Performance, breach, and discharge - Discharge of duties (in...

Learning Outcomes

This article explains how contractual duties may be discharged other than by full performance, including:

• Identifying when an agreement constitutes a valid accord, when satisfaction has occurred, and when the original duty remains suspended
• Distinguishing an accord from a substituted contract, modification, or simple waiver, and predicting which claim the obligee may sue on
• Analyzing fact patterns involving liquidated versus unliquidated debts to determine whether part payment creates an enforceable accord and satisfaction
• Recognizing when the parties have formed a substituted contract that immediately extinguishes the prior agreement and limits remedies to the new contract
• Identifying a novation by spotting substitution of parties, consent of all affected parties, and clear intent to release the original obligor
• Comparing novation with mere delegation or assignment, and determining which parties remain liable on the exam’s claims for breach
• Applying rules on mutual and unilateral rescission, including when a contract is sufficiently executory and when separate grounds such as fraud are required
• Evaluating written releases and covenants not to sue under common law and UCC principles, focusing on consideration, scope, and statutory writing requirements
• Assessing how discharge doctrines affect sureties, third-party beneficiaries, and the allocation of the burden of proof in typical MBE-style disputes

MBE Syllabus

For the MBE, you are required to understand the legal mechanisms that discharge contractual obligations without full performance, with a focus on the following syllabus points:

• Discharge by accord and satisfaction (including executory accord)
• Discharge by substituted contract
• Discharge by novation and its distinction from delegation/assignment
• Discharge by mutual and unilateral rescission
• Discharge by release and covenants not to sue
• The role of consideration, intent, and the Statute of Frauds in these doctrines
• Effect of discharge on third-party beneficiaries and sureties
• Which party bears the burden of proving discharge
• How discharge doctrines interact with modification, conditions, and other excuses (impossibility, impracticability, frustration)

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following best describes an accord and satisfaction?
   1. A mutual agreement to rescind a contract.
   2. A new contract that immediately replaces the old one.
   3. An agreement to accept different performance, followed by that performance.
   4. A unilateral release of one party’s duties.
2. A, B, and C are parties to a contract. All agree that C will replace B and assume B’s duties, with B fully released. What is this called?
   1. Accord and satisfaction
   2. Novation
   3. Substituted contract
   4. Unilateral rescission
3. Which of the following is required for a valid mutual rescission?
   1. Both parties must have fully performed.
   2. The contract must be executory on both sides.
   3. Only one party must consent.
   4. The rescission must always be in writing.
4. A creditor agrees to accept a lesser sum in full satisfaction of a disputed debt, and the debtor pays that sum. What is the legal effect?
   1. The creditor may still sue for the balance.
   2. The debt is discharged.
   3. The agreement is void for lack of consideration.
   4. The original contract remains enforceable.

Introduction

A contract may be discharged not only by full performance, but also by later events or agreements that legally terminate the duty to perform. These doctrines are heavily tested on the MBE because they require close attention to:

• The parties’ intent (Do they mean to replace the old contract now, or only after a new performance occurs?)
• Timing (When is the new agreement made? When, if ever, is it performed?)
• Who is involved (Are new parties added or substituted? Are there third-party beneficiaries or sureties?)
• Scope (Are all duties discharged, or only some? Are rights under the original contract preserved?)

Key Term: Discharge of Duties
The legal termination of a party's obligation to perform under a contract, so that no further performance is required and no breach occurs by nonperformance.

Although contracts can also be discharged by other doctrines (for example, impossibility, impracticability, frustration of purpose, occurrence or non-occurrence of conditions, running of the statute of limitations), this article concentrates on discharge by later agreement and later instruments, including:

• Accord and satisfaction (including executory accord)
• Substituted contract
• Novation
• Rescission (mutual and unilateral)
• Release (and related covenants not to sue)

Typical exam fact patterns include:

• The parties fall into dispute and compromise on a different performance.
• A new person joins the deal and is intended to take over someone’s obligations.
• Both parties decide the contract should simply be undone.
• One party signs a written release of claims, sometimes after partial performance or after a dispute arises.
• A third-party beneficiary or surety is affected by a later change in the principal contract.

Your task on the MBE is to:

• Identify which doctrine fits the facts, and
• Apply its specific consequences: what is discharged, when, and who can still be sued.

Before turning to each doctrine, keep in mind an important procedural point:

• The party who asserts that a duty has been discharged (for example, by novation, accord and satisfaction, or release) generally bears the burden of proving the facts that establish discharge. On an exam, that affects who wins when the evidence is uncertain or conflicting.

With that in mind, we turn to each doctrine in turn.

Discharge by Accord and Satisfaction

An accord and satisfaction occurs when parties agree that a contractual obligation will be satisfied by a different performance (the accord), and that performance is then rendered (the satisfaction). This is most commonly seen where there is a dispute over the amount or nature of a debt, or when the obligor cannot perform as originally promised and proposes a substitute.

Key Term: Accord and Satisfaction
An agreement to accept a different performance in place of an existing contractual duty (accord), followed by the actual performance of that substitute (satisfaction), which discharges the original obligation and the accord.

