Mode of Termination and Discharge of Contract

Simply the word termination is an end of something. Termination or discharge of a contract means discontinuation of the contractual relationship between the parties.

Termination of contract is the ending of a contract. A contract can be terminated when the contracting parties become free from their liability or legal obligations arising from a contract. This is known as discharge of a contract.

The formation of the contract is the prime stage and the terminated or discharged of contract is ending stage where the rights and obligations created by contract come to an end. Termination or discharge of a contract may take place either due to performance or agreement or operation of law or impossibility of contract.

When a contract is duly performed by both parties, the contract comes to a happy ending and nothing more remains. But if one party only performs his promise, he alone is discharged and he gets a right of action against the other party who is breaching the contract.

Contract Terminated in any one of the following Circumstances:

  1. By performance of contract
  2. By mutual consent or agreement
  3. By subsequent or supervening impossibility or illegality
  4. By lapse of time
  5. By operation of law
  6. by the breach

1. Termination by performance:

Performance of a promise by all the contracting parties to a contract is one of the must usual, easy and natural ways of termination or discharge of contract. A performance may be actual or attempted.

a. Actual performance:

When the parties perform their promise in accordance in the terms and conditions of the contract, there will be actual performance of contract.

b. Attempted performance or the tender of performance:

When a performance is offered by the Promisor but is not received by the Promisee there is an attempted performance. It is only the 'tender' not an actual performance. Thus tender is not actual performance but is only an "offer to perform" the obligation under the contract. A valid tender of performance is equivalent to performance.

2. Discharged by mutual agreement or consent:

In Rastriya Bima Sansthan vs. Shreeram Sharma, court held that contract could be amended through the consent of both parties.

The contracting parties may come to an understanding to end the contract. This kind of termination may occur in any of the following ways:

a. Novation:

Where a new contract is agreed by all the parties to replace an existing contract, that is a novation.

In Madan Bahadur Thapa vs. Khindra Bahadur Thapa, court held that, where there are two transaction between the same parties and nothing is mentioned about the previous transaction between the same parties, it will be presumed that the parties have settled the previous transaction and it will have no effect.

b. Alteration:

An agreement reached between the parties that change some terms and conditions to obtain the original objective may also terminate the contract. The alteration is a change in terms of a legal document. In this situation a contract is needed.

c. Remission:

An agreement, between the parties to accept a less sum of money or a less significant fulfillment of the liability, also terminates the contract. It is a unilateral act of a contracting party to discharge the other at his will with happiness and pleasure the other.

d. Rescission:

'Rescission' means a cancellation.' The parties to a contract can rescind before the performance, on the basis of mutual consent and consideration. It is dissolution of contract. In this situation the contract is terminate.

e. Waiver:

A waiver means a 'voluntary giving up' of right or claim, which a person is entitled. If a waiver provision is made in the contract, any of the parties can terminate it in this way. Consideration is not necessary in this kind of termination.

f. Merger:

A merger that takes place, when an inferior right acquired by a contract is merged into a superior right acquired by the same party under the same or other contract, termination of a contract. Example, 'X' holds a house under a lease. Subsequently if he buys the same, he becomes the owner of the house. His rights as a lessee merger into his rights as an owners. This is a case of merger.

3. Discharge by subsequent or supervening impossibility of illegality:

In Manju Kumari Gyawali vs. Tilak Raj Thapa, court held that; contractual obligation need not be fulfilled when there is fundamental change in the situation.

Possibility to perform is one of the significant elements of a valid contract. It was possible to perform at the time of formulation but later on it becomes impossible to perform the work under the contract, this is called subsequent or supervening impossibility. The contract becomes void from the time of its impossibility or when the work becomes impossible to perform.

This principle is known as 'Doctrine of supervening impossibility' or Doctrine of frustration. This doctrine is based on the Maxim "impossibilium nulla obligatoest" which denotes "what is impossible does not create legal obligation." It means the law does not compel to do impossible work.

The conditions of supervening or subsequent impossibility are as below:

  • Destruction of the subject matter: When the subject matter of a contract, subsequent to its formation, is destroyed, without the fault of the promisor or promise in this situation the contract is discharge.
  • Death or permanent incapacity of parties.
  • Failure of ultimate purpose: Where the ultimate purpose for which the contract was entered into fails, the contract is discharged.
  • Change of law: Example, 'A' sold to 'B' 100 bags of wheat at Rs. 1000/- per gage. But before delivery the government rendered the sell and purchase of wheat by private traders illegal under the Nepalese law. In this situation the contract is terminated due to the change of law.
  • Declaration of war and natural calamities.

Non applicability of the Doctrine of Supervening impossibility:

First, the contract must be performed by its parties for its happy ending. In the course of performance, it subsequently becomes impossible to perform, the parties become free from the contractual liability on the ground of supervening impossibility. This is the general rule but it is not an absolute and it is followed by exceptions. Some of these exceptions are also recognized by the Nepal Contract Act, 2056.

In the following cases a contract is not discharged on the ground of supervening or subsequent impossibility.

a. Difficult of the performance of contract:

Example, 'A' agreed with 'B' to supply goods from Pokhara to bhairahawa. Short old road is closed due to landslide. Performance of contact will not be excused because there is another route via Mugling.

b. Commercial hardship or impossibility:

A contract is not discharged merely because expectation of higher profit is not realized, or the necessary raw material is available at the higher price because of the outbreak of war or there is a sudden devaluation of money.

c. Impossibility due to conduct of the third party:

The doctrine of supervening impossibility does not cover cases where the contract could not be perform because of the  impossibility created by the failure of a third person on whose work the promisor relied.

d. Strikes, lockouts and civil disturbance:

A strikes by the workmen or a lock-out by the employer also does not excuse performance because the former is manageable (as labor is available otherwise) and latter is self-induced. Where the impossibility is not absolute or where it is due to the default of the promisor himself. As such this event also does not discharge a contract.

e. Additional tax, revenue:

In a contract of any additional taxes or fees have to be paid afterword, then the contract will not be terminate because of additional tax, revenue.

f. Partial impossibility (Failure of are the objects):

When a contract is entered into for several object, the failure of one of them does not discharge the contract. 

g. Self-induced impossibility:

A strikes by the workmen or a lock-out by the employer also does not excuse performance because the former is manageable (as labor is available otherwise) and latter is self-induced. Where the impossibility is not absolute or where it is due to the default of the promisor himself. As such this event also does not discharge a contract.

4. By Lapse of Time:

Every contract must be performed with in a fixed or reasonable time. If any one does not perform the contract within the prescribed time limitation, he loses his remedy under the contract. In case of contract, the period of limitation is two years, if a party does not file a suit to enforce his right within the prescribed period the courts will not enforce the contract.

5. By Operation of Law:

Sometimes a law itself becomes influenced by some incidents and the law is activated. It can be cause of the termination of the contract. In some cases the contract terminated by operation of law and the rights and liabilities arising out of the contract. It means the law regards the contract as discharged.

The following cases are those in which a law becomes active to discharge the contractual liability:

  • Death of the Promisor
  • Insolvency
  • merger.

6. Termination of contract by the breach:

In contract each of the parties must perform his promise, when one party fails to perform it. The contract is deemed to have been violated and it comes to end. In the case of breach of contract, the contract goes termination. In case the breach of contract, non-breaching party or innocent party can received the contract from his part and claim the compensation against the breaching party. In this situation, the whole contract is terminated.