Discharge of Contract — Modes (Performance, Agreement, Breach, Operation of Law)

A contract under the Indian Contract Act, 1872 creates a bond — what the Roman lawyers called the vinculum juris. Discharge is the dissolution of that bond. The bond may dissolve by being honoured, by being substituted, by being broken, or by being made impossible to honour. Each mode is a separate doctrine with its own statutory anchor, its own ingredients, and its own consequences for restitution. Aspirants who treat discharge as one undifferentiated topic miss the point. The questions on the paper are precise: which mode, on which facts, with which section, with which consequence?

This chapter maps the five working modes recognised under the Act and at common law — discharge by performance, by mutual agreement (Section 62 and Section 63), by breach (Section 39 read with Section 75), by subsequent impossibility or frustration (Section 56), and by operation of law (merger, insolvency, death where the contract is personal, lapse of time under the Limitation Act). It is the connective chapter for almost everything that follows in the Act, including frustration under Section 56, breach of contract, and the downstream remedies on breach.

Statutory anchor and the architecture of discharge

Section 37 is the gateway: the parties must perform, or offer to perform, their respective promises, unless such performance is dispensed with or excused under the provisions of the Act or any other law. The closing limb opens the door to every other mode of discharge. The Act then itemises the excuses — Section 41 (acceptance from a third person), Sections 51 to 54 (reciprocal-promise excuses), Section 56 (frustration), Section 62 (novation, rescission, alteration), Section 63 (remission), Section 67 (refusal of facilities by the promisee). The same gateway recognises that other laws — most importantly the Limitation Act, 1963 and the Insolvency and Bankruptcy Code, 2016 — may also dispense with performance.

Section 65 is the restitution clause that runs through every mode where the contract becomes void: when an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it. Section 65 keeps reappearing in frustration cases, in cases of supervening illegality, and in cases where a contract is set aside for incapacity or want of consideration — all developed in quasi-contracts.

Mode 1 — discharge by performance

The most usual mode is performance. If both parties completely and precisely perform what each has agreed to do, the contract is discharged. The full mechanics — who must perform, time and place, tender of performance, reciprocal promises — are developed in performance of contract. Two refinements apply uniquely to discharge. First, performance must conform precisely; substantial performance with minor deviations does not discharge. A party cannot say he has performed when, instead of providing the thing contracted for, he provides a thing of equal or greater value (the rule in Forman & Co. v. Liddesdale, (1900) A.C. 190). Second, a valid tender of performance, even if rejected, discharges the tendering party from liability for non-performance — Section 38 — though the contract itself remains alive for the purposes of his rights.

Performance by a third person works under Section 41 only where it is actual and complete; anything short of that does not absolve the original promisor. The Privy Council in Har Chandi Lal v. Sheoraj Singh, A.I.R. 1916 P.C. 68, fixed the rule, and the Supreme Court in Citi Bank N.A. v. Standard Chartered Bank, (2004) 1 S.C.C. 12, restated it.

Mode 2 — discharge by mutual agreement (Sections 62 and 63)

What the parties created by agreement they may dissolve by agreement. Section 62 captures the operative principle in a single sentence: 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. The section carries three distinct doctrines under one roof — novation, rescission, and alteration. To these the textbooks add three more, recognised at common law and operating consistently with Section 62 — release, waiver, and remission (the last being the subject of Section 63). The umbrella term is sometimes called "accord and satisfaction."

Novation — Section 62

Novation is the substitution of a new contract for the old. The new contract may be between the same parties on different terms, or it may bring in a new party. The Supreme Court in Union of India v. Kishorilal Gupta and Bros., A.I.R. 1959 S.C. 1362, treated novation as one of the modes by which a contract is discharged "by the same process which created it — i.e., by mutual agreement." The new contract may either replace the old immediately on its making, or replace it only on its successful performance. Which of the two is the question of intention, to be decided on the facts of each case.

The Supreme Court in Lata Construction v. Dr. Rameshchandra Ramniklal Shah, A.I.R. 2000 S.C. 380, sharpened the test. One of the essential requirements of novation as contemplated by Section 62 is that there should be a complete substitution of a new contract in place of the old. A substituted contract should rescind or alter or extinguish the previous contract. But if the terms of the two contracts are inconsistent and they cannot stand together, the subsequent contract cannot be said to be in substitution of the earlier contract. On the facts of that case, the rights under the original flat-purchase contract were not given up — they stood extinguished only on payment of the substituted sum, which was never paid; the original contract therefore remained enforceable.

