Short notes on Discharge by Agreement of Contract

Since a contract is created by means of an agreement, it may also be discharged by another agreement between the same parties. Sections 62 and 63 deal with this subject and provide for the following methods of discharging a contract by mutual agreement:

1. Novation:

Section 62 of the Act provides that "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." Novation creates a new contract. It discharges and extinguishes the original contract. The new contract may be between the same parties, or between them and a stranger. For example, X borrows Rs. 5,000 and writes a promissory note in favour of Y for 3 months. After 3 months, X goes to Y and expresses his inability to pay the amount. X writes a new promissory note for Rs. 5,000, the old promissory note is discharged by the new one. This novation is between the old parties i.e. X and Y.

The following are the essential characteristics of novation:

1. Novation occurs with the consent of both the parties.

2. The new contract must be capable of enforcement at law. If it is not enforceable, the parties shall be bound by the old contract.

3. The agreement to substitute the new contract for the old must be made before the expiry of the time of the performance of the original contract and must not be made after the breach of the old contract.

Whenever novation takes place, the old contracts become completely extinguished and are not to be performed. No action may be taken on the old contract. But if the new contract is unenforceable, the old contract is revived.

2. Rescission:

When all or some of the terms of the contract are cancelled, it is called the rescission of the contract. Rescission may take place by mutual consent of the parties. Similarly where one party has committed a breach of contract, the aggrieved party can rescind the contract. In case of a voidable contract, the party whose consent was not free can, if he so decides, rescind the contract.

Where one party fails to perform its obligations, the other party can treat the contract as rescinded without prejudice to its right of compensation. Rescission may be total or partial. Total rescission occurs when all the terms are rescinded. For example, X agrees to supply 100 tons of rice to Y. X and Y agree that no rice need be supplied. The contract is rescinded. But if before the date of delivery, they agree that only 40 tons of rice may be delivered, the contract is rescinded partially.

3. Alteration:

When one or more of the terms of contract are altered by mutual consent of all of the parties to the contract, it is said that a contract has been altered. In alteration, only the terms of the contract are charged without affecting any change in the parties to the contract. When any alteration is made to the contract with the consent of the parties the original contract is discharged and need not be performed.

If a material alteration in a written contract is done by mutual consent, the original contract is discharged by alteration and the new contract in its altered form takes its place. A material alteration is one which alters the legal effect of the contract, e.g., a change in the amount of money to be paid or a change in the rate of interest. A material alteration is one which alters the legal effect of the contract, e.g., a change in the amount of money to be paid or a change in the rate of interest. In material alteration, e.g., correcting a clerical error in figures or the spelling of a name, has no effect on the validity of the contract and does not amount to alteration in the technical sense.

Alteration may be mutual i.e., bilateral and unilateral.

(i) Bilateral alteration may take place when both the parties to a contract agree to alter the terms of the contract.

(ii) Unilateral alteration takes place when alteration is done by one of the parties without the consent of the other. It is also called unauthorized alteration. A unilateral alteration of material nature will discharge the other party from his liability. Generally, this rule applies to negotiable instruments.

4. Remission:

Remission means acceptance of a lesser performance that what was actually due under the contract. According to section 63, a party may dispense with or remit, wholly or in part, the performance of the promise made to him. He can also extend the time of such performance or accept, instead of it, any satisfaction which he deems fit. A promise to do so will be binding even though there is no consideration for it.

Kapur Chand Godha vs. Mr. Nawab Himayatali Khan. M was to pay a sum of Rs. 27 lakhs to K. Since Hyderabad had been taken over by the Indian Government, a committee was appointed to clear matters. It offered Rs. 20 lakhs to K who accepted in full satisfaction of the claim of Rs. 27 lakhs. Later on, K filed a suit for the recovery of the balance. The Supreme Court held that K could not do so as he had accepted 20 lakhs in full satisfaction.

