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Termination or Discharge of Contracts

Termination or discharge of a contract occurs when parties are no longer legally bound by their obligations, which can happen through performance, mutual consent, impossibility of performance, operation of law, lapse of time, or breach of contract. Each method has specific conditions and examples, such as actual performance fulfilling contract terms, mutual agreement altering or waiving terms, and impossibility arising from unforeseen events. Understanding these methods is crucial for recognizing how contracts can be legally concluded or rendered void.

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0% found this document useful (0 votes)
56 views17 pages

Termination or Discharge of Contracts

Termination or discharge of a contract occurs when parties are no longer legally bound by their obligations, which can happen through performance, mutual consent, impossibility of performance, operation of law, lapse of time, or breach of contract. Each method has specific conditions and examples, such as actual performance fulfilling contract terms, mutual agreement altering or waiving terms, and impossibility arising from unforeseen events. Understanding these methods is crucial for recognizing how contracts can be legally concluded or rendered void.

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lonfy.higer
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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➢ 🔚 Termination / Discharge of Contract – What Does It Mean?

When a contract ends, and parties are no longer legally bound by their obligations under the contract, it is called the
termination or discharge of the contract.
There are six main ways this can happen:

I. Discharge by Performance

This is the most common and ideal way to end a contract.


• A contract is discharged when both parties fulfill their promises exactly as agreed.
• This is called “actual performance.”

Example:
A agrees to sell his house to B for Tk. 10,00,000.
When B pays the money and takes possession of the house, both parties have performed their duties, and the contract is
complete.

II. Discharge by Mutual Consent or Agreement

Contracts are created by mutual agreement, so they can also be ended by mutual agreement.
There are 3 main types under this:
(i) Novation
• Replacing the old contract with a new one by mutual consent.
• The old contract is canceled, and the new one takes its place.
• Can happen between same or different parties.

Example:
A agrees to sell 500 quintals of rice to B. Later, B asks A to supply 800 quintals of wheat instead, and A agrees. This is
novation.

(ii) Alteration
• Changing the terms of the original contract by mutual agreement.
• The original contract is discharged, and the altered contract becomes binding.
• Changes can be in time, place, quantity, or price, etc.

Example:
Changing delivery date from 10th April to 15th April with both parties agreeing.

(iii) Remission or Waiver (Section 63)


• The promisee accepts less than what was originally agreed, or accepts late performance.
• This relieves the promisor from full performance.

Example:
A owes B Tk. 25,000. B is in urgent need of cash and agrees to accept Tk. 20,000. The rest of the debt is waived.
III. Discharge by Impossibility of Performance (Section 56)

This happens when a contract cannot be performed due to unforeseen events or the task was impossible to begin
with.

Two types:
1. Initial Impossibility – The task was never possible.
2. Supervening Impossibility – Task was possible at first, but later became impossible due to external reasons.
This is also called the Doctrine of Frustration.

Situations of Supervening Impossibility:


1. Destruction of Subject Matter

o If the item needed for the contract is destroyed without anyone’s fault. Example: A theater burns
down before a show.
2. Change in Law

o A new law makes the act illegal. Example: Cutting wood becomes illegal after contract is made.
3. Non-occurrence of an Event

o If contract is based on a specific event and it doesn’t happen. Example: Renting a room for a king’s
procession that gets canceled.
4. Personal Incapacity or Death

o If the contract needs a specific person’s skill or presence, and they die or become incapable.
Example: An artist becomes ill and cannot paint.
5. Outbreak of War
o If war breaks out between countries, contracts with the enemy country become void.

IV. Discharge by Operation of Law

A contract ends automatically because of legal events. These include:


(i) Merger
• A lower legal right merges into a higher legal right, ending the previous contract.

Example: A tenant becomes the owner of the property — the lease ends.
Conditions for merger:
• Same parties
• Same contract nature
• Different rights (one must be superior)

(ii) Unauthorized Alteration


• If one party makes a major change to the contract without consent, the contract becomes void.
Example: One party changes the interest rate without telling the other.

