Discharge by Mutual Agreement

Learn Sections 62 and 63 of the Indian Contract Act, 1872, covering novation, rescission, alteration, remission and waiver.

Introduction

A contract creates legally enforceable obligations between the parties. However, the parties are not always required to continue with the original arrangement until every promise has been performed. They may agree to replace the contract, cancel it, or modify its terms. In certain circumstances, a promisee may also release the promisor from an obligation or accept a different form of satisfaction.

This is known as discharge of a contract by mutual agreement or consent. The principle is that parties who have entered into contractual obligations may, subject to the applicable law and the terms of their contract, agree to bring those obligations to an end or change them.

The principal statutory provision is Section 62 of the Indian Contract Act, 1872, which governs novation, rescission and alteration of contracts. Section 63 deals with the promisee’s power to dispense with or remit performance, extend time, or accept alternative satisfaction. Although Sections 62 and 63 are commonly studied together under discharge by agreement, Section 63 does not always require a mutual agreement: it gives the promisee certain statutory powers that can be exercised without fresh consideration.

Understanding these provisions is important for Contract Law notes, law school examinations and questions involving the discharge of contractual obligations.

Meaning of Discharge by Mutual Agreement

Discharge by mutual agreement occurs when parties agree to terminate their existing contractual obligations or replace or modify the arrangement in a legally recognised manner.

A contract ordinarily requires performance according to its terms. However, where the parties validly agree to substitute a new contract for the old one, rescind the existing contract or alter its terms, Section 62 provides that the original contract need not be performed in accordance with its former terms.

Example: A agrees to supply 500 chairs to B for ₹2,50,000. Before delivery, both parties agree to cancel the contract. If their agreement validly rescinds the original contract, A is no longer required to deliver the chairs under that contract, subject to any surviving obligations or consequences arising from the arrangement.

Discharge by agreement may take different forms. The principal concepts are novation, rescission and alteration under Section 62, together with remission and related forms of release under Section 63.

Legal Provisions Governing Discharge by Agreement

Section 62: Effect of Novation, Rescission and Alteration of Contract

Section 62 of the Indian Contract Act, 1872, provides that when the parties agree to substitute a new contract for the existing contract, rescind it or alter it, the original contract need not be performed.

The provision recognises three distinct methods.

Method	Meaning	Legal effect
Novation	Substitution of a new contract for the existing contract	The original contract is discharged to the extent it is replaced by the new contract.
Rescission	Cancellation of the existing contract by agreement	The parties are released from the obligations that have been validly rescinded, subject to applicable consequences.
Alteration	Mutual modification of contractual terms	The original terms are changed to the extent agreed upon.

The essential requirement under Section 62 is a valid agreement between the relevant parties. A party cannot ordinarily impose a novation, rescission or alteration on the other party unilaterally under this provision.

Section 63: Promisee May Dispense with or Remit Performance

Section 63 provides that a promisee may dispense with or remit performance of a promise, wholly or partly, extend the time for performance, or accept any satisfaction that the promisee thinks fit instead of the original performance.

This provision is important because Indian contract law permits certain forms of remission without requiring fresh consideration. Unlike a bilateral substitution or cancellation under Section 62, the statutory power under Section 63 may be exercised by the promisee without a new agreement supported by consideration.

Example: A owes B ₹50,000. B accepts ₹30,000 from A in full satisfaction of the entire debt. If B accepts the amount as full satisfaction, Section 63 may discharge the entire claim rather than leave A liable for the remaining ₹20,000.

It is necessary to distinguish a completed remission or an effective acceptance of alternative satisfaction from a mere promise to remit a debt in the future. The legal consequences depend on the nature and terms of the arrangement.

Novation of Contract

Meaning of Novation

Novation means replacing an existing contract with a new contract. The substitution may involve new terms between the same parties or, where appropriate, the introduction of a new party.

Once a valid novation takes effect, the original contract is no longer required to be performed to the extent that it has been replaced.

