To discharge a contract is to end it. There are therefore as many kinds of
the discharge as there are different ways of ending a contractual obligation.
Discharge of a contract refers to the way in which it comes to an end.
When the contract is formed by agreement, it may also be discharged or
terminated through agreement, subject to the conditions of the contract. The
agreement to extinguish or terminate the contract itself becomes a binding
contract if supported by consideration or made under seal.
The following are
three main types of discharges:
- Bilateral Discharge:
The contract will be mutually discharged where the parties agree to release one another from any further obligations existing from the original contract. The contract is discharged despite the parties failing to fully or partially discharge all their obligations.
- Accord And Satisfaction:
Accord and satisfaction occur where one party accords the release of another party, who is in breach of the original agreement, from its obligations in return for the satisfaction for the performance of another obligation.
- Unilateral Discharge:
Unilateral Discharge occurs where one party has completed its part of the bargain and agrees to release the other party from its outstanding obligations under the contract. The agreement is only binding if supported by consideration or made under seal.
Types Of Discharge By Agreement Or Consent
As per Section 62 of the Indian Contract Act, 1872 whose heading is � Effect of
novation, rescission, and alteration of contract, "If the parties to a contract
agree to substitute a new contract for it, or to rescind or alter it, the
original contract need not be performed.
The 6 types through which discharge of contract through agreement or consent
could take place are:
- Accord and satisfaction
Novation takes place when either a new contract is substituted for an existing
one between the same parties, or, a contract between two parties is rescinded in
consideration of a new contract being entered into on the same terms between one
of the parties and a third party. In the famous case of Scarf v Jardine18 Lord
Selborne explained the meaning and effect of novation in the following words:
There being a contract in existence, some new contract is substituted for it
either between the same parties or between different parties, the consideration
mutually being the discharge of the old contract . A common instance of it in
partnership cases is whereupon the dissolution of a partnership the persons who
are going to continue in business agree and undertake as between themselves and
the retiring partner, that they will assume and discharge the whole liabilities
of the business, usually taking over the assets and if in case they give notice
of their arrangement to a creditor and ask for his accession to it there becomes
a contract between the creditor who accedes and the new firm to the affect that
he will accept the liability instead of the old liability and on the other hand
that they promise to pay him for that consideration hence novation is of two
- A novation involving a change of parties
- A novation involving the substitution of the new contract in the place of old
Change Of Parties
The first illustration to Section 62 is a case of novation by the change of
parties. The illustration is, A owes money to B under a contract. It is agreed
between A, B and C, that B shall henceforth accept C as his debtor, instead of
A. The old debt of A to B is at the end, and a new debt from C to B has been
contracted. If A is a debtor and the creditor agrees to accept B in his place as
the debtor, the original contract between the creditor and A is at the end.
Substitution Of New Agreement
When the parties to a contract agree to substitute a new contract for it, the
original contract is discharged and need not be performed. It is necessary for
the application of this principle that the original contract must be subsisting
and unbroken .
In the supreme court case of Lata Construction v Dr Rameshchandra Ramniklal Shah
it was held that "there should be a complete substitution of a new contract. It
is in this situation that the original contract need not be performed".
In other words, it means that if the new contract changes the heart of the
contract or the root of the primary contract only then it will be considered
Novation. So, the question arises what happens if the heart of the contract is
not changed but only minor changes are made. Any minor change to the contract
which both the parties agree to is called Material alteration to the contract
and it is legally binding on both the parties.
In the case of Nagendra Kumar Brijraj Singh v Hindustan Salts Ltd , the
defendants advertised that there were vacancies in their company at a certain
salary. The petitioner got selected for the job. The day he joined he was
offered the job at a lesser pay scale. He consented to this new contract which
offered him lesser pay than what was advertised. He later sued the defendants
for the advertised pay.
The court quashed this claim and said that since the plaintiff agreed to the new
contract which offered lesser pay the contract had been novated and hence it is
valid. Pay scale is the heart of the contract and changes to that novates the
contract. Hence defendants were held not liable.