(iii) Insolvency
• If one party is declared insolvent (bankrupt), they are legally free from contract obligations.

V. Discharge by Lapse of Time

Contracts must be performed within a specific time limit (called Limitation Period).
• If the party does not perform on time and the other party does not take legal action within the limitation
period, the contract becomes invalid.

Example: A creditor has 3 years to file a case for unpaid debt. After that, they can’t sue.

VI. Discharge by Breach of Contract

When one party fails or refuses to perform their part of the contract.
There are two types of breach:

(i) Actual Breach

• When the breach happens at the time of performance. Example: A doesn’t deliver goods on the agreed date.

(ii) Anticipatory (Constructive) Breach

• When one party tells or shows in advance that they won’t perform their duty. Example: A tells B before the
delivery date that he won’t deliver and sells the item to someone else.
The other party can then:
• Treat it as an actual breach and sue immediately, OR
• Wait till the due date and then sue if performance doesn't happen.

Summary Chart

Method Explanation Example

By Performance Both parties fulfill the contract House sold and paid for

By Mutual Agreement Parties agree to end/change contract Novation, alteration

By Impossibility Event makes performance impossible Fire, law change

By Operation of Law Law automatically ends contract Death, insolvency

By Lapse of Time Legal time limit passes without action Debt unpaid for 3 years

By Breach One party refuses or fails to perform Refuses delivery


1. Discharge by Performance – Explained Simply

What does "Discharge by Performance" mean?


When both parties in a contract do what they promised to do, the contract is said to be discharged by performance.
In simple words:
Each person does their part as agreed = Contract ends successfully.

Key Points to Remember:


• A contract creates obligations for both parties (like to pay, deliver, do something, etc.).
• If those obligations are fulfilled properly and on time, the contract is completed.
• This is the most natural and common way of ending a contract.

Definition (in simple terms):

➢ Discharge by performance happens when both parties completely perform their duties as mentioned in
the contract, within the agreed time and in the agreed manner.

Example:
A agrees to sell his house to B for Tk. 10,00,000.
B pays Tk. 10,00,000 and takes possession (ownership) of the house.
In this case, both A and B have done what they promised, so the contract is complete — it is discharged by
performance.

Important Terms to Know:

Term Meaning

Obligation A legal duty to do something under a contract

Performance Fulfilling what you promised to do in the contract

Discharge Contract ends; no more duties left

Prescribed time and manner The way and time agreed in the contract

Possible MCQ Clues:


1. Discharge by performance means:
o (a) Breach of contract
o (b) When one party refuses to perform

o (c) When both parties fulfill their obligations


o (d) When contract becomes void
2. In a contract, A agrees to sell a house to B. B pays the price and takes possession. The contract is:
o (a) Breached
o (b) Altered

o (c) Discharged by performance


o (d) Terminated by mutual agreement

Summary:
• Discharge by performance is when both sides of a contract do what they agreed to do.
• It happens within the given time and as per the agreed terms.
• Once both parties perform their duties, the contract comes to an end.

➢ 🟡 2. Discharge by Mutual Consent or Agreement


What does this mean?
A contract is formed when both parties agree to it.
In the same way, they can also end it by agreement.
So, when both sides agree to change, cancel, or replace the contract — it is called discharge by mutual consent.

Key Idea:
If both parties agree, they can:
• Replace the old contract with a new one,
• Change some terms,
• Accept less performance, or
• Cancel it altogether.
This method is completely legal and valid.

