Discharge of a Contract

A contract is the foundation of commercial and personal agreements. From a business owner signing a deal to a consumer agreeing to terms and conditions, everyone encounters contracts on a daily basis. However, a contract comes with an expiry date on account of fulfilment of its purpose or due to legal circumstances. This termination of the contract is known as the discharge of a contract. Having an understanding of the discharge of a contract is essential before jumping in a partnership. 

 

What is a Contract?

A contract is an agreement that is specified with details of the business and enforceable rights including two or more parties. The consent typically involves the consent of all the members for the transfer of goods, services, money, or rights. The general purpose of a contract is to enforce promises according to Charles Fried in his book. The existence of a contract can be traced to the dawn of commerce. The emergence of the Hawala system in the Indian subcontinent came up with a bunch of contractual systems like Hundi, which is a transferable contract offering entitlement to the holder to obtain money from its issuer or an agent. 

 

What is Discharge of a Contract?

The discharge of a contract is the process of terminating up a contractual relationship between different parties. The rights and obligations of the parties come to an end and are no longer enforceable by the law. After the discharge of the contract the members of the contract are no longer bound to perform any of the task mentioned in the contract. There are different ways in which the discharge of the contract commences. The concept of the discharge is to highlight the fact that a contract does not indefinitely bind the members and can come to an end under certain circumstances. 

 

What are the different methods of Discharge of Contract?

Discharge of a contract, in legal terms, becomes void of any further action till the resolution of dispute and call for litigation or arbitration. The various methods of discharge of contract are based on the reason for the termination or the type of contract that was made. 

The different methods of discharge of contract are:

 

1. Discharge of the Contract by Performance 

The most common and desired method for the dissolution of a contract is discharge by performance. When all the mentioned partners perform all the task as per their contractual obligation, the contract is discharged by performance. The term "performance" means actual performance where the mentioned parties fulfil their duties and tasks, and “attempted performance” where one party offers to fulfil a task but the other party refutes. 

For example, when a plumber completes the plumbing of a house as per the contract and receives a complete payment from the owner. The contract stands discharged.

 

2. Discharge of a Contract by Mutual Agreement 

When all the mentioned parties wish to no longer stay bound by the original contract. 

The contract can be discharged by mutual agreement by 

• Novation which is replacement with a new contract 
• Rescission which is cancelling the whole contract
• Alteration which is changing the contract terms 
• Remission which is acceptance of lesser performance 

For example, when X agrees to supply 100 T-shirt to Z, but later on tehy mutually agree to change the order to 50 T-shirts. The original contract is discharged by novation. 

 

3. Discharge of Contract by Lapse of Time 

All the contracts are enforceable only within a specific period of time. If one of the party do not fulfill their obligation within the designated time, and the other party does not initiate any legal action within the time period, the contract is discharged by the lapse of time. 

For example, Under the Limitation act, a creditor must file a suit for the recovery of the item or amount within 3 years. If the creditor fails to do so, the contract is discharged. 

 

4. Discharge of Contract by Operation of Law 

The contract sometimes does not end due to the action caused by the member but due to any external legal reason. 

The reasons for the discharge of contract by operation of law can be:

• Death or insolvency of a party or member 
• Unauthorized alteration of the contract 
• Any kind of merger of rights 

For example, when a person is declared bankrupt, they are legally discharged from the contractual obligations. 

 

5. Discharge of Contract by Impossibility of Performance 

Once the formation of the contract is completed, the unforeseen circumstance that makes the performance of the contractual obligations impossible is frustration. This kind of discharge is applicable when the impossibility is caused by genuine reason which was beyond control of the parties. 

For example, when a contract to organize a wedding is at a venue, but the venue burns down, the contract is discharged as performance is now impossible. 

 

6. Discharge of Contract by Breach 

When one of the parties fails to fulfill their promise, it results in a breach of contract. The other party has legal rights to either discharge the contract or sue for the damages occurred. The breach might be on the actual date or on an anticipatory date. 

For example, when a supplier fails to deliver the product on actual date, the buyer can terminate the contract and claim for compensation. 

 

What are the Legal Implications of Discharge of a Contract?

The discharge of a contract does not consist of a clean slate as thought. In few cases, specifically a breach, one of the parties can still claim for compensation or sue for specific performance. After understanding the method of discharge, legal remedies are easily available. For example, contracts are discharged by mutual agreement there is usually no room for any kind of claim, where the breach might lead to lawsuit. 

 

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Frequently Asked Questions (FAQs)

Are discharge of contract and termination of contract same concepts?

Not always. Termination refers to ending the contract due to breach or frustration. Discharge is a broad concept which includes the completion of obligation or agreement by both parties to end the contract. 

Will a contract be discharged by partial performance?

Yes, in some cases where partial performance is accepted by other party, a contract can be discharged. It must be mutually agreed. 

What happens after the contract is discharged?

After the discharge of contract, the parties are no longer bound legally to any contractual obligation. It depends on the nature of discharge, that the legal remedy can be implied.