Rescission and alteration — Section 62

Rescission is the unmaking of an existing contract by mutual consent without substitution of a new one. Both parties release each other from further obligations. The Delhi High Court in Unikol Bottlers Limited v. M/s Dhillon Kool Drinks, A.I.R. 1995 Del. 25, identified the consideration for the second agreement: the discharge of one party from its obligation to perform further is sufficient consideration for the discharge of the other party. Where one party has already fully performed its part, however, there is no consideration for that party in a rescission, and the second agreement may not be enforceable.

Alteration is the change of a term of an existing contract while the contract itself continues. The Bombay High Court in Andheri Bridge View Co-operative Housing Society Limited v. Krishnakant Anandrao Deo, A.I.R. 1991 Bom. 129, drew the distinction between alteration and novation: where there are material or substantial changes which go to the root of the agreement, the result is a new agreement, not a mere alteration. The substance of the change governs, not the label the parties use.

Remission — Section 63

Section 63 is one of the Act's deliberate departures from English common law: every promisee may dispense with or remit, wholly or in part, the performance of the promise made to him, or may extend the time for performance, or may accept instead of it any satisfaction which he thinks fit. Unlike Section 62, Section 63 does not require consideration. The promisee may unilaterally remit. The Supreme Court in Citi Bank N.A. v. Standard Chartered Bank emphasised this difference between Sections 62 and 63 — novation, rescission, or alteration under Section 62 requires the agreement of both parties; remission under Section 63 may be unilateral.

The Privy Council in Chunna Mal-Ram Nath Firm v. Mool Chand-Ram Bhagat Firm, A.I.R. 1928 P.C. 99, settled the contrary interpretations of the High Courts on whether Section 63 requires consideration. It does not: "the language of the section does not refer to any such agreement and ought not to be enlarged by any implication of English doctrines." The Supreme Court in Lala Kapurchand Godha v. Mir Nawab Himayatalikhan Azamjah, A.I.R. 1963 S.C. 250, applied Section 63 (read with Section 41) where a creditor accepted a lesser amount in full satisfaction of a larger debt — having accepted, he could not afterwards sue for the balance. The Indian rule is therefore opposite to the English rule in Pinnel's case and Foakes v. Beer; in India, the part-payment is a discharge if the parties so agree.

Mode 3 — discharge by breach

A breach by one party does not, of itself, automatically discharge the contract. The aggrieved party has an election. Under Section 39, when a party to a contract has refused to perform, or disabled himself from performing, his promise in its entirety, the promisee may put an end to the contract — unless he has signified, by words or conduct, his acquiescence in its continuance. The Supreme Court in State of Kerala v. Cochin Chemical Refineries Ltd., A.I.R. 1968 S.C. 1361, restated the rule: breach does not automatically terminate the obligation; the injured party has the option either to treat the contract as still in existence or to regard himself as discharged.

Where the breach is anticipatory — repudiation before the time for performance — the aggrieved party may either treat the contract as immediately at an end and sue for damages, or keep the contract alive until the time for performance and sue for specific performance, in which case he must show readiness and willingness throughout (the rule applied in Jawahar Lal Wadhwa v. Haripada Chakraborty, 1989 (1) Civil L.J. 340). The full doctrine, including the consequences of keeping the contract alive after repudiation, lives in anticipatory and actual breach.

Section 75 then provides the corollary: a person who rightfully rescinds a contract is entitled to compensation for any damage which he has sustained through the non-fulfilment of the contract. Discharge by breach therefore does not extinguish the cause of action for damages — that survives, and the measure of damages is governed by Sections 73 and 74, developed in damages and liquidated damages.

Mode 4 — discharge by impossibility (Section 56)

Section 56 is the statutory rule on discharge by impossibility. Its first paragraph deals with initial impossibility — an agreement to do an act impossible in itself is void. Its second paragraph deals with subsequent impossibility or frustration — a contract to do an act which, after the contract is made, becomes impossible, or by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful. The third paragraph deals with knowledge — where a promise was to do something which the promisor knew, or with reasonable diligence might have known, to be impossible, and the promisee did not know, the promisor must compensate the promisee for any loss sustained.

The Supreme Court in Satyabrata Ghose v. Mugneeram Bangur & Co., A.I.R. 1954 S.C. 44, held that Section 56 lays down a rule of positive law and does not leave the matter to be determined according to the intention of the parties. The doctrine of frustration in India is therefore statutory, not common-law-based — a critical distinction. The English implied-term theory does not control. The court grants relief on the ground of subsequent impossibility when it finds that the whole purpose or basis of the contract was frustrated by the intrusion or occurrence of an unexpected event or change of circumstances. The full development of the doctrine — including supervening illegality, destruction of subject-matter, frustration of common purpose, and the boundary with concluded transfers under the Transfer of Property Act — lives in the dedicated frustration chapter.