In another case of Juggilal Kamlapat v N.V. Internationale , the Calcutta High
Court also held that "For novation to take effect, modification to the contract
must go to the root of the original contract and change its essential character"
In another similar case of Manohar Koyal v Thakur Das Nasker , the defendants
owed the plaintiff a sum of Rs 1173 due on a bond. But the amount was not paid
in due time and the plaintiffs after the passing of the due date agreed to
accept Rs 400 in cash and a new bond of Rs 700 payable in instalments. The
defendant defaulted again and neither paid Rs 400 in cash nor the Rs 700 bond.
The Plaintiffs sued for the original bond of Rs1173. The court held that the
original contract was voided not because of novation but because of breach of
the contract by the plaintiff and the plaintiff was entitled to sue for breach
of contract. When a breach of contract occurs, the contract becomes void and the
plaintiff can sue for damages.
The court further observed that the second agreement the parties entered into is
not valid as novation can happen only to an already existing contract. Since the
first contract became void it cannot be novated.
Section 62 of the Indian Contract Act also permits the parties to rescind their
contract. The Supreme Court allowed the parties to rescind under this section a
contract for sale of forest coupes because of substantial variance between the
particulars of quantity and quality of timber held out at the time of the
auction and the timber actually available. The contractor was allowed to refund
of his deposit. But no compensation was allowed to him for his loss because the
contract contained a clause against compensation in such circumstances. This was
decided in the famous case law, namely Syed Isar Masood v State of MP .
Where an old contract is rescinded and is replaced by a new one, the old one
will not revive only for the reason that has been a failure to keep the new
promise. The parties may, however, by mutual consent, restore the original and
then the original will revive and become binding on the parties.
Mode Of Communicating Or Revoking Rescission
The rescission of a voidable contract may be communicated or revoked in the same
manner, and the subject to the same rules, as apply to the communication, or
revocation, of a proposal. This is mentioned in Section 66 of the Indian
Contract Act, 1872 .
As per Section 64 of the Act, the party rescinding the voidable contract shall,
if he has received any benefit thereunder from another party to such contract,
restore such benefit, so far as may be, to the person from whom it was received.
Section 62 of the Indian Contract Act, 1872 defines alteration. Alteration of a
contract may take place when one or more of the terms of the contract is/are
altered by mutual consent of the parties to the contract. In such a case the old
contract is discharged.
In the case of United India Insurance Co Ltd v M.K.J. Corpn it was delivered in
the judgement that "Good faith is a continuing obligation inasmuch as even after
entering into the contract, no material alteration can be made by a party in the
terms of the contract without the consent of the other.
Where a contract is embodied in a deed and the party who has the custody of the
deed alters it without the consent of the other in a material particular, the
effect would exactly be the same as that of cancelling the deed. Both parties
will be discharged from their respective obligations. The meaning of the
expression "material alteration" was considered by the Supreme Court in Kalianna
Gounder v Palani Gounder .
In the particular case, a memorandum of agreement for the sale of land under
which Rs. 2000 were paid in advance was with the plaintiff. The defendant
refused to convey the land and pleaded that the plaintiff had alerted the deed
by adding the words that the seller shall "clear the debts and execute the sale
deed free from encumbrance.
The plea was dismissed because the alleged alteration could not be proved, but
Shah J took the opportunity to point out: "Even if it be assumed that the
sentence regarding encumbrances was written after the deed was executed it will
not invalidate the deed, ordinarily when the property is agreed to be sold for a
price, it would be the duty of the vendor to clear it of all encumbrances before
executing the sale deed. The alteration, if any, cannot, therefore, be regarded
as material .
A promisee can forgo or transmit the execution of guarantee of an agreement,
completely or to some degree. He can likewise expand the time concurred for the
execution of the equivalent .
A remission is ordinary when it comes to fruition through an express concede to
the account holder by a bank. It is inferred when the leaser makes a wilful
surrender of the first title to the indebted person under private mark
comprising the commitment. The term remission is additionally utilized in
reference to the absolution or approbation of damage or offence , or the
demonstration through which a Forfeiture or punishment is excused.
Reduction implies acknowledgement of a lesser exhibition that what was in
reality due under the agreement. As per area 63, a gathering may shed or
transmit, entirely or to a limited extent, the execution of the guarantee made
to him. He can likewise broaden the season of such execution or acknowledge,
rather than it, any fulfilment which he considers fit. A guarantee to do as such
will tie despite the fact that there is no thought for it.
