Discharge by Agreement

Introduction

A contract can be discharged by mutual agreement when the parties decide to end it or replace it with a new contract. The Indian Contract Act, 1872 recognises various forms of discharge by agreement, ensuring that obligations under the original contract no longer need to be performed once the parties agree.

Meaning / Definition

Discharge by agreement occurs when the parties to a contract mutually consent to terminate, modify, or replace their existing contractual obligations. Section 62 of the Indian Contract Act provides that if parties agree to substitute a new contract for the original one, or to rescind or alter it, the original contract need not be performed.

Modes / Types of Discharge by Agreement

Novation

• Novation is the substitution of a new contract in place of an existing contract.
• It may involve the same parties or different parties.
• All parties to the original contract must agree.
• Consideration for the new contract is the discharge of the old contract.
• Example: Adam owes money to Brown. Adam, Brown, and Carlos agree that Carlos will pay Brown instead. Adam’s debt is discharged, and a new contract is created between Carlos and Brown.

Rescission

• Rescission is the cancellation of the contract by mutual consent.
• Can occur before the performance becomes due.
• Non-performance over a long period without complaint may imply rescission.
• Unlike novation, no new contract is created; the original contract is simply cancelled.

Alteration

• Alteration means changing one or more terms of a contract with consent of all parties.
• Terminates the original contract but does not change the parties.
• Rules for valid alteration:
  • Must be intentional and made with consent.
  • Must relate to a material part of the contract.
• Material changes usually involve higher liability on the promisor.

Remission

• Remission is accepting lesser performance or a reduced sum than originally agreed.
• Section 63 allows a promisee to remit part of the performance or extend the time for performance.
• Example: A owes B Rs. 5,000. B accepts Rs. 3,000 as full settlement; the debt is discharged.

Waiver

• Waiver is the voluntary abandonment of a right under a contract.
• When one party waives their rights, the other is released from corresponding obligations.
• Example: A promises to paint a picture for B, then forbids B from doing so. A is no longer bound to perform.
• Case Reference: M. Sham Singh v. State of Mysore – Extension of time for performance is not waiver of liability.

Accord and Satisfaction

• Accord and satisfaction occurs when parties agree to accept a different performance or settlement instead of the original obligation.
• This discharges the original contract.
• Commonly used to settle claims before legal action.

Practical Example

• A and B agree to replace an existing supply contract with a new contract at revised rates. The original contract is discharged (novation).
• A owes B a sum but B agrees to accept a lesser amount as full settlement. The original debt is discharged (remission).

Summary

• Discharge by agreement occurs when parties mutually consent to terminate, modify, or replace a contract.
• Novation: new contract replaces old contract; may involve new parties.
• Rescission: contract cancelled; no new contract made.
• Alteration: material change in contract terms; original contract terminated.
• Remission: acceptance of lesser performance or sum; obligation discharged.
• Waiver: voluntary abandonment of a contractual right; releases other party from obligation.
• Accord and Satisfaction: agreement to accept alternate performance; discharges original contract.
• Section 62 and 63 of the Contract Act govern substitution, rescission, and remission of contracts.