Discharge of Contract by Agreement
Discharge of Contract by Agreement
1. Introduction
A contract is said to be discharged when the parties involved are freed from their obligations and liabilities under the contract. One of the fundamental ways in which a contract can be discharged is by mutual agreement of the parties.
2. What is Discharge by Agreement?
Discharge by agreement means that both parties agree to end the contract before the contract has been fully performed or to modify their obligations in such a way that the original contract ceases to exist.
This form of discharge occurs by the mutual consent of the parties either by:
Rescission
Novation
Alteration
Remission
These methods are recognized under Section 62 and Section 63 of the Indian Contract Act, 1872.
3. Modes of Discharge by Agreement
3.1 Rescission
Definition: Rescission means the parties agree to cancel the contract, releasing each other from future performance.
It can be express (explicit agreement) or implied (conduct indicating cancellation).
It essentially restores the parties to their pre-contractual position.
Case Law:
Chinnayya v. Ramayya (1882) ILR 5 Mad 161
It was held that mutual rescission is a valid mode of discharge, and no party can sue for breach once rescission is agreed.
3.2 Novation
Definition: Novation occurs when the parties agree to substitute the original contract with a new one, thereby extinguishing the original contract.
It may involve:
Substituting a new contract in place of the old one.
Substituting a new party in place of an original party.
Substituting new terms.
Case Law:
Kishore Lal v. Lal Ram (1925) 52 Ind App 96
The court held novation requires mutual consent and extinguishes the old contract.
3.3 Alteration
Definition: Alteration means the parties agree to change some terms or conditions of the contract without creating a new contract or canceling the old one.
This change discharges the original contract only to the extent of the alteration.
Case Law:
Union of India v. Raman Iron Foundry AIR 1974 SC 1590
The court discussed how alteration without consent discharges the surety (by analogy to contract alteration).
3.4 Remission
Definition: Remission refers to the voluntary acceptance by the creditor of less than what is due or acceptance of late performance.
It amounts to discharge of the liability to the extent of remission.
Case Law:
Lala Ram v. Shambhu Dutt AIR 1928 Lah 112
The court held that remission of debt discharges the debtor from the original liability.
4. Essential Conditions for Discharge by Agreement
There must be mutual consent between parties.
The agreement must be valid and lawful.
Parties must have the capacity to contract.
The agreement may be express or implied.
There should be no coercion, fraud, or misrepresentation.
5. Effect of Discharge by Agreement
Parties are released from their obligations under the original contract.
No party can sue for breach after discharge.
If discharged by novation, the new contract replaces the old one.
In rescission, the contract is canceled entirely.
In alteration, only the altered parts are replaced.
In remission, liability is reduced accordingly.
6. Related Case Laws
a) Parabia v. Bhiwandi Municipal Corporation AIR 1966 SC 1750
The Supreme Court recognized that mutual agreement can discharge contractual obligations, even if performance is incomplete.
b) Kailash v. Nandini (1960) 3 SCR 994
The court held that a novation requires mutual consent and intention to extinguish old contract.
c) Satyabrata Ghose v. Mugneeram Bangur AIR 1954 SC 44
Discussed alteration and novation as recognized modes of discharge by agreement.
7. Conclusion
Discharge of contract by agreement is a voluntary and consensual termination or modification of the contractual obligations between parties. It provides flexibility and autonomy to the parties to end or modify their contracts without the necessity of performance or litigation.
The modes—rescission, novation, alteration, and remission—offer different ways to end or modify contracts legally and fairly.
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