Three limits matter. First, Section 56 does not apply to leases — once a valid lease has come into existence, the agreement to lease has become a completed conveyance, and events that discharge a contract do not invalidate a concluded transfer (Raja Dhruv Dev Chand v. Raja Harmohinder Singh, A.I.R. 1968 S.C. 1024). Second, Section 56 does not apply to self-induced impossibility; the event must be one the promisor could not prevent. Third, Section 56 does not apply where the contract itself contains a term — express or implied — providing for discharge on the happening of a contingency; such cases are governed by Section 32 in the contingent-contracts chapter, not by Section 56.

Mode 5 — discharge by operation of law

Operation of law is a residual category covering events outside the parties' agreement that nonetheless extinguish the contract. Four sub-modes recur in the case law.

Merger. Where a lower contractual right is merged into a higher security — for example, an unsecured debt is replaced by a mortgage, or a simple contract is reduced to a judgment of court — the lower right is extinguished. The Bombay High Court in National Petroleum Co. Ltd. v. Popatlal Mulji, A.I.R. 1936 Bom. 344, applied the merger rule in the alternative-claim context: the moment the plaintiff took judgment against one defendant, and thereby destroyed the debt and merged it in the judgment, there was nothing left for the other defendant to pay under his contract of indemnity.

Insolvency. The adjudication of a party as insolvent under the Insolvency and Bankruptcy Code, 2016 (or under the predecessor Provincial Insolvency Act, 1920 and Presidency-Towns Insolvency Act, 1909) discharges him from the obligations covered by the order of discharge. The closing limb of Section 37 — "or of any other law" — recognises this; the Federal Court in Meghraj v. Allah Rakhia, A.I.R. 1942 F.C. 27, observed that the Act does not purport to be exhaustive and itself permits other laws to dispense with performance.

Death where performance is personal. Where the contract requires personal skill, taste, or confidence — a singer's engagement, a portrait commission, a contract of personal service — the death of the party in whose person the skill resided puts an end to the contract. The Orissa High Court in Jagannath v. Pitambar, A.I.R. 1954 Orissa 241, applied the rule. Where the contract is impersonal, however, the obligations bind the representatives — Section 37, second paragraph.

Lapse of time. The Limitation Act, 1963, does not, strictly speaking, discharge the contract — it bars the remedy. But for practical purposes the contract is unenforceable once the limitation period has run. Section 37 expressly recognises the Limitation Act as one of the "other laws" that may excuse performance. The right to receive the debt may persist; the right to sue for it does not.

Restitution on discharge — Section 65

The closing question on every mode of discharge that produces a void contract is restitution. Section 65 supplies the rule: when an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under it is bound to restore it, or to make compensation for it, to the person from whom he received it. The section operates after frustration under Section 56, after a contract is set aside for want of consideration under Section 25, after rescission under Section 19 for fraud or misrepresentation, and after an insurer is held entitled to recover sums paid before a cheque towards premium was returned dishonoured (National Insurance Company Limited v. Seema Malhotra, A.I.R. 2001 S.C. 1197). The full doctrine of restitution, including the bona fide purchaser carve-out, sits in quasi-contracts under Sections 68 to 72.

Distinctions to keep clean

Novation vs. alteration. Novation substitutes a new contract for the old; alteration changes a term of the existing contract while the contract continues. The substance, not the form, governs. Material changes that go to the root of the agreement amount to novation even if the parties call them an amendment.

Section 62 vs. Section 63. Section 62 (novation, rescission, alteration) requires bilateral agreement and consideration; Section 63 (remission, dispensation, extension of time, acceptance of any satisfaction) is unilateral and needs no consideration. The Indian rule on remission departs sharply from the English rule; aspirants who cite Foakes v. Beer as the position in India lose marks.

Discharge by breach vs. termination by clause. Discharge by breach turns on Section 39 and the aggrieved party's election; termination under a contractual termination clause turns on the clause itself. A party may have a right to terminate even where there is no breach — for example, by giving notice. The two routes have different consequences for damages.

Frustration vs. force majeure. Section 56 applies where the contract has no term covering the supervening event; where the contract itself contains a force-majeure clause covering the event, the parties' rights are governed by the clause and the case falls outside Section 56 — under Section 32. The Supreme Court applied the distinction in Naihati Jute Mills Ltd. v. Khyaliram Jagannath, A.I.R. 1968 S.C. 522.

