When drafting, negotiating, or signing a contract, it may be unlikely that you’re thinking about how to end it properly.
But a thorough ending means termination of all the contractual obligations in an acceptable way.
A poorly discharged contract can lead to its breach, legal actions, financial and potential losses, as well as reputational harm.
Within this article, we’ll define the basics of contract discharging, review the cases when the contract can or cannot be discharged, provide you with some illustrative examples, and show how to discharge and manage your contracts efficiently and with the least effort.
- Discharge is a cessation of any relationship under the contract, most often as a result of successfully fulfilled contractual obligations but also by mutual agreement, lapse of time, frustration, or operation of law.
- At the same time, breach, rescission, or termination occur when the obligations aren’t fulfilled, meaning not only the cessation of existing contractual relationship but also occurrence of certain new obligations based on context.
- There are six specific instances when discharge can be applied, as well as several other cases when it cannot.
- Efficient discharge of contracts in today’s reality requires using comprehensive contract management software.
What is meant by discharge of contract?
Although the topic may look simple at first glance, there are numerous aspects that must be taken into account.
Let’s first sort this intricate stuff out.
In a nutshell, the discharge of the contract is an important part of contract lifecycle management, meaning a termination of the contractual relationship that exists between the involved parties.
This means all of them are now free from any contractual obligations, regardless of whether they were fulfilled.
6 ways to discharge a contract (+ examples)
The discharge of a contract can be a normal or accidental ending.
Basically, managing contract discharging properly means an appropriate identification of the specific situation and further following the appropriate set of activities.
Below are the ways contracts can be discharged.
1. By performance
The most popular and obvious way of discharging the contract is when both parties have fulfilled their contractual obligations.
As a result, all the rights and obligations tied to this contract then come to an end.
The contractual performance is called full when we speak about something transparent and predictable.
For example, the performing party is obliged to deliver 10 tons of sugar. Once all 10 tons have been delivered, both parties can discharge the contract by full performance.
Sometimes the contract can be discharged by so-called substantial performance even if it wasn’t full.
For instance, the performing party is obliged to build 15 custom vehicles and deliver them to the buying party within 12 months.
During the contract execution, they faced heavy shortages of required components, which resulted in the ability to build only 14 vehicles within this period.
The buying party can refuse to accept this new performance, but the performing party can argue that it is substantial enough.
A court will likely consider this contract discharged by substantial performance, alongside charging the performing party a certain damage fee in favor of a buying party.
2. By breach
In this case, only one party has fulfilled their contractual obligations, the second party becomes guilty, and the contract must be discharged by breach.
This means the existing contractual obligations will cease but the guilty party must then compensate all the damages resulting from the unexpected ending of the contract.
For example, a homeowner contracts a carpenter for building an oaken gazebo.
But the carpenter ends up using a lower-quality pine wood, which is a clear breach of the agreements.
The situation when an executing party states that they won’t perform their contractual obligations before these obligations are due is called an anticipatory breach.
The second party, in this case, can treat the contract as discharged to free themselves from their part of obligations, filing an action immediately or waiting until the obligations aren’t fulfilled within the required terms.
For instance, a band contracts with a concert venue to perform on a specific date.
Two weeks before the concert, the band notifies the venue that they won’t be able to perform due to unexpected circumstances.
This constitutes an anticipatory breach of contract, giving the venue the ability to consider the contract discharged and seek to mitigate damages.
3. By mutual agreement
The parties can also come to a mutual agreement as a reason for discharging the contract in this manner.
This way of discharging has several types: alteration, merger, novation, remission, rescission, and waiver.
Alteration means a situation when the parties decide to change any terms of a contract.
This results in discharging of the existing contract.
Here’s an example: A tenant and a landlord have a year-long rental contract with the monthly rent set at $1,000.
Six months into the contract, the landlord unilaterally changes the terms of the contract and increases the rent to $1,500 without the tenant’s consent.
This means significant conditions change, allowing the tenant to potentially be released from their obligations under the contract.
Merger occurs when a second contract arrives covering all the clauses of the original one.
