Discharge of Contract by Agreement

With Regards,

Submitted By:

Prof. Jyoti Sharma

DivyanshSharma

MATS Law School

B.B.A. L.L.B(Sem-2)

MATS University
Arang, Gullu, Raipur

ACKNOWLEDGEMENT
The success & final outcome of this project required a lot of guidance &
assistance from many people & we are extremely fortunate to have got this all
along the completion of my project work.
I respect & thank Miss. Jyoti Sharma for giving me an
opportunity to do the project work on Discharge of Contract by
Agreement& providing me all support & guidance which made me complete
the project.
I am extremely grateful to you for providing such a nice support & guidance
though you had busy schedule.
I am thankful to you & fortunate enough to get constant
encouragement, support & guidance from all Teaching staff of different
Department which helped us in successfully completing my project work.
Also, I could like to extend my sincere regards to all the nonteaching staff of department of library for their timely support.

Divyansh Sharma

Table of Content

Page No.

1.

Introduction - - - - - - - - - - - - - - - - - - - - - - - - -

4
2.

Discharge by Agreement of Contract - - - - - - -

5-18
I.

What is Contract?

II.

What is Agreement?

III.

What is the difference between a Contract and an Agreement?

IV.

Discharge of Contract by Agreement or Mutual Consent

V.

Case Cited

3.

Biblography - - - - - - - - - - - - - - - - - - - - - - - - -

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Introduction
The duties under a contract are discharged when there is a legally binding
termination of such duty by a Voluntary Act of the parties or by operation of law.
Among the ways to discharge a contractual duty are impossibility or impracticability
to perform personal services because of death or illness; or impossibility caused by
the other party.
The two most significant methods of voluntary discharge are Accord and
Satisfaction and novation. An accord is an agreement to accept some performance
other than that which was previously owed under a prior contract. Satisfaction is the
performance of the terms of that accord. Both elements must occur in order for there
to be discharge by these means.
A novation involves the substitution of a new party while discharging one of the
original parties to a contract by agreement of all three parties. A new contract is
created with the same terms as the original one, but the parties are different.
Contractual liability may be voluntarily discharged by the agreement of the parties,
by estoppel, and by the cancellation, intentional destruction, or surrender of a
contract under seal with intent to discharge the duty.
The discharge of a contractual duty may also occur by operation of law through
illegality, merger, statutory release, such as a discharge in bankruptcy, and objective
impossibility. Merger takes place when one contract is extinguished because it is
absorbed into another.
There are two types of impossibility of performance that discharge the duty of
performance under a contract. Subjective impossibility is due to the inability of the
individual promisor to perform, such as by illness or death. Objective impossibility
means that no one can render the performance. The destruction of the subject matter
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of the contract, the frustration of its purpose, or supervening impossibility after the
contract is formed are types of objective impossibility. "Impracticability" because of
extreme and unreasonable difficulty, expense, injury, or loss involved is considered
part of impossibility.

Discharge by Agreement of Contract

What is Contract?
Agreements between two entities, creating an enforceable obligation to do, or to
refrain from doing, a particular thing. The purpose of a contract is to establish the
agreement that the parties have made and to fix their rights and duties in accordance
with that agreement. The courts must enforce a valid contract as it is made, unless
there are grounds that bar its enforcement.
Statutes prescribe and restrict the terms of a contract where the general public is
affected. The terms of an insurance contract that protect a common carrier are
controlled by statute in order to safeguard the public by guaranteeing that there will
be financial resources available in the event of an accident.
The courts may not create a contract for the parties. When the parties have no
express or implied agreement on the essential terms of a contract, there is no
contract. Courts are only empowered to enforce contracts, not to write them, for the
parties. A contract, in order to be enforceable, must be a valid. The function of the
court is to enforce agreements only if they exist and not to create them through the
imposition of such terms as the court considers reasonable.
It is the policy of the law to encourage the formation of contracts between
competent parties for lawful objectives. As a general rule, contracts by competent

persons, equitably made, are valid and enforceable. Parties to a contract are bound
by the terms to which they have agreed, usually even if the contract appears to be
improvident or a bad bargain, as long as it did not result from Fraud, duress, or
Undue Influence.
The binding force of a contract is based on the fact that it evinces a meeting of
minds of two parties in Good Faith. A contract, once formed, does not contemplate a
right of a party to reject it. Contracts that were mutually entered into between parties
with the capacity to contract are binding obligations and may not be set aside due to
the caprice of one party or the other unless a statute provides to the contrary.