Key structural points:

• The accord is itself a contract: it must have offer, acceptance, and consideration.
• Until the agreed substitute performance is carried out, the original duty is suspended, not discharged (majority rule).
• Only when satisfaction (the agreed substitute performance) occurs is the original duty discharged.
• If the obligor fails to perform the accord, the other party may usually sue on either:
  • the original contract, or
  • the accord (often treated as a new contract in its own right).

Key Term: Executory Accord
An agreement in which a party promises to accept a future substitute performance in satisfaction of a preexisting duty. Until performance of the accord occurs, the original duty is suspended, not discharged.

An executory accord is simply an accord that has not yet been performed; it becomes an accord and satisfaction only when the substitute performance occurs.

• Majority view: If the obligor breaches the executory accord, the obligee may sue on either the original contract or the accord.
• Minority view: The obligee is limited to suing on the accord, treating it like a substituted contract; the original claim is regarded as merged.

On the MBE, unless told otherwise, apply the majority rule.

Consideration and partial payment of debts

Consideration is central to determining whether a purported accord is enforceable, especially in debt problems.

Key Term: Liquidated Debt
A debt whose existence and amount are undisputed and fixed (for example, an invoice for a known sum already due).

Key Term: Unliquidated Debt
A debt where there is a genuine dispute over the existence or amount of the obligation, or where the amount cannot be precisely determined at the time.

At common law:

• If a debt is undisputed and liquidated (fixed and already due), a mere promise to accept less money in full satisfaction, without more, is generally not supported by consideration. The creditor can usually still sue for the balance despite any receipt or notation saying “paid in full.”
  • Rationale: The debtor is already bound to pay the full amount; paying part of what is already due confers no new legal detriment or benefit.
• If the claim is unliquidated or disputed (about liability or amount), an agreement to accept a different amount or different performance is supported by consideration: the compromise of a genuinely disputed claim is a legal benefit/detriment on both sides.

This is a classic MBE trap: you must distinguish between:

• A liquidated, undisputed debt (no valid accord and satisfaction by mere part payment), and
• An unliquidated or disputed claim (valid consideration for compromise).

Examples of valid consideration for an accord include:

• Payment of a lesser sum on a disputed or unliquidated debt.
• Payment of the same sum earlier than due, or in a different form (for example, property instead of cash, or payment in a different location, if bargained for).
• Payment to a third party designated by the creditor.
• Agreement by the creditor to forbear suit for a definite period, when the creditor is not already bound to forbear.

Also remember two related devices:

• Composition with creditors: A debtor and several creditors agree that each creditor will accept a reduced percentage of their claims in full satisfaction.
  • Each creditor’s promise to accept less is supported by the other creditors’ similar promises; this is generally enforceable and discharges the original debts according to the composition terms.
• Disputed portion of a larger obligation: If part of an invoice is genuinely disputed (for example, hours billed), a compromise on that portion can create a valid accord and satisfaction, even if the total invoice is stated in a fixed amount.

Accords under the UCC: “Payment in full” checks

Under UCC Article 3 (negotiable instruments), special rules can create accord and satisfaction by check:

• If:
  • a claim is unliquidated or subject to a bona fide dispute, and
  • the debtor tenders a good-faith check that conspicuously states “paid in full” (or similar language), and
  • the creditor cashes or deposits the check,
• Then, in many jurisdictions, there is an accord and satisfaction discharging the claim, even if the creditor protests or crosses out the language.

Some statutes allow large organizations to designate a specific address for “payment in full” checks, or to refund the payment within a short time to avoid accord and satisfaction. The NCBE sometimes hints at this by describing an internal “dispute department” or a special mailing address.

On the MBE, if you see a disputed claim, a “payment in full” notation, and the creditor cashing the check, you should think accord and satisfaction unless facts show a statutory escape route.

Consequences of breach of an accord

If the obligor fails to perform the accord:

• Under the majority rule, the obligee may:
  • enforce the original contract, or
  • enforce the accord (often tactically choosing whichever yields greater recovery or procedural advantage).
• Under the minority rule, the original duty is viewed as merged into the executory accord, so the obligee must sue on the accord alone.

The exam will sometimes expressly tell you which rule applies. If not, assume you can sue on either.

Also, if the accord is itself invalid (for example, because of fraud, duress, lack of consideration), the original contract remains enforceable; the accord never suspended the original duty.

Accord, sureties, and third parties

Key Term: Surety
A person who promises to be responsible for the debt or default of another (the principal obligor), often called a guarantor.

Accords can affect sureties and third-party beneficiaries in subtle ways.

• If a creditor and principal debtor enter into an accord that materially changes the principal’s obligation (for example, extends the time for payment, reduces the amount, or changes the nature of performance) without the surety’s consent:
  • Many courts hold that the surety is discharged, at least to the extent the change increases the surety’s risk or prejudices the surety.
  • If the creditor expressly reserves rights against the surety and the change does not increase the surety’s risk, some jurisdictions keep the surety bound.
• If the creditor and principal debtor agree on an accord that reduces the principal obligation and the surety consented to guarantee “whatever is owed,” the surety’s obligation is typically reduced in parallel.

