A contract creates certain obligations on one or all parties involved. The discharge of a contract happens when these obligations come to an end. There are many ways in which a contract is discharged.
Discharge by Performance
When the parties to a contract fulfill the obligations arising under the contract within the time and manner prescribed, then the contract is discharged by performance.
Illustration: Peter agrees to sell his cycle to John for an amount of Rs 10,000 to be paid by John on the delivery of the cycle. As soon as it is delivered, John pays the promised amount.
Since both the parties to the contract fulfill their obligation arising under the contract, then it is discharged by performance. Now, discharge by the performance of a contract can be by:
1. Actual performance
2. Attempted performance
As shown in the example above, actual performance is when all the parties to a contract do what they had agreed for under the contract. On the other hand, it is possible that when the promisor attempts to perform his promise, the promisee refuses to accept it. In such cases, it is called attempted performance or tender.
Discharge by Mutual Agreement
If all parties to a contract mutually agree to replace the contract with a new one or annul or remit or alter it, then it leads to a discharge of the original contract due to a mutual agreement.
Illustration: Peter owes Rs 100,000 to John and agrees to repay it within one year. They document the debt under a contract. Subsequently, he loses his job and requests John to accept Rs 75,000 as a final settlement of the loan. John agrees and they make a contract to that effect. This discharges the original contract due to mutual consent.
Discharge by the Impossibility of Performance
If it is impossible for any of the parties to the contract to perform their obligations, then the impossibility of performance leads to a discharge of the contract. If the impossibility exists from the start, then it is impossibility ab-initio. However, the impossibility might also arise later due to:
- An unforeseen change in the law
- Destruction of the subject-matter essential to the performance
- The non-existence or non-occurrence of a particular state of things which was considered a given for the performance of the contract.
- A declaration of war
Illustration: Peter enters into a contract with John to marry his sister Olivia within one year. However, Peter meets with an accident and becomes insane. The impossibility of performance leads to a discharge of the contract.
Discharge of a Contract by Lapse of Time
The Limitation Act, 1963 prescribes a specified period for the performance of a contract. If the promisor fails to perform and the promisee fails to take action within this specified period, then the latter cannot seek a remedy through law. It discharges the contract due to the lapse of time.
Illustration: Peter takes a loan from John and agrees to pay installments every month for the next five years. However, he does not pay even a single installment. John calls him a few times but then gets busy and takes no action. Three years later, he approaches the court to help him recover his money. However, the court rejects his suit since he has crossed the time-limit of three years to recover his debts.
Discharge of a Contract by Operation of Law
A contract can be discharged by operation of law which includes insolvency or death of the promisor.
Discharge by Breach of Contract
If a party to a contract fails to perform his obligation according to the time and place specified, then he is said to have committed a breach of contract.
Also, if a party repudiates a contract before the agreed time of performance of a contract, then he is said to have committed an anticipatory breach of contract.
In both cases, the breach discharges the contract. In the case of:
- an actual breach, the promisee retains his right of action for damages.
- an anticipatory breach of contract, the promisee cannot file a suit for damages. It also discharges the promisor from performing his part of the contract.
Discharge of a Contract by Remission
A promisee can waive or remit the performance of promise of a contract, wholly or in part. He can also extend the time agreed for the performance of the same.
In example 3 above, Peter only repays a part of the money he owes to John. However, John agrees to accept it as a final settlement of the debt. John’s act of remission discharges the contract.
Discharge by Non-Provisioning of Facilities
In many contracts, the promisee agrees to offer reasonable facilities to the promisor for the performance of the contract. If the promisee fails to do so, then the promisor is discharged of all liabilities arising due to non-performance of the contract.
Illustration: Peter agrees to fix John’s garage floor provided he keeps his car out for at least 6 hours. Peter approaches him a few times but John is reluctant to get his car out. John fails to provide reasonable facilities to Peter (an empty floor). This discharges him of all obligations arising under the contract.
Discharge of a Contract due to the Merger of Rights
In some situations, it is possible that inferior and superior right coincides in the same person. In such cases, both the rights combine leading to a discharge of the contract governing the inferior rights.
Illustration: Peter rents John’s apartment for two years. One year into the contract, he offers to buy the property from John, who agrees. The enter a sale contract and Peter becomes the owner of the apartment. Here Peter has two rights; one accorded by the lease agreement making him the renter and second by the sale agreement making him the owner. The former being an inferior right merges with the superior one and discharges the lease contract.