Discharge of a Contract: the Whole Picture

Mode three: discharge by impossibility or frustration

Section 56. An agreement to do an act impossible in itself is void; a contract that afterwards becomes impossible or unlawful becomes void when it does. The consequences are in section 65. See [Impossibility of Performance, and Frustration].

Mode four: discharge by breach

Where one party refuses to perform, or disables himself from performing, in its entirety, section 39 allows the promisee to put an end to the contract. The breach may be actual or anticipatory, and the remedies are compensation under sections 73 and 74 and, for a party who rightfully rescinds, section 75. See [Breach of Contract, Actual and Anticipatory].

Mode five: discharge by operation of law

Not gathered in any one section, and it is the mode students forget. It includes:

• Merger, where an inferior right is absorbed into a superior one, as where a contractual right merges in a judgment obtained on it;
• Insolvency, where an order of discharge releases the insolvent from provable debts;
• Material alteration of a written contract by one party without the other's consent, which makes it unenforceable against that other;
• Death, in a contract of personal skill, under the second paragraph of section 37;
• Lapse of time, in the qualified sense that the Limitation Act 1963 bars the remedy after the prescribed period, the obligation itself surviving.

A related route the Act itself provides: under section 67 a promisee who neglects or refuses to afford reasonable facilities excuses the promisor as to the non performance caused. That is an excuse rather than a discharge, and it is worth naming so as to distinguish it.

The five modes in a table

A worked example

Trace one contract through all five endings. Ananya engages Bharat to build a compound wall for six lakh rupees by 1 December.

• Bharat builds the wall and Ananya pays. Discharge by performance, section 37.
• Bharat completes the wall on 1 December and Ananya refuses to accept or pay. Bharat had brought his materials and workers and was ready throughout. Where the issue is his own obligation, a valid tender under section 38 protects him: he is not responsible for the non performance and keeps his rights.
• They agree in October that Bharat will build a gate instead, for four lakh. Discharge of the original contract by novation under section 62.
• They agree in October to call it off. Rescission by agreement, section 62. If instead Ananya simply tells Bharat not to bother and asks nothing in return, that is remission under section 63, and it needs no consideration.
• In November the land is compulsorily acquired by the State. The contract becomes void under section 56, and any advance is restored under section 65.
• In November Bharat writes that he will not build. A refusal in its entirety, so Ananya may put an end to the contract under section 39 and claim damages under sections 73 and 75.
• Ananya sues Bharat and obtains a decree for damages. Her contractual right merges in the judgment: discharge by operation of law.

What it does NOT mean

"Discharge means nobody owes anything." Damages survive a discharge by breach, and restitution survives a discharge by frustration.

"A contract is discharged only by performance." Four other modes exist, and MU's topic 3.2 expects them.

"Discharge by agreement needs consideration." Section 63 requires none for remission, waiver, extension of time or accord and satisfaction.

"Limitation discharges a contract." It bars the remedy; the debt survives, which is why section 25(3) can revive it by a fresh written promise and why sections 60 and 61 allow appropriation to a barred debt.

"A frustrated contract is discharged by breach." Frustration is nobody's fault and discharges both parties automatically. Breach is somebody's fault and gives the innocent party a remedy.

Quick revision

• Five modes: performance; agreement; impossibility; breach; operation of law.
• Performance: s.37, and s.38 tender. Tender of goods discharges; tender of money does not discharge the debt.
• Agreement: s.62 novation, rescission, alteration; s.63 remission, waiver, extension of time, and accord and satisfaction, all without consideration.
• Impossibility: s.56, with restitution under s.65.
• Breach: s.39, actual or anticipatory, with ss.73, 74 damages and s.75 for a party who rightfully rescinds.
• Operation of law: merger, insolvency, material alteration by one party, death in a personal contract (s.37 second paragraph), and limitation, which bars the remedy only.
• s.67 is an excuse, not a discharge.

Test yourself

1. Name the five modes of discharge, with a leading provision for each. Performance, under section 37 with tender under section 38; agreement, under sections 62 and 63; impossibility or frustration, under section 56 with restitution under section 65; breach, under section 39 with the remedies in sections 73 to 75; and operation of law, which is not confined to a single section and covers merger, insolvency, material alteration, death in a personal contract and the effect of limitation.

2. Does discharge mean no liability remains? No. What ends is the obligation to perform. A contract discharged by breach leaves the guilty party liable in damages under sections 73 and 74; a contract discharged by frustration leaves any advantage received to be restored or paid for under section 65.

3. What is accord and satisfaction? It is the last of the powers in section 63, by which a promisee may accept, instead of performance, any satisfaction he thinks fit. The accord is the agreement to accept something different from what was promised, and the satisfaction is the thing actually accepted. No consideration is required, which is a departure from the English rule in Pinnel's Case.

4. Give three instances of discharge by operation of law. Merger, where a contractual right is absorbed into a higher right such as a judgment obtained upon it; insolvency, where an order of discharge releases the insolvent from provable debts; and material alteration of a written contract by one party without the other's consent, which makes the document unenforceable against that other. Death in a contract of personal skill, under the second paragraph of section 37, is a fourth.

5. Distinguish discharge by frustration from discharge by breach. Frustration arises from an event outside the control of either party that makes performance impossible or unlawful, discharges both parties automatically under section 56, and leaves only restitution under section 65. Breach is the fault of one party, discharges the contract only if the innocent party elects to put an end to it under section 39, and leaves that party with a claim to damages.