What is “Discharge of Contract by Agreement”?
The fundamental rule of law says that a thing can be brought to an end or destroyed in the same manner in which it was constituted. By applying this principle, an agreement or a contractual obligation can also be terminated by executing another agreement which may either be express or implied. When the parties to an agreement engage in a fresh agreement to terminate the original contractual obligation or when they mutually consent to terminate the contract, it is referred to as “discharge of a contract by agreement”. When a contract is discharged by mutual agreement, it is no longer binding on any of the parties.
Discharge of a contract by Implied consent or agreement
According to Section 62 of the Indian Contract Act, 1872, the discharge of a contract by implied consent may take the form of the following:
Novation is referred to as the substitution of a new contract in place of the original one. To replace the existing contract, the new contract may either be between the same parties or there could also be a change in parties.
To understand this term with the help of an example, assume A owes money to B under a contract. Now, A, B, and C all agree that instead of A, C shall henceforth be accountable to pay money to B and shall become his debtor. Here, the old contract between A and B comes to an end and a new contract between C and B comes into existence.
To ensure that there is a valid novation, the following essentials must be present:
- Mutual consent of the parties
- The new contract must be enforceable by law and should not be unenforceable.
- Novation should take place before the expiry of the term of performance of the existing agreement.
Where the parties to a contract agree to alter one or more of the contract’s terms by mutual consent, this is known as alteration. Both bilateral and unilateral alterations are possible. The distinction between novation and alteration is that novation might result in a change in the terms or change in the parties, whereas alteration keeps the parties the same. As a result, novation covers a wider meaning than alteration.
If a major change is made to a written contract with the approval of all parties, the old contract is discharged by such alteration and a new contract takes its place. A change in the value of money, the rate of interest, or the names of the parties is an example of an alteration. The prior contract may be discharged in such instances.
Rescission of the contract occurs when the parties mutually agree to cancel all or portion of the terms of the contract. Similarly, if a contract is breached, the aggrieved party can rescind the contract and sue the guilty party for compensation. In the event of a voidable contract, the aggrieved party whose consent was not freely given also has the right to rescind or cancel the contract. Further, rescission can be total or partial.
Remission is a way to discharge the contract and it involves the acceptance of a lesser performance than what was originally contracted for. Under English Law, accord and satisfaction are one of the methods by which a contract can be discharged. When the promisee accepts a lesser amount than what is owed to him under the existing agreement, it is called ‘accord’, and the payment made by the promisor is called ‘satisfaction’. To discharge a contract in this manner, ‘accord’ must be followed by ‘satisfaction’. It represents that the promisee accepts an amount in satisfaction of the whole debt (normally lesser than what is due).
As per Section 63 of the Indian Contract Act, 1982, a promisee is allowed to do the following:
- To dispense with the performance of the agreement (in whole or part thereof), or
- To extend the time period for performance of the contract, or
- To accept a different consideration than the one agreed to in the existing contract
Assume A owes Rs. 10,000 to B. ‘A’ pays an amount of Rs. 6,000 and ‘B’ accepts the same in satisfaction of the whole debt. Here, when the promisee (B) accepts a lesser sum of Rs. 6,000, it is called ‘accord’ and the actual payment made by the promisor (A) is the satisfaction. Hence, the contract is discharged.
To take another example, consider the following scenario: A owes B Rs. 10,000 after one month. A is unable to meet his commitment by the due date and requests an extension of one week from B to make the payment. B agrees to A’s request. The promise without consideration is legally binding, and no lawsuit may be filed until the extended credit period expires.
Further, following the case law of Hari Chand Madan Gopal and Others v. the State of Punjab (1973) S.C.R. (2) 582, ‘A’ owed ‘B’ a sum of Rs. 30,000. C, a friend of A, provided Rs. 20,000 to B, who accepted it in full settlement of his claim against A. Following that, B filed a petition to recover the remaining Rs. 10,000. It was determined that if a promisee accepts a lesser performance from a promisor or a third party, the promisor is released from liability. As a result, A was released from the obligation.
It refers to the deliberate abandonment or giving up of a right to which a party is entitled under a contract, as a result of which the other party to the contract is relieved from his obligation. For example, A agrees to draw a painting for B. B later disallows him to do so. The waiver of a right on the part of B results in the discharge of the contract.
In short, a contract may be cancelled, or its terms may be altered, or a new agreement may be substituted for it if all the parties mutually agree. The old contract is dissolved whenever any of these events occur. The discharge of a contract by mutual agreement can take place in a variety of methods, including novation, alteration, remission, rescission, or waiver.
Moreover, apart from mutual agreement, a contract may be discharged by several other means such as by actual performance, by operation of law and lapse of time, by the impossibility of its performance, or by breach of contract.
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