE LAW: Frost v. Knight

In this case, the plaintiff was promised by the defendant, of marriage upon the death of the defendant's father. However, before the death of the father, the defendant broke off the engagement. The plaintiff sued the defendant, before the death of the defendant's father on breach of contract and was successful.


3. Discharge by Impossibility of Performance:

Discharge of Contracts under Indian Contract Act, 1872

Section 56 of the Contract Act provides for Discharge of Contract by Impossibility of Performance. If the performance of a contract is impossible, the same is considered void, in both England and India.

  • Initial Impossibility under Section 56(1)

An agreement to do an inconceivable demonstration is in itself void. Performance of the respective promises by parties is the most essential aspect of any agreement.

If a contract is impossible to be performed, the parties to it will never be able to fulfil their objective and hence such agreement is void.


Section 56 is based on the maxim-les non-cogit ad impossibilia which means that the law does not compel a man to do something that he cannot possibly perform.


  • Subsequent Impossibility under Section 56(2)

Upon entering the contract, the performance of the terms of such contract may be reasonable and can be performed. However, the occurrence of certain events or circumstances can later render it impossible for any one of the parties to fulfil their part of the contract.

Thus, in the event, when the performance of the contract becomes impossible, the contract is void.


Case law:

In Punj Sons Pvt. Ltd. v. Union of India, the plaintiff's company (Punj) in New Delhi entered into a contract with Union of India for the supply of 8,420 milk containers of 20 litres each duty coated with “hot-dip coating”.

The parties were aware of the fact that such coating is composed of tin ingots, a controlled item, that was not available in the market without a release order from the Director-General of Supplies and Disposals. Despite reasonable efforts on part of the petitioners to obtain the release of the necessary quota of tin ingots, the same was not done.


It was held that the performance of the contract became void due to impossibility of performance furthermore; the promisors couldn't be made at risk to pay harm for the breach of contract.


4. Discharge by Agreement and Novation:

Discharge of Contracts under Indian Contract Act, 1872

Section 62 of the Contract Act provides for the discharge of contract by agreement and novation.

Novation refers to the addition of a new contract in substitution of the existing contract.

When by an agreement between the parties to a contract, a new contract replaces an existing one, the already existing one is thereby discharged and its place, the obligation of the parties in respect in respect of the new contract comes into existence.


Novation is of two kinds:-


  • Novation by a change in the terms of the contract:-

Novation in the change of terms may imply that the parties to the contract have changed the terms to the contract, either by adding new terms to the contract or by extinguishing the terms of the existing contract.


In Salima Jabeen v. National Insurance Co. Ltd., the appealing party went into an agreement of protection of her property against fire with the respondent company.

After assessment of the damaged property and deliberation with the plaintiff, a compensation amount was decided and later paid to the plaintiff by the defendant company.


Upon acceptance of such compensation and refusing to make further claims, the plaintiff forfeited her right of further claims and released the defendant company from further obligations.

The terms and conditions of an agreement can unquestionably be changed or adjusted. However, it cannot be done unilaterally unless there exists any provision either in the contract itself or in law.


  • Change in the parties to the Contract:-

Novation of a contract by changing the parties to the contract is another way whereby one of the parties to the contract is replaced by another, to fulfil the terms of the existing contract.


In Satish Chandra Jain v. National Small Industries Corporation, the appellant stood guarantor to funding done to his proprietory business venture. In this manner, the child changed over his business into a private company. It was held that because of resulting changes, which added up to novation, the appealing party's assurance stood released.


CONCLUSION

In conclusion of the matters discussed above, we have come to understand that performance of a contract by parties to the contract, is not the only way of discharging a contract. The contract may also be discharged by breach of the contract or impossibility of performance or other modes as was discussed above.

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