What Is Discharge of Contract by Agreement
Discharge of Contract by Agreement means the termination of a valid contract executed by the parties. According to the Indian Contract Acts, 1872, an agreement can or may be discharged in the following ways:
However, when a contract is discharged by agreement, the remaining rights and obligations under the contract are no longer enforceable.
Mutual Consent, Maturity of Time, Performance of Contract and By Impossibility are some of the reasons for discharge of Contract by Agreement.
Parties to a contract / agreement can mutually rescind the agreement, as expressed under sections 62 to 67 of the Contract Act.
If the parties explicitly rescind or renounce the contract between them, it is a mutual rescission and the rights and obligations under the contract are terminated. Under the provisions of the Contract Act, the obligation of either party under the contract ceases to exist with a mutual consent.
In case the parties agree to rescind the contract without any intention of substituting a new one, all the obligations previously between them need to be observed and the parties are restored to the position they would have occupied if the particular contract was never made, unless there is a contract to the contrary.
The agreement to rescind the contract must be free, deliberate and informed. The agreement to rescind the contract should be present on the contract itself or should be a separate agreement.
The performance of a contract on its maturity or expiration discharge the contract. The performance is said to discharge the obligations arising from the contract in the manner specified in the contract and according to the provisions of the Indian Contract Act.
Strike down of an obligation performed does not affect the parties to the contract.
- Impossibility of Performance.
- By Act of God
- Waiver or Remission by Promisor.
- Subsequent Agreement, Rescission or Revocation of Contract.
- By Alteration of the terms of Contract.
- By Novation or Substitution.
- By Rescission or Cancellation .
- By Breach of Contract.
- By Assignment or Transfer of Rights and Liabilities.
- By Distinction of Contract due to Non-Fulfillment of Conditions.
In the case of impossibility of performance, a new contract is to be substituted by the parties, and the subsequent agreement rescinds the previous contract.
The parties can express themselves in any manner, which shows that they have agreed to rescind the contract as long as such agreement is not against public policy.
If the parties mutually agree to vary certain terms of the contract, it is called a novation of the contract.
In the case of Shrimant Hiralal Dutta v. Balabai Dutta, it is discussed that Section 62 of Indian Contract Act is applicable where the parties to a contract intentionally substitute a new contract for an existing one, and not where the parties to a contract mutually agree to rescind the existing contract and enter into a new contract.
As per this section, performances of the existing contract discharges that contract when the parties to the contract enter into a second agreement, which will discharge the original contract. The second contract should be a complete substitution of the old contract, and hence executory.
The agreement to rescind an existing contract through mere omission to do something, which unless done would terminate the contract is only implied when, in relation to the facts of the case, the intention of the parties has to be inferred.
A valid contract can be discharged by mutual consent of all the parties. Parties to a contract are competent enough to determine the fate of their agreement. Therefore, they should possess the maturity of mind so as to meaningfully abide by the contract.
Discharge of Contract by Agreement is a general concept; However, the above mentioned categories are used when parties seek for discharge of contract by agreement.
The performance of the contract is not done properly in cases where breach of contract occurs. Thus, here there is a need for damages.
Types of Agreement that Lead to Discharge
As mentioned above, in some cases a valid agreement can discharge a contract without any performance. Perhaps the most frequent examples of the discharge of a contract by mutual agreement are (1) mutual rescission of a contract, (2) novation of a contract, (3) accord and satisfaction, and (4) release.
Mutual Rescission. Rescission of a contract is an agreement of the parties to cancel their contract with each other. A contract is the performance of a promise in exchange for a promise. If how that promise is fulfilled changes and/or one party no longer wants to perform her part of the original deal, then the parties could mutually agree to cool off to no longer exchange promises and then they have cancelled the contract. The parties to the contract need to agree [bless you] on the cancelling of the contract. Whenever the parties to the contract agree to do something different than the original contract, the parties have mutually rescinded the contract with each other.
Novation. Novation occurs when new parties are substituted for the parties in the contract, thereby discharging the party being replaced. Here, one party is substituted for another. Novation is created when the parties intend to put an end to the old contract. Accordingly, the intent to discharge an original party by a new party is essential. An example of this is when a father sells his son’s car and the son agrees that the buyer will not hold him liable for anything regarding the contract, then the son has been discharged.
Accord and Satisfaction. Accord and satisfaction occurs when a satisfactory performance is deemed by the parties to have been made. However, if a party to a contract has performed an accord but there has been no satisfaction (that is, a party has failed to perform as promised) then there has not been an effective discharge. In other words, an accord must be followed by performance, otherwise there is no satisfaction and the original contract is still in force.