Important Terms and Types:


There are 3 main ways contracts can be ended by mutual consent:

I. Novation (New Contract)


Definition:
When both parties replace the old contract with a new contract, it is called Novation.
Key points:
• The old contract ends and a new contract is formed.
• It must be done with consent of all parties.
• Novation can happen:
o Between same parties, or
o Between new parties (third party involvement)
Example 1:
A contracts with B to supply 500 quintals of rice at Tk. 900 per quintal.
Before delivery, B says: “I want 800 quintals of wheat instead, at Tk. 250 per quintal.”
A agrees. This is Novation, because the subject and terms changed — new contract replaces the old one.
Example 2:
A owes B Tk. 50,000. With B’s consent, A arranges for C (a third party) to pay the amount to B.
This is also novation involving a third party.
MCQ Tip:
• Novation = New contract replaces old one
• Requires consent from all parties

II. Alteration (Change in Terms)


Definition:
If both parties agree to change terms of the original contract (like time, place, price), it is called Alteration.
Key points:
• Same contract, modified terms
• Must be by mutual consent
• No new contract is formed — only the existing one is changed
Example 1:
A is to deliver goods to B on 15th April. Later, they both agree to change the date to 20th April.
This is alteration of the time term.
Example 2:
Changing price, quantity, or place of delivery — with both parties agreeing — is also Alteration.
MCQ Tip:
• Alteration = Change in the terms of the same contract
• Requires mutual agreement

III. Remission or Waiver (Acceptance of Less)


Definition:
If a party accepts less than what was originally promised, or agrees to delay the performance, it is called remission
or waiver.
This is allowed under Section 63 of the Contract Act.
Key points:
• The promisee (person who should receive performance) can:
o Accept less money, or
o Accept partial performance, or
o Delay the fulfillment
• The promisor is then free from the rest of the obligation
Example:
A owes B Tk. 25,000.
B is in urgent need of money and agrees to take Tk. 20,000 immediately as full payment.
This is remission. B has waived the rest.
MCQ Tip:
• Remission = Accepting less or delayed performance
• No need to make a new contract

Summary Table:

Type What Happens Key Condition Example

Old contract replaced with new


Novation Consent of both parties Changing rice contract to wheat
one

Alteration Terms of contract are changed Consent of both parties Changing delivery date or price

Allowed under Section Accepting Tk. 20,000 instead of Tk.


Remission/Waiver Promisee accepts less or delays
63 25,000

Practice MCQs:
1. A contract is discharged by mutual agreement through:
o (a) Breach of contract

o (b) Novation, Alteration, Remission


o (c) Performance only
o (d) Court order
2. Novation involves:

o (a) Replacing old contract with a new one


o (b) Altering terms of same contract
o (c) Breach of contract
o (d) Delayed performance
3. Accepting lesser amount in full settlement is called:
o (a) Alteration

o (b) Remission
o (c) Novation
o (d) Merger

In-depth Understanding Angle:


• This method shows flexibility in contracts.
• It helps parties adjust or cancel contracts without legal action.
• It encourages amicable settlement.
• Each type (Novation, Alteration, Remission) must be voluntary and agreed by both parties.
• If any change is forced, it may be void or a breach.

➢ 🔴 3. Discharge by Impossibility of Performance


What does it mean?
Sometimes, a contract can no longer be performed because it has become impossible or illegal to do so.
In such cases, the law allows the contract to be discharged (ended).
This is known as:
• Impossibility of Performance, or
• Doctrine of Frustration

SECTION 56 of the Contract Act


This section says:

If the act mentioned in the contract is impossible to do, the agreement is void.
That means:
• If something is already impossible at the time of the contract → Void from the beginning (Void ab initio).
• If it becomes impossible later due to events outside of control → Also void, under Supervening Impossibility.

2 Types of Impossibility:

1️⃣ Initial Impossibility (Void ab initio)


If something is already impossible at the time of agreement, the contract is void from the beginning.
Example:
A promises B to find a lost treasure using magic.
This is impossible and not real.
The contract is void ab initio (invalid from the start).

2️⃣ Supervening Impossibility (After Contract Is Made)

When a contract was possible when made, but later becomes impossible or illegal due to unforeseen events.

This is called Supervening Impossibility or the Doctrine of Frustration.

