CMA Foundation – Discharge of Contracts Lesson 2.9

A contract creates legal rights and obligations between the parties. However, these rights and obligations do not continue forever. When they come to an end, the contract is said to be discharged. Discharge of contract means the termination of the contractual relationship between the parties.

Understanding the modes of discharge of contracts is essential for CMA Foundation students, as this topic is frequently tested in theory questions, case-based questions, and MCQs. This lesson explains the various ways in which a contract may be discharged, with suitable examples and illustrations.

Meaning of Discharge of Contract

When the rights and obligations created by a contract come to an end, the contract is said to be discharged or terminated. Once a contract is discharged, the parties are no longer legally bound to perform their respective promises.

Modes of Discharge

A contract may be discharged in the following ways:

• Discharge by performance
• Discharge by agreement
• Discharge by lapse of time
• Discharge by operation of law
• Discharge by impossibility of performance
• Discharge by breach of contract

Each mode is explained below.

1. Discharge by Performance

Performance is the normal and most common mode of discharge of a contract. When both parties perform their respective obligations as agreed, the contract comes to an end.

Performance may be of two types:

(a) Actual Performance

Actual performance occurs when both parties fulfill their obligations strictly according to the terms of the contract.

Example:
A agrees to deliver goods to B and B agrees to pay the price. A delivers the goods and B pays the amount. The contract is discharged by actual performance.

(b) Attempted Performance

Attempted performance is also known as tender of performance. It occurs when one party offers to perform his obligation, but the other party refuses to accept it.

A valid tender of performance is treated as equivalent to performance.

Example:
A offers to deliver goods to B at the agreed time and place, but B refuses to accept them. A is discharged from his obligation.

2. Discharge by Agreement

A contract may be discharged by a mutual agreement between the parties. The parties may agree to terminate or modify the contract in the following ways:

(a) Novation (Section 62)

Novation means substitution of a new contract in place of the existing contract. The original contract is discharged and a new contract comes into existence.

Novation may involve:

• Change of parties, or
• Change of terms

Consent of all parties is necessary.

Example:
A owes money to B. It is agreed between A, B, and C that C will pay B instead of A. The old contract between A and B is discharged, and a new contract between C and B is formed.

(b) Alteration (Section 62)

Alteration means change in one or more terms of the contract, while the parties remain the same. Unlike novation, there is no change of parties.

Example:
A and B agree that A will supply goods to B in June. Later, both agree to change the delivery date to July. The original contract is discharged and replaced by an altered contract.

(c) Rescission (Section 62)

Rescission means cancellation of the contract. The parties may cancel all or some of the terms of the contract.

Rescission results in the discharge of the contract.

Example:
A and B enter into a contract. Later, they mutually agree to cancel it. The contract is rescinded.

(d) Remission (Section 63)

Remission means acceptance of a lesser performance than what is originally due under the contract. No consideration is required for remission.

Example:
A owes B ₹10,000. B agrees to accept ₹8,000 in full settlement. The contract is discharged by remission.

(e) Waiver (Section 63)

Waiver means voluntary giving up of a right by a party. When a party waives his right, the contract is discharged.

Example:
A promises to paint a picture for B. Later, B forbids A from doing so. A is discharged from his obligation.

3. Discharge by Lapse of Time

Every contract must be performed within a fixed or reasonable time. If a party fails to enforce his rights within the prescribed time, the contract is discharged by lapse of time.

The Limitation Act prescribes time limits for enforcing contractual rights.

Example:
If a creditor does not file a suit to recover a debt within three years, the debt becomes time-barred. Though the debt exists, the legal remedy is lost.

4. Discharge by Operation of Law

A contract may be discharged by operation of law in the following cases:

(a) Death

Contracts involving personal skill or personal qualifications are discharged on the death of the promisor.

In other contracts, rights and liabilities pass to legal representatives.

Example:
A contracts to paint a portrait. If A dies, the contract is discharged.

(b) Insolvency

When a person is declared insolvent, he is discharged from all liabilities incurred before insolvency.

Example:
If A is adjudged insolvent, his contractual obligations prior to insolvency are discharged.

(c) Unauthorized Material Alteration

If one party makes a material alteration in the contract without the consent of the other party, the contract is discharged.

Material alteration includes changes in:

• Amount payable
• Date of payment
• Place of payment

Example:
Changing the amount payable in a promissory note without consent discharges the contract.

(d) Merger

Merger occurs when inferior rights under a contract merge into superior rights under a new contract.

The earlier contract comes to an end.

Illustration:
When a part-time lecturer is appointed as a full-time lecturer, the part-time contract is discharged due to merger.

5. Discharge by Breach of Contract

A breach of contract occurs when a party fails to perform his obligations.

Breach may be:

• Actual breach, or
• Anticipatory breach

Breach puts an end to the contractual obligations.

Example:
If A fails to deliver goods on the agreed date, the contract is discharged due to breach.

6. Discharge by Impossibility of Performance

When performance of a contract becomes impossible, the contract is discharged.

Law does not compel a person to do an impossible act.

An agreement which is impossible is void.

Example:
A and B agree to marry each other. Before the marriage date, A becomes insane. The contract becomes void due to impossibility.

Lesson Conclusion

Discharge of contract marks the end of legal obligations between the parties. A contract may be discharged through performance, agreement, lapse of time, operation of law, breach, or impossibility of performance. Each mode has its own legal significance and practical application.

CMA Foundation students, a clear understanding of the different modes of discharge will help you in applying legal principles correctly to practical situations.

Revision Questions

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