What is Agreement?
A meeting of minds with the understanding and acceptance of reciprocal legal rights
and duties as to particular actions or obligations, which the parties intend to
exchange; a mutual assent to do or refrain from doing something; a contract.
The writing or document that records the meeting of the minds of the parties. An
oral compact between two parties who join together for a common purpose
intending to change their rights and duties.An agreement is not always synonymous
with a contract because it might lack an essential element of a contract, such as
consideration.

What is the difference between a Contract and an

Agreement?
Contract
1. A Contract is defined under Sec.2(h).

2. A Contract is an agreement enforceable at law.

3. Its scope is limited.
4. Only valid agreement are called
5. A contract is enforceable.
6. A contract arises out of an agreement. Therefore, a contract includes an
agreement.
7. A contract must have all the essentials of a valid contract like consideration,
capacity, free consent, etc.

Agreement
1. An agreement is defined under Sec.2(e)
2. Every promise or set of promises forming consideration for each other is an
agreement.
3. Its scope is very wide.
4. An agreement and be both legal or illegal
5. An agreement may or may not be enforceable.
6. An agreement does not arise out of a contract. Therefore, an agreement does not
include a contract.
7. An agreement has only an offer and its acceptance. It need not have other
essentials.

Discharge of Contract by Agreement or Mutual Consent

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 of Contract
Act,1872 deal with this subject and provide for the following methods of
discharging a contract by mutual agreement:

1. Novation:
Section 62 of the Contract Act,1872 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
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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 of Contract Act,1872 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.
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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,

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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

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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 15 th 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
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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

Case Cited
1.Charles Rickards Ltd v Oppenheim [1950] 1 All ER 420
Court of Appeal
Rickards agreed to build a car for Oppenheim within seven months, time being of
the essence of the contract. The seven months began to run from 20 August 1947.
The car was not ready by 20 March 1948 (the last date for delivery). Oppenheim did
not cancel the contract as he was entitled to do so but instead he waived his right as
regards the stipulation of time by asking for delivery in time for Ascot. The car was
not ready for Ascot and on 29 June Oppenheim wrote to Rickards saying

"Further to my conversation with Mr Musk today, I regret that I shall be

unable, unless my plans change, to accept delivery of the Rolls you are
making for me after 25 July. For six months I have had a reservation to take
a car abroad on 3 August for my holiday and it would appear to me to be
impossible for me to alter this date. I shall therefore have to buy another
car."

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The car was still not ready for that date so Oppenheim bought another car.

The issue before the Court of Appeal was whether Oppenheim, having waived his
original right as regards the stipulation of time, could 'go back' on that waiver and
once again make time the essence of the contract.

Judgement:
'... If the defendant, as he did, led the plaintiffs to believe that he would not
insist on the stipulation as to time, and that, if they carried out the work, he
would accept it, and they did it, he could not afterwards set up the stipulation
in regard to time against them. Whether it be called waiver or forbearance on
his part, or an agreed variation or substituted performance, does not matter. It
is a kind of estoppel. By his conduct he made a promise not to insist on his
strict legal rights. That promise was intended to be binding, intended to be
acted on, and was, in fact, acted on. He cannot afterwards go back on it. That,
I think, follows from Panoutsos v Raymond Hadley Corpn. of New York, a
decision of this court, and it was also anticipated in Bruner v Moore. It is a
particular application of the principle which I endeavoured to state in Central
London Property Trust Ltd v High Trees House Ltd.

