Performance and Discharge of Contracts: Meaning, Modes & Cases for UPSC

A contract is considered discharged when the parties involved are released from their contractual obligations effectively ending the agreement. This can occur through different methods such as complete performance, mutual consent, breach by a party or by operation of law. The most frequent mode of discharge is performance where both parties satisfactorily carry out their agreed duties. Understanding the discharge of contracts is important for the UPSC Law Optional as it forms a primary part of contract law often tested in both theoretical and application-based questions.

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What is Discharge of Contract?

A contract is a legally enforceable agreement between two or more parties. Discharge of Contracts signifies a process by which this agreement comes to an end releasing all parties from their respective obligations. Once discharged, the contract no longer holds any legal effect and no party is bound to fulfill any further duties under it.

The most common and preferred method of discharge is by performance when each party fulfills the terms of the contract within the stipulated time. Other forms of discharge such as breach or frustration are generally less ideal as they may lead to legal disputes or claims for damages.

Understanding the various modes of performance and discharge of contract is important for making informed legal and business decisions. The primary ways in which a contract can be discharged are as follows -

By Performance

A contract is discharged when all parties fulfill their contractual obligations as agreed. This is the straight form of performance and discharge of contract. If only one party performs, they are released from their obligation but the other party remains liable.

Example: A agrees to pay B Rs. 1,000 for delivering a package to C’s house. Once B delivers the package and A makes the payment, the contract is fully discharged through performance.

By Mutual Agreement

Contracts may be discharged when parties mutually decide to alter or cancel the original agreement. This form of discharge reflects consent and cooperation between parties.

• Novation: The original contract is replaced by a new one with the consent of all parties involved.
• Alteration: Changes in the terms of the contract by mutual consent discharge the old agreement.
• Rescission: The contract is cancelled with mutual agreement releasing both parties from obligations.
• Waiver: One party voluntarily gives up its rights under the contract discharging the other.
• Merger: A lesser right merges into a superior right, ending the original contractual relationship.

Example: P owes Q a sum of money. Later, all parties agree that R will pay Q instead. This novation discharges the original contract between P and Q.

By Impossibility or Frustration

When a contractual obligation becomes impossible to perform or illegal after the contract has been formed (and not due to any party’s fault) the contract is discharged under the doctrine of frustration. This is a recognized mode of discharge of contract by impossibility.

Example: If a hall booked for an event is destroyed by fire the contract becomes void due to impossibility of performance.

By Operation of Law

Certain events can automatically result in the discharge of a contract irrespective of the intentions of the parties -

• Death: Particularly relevant in contracts requiring personal services.
• Insolvency: If a party is declared insolvent by the court their obligations are legally discharged.
• Merger: When an inferior right merges into a superior one ending the initial contractual relationship.

By Lapse of Time

If a contract is not performed within the period prescribed under the Limitation Act it becomes legally unenforceable and is deemed discharged by lapse of time.

Example: If a creditor fails to initiate legal action within the limitation period, the contract stands discharged.

By Breach of Contract

When one party fails or refuses to fulfill their contractual obligations it results in a breach which also constitutes a discharge of contract. The non-breaching party may seek remedies such as damages.

• Actual Breach: Occurs when a party fails to perform on the due date or during performance.
• Anticipatory Breach: Happens when a party declares their inability to perform before the performance is due.

Exceptional Cases Where a Contract is Not Discharged

The doctrine of frustration or supervening impossibility does not apply in the following circumstances. It means that the contract remains enforceable despite the challenges -

• If the performance of a contractual promise becomes extremely difficult but not impossible, the contract is still valid and not discharged.
• Mere commercial hardship or loss of profitability does not amount to frustration and does not release the parties from their obligations.
• Events such as strikes, lockouts, riots or civil disturbances do not automatically discharge a contract unless the agreement specifically includes a clause allowing termination in such situations.
• A contract cannot be discharged due to a party’s own deliberate or self-induced inability to perform their obligations.
• Where the performance of a contract depends on a third party, the failure or default of that third party does not discharge the original contract.

Performance and Discharge of Contract Case Law

Judicial decisions play an important role in interpreting the principles related to performance and discharge of contract. The following landmark cases explain important aspects like breach, novation and continuing duty of good faith -

Manohur Koyal v. Thakur Das (1888)

In this case, the defendant failed to pay the agreed amount on the due date. He later promised to pay Rs. 400 and issue a new Kisti Bundi bond, which the plaintiff accepted. However, the defendant did not fulfil this new promise either. The Calcutta High Court held that since the new agreement came after the breach of the original contract, it did not qualify as novation. Hence, the discharge occurred due to breach, not novation.

United India Insurance Co. Ltd. v. M.K.J. Corporation (1996)

The Supreme Court ruled that contracting parties must maintain utmost good faith throughout the contractual relationship. This duty continues even after the contract is executed, and no material changes can be made without mutual consent.

Conclusion

Performance and discharge of contract is a fundamental concept in contract law that determines how and when contractual obligations come to an end. Understanding its various modes such as performance, mutual agreement, breach and frustration is important.