Exploring The 6 Different Types of Discharge of Contracts

Exploring The 6 Different Types of Discharge of Contracts

Written By
Joy Cunanan
Updated on
July 16, 2024
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Contracts are the cornerstones of a healthy, mutually beneficial company partnership, laying the groundwork for long-term expansion, cooperation, and success. When businesses get into a contract, the termination phase could seem far off and unimportant at first, but all contracts eventually come to an end and are discharged. 

Nevertheless, the methods employed for discharging contracts can vary significantly depending on a variety of factors or circumstances. In this article, we’ll explore the meaning of a contract discharge, as well as outlining the multitude of pathways that can lead to the termination of a contract. By the end of this article, you will have a comprehensive understanding of the discharge of contracts, empowering your business to navigate the complexities of contractual relationships and safeguarding your business’s interest for the future. 

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What Does a Discharge of a Contract Mean?

When it comes to contracts, the discharge process is all about fulfilling or ending the obligations that both parties have agreed upon. Think of the discharge of a contract as reaching the finish line of the agreement, freeing everyone involved from their responsibilities and obligations of that contract. Whether you're a seasoned entrepreneur or a business professional, it's crucial to grasp the concept of contract discharge to protect your own interests.

This is because a thorough understanding of contract discharge empowers you to proactively manage contractual relationships, mitigate risks, and make informed decisions that align with your business objectives. By recognising the various methods and implications of contract discharge, you can navigate potential challenges, negotiate favourable terms, and ensure compliance, thereby enhancing your overall business resilience and success.

The 6 Different Ways to Discharge a Contract                                                                       

In order to fully comprehend the ramifications associated with the discharge of a contract, it is important to be aware of the diverse ways in which contracts can be lawfully discharged. Gaining an understanding of these different methods of discharge is crucial as each method will shape the subsequent implications arising from the termination of a contract.

Now, let's explore the key approaches when it comes to a discharge of a contract:

  1. Discharge by Performance

Generally, contracts end when both parties have successfully fulfilled their contractual obligations to the best of their abilities. A discharge by performance occurs when all the terms and conditions are met satisfactorily, which leads to the completion of the agreement. This is also known as a full performance. 

However, a discharge of contract by performance can also take place if substantial performance occurs as well. This occurs when a party has performed their contractual obligations to a significant extent, although there may be minor deficiencies or deviations. This allows for the contract to be considered fulfilled, even if there are some incomplete or imperfect aspects, as long as the essential purpose of the contract has been achieved.

Example of Discharge by Performance:

A construction company completes all the agreed-upon tasks, including finishing the project within the specified timeline, meeting quality standards, and delivering the final product as per the contract.

  1. Discharge by Agreement or Consent

Contracts may also be discharged if both parties mutually agree to release one another from the contractual obligations. There are two main scenarios that lead to this happening. First, neither party is able to fulfil their contractual obligations — which is relatively a straightforward process as both parties will generally agree to release each other from the contract as it serves both of them equally to do so.

However, things get more complicated when one party has already fulfilled their end of the contract, while the other party has not. In such cases, a form of consideration is required in order to discharge the contract through mutual agreement. 

To properly discharge a contract by agreement, it is essential to create a separate contract that clearly outlines the new consideration being provided. This ensures that the agreement to discharge the original contract is explicitly stated and legally recognised.

Example of Discharge by Agreement or Consent:

A software development company and its client agree to end the contract prematurely due to changing project requirements, understanding that the original scope is no longer feasible.

  1. Discharge by Impossibility of Performance

As mentioned, contracts are generally discharged when all parties have fulfilled their legal obligations in their contractual agreements, however, contracts can also end due to an impossibility of performance.

There are many reasons why it may become impossible for a party to perform their contractual obligations, some reasons include an unforeseen change in the law, an occurrence of a natural disaster, or anything else that renders the performance of the contract illegal or fundamentally different from what was initially intended. 

When circumstances change beyond each party’s control, there are a few legal remedies to help each party navigate the complexities that arise.