Novation is governed by Section 62 of the Indian Contract Act, 1872.

Essentials of Novation

Novation requires a valid agreement to substitute the new contract for the existing one. The intention to extinguish or replace the original contractual obligations must be established from the agreement and the surrounding circumstances.

A mere change in an incidental term or the execution of an additional document does not automatically establish novation. The original and subsequent arrangements must be examined to determine whether the parties intended the new arrangement to replace the earlier contract.

Where the proposed novation introduces a new debtor or another party whose consent is necessary, the required parties must agree to the substitution. A creditor cannot ordinarily replace the original debtor with a new debtor merely by making a unilateral declaration.

Example of Novation

A owes B ₹1,00,000 under a contract. A, B and C agree that C will become B’s debtor instead of A, and B accepts C in place of A.

If the arrangement validly substitutes C’s obligation for A’s original obligation, the old debt is discharged and a new contractual obligation arises between C and B.

Section 62 expressly illustrates this principle through an arrangement in which a creditor agrees to accept a third person as the debtor instead of the original debtor.

Case Law: Lata Construction v. Dr. Rameshchandra Ramniklal Shah

In Lata Construction v. Dr. Rameshchandra Ramniklal Shah, (2000) 1 SCC 586, the Supreme Court of India considered whether a subsequent agreement had replaced an earlier agreement under Section 62 of the Indian Contract Act, 1872. <Cite refs={[“turn791358search2″,”turn791358search10”]} />

The dispute concerned an earlier agreement relating to a flat and a subsequent arrangement under which payment was to be made. The Court found that the rights under the original agreement had not been extinguished merely because a later agreement had been executed. The original rights were to come to an end only upon fulfilment of the conditions specified in the subsequent arrangement.

The Supreme Court explained that one essential requirement of novation is the complete substitution of the new contract for the old one. The parties must agree to replace, rescind or alter the earlier arrangement in a manner that extinguishes the relevant original obligations.

Legal principle: A subsequent agreement does not automatically amount to novation. The court must determine whether the parties intended to substitute the new contract for the original contract. If the original rights remain alive under the terms of the subsequent arrangement, novation may not have occurred.

This case is particularly important when analysing whether a settlement agreement, revised payment arrangement or subsequent contract has discharged the original contractual obligations.

Rescission of Contract

Meaning of Rescission

Rescission means cancelling a contract. Under Section 62, parties may mutually agree to rescind an existing contract so that the original contractual obligations need not be performed.

Rescission by mutual agreement must be distinguished from rescission of a voidable contract under Sections 64 and 66, which concern separate statutory rules.

Example of Rescission

A agrees to sell a motorcycle to B for ₹80,000. Before delivery and payment, both parties mutually agree to cancel the sale contract.

If the agreement validly rescinds the contract, A is no longer required to deliver the motorcycle and B is no longer required to pay the price under the rescinded arrangement. If either party has already received a benefit or payment, the consequences will depend on the rescission agreement and the applicable law.

Legal Effect of Rescission

The principal effect is that the parties are released from the obligations that have been validly rescinded. However, rescission does not necessarily mean that every legal consequence of the original transaction disappears.

For example, the agreement may preserve obligations relating to repayment, confidentiality, dispute resolution or other matters. Statutory rules may also require restoration of benefits in particular circumstances.

A court examining rescission will therefore consider the terms of the agreement and the legal basis on which the contract has been cancelled.

Alteration of Contract

Meaning of Alteration

Alteration means changing one or more terms of an existing contract by agreement between the parties. Under Section 62, the original contract need not be performed according to the terms that have been validly altered.

Unlike novation, alteration does not necessarily replace the entire contract. The existing contract may continue with the agreed modifications.

Example of Alteration

A agrees to deliver 200 units of a product to B on 1 November for ₹1,00,000. Before delivery, both parties agree to change the delivery date to 15 November while retaining the other terms.

