Discharge of contract means the termination of the contractual relationship between the parties, releasing them from their obligations. A contract may be discharged in several ways. (1) By performance – when both parties fulfill their promises. (2) By mutual agreement – through novation, rescission, alteration, or remission. (3) By impossibility of performance – when the act becomes impossible or unlawful after formation (Section 56). (4) By lapse of time – when a party fails to perform within the period prescribed by the Limitation Act. (5) By operation of law – through insolvency, merger, or death of a promisor in personal contracts. (6) By breach of contract – when one party refuses or fails to perform. Once discharged, no party can sue for performance thereafter.
Ways of Discharge of Contracts:
1. Discharge by Performance
A contract is discharged by performance when both parties fulfill their respective obligations as agreed. Performance may be actual or attempted (tender of performance). Actual performance occurs when promises are completely executed, ending the contract. Tender of performance means an offer to perform, even if refused by the other party; it discharges the offering party. Performance must be unconditional and according to the contract terms. In joint promises, all promisors are jointly and severally liable. Discharge by performance is the most natural and desirable way to end contractual obligations.
For example, if A agrees to sell goods to B and delivers them as promised, and B pays the agreed price, the contract stands discharged by complete performance.
2. Discharge by Mutual Agreement
A contract can be discharged by mutual consent of the parties under Section 62 of the Indian Contract Act. This may occur through novation, rescission, alteration, or remission.
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Novation: Substitution of a new contract for an old one.
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Rescission: Cancellation of the contract by mutual consent.
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Alteration: Change in terms of the existing contract by consent.
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Remission: Acceptance of a lesser performance than agreed.
All these methods depend on free consent and mutual understanding. When the parties agree to end, modify, or replace a contract, their original obligations are discharged. For instance, if A and B agree to cancel their earlier contract and make a new one on different terms, the old contract ceases to exist.
3. Discharge by Impossibility or Frustration
A contract is discharged when its performance becomes impossible or unlawful after formation, as per Section 56. This is known as frustration of contract. Impossibility may be initial (impossible from the start) or supervening (occurs later due to events beyond control). Examples include destruction of subject matter, change in law, death, war, or natural calamity. The rule is based on the principle that “the law does not compel a man to do what he cannot possibly perform.”
For example, if A contracts to sing for B but dies before the event, the contract becomes void. However, mere difficulty or inconvenience is not considered impossibility. The doctrine of frustration protects parties from liability where performance becomes genuinely impossible.
4. Discharge by Lapse of Time
Under the Limitation Act, 1963, every contract must be performed within a prescribed time limit. If a party fails to perform within that period, the contract is discharged by lapse of time, and the aggrieved party loses the right to sue. Generally, the limitation period for contractual obligations is three years from the date performance becomes due. The purpose is to promote legal certainty and prevent stale claims.
For example, if a debtor fails to repay a loan and the creditor does not take legal action within three years, the right to recover the amount is barred by limitation. Thus, discharge by lapse of time releases both parties from their contractual rights and duties due to inaction over a prolonged period.
5. Discharge by Operation of Law
A contract may be discharged automatically by operation of law, without any act of the parties. This occurs in cases such as death, insolvency, merger, or material alteration.
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Death: In contracts requiring personal skill or ability, death discharges the contract.
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Insolvency: When a person is declared insolvent, his rights and obligations transfer to an official receiver.
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Merger: When an inferior right merges into a superior one.
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Material alteration: Any unauthorized change in terms makes the contract void.
In such cases, the law itself releases the parties from further performance, ensuring fairness and preventing unjust enforcement.
6. Discharge by Breach of Contract
A contract is discharged by breach when one party refuses or fails to perform their obligation, either actually or anticipatorily.
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Actual breach occurs when the promisor fails to perform on the due date.
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Anticipatory breach occurs when a party declares, before the due date, that they will not perform.
When a breach occurs, the aggrieved party may treat the contract as terminated and claim damages for losses suffered. The breach releases the innocent party from performing their part. For example, if A agrees to supply goods to B on a fixed date but fails to deliver, B can terminate the contract and sue for damages. Thus, breach of contract ends the legal relationship between the parties.