Key Term: Third-Party Beneficiary
A nonparty to a contract whom the contracting parties intend to benefit directly, and who may acquire the right to enforce the contract once their rights vest.

As to third-party beneficiaries:

• If the original contract is made for the benefit of a third party and the parties later enter into an accord before the beneficiary’s rights vest (usually by assent, reliance, or suit), the parties may modify, replace, or extinguish the beneficiary’s expected benefit by that accord.
• Once the beneficiary’s rights vest, the original parties generally cannot discharge or modify those rights by a later accord, novation, or rescission without the beneficiary’s consent.

A classic exam pattern:

• Original contract: A promises B to pay B’s creditor C.
• Before C learns of or relies on the promise, A and B modify the contract so that B will be paid directly instead of C.
  • C is a creditor beneficiary, but his rights have not vested; the modification is effective and C cannot enforce the original promise.
• If C had already changed position in reliance on the promise (for example, by forbearing collection from A’s debtor), C’s rights would have vested and could not be destroyed without C’s consent.

Writing requirements and the Statute of Frauds

There is no special “Statute of Frauds for accords,” but general rules still apply:

• If the original contract is within the Statute of Frauds (for example, land sale; contract not performable within one year; sale of goods $500 or more), an accord that itself falls within the Statute must comply with the writing requirement.
  • Example: Original written land sale contract. The parties later agree that, instead of the original closing, the buyer will convey a different parcel to the seller. That accord involves a new transfer of land, so it must be in writing.
• Under UCC Article 2, a modification or accord that as modified involves a sale of goods for $500 or more must be evidenced by a sufficient writing, unless an exception applies (such as part performance, merchant confirmation, or admissions).

If the accord merely changes time or manner of payment, and the change is not itself within the Statute of Frauds, many courts allow it to be oral, even if the original contract was written.

Covenant not to sue and accords

Key Term: Covenant Not to Sue
A promise by the promisee not to pursue an existing claim against the promisor, which does not extinguish the original claim but makes suit a breach of the covenant.

A covenant not to sue can operate like an accord:

• The promisee agrees not to sue on an existing claim (the “old” right) in exchange for some other performance.
• Whether this discharges the original obligation or merely bars suit depends on its wording and the parties’ intent.
  • Strictly speaking, a covenant not to sue leaves the original claim intact, but makes suit itself a breach of the covenant.
  • In practice, courts often treat a well-drafted covenant not to sue as functional discharge as between the immediate parties.

On the exam, the main distinction is between:

• Release (discussed below): extinguishes the claim itself, and
• Covenant not to sue: preserves the claim but bars enforcement (and is enforceable as a separate contract).

Worked Example 1.1

A owes B $10,000. They dispute whether A owes the full amount. They agree that A will pay $7,000 in full satisfaction of the debt. A pays $7,000, which B deposits.

Answer:
The original debt is discharged. The accord (agreement to accept $7,000) and satisfaction (payment of $7,000) together extinguish the obligation, because the debt was disputed or unliquidated, providing consideration for the compromise.

Worked Example 1.2

Same facts as above, except A pays nothing under the accord. B sues A.

Answer:
Because there has been no satisfaction, the original obligation is not discharged. Under the majority rule, B can elect to sue on the original contract for $10,000 or on the executory accord for $7,000. Under the minority rule, B would be limited to suing on the accord for $7,000.

Discharge by Substituted Contract

A substituted contract is a new agreement that immediately replaces and extinguishes the original contract. Unlike an accord, the substituted contract itself discharges the prior duty, regardless of whether the new promise is eventually performed.

Key Term: Substituted Contract
A new contract that the parties intend to replace and immediately discharge the original contract; if breached, the remedy is on the new contract only.

Key features:

• The parties must clearly intend the new contract to serve as a complete replacement of the old one, not merely as a future compromise.
• Consideration is usually satisfied because each party agrees to give up rights under the original contract and accept rights under the new one.
• Once the substituted contract is formed:
  • The original contract is immediately discharged.
  • If the new contract is later breached, the injured party’s remedy is to sue on the substituted contract only; the original contract cannot be revived.

The central exam question: did the parties intend:

• Immediate discharge of the original obligations upon making the new agreement (substituted contract), or
• Discharge only after new performance occurs (executory accord)?

Distinguishing a substituted contract from an accord or modification

On the exam, you are often given a later agreement and asked which doctrine it represents. Focus on:

• Intent as to discharge:
  • Substituted contract: “This agreement supersedes all prior agreements,” “in full substitution for and satisfaction of all prior obligations,” “this is the entire agreement between the parties concerning X.”
  • Accord: “We will accept [new performance] in full satisfaction when performed,” or terms that clearly contemplate that the original duties persist until the new performance actually occurs.
• Scope:
  • If the new agreement comprehensively restates obligations on the same subject matter with inconsistent terms, and the parties behave as if the old contract is gone, that points toward a substituted contract or novation.
  • If the new agreement changes only part of the existing bargain (for example, just the delivery date or payment schedule), think modification, not substituted contract or accord.

