Discharge of Contract under the Indian Contract Act, 1872: The Six Modes, Novation, Rescission and Alteration under Section 62, Remission under Section 63, and Restitution under Sections 64 to 67

A contract is discharged when the obligations it created come to an end. The Act does not collect the modes in one place, and the standard classification into six is a textbook arrangement of provisions scattered across the statute. Sections 62 to 67 contain the most important of them, and they are gathered under the heading contracts which need not be performed, which is the counterpart of the words in Section 37 requiring performance unless dispensed with or excused. This topic sets out the six modes, then works through Sections 62 to 67 provision by provision, with particular attention to the distinctions that decide cases: novation against alteration, novation against assignment, and remission against waiver.

The six modes, and the provisions that govern the consequences

1. The Six Modes

Mode	How it operates	Provisions
By performance	Both parties do what they promised, or make a valid tender which is refused	Sections 37 and 38
By agreement	The parties agree to substitute, rescind, alter or remit	Sections 62 and 63
By impossibility	Performance becomes impossible or unlawful after the contract is made	Section 56, second paragraph
By lapse of time	The remedy becomes barred, though the right survives, so this discharges the action rather than the obligation	Limitation Act, 1963
By operation of law	Death in a personal contract, insolvency, merger of a lesser right in a greater, or unauthorised material alteration of a written instrument	Sections 37 and 40, and the general law
By breach	One party repudiates or fails in its entirety, and the other elects to end the contract	Sections 39 and 73

2. Section 62: Novation, Rescission and Alteration

Sections 62 and 63, Indian Contract Act, 1872

62. Effect of novation, rescission, and alteration of contract. If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed.

63. 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.

2.1 Novation

Novation is the substitution of a new contract for an existing one, either between the same parties on new terms or between different parties. Its essentials are strict.

There must be an existing valid contract to be replaced.
All parties must consent, including, where a party is being substituted, the incoming party and the party who is to be released.
The new contract must be valid and enforceable. If it is void or unenforceable, the novation fails and the original contract revives.
Novation must take place before breach. After breach the cause of action has accrued, and an agreement then made is a compromise or an accord rather than a novation.
The intention to extinguish the old contract must be clear. A mere variation of terms is an alteration, not a novation.

📖 Union of India v. Kishorilal Gupta & Bros., AIR 1959 SC 1362

Facts: Contracts for the supply of goods contained arbitration clauses. Disputes arose and the parties entered into settlement agreements which disposed of all the claims under the original contracts. A party afterwards sought to invoke the arbitration clause contained in the original contracts.

Held: The Supreme Court held that the arbitration clause could not be invoked. Where an original contract is superseded by a new agreement which covers the same subject matter, the original contract, including the arbitration clause it contains, comes to an end. An arbitration clause is part of the contract and perishes with it. The Court drew a distinction between a contract that is discharged by a substituted agreement and one that remains in existence with the disputes under it referred to arbitration.

Ratio: A validly substituted agreement extinguishes the original contract together with every clause in it, including the arbitration clause. The clause survives only where the original contract itself survives.

📖 Lata Construction v. Dr. Rameshchandra Ramniklal Shah, (2000) 1 SCC 586

Facts: A developer who had agreed to deliver a flat failed to do so, and a subsequent agreement was entered into by which the developer undertook to pay a sum of money to the purchaser. It was contended that the second agreement had novated the first, so that the original obligation to deliver the flat, and the right to specific performance of it, had come to an end.

Held: The Supreme Court held that there was no novation. For novation under Section 62 the original contract must be substituted by a new one which is itself valid and capable of being enforced, and the parties must have intended to rescind the old contract and to replace it. A mere agreement to pay money, which itself remained unperformed, did not extinguish the original obligation. The purchaser's right to enforce the original agreement therefore survived.

Ratio: Novation requires a complete substitution by a valid and enforceable new contract entered into with the intention of extinguishing the old one. A subsequent arrangement that is itself not performed does not discharge the original obligation.

2.2 Rescission and alteration

Rescission by agreement under Section 62 is the discharge of the whole contract by mutual consent, with nothing substituted in its place. It is distinct from rescission of a voidable contract under Section 64, which is a unilateral act of the party entitled to avoid.
Alteration is a change to one or more terms with the contract otherwise continuing. The parties, the subject matter and the substance remain the same; only the terms are modified.

	Novation	Alteration
Effect on the original contract	Extinguished and replaced	Continues in existence with modified terms
Parties	May change, and a new party may be introduced	Remain the same throughout
Terms	A new set of terms replaces the old	Some terms change; the rest survive
Consent required	Of all parties, including any incoming and outgoing party	Of the existing parties
Effect on an arbitration clause	Perishes with the original contract, per Kishorilal Gupta	Survives, the contract continuing
If the new arrangement fails	The original contract revives, per Lata Construction	The contract stands as altered, or as originally made if the alteration was ineffective

2.3 Novation and assignment

The two are frequently confused because both change who is involved. Novation substitutes a new contract and requires the consent of all parties, and it can transfer both the benefit and the burden. Assignment transfers the benefit of a contract without the debtor's consent and cannot transfer the burden, since a party cannot be given a new debtor without agreeing to it. A transaction described as an assignment of a contract is therefore in truth a novation so far as it purports to pass obligations, and it needs the other party's consent to be effective.

3. Section 63: Remission

Section 63 permits a promisee to give up what is due to him without any consideration. The section is one of the clearest Indian departures from English law, which required fresh consideration for the discharge of a debt and produced the rule in Pinnel's Case that payment of a lesser sum cannot satisfy a greater. It covers four distinct acts.

