Discharge by Agreement

Introduction

Discharge by agreement is a straightforward way for parties to end or reshape a contract. It relies on the same principle that created the contract in the first place: mutual consent. When both sides agree to release each other or to replace or vary terms, the original obligations can be brought to an end, either wholly or partly.

In practice, discharge by agreement takes several forms, including mutual release, abandonment by conduct, novation, accord and satisfaction, variation, and waiver. Each has its own rules on consent, consideration, and formality. The safest approach is to record any change clearly and ensure the agreement is either supported by consideration or executed as a deed. Failing to do so can leave parties exposed to claims about unpaid sums, alleged breaches, or disputes over whether a change was intended at all.

What You'll Learn

• When a mutual release (rescission by agreement) brings a contract to an end
• How abandonment by conduct works and why it’s risky to leave things informal
• The difference between novation, variation, and assignment
• How accord and satisfaction settles claims, and the limits on part payment of debts
• How waiver operates, and when promissory estoppel can suspend rights
• Drafting points: deeds, consideration, No Oral Modification clauses, and accrued rights
• Practical steps to choose the right route and document it properly

Core Concepts

Mutual Release (Rescission by Agreement)

• What it is: A fresh agreement in which each party agrees to release the other from further performance. This can end the contract entirely or on defined terms.
• Consideration or deed: A mutual release is typically supported by each party’s promise to release the other, which counts as consideration. If consideration is doubtful (e.g., one party has fully performed and only the other owes obligations), execute a deed of release to avoid challenges.
• Scope: Be clear whether the release covers:
  • Future obligations only
  • Accrued rights (e.g., invoices already due)
  • Known and unknown claims (often addressed with a broad “full and final settlement” wording)
• Recording: Use a short termination agreement or deed specifying:
  • Date of termination
  • Payments and conditions
  • Treatment of accrued rights
  • Confidentiality, return of property, and any continuing clauses (e.g., restrictive covenants)

Abandonment by Conduct

• Concept: A contract may end where both parties’ conduct demonstrates a shared intention not to perform any further. This is sometimes inferred after long inactivity and silence.
• Threshold: The conduct must be clear, mutual, and consistent with the contract being at an end. Mere delay or one-sided inaction is not enough.
• Risk: Abandonment is fact‑sensitive and uncertain. If you want the contract to end, agree that expressly and document it. Reliance on silence or inactivity often triggers disputes later.

Novation (vs Assignment)

• Novation: A new contract replaces the old one, usually substituting one party for another. All parties (including the incoming party) must consent. The original contract is extinguished; the new contract takes its place.
• Assignment: Transfers rights, not obligations. The original obligor remains liable unless the counterparty agrees to a novation.
• Formalities:
  • Consent of all relevant parties
  • Often done by deed (especially if consideration is unclear)
  • State whether accrued liabilities pass to the new party or remain with the old party
• Use cases: Outsourcing, business sales, project transfers, group reorganisations.

Accord and Satisfaction

• Meaning: An “accord” (the agreement to settle) plus “satisfaction” (the performance of that agreement). The performance is what discharges the original obligation.
• Part payment of debts:
  • General rule: Part payment alone does not discharge a debt (Foakes v Beer). Something extra is needed, such as earlier payment, payment at a different place if requested by the creditor, or a third party’s payment.
  • Composition agreements with multiple creditors are an exception (all creditors agree to accept a proportion).
• Practical points:
  • Make the settlement terms clear: what is being given up and upon what performance
  • Label payments or actions as “in full and final settlement” only if that is truly intended
  • Beware pressure or unfair conduct; agreements reached under improper pressure can be challenged

Variation (Material Alteration) and Consideration

• Variation: The parties agree to modify terms (e.g., price, scope, timelines). The contract continues but on the varied terms.
• Consideration and formality:
  • A variation must be supported by consideration unless executed as a deed
  • A practical benefit may amount to consideration for promising extra payment in some contexts, but not for part‑payment of a debt
  • Many contracts contain No Oral Modification (NOM) clauses requiring variations to be in writing and signed; courts generally uphold these clauses
• Drafting tips:
  • State exactly which clauses are varied
  • Confirm that all other terms remain in force
  • Address any knock‑on effects (e.g., milestones, warranties, price adjustments)

Waiver and Promissory Estoppel

• Waiver (by election): A party decides not to insist on a contractual right (e.g., a deadline), often temporarily. Clear communication is needed. The party can usually reinstate strict performance by giving reasonable notice and time to comply.
• Promissory estoppel:
  • Prevents a party from going back on a clear promise not to enforce rights when the other party has relied on it
  • Generally suspends rights rather than extinguishing them and is used as a defence, not a cause of action
  • To revert to strict terms, give reasonable notice and allow time to adjust
• Good practice: If you are willing to relax a term, confirm in writing whether the concession is temporary and whether you reserve the right to enforce strictly later.