Remember:

• A modification changes the terms of the existing contract but does not extinguish it. In a modification, you still look to the original contract (as modified) to determine the parties’ rights.
• A substituted contract extinguishes the original contract completely; the original contract no longer governs any rights or duties.

At common law, modifications require new consideration (unless a recognized exception applies, such as unforeseen circumstances). Under the UCC, a modification to a contract for the sale of goods does not require additional consideration but must be made in good faith and comply with any Statute of Frauds requirements.

Exam trick: sometimes the fact pattern looks like a “new deal” but the parties do not state that the original is discharged; they just adjust terms. Unless there is clear intent to wipe out the old contract, treat this as a modification, not a substituted contract or accord.

Substituted contract vs. novation

A novation (discussed next) is a special type of substituted contract that changes the parties.

• A substituted contract may:
  • Keep the same parties but change obligations, or
  • Change obligations and parties (which is then a novation if an original party is released).
• A novation always involves:
  • A change in who is bound (substitution of parties) and
  • An intent to release the original party.

In both cases, the test is intent to discharge the old contract immediately. Without that intent, you likely have a mere modification or an executory accord.

Effect on sureties and third-party beneficiaries

A substituted contract can affect third parties in ways similar to an accord:

• If the creditor and principal debtor enter into a substituted contract that materially alters the obligation without the surety’s consent, the surety is usually discharged, because the obligation it guaranteed no longer exists.
• For intended third-party beneficiaries:
  • Before their rights vest, the original parties can enter into a substituted contract that eliminates or changes the beneficiary’s right.
  • After vesting, a substituted contract that would harm the beneficiary generally requires the beneficiary’s consent, or it is ineffective as against the beneficiary.

Writing requirements

A substituted contract must satisfy the Statute of Frauds if:

• The substituted contract itself falls within a category that requires a writing (for example, sale of land, goods over $500, a contract not performable within one year), or
• The parties have agreed that modifications or replacements must be in writing (for example, under UCC § 2-209).

Otherwise, a substituted contract may be oral, even if the original contract was written. However, as with accords, if the substituted contract involves new land transfers, a writing will normally be required.

Worked Example 1.3

X and Y have a contract for X to deliver goods. They later agree that X will instead provide consulting services, and both intend this to replace the original deal; their written agreement states that it “supersedes and replaces all prior agreements between the parties concerning the subject matter hereof.”

Answer:
The original contract is discharged immediately by a substituted contract. The language shows intent to replace the prior agreement now. If X fails to provide consulting, Y may only sue for breach of the substituted contract, not on the original goods contract.

Worked Example 1.4

Seller contracts to deliver 1,000 widgets to Buyer. Later, they sign a new written agreement in which Seller will instead deliver 500 gadgets at a different price, “in full substitution for and in satisfaction of all prior agreements between the parties regarding widgets.” Seller fails to deliver any gadgets.

Answer:
The second agreement is a substituted contract. The original widget contract was immediately discharged; Buyer’s sole claim is for breach of the gadget contract. Buyer cannot sue to enforce the original widget deal.

If instead the second writing had stated, “Seller will deliver 500 gadgets, and upon such delivery, the original widget obligation will be deemed fully satisfied,” that would more likely be an executory accord: the original contract would not be discharged until the new performance (gadgets) was rendered.

Discharge by Novation

A novation is a new contract that replaces one party to the original contract with a new party, with the consent of all original and new parties. The original party is fully released from further liability.

Key Term: Novation
A mutual agreement among all parties to substitute a new party for an original party, with the intent to release the original party from all obligations.

Requirements for novation (common exam formulation):

• A previous valid contract.
• An agreement among all parties, including the incoming party, to a new contract.
• Clear intent to extinguish the duties of the original party as between the original parties.
• A valid new contract where the new party assumes the obligations.

Once a novation is formed:

• The original party is fully discharged from liability on the old contract.
• The new party is solely liable going forward.
• The creditor (or other obligee) cannot later sue the released party for breach of the original obligation.

Novation is heavily tested in questions involving delegation and assignment, because students often confuse them.

Key Term: Delegation
A transfer of contractual duties by the original obligor to another person (the delegate), without necessarily releasing the original obligor.

Key Term: Assignment
A transfer by a party (the assignor) of its right to receive performance under a contract to another (the assignee).

Novation vs. delegation and assignment

Distinguishing these:

• Delegation of duties:
  • Original obligor arranges for someone else to perform.
  • Does not require the obligee’s consent (unless the contract forbids delegation or involves a personal-services obligation).
  • The original obligor remains liable for performance unless a novation occurs.
• Assignment of rights:
  • Transfers the right to receive performance, not the duty to perform.
  • Does not automatically transfer duties or release anyone from liability.
• Novation:
  • Requires agreement of all parties, including the obligee.
  • Releases the original obligor; only the new obligor is liable.

Exam trap: facts where A tells B that C will perform instead, and C agrees with A, but B never agrees to release A. That is a delegation, not a novation; A remains liable.

