DISCHARGE OF AGREEMENT AND ITS EFFECT ON ARBITRATION CLAUSE

DISCHARGE OF AGREEMENT AND ITS EFFECT ON ARBITRATION CLAUSE

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DISCHARGE OF AGREEMENT AND ITS EFFECT ON ARBITRATION CLAUSE

 

 

AuthorCIT V. M. VENKATESWARA RAO (2015) 370 ITR 212 HOB’BLE APPELLATE TRIBUNAL, AP

CS Deepak P. Singh

 

 


As you are aware that  discharge of contract by performance refers to fulfilment of the contract by performance of all the obligations in terms of the original contract, discharge by “accord and satisfaction” refers to the contract being discharged by reason of performance of certain substituted obligations. The agreement by which the original obligation is discharged is the accord, and the discharge of the substituted obligation is the satisfaction. A contract can be discharged by the same process which created it, that is, by mutual agreement.
The discharge of a contract is characterised as the end of an agreement or an arrangement made by a couple of parties, which results in the failure in performing or playing out the obligations referenced at the hour of making a contract with the acknowledgment of all the parties with free consent. Subsequently, the commitments might be legal or contractual or performance, or even operational.
The term discharge of contract means ending of the contractual relationship between the parties. A contract is said to have been discharged when it ceases to operate i.e. when the rights and obligations created by the parties came to an end.
A contract can be discharged if the parties mutually agree to terminate the contract. Also there are different methods through which contracts can be discharged. In this article, we will discuss the different methods of discharge.
Discharge of Contract Method
A contract is said to be discharged using the following methods:
i)  Discharge by Performance
ii)  Discharge by Agreement or Consent
iii) Discharge by Impossibility of Performance
iv) Discharge by Lapse of Time
v)   Discharge by Operation of Law
vi) Discharge by Breach of Contract
Let us understand the discharge of contract methods in brief;
 
