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Summer/May 2012 MB0051-1) Explain different modes of discharge of contracts.

Answer : Different Modes of Discharge of Contracts (Secs.73-75)

A contract may be discharged by (i) performance, (ii) tender; (iii) mutual consent; (iv) subsequent impossibility; (v) operation of law; (vi) breach.

Discharge of contracts by performance or tender

The obvious mode of discharge of a contract is by performances that is where the parties have done whatever was contemplated under

the contract, the contract comes to an end. Thus, where A contracts to sell his car to B for Rs 1,85,000, as soon as the car is delivered to B and B pays the agreed price for it, the contract comes to an end by performance. The tender or offer of performance has the same effect as performance. If a promisor tenders performance of his promise but the other party refuses to accept, the promisor stands discharged of his obligations.

Meaning of mutual consent (Sec.62)

If the parties to a contract agree to substitute a new contract for it, or to rescind it or alter it, the original contract is discharged. A contract may terminate by mutual consent in any of the six ways viz. novation, rescission, alteration and remission, waiver and merger. Novation means substitution of a new contract for the original one.

Discharge of contracts by impossibility of performance

A contract may be discharged because of impossibility of performance. There are two types of impossibility: (i) Impossibility may be inherent in the transaction (i.e., the contract), (ii) Impossibility may emerge later by the change of certain circumstances material to the contract.

Discharge of a contract by operation of law

Discharge by operation of law may take place in four ways: (i) By death. Death of the promisor results in termination of the contract in cases involving personal skill or ability. (ii) By insolvency. The insolvency law provides for discharge of contracts under certain circumstances so where an order of discharge is passed by an insolvency court the insolvent stands discharged of all debts incurred previous to his adjudication. (iii) By merger.

Discharge of contracts by breach

A breach of contract is one party’s failure, without a legal excuse, to live up to any of its promises under a contract. A contract terminates by breach of contract. If the promisor has not performed his promise in accordance with the terms of the contract or where the performance is not excused by tender, mutual consent or impossibility or operation of law, then this amounts to a breach of contract on the part of the promisor. The consequence of this is that the promisee becomes entitled to certain remedies. The breach of contract may arise in two ways:

(i) anticipatory and (ii) actual.

Anticipatory breach of contracts: The anticipatory breach of contract occurs when a party repudiates it before the time fixed for performance has arrived or when a party by his own act disables himself from performing the contract.

Actual breach of contracts: The actual breach can occur by (i) failure to perform as promised, (ii) making it impossible for the other party to perform. The failure to perform means that one party must not have performed a material part of the contract by a stated deadline. The actual breach by failure to perform may take place (a) at the time when performance is due, or (b) during the performance of the contract. Thus, if a person does not perform his part of the contract at the stipulated time, he will be liable for its breach.

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