7.6 Discharge by Agreement: Rescission, Novation & Accord and Satisfaction

Discharge by Agreement: Rescission, Novation & Accord and Satisfaction

I. Methods of Consensual Discharge of Contractual Obligations

Parties may extinguish, modify, or discharge their contractual duties through mutual agreements. Mastery of the distinctions among these mechanisms is essential for the FYLSE:

                               ┌─────────────────────────────┐
                               │ Methods of Consensual       │
                               │         Discharge           │
                               └──────────────┬──────────────┘
                                              │
         ┌────────────────────────────────────┼────────────────────────────────────┐
         ▼                                    ▼                                    ▼
   [Accord & Satisfaction]                 [Novation]                     [Mutual Rescission]
- Agreement for substitute perf.      - 4-party mutual agreement        - Mutual agreement to cancel
- Suspends original duty              - Substitutes new obligor           executory contract
- Satisfaction discharges all         - Immediately discharges delegator - Requires unperformed duties
- Breach: Sue on original OR accord   - Distinguish from mere delegation  on both sides (consideration)

1. Accord and Satisfaction

• The Accord (Restatement (Second) of Contracts § 281): A contract between an obligee and an obligor under which the obligee agrees to accept a different, substitute performance in full satisfaction of the obligor's existing contractual duty.
  • Consideration Required: An accord requires consideration. For a liquidated (undisputed, sum certain) debt, agreeing to accept a lesser cash amount is unenforceable under the pre-existing duty rule unless the debtor tenders a different performance (e.g., paying earlier, paying in goods, or paying at a different location).
  • Suspension of Original Duty: An accord does not immediately extinguish the original obligation. The accord merely suspends the obligee's right to enforce the original contract until the date scheduled for performance of the accord.
• The Satisfaction: The actual execution or tender of the agreed performance under the accord. Once satisfaction occurs, both the accord and the original contractual duty are completely discharged.
• Remedies Upon Breach of an Accord:
  • If Debtor Breaches the Accord: The obligee may sue EITHER on the original contract OR on the accord.
  • If Creditor Breaches the Accord (sues on the original contract before debtor defaults on the accord): The debtor may assert the accord as an equitable defense or enjoin the action.
• Check Cashing Rules / "Payment in Full" (UCC § 3-311): If a debtor sends a check conspicuously marked "payment in full" for an amount less than claimed, cashing the check operates as an accord and satisfaction ONLY IF: (1) the debt is unliquidated or subject to a bona fide, good-faith dispute; and (2) the check was tendered in good faith. If the debt is liquidated and undisputed, writing "payment in full" has no legal effect, and the creditor may cash the check and sue for the remaining balance.

2. Novation (Restatement (Second) of Contracts § 280)

A novation is a new contract that substitutes a new party into an existing contract, discharging the original party.

[!IMPORTANT] The Novation vs. Delegation Distinction on the FYLSE: On the FYLSE, examiners constantly test whether a transfer of duties is a delegation or a novation:

• Delegation: Obligor assigns duties to Delegate. Obligee accepts performance from Delegate. Obligor remains personally, secondarily liable as a surety if Delegate fails to perform. Obligee's mere consent to the delegation does not release the obligor!
• Novation: Requires the express or clear implied agreement of all parties (Obligor, Obligee, and Delegate) to completely release and discharge the original obligor from all further liability and substitute the Delegate as the sole obligor.

3. Mutual Rescission (Restatement (Second) of Contracts § 283)

• Rule: A mutual agreement between contracting parties to terminate and discharge an executory bilateral contract.
• Requirement of Mutual Consideration: Mutual rescission requires consideration. In an executory bilateral contract, consideration is readily present because each party surrenders their legal right to compel the other party's return performance.
• The Unilateral Performance Trap: If one party has already fully performed, an oral or written agreement to "rescind" the contract is void for lack of consideration. The performing party gives up a right to receive performance, but receives nothing in return. To discharge a contract where one party has fully performed, the parties must execute a formal release supported by new consideration or a writing under seal/statute.

4. Account Stated, Release, and Merger

• Account Stated: An agreement between parties who have had previous monetary transactions fixing the final net balance due between them and promising payment. It creates an independent cause of action on the balance.
• Release (Restatement § 284): A formal written manifestation by an obligee discharging an obligor's immediate or future duty. Requires consideration at common law unless modified by statutory writing rules (e.g., UCC § 1-306 waiver after breach without consideration in signed writing).
• Merger: A contractual duty is discharged by merger when the identical duty is superseded by and embodied into a higher form of legal obligation (e.g., when a contract claim merges into a final court judgment, or an executory real estate contract merges into a deed upon closing under the merger doctrine).

II. Comparative Overview of Discharge Mechanisms