Also note:

• A novation can substitute:
  • a new debtor (new obligor) for the old debtor,
  • a new creditor (new obligee) for the old creditor, or
  • both a new party and new obligations.

In each case, the core is the intent to release an existing party and substitute another in their place.

Types of novation

Novations can occur in several patterns:

• Substitution of a new debtor: Creditor agrees to release old debtor in favor of new debtor.
• Substitution of a new creditor: Debtor agrees to owe new creditor instead of old creditor; the old creditor is paid off or released and the new creditor takes over.
• Substitution of a new contract: The parties release each other from the original contract and enter into a new agreement that changes both obligations and parties (for example, replacing a partnership with a newly formed corporation).

The effect is always the same: the original party whose place has been taken is no longer liable on the old obligation.

Novation, sureties, and third parties

Novations have important consequences for sureties:

• If a novation substitutes a new principal obligor and releases the original principal, a surety on the original obligation is usually discharged, because the obligation it guaranteed no longer exists.
• If the creditor releases the surety but reserves rights against the principal obligor, the principal remains liable, but the surety is discharged.
• If the creditor and principal obligor enter into a novation that materially changes the obligation without the surety’s consent, the surety is typically discharged (similar to the effect of a substituted contract).

Novations can also affect third-party beneficiaries:

• Before a third-party beneficiary’s rights vest, a novation or other substituted contract can destroy those expected rights.
• After vesting, the beneficiary’s consent is generally required to eliminate the beneficiary’s rights.

Writing requirements and burden of proof

A novation need not be in writing unless:

• The new contract itself falls within the Statute of Frauds (for example, land sale; a suretyship promise, which must be in writing unless an exception applies), or
• A writing is required by statute or by the parties’ prior agreement.

The party asserting novation as a defense bears the burden of proving all elements, including:

• The existence of the prior contract,
• The agreement of all parties (including the obligee) to the substitution,
• The intent to release the original obligor, and
• A valid new contract with the substituted party.

Because consent of all parties is essential, novation is not lightly inferred; vague references to a third party “taking over” are not enough.

Worked Example 1.5

A contracts with B to build a house. With A and B’s agreement, C takes over A’s duties, and B releases A from liability.

Answer:
This is a novation. All parties agreed to substitute C for A, and B expressly released A. C is now liable; A is discharged. If C breaches, B’s claim lies only against C.

Worked Example 1.6

Compare: A tells B, “C will do the work for me,” and C agrees with A to perform, but B never agrees to release A.

Answer:
This is a delegation, not a novation. A remains liable because B never agreed to substitute C for A or to release A. B can still sue A if C fails to perform; B may also have a claim against C as a third-party beneficiary of A–C’s delegation agreement.

Discharge by Rescission

Rescission is the cancellation of a contract so that the parties are restored, as far as possible, to the position they were in before the contract. It can be mutual (by agreement of both parties) or unilateral (based on legal grounds allowing one party to treat the contract as canceled).

Key Term: Rescission
The cancellation of a contract and discharge of all remaining duties, usually by agreement of the parties or by court decree based on a valid ground such as fraud, misrepresentation, mistake, duress, or failure of consideration.

Mutual rescission

Key Term: Mutual Rescission
A bilateral agreement by both parties to an existing contract to discharge and cancel that contract, based on their mutual release of each other’s remaining duties.

Key points:

• Mutual rescission is only available if the contract is executory on both sides: both parties still have unperformed duties.
  • The mutual promises to release each other’s remaining duties constitute the consideration.
• If one party has fully performed, mutual rescission generally requires new consideration (for example, additional payment by the fully performing party), unless there is another recognized ground (fraud, mistake, misrepresentation, etc.).
  • Many MBE questions hinge on this: if Seller has delivered goods and only Buyer’s payment obligation remains, Seller’s bare promise to “let Buyer out” of the contract is not supported by consideration and is generally not binding unless some other doctrine applies.
• The parties can rescind all or only part of the contract (partial rescission), so long as the rescinded portion can be separated without injustice.

Form:

• At common law, mutual rescission may be oral, unless:
  • A statute requires a writing (for example, in some jurisdictions, rescission of land contracts), or
  • The original contract falls within the Statute of Frauds and local law requires a writing to rescind it.
• Under UCC Article 2:
  • For a sale of goods, the parties can mutually rescind without consideration; the UCC recognises that agreement to cancel is effective by itself.
  • However, if the original contract requires written rescission or modification, then a written rescission is needed (§ 2-209(2)), though an attempted oral rescission can sometimes operate as a waiver if relied upon.

Key Term: Mutual Rescission
The parties’ agreement to discharge all remaining duties under a contract that is executory on both sides, each giving up their rights to the other’s future performance.

Note that mutual rescission is distinct from a substituted contract or accord:

• In mutual rescission, the parties are simply ending their obligations; there is no new performance promised to replace the old one.
• In a substituted contract or accord, the parties replace the old performance with something else.

Unilateral rescission

Key Term: Unilateral Rescission
An attempt by one party to cancel a contract without the other party’s consent, based on legal grounds such as fraud, misrepresentation, mistake, duress, or failure of consideration.