This is an alteration of the contract. The delivery obligation is now governed by the revised date, while the remaining terms continue to apply unless they are also changed.

Requirements for Alteration

The alteration must be mutually agreed upon by the parties whose contractual rights or obligations are affected. A party cannot ordinarily change the contract merely by announcing new terms.

The alteration must also be distinguished from a new contract that completely substitutes the old one. The classification depends on the substance of the arrangement and the intention of the parties.

Example: If the parties merely extend the delivery date, they may have altered the existing contract. If they agree to replace the entire arrangement with a fundamentally different contract and extinguish the earlier obligations, the transaction may amount to novation.

Remission of Performance

Meaning of Remission

Remission is governed by Section 63 of the Indian Contract Act, 1872. It allows the promisee to accept less than the full performance originally promised, dispense with performance wholly or partly, extend the time for performance, or accept alternative satisfaction.

The provision is significant because a promisee may release a promisor from an obligation without requiring fresh consideration for the remission itself.

Example of Remission

A owes B ₹60,000. B agrees to accept ₹40,000 in full satisfaction of the debt, and A pays that amount on the agreed terms.

Where B validly accepts ₹40,000 as full satisfaction, Section 63 may discharge the entire debt. B cannot ordinarily demand the remaining ₹20,000 after accepting the reduced payment as full satisfaction.

However, if B accepts ₹40,000 merely as a part payment and does not remit the balance, the remaining debt is not automatically discharged. The intention and terms of the acceptance are important.

Case Law: Kapur Chand Godha v. Mir Nawab Himayatalikhan Azamjah

In Kapur Chand Godha v. Mir Nawab Himayatalikhan Azamjah, 1963 AIR 250; 1963 SCR (2) 168, the Supreme Court considered Sections 41 and 63 of the Indian Contract Act, 1872. <Cite refs={[“turn791358search0″,”turn791358search1”]} />

The dispute concerned a claim arising from goods supplied to the Prince of Berar and the acceptance of payment in full satisfaction of the claim. The Court applied Section 63 and its illustration concerning the acceptance of a lesser amount in satisfaction of an entire debt.

The Court held that where the claimants had accepted payment in full satisfaction of their claim, they were not entitled to sue for the balance. It also referred to Section 41, under which a promisee who accepts performance of a promise from a third person cannot afterwards enforce that same promise against the original promisor.

Legal principle: A promisee may accept a form of satisfaction that discharges the entire claim under Section 63. The legal effect depends on whether the payment or other satisfaction was accepted in full settlement rather than merely as partial performance.

Extension of Time for Performance

Section 63 also permits the promisee to extend the time for performance of a promise.

An extension of time changes when the obligation must be fulfilled. It does not necessarily cancel the underlying contractual obligation.

Example: A agrees to repay B ₹25,000 on 1 December. B agrees that A may repay the amount by 31 December instead. Section 63 recognises the promisee’s power to extend the time for performance.

The distinction between an extension and a waiver is important. An extension changes the time allowed for performance, whereas a waiver generally involves giving up a right or requirement. The actual legal effect depends on the terms and circumstances.

Waiver of Contractual Rights

Waiver is commonly discussed as another way in which a contractual obligation or right may be relinquished. It refers to the intentional abandonment of a right that a party is entitled to enforce.

Waiver must be distinguished from novation, rescission and alteration under Section 62. It may arise in connection with the promisee’s powers under Section 63, but its legal effect depends on the right waived, the wording or conduct demonstrating the waiver, and the applicable legal principles.

Example: A contract requires delivery of goods by 10 November. B, who is entitled to insist on that date, clearly agrees to waive the requirement and accepts delivery on 15 November. Depending on the circumstances and the terms of the arrangement, B may be prevented from relying on the original delivery date as a basis for a claim.

A waiver of one contractual requirement does not automatically extinguish the entire contract. The scope of the waiver must be determined from the right relinquished and the surrounding circumstances.

