Discharge of a Contract by Operation of Law
Discharge of Contract by Operation of Law
1. Meaning of Discharge of Contract
Discharge of a contract means the termination or extinction of contractual obligations, so the parties are no longer bound by the terms of the contract.
A contract can be discharged by performance, agreement, breach, impossibility, or operation of law.
2. What is Discharge by Operation of Law?
When a contract is discharged not by the act or agreement of the parties, but by operation of law, it means that certain legal rules or events automatically terminate the contract.
This discharge happens due to circumstances or facts outside the control of the parties.
3. Modes of Discharge by Operation of Law
(i) Death or Insanity of a Party
If the contract involves personal skill, qualifications, or trust, the death or insanity of a party discharges the contract.
Example: Contract to paint a portrait by a particular artist.
If the contract is non-personal, death may not discharge the contract (like sale of goods).
(ii) Merger of Contract
When a contract of an inferior nature merges into a contract of a superior nature, the inferior contract is discharged.
Example: A contract of agency may merge into a contract of sale.
(iii) Unauthorized Alteration of Contract
If one party unilaterally alters the terms of the contract without consent, the contract is discharged by operation of law.
The innocent party is discharged from performance.
(iv) Time Limitations (Law of Limitation)
If the time prescribed by law to enforce a contract expires, the contract is discharged because the right to sue is lost.
This is governed by the Limitation Act, 1963.
(v) Supervening Illegality
If after the contract is made, the performance becomes illegal due to change in law or government order, the contract is discharged.
(vi) Impossibility of Performance
If due to operation of law or an event beyond control, the contract becomes impossible to perform, it is discharged (also covered under doctrine of frustration).
4. Case Laws on Discharge by Operation of Law
a. Taylor v. Caldwell (1863)
Facts: Contract to use a music hall; hall was destroyed by fire.
Held: Contract discharged due to impossibility caused by operation of law (destruction of subject matter).
Significance: Established the doctrine of frustration.
b. Hadley v. Baxendale (1854)
While primarily on damages, it highlights impossibility and operation of law in breach and discharge.
c. Parsi Panchayat v. Parsis (1906)
Held: If a party becomes insane, contract requiring personal performance is discharged.
d. Amrit Lal v. King Emperor (1936)
Held: If contract performance becomes illegal after formation (supervening illegality), contract is discharged.
e. Derry v. Peek (1889)
Illustrates that contract is discharged if terms are altered fraudulently or without consent.
5. Summary Table
| Mode of Discharge | Explanation | Example/Case |
|---|---|---|
| Death or Insanity | Personal contracts discharged | Parsi Panchayat v. Parsis |
| Merger | Inferior contract merges into superior | Agency contract merging into sale |
| Unauthorized Alteration | Unilateral change discharges contract | Derry v. Peek |
| Law of Limitation | Expiry of limitation period | Governed by Limitation Act |
| Supervening Illegality | Change in law makes contract illegal | Amrit Lal v. King Emperor |
| Impossibility (Frustration) | Performance impossible due to law/event | Taylor v. Caldwell |
6. Why is Discharge by Operation of Law Important?
It protects parties when circumstances beyond their control make contract performance unfair or impossible.
It prevents injustice by freeing parties from obligations they cannot fulfill.
Recognizes public policy and legal changes impacting contracts.
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