Example of Discharge by Impossibility of Performance:

A performer falls ill on the day of a scheduled concert, making it impossible for them to deliver the performance as contracted.

  1. Discharge by Lapse of Time

Contracts commonly incorporate provisions that establish specific timeframes or deadlines for the fulfilment of obligations. When these predetermined periods elapse without complete fulfilment, the contract is discharged due to the passage of time. In such instances, the contract naturally concludes solely as a result of the elapsed time, without necessitating additional actions or explicit agreement between the involved parties.

It is imperative to recognize that when contracts are discharged through the passage of time and the promisee neglects to pursue legal recourse within the stipulated time frame, the promisee may forfeit the opportunity to seek legal remedies. 

Thus, it is important for parties to be aware of and adhere to the specified timeframe outlined in the contract to ensure the successful and timely fulfilment of their obligations.

Example of Discharge by Lapse of Time:

A licensing agreement specifies that the licence will expire after five years, and if neither party takes action to renew or extend the agreement, it will be discharged by the lapse of time.

  1. Discharge by Operation of Law

Discharge by operation of law occurs in specific circumstances, such as bankruptcy, impossibility of performance, or situations where the contract becomes illegal. These events automatically release the parties from their contractual obligations as prescribed by the law. 

In such cases, the contract loses its enforceability and is considered void. It is essential for businesses to be aware of these legal triggers to navigate potential challenges and protect their interests within the framework of the law.

Example of Discharge by Operational Law:

If a company becomes bankrupt, contracts with suppliers and clients may be automatically discharged by operation of law, relieving both parties from further obligations.

  1. Discharge by Breach of Contract

A breach of contract signifies a failure to uphold the obligations and responsibilities embedded within a contract, consequently inflicting significant losses and jeopardising the hard-earned reputation of a business. This breach can lead to discharge, as the non-breaching party may choose to terminate the agreement.

Example of Discharge by Breach of a Contract:

A tenant violates the terms of the lease agreement by subletting the rental property without the landlord's consent, resulting in a breach of contract.

The Best Way To Discharge a Contract

There are several ways to achieve the discharge of a contract, but one method stands out as the most prevalent: performance

Discharge by performance is widely regarded as the most favourable and effective method for achieving the discharge of a contract for a few different reasons. It offers a sense of certainty and fulfilment as both parties conscientiously fulfil their obligations in accordance with the agreed-upon terms, resulting in a successful discharge. Furthermore, it holds strong legal enforceability, providing irrefutable evidence of obligations being met. 

By establishing clear and objective criteria within the contractual framework, discharge by performance minimises the potential for disputes, thereby nurturing and sustaining positive business relationships rooted in trust. Additionally, this method proves highly efficient and cost-effective, eliminating the need for costly legal interventions or supplementary agreements. 

By faithfully fulfilling their respective obligations in accordance with the agreed-upon terms, both parties bring the contract to a successful conclusion and accomplish the desired discharge. This approach offers a fair and transparent recourse, guaranteeing that all contractual commitments are diligently honoured and fulfilled.

Effectively Manage The Discharge of Contracts With Lexagle

Managing contracts, including their discharge, can be a complex task, particularly for those without prior experience in contract law. However, it is a crucial process for protecting your business and mitigating potential risks along the road. 

As your business grows, the need for effective contract management becomes even more critical. By utilising advanced contract management platforms like Lexagle, you can access a variety of contract templates and streamline collaboration, workflow management, analytics, and search capabilities. 

With Lexagle, you can efficiently handle the discharge of contracts and ensure the long-term success of your business. Transform your contract management processes today by exploring the comprehensive features offered by Lexagle.

Exploring The 6 Different Types of Discharge of Contracts
Joy Cunanan
Joy is the Digital Transformation Manager at Lexagle. As a marketing professional in the Tech and B2B industry for over seven years, she is always on the lookout for the next best solution in the ever-changing online world. With a passion for helping businesses thrive and optimize operations, she shares her expertise in the power of contract lifecycle management and its capacity of easing the contracting process for busy organizations worldwide.

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