As a result, the first contract is said to be merged into the second one.
For example, one company acts as a recurring supplier for a second company.
When the second company decides to acquire the first one, they enter into a new contractual agreement that covers a broader set of obligations, responsibilities, and rights, including all the existing ones.
Novation means the existing contract or any of the parties is replaced with the new one.
In both cases, the original contract must be discharged and replaced with the new document with actual clauses.
As an example, one company is contracted by a second one to provide the latter with monthly maintenance services.
Once the second company is acquired by a third company, the new business owner wants to take over all existing contracts.
So, the parties discharge the existing document and sign a fresh one with the now-involved new owner.
Remission is a situation when a promisee voluntarily agrees on reduced or even lack of fulfillment of obligations the second party had previously committed to fulfilling.
For example, one party loans money to the second one.
Under a contract, the second party must repay the amount by a certain date. But the first party has a right to discharge the contract, relieving themselves from the right to demand repayment.
Rescission is a cancellation of a contract by mutual agreement or due to misrepresentation, mistake, undue influence, duress, fraud, or other illegality detected.
The parties then treat this contract as if it never existed, and try to restore to their original positions prior to the contract.
For instance, a buyer and a seller enter into a contract for the sale of a car.
After the contract is signed but before the car changes hands, the buyer discovers that the seller has misrepresented the condition of the car. In this situation, the buyer could potentially seek a rescission of the contract.
Waiver means the situation of voluntary cancellation of any of the rights the promisee has.
Apart from remission, this concept is much broader and covers not only financial obligations but any clauses of the contract.
Example: A book publisher has a contract with an author who is supposed to submit a manuscript by a specific date.
If the author is unable to meet the deadline, the publisher can enforce the terms, seek damages, or cancel the contract.
Or the publisher can prefer to maintain a good relationship with the author, waiving the deadline.
It’s worth adding that you should determine waiver in terms of contract discharging, and liability waiver.
The latter means a specific contract type helping the performing party avoid possible consequences in case of damages tied to the contract execution.
4. By lapse of time
The actual contract performance is limited to specific time frames. In case the promising party failed to fulfill the obligations, and the promisee, in their turn, failed to take legal action, the contract then discharges due to the lapse of time.
For example, a construction company failed to finish a building on time.
If the client neglects to sue them within the required period, then they lose the right to seek a legal remedy.
5. By frustration
Once unforeseen circumstances make the fulfillment of contractual obligations impossible or highly challenging, the agreement might be discharged by frustration.
Let’s say that the company has contractual obligations to deliver some goods to the second company at a certain date.
The reasons to discharge the contract by frustration can be a strike of their workers, any accidents like a delivery truck being wrecked, or other unforeseen events.
We cover this explicitly in a special article, one where you can find out all the details on how to deal with the frustration of contracts.
6. By operation of law
Discharge by operation of law points out the situations where a contract is discharged due to circumstances beyond the control of the parties involved, and where the law intervenes to end the contract.
This type of discharge often involves external legal principles or events that make the contract unenforceable, canceled, or void.
The death of a party can lead to the contract discharge if the obligations are quite personal.
For example, a singer’s death results in the discharge of the contract for an upcoming gig.
Insolvency or bankruptcy
Insolvency or bankruptcy of the party may be a legal reason for discharging the contract to relieve the debt.
Merger is also a reason for contract discharging when a higher-level contract supersedes the original contract.
Alteration of a contract by one party without the consent of the opposite one may also discharge it.
Sometimes changes in laws or regulations can make the contract illegal, and thus it is discharged.
For instance, a pharmaceutical company regularly bought a specific chemical substance from abroad but the government then decided to ban this compound as dangerous — this would be a clear reason to discharge the supply contract.
When the contract won’t be discharged
Let’s also take a look at some situations when the contract won’t be discharged.
- When one or both parties haven’t fulfilled their obligations under the contract, the contract is not discharged. Both parties remain obligated to fulfill their contractual duties until they have done so.