Dispensing with performance, wholly or in part.
Remitting performance, wholly or in part, which is the release of a debt or obligation.
Extending the time for performance.
Accepting any satisfaction the promisee thinks fit in place of performance, including a smaller sum or a different thing.

The Supreme Court applied the section in Kapur Chand Godha v. Mir Nawab Himayatalikhan Azamjah, AIR 1963 SC 250, holding that a creditor who accepts payment on the condition on which it is offered cannot say that he accepted the money but not the condition, and cannot afterwards sue for the balance.

3.1 Section 63 and accord and satisfaction

⚠ Accord and satisfaction and Section 63 are not the same mechanism

In English law a debt is discharged by accord and satisfaction: the accord is the agreement to accept something different, and the satisfaction is the consideration that makes the accord binding. Both elements are needed, which is why the English courts had such difficulty with part payment of a debt. Section 63 dispenses with the satisfaction: the accord alone binds, because no consideration is required. The practical consequences are two. A promise to remit is binding in India even before it is acted upon, and a creditor who agrees to accept less cannot resile on the ground that he received nothing in return.

3.2 Remission and waiver

	Remission under Section 63	Waiver
What is given up	The performance itself, wholly or in part, or the time for it	A right, benefit or procedural advantage under the contract
Source	Statutory; Section 63 in terms	General law, resting on election and on estoppel
Consideration	Not required	Not required, but detrimental reliance may be needed to make it irrevocable
Can it be withdrawn?	A remission once made is binding and cannot be recalled	A waiver of a continuing requirement may be withdrawn on reasonable notice for the future
Typical instance	Accepting a lesser sum in full settlement; releasing a guarantor	Accepting late delivery without objection; not insisting on a condition

4. Sections 64 to 67: The Consequences

Sections 64 to 67, Indian Contract Act, 1872, in substance

64. When a person at whose option a contract is voidable rescinds it, the other party thereto need not perform any promise therein contained in which he is promisor. The party rescinding a voidable contract shall, if he has received any benefit thereunder from another party to such contract, restore such benefit, so far as may be, to the person from whom it was received.

65. When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it.

66. The rescission of a voidable contract may be communicated or revoked in the same manner, and subject to the same rules, as apply to the communication or revocation of a proposal.

67. If any promisee neglects or refuses to afford the promisor reasonable facilities for the performance of his promise, the promisor is excused by such neglect or refusal as to any non-performance caused thereby.

4.1 Section 64 and Section 65 distinguished

Section 64 applies to a voidable contract that is rescinded. The contract existed and was valid until avoided. The obligation to restore falls on the party rescinding, and the other party is relieved from performing.
Section 65 applies to an agreement discovered to be void, or a contract that becomes void. The obligation to restore falls on any person who has received an advantage, in either direction.
Discovered to be void includes an agreement void from inception whose invalidity is established later, as Tarsem Singh v. Sukhminder Singh, (1998) 3 SCC 471 holds on the authority of Thakurain Harnath Kuar.
Neither section applies to a minor's agreement, since both presuppose a contract or an agreement between competent parties, as Mohori Bibee v. Dharmodas Ghose decides. Relief there lies under Section 33 of the Specific Relief Act, 1963.
Section 65 is the sole route to adjustment on frustration, India having no statute corresponding to the English legislation on frustrated contracts, and it reaches an advantage received rather than expenditure wasted.

4.2 Sections 66 and 67

Section 66 applies the rules on communication and revocation of a proposal to the rescission of a voidable contract, so rescission is effective when it comes to the knowledge of the other party, and may be revoked before it does. Section 67 completes the chapter with a point of practical importance in construction and supply: a promisee who does not give the promisor reasonable facilities for performance, by refusing access, withholding materials or failing to give instructions, cannot complain of the non-performance his own neglect caused. It is the statutory expression of the same principle that underlies Section 53.

5. The Position Stated Shortly

The six modes of discharge are performance, agreement, impossibility, lapse of time, operation of law and breach.
Section 62 covers discharge by agreement through novation, rescission and alteration.
Novation requires an existing contract, the consent of all parties, a valid and enforceable new contract, a clear intention to extinguish the old, and must precede breach.
Kishorilal Gupta: a substituted agreement extinguishes the original contract and the arbitration clause in it perishes with it.
Lata Construction: a subsequent arrangement that is itself unperformed is not a novation, and the original obligation survives.
Novation changes the contract and may change the parties; alteration changes terms only and leaves the contract and its arbitration clause alive.
Assignment transfers the benefit without consent and cannot transfer the burden; transferring obligations requires novation.
Section 63 permits dispensation, remission, extension of time and acceptance of any satisfaction, without consideration, displacing Pinnel's Case and the English requirement of satisfaction.
Section 64 governs restoration on rescission of a voidable contract; Section 65 governs restoration where an agreement is discovered to be void or a contract becomes void.
Section 66 applies the proposal rules to communication of rescission, and Section 67 excuses a promisor whose performance the promisee has obstructed.

6. Related Topics and Provisions

Topic or provision	Connection
Doctrine of Frustration under Section 56	Discharge by impossibility, and Section 65
Anticipatory Breach under Section 39	Discharge by breach and the promisee's election
Exceptions to the Rule of No Consideration	Section 63 and remission without consideration
Performance of Contracts under Sections 37 to 67	The chapter as a whole
Void vs Voidable Contract	Why Sections 64 and 65 apply to different situations
Section 62, Indian Contract Act	Novation, rescission and alteration
Section 63, Indian Contract Act	Remission, extension of time and other satisfaction
Sections 64 to 67, Indian Contract Act	Restoration, communication of rescission, and the promisee's neglect
Section 33, Specific Relief Act, 1963	Restitution where a party pleads incompetence
Limitation Act, 1963	Discharge of the remedy by lapse of time