Key Examples or Case Studies

Scarf v Jardine (1882) 7 App Cas 345 — Novation

• Context: A creditor dealt with a new partnership in place of an old one.
• Key point: A novation substitutes a new contract and party, releasing the old obligor. Consent of all parties is essential.
• Application: Use a novation when you want obligations to transfer and the original contract to end.

Foakes v Beer (1884) 9 App Cas 605 — Part Payment of Debt

• Context: Debtor paid part of a judgment debt in instalments; creditor later claimed interest.
• Key point: Part payment is not good consideration for release of the balance. Additional consideration is needed.
• Application: If settling a debt for less, add something more (e.g., early payment, different method, third‑party funds) or use a deed.

D & C Builders v Rees [1966] 2 QB 617 — Accord and Satisfaction Under Pressure

• Context: Builders accepted a reduced sum from a customer facing financial difficulty; acceptance was induced by pressure.
• Key point: Agreements reached under improper pressure may not be a valid accord and satisfaction.
• Application: Keep settlement discussions fair and well‑documented; avoid tactics that could later void the agreement.

The Hannah Blumenthal [1983] 1 AC 854 — Abandonment by Conduct

• Context: Long delay in pursuing arbitration led to arguments that the arbitration agreement had been abandoned.
• Key point: Prolonged inactivity and conduct inconsistent with further performance can support a finding of abandonment, but the threshold is high.
• Application: Do not rely on silence. If a contract should end, document the termination.

Charles Rickards Ltd v Oppenheim [1950] 1 KB 616 — Waiver and Reinstating Time

• Context: Buyer tolerated missed delivery dates, then gave a clear notice making time of the essence.
• Key point: A party who has waived strict deadlines can reinstate them with reasonable notice.
• Application: If you have relaxed a requirement, say when it will be enforced again and allow time to comply.

MWB Business Exchange Centres Ltd v Rock Advertising [2018] UKSC 24 — No Oral Modification

• Context: An oral agreement to reschedule licence fees clashed with a NOM clause requiring written variations.
• Key point: NOM clauses are generally effective; oral variations made contrary to them are unlikely to be enforced.
• Application: If your contract has a NOM clause, put any variation in a signed written document.

Practical Applications

• Choose the right mechanism:
  • End everything now: mutual release (use a deed if consideration is unclear)
  • Replace a party: novation with clear transfer terms
  • Resolve a dispute or debt: accord and satisfaction (define performance that triggers discharge)
  • Adjust terms: written variation compliant with any NOM clause
  • Relax enforcement temporarily: written waiver reserving rights
• Draft with precision:
  • Identify the original contract and parties
  • State whether the change is a termination, novation, settlement, or variation
  • Set out payments, conditions, timelines, and consequences of non‑performance
  • Deal expressly with accrued rights, ongoing clauses (confidentiality, IP, restrictive covenants), and return of property
• Mind the formalities:
  • Consideration or deed for releases and variations
  • Tripartite consent for novations
  • Respect any NOM clauses and signature requirements
• Manage risk in settlements:
  • Use “without prejudice” communications during negotiations where appropriate
  • Avoid pressure that could be challenged as duress
  • Make it clear whether the agreement is a full and final settlement, and which claims it covers
• Handle part‑payment carefully:
  • To settle for less, add something extra (earlier payment, different method/place, third‑party payment) or use a deed
  • For multiple creditors, consider a composition agreement
• Keep records:
  • Confirm any waiver or temporary concession in writing
  • If resuming strict enforcement, give clear notice and reasonable time to comply
• Check for constraints:
  • Third‑party rights (Contract (Rights of Third Parties) Act 1999) that may be affected
  • Insolvency or regulatory issues that could limit what can be agreed
  • Internal approvals and authority to sign

Summary Checklist

• Confirm both parties consent to end, replace, settle, or vary the contract
• Decide between mutual release, novation, accord and satisfaction, variation, or waiver
• Ensure consideration or use a deed where needed
• Comply with any No Oral Modification clause
• State what happens to accrued rights and ongoing clauses
• For part‑payment of debts, add fresh consideration or execute a deed
• Avoid pressure; document settlement terms clearly
• For waivers, reserve rights and give notice to reinstate strict terms
• Obtain necessary third‑party consents and internal approvals
• Keep a complete paper trail of negotiations and the final agreement

Quick Reference