Discharge by agreement and by operation of law

1. The modes of discharge

• By performance: actual performance, or a valid tender under section 38.
• By agreement or consent: novation, rescission and alteration (section 62); remission, waiver and accord and satisfaction (section 63).
• By impossibility: supervening impossibility or illegality under section 56.
• By lapse of time: the contract is not extinguished, but the remedy is barred once the limitation period runs out.
• By operation of law: death in personal contracts, merger, insolvency, unauthorised material alteration.
• By breach: actual or anticipatory (section 39).

2. Section 62: novation, rescission and alteration

Section 62 provides: 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. A contract made by agreement can be ended by agreement.

Novation is the substitution of a new contract for the old one, either between the same parties on new terms, or with a new party. The illustrations show both:

• A owes money to B. It is agreed between A, B and C that B shall accept C as his debtor instead of A. The old debt of A is at an end and a new debt from C to B is contracted.
• A owes B Rs 10,000. A enters into an arrangement with B and gives B a mortgage of his estate for Rs 5,000 in place of the debt of Rs 10,000. This is a new contract and extinguishes the old.
• A owes B Rs 1,000 under a contract, and B owes C Rs 1,000. B orders A to credit C with Rs 1,000 in his books, but C does not assent. B still owes C Rs 1,000; there is no new contract, because novation with a new party needs the consent of all three.

The requirements follow. The new contract must be agreed by all parties; it must be valid and enforceable in itself, since a void substitute cannot extinguish the original; and it must be agreed before the time for performing the original has passed. In Lata Construction v. Rameshchandra Ramniklal Shah, 1999 INSC 326, (2000) 1 SCC 586, the Supreme Court said that novation under section 62 requires a complete substitution of a new contract in place of the old, by agreement between the parties; only then is the original no longer to be performed.

Rescission is the cancellation of the contract, wholly or in part, by mutual agreement. It may be express, or implied when neither side does anything for so long that the court infers abandonment. Alteration is a change in one or more terms by mutual consent, leaving the parties the same. Once altered, the contract stands on its new terms.

3. Section 63: remission, extension and accord and satisfaction

Section 63 provides that every promisee may dispense with or remit, wholly or in part, the performance of the promise made to him, or may extend the time for performance, or may accept instead of it any satisfaction he thinks fit. Its illustrations are the clearest guide:

• A promises to paint a picture for B. B afterwards forbids him to do so. A is no longer bound to perform.
• A owes B Rs 5,000. A pays B, and B accepts in satisfaction of the whole debt, Rs 2,000 paid at the time and place at which the Rs 5,000 was payable. The whole debt is discharged.
• A owes B Rs 5,000. C pays B Rs 1,000, and B accepts it in satisfaction of his claim on A. The payment discharges the whole claim.
• A owes B a sum under a contract, the amount of which has not been ascertained. A, without ascertaining it, gives B and B accepts Rs 2,000 in satisfaction. The whole debt is discharged, whatever its amount.

The important point is that section 63 needs no fresh consideration. English law, after Pinnel's case (1602) and Foakes v. Beer (1884), held that payment of a smaller sum on the due date does not discharge a larger debt. Indian law took the opposite course. In Kapur Chand Godha v. Mir Nawab Himayatalikhan Azamjah, 1962 INSC 142, AIR 1963 SC 250, the Supreme Court held that the acceptance of a lesser sum in full settlement amounted to accord and satisfaction under section 63 and discharged the whole claim, without any consideration for the remission.

• Remission: accepting less than what was promised.
• Waiver: the intentional giving up of a contractual right. It must be by a person who knows of the right and means to abandon it.
• Accord and satisfaction: the accord is the agreement to accept something different; the satisfaction is its performance. The original obligation ends when the satisfaction is given.
• Extension of time: the promisee may give more time, and the promisor is not in breach until the extended date.

4. Discharge by operation of law

• Death. Under section 37, a contract that depends on the personal skill or volition of the promisor ends with his death. Other contracts bind his representatives.
• Merger. When an inferior right merges into a superior right in the same person, the inferior right ends. A tenant who buys the house he rents no longer owes rent: the lease merges in the ownership. A simple contract debt merges into a judgment for that debt.
• Insolvency. When a debtor is adjudged insolvent and later discharged, he is released from the provable debts incurred before adjudication, under the insolvency law that applies to him.
• Unauthorised material alteration. If one party alters a written contract in a material respect without the other's consent (for example, changing the amount, the date or the rate of interest), the other party is discharged. A change that does not alter legal effect, such as correcting a spelling, does not have this result.

5. Consequences: sections 64 and 65

Section 64. When a person at whose option a contract is voidable rescinds it, the other party need not perform any promise made to him. But the party rescinding must restore any benefit he has received under the contract to the person from whom he received it.

Section 65. When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under it is bound to restore it, or to make compensation for it, to the person from whom he received it. The illustrations: A pays B Rs 1,000 in consideration of B's promising to marry C, A's daughter; C is dead at the time of the promise; the agreement is void, and B must repay A. And where A contracts to sing for B at a concert for Rs 1,000 paid in advance and is too ill to sing, A need not compensate B for lost profits, but must refund the Rs 1,000.

Section 65 does not apply to an agreement that both parties knew to be illegal from the start. It covers agreements discovered to be void and contracts that become void.

6. Problem

A owes B Rs 50,000 payable on 1 June. On 1 June A pays Rs 30,000 and B writes “received in full and final settlement”. A month later B sues for the balance, saying he received no consideration for giving up Rs 20,000.

Issue. Whether acceptance of a smaller sum in full settlement discharges the whole debt without consideration.

Law. Section 63 lets a promisee remit performance wholly or in part, or accept any satisfaction he thinks fit. Illustration (b) covers this exact case, and Kapur Chand Godha confirms that no consideration is needed in India.

Application. B accepted Rs 30,000 at the time and place of payment and recorded that it was in full settlement. That is remission and accord and satisfaction. The English rule in Foakes v. Beer would help B, but it does not apply under section 63. The position would be different if B's receipt had been obtained by coercion or fraud.

Conclusion. The debt is discharged. B cannot recover the balance.

How this is examined

The standard essay is “What are the different modes of discharge of a contract?”: list the six modes, then give a paragraph to each, with the most detail on sections 62 and 63. As short notes: novation, accord and satisfaction, remission under section 63, or the effect of material alteration. The full-settlement problem above is a common Part C question, and the answer turns on the contrast between section 63 and Foakes v. Beer.