Waiver signifies "Surrendering" the rights. At the point when involved with the
agreement relinquishes or postpones his rights, the agreement is released. Here,
both the gatherings commonly concur that they will never again be bound by the
agreement. It adds up to an arrival of gatherings from their legally binding
What Is A Waiver?
Waiver implies an individual surrendering a few or the majority of their
legitimate rights under an agreement. There is more than one path by which a
privilege might be postponed, and a waiver can happen either deliberately or
- Waiver By Contract Or Deed:
This happens where a gathering explicitly consents to surrender their lawful
rights. Such an understanding will tie gave the ordinary prerequisites of an
agreement have been met. Instances of this sort of waiver incorporate
settlement or bargain understandings, varieties to a current contract, or
another agreement supplanting a more seasoned one.
- Waiver By The Decision:
This applies where a rupture of the agreement has happened and the "honest
party" has a decision between two elective rights or cures. Waiver by race,
as a rule, happens where the agreement contains an express right or
alternative to end or repeal it in specific circumstances, or where one
gathering submits a genuine rupture which gives the "blameless" party the
privilege to end the agreement right away. In such cases, the "honest" party
may pick either to end the agreement promptly or to forgo the rupture and
proceed with the agreement.
Waiver in simple words is the voluntary abandonment of one's right. For
example, let's say A owes B 1000 rupees. A has the right to claim this amount
from B but due to some circumstances he voluntarily releases B of his
obligation. Here A waived his right of 1000 rupees from B.
Waiving one's right need not always be expressed. In the words of Lord Denning
said that the principle of waiver also applies if one party, by his conduct,
leads another to believe that strict rights arising under the contract will not
be insisted upon .
In the case of M.Sham Singh v State of Mysore , M was sent to the United States
to pursue higher studies under a scholarship which entailed the condition that
upon his return he would work for the State and that the State would offer him a
job within 6 months of his return. The contract also had the condition that if
the state failed to provide employment within 6 months the contract shall stand
waived and if M failed to comply, he would have to return the scholarship
M was selected for further training of one year, on his request, the State
complied with his request of extension of his time. Before the beginning of his
new one-year training M had to come back to India due to domestic reasons and
stayed for 6 months and again returned to the United States with the permission
of the State. After the completion of his new one-year training he started
working in the United States and the State of Mysore sued for the scholarship
M pleaded that when he was in India, he was not hired within the stipulated
period of 6months and that there was conduct on the part of the State to waive
their rights. The court held that there was no waiver whatsoever as the
extension was mutually agreed upon by the parties and there was no conduct on
the part of the State showing an intention to waive.
In the case of Richards (Charles) Ltd v Oppenhaim
, the contract was to
provide a car frame on which a body was to be built within a certain period of
time, time being of the essence. The contractor could not deliver the frame of
the car within the due date. Yet the buyer very liberally granted the contractor
an extension in time of 4 weeks, he also gave notice that beyond this time there
will be no acceptance.
When the delivery was made well beyond 4 weeks the buyer did not accept
performance. The defendants pleaded that the buyer through his conduct waived
his right of performance in due time by leniently giving time extension. The
court held that the buyer reclaimed his right to make time of essence when he
gave a notice. Hence, he was allowed to rescind the contract.
An agreement additionally stands released through a merger that happens when a
substandard right accumulating to party in an argument amalgamates into the
better right resulting than a similar gathering. For example, contracts an
industrial facility premises from B for assembling movement for a year, yet 3
months in front of the expiry of rent buys that very premises. Presently since A
has turned into the proprietor of the structure, his rights related with the
rent (substandard rights) in this manner converge into the privileges of
possession (unrivalled rights).
The past rental contract stops to exist. In certain circumstances, it is
conceivable that substandard and predominant right corresponds in a similar
individual. In such cases, both the rights join prompting a release of the
agreement administering the sub-par rights.
