Discharge of Contract: Meaning, Modes, and Legal Rules

Discharge of contract is a key concept in Business Law and Commerce, referring to the process where the legal relationship and the binding force of a contract comes to an end. When parties have completed all rights, duties, and obligations as outlined in the contract, the contract is said to be “discharged.” This means both parties are released from their commitments, and the contract becomes void—no longer enforceable by law.

What is Discharge of Contract?

A contract is a legally binding agreement between two or more parties. Discharge of contract means the termination of the contractual relationship wherein parties are freed from their respective obligations. Once a contract is discharged, it loses its legal power, and none of the involved parties is required to perform any obligation under it.

Discharge can occur in several ways, but the most common and preferable way is by fulfilling the promise stated in the contract within the agreed time. Other methods are less desirable since they may result in disputes or damages.

Modes of Discharge of Contract

Understanding the different modes of discharge helps in applying the right course of action in legal and business situations. Below are the main modes:

1. By Performance
   The contract is discharged when both parties fulfill their promises. If one party alone performs, only that party is discharged, and the other remains liable.
   Example: A agrees to pay B Rs 1,000 if B delivers a package to C’s house. B delivers the package and A pays Rs 1,000. The contract is discharged.
2. By Mutual Agreement
   Contracts can be discharged if both parties agree to substitute, alter, rescind, or waive the contract.

   • Novation: The old contract is replaced by a new one with the consent of all parties.
   • Alteration: Some terms are changed with mutual consent, leading to the end of the old contract.
   • Rescission: Contract is cancelled by mutual agreement, discharging original obligations.
   • Waiver: A party abandons their right, discharging the other party.
   • Merger: An inferior right merges with a superior right, thereby ending the original contract.

   Example: P owes Q money. They agree that R will pay Q instead. The original contract between P and Q is discharged.
3. By Impossibility or Frustration
   If the promised act becomes impossible or illegal after forming the contract (not due to the parties’ fault), the contract is discharged. This is known as “doctrine of frustration.”
   Example: If the subject matter of the contract, like a hall for an event, is destroyed, the contract is void.
4. By Operation of Law
   Legal factors such as death, insolvency, or merger can discharge a contract. These occur independently of the parties’ wishes.

   • Death: Especially for personal service contracts
   • Insolvency: The court discharges obligations if a party is declared insolvent.
5. By Lapse of Time
   If the contract isn’t performed during the time limit specified in law, the contract is discharged and becomes unenforceable.
   Example: If a creditor does not file suit for recovery within the limitation period, the contract becomes void.
6. By Breach of Contract
   If a party fails or refuses to perform obligations when due, this is a breach. The contract is discharged and the injured party can claim damages.

   • Actual Breach: Refusal or failure to perform on the due date or during performance.
   • Anticipatory Breach: Announcing inability to perform before time for performance arrives.

Key Principles and Important Points

• Discharge of contract makes the contract void and unenforceable in law.
• Best mode is by performance, as it avoids disputes and damages.
• Consent of all parties is essential for novation, alteration, or rescission.
• In case of impossibility, the contract is void but not due to self-induced reasons.
• Commercial hardship or unprofitability does not discharge a contract.
• Strikes, riots, or lockouts do not discharge the contract unless contract provides for it.

Step-by-Step Approach to Analyzing Discharge of Contract

1. Read the contract terms and facts carefully.
2. Identify whether obligations have been performed or any breach occurred.
3. Check for impossibility, lapse of time, or intervention by law (death/insolvency).
4. Determine if the contract was substituted, altered, rescinded, or waived by consent.
5. Conclude how the contract stands discharged based on facts and legal principle.

Conceptual Examples

• Performance: B promises to deliver goods to C. When delivered and paid for, the contract is discharged.
• Breach: A fails to pay for delivery on due date. The contract is discharged by breach; B may claim damages.
• Impossibility: An earthquake destroys the subject matter. The contract is void.

Practice Questions

1. Describe two main differences between discharge by performance and discharge by breach.
2. Explain with example what is meant by discharge of contract by mutual agreement.
3. When does impossibility or frustration apply to discharge a contract?

Next Steps for Learning

• Review practical case studies based on different discharge situations.
• Practice contract law questions using Vedantu’s Commerce learning tools.
• Revise related legal topics in Business Law, such as consideration, offer, acceptance, and void agreements.
• Explore linked resources for a thorough understanding of legal and business frameworks.

To build a strong understanding in Commerce subjects and business law, practice various scenarios and use available Vedantu resources. Mastering discharge of contract ensures clarity in solving real-life legal problems and performing well in exams and business decision-making.