Difference Between Novation, Rescission, Alteration and Remission

Basis	Novation	Rescission	Alteration	Remission
Main provision	Section 62	Section 62	Section 62	Section 63
Meaning	Substitution of a new contract	Cancellation of the existing contract	Modification of contractual terms	Dispensing with or reducing performance, extending time, or accepting alternative satisfaction
Nature	Replaces the original arrangement to the extent agreed	Ends the obligations that are validly rescinded	Changes specified terms	Relieves the promisor from performance to the extent remitted
Consent	Agreement of the relevant parties is required	Mutual agreement under Section 62	Agreement of the affected parties is required	The promisee may exercise the statutory power without fresh consideration
Example	A new debtor is accepted in place of the original debtor	Both parties cancel a sale contract	Parties change the delivery date	A creditor accepts a lesser amount in full satisfaction of a debt

Difference Between Discharge by Mutual Agreement and Discharge by Performance

Basis	Discharge by mutual agreement	Discharge by performance
Meaning	Contractual obligations are ended or modified through a legally effective agreement or statutory remission.	Contractual obligations are fulfilled as required.
Relevant provisions	Sections 62 and 63	Principally Section 37, read with relevant provisions on performance
Need for actual performance	Not always; the contract may be cancelled or replaced before performance.	Actual performance ordinarily involves fulfilment of the promise, although a valid tender may have legal consequences under Section 38.
Example	The parties mutually agree to cancel a contract before delivery.	The seller delivers the goods and the buyer pays the price.

Important Legal Principles

Mutual consent under Section 62: Novation, rescission and alteration require a valid agreement between the relevant parties. A unilateral announcement does not ordinarily substitute, cancel or alter the contract under Section 62.

Complete substitution for novation: A new agreement must replace the original contractual arrangement to the extent required for novation. The existence of a later document alone is not conclusive.

Original rights may survive: If the subsequent agreement preserves the original rights until a particular condition is fulfilled, the original contract may remain enforceable until that condition is satisfied.

Remission under Section 63: A promisee may dispense with or remit performance, extend time or accept alternative satisfaction without fresh consideration for that statutory act.

Full satisfaction matters: Acceptance of a reduced payment as full settlement may discharge the entire debt. Acceptance of a payment merely as part payment does not, by itself, establish remission of the balance.

Scope of discharge: Discharge of one obligation or waiver of one contractual right does not automatically extinguish every other obligation under the contract.

Key Points for Exams

Discharge by mutual agreement is an important method of bringing contractual obligations to an end under the Indian Contract Act, 1872.

Section 62 governs novation, rescission and alteration. Novation substitutes a new contract, rescission cancels the existing contract, and alteration changes agreed contractual terms.

Section 63 allows the promisee to dispense with or remit performance, extend time or accept alternative satisfaction. It does not always require mutual agreement or fresh consideration.

In Lata Construction v. Dr. Rameshchandra Ramniklal Shah, the Supreme Court explained that novation requires complete substitution of the new contract for the old one.

In Kapur Chand Godha v. Mir Nawab Himayatalikhan Azamjah, the Supreme Court applied Section 63 to acceptance of payment in full satisfaction of a claim.

The legal effect of a subsequent agreement depends on its terms and whether the original contractual rights have actually been extinguished.

Conclusion

Discharge by mutual agreement recognises that contractual parties may alter their legal relationship through a valid agreement or through the statutory powers available to a promisee. Section 62 deals with novation, rescission and alteration, while Section 63 governs remission, extension of time and acceptance of alternative satisfaction.

For law students, the most important distinction is between replacing or cancelling a contract under Section 62 and releasing or modifying the performance owed to a promisee under Section 63. The decisions in Lata Construction and Kapur Chand Godha demonstrate why the precise terms of an agreement and the nature of the satisfaction accepted are central to determining whether contractual obligations have been discharged.