Mutual Rescission in Detail
Mutual rescission occurs when both parties agree to end their contract. By doing so, they both relinquish their benefits, and thus restore the consideration that they had first given to one another at the beginning of the contract cycle. The discharge then will be seen as mutual, since both parties have agreed upon the termination, and they also have agreed on how affairs are conducted in the first place.
Keep in mind that just because a party wants to terminate a contract on their own accord, does not mean they can do so without consent. Contractually binding parties have to either breach the agreement, or they have to get the other party’s consent to the termination of the contract. Without this consent, the other party could expect damages for breaking the contract. In the case of mutual rescission, both parties agree to terminate the contract through any of three ways. The first way is through their execution of a contract that terminates the previous contract. Alternatively, the parties can rescind by orally communicating their willingness to terminate. Or lastly, they can do the same implicitly.
When parties terminate a contract by mutual rescission, they do so for a large number of reasons. Here are some of them:
Discharge by Novation as Agreement
A more formalized arrangement for discharge of contract by agreement is a process known as "novation." When parties enter into a valid contract, they essentially create mutual obligations, wherein each party has a thing due to the other. A novation is a special form of discharge that occurs when a new contract is substituted for an existing contract between the same parties. In this case, the old contract is voided. In addition, a novation can also occur when a new party replaces an existing party in a contract.
An example may be seen in the following situation:
Debbie Sellers sells products to ABC, Inc. (ABC) and is entitled to payment under the contract. That right to payment is a right (thing) due to the seller from the buyer. The contract has a defined term, so it will expire at a certain point and be replaced with a new contract. Upon expiration of the contract term, ABC orders $100,000 worth of goods. Debbie Sellers fulfills the order. ABC owes for the merchandise under the new order. This new order does not require a new contract because the parties are the same and only the price term is different. That is not a novation, but an amendment. The parties could, however, choose to novate the original contract to replace the old with a new contract. If they did, the contract rights are replaced with the rights in the new contract. Essentially, the old contract is void and replaced by the new contract.
The process for a novation is explained in Connecticut National Bank v. Giacomi, 233 Conn. 31, 660 A.2d 875 (1995):
"[A] party seeking to enforce a contract must prove that a valid and binding contract exists, that he or she performed the conditions on his or her part, and that the other party failed to perform his or her part." (Internal quotation marks omitted.) Aetna Life Ins. Co. v. Jones, supra, 221 Conn. at 737, 607 A.2d 430. In addition, [s]trict proof of the elements of a breach of contract is required. . . . . . . The elements of a valid contract require (1) an offer; (2) an acceptance; (3) consideration; (4) mutual assent; and (5) intent to be bound." (Internal quotation marks omitted.) McCluskey v. Trumbull, 213 Conn. 536, 542 n. 1, 569 A.2d 1121 (1990). "[A]n acceptance must be the unconditional and complete expression of the offeree’s agreement to the terms of the offer." (Internal quotation marks omitted.) Kingston v. Pre-Emption, Inc., 192 Conn. 415, 421, 472 A.2d 788 (1984). "It is well settled that in order for a new agreement to supplant a prior one, the terms of the new contract must be shown to be clear and unambiguous," provided, however, "the new agreement does not effect a novation." Id., at 423. "At common law a novation . . . is the substitution of a new obligation for an existing one, which is thereby extinguished." (Internal quotation marks omitted.) [Guardianship of] Negron, 37 Conn. App. 914, 917, 653 A.2d 219 (1994).
In a novation, one of the contracting parties discharges another and the old obligation is replaced with a new obligation, such that the second party is not liable under the contract. Smith v. Allentown Auto Sales, Inc., 150 Conn. 728, 733-34, 192 A.2d 735 (1963); [Shiffman] v. City Bank & Trust Co. 72 Conn. 423, 426, 44 A. 935 (1899). "We have stated three requirements for the finding of a novation: (1) A previous valid obligation; (2) of the executors or administrators, . . . to make provision for the payment of a debt as required by the statute; and (3) a new valid obligation. Defendant asserts that only the first two elements of a novation are present in this case. We agree that there was a discharge by substitution of a new obligation, but we conclude that the test for novation has not been met." Negron, supra, 37 Conn. App. at 918.
The Accord and Satisfaction Discharge
The discharge of a contract by agreement (both at and after performance) describes the voluntary termination of the parties’ mutual duties and is also known as an "accord and satisfaction." The "accord" is the new agreement that substitutes for the original contract, and the "satisfaction" is the performance of the bargain – the "satisfaction" is the performance of the accord. Because the accepted new contract discharges the old contract, it is also called an "executed" accord.
