discharge by mutual agreement

Discharge by Mutual Agreement

Overview

  • Contracting parties can discharge a contract through mutual agreement in four principal ways:

    • Rescission

    • Accord and Satisfaction

    • Substitute Agreement

    • Novation

Rescission

  • Definition: Cancellation of the contract if neither party has fully performed.

  • Process:

    • Both parties must agree to rescind the contract. A unilateral rescission by only one party is not permitted.

    • Both parties give up their rights under the contract.

  • Example:

    • Earl hires Peter to paint an office for $1,000. After starting work, Peter realizes he cannot profit and proposes rescission to Earl. If both agree, the contract is canceled, and neither owes anything to the other.

Accord and Satisfaction

  • Definition: A new agreement where one party offers a different performance in lieu of the original promise.

  • Process:

    • One party agrees to provide a substitute performance (the accord) and the other party agrees to accept it as fulfillment of the original obligation.

    • The obligation is discharged only when the substitute performance is rendered and accepted.

  • Example:

    • If Peter finishes painting, but Earl cannot pay the full amount ($1,000), he offers $1,100 in 60 days, which Peter accepts. This becomes an accord, and upon payment, it discharges the original $1,000 obligation.

  • Important Note:

    • If the substitute performance is not rendered, the other party may recover damages either under the original contract or the accord contract.

  • Court Implication:

    • A check marked "Payment in Full" may represent an accord; if cashed, courts often treat it as acceptance of that accord. Returning the check with rejection maintains the right to the original claim.

Case 11.3: McMahon Food Corp. v. Burger Dairy Co.

  • Facts:

    • MFC has a debt with Burger of $58,518.41. A dispute arises over the debt.

    • MFC pays a reduced amount of $51,812.98 marked "payment in full."

    • More issues arise as Burger does not acknowledge the settlement.

  • Legal Finding:

    • The court ruled that no accord was established due to a lack of an honest dispute; McMahon's actions misled the new general manager of Burger.

    • A key issue: there must be an honest dispute regarding the amount owed.

Substitute Agreement

  • Definition: A new agreement replaces the original contract and immediately discharges all obligations.

  • Example:

    • Earl and Peter agree that Earl will pay $1,100 in 60 days, discharging the original $1,000 debt before the job is completed.

  • Important Note:

    • Failure to perform under the new agreement limits the recovering party to those terms and not the original obligations.

Novation

  • Definition: Discharge of a party's obligations by substituting a third party in the contract.

  • Process:

    • Agreement between original parties to allow a new party to take over the obligations.

    • The original party is completely discharged from the contract obligations upon agreement.

  • Example:

    • Peter proposes to have Pablo complete the painting instead of him. If Earl agrees, then a novation occurs, and Peter is released from any further obligations under the original agreement.

Takeaway Concepts

  • Discharge by mutual agreement includes various methods: rescission, accord and satisfaction, substitute agreements, and novation.

  • Courts often require a good faith dispute regarding claims to enforce accord and satisfaction.