Section 63 of the Contract Act provides as follows:
“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.”
Illustration (b) thereof says: “(b) A owes B 5,000 rupees. A pays to B, and B accepts in satisfaction of the whole debt, 2,000 rupees paid at the time and place at which the 5,000 rupees were payable. The whole debt is discharged.”
Section 63 of the Contract Act embodies the principle of discharge of contract by ‘accord and satisfaction’. The Apex Court in National Insurance Co. Ltd. vs. Boghara Polyfab (P) Ltd., (2009) 1 SCC 267, explained the principle of discharge of contract by ‘accord and satisfaction’. In paragraph 27 of the decision, it held 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. A contract may be discharged by the parties to the original contract either by entering into a new contract in substitution of the original contract; or by acceptance of performance of modified obligations in lieu of the obligations stipulated in the contract.”
In paragraph 28 of the same decision, the Apex Court approved the decision of the Privy Council in Payana Reena Saminathan vs. Pana Lana Palaniappa, 41 Indian Appeals 1941, wherein it was held as under:
“… The ‘receipt’ given by the appellants and accepted by the respondent, and acted on by both parties proves conclusively that all the parties agreed to a settlement of all their existing disputes by the arrangement formulated in the ‘receipt’. It is a clear example of what used to be well known as common law pleading as ‘accord and satisfaction by a substituted agreement’. No matter what were the respective rights of the parties inter se they are abandoned inconsideration of the acceptance by all for a 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 .”
The decision in Kapur Chand Godha & ors. vs. Mir Nawab Himayatalikhan Azamjah, AIR 1963 SC 250, may also be referred to in this connection. In that case, the Apex Court held on a construction of Section 63 and illustration (c) thereof that the appellants having accepted payment in full satisfaction of their claim were not entitled to sue the respondent for the balance.