When an accord takes place, it discharges the original contract obligation, and the original claim for that breach cannot be enlarged into a larger claim based on the new contract; the client cannot offer the defendant a second bite at the apple. The accord must be specific about what is being paid and the manner in which it will be paid. The best way to present the accord is to include the check that satisfies a disputed amount. Evidence of the accord must be submitted if the accord is denied by the client , even if the other party makes payments toward the accord but then refuses to meet its part of the bargain; the court will treat the dispute like an accord and satisfaction.
An accord and satisfaction discharges the original contract, but not willfully refusing to pay the claim means the accord and satisfaction was caused by the claimant’s conduct. The accord is a measure of the damage: the money is not getting paid because of the claimant’s defense. The accord and satisfaction doctrine must be balanced against the court policy of requiring parties to perform their contracts. The forfeiture doctrine allows the enforcement of a non-consideration contract and the imposition of a contract obligation on the aggrieved party to compensate based on the facts.
The client’s position is that the contract can only be discharged through full performance anyway.
Legal Implications and Results
The legal impact and consequences of the discharge of contract by agreement include the release of the parties from their obligations thereunder. Once a contract is terminated by agreement, it ceases to exist and neither party has any further obligation to perform. This is so even if only one party has performed at that date.
However, in circumstances where nothing has been performed, further obligations may arise. For example, the parties may have signed a written agreement which continues to exist. Alternatively, the parties may have originated a dispute concerning an amount of money to be paid, which was resolved by the further agreement to settle.
The effect of a discharge of contract by agreement is that the parties are then relieved of their respective obligations to perform the contract, but they are not exonerated from obligations which may have accrued up to the date of discharge (i.e. for payment of damages resulting from breach of contract) or obligations arising thereafter if such obligations (as may be the case with an employment agreement) survive the termination date, until such time as the event giving rise to the obligation arises.
The general rule applicable to the discharge of contract by agreement is that the discharge is full and complete and does not affect any rights or obligations arising before discharge. The test applied to evidence the discharge of the agreement is that the parties have come to a common view with respect to the cancellation of the contract. However, the parties may limit the effects of the discharge so as to preserve the various rights they had under the contract until the parties come to some alternative arrangement with respect to their further obligations under the contract, despite the fact that the contract is terminated.
If two parties enter into a further agreement novating the prior agreement, the original agreement ceases to exist (or more accurately it is displaced) and is thereafter replaced by the new agreement.
The parties have the right to agree to any undertaking they choose, even one continuing an earlier contract. In so doing, the parties do not create a new cause of action or a new contractual relationship, but simply discharge the original contract and bring the new contract into existence.
It is important to note that the parties need not have performed the original contract for the new agreement to apply. However, the legal position of the parties depends on the circumstances.
In circumstances where it has been agreed between the parties that the new contract will not come into operation until performance of the original contract has been completed, it has been held that a right of compensation for cost and time wasted by the breach of the original contract, will not arise until the new contract comes into operation.
If an assignee [either in a written agreement or in practice] does not agree to the substitution on his part for the original party to the contract, any damages resulting from the breach of the original contract, will not arise until the new contract comes into operation.
In terms of the Parol Evidence Rule, when a new agreement is reached and the original agreement is terminated, oral evidence as to the meaning of the terms of the original agreement [i.e. ‘parole evidence’], is not admissible. Once the discharge of contract by agreement has taken place, no evidence can be lead to prove that parties had varied the terms of the contract orally.
In addition to the common law and statutory remedies available for breach of contract, contracting parties may also expressly or tacitly agree to the inclusion of clauses which may restrict or extend or provide for any particular damage caused in the event of a breach of the agreement.
Practical Examples and Case Analysis
Recent examples of discharge of contract by agreement can be drawn from numerous contract disputes that have been adjudicated. In the action of Renegade Holdings, Inc. v. Johnson, 187 So.3d 422 (Fla. 1st DCA 2016), the parties entered into a real estate purchase and sale contract that required the defendant to obtain financing for the client’s property and pay off her mortgage. The defendant was unable to do so. The defendant showed up at the closing with only a check for $3,000, which he handed to the plaintiffs. The plaintiffs refused to sign the deed and refused to return the check to defendant. At the bench trial, the seller attempted to rescind the contract and the buyer alleged breach. The court determined that the contract had not been discharged and the defendant was in breach. The appellate court upheld the lower court’s determination. The plaintiff had informed the defendant that because the defendant did not obtain bank financing and the closing was held in violation of the contract, the contract became void. This was an acceptance of partial performance, the seller intended to continue performance, and the seller could not rescind until the entire contract had been performed. The defendant breached the contract by failing to secure bank financing.
