Assets Taxable Under Wealth Tax in India

 Discharge of Contract

 Introduction

• A contract is a legally binding agreement between two or more parties, where one agrees to do or refrain from doing something in exchange for consideration.
• Discharge of contract means terminating the contractual relationship between the two or more parties who entered into the contract previously.
• When the rights, obligations and duties of the parties come to an end it is known as the discharge of contract.
• Discharge of contract also ceases the legally binding power of the contract. Therefore, once a contract has been discharged the parties are no more obligated to each other and the contract becomes void.

Various modes of Discharge of Contract

• Discharge by Performance:
• A contract can be discharged by performance, and it is the most common form of discharge of contract. A contract will be discharged if the duty stated in the contract has been fulfilled by the parties. If only one person in a contract performs the promise which is mentioned, then he alone is discharged. There are two types of discharge of a contract by performance.
• For example, A and B enter into a contract that A will pay B Rs 1,000 if B delivers a package to C’s house. B does the agreed part specified in the contract and upon doing it A pays B the amount mentioned in the contract. Thus, the contract is discharged by performance since both parties performed the specified task in the contract.
• Actual Performance:
• In this case, both the parties in a contract must perform their promises. Unless the Indian Contract Act,1872(ICA) or any law at the time being prohibits the parties from performing their promises. In case either party dies or is unable to fulfil the promise then the representatives of such party shall be liable to perform the promise laid down in the contract.
• Attempted Performance:
• When the promisor offers to give his performance under the contract, but the promisee refuses to accept the same, then it amounts to discharge by attempted performance.
• Discharge by Mutual Agreement:
• In this case, the parties to a contract do not perform the promise stated in the contract if they arrive at a mutual agreement. This requires substituting or altering the existing contract with a new one.
• Illustration: ‘P’ owes a certain sum of money to ‘Q’ under a contract, but they arrive at a mutual agreement that henceforth ‘R’ will pay back the money owed to ‘Q’. This results in a mutual discharge of the contract between ‘P’ and ‘Q’ and a new contract is formed between ‘R’ and ‘Q’.
• Novation:
• It occurs when a contract is substituted for the old contract between the same or new parties. In order to enforce novation, the conditions mentioned under Section 62 of the ICA must be followed.
• There must be a valid reason for substituting the contract.
• Consent of all the parties is required.
• The old contract must be substituted before the expiry or breach of the contract.
• Remission:
• Remission occurs when parties to a contract accept a lesser amount or lesser degree of performance than what was initially agreed upon in the contract. Section 63 of the act states that a party may;
• Remit the performance stated wholly or in part.
• Extend the time for performance.
• Accept any other kind of performance apart from the one mentioned in the contract.
• Alteration:
• It means changing one or more contract terms, thereby discharging the old contract and forming a new one. Alterations to a contract must take place with the consent of all the parties to the contract.
• Rescission:
• Rescission takes place when the parties in the contract agree to dissolve the contract. In this case, the old contract stands discharged and no new contract is formed.
• Waiver:
• The term waiver means the abandonment of a right. A party to a contract may have their rights specifically stated under the contract, which also helps to release the other party from the contract and the contract is discharge.
• Merger:
• When an existing inferior right of a party, in respect of a subject matter, merges into a newly acquired superior right of the same person, in respect of the same subject matter, then the previous contract conferring the inferior right stands discharged by the way of merger.
• Discharge by Lapse of Time:
• A contract will be discharged if the performance is not completed within the given time period. This might also result in a breach of contract. In that case, a person might file a suit under the court of law stating that his rights have been infringed and also claiming to enforce his rights.
• Discharge by Operation of Law:
• This mode of discharge of contract does not allow the fulfilment of the promise laid down in the contract by the provisions of law. Situations such as death, insolvency, merger, etc. do not enable the fulfilment of the promise, hence it results in the discharge of the contract.
• Discharge by Supervening Impossibility:
• Discharge of a contract by supervening impossibility is a contract that has become impossible or illegal to perform. In these cases, the contract becomes void. It is also known as the doctrine of frustration.
• Frustration occurs when it is established that due to subsequent changes in circumstances, the contract has become impossible to perform or it has been deprived of its commercial purpose. The ways in which it occurs are mentioned below;
• On the destruction of subject matter, a contract will be discharged, and no party will be held liable.
• If the performance of the promise mentioned in the contract becomes unlawful, then the contract will be void.
• A contract tends to be discharged on accounts of death or personal incapacity.
• When the circumstances surrounding a contract change then it will be discharged.
• Discharge by Breach:
• When a contract is broken by one party the other party or parties are freed from the obligation of performing the contract. They can also take the remedial measures to which they are entitled. Breach of contract may arise in two ways:
• Actual breach of contract: Actual breach of contract occurs when, during the performance of the contract or at the time when the performance of the contract is due, one party either fails or refuses to perform his obligations under the contract. The refusal of performance may be express (i.e., by word or by writing) or implied (i.e., by conduct of the party or by non-action) or abstaining from doing something.
• Anticipatory breach of contract (Sec. 39): Anticipatory breach of contract occurs:
• when a party before the time for performance is due announces that he is not going to perform the contract or,
• when a party by his own act disables himself from performing the contract.

Exceptional Cases when a Contract is not Discharged

The doctrine of frustration or supervening impossibility does not apply to the following cases mentioned below.

• When in any case a situation arises that makes the performance of the certain promise mentioned in the contract very difficult to be performed, then in that situation, it makes the promise challenging to be fulfilled but the contract is not discharged.
• Commercial hardships make the contract unprofitable, but it does not discharge a contract.
• Strikes, lockouts, civil disturbances and riots do not discharge the contract unless there is a clause in the contract specifying that in such event the contract will be terminated.
• A contract is not discharged due to the self-induced incapacity of the parties to a contract.
• In a contract where performance is relied upon by a third party, it will not be discharged due to the failure or default of the third party.

Case Law

• Manohur Koyal v. Thakur Das(1888):
• The defendant failed to pay the agreed upon sum to the plaintiff on the due date stated in the contract. However, the defendant promised to pay Rs. 400 to the plaintiff and to execute a fresh Kisti Bundi bond. The plaintiff agreed to this, but the defendant failed to pay that amount consequently, the plaintiff sued the defendant.
• The Calcutta High Court stated that since the new bond was created after the breach of the original contract, therefore the contract cannot be discharged by novation but by breach of contract.
• United India Insurance Co. Ltd v. M.K.J. Corporation (1996):
• The Supreme Court held that utmost good faith must be observed by the contracting parties and the duty of good faith is of a continuing nature even after the completion of the agreement no material alterations can be made to the contract without the mutual consent of the parties.

Conclusion

Thus, we can understand that discharge of contract refers to the contractual relationship coming to an end when the obligations and duties have been fulfilled by the parties to a contract. In this case, the parties are free from the obligations of the contract. As mentioned earlier there are various modes of discharging a contract but the best way to do it is by performing the promise within the stipulated time stated in the contract as the other modes are quite unpleasant ways to release the parties from duties because it leads to damages.