Discharge of contract by mutual agreement
Discharge of Contract by mutual agreement
- Since a contract is created by mutual agreement, it can also be discharged by mutual agreement.
- And once the contract is discharged, it need not be performed.
- A contract may be discharged by mutual agreement in the following manner:
i) Novation [Section 62]
- Novation means substitution of a new contract for the original contract.
- New contract may be either between same parties or between different parties.
- The consideration for new contract is discharge of original contract.
| Example 1: A owes ₹ 10,000 to B at interest of 5% p.a. Later, A enters into an agreement with B, and gives B a mortgage of his (A’s) estate and also agrees to repay the loan with interest @ 10% p.a. This is a new contract and extinguishes the old. |
| Example 2: A owes money to B and B owes money to C. It is agreed between A, B and C that C shall henceforth accept A as his debtor, instead of B. The old debt of A to B no longer exists and a new debt from A to C has been contracted. |
ii) Alteration [Section 62]
- Alteration means a change in one or more of the terms of contract with mutual consent of parties.
- Alteration results in the original contract being performed in a modified manner.
- Parties to the new contract must not change.
| Example 1: X promises to sell and deliver 100kg of rice @ ₹ 50 per kg on 1st March and Y promises to pay for the rice on 15th March. Later, X and Y mutually decide that the goods shall be delivered in five equal instalments and payment shall be made on deliver of the last instalment. |
Distinction between Novation and Alteration
|
Novation |
Alteration |
| 1) Novation means substitution of a new contract for the original contract. | 1) Alteration means a change in one or more of the terms of contract. |
| 2) New contract may be either between same parties or between different parties. | 2) Parties remain the same. |
| 3) In case of novation the original contract is cancelled and it need not be performed. | 3) Alteration does not cancel the original contract. The original contract is performed in a modified manner. |
iii) Rescission [Section 62]
- Rescission means cancellation by mutual agreement of contract by any party or all parties to a contract.
- The old contract is cancelled and no new contract comes into existence.
| Example 1: X promises to sell and deliver 100kg of rice @ ₹ 50 per kg on 1st March and Y promises to pay for the rice on 15th March. Later, X and Y mutually decide that the contract shall not be performed. The contract stands discharged by rescission. |
iv) Remission [Section 63]
- Remission means acceptance by the promisee of a lesser amount or a lesser degree of performance than what was contracted for in full discharge of the contract.
| Example 1: A owes ₹5,000 to B. A pays to B ₹2,000 and B accepts it in satisfaction of the whole debt of ₹5,000. The whole debt is discharged by remission. |
| Example 2: A owes B ₹2,000 and is also indebted to other creditors. A makes an arrangement with his creditors, including B, to pay them a composition of 50 paise in a rupee upon respective demands. Payment to B of ₹ 1,000 is a discharge of B’s demand. |
v) Waiver [Section 63]
- Waiver means to give up or relinquish a right under the contract.
- On waiver, one party is discharged from the performance of his liability.
| Example 1: A promises to supply goods to B. Subsequently, B exempts A from carrying out the promise. This amounts to waiving the right of performance on the part of B. |
| Example 2: X, a tailor, promises to stitch a shirt for Y, a singer, if Y sings at a senior citizen’s event. Accordingly, Y sang a song, but later forbade X from stitching the shirt. X consents. The contract is terminated by waiver. |
This article is written by CA Preeti Aggarwal
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