In American Home Mortgage Corporation v. Calise, 37 So.3d 940 (Fla. 5th DCA 2010) the sale of a home was closed and the buyer made a payment to the lender to fully pay off the pre-existing loan. The seller subsequently learned that the loan had not been fully paid off and sued the buyer for breach of contract. The lower court found that the parties had waived the conditions for closing contained in the contract through their conduct. The appellate court disagreed, finding that the seller was made whole as the lender received the full payoff and the mortgage was satisfied. The court found that even if the defendant had breached the contract by failing to make the contract conditions precedent prior to closing, the seller would not have been permitted to sue for fraud because the buyer retained no benefits under the contract. The earlier opinion that the buyer could sue the seller for breach of contract was therefore reversed.
In the action of Cruz Construction Company of Brevard, Inc. v. Poinciana Place Association, Inc., 695 So. 2d 50 (Fla. 4th DCA 1997), the plaintiff did not complete work on schedule but the defendant willfully delayed in making payments on the project. The defendant refused to pay the plaintiff before the work was completed. When this occurred, the court ruled that the plaintiff was entitled to summary judgment because the defendant willfully breached its own obligations by withholding payment. The plaintiff was entitled to collect damages based upon breach by the defendant with regard to some of the counts for breach of contract that were submitted to the jury. The court ordered that the final judgment be modified to eliminate the original judgment that was entered on the breach-of-contract verdicts in favor of the plaintiff.
In Machin v. City of Clermont, 506 So.2d 442 (Fla. 5th DCA 1987), the appellate court was faced with a case that addressed whether the parties had reached a accord and satisfaction, discharging the contract. The trial court found that there was a accord and satisfaction as the plaintiff took the check, knew the true amount owed, and had failed to indorse the check. The appellate court disagreed with the lower court’s finding noting that the City did not make an unequivocal demand that the plaintiff settle for that amount, the plaintiff unequivocally reserved his rights, and the plaintiff did not deposit the check. Therefore, the court determined that there had not been an accord and satisfaction.
The litigation of these cases demonstrates that discharge of contract by agreement may be utilized to resolve minor issues without litigation. However, other principles of contract law apply in some circumstances and may override the ability of the parties to discharge the contract.
Important Factors and Considerations
When agreeing to discharge a contract, it is important that parties keep in mind the amount of legal obligations they will be bartering away. Therefore, party’s should consider the following: The party’s likely exposure under the original contract / agreement; and The likelihood of future claims or pre-discharge issues under the original contract / agreement. Whilst courts will intervene to correct truly unjust situations, the efficacy of the doctrine of freedom of contract means that in most circumstances, a party’s ability to traverse an agreement with a willing counterparty will not be disturbed. Furthermore, it will be very difficult for a party to run a claim that discharge was not for good consideration when they admittedly entered into the discharge for good consideration. To minimise any potential disputes about the validity of an agreement to discharge a contract, parties should ensure that any discharge of a contract or deed is duly executed by all parties (i.e. signed, witnessed where appropriate and dated). Further, if a party wishes to preserve certain rights (e.g. to run a claim for breach in relation to an earlier period of time) but they agree to "discharge" that contract, unless the discharge document expressly retains those rights it will likely be found to discharge those rights. Similarly , any release of rights must be addressed with precision and accuracy. Drafting an "over release" will be equally as problematic as drafting an "over discharge" when a party intends to retain certain rights. In very limited circumstances, a unilateral discharge may be relied upon to terminate a contract. An example of such is when a party states that a contract will not be performed within the time period stated in the contract. That repudiation will be accepted by the other party. However, that position is not the same as a decision by both parties to discharge a contract. Therefore, parties should take care to specify if they are accepting a repudiation or mutually discharging the contract. It is critical that parties not only get advice from their solicitor at the time the discharge agreement is being entered into, but also ensure that the agreement is clear on its face. It is not enough for parties to just run a clause past their solicitor, then assume their contract has been validly discharged. Where possible, parties should be careful to pay explicit regard to whether there is any ambiguity in the scope of the discharge and/or if there are any limitations in an earlier contract that they wish to retain. If the agreement is silent or reflects a good faith negotiation without more, there is little room on behalf of the aggrieved party to argue that the agreement should be struck down.