Discharge of Contract

Discharge of Contract

Author : V. Krishna Laasya

Introduction

A contract that is formed by formation of an Agreement can also be terminated or discharged by the same agreement, provided that the terms and conditions stipulated are met with. A contract is said to be discharged when the agreement that binds the parties, no longer binds them.

Contract can be discharged by the following broad divisions-

1. Performance
2. Breach
3. Impossibility
4. Agreement and Novation

Discharge of Contract by Performance

In an Agreement, both parties are bound to each other and are required to fulfill the obligations mentioned in the agreement. Performance of the Contract means doing or completing that which is required to be completed in a contract.

As each party has to ensure that he performs his part of the obligation, completion of the same will discharge the contract. Thus, after the party fulfills the performance according to the contract, the liability ends. A contract is said to be discharged by performance, after the completion of duties and rights vested in the parties by virtue of the contract. After performance, right to complete the performance and obligation no longer remain[1]. It is noteworthy that if only one side of the contract (one party) is able to fulfill the obligations and perform the duties, then only that side is discharged and the other party cannot be considered discharge of the performance[2]. 

Discharge of Contract by Breach

When a party fails to perform the duty imposed under the Contract, where the performance is deemed to be impossible or he refuses the performance of the contract, there is a breach in the fulfillment of the contract. If there is a breach of contract, the other party is discharged from the obligation of fulfilling the provisions of the contract.

Breach of a contract may either be actual (that is non- performance on the due date) or anticipatory (before the due date of performance)

In this regard, Anticipatory Breach of contract is important as it analyses the repudiation of contract even before the performance is due. S. 39 of the Indian Contract Act, 1872 states that when a party has refused the performance or disabled himself from the performance, then the promisee may bring the contract to an end unless he has signified its continuance.

If there is refusal to perform the contract and there is no entirety, then Anticipatory breach is not possible[3] under S. 39. When there has occurred a situation of anticipatory breach, the other parties has either the alternative of rescinding the contract immediately by bringing an action for immediately ending the contract without waiting for the due date or treat the contract as subsisting and alive.

Discharge by Impossibility of Performance

If there is impossibility in the performance of the contract, then the contract is deemed void. S. 56 of the Indian Contract Act, 1872 provides for the same. It per se deems the contract void if there is impossibility of performance. It also refers to a contract becoming unenforceable if the act is in itself impossible and the promisor could not prevent the reason or happening of an event.

The Act lays down positive rules of law on the recent questions by English and the American courts and their regard to matters of construction dependent on the true intention of the parties[4].

This Section is divided into

1. Impossibility of performance leading to the contract being void: impossibility refers to the non- fulfillment of the objective laid down in the contract. It is based on the maxim “ les non cogit ad impossibilia” where it is said that law does not compel the performance, if there is no possibility of the fulfillment of performance. Impossibility here refers to physical and legal impossibility. If the performance is in such a way that the promisor is aware of the possibility to not perform and the promisee is not aware, the promisor must compensate the loss incurred by the promisee pertaining to the contract alone.
2. Performance of a contract is possible at the time of entering the contract, but is subsequently deemed impossible because of the happening or non- happening of a certain event which leads to the performance of the contract being unlawful. S. 56 (paragraph 2) states that every contract is entered into based on the assumption that the performance can be met with. However, if the contract later becomes impossible to perform, the contract becomes void.

Doctrine of Frustration

If the performance of a contract becomes impossible, then the parties’ purpose for entering into the contract becomes frustrated. This doctrine of frustration is a part of English Law and is covered under Section 56 of the Indian Contract Act, 1872[5].  This doctrine is considered to be an aspect of the discharge through the reason of impossibility of the Act agreed to be done by the parties, under the ambit of Section 56.

Where performance of any contract is hindered, either due to non- existence of subject matter or if the base for formation fails, the contract can be said to be discharged.

Discharge by Agreement and Novation

Novation refers to choosing the alternative of substituting a contract with a new one. The older contract is hereby discharged when it is replaced with the new contract. The obligation of parties is now turned towards the new contract, and the old contract no longer plays in the picture. Section 62 lays down a broad outline highlighting two means of Novation:

Novation by an amendment of the terms stipulated in the contract

The parties are given ample freedom to change the terms of the contract provided that the original terms are no longer in play and the terms are extinguished in favour of the new one. In Salima Jabeen v. National Insurance Co Ltd[6], the appellant entered into an insurance contract with a fire company. Her property was set on fire by militants and this caused a huge loss to the appellant. It was held by the Court that the terms and conditions can be changed by the parties, however it must be bilateral and not only through one side of the contract.

Novation by way of change in the parties of the contract

This can take place only when there is consent between the three parties namely the discharged party, person in place of the discharged party and the person in favour of the contract performance.                            

Conclusion

It is pertinent to note that the natural and original way of terminating any contract is to perform the terms and conditions stipulated in it. Thus, it must be kept in mind by all parties and persons that it is better to fulfill the terms of the contract, expect for any unforeseen impossibility, rather than discharge it through other complicated means.

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[1] National Insurance Co Ltd v. Boghara Polyfab Pvt. Ltd AIR 2009 SC 170

[2] For Aspects of Discharge by Performance, see <https://www.jandkicai.org/pdf/16817Discharge.pdf>. last accessed August 06, 2020.

[3] West Bengal Financial Corporation v. Gluco Serires AIR 1973 Cal. 268

[4] CBI Staff Co-operative Society Ltd v. Koteswara Rao AIR 2004 AP 18

[5] Satyabrata Ghose v. Mugneeram AIR 1954 SC 47, Taylor v. Caldwell (1863) 3 B &S 826.

[6] Salima Jabeen v. National Insurance Co Ltd AIR 1999 J&K 110