5. Satisfaction:

These two terms are used in English Law but find no place in Indian Law. According to English Law, a promise to accept less than what is due under an existing contract, is unenforceable because it is not supported by consideration. But where the lesser sum is actually paid or lesser obligation actually performed and accepted by the promise, it discharges t the original contract. In other words, where a lesser sum is actually paid, than what is due under the existing contract, the new contract is called 'accord' and actual payment is called 'satisfaction'.

Illustration:

X purchased a house from Y and agreed to pay Rs. 50,000 within 30 days. X failed to pay Y at the end of the period and a new agreement was entered into whereby X was to deliver 10 tons of cotton in full payment of the debt. Y in this case, may recover his debt of Rs. 50,000 under the original contract at any time before the delivery of cotton to him. An accord, unless executed so as to satisfy the contract, shall be of no avail.

6. Discharge by Waiver:

Waiver means giving up or foregoing certain rights. When a party agrees to give up its rights or forego its rights, the contract is discharged and the other party is thereupon released from his obligations. For example, Y employs Z to paint a picture for him. Later on, Y forbids him from doing so. Z is no longer bound to perform the promise.

7. Discharge by Merger:

When inferior rights of a person under a contract merge with superior rights under a new contract, the contract with the inferior rights will come to an end. For example, X was a tenant of Y's house. X purchased this house. X's tenancy right is merged with his ownership rights i.e. tenancy agreement will come to end when X becomes the owner of the house. Tenancy right is an inferior right as compared to the ownership right which is a superior right.

Discharge by Operation of Law :

A contract may be discharged independently of the wishes of the parties i.e. by operation of law. This includes discharge.

A contract may be discharged independently of the wishes of the parties i.e. by operation of law. This includes discharge:

(a) By death (as already discussed).

(b) By merger (as already discussed).

(c) By rights and liabilities becoming vested in the same person where the rights and liabilities under a contract vest in the same person, for example, when a bill of exchange gets into the hands of the acceptor, the other parties are discharged.

(d) By Insolvency. Upon insolvency, the rights and liabilities of the insolvent are transferred to the Official Assignment or Official Receiver, as the case may be. When a person is adjudged insolvent, he is released from performing his part of the contract by law. The order of discharge gives a new lease of life to the insolvent and he is discharged from all obligations arising from all his earlier contracts.

(e) By unauthorised material alteration of the contract. In a written contract, if the promisee or his agent makes any material alteration intentionally and without the consent of the promisor, the contract is discharged. Such alteration entitles the promisor to rescind the contract. Material alteration changes the character of the contract or alters the rights and liabilities of the parties to the contract. 'Any alteration is material which affects the substance of the contract'. It varies the legal effect of the instrument. Examples of material alteration include an alteration in (i) the amount of money to be paid, (ii) the time of payment, (iii) the place of payment (iv) the names of the parties etc. In case of a material alteration, the party making the alteration cannot enforce the agreement either in its original form or in its altered form.

Alterations which are not material and which do not affect the rights and liabilities of the parties or which are made to carry out the common intention of the parties or which are made with the consent of the parties to a contract and do not affect the validity of the contract. For instance, a correction of electrical errors in words and figures or correction of the spelling of a name of a party to the contract etc. have no effect on the validity of the contract.

Illustration :

For example, C and F entered into a contract of carriage by sea whereby C agreed that his ship would sail from Amsterdam on March 15th next to Liverpool and would there load a cargo to be provided by F. After the singing of the written contract (i.e. the charter Party) the broker who acted for C wrote in after "March next" the words (i.e. the charter Party) the broker who acted for C wrote in after "March next" the words "wind and weather permitting". This was held to be a material alteration and C was precluded from relying on the charter party in an action against F on his refusal to supply the cargo.

In the famous case of Ananthrao vs. Kandikanda, it was held that the document, though altered, could be used as proof of the transaction and the creditor might be allowed to claim refund to money actually advanced by him under section 65 of the Contract Act which is based on the Equitable Doctrine of Restitution.