CHAPTER

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Changes by Agreementof the Parties

TWELVE

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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, 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

Renegotiation of the Contract

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• These methods of reformation include:1. Mutual rescission2. Release3. Accord and satisfaction4. Substituted agreement/novation5. Modification

Renegotiation of the Contract

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• Mutual rescission– An agreement by mutual assent of both

parties to terminate the contractual relationship and return to the pre-contract status quo

Mutual Rescission

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• 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rights under the contract without holding the other “at fault,” or responsible in any way, then they have mutually rescinded the contract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

Mutual Rescission

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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

Mutual Rescission

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• 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

Release

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• 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

Release

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• 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

Release

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• 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”

Accord and Satisfaction

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• 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

Accord and Satisfaction

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• Forgoing a legal right to sue– Valid consideration as it has

recognized legal value to support a contractual obligation

Accord and Satisfaction

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• 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

Substituted Agreement/Novation

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• Merger– Combining previous obligations into a

new agreement

Substituted Agreement/Novation

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• 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

Substituted Agreement/Novation

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• 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

Substituted Agreement/Novation

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• 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

Substituted Agreement/Novation

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• 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

Substituted Agreement/Novation

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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

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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