Doctrine of Frustration
This means:
The contract is frustrated or destroyed because of events beyond anyone’s control.
The parties are then freed from performing their obligations.

Situations Where Impossibility Can Occur:

(i) Destruction of Subject Matter


If the thing related to the contract is destroyed, and it’s not the fault of either party, the contract becomes void.
Example (Case: Taylor vs. Caldwell):
A theatre was rented for a concert. Before the event, the theatre caught fire and was destroyed.
Court said: Since the subject (theatre) was destroyed, the contract is void.

(ii) Change of Law


If the contract was legal at first, but a new law makes it illegal, the contract is discharged.
Example:
A agrees to supply a certain type of wood from a forest.
After the contract, a new law bans cutting wood from that forest.
Contract becomes void because it’s now illegal to perform.

(iii) Non-occurrence of a Particular Event


If a contract is based on a specific event, and that event does not happen, the contract is void.
Example (Case: Krell vs. Henry):
Henry rented a room from Krell to watch King Edward VII's coronation.
The event was cancelled because the King got sick.
Court said: The purpose of the contract was frustrated, so Henry didn’t have to pay rent.

(iv) Personal Incapacity or Death


If the contract depends on a person’s special skill or presence, and that person dies or becomes unfit, the contract is
discharged.
Example:
A famous painter agrees to paint a portrait. Before starting, the painter dies.
The contract cannot be completed — it's discharged.

(v) Outbreak of War


Contracts between people from two countries become void if a war breaks out between those countries.
Example:
A in Bangladesh makes a contract with B in another country. If war breaks out, the contract becomes impossible to
perform and is void.

Summary Table:
Situation What Happens? Example / Case

Initial Impossibility Void from the beginning Promise to find treasure by magic

Destruction of Subject Matter Contract is void Taylor vs. Caldwell – Theatre fire

Change of Law Contract becomes illegal Ban on forest wood after contract

Non-occurrence of Event Purpose frustrated Krell vs. Henry – Coronation cancelled

Death/Incapacity Contract ends Artist dies before painting a portrait

War Contract void Country A vs. Country B war breaks out

MCQ Practice:
1. A contract is said to be frustrated when:
o (a) One party disagrees

o (b) Performance becomes impossible due to outside events


o (c) It is performed early
o (d) It is a voidable contract
2. If the subject matter of a contract is destroyed, the contract is:
o (a) Valid

o (b) Void
o (c) Illegal
o (d) Voidable
3. The legal rule that deals with impossibility of performance is:
o (a) Doctrine of Free Consent
o (b) Doctrine of Capacity

o (c) Doctrine of Frustration


o (d) Doctrine of Mistake
4. In Krell vs. Henry, why was the contract discharged?
o (a) Rent was not paid

o (b) The purpose of the contract (viewing coronation) was frustrated


o (c) House was destroyed
o (d) King died

Final Recap:
• Impossibility of performance discharges the contract.
• Covers initial and supervening impossibility.
• Supervening impossibility = contract was possible earlier, but later events made it impossible or illegal.
• Covered under Section 56 of the Contract Act.
• Known as the Doctrine of Frustration.

➢ 🔴 4. Discharge by Lapse of Time


What does it mean?
Sometimes a contract is discharged (comes to an end) simply because too much time has passed.

The law sets a time limit (called Limitation Period) within which a person must take legal action if the other party
doesn’t perform their part of the contract.

If this time expires, the contract is discharged, and the other person is not legally bound anymore.

Example:
Let’s say:
• A borrows money from B and promises to repay it by January 1, 2022.
• A doesn’t repay.
• B must file a case (legal suit) within 3 years, which means by January 1, 2025.

• If B files the case after that date (say, in 2026), the court will not accept it. A will not be legally required to
pay anymore.
So the contract is discharged due to lapse of time.