Discharge vs. mere unenforceability. A time-barred contract is unenforceable but not, strictly, discharged — the right may revive on acknowledgement under Section 18 of the Limitation Act, or on a fresh promise under Section 25(3) of the Contract Act. A discharged contract cannot revive.

Exam-angle — what the paper actually asks

Three patterns recur. First, a fact-pattern in which the parties have entered into a second agreement after the first — the candidate must classify the transaction as novation, alteration, rescission, or mere variation, applying the Lata Construction and Union of India v. Kishorilal tests, and identify whether the original contract has been extinguished or merely altered. Second, a fact-pattern in which a creditor has accepted a lesser sum in full satisfaction of a larger debt — the candidate must spot Section 63, contrast it with the English rule in Foakes v. Beer, and apply Lala Kapurchand Godha v. Mir Nawab. Third, a frustration fact-pattern — the candidate must distinguish Section 56 from Section 32, apply Satyabrata Ghose, and remember that frustration in India is statutory, not common-law, and that Section 56 does not apply to completed transfers such as leases.

Sub-themes worth flagging: the unilateral nature of Section 63 remission; the limits of Section 41 (only complete performance by a third person discharges); restitution under Section 65; merger of contractual rights into judgment; and the closing limb of Section 37 that recognises the Limitation Act and insolvency law as discharging events. The discharge chapter is the spine that holds the post-formation portion of the Act together. Pair it with remedies for breach on the consequences side, and with performance and free consent on the formation side, to see how the entire contractual life-cycle locks together.

Frequently asked questions

What is the difference between novation under Section 62 and remission under Section 63?

Novation under Section 62 is the substitution of a new contract for the old by mutual agreement of all the parties; it requires consideration on both sides. Remission under Section 63 is unilateral — every promisee may dispense with or remit, wholly or in part, the performance of the promise, or extend the time for performance, or accept any satisfaction he thinks fit. Section 63 does not require consideration. The Privy Council in Chunna Mal Firm v. Mool Chand Firm settled the rule, and the Supreme Court in Citi Bank N.A. v. Standard Chartered Bank confirmed the distinction. The Indian rule on remission departs from the English rule in Foakes v. Beer.

Does breach of contract automatically discharge the contract?

No, breach does not automatically discharge. Under Section 39, where a party has refused to perform or disabled himself from performing his promise in its entirety, the promisee may put an end to the contract — unless he has signified, by words or conduct, his acquiescence in its continuance. The election lies with the aggrieved party. The Supreme Court in State of Kerala v. Cochin Chemical Refineries Ltd. restated the rule. Even after election to discharge, the cause of action for damages survives under Section 75. In anticipatory breach, the aggrieved party may either treat the contract as immediately at an end or keep it alive until the time for performance, in which case he must remain ready and willing throughout.

Is the doctrine of frustration in India based on English common law?

No. The Supreme Court in Satyabrata Ghose v. Mugneeram Bangur held that Section 56 lays down a rule of positive law and does not leave the matter to be determined according to the intention of the parties. The doctrine of frustration in India is statutory, not common-law. The English implied-term theory does not control. The court grants relief on the ground of subsequent impossibility when an unexpected event or change of circumstances frustrates the whole purpose or basis of the contract. Where the contract itself contains a term — express or implied — covering the supervening event, the case falls under Section 32 (contingent contracts), not Section 56.

Does Section 56 apply to leases of immovable property?

No. The Supreme Court in Raja Dhruv Dev Chand v. Raja Harmohinder Singh held that Section 56 of the Contract Act does not apply to leases. Once a valid lease has come into existence, the agreement to lease has disappeared and its place is taken by the lease — a completed conveyance under which the lessee gets an interest in the property. There is a clear distinction between a completed conveyance and an executory contract; events that discharge a contract do not invalidate a concluded transfer. The position is different for an agreement to lease, which has not yet been executed and registered — that is a contract within Section 56 and may be frustrated.

Can a contract discharged by breach still give rise to a claim for damages?

Yes. Section 75 is express on this — a person who rightfully rescinds a contract is entitled to compensation for any damage which he has sustained through the non-fulfilment of the contract. Discharge by breach does not extinguish the cause of action for damages; it preserves it. The measure of damages is governed by Section 73 (general damages on the rule in Hadley v. Baxendale) and Section 74 (liquidated damages and penalty). In specific-performance cases, the aggrieved party who keeps the contract alive after anticipatory breach must show continuous readiness and willingness — Jawahar Lal Wadhwa v. Haripada Chakraborty applied the rule.