Unilateral rescission is not a free-standing right to walk away from a valid contract. It is available only when the rescinding party has a valid contract defense, such as:

• Misrepresentation or fraud (either in the inducement or, more rarely, in the factum),
• Duress or undue influence,
• Material mistake (mutual, or in limited cases unilateral mistake),
• Failure of consideration (for example, total failure by the other party to perform a promised condition).

If the other party does not voluntarily agree to rescind, the rescinding party must typically bring an equitable action for rescission, asking a court to cancel the contract. Courts of equity often combine rescission with restitution, requiring each party to return what has been conferred, to avoid unjust enrichment.

Common exam angle:

• Party discovers a fraud and promptly notifies the other party of rescission and offers to return what has been received.
• If the facts show prompt action and restoration or tender of restoration, courts often treat the contract as rescinded, even before a formal judgment.

If the rescinding party continues to perform or accepts further performance after discovering the grounds for rescission, this can be treated as affirmation of the contract and waiver of the rescission right.

Effect of rescission on third-party beneficiaries

As with other modifications and discharges by agreement:

• If an intended third-party beneficiary’s rights have vested (for example, by assent, suit, or reliance), the original parties cannot rescind or modify the contract to the beneficiary’s detriment without the beneficiary’s consent.
• Before vesting, the parties are generally free to rescind or modify as they wish, and third-party beneficiaries cannot complain.

Writing and Statute of Frauds issues

• A rescission of a contract for the sale of land may be required by local law to be in writing; however, many courts enforce an executed oral rescission where both parties have acted consistently with cancellation.
• Under UCC § 2-209, a term stating that “all rescissions or modifications must be in writing” is enforceable. Thus, an oral rescission that violates such a clause may be ineffective, though it may operate as a waiver of strict compliance in some circumstances.

Worked Example 1.7

Seller contracts in writing to sell land to Buyer. Buyer has not yet paid, and Seller has not conveyed title. The parties later agree orally that they will “forget about the deal,” and neither performs.

Answer:
This is a valid mutual rescission because the contract was executory on both sides. The mutual promise to release each other’s duties is sufficient consideration, and the contract is discharged. Some jurisdictions require rescission of land contracts to be in writing, but many enforce an executed oral rescission when both parties have fully abandoned the transaction.

Worked Example 1.8

Same facts, except Buyer has fully paid, and only Seller’s duty to convey remains. Seller now wants to rescind, and Buyer agrees to accept back the purchase price, but Seller does not pay it.

Answer:
Because Buyer has fully performed, Buyer’s bare promise to allow rescission is not supported by fresh consideration. There is no effective mutual rescission until Seller provides the agreed return payment (or some other new consideration), or there is an independent ground for rescission (such as fraud). Mere agreement in words, without return of the consideration, does not discharge Seller’s duty in many jurisdictions.

Discharge by Release

A release is a written agreement by which one party gives up the right to enforce the other party’s contractual duties.

Key Term: Release
A written agreement in which one party relinquishes the right to enforce another party’s contractual obligations, thereby discharging those duties to the extent stated.

Key points:

• At common law, a release required consideration or a seal.
• Under modern statutes (including the UCC for sales of goods), a signed writing is usually sufficient; consideration is often not required.
  • UCC § 1-306: An authenticated record (signed writing) releasing a claim or right under a sales contract is effective without consideration.
• A release is usually unilateral: only the releasing party needs to sign.
• A release is interpreted according to its terms; it may:
  • Discharge all claims arising out of a contract or transaction (broad general release), or
  • Discharge only specified claims (for example, all claims up to a certain date, or only claims of a particular type).

Many exam questions turn on the scope of the release: does it cover unknown claims? Future claims? Claims of third parties? Always read the release language carefully.

Key Term: Covenant Not to Sue
A promise by a claimant not to file or pursue a lawsuit on an existing claim; it does not extinguish the claim itself, but breach of the covenant may give rise to damages or injunctive relief.

Release vs. covenant not to sue

Distinguishing a release from a covenant not to sue:

• A release generally extinguishes the claim itself.
• A covenant not to sue leaves the original claim in existence but promises not to enforce it; violation is a breach of contract.

Modernly, courts often treat both instruments similarly as to their effect on joint obligors and insurance coverage, but the conceptual distinction still matters, especially on the MBE:

• Releasing one joint obligor can, depending on jurisdiction and language, discharge others unless rights are expressly reserved.
• A covenant not to sue one obligor usually does not discharge the others.

Statutes in many states now provide that releasing one joint tortfeasor or joint obligor, while reserving rights against others, does not release the nonreleased parties.

Releases, sureties, and multiple obligors

Releases are particularly important where there are sureties, co-obligors, or joint tortfeasors:

• Release of the principal obligor without reserving rights against the surety often discharges the surety, because there is no remaining principal obligation to guarantee.
• Release of the surety, while reserving rights against the principal, generally leaves the principal’s obligation intact.
• Many modern statutes provide that releasing one joint obligor does not automatically release others, especially where the release states that claims are preserved against nonreleased parties.

