DISCHARGE OF CONTRACTS
This chapter focuses on various ways the parties to a contract can, by mutual consent, discharge one or both of them from their obligations under the contract. Key concepts:
- Rescission: If neither party has fully performed, the parties may agree to rescind, i.e., cancel, the contract. Each party gives up his rights under the contract in consideration for freedom from completing performance.
- Accord and satisfaction: An “accord” is an agreement in which one party to a contract promises to render a substitute performance, and the other party promises to accept that substitute performance in discharge of the existing duty.
- Satisfaction: The discharge of the existing duty does not occur until the substitute performance is completed. The completion of the substitute performance is called a “satisfaction” of the accord.
- Election by plaintiff: Therefore, if the substitute performance does not occur, the party who agreed to receive it has a choice of suing either for breach of the original contract or for breach of the accord.
- Substituted agreement: In a “substituted agreement,” the parties discharge the existing agreement by replacing it.
- Why it matters: If a party agrees to a substituted agreement, she loses the right to sue on the original agreement if the other party breaches the substituted agreement. That’s why it’s important to distinguish between a substituted agreement and an accord.
- How to tell: The more deliberate and formalized the new agreement is, the more likely it is to be a substituted agreement rather than an accord.
- Novation: After a party delegates his duties to a third party, if the obligee agrees to relieve the original obligor/delegator of all liability and to hold only the substituted obligor/delegate liable, a “novation” has taken place.
A. Mutual rescission: As long as a contract is executory on both sides (i.e., neither party has fully performed), the parties may agree to cancel the whole contract. Such an agreement is called a mutual rescission. It is enforceable because it is supported by consideration on both sides: each party is receiving freedom from his remaining obligations under the contract, in return for giving up his rights under the contract. See Rest. 2d, § 283.
Example: A and B make a contract, by which A promises to paint B’s house and B promises to pay A $5,000. After beginning the work, A realizes that he will lose more money by completing the work than by giving up at once. Therefore, he makes B an offer to rescind the contract, and B accepts. There has been a mutual rescission, and the duties of both A and B are discharged. Rest. 2d, § 283, Illustr. 1.