Discharge Of Contract: A Complete Guide

When entering a legal agreement, you likely anticipate a successful outcome for all parties involved. 

However, things don't always go as planned. This is why detailed contracts are essential—they account for various eventualities.

Despite this, contracts can end or be discharged in unexpected ways. Understanding the discharge of contracts can help you prepare comprehensive agreements that protect the interests of involved parties. This knowledge helps minimize the risk of disputes, lawsuits, and financial losses.

In this blog, we’ll explore the various ways a contract can be discharged. We’ll also delve into the legal implications of contract discharge.

What is Discharge of Contract?

Discharge of contract refers to the end of a legal relationship between parties. 

When a contract is discharged, neither party has any further obligations, and no additional performance is required.

Ways of Discharging a Contract

There are several ways in which a contract can be discharged. Let’s look at each one of them in detail.

Performance 

Discharge of contract by performance is the ideal outcome, occurring when both parties fulfill their contractual obligations as specified. 

Full performance

Suppose you hire a contractor to build a house. You sign a contract that defines the design, materials, timeline, and payment terms. The contract is discharged by full performance when the contractor completes the house as agreed, and you make the final payment. This signifies that both parties have met their obligations fully.

Substantial performance

Now, let’s say that the contractor is unable to complete the fence around the house due to unexpected procurement issues. Eventually, both parties agree to end the contract without the fence.

This is an example of contract discharge by substantial performance, where most obligations are fulfilled, and the contract ends amicably.

Mutual agreement

Discharge by mutual agreement involves altering or ending the contract through the consent of all parties involved.

Modification

This occurs when the parties agree to change the terms of an existing contract. The modification replaces original obligations with new ones.

For instance, if you and the contractor agree to redesign the house, extend the deadline, and adjust the cost, the original contract is discharged and a new, modified contract is created.

Remission

Remission happens when a party agrees to accept less than what was originally agreed upon.

For example, if the contractor is unable to complete certain tasks, you might agree to a reduced final payment, thereby discharging the contract partially.

Rescission

Recession occurs when both parties agree to cancel the contract due to issues like misrepresentation or illegality.

For instance, if you discover that the contractor misrepresented their skills, you can rescind the contract as it becomes untenable.

Novation

Novation involves replacing the contract or one of the parties with a new one. 

For example, if a SaaS provider is acquired by another company, the new owner might replace the original contract with a new one.

Waiver

Waiver is when a party voluntarily relinquishes a right or obligation, partially or fully discharging the contract. 

So, if the SaaS service provider fails to meet the service level agreement (SLA) but you agree to forgo penalties, the contract continues with the specific obligations waived.

Frustration

Discharge by frustration occurs when unforeseen events make performance of the contract impossible, impractical, or illegal. The unforeseen event can be a natural disaster, change in laws and regulations, or government intervention.

For instance, if a concert venue burns down, its contract with the rock band that booked it is automatically discharged by frustration.

Breach

Discharge by breach happens when one party fails to meet their obligations, resulting in a contract termination.

Material breach

A material breach is a significant violation that affects the contract’s core purpose. The non-breaching party is deprived of the benefits they were entitled to and has the right to terminate it. They can also sue the breaching party to obtain compensation for damages.

If you hire an IT service provider to install software, but they install one that is different from what you ordered, it significantly impacts business operations. This is considered a material breach.

Minor breach

A minor or partial breach occurs when a party fails to perform a small portion of their obligation without defeating the overall purpose of the contract. This breach does not entitle the non-breaching party to cancel the contract. However, they are entitled to suitable compensation.

In this case, if the service provider installs an outdated version that does not affect business operations, the contract remains in force, but the service provider must correct the error.

Operation of law

Discharge by operation of law takes place when a contract is terminated due to legal reasons rather than the actions of the involved parties.

Death or incapacity

If a party dies or becomes incapacitated, the contract is discharged by operation of law unless their legal representatives can fulfill the obligations.

For example, if you hire a freelancer to build an app, and the freelancer dies, the contract is discharged.

However, a loan agreement remains valid as the legal heirs can repay the debt.

Bankruptcy or insolvency

A contract can be discharged if one of the parties declares bankruptcy or becomes insolvent.

Illegality

A contract may be discharged if its performance becomes illegal due to changes in law.

For instance, if a country under international sanctions prohibits trade, an export contract with that country becomes void.

Expiration of time limit

Contracts with specific time limits are discharged if the limit passes without full performance of the obligations, especially if the contract specifies a final date.

If you buy a software license for two years, the contract will expire unless you renew it or buy a new one.

Legal Implications of Contract Discharge

The legal implications of contract discharge vary according to the type of discharge.

When a contract is fully performed, and all parties meet their obligations, the contract ends without any legal consequences for those involved.

However, if a contract is discharged due to a material breach, the non-breaching party can pursue legal action, depending on the contract’s terms. They may sue for damages or demand specific performance from the breaching party.

Contracts may also end by mutual agreement, where both parties agree to terminate before fulfilling all obligations.

In this case, unless one party violates the termination agreement, there are generally no legal consequences.

Contracts discharged due to force majeure events, which make performance impossible, typically do not carry legal penalties.

Similarly, contracts discharged by operation of law (e.g., due to death or incapacity) generally carry no legal implications unless legal representatives are obligated to take over.

When is a Contract Considered Discharged?

A contract is considered to be discharged when the involved parties have either fulfilled their respective obligations or when the contract is no longer enforceable. This can happen in several ways including performance, mutual agreement, breach, rescission, or termination. 

Discharge vs. Breach vs. Rescission vs. Termination

Here’s a comparison of key contract-related terms:

How Can You Discharge Contracts with Document Automation?

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