- When the parties don’t mutually agree to end the contract, it remains in force. The parties must continue to perform their obligations unless and until they agree to terminate the contract or unless some other form of discharge applies.
- When one party fails to perform their contractual obligations and there is no legal excuse for their non-performance (like an impossibility, frustration, or force majeure), the contract will not be discharged. The non-performing party may be subject to legal consequences.
- In some contracts, certain conditions must be fulfilled before the contract is fully enforceable. If these condition precedents aren’t met, the contract will not be discharged.
The fixed-term contract won’t be discharged if that term has not yet expired.
Discharge vs. breach vs. rescission vs. termination
There are several concepts that look quite similar to the discharge of a contract — and, indeed, even intersect under the umbrella definition of discharging a contract — but nonetheless have their own unique and significant differences as well.
Let’s compare discharge, breach, rescission, and termination in order to avoid potential confusion.
Discharge is a broad term meaning a release of the parties from their contractual obligations (the contract has been fully performed, frustrated, or rendered unenforceable in any other way).
It might be caused by full or substantial performance, breach, mutual agreement, lapse of time, frustration, or operation of law.
Simplifying further, it is worth saying that discharge is a specific result that can be caused by different reasons.
Breach, in the context of “discharge by breach,” means one of possible reasons leading to the discharge of the contract.
However, this is also an in-between result caused by the non-meeting of one of the parties involved in the contract, of their contractual responsibilities, either partially or entirely.
This could be a failure to carry out tasks as stipulated by the contract, not performing up to agreed standards, or the anticipatory breach, which refers to a clear indication that a party will not fulfill their obligations before they are due to be performed.
Rescission is akin to hitting a “reset” button on a contract, canceling it entirely, and reverting the parties involved back to the state they were in before the contract was formed.
In this case, rescission is a result, caused not by a breach of the contract but by factors like misrepresentation, mistakes in the contract, undue pressure or influence, illegality, or fraud.
This process negates the contract as if it never existed in the first place.
At the same time, when we speak about the contract discharge by mutual agreement, rescission means a certain discharge type.
Sounds a bit weird and confusing? Indeed, it can be sometimes! (And that’s why we’re here, making sense of it for you!)
Termination of a contract is its ending before the completion of the contractual obligations, usually due to a specific clause or agreement within the contract or by mutual agreement between the parties.
Termination is also a result that may be caused by a breach of contract, by mutual agreement, by failure to fulfill a condition precedent, by expiration of terms, or by a specific event or condition occurrence.
Discharge your contracts painlessly with PandaDoc
Now, let’s go through our checklist for managing the discharge of contracts efficiently.
It may seem like an easy ride for those out of the loop.
But the rest of us know the hazards of depleting and/or juggling of responsibilities that result in inefficient contract management.
The legal jargon can be overwhelming, the fear of non-compliance is daunting, and the potential for strained business relationships is always lurking in the shadows.
Things are even worse for those who are forced to rely on ineffective tools, if not paper contracts.
Crafting contracts in Word, sending them via an insecure email client, and manually adding records to a CRM, you’re definitely stuck in flawed processes.
It may seem like you and your team work nonstop but the actual performance barely reaches an acceptable minimum.
Let’s take a look at how to handle these important nuances by adopting an all-in-one contract management solution.
Using the tracking feature, you can monitor the fulfillment of obligations in real-time, control progress, and stay fully aware of the actual situation related to any specific contract.
It makes it unnecessary to continuously check the fulfillment manually, which saves you considerable time and effort.
Set up an environment for streamlined collaboration to correct any flaws as soon as they are detected.
Doing so is an effective way to lower conflict risks and avoid possible disputes or even rescissions.
It is worth also mentioning that in granting such rights to the second party, it’s important to log the history of changes.
This is both a way to better understand the behavior of a second party and a safeguard against any potential unauthorized alterations or attempted legal manipulations of the contract.
Finally, closing deals upon their completion is much faster and more secure by signing them electronically.
Apart from the added convenience, e-signing reduces risks of delayed performance or resources wrongly allocated to already finished projects, as well as the risk of losing instead of closing.