Important Terms:

Term Meaning

Lapse of Time Time has passed beyond the allowed legal period

Stipulated Time Time mentioned or fixed in the contract

Limitation Period The time limit within which a legal case must be filed (usually 3 years)

Discharge Legal end of the contract

Key Points to Remember:


• Every contract has a time frame for performance.
• If performance is not done on time, the injured party (e.g., creditor) must act within the limitation period.
• If no action is taken in time, the contract is considered discharged.
• After that, no legal claim can be made.

Real-Life Example:
• A signs a contract to deliver goods to B by March 1.
• A doesn’t deliver.
• B waits but does not file a complaint or go to court.

• If B waits more than 3 years, he loses the right to sue. Contract is discharged due to lapse of time.

Difference from Breach of Contract:

Discharge by Breach Discharge by Lapse of Time

One party refuses or fails to perform Both parties do nothing, but legal time runs out

Can file a case immediately Case must be filed before time expires

MCQ Practice:
1. A contract is discharged by lapse of time when:
o (a) Parties mutually agree
o (b) It becomes illegal

o (c) The limitation period to file a case ends


o (d) Goods are not delivered on time
2. If a debt is not claimed within the legal time limit:
o (a) It becomes more valuable
o (b) The debtor must still pay it

o (c) The debtor is not legally required to pay it anymore


o (d) The contract becomes voidable
3. The usual limitation period for filing a suit under contract is:
o (a) 1 year

o (b) 3 years
o (c) 5 years
o (d) 10 years

Recap:
• Discharge by lapse of time means the contract ends because too much time has passed.
• The legal right to enforce the contract ends if a case is not filed within the limitation period (usually 3 years).
• After that, the contract is discharged automatically and no legal action is possible.
➢ 🔵 5. Discharge by Operation of Law
What does this mean?
Sometimes a contract can end automatically because of legal reasons — without needing any action from the parties
involved.
This is called "discharge by operation of law."
It happens in three main cases:
1. Merger
2. Unauthorized Alteration
3. Insolvency
Let’s understand each of these with examples:

i) Discharge by Merger

What is a Merger?

A merger happens when a person’s lower right under one contract gets absorbed into a higher right, and the lower
right ends.

Simple Example:
• A tenant (lesser right) rents a house.
• Later, he becomes the owner (higher right) of that house.
• So, the tenant rights get merged into ownership rights, and the rental contract ends.

Conditions for Merger:


To call it a merger, three conditions must be true:

Condition What it Means

Same Parties The people in both roles must be the same person

No change in contract type The type or subject of the contract stays the same

Different Rights (one superior) One right is lower (e.g., tenant), the other is higher (e.g., owner)

ii) Discharge by Unauthorized Alteration

What is Unauthorized Alteration?

If one party makes a big (material) change to the contract without telling or getting consent from the other party,
the contract becomes invalid or discharged.

Example:
• A and B sign a loan agreement with 5% interest.

• A later changes it to 8% without telling B. The contract is no longer valid. It is discharged because of
unauthorized (illegal) alteration.

Important:
• Only material (important) changes will discharge a contract. Minor spelling fixes or grammar won’t.
• Consent of both parties is a must for any change.

iii) Discharge by Insolvency

What is Insolvency?

When a person cannot pay their debts and is legally declared insolvent (bankrupt), they are released from their
contract obligations.

Example:
• A owes B Tk. 1,00,000 under a contract.

• A becomes insolvent, and the court declares that he cannot pay. The contract ends — A is not required to
fulfill the contract anymore.