On the MBE, look for:

• Whether the release is broad or narrow in its wording,
• Whether it “reserves rights against all other obligors,” and
• Whether the person seeking protection under the release is actually named or clearly within the released group.

Writing requirements (releases)

Because a release operates as a contract:

• Common law: Traditionally required consideration or a seal; modernly, a signed writing is often adequate under statute.
• UCC: For goods contracts, a signed writing is sufficient; no consideration is necessary.
• Many states require that releases be in writing to be enforceable; oral “releases” may instead be treated as accords, or as waivers where reliance exists.

A release is usually raised as an affirmative defense; the party asserting it bears the burden of proving its existence and scope.

Worked Example 1.9

Contractor finishes work for Owner. Owner and Contractor then sign a document in which Owner “releases Contractor from any and all claims arising out of the remodeling project.” No extra payment is made.

Answer:
Under modern statutes and under UCC principles for goods, the signed written release is effective to discharge Contractor’s liability, even absent new consideration. Owner cannot later sue Contractor for defective work covered by the release, unless some separate ground exists to avoid the release (for example, fraud or duress in obtaining the release).

Distinguishing the Doctrines

These doctrines often appear together in MBE answer choices. The outcome depends on what changed (performance, party, or both), when discharge occurs, and who agreed.

• Accord and satisfaction:

  • Parties agree to different performance in satisfaction of an existing duty.
  • The original duty is suspended by the accord and discharged only upon performance of the substitute (satisfaction).
  • If the accord is breached, the obligee may sue on the original contract (and often on the accord as well, under the majority rule).

• Substituted contract:

  • Parties make a new contract that they intend to immediately replace the old one.
  • The original contract is immediately discharged when the substituted contract is formed.
  • If the new contract is breached, the injured party sues only on the substituted contract.

• Novation:

  • All parties agree to substitute a new party in place of an original party, with intent to release the original party.
  • The original party is released; the new party assumes obligations.
  • Unlike a mere delegation, the original obligor is no longer liable.

• Rescission:

  • Mutual rescission: both parties agree to cancel an executory contract; their mutual releases supply consideration (common law) or are recognized without consideration (UCC).
  • Unilateral rescission: one party rescinds based on a recognized contract defense (for example, fraud, mistake, duress, total failure of consideration) and typically requires judicial action if disputed.
  • Rescission cancels remaining duties; courts often order restitution to restore pre-contract status as far as possible.

• Release:

  • A written relinquishment of rights by the promisee, often valid without consideration under modern law.
  • May extinguish obligations under an executed contract, including after breach.

Additional related concepts frequently tested alongside these doctrines:

• Modification: Changes the terms going forward but does not necessarily discharge the entire original contract.
  • Common law: requires new consideration (unless an exception applies).
  • UCC: requires good faith; no consideration is needed, though a new writing may be required if the contract as modified falls within the Statute of Frauds.
• Cancellation: Physical destruction or surrender of the written contract document. By itself, this does not discharge duties unless accompanied by clear intent and supported by consideration or a recognized doctrine (for example, mutual rescission, substituted contract).

Exam Warning

Common traps include:

• Treating a mere delegation as a novation: remember that consent of the obligee and release of the original obligor are required for novation.
• Treating any new agreement as a substituted contract: unless the original contract is meant to end immediately, you likely have an executory accord.
• Assuming a creditor’s acceptance of a lesser sum on a liquidated, undisputed debt is binding: absent additional consideration or statutory rules (like a UCC “paid in full” check), the creditor can still claim the balance.
• Ignoring the Statute of Frauds: a substituted contract or accord that itself falls within the Statute must satisfy the writing requirement.
• Forgetting third-party rights: once a third-party beneficiary’s rights vest, later rescissions, novations, or substituted contracts generally cannot wipe those rights out without the beneficiary’s consent.

Revision Tip

On the MBE, look for clear evidence of intent regarding the original contract:

• If the parties agree to a new contract and intend it to replace the old one immediately, it is a substituted contract (or novation if parties change).
• If they intend the old contract to be discharged only after the new promise is performed, it is an executory accord leading to accord and satisfaction when performance occurs.
• If they simply agree to “call it off” and neither will perform, that is mutual rescission.
• If one party signs a document saying “I hereby release X from all claims,” that is a release.

Worked Example 1.10

Owner contracts with Painter to paint Owner’s house for $5,000. Before work begins, Owner, Painter, and Decorator sign a written agreement that Decorator will do the painting for $5,000, and that Painter is “released from all obligations under the prior painting contract.” Decorator later refuses to paint.

Answer:
This is a novation. All parties agreed to substitute Decorator for Painter, and Owner expressly released Painter. Owner’s claim is against Decorator only; Painter is discharged. This is not an accord (no different performance promised) and not merely a delegation (because Painter was expressly released).

Additional Procedural and Third-Party Issues

Burden of proving discharge

In exam questions, do not overlook who must prove what:

• A plaintiff establishes a prima facie case for breach by proving:
  • a valid contract,
  • breach, and
  • damages.
• A defendant who claims the duty was discharged by novation, accord and satisfaction, rescission, or release bears the burden of proof on that discharge.