Therefore, if the matter stopped there, the plaintiffs could have said that,
notwithstanding that more than seven months had elapsed, the defendant was
bound to accept, but the matter does not stop there, because delivery was not
given in compliance with the requests of the defendant. Time and time again

15

the defendant pressed for delivery, time and time again he was assured that he
would have early delivery, but he never got satisfaction, and eventually at the
end of June he gave notice saying that, unless the car was delivered by July
25, he would not accept it. The question thus arises whether he was entitled
to give such a notice, making time of the essence, and that is the question
which counsel for the plaintiffs has argued before us... [T]he defendant was
entitled to give a notice bringing the matter to a head. It would be most
unreasonable if, having been lenient and having waived the initial expressed
time, he should thereby have prevented himself from ever thereafter insisting
on reasonably quick delivery. In my judgment, he was entitled to give a
reasonable notice making time of the essence of the matter. Adequate
protection to the suppliers is given by the requirement that the notice should
be reasonable.

The next question, therefore, is: Was this a reasonable notice? Counsel for the
plaintiffs argued that it was not. He said that a reasonable notice must give
sufficient time for the work then outstanding to be completed, and that, on
the evidence in this case, four weeks was not a reasonable time because it
would, and did, in fact, require three and a half months to complete it. In my
opinion, however, the words of Lord Parker of Waddington in Stickney v
Keeble apply to such a case as the present, just as much as they do to a
contract for the sale of land. Lord Parker said:

"In considering whether the time so limited is a reasonable time the

court will consider all the circumstances of the case. No doubt what
remains to be done at the date of the notice is of importance, but it is

16

by no means the only relevant fact. The fact that the purchaser has
continually been pressing for completion, or has before given similar
notices which he has waived, or that it is specially important to him to
obtain early completion, are equally relevant facts..."

To that statement I would add, in the present case, the fact that the original
contract made time of the essence. In this case, not only did the defendant
press continually for delivery, not only was he given promises of speedy
delivery, but, on the very day before he gave the notice, he was told by the
sub-contractors' manager, who was in charge of the work, that it would be
ready within two weeks. He then gave a four weeks' notice. The judge found
that it was a reasonable notice and, in my judgment, there is no ground on
which this court could in any way differ from that finding. The
reasonableness of the notice must, of course, be judged at the time at which it
is given. It cannot be held to be a bad notice because, after it is given, the
suppliers find themselves in unanticipated difficulties in making delivery.
The notice of June 29, 1948, was, therefore, a perfectly good notice so as to
make time of the essence of the contract...
The case, therefore, comes down to this. There was a contract by the
plaintiffs to supply and fix a body on the chassis within six or seven months.
They did not do it. The defendant waived that stipulation. For three months
after the time had expired he pressed them for delivery, asking for it first for
Ascot and then for his holiday abroad. But still they did not deliver it.
Eventually at the end of June, being tired of waiting any longer, he gave a
four weeks' notice and said: "At all events, if you do not supply it at the end
of four weeks I must cancel," and he did cancel. I see no injustice to the

17

plaintiffs in saying that that was a reasonable notice. Having originally

stipulated for six to seven months, having waited eleven months, and still not
getting delivery, the defendant was entitled to cancel the contract.'

2. Citi Bank N.A vs Standard Chartered Bank & Others on 8 October,

2003

3. Phoenix Mills Ltd. vs M.H. Dinshaw And Co. on 4 July, 1945

4. Anandram Mangturam vs Bholaram Tanumal on 13 March, 1945
5. K.M.P.R.N.M. Firm vs P.T. Theperumal Chetty on 13 October, 1921
6. M/S. Nalini Singh Associates vs M/S. Prime Time-Ip Media Services
... on 10 September, 2008

7. K.M.P.R.N.M. Firm Merchants ... vs P. Theperumal Chetty A

Merchant ... on 13 October, 1921

8. Union Of India (Uoi) vs Kishorilal Gupta & Bros. on 11 February,

1953, AIR 1953 Cal 642

9. Maharashtra State Electricity ... vs Sterlite Industries (India) Ltd. on

17 February, 2000, AIR 2000 Bom 204

10. New Standard Bank Ltd., By B.K. ... vs Probodh Chandra

Chakravarty on 1 May, 1941, AIR 1942 Cal 87

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Bibliography
1.

www.indiankanoon.org

2.

www.scconline.co.in

3.

www.lawguru.com

4.

Contract and Specific Relief by Avtar singh

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