Types of Discharge of Contract with Practical Examples
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:
- By PerformanceThe 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. - By Mutual AgreementContracts 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.
- By Impossibility or FrustrationIf 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. - By Operation of LawLegal 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.
- By Lapse of TimeIf 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. - By Breach of ContractIf 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.
| Mode | How Contract Ends | Example |
|---|---|---|
| Performance | Both parties carry out obligations as agreed | Delivery of goods + payment |
| Mutual Agreement | Agreed substitution, alteration, rescission, or waiver | Replacing with new contract |
| Impossibility/Frustration | Act impossible due to external factors | Contract becomes illegal or object is destroyed |
| Operation of Law | Ends automatically by law (death, insolvency) | Party dies before performance |
| Lapse of Time | Time allowed by law expires | Not suing for recovery within limitation |
| Breach | A party fails/refuses to perform | Non-payment or non-delivery |
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
- Read the contract terms and facts carefully.
- Identify whether obligations have been performed or any breach occurred.
- Check for impossibility, lapse of time, or intervention by law (death/insolvency).
- Determine if the contract was substituted, altered, rescinded, or waived by consent.
- 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
- Describe two main differences between discharge by performance and discharge by breach.
- Explain with example what is meant by discharge of contract by mutual agreement.
- 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.
FAQs on Discharge of Contract: Meaning, Modes, and Legal Rules
1. What is the discharge of contract?
Discharge of contract refers to the legal termination of the contractual relationship between parties, releasing them from their respective obligations under the contract. Once a contract is discharged, parties are no longer bound to perform the agreed terms, and the contract becomes unenforceable in law.
2. What are the modes of discharge of contract?
The main modes of discharge of contract are:
- By performance (fulfilment of obligations)
- By mutual agreement (novation, rescission, alteration, remission, waiver)
- By impossibility or frustration (performance becomes impossible)
- By operation of law (death, insolvency, merger)
- By breach of contract (failure or refusal to perform by a party)
3. Explain discharge of contract by performance with an example.
Discharge by performance means both parties have carried out their contractual obligations, ending the contract.
Example: A agrees to sell goods to B for ₹10,000. A delivers the goods and B pays the agreed amount. The contract is said to be discharged by performance.
4. What is discharge of contract by mutual agreement?
Discharge by mutual agreement occurs when both parties consent to end, modify, or replace the contract before full performance. This can include novation, rescission, remission, waiver, or alteration. All parties must agree to the changes or cancellation for the discharge to be valid.
5. How is a contract discharged by operation of law?
A contract is discharged by operation of law when certain legal events automatically terminate it. Common situations include:
- Death of a party (in personal contracts)
- Insolvency (party declared bankrupt)
- Merger (inferior right merges into a superior right)
- Material alteration without other party’s consent
6. What do you mean by discharge of contract by impossibility or frustration?
Discharge by impossibility or frustration arises when an unforeseen event makes the performance of the contract impossible or illegal after it is formed, making it void.
Example: If a law is passed after contract formation making the subject matter illegal, the contract is discharged due to frustration (Section 56 of the Indian Contract Act).
7. Differentiate between breach of contract and discharge of contract.
Breach of contract is the failure or refusal by a party to perform obligations, leading to legal remedies for the other party.
Discharge of contract ends the contract and releases parties from duties, which can be by performance, agreement, frustration, law, or breach itself.
- Breach is a cause, discharge is the effect.
- Discharge may or may not involve breach.
- Breach entitles the innocent party to claim damages.
8. What is the difference between discharge and termination of contract?
Discharge of contract means ending the contract and all obligations, usually after full performance or by law.
Termination typically means ending the contract before completion, often due to breach or as per terms.
After discharge, parties are fully released. After termination, parties may have post-termination rights or liabilities depending on contract terms.
9. Can a contract be discharged by partial performance?
Yes, a contract can be discharged by partial performance if the promisee accepts it as complete satisfaction of the whole contract. This is called remission under Section 63 of the Indian Contract Act. Both parties must agree to such settlement for discharge to occur.
10. What happens after the discharge of a contract?
After the discharge of a contract, the parties are free from their contractual obligations. The contract becomes unenforceable, and, except in cases of breach, neither party can demand performance or seek damages under the contract.
11. Is 'doctrine of frustration' the same as discharge by impossibility?
Yes, the doctrine of frustration refers to discharge by supervening impossibility. When an unforeseen event makes contract performance impossible or illegal, the contract is automatically discharged under Section 56 of the Indian Contract Act. However, this does not apply to self-induced impossibility or mere commercial inconvenience.
12. Give an example of discharge of contract by operation of law.
Example: A enters into a contract with B for personal services, but A is declared insolvent by a court. The contract is discharged by operation of law because A’s insolvency ends his personal liability under the contract.
