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McGraw-Hill/Irwin
Changes by Agreement
of the Parties
©2008 The McGraw-Hill Companies, All Rights Reserved
Objectives
Chapter Objectives:
• Use properly vocabulary regarding changes in
contact terms or performance
• Identify when consideration is necessary for the
change(s)
• Determine a party’s right to sue and when it is
waived by the subsequent agreement
• Differentiate among the five types of
agreements that can alter the terms of
performance
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Objectives
• This chapter will examine HOW parties can
terminate the contractual relationship by
making changes to the existing agreement and,
• WHAT terms must be included in order to
effectuate the valid and enforceable termination
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Renegotiation of the Contract
• Renegotiation of the contract, in an attempt to
salvage what they can of the agreement, can
take many forms, all of which avoid recourse to
the court system
• The incentive to reach a “new” agreement lies
in the costly and time-consuming nature of
litigation and/or the parties’ need to maintain
their relationship
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Renegotiation of the Contract
• These methods of reformation include:
1. Mutual rescission
2. Release
3. Accord and satisfaction
4. Substituted agreement/novation
5. Modification
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Mutual Rescission
• Mutual rescission
– An agreement by mutual assent of both
parties to terminate the contractual
relationship and return to the pre-contract
status quo
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Mutual Rescission
• If both parties agree to surrender their
respective rights under the contract without
holding the other “at fault,” or responsible in
any way, then they have mutually rescinded
the contract
• The agreement to terminate the contract
must be mutual; both parties, through words
or actions, must assent to the abandonment
of the performance obligations
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Mutual Rescission
A mutual rescission also acts as a
covenant not to sue for breach as it
acknowledges that there has been
consent by both parties to forgo any
legal remedies
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Release
•
Release
– A discharge from the parties’ performance
obligations that acknowledges the dispute
but forgoes contractual remedies
– Where a release is involved, there is a
dispute as to the obligations of one or both
parties.
– The release and accompanying covenant
not to sue acknowledge that there are
unresolved questions of obligation and
liability but do not impose a contractual
remedy
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Release
•
There are a few rules regarding releases
– The first is logical: the release, to be
enforceable, must be in writing
– This is not a Statute of Frauds issue but
rather one of proof of intent
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Release
• There are a few rules regarding releases
– The second falls under the rules of
construction. A release is construed in
favor of the releasing party
– The words should be specific with regard
to the rights that are relinquished and
refer to the clear intent of the parties to
give up those rights
– There must be a clear indication that a
party intended to release the potentially
breaching party from liability
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Accord and Satisfaction
• Accord and satisfaction
– An agreement to accept the imperfectly
proffered performance as a fulfillment of
the contractual obligations
– One or both parties state that they have
not received what they bargained for, but
they cannot come to any agreement as to
the deficiency
– Instead of resolving the dispute in court,
the parties “agree to disagree”
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Accord and Satisfaction
•
The parties come to an accord (amicable
arrangement) that the different
nonconforming performance will satisfy the
originally required performance
•
An accord and satisfaction must comply with
all the requirements for any contractual
agreement, which means that the parties
must intend to enter into this kind of
settlement of their dispute
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Accord and Satisfaction
• Forgoing a legal right to sue
– Valid consideration as it has recognized
legal value to support a contractual
obligation
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Substituted Agreement/Novation
• Substituted agreement
– Replacement of a previous agreement with
a new contract with additional but not
inconsistent obligations
– The subsequent contract alters the
obligations but does not directly contradict
them
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Substituted Agreement/Novation
• Merger
– Combining previous obligations into a new
agreement
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Substituted Agreement/Novation
•
Novation
– An agreement that replaces previous
contractual obligations with new
obligations and/or different parties
– A novation is the only way to “switch out”
the parties to the contract
– The contract is “made new” by
transferring the duties of the old party to
the new one
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Substituted Agreement/Novation
• There are rules or conditions that must exist
for a valid novation:
1. There must be a legally binding present
obligation that has not been breached
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Substituted Agreement/Novation
• There are rules or conditions that must exist
for a valid novation:
2. All parties to the arrangement must consent
to the substitution of the new party
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Substituted Agreement/Novation
• There are rules or conditions that must exist
for a valid novation:
3. The new obligations must rest solely on the
new party, extinguishing liability of the old
party. There must be a clear intent to
extinguish the previous liability of the
parties
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Modification
• Modification
– A change or addition in contractual terms
that does not extinguish the underlying
agreement
– Freedom to contract includes the freedom to
modify the parties’ rights and obligations
– All three requirements of a valid contract
(offer, acceptance, and consideration) must
be present
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Modification
• Requiring consideration to be present when
modifying a contract ensures that there is a
valid bargain made regarding the change
• Without consideration, the proposed
modification is a new offer to enter into a new
and different contract and terminate the
previous contract
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Modification
• There is an exception for transactions between
merchants, in order to facilitate commerce and
ensure speedy transactions, merchants, in the
course of business, may modify existing
contracts without consideration for the change
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Summary
• Changes to a contract can take several forms,
including:
1. Mutual rescission-wherein the parties
decide that the contract is no longer worth
pursuing. Both parties surrender their
rights and no fault is assigned to
nonperformance
2. Release-where the party having a right to
sue for nonperformance voluntarily
relinquishes that right. This is often
accompanied by a covenant not to sue
based on the defective or nonexistent
performance
12-24
Summary
• Changes to a contract can take several forms,
including:
3. Accord and satisfaction-where the parties
agree the tendered performance is “good
enough” and change the original contract
to reflect the actual occurrence
4. Substituted agreement-where the parties
merge the old agreement into a new one
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Summary
• Changes to a contract can take several forms,
including:
5. Novation-wherein one party steps
completely out of the transaction and a
new party is substituted for the departing
party. The agreement is made new by the
replacement
6. Modification-wherein the parties
mutually assent to change the terms of
the contract and this modification is
supported by consideration
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