Accord And Satisfaction
Accord refers to an agreement whereby a person after there has been a breach of
the contract agrees to accept some valuable consideration in lieu of the right
of action that he has against the other party. And satisfaction refers to the
discharge of the obligation formed under the new agreement after the breach has
occurred. Discharge of a contract by accord and satisfaction means the discharge
of the original contract by reason of performance of the new substituted
The liability arising out of breach of contract can be discharged by accord and
satisfaction. Unlike Novation, Accord and Satisfaction is only possible after
there has been a breach of the original contract. Consensus is also a
requirement to settle a contract under Accord and Satisfaction.
In the case of Snow View Properties Ltd v Sindh and Punjab Bank , The petitioner
floated a loan and mortgaged his property to secure the loan. The petitioner was
unable to clear the loan in the given time so the bank authorities seized the
mortgaged property. The petitioner after the breach of the contract entered into
a contract with the bank to pay a certain amount of money in exchange of his
property. The bank authorities agreed to this and later did not release his
property even after receiving the promised amount.
The court held that the bank must give him his property back stating that the
doctrine of accord and satisfaction applies fully in this situation. Since the
new contract was floated to satisfy the breach of the original contract and the
banks voluntarily agreed to it so they cannot go back on their new terms.
Another illustration of accord and satisfaction is the case of Kapurchand Godha
v Mir Nawab Himayatalikhan Azamjah , the plaintiff though initially protected to
accept the new agreement later expressed readiness to accept the amount sent if
full satisfaction of his claim and discharge the promissory note. It was held by
the Supreme Court of India that this circumstance was completely covered by
Section 63 of the Contracts Act.
No matter what were the respective rights of parties under the original
agreement, they are abandoned in consideration of the acceptance of a new
agreement. The consequence is that when such an accord and satisfaction take
place the prior rights of the parties are extinguished. They have, in fact, been
extinguished by the new rights .
Discharge Of Contract By Operation Of Law
The contract is discharged by the operation of law when a contract is discharged
by the intervention of law. This can be done in any of the following ways:
Material alteration means any alteration or change in the contract that affects
the rights and liabilities of the parties to the contract significantly.
Material alteration puts an end to the contract.
If one party without the consent of the other party makes such an alteration in
the contract, the other party can avoid the contract. In such cases, the effect
of alteration would be the same as that of cancellation of the document.
However, an alteration which is not material or which is made to carry out the
common intention of the parties, does not affect the validity of the contract .
It is an operation of law that extinguishes a right due to its coincidence with
another greater right in the same person. On merger, the inferior rights are not
required to be enforced.
The insolvent is neither allowed to deal with his property nor to pay any of his
creditors. After a person is adjudicated as insolvent, all of his rights and
liabilities are transferred to the Official Receiver or the Assignee, as the
case maybe. When he is adjudged as insolvent, he is discharged from all
liabilities incurred prior to his adjudication.
In case of contracts, which involve personal skill or ability, the contract is
discharged or terminated on the death of the promisor. However, in other
contracts, the rights and liabilities of a deceased person shall pass on to the
legal representatives of the deceased person.
In the Law of contracts, there is a great deal of misunderstanding or lack of
understanding in regard to certain topics connected with the subject of
discharge. It is due to the fact that few people use such terms as condition and
warranty in the same sense, the rest is due to faulty reasoning concerning
matters that are admittedly difficult.
The best way of discharging a contract is based on performance. As this way both
the parties follow all the terms of the contract and afterwards go for its
discharge. On the other hand, discharge by the breach is the most unpleasant way
to release you from duties. Therefore, discharge by breach results in damages
Where there is no instrument that can be regarded as the obligation, there is
great difficulty in proving the execution of a deed, for the obligation itself,
cannot be physically delivered. But the surrender or cancellation of evidential
documents may even in these latter cases prevent proof of the obligation or may
be given evidence of mutual recession. but the recession and substitution are
interwoven into one body and one breath neither one having power of separate
in pleading such a discharge, the defendant must allege the very same things
that must be alleged by a plaintiff who sues upon a contract except that it has
to show a breach. The defendant is not seeking a remedy and hence he does not
have to establish the existence of any secondary obligation.
He must allege merely the agreement, showing that it includes a recession of the
former obligation. No technical language is required. The facts must be so
stated that the court can determine whether or not there was an agreement and
what were its terms.