Termination or Discharge of Contracts
Termination or Discharge of Contracts
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
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.
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.
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.
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.
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)
(iii) Insolvency
• If one party is declared insolvent (bankrupt), they are legally free from contract obligations.
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.
When one party fails or refuses to perform their part of the contract.
There are two types of breach:
• When the breach happens at the time of performance. Example: A doesn’t deliver goods on the agreed date.
• 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
By Performance Both parties fulfill the contract House sold and paid for
By Lapse of Time Legal time limit passes without action Debt unpaid for 3 years
➢ 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.
Term Meaning
Prescribed time and manner The way and time agreed in the contract
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.
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.
Summary Table:
Alteration Terms of contract are changed Consent of both parties Changing delivery date or price
Practice MCQs:
1. A contract is discharged by mutual agreement through:
o (a) Breach of contract
o (b) Remission
o (c) Novation
o (d) Merger
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:
When a contract was possible when made, but later becomes impossible or illegal due to unforeseen events.
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.
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
MCQ Practice:
1. A contract is said to be frustrated when:
o (a) One party disagrees
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
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.
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
Limitation Period The time limit within which a legal case must be filed (usually 3 years)
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.
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 (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.
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)
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.
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.
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
MCQ Practice:
1. A contract is discharged by operation of law when:
o (a) Both parties agree
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) 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.
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.
• 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.
Option Explanation
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.
Term Meaning
Anticipatory breach Party shows before the due date that they won’t perform.
MCQ Practice:
1. A breach that occurs on the due date of performance is called:
o (a) Anticipatory breach
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
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.