i) Discharge by Performance
Performing means doing all those things which are required by a contract. Discharge of performance occurs when the parties to the contract fulfil their obligations set out under the contract within the specified time and in the manner prescribed. In such a case, parties are discharged and contracts come to an end. But if only one of the party performs, he alone is discharged. Such a party gets the right of action against the other party who is guilty. Discharge of Performance may be:
a) Actual Performance
b) Attempted Performance
a)   Actual Performance
When both the parties perform their performance, then the contract is said to be discharged. Performance should be complete and precise according to the terms of the agreement. Majority of the contracts are discharged by performance in this manner.
b)   Attempted Performance
Attempted performance is only an offer to perform the obligation under the contract. When the promisor agrees to perform the contract but the promise refuses to accept the performance, then in such case, it is termed as discharge of contract by attempted performance or tender.
ii) Discharge by Agreement or Consent
a) Novation
The term novation means the substitution of the new contract by the original one. The new agreement may be with the same parties or with the new parties. For a contract to be valid and effective, the consent of all the parties including the new one if any is necessary. Moreover, the second party must be capable of enforcement of law, the consideration for which is the exchange of promise not to carry out the original contract.
b) Alteration
This refers to change in one or more terms of a contract with the consent of all the parties entered in the contract. Alteration leads to formation of new contracts but the parties to it remain the same.
c)Remission
This means the acceptance by the promisee of a lesser sum than what was mentioned in the contract, or a lesser fulfilment of the promise made. According to the section 63, every promise may:
·  May remit or give up with it
·  Extend the performance time
· Accept any other satisfaction rather than performance
d) Recession
The term recession refers to cancellation of all or some of the material terms of the contract. If the parties entered into the contract, mutually agreed to do so, then in such case the respective contractual agreement of the parties gets terminated.
e)  Waiver
The term waiver means abandonment of rights. When one party deliberately abandons his right under the contract, the other party is released of his obligations, else binding upon it.
iii)  Discharge by Impossibility of Performance
If it is impossible for any of the parties entered in the contract to perform their obligations, then the impossibility of performance of contract leads to discharge of contract. If the impossibility of performing the contract exists from the start, then it is termed as impossibility by ab-initio. However, impossibility of performing the contract may also arise later due to:
·  An unforeseen change in the law
· Destruction of subject-matter of the contract
·  Non-existence or Non-occurrence of a particular state of things.
· Outbreak of War
Example:
John enters into the contract with this friend Tom to marry his sister within 6 months. Howbere, John met with an accident and became insane. This impossibility of performance leads to discharge of contract.
iv) Discharge of Contract by a Lapse of a Time
According to The Limitation Act, 1963, there is a specific time period for the performance of a contract. If the promisor failed to perform his duties and the promisee failed to take action within this specified period, then the promisee in such a case cannot be deprived of his remedy through law. Here, the contract is said to be discharged  due to the lapse of time. For example: John takes a loan from one of his friends and agrees to pay him instalments every month for the next five years. However, he does not pay even a single instalment. His friend calls him several times but then gets busy and takes no action. After three years, he approaches the court to help him recover his money. However, the court rejects his complaint because he has crossed the time-limit of three years to recover his debts.
v) Discharge of Contract By Operation of Law
A contract can be discharged by the operation of law in the following circumstance:
·  Unauthorized Material Alteration of Written Document: A party can discharge the contract i.e. from his side if the other party changes the terms such as price or quantity of contract without taking any permission from the former.
·By Insolvency
· By Death
vi) Discharge by Breach of Contract
A contract is obliged to perform according to its terms. But when a promisor fails to perform a contract according to the terms of the contract, then he is said to have committed a breach of contract. The breach of contract is of two types
a)    Actual Breach
b)    Anticipated Breach
a)   Actual Breach: Actual breach of contract refers to failure to perform the obligation when the performance is due. For example, if a seller fails to deliver the goods by the appointed time, or the goods are delivered but not up to the mark in terms of quality or quantity specified in the contract.
b)   Anticipatory Breach: Anticipatory Breach, also known as Breach by Contradiction, takes place when one party before the arrival of the fixed date for performance states that it cannot or will not able to perform material part of the contractual obligation on the specified date or it aims to perform the contract in a way that is inconsistent with the deeds specified in the contract at the initiation.
From above we conclude that when a contract has been fully performed , there is discharge of contract by performance , and the contract comes to an end. In regard to such discharge contract , nothing remains-neither any right to seek performance nor any obligation to perform. In short, we can say that there cannot be any dispute between the contracting parties on the basis of terms and conditions of the contract.
In a contract/agreement which is discharged there can not be any reference to arbitration of any dispute arising from breach of any terms and conditions in performance of the contract.
Whether a contract has been  discharged by performance or not is a mixed question of fact and law, and if there is a dispute in regard to that question, that is arbitral. But there is exception , where both parties to a contract confirm in writing that the contract has been fully and finally discharged by performance of all obligations and there are not outstanding claims or disputes , the courts will not refer subsequent claim or dispute to arbitration.
