Common Legal Grounds For Discharge Of Contract: Explained

Content

• What is a discharge of a contract?
• Discharge of contract by Performance
• Discharge of contract by Agreement
• Discharge of contract by Breach
• Discharge of contract by Frustration
• Discharge of contract by Operation of law
• How is the discharge of a contract different from termination?

What is a discharge of a contract?

Contracts are promises enforceable by law, where two or more parties mutually agree to carry out a  set of obligations. However, the parties' legal relationship will end, and the terms will no longer bind them. It is known as the discharge of a contract. All obligations, privileges, and rights expire as well.

Contract discharge refers to the termination or completion of a legally binding agreement between two or more parties. The rights and duties terminate upon the end of the contract. However, the discharge of contracts can happen due to a wide variety of reasons. Understanding these circumstances can help parties manage their contractual relationships and ensure proper closure when necessary. The common legal grounds for the discharge of a contract include: 

 1. Discharge of contract by Performance

Discharge of a contract by performance is one of the most common ways to bring a contract to an end. It happens when each party carries out their mutually agreed responsibilities. Here are some key points regarding the discharge of a contract by performance:

• Complete Performance

Both parties must precisely and fully carry out the terms of their respective obligations to discharge the contract by performance. It signifies that they have accomplished all the contract terms and conditions per the contract's specifications for terms, quantities, quality, and delivery dates.

• Substantial Performance

If there has been substantial performance, sometimes, strict or exact performance may not be necessary for discharge. It refers to a situation where a party has fulfilled the main essence of their obligations, even if there are minor deviations or defects. The performance must not be so deficient that it defeats the purpose of the contract or substantially affects the other party's rights.

• Time of performance

If the contract does not mention a deadline, the performance must occur within the specified time frame or within a reasonable time. If a party fails to perform within the stipulated time, it may be considered a breach of contract, and the non-breaching party may be entitled to remedies.

• Acceptance of performance

The party receiving the performance must accept it as satisfactory. Contract discharge may occur if the receiving party rejects it for a valid reason, such as non-conformity with the contract terms. In such cases, the performing party may need to rectify the non-conformity or provide proper performance to achieve discharge.

 2. Discharge of contract by Agreement

Discharge of a contract by agreement refers to the mutual assent between the parties involved to terminate or discharge the contract. The agreement can be reached at any point during the performance of the contract, provided both parties consent to end their obligations under the contract. Here is all you need to know about the discharge of a contract by agreement:

• Mutual Consent

Both parties must freely and willingly agree to terminate the contract. This agreement can be express (explicitly stated) or implied (inferred from the parties' actions).

• Revision or Rescission

The parties can change the original agreement to reflect their decision to terminate. Alternatively, they may rescind the document entirely, undoing the contract and returning to their pre-contractual positions.

• Consequences

Upon the discharge of the contract by agreement, both parties do not have to abide by the future obligations under the original contract. But it might still be necessary to deal with any rights or duties that had already accrued or emerged before the discharge.

 3. Discharge of contract by Breach

Discharge of a contract by breach occurs when one party fails to fulfill its obligations or violates the terms and conditions of the contractual agreement. It can either be a material breach or a minor breach. And the non-breaching party may choose to terminate the contract as a result. Here's how the breach of contract typically works:

• Material Breach

A material breach occurs when one party fails to perform a substantial part of its obligations under the contract and undermines its fundamental purpose. In this case, the non-breaching party has the right to consider the contract terminated and seek remedies for the breach. The legal remedies may include:

The non-breaching party can discharge the contract due to the material breach. Both parties are released from their ongoing responsibilities under the contract and are no longer subject to its terms after termination.

• Minor Breach

A minor breach, also known as an immaterial or partial breach, occurs when a party fails to perform a relatively insignificant part of their obligations under the contract. In such cases, the non-breaching party is not entitled to terminate the contract but may seek remedies for the breach. The dispute resolution for a minor breach typically involves claiming damages to compensate for any losses incurred.

 4. Discharge of contract by Frustration

When unforeseen circumstances make it impossible or significantly different to perform the contractual obligations, there’s a discharge of contract by frustration. Frustration typically involves events not foreseeable during contract formation. Here are key points to understand about the discharge of a contract by frustration:

• Requirements for Frustration

The event causing frustration must be unexpected and beyond the parties' control. It should be an event that could not have been anticipated or provided for in the contract. The event must cause a corresponding change in the situation that renders the contract impossible or fundamentally different to perform. A minor inconvenience or difficulty is insufficient; the change must be substantial.

The party seeking discharge should not be responsible for the frustrating event. If the event was within the control of that party or was foreseeable, frustration may not be a valid ground for discharge. Frustration applies when the event is not due to the fault or default of any party. If a party contributed to or caused the frustrating event, they cannot claim frustration as a defense.

• Effects of Frustration

Discharge of contract due to frustration releases all the parties from their future contractual obligations. However, any rights or obligations accrued before the frustrating event remain valid. Additionally, any payments made or benefits received under the contract before frustration may need to be accounted for or returned.

Frustration generally operates as a loss-sharing mechanism. The law aims to distribute the losses resulting from the frustrating event fairly between the parties. The specific rules governing the allocation of losses may vary depending on the jurisdiction and the nature of the contract. Organizations can include provisions addressing the consequences of frustration. These provisions may allocate risks and losses differently than what the common law principles of frustration would dictate.

 5. Discharge of contract by Operation of law

Contract discharge by operation of law refers to the automatic termination of a contract without any action or agreement by the parties involved. In other words, particular events or legal principles prescribed by law can discharge a contract. Here are some common instances of contract discharge by operation of law:

• Expiration of Time

Contracts often have a specified duration or an end date. When the term expires, the contract is discharged without any further action. And the parties no longer have to uphold the terms and conditions.

• Death or Incapacity

If a contracting party dies or becomes legally incapacitated, there are grounds for contract discharge. Thus, no one can enforce the contractual agreement against the will of the deceased or incapacitated party.

• Illegality

If the continued performance of a contract becomes illegal or contrary to public policy, there are grounds for discharge. It can occur due to changes in legislation or regulations that render the contractual agreement unlawful or unenforceable.

• Bankruptcy

If one of the parties becomes bankrupt, there is a discharge of contract by operation of bankruptcy law. Bankruptcy proceedings can impact the ability of the bankrupt party to fulfill their contractual obligations, leading to the termination of the contract.

• Merger or Novation

If the parties enter into a new agreement that supersedes or replaces the prior one, there is scope for contract discharge. It can happen through a merger, where the rights and obligations under the original contract combine with those of a new agreement. Alternatively, novation occurs when the parties agree to replace one party with a new one, effectively discharging the original contractual obligations.

How is the discharge of a contract different from termination?

In contract law, "contract discharge" and "contract termination" refer to two distinct ways a contract may end. Contract discharge refers to the fulfillment or completion of the contractual obligations by both parties, resulting in the termination of the contract. In other words, there is a discharge of contract when both parties have performed their respective duties and obligations.

Contract termination, on the other hand, refers to the premature end of a contract before its natural completion. Termination typically occurs due to the occurrence of specific events or breaches of contract by one or both parties. Specific terms and conditions, as well as applicable laws and regulations, govern the discharge and termination of contracts.