Important Terms Recap:

Term Meaning

Operation of Law Contract ends because of a legal reason, not personal decision

Merger A lower right gets absorbed into a higher right — contract ends

Unauthorized Alteration Changing the contract without consent — contract ends

Insolvency Debtor cannot pay — court discharges contract obligations

MCQ Practice:
1. A contract is discharged by operation of law when:
o (a) Both parties agree

o (b) One party is declared insolvent


o (c) Time for performance is extended
o (d) The contract becomes illegal
2. If a tenant becomes the owner of the rented house, the lease ends due to:
o (a) Waiver
o (b) Alteration

o (c) Merger
o (d) Frustration
3. Changing the rate of interest in a contract without the other party’s permission is:
o (a) Legal Modification

o (b) Unauthorized alteration


o (c) Mutual consent
o (d) Novation
4. If a person cannot pay debts and is declared bankrupt, the contract:
o (a) Is enforced anyway

o (b) Is discharged
o (c) Becomes voidable
o (d) Must be renewed

Summary:
• Discharge by Operation of Law ends a contract automatically because of legal situations.
• It includes:
1. Merger – Lower rights absorbed by higher rights.
2. Unauthorized Alteration – Important change made without consent.
3. Insolvency – Court declares a person bankrupt, releasing them from duties.

➢ 🔴 6. Discharge by Breach of Contract


What does this mean?
A contract is discharged (ended) when one party breaks the promise or refuses to perform their part of the deal
without any valid/legal reason.
This is called a breach of contract.

According to Section 39 of the Contract Act:


“If a party refuses to perform their obligation under the contract without lawful excuse, the other party has the right to
treat the contract as broken.”

Two Types of Breach of Contract:


There are two main types of breach:

i) Actual Breach
When does it happen?
It happens on the day the performance is due, and the party fails or refuses to do their part.
Example:
• Harun promises to deliver a horse to Karim on 10 April.

• But on 10 April, Harun refuses to deliver the horse. This is a case of actual breach — because the contract
was not performed at the time it was supposed to.

Key Point: Actual breach is when a promise is broken at the time of performance.

ii) Anticipatory Breach (also called Constructive Breach)


When does it happen?
This happens before the actual date of performance — when one party clearly shows that they will not fulfill their
obligation.
This can be done in two ways:
1. By words — saying they won’t perform.
2. By actions — doing something that makes performance impossible.
Example:
• Harun agrees to deliver a horse to Karim on 10 April.

• But before 10 April, Harun sells the horse to someone else (Arman) or tells Karim he won’t deliver. This is
an anticipatory breach — Harun made it clear before the date that he would not perform the contract.

What can the other (aggrieved) party do in anticipatory breach?


The other party (here, Karim) has two options:

Option Explanation

1. Treat it as actual breach right


Karim can immediately sue Harun for breach of contract.
away

2. Wait until the performance Karim can wait until 10 April to see if Harun performs. If Harun still fails, Karim
date can then sue.

Important Terms Recap:

Term Meaning

Breach of contract One party fails or refuses to do what they promised.

Actual breach Party refuses or fails to perform on the due date.

Anticipatory breach Party shows before the due date that they won’t perform.

Repudiate Reject or end the contract because of the breach.

Aggrieved party The party who suffers because of the breach.

MCQ Practice:
1. A breach that occurs on the due date of performance is called:
o (a) Anticipatory breach

o (b) Actual breach


o (c) Novation
o (d) Alteration
2. If a party tells the other before the due date that they won't perform the contract, it is:
o (a) Fraud

o (b) Anticipatory breach


o (c) Mutual consent
o (d) Impossibility
3. In anticipatory breach, the aggrieved party can:
o (a) Do nothing

o (b) Treat the breach as actual and sue or wait until the due date
o (c) Must wait till the date of performance
o (d) Automatically cancel the contract without proof
4. Harun agrees to deliver a horse on 10 April. He sells the horse to someone else on 5 April. This is a case of:
o (a) Actual breach

o (b) Anticipatory breach


o (c) Merger
o (d) Remission

Summary:
• A breach ends a contract when one party refuses or fails to perform their promise.
• There are two types:
1. Actual Breach – Fails on the due date.
2. Anticipatory Breach – Refuses or acts against the contract before the due date.
• The affected (aggrieved) party can either:
o Sue immediately, or
o Wait till the performance date to see if the breach occurs.

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