Discharge of Contracts in Indian Contract Act, 1872

Discharge of contract means the contract comes to an end and both parties are freed from their duties. Under the Indian Contract Act, 1872, a contract is discharged when it is fully performed, canceled, becomes impossible, or when parties agree to end or change it. Discharge can happen by performance when both sides complete their obligations. It can also happen by mutual agreement, such as novation, alteration, or rescission. Sometimes the contract ends automatically because of impossibility, death, or change in law. A contract may also be discharged by breach when one party refuses or fails to perform. Once discharged, no party can demand further performance except in special cases like damages for breach.

Modes of Discharge:

1. Discharge by Performance

A contract is discharged by performance when both parties complete the promises exactly as agreed. This is the normal and most common way of ending a contract. Performance may be actual when work is fully completed or attempted when one party offers to perform but the other refuses. If the offer is genuine and proper, the party making the offer is freed from liability. Performance must match the terms of the contract. Once both sides finish their duties, the contract ends automatically and no further claim can be made by either party.

2. Discharge by Mutual Agreement

A contract can be discharged when both parties mutually agree to change or end the agreement. This includes novation, where the old contract is replaced by a new one. It includes alteration, where terms are changed without replacing the whole contract. Rescission allows the parties to cancel the contract by consent. Remission lets the promisee accept less performance than agreed. Waiver means giving up a right under the contract. These methods work only when both sides agree voluntarily. Once the mutual decision is made, the original contract ends and cannot be enforced.

3. Discharge by Impossibility of Performance

A contract is discharged when performance becomes impossible due to reasons beyond the control of both parties. This is called frustration. Impossibility may exist from the start, such as an agreement to do something unlawful. It can also arise later due to events like destruction of subject matter, death of a person required for personal skills, war, change in law, or natural calamities. When the event makes the contract impossible or pointless, the law automatically ends the contract. No party is held responsible because the failure is not due to their fault.

4. Discharge by Lapse of Time

A contract is discharged when the time allowed by the Limitation Act for enforcing rights expires. If one party does not take action within the legally permitted time, usually three years for most contracts, the claim becomes invalid. The contract is not canceled technically, but the court will not accept a case filed after the time limit. This protects parties from old claims and encourages timely enforcement. Once the limitation period is over, the contract is treated as discharged in practical terms because no remedy can be taken.

5. Discharge by Operation of Law

A contract may end automatically due to legal reasons. This includes insolvency, where the court declares a person unable to pay debts, freeing him from some contractual liabilities. It includes death when the contract needs personal skills. It also includes merger when a lower right merges into a higher right. Material alteration without consent also discharges a contract because the original terms are changed unfairly. Operation of law does not require the consent of parties. The contract ends because the law itself steps in.

6. Discharge by Breach of Contract

A contract is discharged when one party breaks important terms or refuses to perform. Breach may be actual, happening on the due date, or anticipatory, happening before the performance date when a party clearly shows they will not perform. The aggrieved party gets the right to stop their own performance and treat the contract as ended. They may also claim damages for the loss suffered. Breach ends the contract because trust and purpose of the agreement are destroyed. This is one of the most important modes of discharge.

Exceptional Cases when a Contract is not Discharged:

1. Commercial Impossibility is not accepted as Discharge

A contract is not discharged simply because performance has become difficult, costly, or less profitable. Indian law clearly states that commercial hardship does not amount to impossibility. If the subject matter still exists and performance is still physically possible, the parties must complete their obligations. Increase in price, shortage of labour, rise in transportation cost, or economic loss do not release the parties from the contract. Courts expect parties to take normal business risks. Therefore, the contract continues, and the promisor must perform even if it causes financial burden.

2. Self Induced Impossibility does not Discharge a Contract

If a party creates the impossibility by their own action, the contract is not discharged. For example, if a seller agrees to sell goods and later sells them to someone else, they cannot claim impossibility. The law does not allow a person to take advantage of their own wrongful act. Self induced impossibility is treated as a breach, not as frustration. The defaulting party remains responsible for compensation. Only impossibility caused by external and uncontrollable events can discharge a contract. Personal negligence, failure to arrange resources, or deliberate acts do not end contractual duties.

3. Partial Impossibility does not always Discharge the Contract

If only a small part of the contract becomes impossible while the remaining portion can still be performed, the contract is not fully discharged. The parties must perform the possible part unless the impossible part affects the whole purpose of the agreement. For example, if one section of work becomes impossible but the main job can continue, the contract remains valid for the rest. Courts examine whether the remaining part still has meaning for both parties. Only when the impossible portion destroys the main objective can the entire contract be discharged.

4. Temporary Impossibility does not Discharge the Contract

When performance is not permanently impossible but only delayed due to temporary events, the contract is not discharged. Situations like strikes, temporary government restrictions, temporary sickness, or short-term natural events only postpone performance. Once the situation ends, parties must continue the contract. The duty ends only if the delay destroys the purpose of the agreement, such as missing a time-bound event. Otherwise, the contract remains valid. Temporary impossibility does not release parties from obligations because the barrier is not permanent. The law expects performance once normal conditions return.

Example of Discharge of Contracts in Indian Contract Act, 1872:

1. Commercial Impossibility

In Tsakiroglou & Co Ltd v Noblee Thorl GmbH, a contract involved shipping groundnuts through the Suez Canal. Later, the canal was closed, making the original route unavailable. Shipping through a longer route added extra cost and time. The seller claimed the contract should be discharged due to impossibility. The court rejected this argument and held that commercial difficulty or increased cost does not make a contract impossible. Since the goods could still be transported through another route, the contract remained valid. This case shows that economic hardship is not an excuse to avoid contractual duties.

2. Self-Induced Impossibility

In Maritime National Fish Ltd v Ocean Trawlers Ltd, a company hired a trawler that required a licence. The government gave the company fewer licences than requested. Instead of giving a licence to the hired trawler, the company gave licences to its own vessels. Later, it claimed that performance was impossible due to lack of licence. The court held that impossibility was self-induced because the company chose not to allocate the licence to the hired vessel. Therefore, the contract was not discharged. This case shows that a party cannot avoid responsibility by creating the impossibility themselves.

3. Partial Impossibility

In Krell v Henry, a room was rented to watch the coronation procession of King Edward VII. The procession was cancelled due to the king’s illness. The purpose of the contract was defeated completely, even though the room itself was still available. Since the main objective became impossible, the contract was discharged. This case helps explain partial impossibility: the physical performance was possible, but the essential purpose failed. If only a minor part had become impossible, the contract would continue. Here, the entire purpose collapsed, so discharge was allowed.

4. Temporary Impossibility

In Nicolene Ltd v Simmonds, temporary circumstances did not cancel the contract because performance was still possible later. A similar principle appears in many Indian cases where temporary restrictions, strikes, or short-term government orders only delay performance. Courts hold that if the blockage is not permanent, parties must perform once conditions return to normal. Temporary impossibility does not end contractual duties unless the delay destroys the purpose of the contract. If the main objective can still be achieved after the temporary event, the agreement continues.