Similarly where one of the party of a contract issue a full and final discharge voucher ( or No Dues Certificate ) confirming that he has received the payment in full and final satisfaction of all claims , and he has no outstanding claim , that amount to discharge of the contract by acceptance of performance and the party issuing the Discharge Voucher/Certificate cannot thereafter make nay fresh claim or revive any settled claim.
PLEASE NOTE THAT – when we refer to a discharge of a contract by an agreement signed by the both parties or by execution of full and final discharge voucher/ certificate /receipt by one of the parties , we refer to an agreement or discharge voucher which is validly and voluntarily executed. If a party who has executed the discharge agreement/voucher alleges that the execution of such discharge agreement or voucher was on account of fraud/coercion/undue influence practiced by the other party and is able to establish the same, then obviously the discharge of contract by such agreement/certificate/voucher is rendered void and cannot be acted upon. Consequently any dispute raised by the said party would be arbitral.
We know that discharge of contract by performance refers to fulfilment of the contract by performance of all obligations in terms of original contract, discharge by “ accord and satisfaction”, refers to the contract being discharged by reason of performance of certain substituted obligations. The agreement by which the Original obligation is discharged is the accord , and the discharge of the substituted obligation is the satisfaction. It is to be noted that a contract can be discharged in the same process or through the same process ,which creates it, that is by mutual agreement between the contracting parties.
The Doctrine of Accord and Satisfaction (“Doctrine”) means discharge of one’s contractual obligations by way of performing substituted obligations. It is a mode of one’s discharge from its contractual obligations wherein parties to a contract perform a new set of obligations in substitution of older contractual terms. In the Boghara Polyfab Case, the Supreme Court of India (“Supreme Court”) has explained the Doctrine as follows:
“27. While discharge of contract by performance refers to fulfilment of the contract by performance of all the obligations in terms of the original contract, discharge by “accord and satisfaction” refers to the contract being discharged by reason of performance of certain substituted obligations. The agreement by which the original obligation is discharged is the accord, and the discharge of the substituted obligation is the satisfaction.” A contract can be discharged by the same process which created it, that is, by mutual agreement.”
PLEASE NOTE THAT-the Supreme Court has further explained that as the discharge of contract is also done by mutual consent, such discharge can happen either by performing modified obligations or by entering into a whole new contract in substitution of the original contract. Essentially, the discharge of one’s contractual obligations by way of performing the original terms of the contract is substituted by either a whole new contract or a new set of obligations within the same contract.
The Doctrine has gradually taken shape under the Indian Jurisprudence. The Privy Council has applied the said Doctrine in a matter where one party had accepted the receipt of payment made in lieu of a settlement by the other party.
The Supreme Court has also relied on the said judgment while adjudicating on the National Insurance Company Limited v. Boghara Polyfab Private Limited (2009) 1 SCC 267.
Even though the Doctrine is wholly applicable to transactions governed by the Indian Contract Act 1872 (“Contract Act”), it has been mostly elaborated upon by the Supreme Court while dealing with cases related to the existence of an arbitrable dispute between the parties. The elaboration on the Doctrine by the Supreme Court in National Insurance Company Limited v. Boghara Polyfab Private Limited (2009) 1 SCC 267 was also done on the subject matter pertaining to the existence of an arbitrable dispute for the purpose of appointing an arbitrator by the Court.
Before the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) came into existence, matters have been adjudicated by the Supreme Court on the existence of an arbitration dispute as per the provisions of the older Arbitration and Conciliation Act, 1940 and the Doctrine have been squarely applied by the courts for adjudicating issues related to making reference to an arbitrator. It was only after the Mayavati Trading Private Limited v. Pradyut Deb Burman (2019) 8 SCC 714, that the Supreme Court adjudicated that the appointment of an arbitrator under Section 11 of the Arbitration Act has to be done institutionally and all the preliminary issues related to the existence of an arbitration agreement with the parties, which inter alia includes the plea of the said Doctrine, will be determined by the arbitrator itself. It may be noted that the Mayavati Trading Case only ousted the plea of Doctrine being entertained by the Court at the stage of reference under Section 11 of the Arbitration Act and did not negate the Doctrine itself. Meaning thereby, such a Doctrine, like any other legal plea, can still be raised before an arbitrator for the purpose of ascertaining the existence of an arbitration agreement between the parties.
According to Calcutta High Court, the principle of discharge by way of ‘accord and satisfaction’ is embodied in Section 63 of the Contract Act. While referring to the Boghara Polyfab Case, the Calcutta High Court determined that the Appellant had discharged its obligations against the Bank i.e. the Respondent, by way of ‘accord and satisfaction’ as the Bank had already accepted certain payments made by the Appellant in lieu of discharge of the Appellant’s obligations.
DIFFERENCE BETWEEN THE DOCTRINE OF ‘WAIVER’ AND ‘ACCORD AND SATISFACTION’
Section 63 in The Indian Contract Act, 1872
Promisee may dispense with or remit performance of promise.
—Every promisee may dispense with or remit, wholly or in part, the performance of the promise made to him, or may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit.
 —Every promisee may dispense with or remit, wholly or in part, the performance of the promise made to him, or may extend the time for such performance,1or may accept instead of it any satisfaction which he thinks fit.”
SECTION 63 OF THE CONTRACT ACT envisages remittance as well as substitution of obligations of the original contractual terms entered between the parties. The section provides for mode of discharging one’s obligations, either by way of performing substituted obligations or by dispensing with certain terms of the contract. In the context of contractual obligations, Section 63 of the Contract Act may be construed in a manner to suggest that both, ‘waiver’ of contractual obligations and discharge by ‘accord and satisfaction’ are covered thereunder.