Examples:

• If a debtor pleads that the creditor released the debt, the debtor must prove the existence and scope of the release.
• If an obligor asserts novation, it must show that the obligee agreed to release it in favor of the new obligor.
• If a party claims mutual rescission, it must show that both parties agreed to cancel and that there were remaining obligations on both sides (or that statutory or UCC rules dispense with consideration).

On a multiple-choice question, if evidence is ambiguous (for example, a vague letter or oral statement), tilt against the party who carries the burden on that issue.

Effect on third-party beneficiaries

As noted earlier, discharge by later agreement interacts with third-party beneficiaries:

• Before vesting, the original parties may modify, rescind, substitute, or extinguish the contract (including by accord, novation, or release) without the beneficiary’s consent.
• After vesting, changes that would impair the beneficiary’s rights normally require the beneficiary’s consent.

Exam pattern (illustrating both timing and doctrine):

• On August 20, a rodeo manager contracts with a hatmaker for hats and agrees to pay part of the price directly to a tannery owner to whom the hatmaker owes a prior debt. The tannery owner is a creditor beneficiary of the August 20 contract, but is not told of it.
• On August 25, the hatmaker and rodeo manager execute a modification eliminating the payment obligation to the tannery.
• On August 30, the manager’s brother tells the tannery owner for the first time that the hatmaker’s debt will be paid from this contract.
• When the manager later refuses to pay the tannery owner, the tannery owner sues.

Because the modification occurred before the tannery owner had knowledge or relied on the promise, the tannery owner’s rights had not vested. The hatmaker and manager were free to modify or rescind as they did. The tannery owner therefore cannot recover from the manager under the original contract.

This example mirrors the testable rule: intended beneficiaries’ rights can be wiped out by later agreement before they vest; they are protected after vesting.

Effect on sureties

Suretyship and guaranty problems often turn on whether the primary obligation has been altered or extinguished:

• If the primary obligation is discharged (for example, by novation substituting a new principal, or by substituted contract that changes the debt), the surety is generally discharged, unless:
  • the surety consented to the change, or
  • the surety’s contract explicitly allows modifications without the surety’s consent.
• A release of the principal obligor without reserving rights against the surety typically discharges the surety.
• A creditor can preserve its rights against a surety by expressly reserving them in the release, but if the modification materially increases the surety’s risk, some courts will still discharge the surety.

On the MBE, look for language indicating whether:

• the surety consented to the new arrangement, or
• the creditor expressly “reserves all rights against the guarantor.”

Those lines often determine whether the surety remains liable.

Key Point Checklist

This article has covered the following key knowledge points:

• Contractual duties can be discharged by accord and satisfaction, substituted contract, novation, rescission, or release, even without full performance of the original terms.
• An accord is a contract for substitute future performance; the original duty is suspended and discharged only upon satisfaction.
• An executory accord is an unperformed accord; if breached, the obligee may typically sue on the original contract or the accord (majority rule).
• Whether a debt is liquidated or unliquidated determines whether an agreement to accept a lesser sum is supported by consideration.
• A substituted contract immediately replaces and discharges the original contract; later breach gives rise only to a claim on the substituted contract.
• A novation substitutes a new party by agreement of all concerned, releasing the original party from future liability.
• A novation is different from delegation or assignment because it requires the creditor’s consent and releases the original obligor.
• Mutual rescission cancels a contract by mutual agreement and is generally available only when both parties still have duties remaining (executory on both sides).
• Unilateral rescission is available only when there is a valid ground (for example, fraud, mistake, duress, total failure of consideration) and typically requires judicial action if disputed.
• A release is a written relinquishment of rights, effective upon execution under modern statutes, often without consideration, and it extinguishes the claim to the extent stated.
• A covenant not to sue generally does not extinguish the original claim but bars suit and may give rise to damages if breached.
• The Statute of Frauds and UCC writing requirements apply to accords, substituted contracts, novations, rescissions, and releases when those agreements themselves fall within Statute of Frauds categories.
• Rights of intended third-party beneficiaries that have vested cannot be destroyed by later rescission, novation, or substituted contract without the beneficiary’s consent.
• Modifications, substituted contracts, accords, and rescissions entered into before a beneficiary’s rights vest can eliminate or change the beneficiary’s rights.
• Changes to the primary obligation, or a release of the principal, can discharge a surety if made without the surety’s consent or if they materially increase the surety’s risk.
• The party asserting discharge (for example, by novation, release, or accord and satisfaction) bears the burden of proving the facts establishing discharge.
• On exam fact patterns, distinguishing between modification, accord, substituted contract, novation, rescission, and release turns on intent, timing, scope, and the involvement of new parties.

Key Terms and Concepts

• Discharge of Duties
• Accord and Satisfaction
• Executory Accord
• Liquidated Debt
• Unliquidated Debt
• Substituted Contract
• Novation
• Delegation
• Assignment
• Rescission
• Mutual Rescission
• Unilateral Rescission
• Release
• Covenant Not to Sue
• Surety
• Third-Party Beneficiary