The term "discharge of a contract" refers to the termination of contractual obligations, rendering the contract inoperative. It signifies that the rights and duties arising from the contract are extinguished, freeing both parties from their commitments. Under the Indian Contract Act, 1872, the discharge of a contract can occur in several ways, as outlined below.

1. Discharge by Performance

Performance is the most common method of discharging a contract. The parties discharge the contract when they both perform their respective obligations as agreed.

• Actual Performance: When the contract is fully executed by both parties.

• Attempted Performance or Tender: When one party offers to perform his obligation but is prevented by the other party from doing so.

Example: If A agrees to supply commodities on a date for the benefit of B and satisfies the said promise, it is discharged.

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2. Discharge by Agreement or Consent

When both parties agree to discharge or otherwise agree to vary the terms and conditions of the contract then the contract gets discharged, and this may be in the following ways:

Novation (Section 62)

The replacement of an existing contract with a new one, either involving the same or different parties. The old contract is discharged.

• Example: A owes B ₹10,000. Both agree that A will transfer property worth ₹5,000 to B instead of cash. The old contract is replaced by the new agreement.

Rescission (Section 62)

The cancellation of the contract by mutual consent, without replacing it with another contract.

• Example: A accepts to supply particular commodities to B. Just prior to the delivery, both mutually rescind the contract based on changes in market conditions.

Modification (Section 62)

Agreement to change the terms of the contract between parties

• Example: A and B agree to alter the delivery date of commodities already in a contract.

Remission (Section 63)

Acceptance of lesser performance as compared to what had originally been agreed upon.

• Example: B accepts partial payment from A to settle a more extensive obligation.

Waiver

Deliberate abandonment of an obligation under the contract.

• Example: A chooses not to exercise a penalty obligation on B for late performance.

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3. Discharge by Impossibility or Illegality (Section 56)

When it becomes impossible for a party to carry out his obligation under a contract, due to unforeseeable events, the said obligation is discharged under the "doctrine of frustration."

Subsequent Impossibility: Events happening after the formation of the contract, which make performance impossible:

• Natural disasters

• Alteration in law

• Death or incapacity in personal service contracts

Example: A contracts with B to deliver goods. Before the delivery, a government ban is imposed on trading those goods. The contract is discharged.

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4. Discharge by Lapse of Time

Under the Limitation Act, 1963, a contract has to be presented within a specific period; otherwise, it is released.

• Example: The liability of a debt contract cannot be enforced if the creditor failed to file a claim within a prescribed period.

5. Discharge by Operation of Law

A contract becomes discharged by law circumstances among which are:

• Insolvency: When a party is declared insolvent, then their obligations under the contract are terminated.

• Merger: When inferior rights under a contract are absorbed into superior rights.

• Unauthorized Alteration: A material alteration to the contract without the consent of all parties leads to discharge.

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6. Discharge by Breach of Contract

A breach of contract occurs when one party fails to perform their obligations. This can result in the discharge of the contract, particularly in cases of:

• Actual Breach: When a party fails to perform on the due date.

• Anticipatory Breach: When a party declares his intention not to perform before the performance is due.

Illustration: If A agrees to deliver goods to B but refuses to do so before the due date, B can consider the contract discharged.

7. Discharge by Accord and Satisfaction

This is a compromise in which the parties agree to accept a performance different from what was originally agreed upon.

• Example: A agrees to settle B's claim by paying ₹5,000 instead of ₹10,000. Upon acceptance, the contract is discharged.

Exceptions to Discharge of Contract

There are, of course, many different forms that the discharge of a contract may take. Exceptions sometimes, however, deny even these forms, where either justice or morality demand fairness. In this category there will fall those instances wherein, though specific provisions of the Indian Contract Act, 1872, cut in cross to the general rule. A few important exceptions can be identified: 

Doctrine of Frustration (Section 56) – Exceptions:

• Self-Induced Impossibility: If the impossibility is brought about by the promisor's act, the contract is not discharged.

• Commercial Hardship: Difficulty or economic hardship does not discharge the contract.

• Foreseeable Events: Where the event that brings about impossibility was foreseeable, the doctrine does not apply.

Breach of Contract – Exceptions:

• Partial Breach: Minor breaches may not cause a discharge unless it reaches the root of the contract.

• Waiver of Breach: When the aggrieved party accepts the breach and elects to continue the contract, it is not discharged.

Impossibility After Agreement:

• If the parties knew at the time of the agreement that the performance was impossible, the contract is void ab initio and not discharged. 

Limitation Act – Exceptions:

• If a party puts its acceptance of the debt or obligation in writing before the limitation period is over, the period starts running and the contract is not discharged.

Also, Get to Know about What are the 10 Essential Elements of a Valid Contract in Indian Contract Act, 1872.

Judicial Interpretations

Indian courts have played a significant role in interpreting the discharge of contracts. The Supreme Court in Satyabrata Ghose v. Mugneeram Bangur & Co. clarified the doctrine of frustration under Section 56, emphasizing that frustration arises due to the impossibility of performance.

Similarly, in Union of India v. Kishorilal Gupta, the court explained the concept of novation and the circumstances under which a new contract replaces the old one.

Summing Up

The discharge of a contract is an important aspect of contract law because it outlines the end of legal obligations between parties. It is discharged either through performance, agreement, breach, or impossibility, which means the end of a contract will provide closure and prevent unnecessary disputes. This is an essential principle for anyone who may be involved in legal or business agreements.

Discharge of Contract: FAQs

Q1: What is "discharge of contract"?

The discharge of a contract refers to the termination of obligations under the agreement, making it inoperative.

Q2: What are the main modes of discharge of a contract?

The contracts can be discharged by performance, mutual agreement, impossibility, breach, lapse of time, or by operation of law.

Q3: What is discharge by performance?

When both parties perform the contract as agreed upon, whether fully or partially, then that would be discharged by performance.

Q4: What is the doctrine of frustration under Section 56?

It is the discharge of a contract when unforeseen events make its performance impossible or illegal.

Q5: Can a contract be discharged without performance?

Yes, a contract can be discharged by mutual agreement, breach, impossibility, or other legal factors like lapse of time or insolvency.