Modes of Discharge of a Contract — Performance, Agreement & Operation of Law — KSLU Contract I Notes

Modes of Discharge; Performance, Time & Reciprocal Promises

Every contract is a small loan of trust that has to be repaid — usually by doing what you promised. But “performance” hides a dozen practical questions: performed when? where? in what order when both sides owe duties? Getting these right is the difference between a discharged contract and a breach.

The exits from a contract

A contract may be discharged (ended) in five main ways:

  1. By performance — both parties do what they promised (the normal way).

  2. By agreement — the parties agree to end or change it (novation, rescission, alteration, remission, waiver).

  3. By operation of law — merger, insolvency, death, material alteration.

  4. By impossibility / frustration — performance becomes impossible (s.56).

  5. By breach — one party fails or refuses to perform (actual or anticipatory).

(Lapse of time under the Limitation Act is sometimes added as a sixth.)

A. Discharge by performance (ss.37–38).

The parties must perform, or offer to perform (tender), their promises (s.37). A valid tender of performance that is refused discharges the tenderer from liability without discharging his rights (s.38). Performance may be by the promisor, his agent, or (in non-personal contracts) a third person (s.40–41).

Section 37, Indian Contract Act, 1872: “The parties to a contract must either perform, or offer to perform, their respective promises, unless such performance is dispensed with or excused under the provisions of this Act, or of any other law.”

In Simple Terms: the normal way a contract ends is that everyone simply does what they promised — the rest of this unit is about the situations where that does not happen.

flowchart TD
    DIS["Discharge of contract"]
    DIS --> P["Performance (ss.37-38)"]
    DIS --> AG["Agreement (ss.62-63)"]
    DIS --> OL["Operation of law"]
    DIS --> IM["Impossibility / frustration (s.56)"]
    DIS --> BR["Breach (s.39) — actual / anticipatory"]
    P --> TIME["Time & place (ss.46-55): time of essence?"]
    P --> REC["Reciprocal promises (ss.51-54): order of performance"]

Case Laws

  • Startup v Macdonald (1843) — a valid tender of performance which is refused discharges the party who tendered from further liability.

Discharge by Agreement & by Operation of Law

The same free will that made a contract can also unmake it. What two people agreed to, two people can agree to change or cancel — and sometimes the law itself tears up a contract without anyone asking. These are the quiet, non-dramatic ways a contract ends.

A. Discharge by agreement (ss.62–63).

“Whatever is created by agreement may be ended by agreement.” The Act recognises:

  1. Novation (s.62) — substituting a new contract for the old, or a new party (with all parties’ consent); the old contract is discharged.

  2. Rescission (s.62) — the parties agree to cancel the contract altogether.

  3. Alteration (s.62) — a change in one or more terms by mutual consent (the altered contract replaces the old).

  4. Remission (s.63) — the promisee accepts less than what is due, or extends time, or accepts a different satisfaction; no fresh consideration is needed.

  5. Waiver — a party intentionally gives up a right under the contract.

B. Discharge by operation of law.

Independently of the parties’ wishes, a contract may end by:

  1. Merger — an inferior right merges into a superior one (e.g. a lessee who buys the property).

  2. Insolvency — the insolvent is discharged from contracts provable in insolvency.

  3. Death — in contracts involving personal skill (an artist, author), death discharges the contract; ordinary contracts pass to the legal representatives.

  4. Unauthorised material alteration — a material alteration of a written contract by one party without the other’s consent discharges the other.

Section 62, Indian Contract Act, 1872: “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.”

In Simple Terms: by mutual agreement the parties can replace, cancel, tweak or scale down a contract; and in a few situations the law ends it for them.

flowchart TD
    A["Discharge by AGREEMENT (ss.62-63)"]
    A --> N["Novation (new contract/party)"]
    A --> R["Rescission (cancel)"]
    A --> AL["Alteration (change terms)"]
    A --> RM["Remission (accept less, s.63) / Waiver"]
    B["Discharge by OPERATION OF LAW"]
    B --> M["Merger · Insolvency · Death (personal skill) · Material alteration"]

Case Laws

  • Manohur Koyal v Thakur Das (1888) — a promise to accept a lesser sum must itself satisfy s.63; illustrates remission/accord and satisfaction under Indian law.

Appropriation of Payments

You owe your landlord for three separate months and hand over one month’s rent saying nothing about which month it clears. Which debt does it wipe out — and does it matter? When a debtor owes several debts and pays something, the law has neat rules for appropriating (applying) the payment, and they make a favourite problem.

Applying a payment among several debts

The rules come from ss.59–61 (and the famous Clayton’s Case):

  1. s.59 — debtor’s right to appropriate. When a debtor owing several distinct debts pays, and expressly intimates (or the circumstances imply) that the payment is to a particular debt, it must be applied accordingly.

  2. s.60 — creditor’s right. If the debtor does not appropriate, the creditor may apply the payment to any lawful debt due to him, including a time-barred debt.

  3. s.61 — application by law. If neither appropriates, the law applies the payment to the debts in order of time (earliest first); if debts are of equal date, proportionately. In a running account (Clayton’s Case), the first item on the debit side is discharged by the first item on the credit side — “first in, first out.”

🧩 WORKED EXAMPLE — a bare payment on several debts.

Facts. A owes B three debts (2019, 2020, 2021). A pays a lump sum without saying which debt it clears; B says nothing either.

Rule. Debtor’s silence passes the choice to the creditor (s.60); if the creditor is also silent, s.61 applies the payment to the earliest debt first.

Apply. With both silent, the 2019 debt is discharged first, then 2020, and so on in order of time.

Conclusion. The payment clears the oldest debt first (s.61 / Clayton’s Case).

Section 59, Indian Contract Act, 1872: “Where a debtor, owing several distinct debts to one person, makes a payment to him… with express intimation… that the payment is to be applied to the discharge of some particular debt, the payment… must be applied accordingly.”

In Simple Terms: the debtor chooses first; if he stays silent the creditor chooses; if both stay silent the law clears the oldest debt first.

flowchart TD
    PAY["Payment on several debts"]
    PAY --> D["Debtor appropriates (s.59)?"]
    D --> C["If not, creditor appropriates — even a time-barred debt (s.60)"]
    C --> L["If neither, law applies in order of time; equal dates → proportionately (s.61)"]
    L --> CLAY["Running account: first-in, first-out (Clayton's Case)"]

Case Laws

  • Clayton’s Case (Devaynes v Noble, 1816) — in a running account, payments are appropriated on a “first in, first out” basis.

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