Termination of Contract

Contract creates relation between the parties and binds them over. Termination of such contractual relations is called discharge of contract. The following are different modes of discharge or termination of contract.
  1. Discharge by Performance.
  2. Discharge by Breach of Contract.
  3. Discharge by Impossibility.
  4. Discharge by Operation of Law.
  5. Discharge by Lapse of Time.
  6. Discharge by Mutual understanding or by Agreement.

Discharge of contract by Performance

As said by Salmond, contract creates obligations to parties. If both parties perform their contractual obligations promptly, the contract is said to be discharged by performance. It is the ideal method that number of contracts gets terminated in this way.

Discharge of contract by Breach

Failure in performance of contractual obligation is called breach of contract. Discharge of contract takes place by breach of contract also. Breach of contract is of two types. Namely;

  • Actual breach and
  • Anticipatory breach.

In case where contract is breached by party on the date of performance, it is called actual breach. If breach of Contract takes place before data of performance, it is called anticipatory breach.

Discharge of contract by Impossibility

The element of impossibility terminate contractual relations. impossibility is of two types. Namely;

  • Pre Contractual impossibility and
  • Post Contractual impossibility.

If impossibility has already come into force before the contract itself, it is called Pre-Contractual impossibility. Here discharge of Contract takes place soon after formation of Contract. The impossibility which comes into force after the contract is called Post-Contractual Impossibility. Here contractual relations will exists only up to occurrence of impossibility.

Discharge of contract by lapse of time

Limitation act has specified duration to perform different contracts. The duration thus specified is called limitation period. Soon after expiry of limitation period, the contract gets discharged.

Example: There is a contract of loan between A and B. Her limitation period is 3 years. After completion of 3rd year discharge of contract takes place and debtor – creditor relationship comes an end. Thus it becomes time bared debt which cannot be recovered by means of legal proceedings.

Discharge of contract by Operation of law

This can be as following;

By Death: Whenever one of the parties comes across death, contractual relations will come to an end.

By Insolvency: When one of the parties to the contract becomes insolvent, he forgoes capacity to contract and those contracts which were made by that person will get discharge.

By lunacy: When one of the parties gets attached by lunacy discharge of contract takes place.

Right and liability going into the hands of same party: Contract creates right to one party and liability to the other when right and liability reach the same person, the result is discharge of contract.

Example: X has drawn a bill on Y. Here X has right to collect amount on the bill and Y has liability to pay. There after X has endorsed the bill to Z. Where Z has got the right and liability is with Y. Assume that Z has endorsed the bill to Y. Now right as well as liability are with Y. This situation discharges the contract.

Discharge of contract by Agreement

This can be as following;

By Alterations: Whenever Material alterations in contract are made, then it is said that old contract has got discharged and a new contract has come into force.

By Renewal: At times parties to the contracts may substitute completely new contract in the place of old contract. Now the old contract has got discharged.

By Recession: In case of recession old contract gets discharged and there will be no formation of new contract.

Example: There is a contract between A and B according to which A has to supply 100 pairs of ready made dresses to B on 10th January. Where date of formation of contractee`s 1st January. On 2nd January A says to B that those dresses have become out of fashion and hence not possible to assemble 100 pairs. Still B says that though he (B) supplies 100 pairs by taking a lot of risk, B cannot sell them because they are outdated. Thus by mutual understanding, they have terminated their contract.