However, there are some differences between the two doctrines which can be pointed out as under:
  1. Waiver includes complete abandonment of contractual rights or obligations by mutual consent, whereas ‘accord and satisfaction’ involves replacement of an old set of obligations with new contractual obligations.
  2. Waiver of contractual obligations does not require any consideration, whereas discharge by way of ‘accord and satisfaction’ requires new set of obligations to be performed and such substituted obligations have to adhere to the basic principles of contract i.e. offer, acceptance and consideration.
  3.  The doctrine of Accord and Satisfaction is a mode of discharge of contractual obligations as opposed to Waiver of Contractual Rights which only covers the liberty of a person to let go of certain obligations irrespective of the fact whether the remaining obligations have been fulfilled or not.
Essentially, both the doctrines involve a mutual change in the original contractual arrangement between the parties, but the doctrine of Accord and Satisfaction also covers subsequent conduct vis a vis the change in such arrangement. One can also say that the doctrine of Accord and Satisfaction goes a step ahead and encapsulates sanctioning of change in contractual obligations with subsequent mandate for performance of such new set of obligations, as opposed to the Doctrine of Waiver which only provides for a person to let go of its part of obligations in a contract.
PLEA OF ACCORD AND SATISFACTION
As the Doctrine seems to have an application on every contractual arrangement, there might be instances wherein one party may try to wriggle out of its contractual obligations on the basis of the plea of the Doctrine, in situations where actual facts might differ from the plea taken. One of the most common practice is the execution of a discharge voucher/ discharge certificate, which are, generally, obtained by the one party from the other in a works contract, for the purpose of putting a defence of discharge of the contract by way of applying the Doctrine.
For the purpose of defending oneself against such a plea, the other party to the contract may raise a plea of obtaining such discharge voucher/ discharge certificate by way of ‘fraud’, ‘coercion’, ‘financial duress’ etc.
The Supreme Court has come across such a situation in various instances. In R.L. Kalathia and Company v. State of Gujarat (2011) 2 SCC 400, the Supreme Court has held that even if someone has signed a ‘no-dues certificate’ or a discharge voucher, such person is still entitled to the claim amount if he/she can prove such entitlement with adequate supporting material in the nature of oral and documentary evidence, both.
With respect to the adjudication of an application for appointment of an arbitrator filed under Section 11 of the Arbitration Act, the Supreme Court, in Union of India v. Master Construction Company (2011) 12 SCC 349, has stated that where the Claimant contends that a discharge voucher or ‘no-claim certificate’ has been obtained by way of fraud or coercion and challenges the genuineness of the discharge voucher, the Court will have to ascertain whether any prima facie case is being met out or not by the contending party. The Court had further held that if the contention lacks credibility at a prima facie level, it will not be necessary to refer the dispute for arbitration.
A similar approach was adopted by the Supreme Court in theONGC Mangalore Petrochemicals Limited v. ANS Constructions Limited and Anr. (2018) 3 SCC373 while dismissing an Application filed under Section 11 of the Arbitration Act.
The Supreme Court, in the Bharat Coking Coal Ltd. v. Annapurna Construction AIR 2003 SC 3660 has also held that if a person has even accepted a final bill, such a person can still raise his unsatisfied claim under the contract agreement before an arbitrator.
In Payan Reena Saminathan Vs. Pana Lana Palanippa (41 IA 142)- the Apex Court held that “ the receipt given by the appellants and accepted by the respondent, and acted upon it by the both parties proves conclusively that all the parties agreed to a settlement  of all their existing disputes by the agreement formulated in the receipt. It is clear example of what used to be well known as common law pleading as “ Accord and Satisfaction “ by substituted agreement. No matter what were the respective rights of the parties inter se they are abandoned in consideration of the acceptance by all of the new agreement. The consequence is that when such an accord and satisfaction takes place the prior rights of the parties are extinguished. They have in fact been exchanged for the new rights , and the new agreement becomes a new departure , and the rights of all the parties are fully represented by it.”
CONCLUSION from above discussion it is clear that discharge of an agreement means fulfilment of all obligations and terms /conditions of the same contract through performance. In case of discharge of contract one party to the contract tender discharge voucher/ agreement or no dues certificate to the other party and confirm that all due or full and final  amount has been received by him from other party on performance of the agreement.  There is no dispute in case of proper discharge of a contract , but in some cases a party may proof that discharge agreement /voucher has been received from him on the basis of fraud /misrepresentation / undue influence or by coercion , then he /she can raise dispute and same will be arbitral dispute. A  Contract may also be performed on the basis of “ Doctrine of Accord        and Satisfaction” in which a contract is substituted with another new contract with the consent of both parties under original contract or terms and conditions of Original Contract may be modified with the consent of parties and performed.
DISCLAIMER: the article produced here is for sharing information with readers. The article has been prepared on the basis of available materials on various forums at the time of preparation. The author has taken all precautions at the time of preparation of this article. The views expressed here are the personal views of the author and same should not be considered as professional advice. In case of necessity do consult with consultants.
REREFENCE:
  1. https://www.mondaq.com/india/arbitration-dispute-resolution/980030/treatment-of-the-doctrine-of-accord-and-satisfaction39-by-the-indian-judiciary-protecting-the-unwary
  2. https://indiankanoon.org/doc/1391279/
  3. https://www.google.com/search?q=discharge+of+a+contract+means&rlz=1C1CHBF_enIN982IN982&oq=DI&aqs=chrome.1.69i59l2j69i57j69i59j0i131i433i512j69i61j69i60l2.1615j0j7&sourceid=chrome&ie=UTF-8
  4. https://www.vedantu.com/commerce/discharge-of-contract

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