Discharge of Contract by Agreement: Meaning, Types, and Legal Effects

DISCHARGE OF CONTRACT BY AGREEMENT

1. Introduction

Discharge of contract refers to the release of parties from further performance of their contractual obligations. Once a contract is discharged, the legal relationship created by the agreement comes to an end and neither party can insist on future performance unless a new contract is formed.

Under Ghanaian contract law, a contract may be discharged in four main ways:

1. By agreement
2. By performance
3. By breach
4. By frustration

This topic focuses on discharge by agreement, which arises where the parties voluntarily agree to bring their contract to an end.

Since contractual obligations are created by the free consent of the parties, the law recognizes that the same parties may by mutual consent determine how and when the contract should be terminated.

Most commercial contracts contain express termination clauses specifying the circumstances and procedures by which the agreement may be brought to an end. Where disputes arise regarding whether termination has occurred, the courts apply the objective test by examining the words and conduct of the parties to determine their true intention.

2. Meaning of Discharge by Agreement

Discharge by agreement occurs where both parties mutually consent to terminate their contractual relationship and release each other from further obligations.

The essential elements of discharge by agreement are:

1. There must be an offer by one party to terminate the contract
2. The other party must accept the offer in accordance with the expressed terms
3. The agreement must be voluntary
4. The agreement must clearly release both parties from future obligations

The effect of such agreement is to extinguish all rights and obligations created by the original contract unless otherwise preserved by the parties.

3. Forms of Discharge by Agreement

Discharge by agreement may occur in several ways, including:

• Express mutual rescission
• Implied mutual rescission through conduct
• Substitution of a new contract for the old one
• Waiver of rights by mutual consent

Each of these methods operates on the same fundamental principle of mutual consent.

4. Express Mutual Rescission

Meaning

Express rescission occurs where parties expressly agree, either orally or in writing, to bring their contract to an end.

This method is common where the contract has not yet been fully performed and both parties wish to withdraw from further obligations.

Illustration

A landlord and tenant enter into a two-year lease. After six months both parties agree in writing to terminate the lease because the tenant is relocating. The tenant vacates the premises and the landlord refunds part of the advance rent.

Legal Effect: The contract is discharged by agreement and neither party can sue for future rent or occupation.

5. Discharge by Substitution of a New Contract

Meaning

An existing contract may be discharged where the parties enter into a new agreement that is inconsistent with or replaces the earlier contract. The new agreement extinguishes the rights and obligations of the earlier contract.

For this to occur, there must be a clear intention to abandon the first contract and substitute it with the second. Mere variation of terms does not amount to discharge.

Fish & Meat Co Ltd v Ichnusa Ltd

Facts

By a written contract dated 4 December 1961, the defendants who owned a fishing vessel agreed to sell all fish caught by the vessel exclusively to the plaintiffs. Under this agreement, the defendants retained responsibility for maintaining the vessel and paying the crew.

On 29 December 1961, the same parties entered into another contract under which the plaintiffs agreed to purchase the defendants’ fishing vessel outright.

On 3 May 1962, the plaintiffs wrote a letter to the defendants stating that they were no longer interested in purchasing the vessel. However, when the vessel arrived in Ghana on 17 July 1962, the plaintiffs took possession, operated it, paid for its maintenance and paid the crew.

Later, the defendants took possession of the vessel, sold the fish catches and threatened to remove the vessel from Ghana. The plaintiffs sued for accounts of the fish sold, payment of proceeds and an injunction to restrain the removal of the vessel.

The central issue was whether the parties were operating under the first agreement for fish supply or the second agreement for sale of the vessel.

Decision

The court held that the first contract had been discharged by the second contract. The second agreement was inconsistent with and fundamentally different from the first. It clearly demonstrated an intention to abandon the fish supply agreement and replace it with a vessel purchase agreement.

The court further held that a discharged contract cannot be revived by a mere letter. For the parties to return to the original arrangement, they would have had to enter into a fresh agreement satisfying the requirements of offer and acceptance.

Principle

An existing contract may be discharged by a subsequent agreement where there is clear intention to substitute the old contract with a new one. Once extinguished, the original contract cannot be revived without a fresh agreement.

Illustration

A cocoa farmer enters into a contract with a buyer to supply cocoa beans every month. Later, both parties sign a new agreement under which the buyer purchases the farmer’s entire farm. The supply contract is automatically discharged because ownership of the farm has changed and the new agreement replaces the old arrangement.

6. Discharge by Implied Agreement Through Conduct

Meaning

Discharge by agreement may also be inferred from the conduct of the parties. Where both parties act in a manner that is inconsistent with the continuation of the contract, the law may infer that they have mutually agreed to terminate it.

Illustration

A contractor and a client agree on a building project. After delays, both parties stop communicating, the contractor withdraws equipment from the site and the client engages a new contractor without objection from the first contractor.

Legal Effect: The conduct of both parties may amount to implied mutual rescission of the original contract.

7. Discharge of Executory Contracts Without Consideration

An executory contract is one where obligations remain unperformed by both parties.

It is a settled principle of law that parties to an executory contract may discharge their obligations by mutual agreement even without fresh consideration. This is because each party’s promise to release the other from performance serves as sufficient mutual waiver.

Illustration

Two companies enter into a supply contract scheduled to begin in six months. Before performance begins, both companies agree to cancel the contract due to market changes.

Legal Effect: The contract is discharged even though no payment or compensation has been exchanged.

8. Distinction Between Discharge and Variation

It is important to distinguish between discharge of a contract and mere variation of its terms.

• Discharge brings the contract to an end
• Variation alters some terms but preserves the contract

For discharge to occur, the intention to terminate must be clear and unambiguous.

Illustration

If parties agree to change delivery dates under a supply contract, the contract is varied, not discharged.

If parties agree that the supply contract should no longer continue at all, the contract is discharged.

9. Revival of Discharged Contracts

Once a contract has been discharged by agreement, it cannot be revived by unilateral action or informal communication. A new agreement must be formed satisfying the essential elements of contract formation.

This principle was clearly affirmed in Fish & Meat Co Ltd v Ichnusa Ltd, where the court held that a mere letter expressing intention to revert to the earlier contract could not revive the discharged agreement.

Illustration

If two parties cancel a lease by mutual agreement and one party later writes a letter claiming to return to the old lease terms, the lease is not revived unless the other party accepts and a new agreement is formed.

10. Legal Effects of Discharge by Agreement

When a contract is discharged by agreement:

1. Future obligations of both parties are extinguished
2. Accrued rights remain enforceable unless waived
3. Neither party can sue for future performance
4. Any new obligations must arise from a fresh contract

11. Practical Importance of Discharge by Agreement

Discharge by agreement promotes commercial flexibility and allows parties to adapt to changing circumstances without resorting to litigation. It also encourages negotiated settlements and efficient termination of contractual relationships.

SUMMARY TABLE

Method	Description	Key Authority	Legal Effect
Express rescission	Clear agreement to terminate	General principle	Contract ends immediately
Substitution	New contract replaces old	Fish & Meat v Ichnusa	Old contract extinguished
Implied rescission	Conduct shows termination	Common law principle	Contract treated as discharged
Executory discharge	Mutual abandonment before performance	Common law rule	No consideration required
Variation	Change of terms only	Distinction principle	Contract continues
Revival attempt	Unilateral communication	Fish & Meat v Ichnusa	Ineffective without new agreement