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Chapter 14 I. RESCISSION A. Mutual rescission: As long as a
contract is executory on both sides (i.e., neither party has
fully performed), the parties may agree to cancel the whole
contract. This is a "mutual rescission."
1. No writing: In most states, a mutual rescission does not have to be in writing. This is true even if the original contract fell within the Statute of Frauds. 2. Fully performed on one side: If the contract has been fully performed on one side, a mutual rescission will not be effective, because there is no mutual consideration. B. Unilateral rescission: Where one of the parties to a contract has been the victim of fraud, duress, mistake, or breach by the other party, he will generally be allowed to cancel the contract, terminating his obligations under it. Some courts call this a "unilateral rescission." But it is better to say that the innocent party may "cancel" or "terminate." A. Executory accord generally: An executory accord is an agreement by the parties to a contract under which one promises to render a substitute performance in the future, and the other promises to accept that substitute in discharge of the existing duty. (Example: Debtor owes Creditor $1,000 due in 30 days. Creditor promises Debtor that if Debtor will pay $1,100 in 60 days, Creditor will accept this payment in discharge; Debtor promises to make the $1,100 payment in 60 days. The new agreement is an executory accord.) B. Consequences: Executory accords are enforceable. However, an accord does not discharge the previous contractual duty as soon as the accord is made; instead, no discharge occurs until the terms of the accord are performed. Once the terms of the accord are performed, there is said to have been an "accord and satisfaction." 1. Failure to perform accord: If a party fails to perform under the terms of the executory accord, the other party may sue for breach of the original agreement, or breach of the accord, at his option. (Example: On the facts of the above example, if Debtor fails to make the $1,100 payment, Creditor may sue for either $1,000 plus damages for failure to get the money in 30 days, or $1,100 plus damages for failure to get the money in 60 days.) A. Distinguished from executory accord: A "substituted agreement" is similar but not identical to an executory accord. Under a substituted agreement, the previous contract is immediately discharged, and replaced with a new agreement. (Example: On the facts of the above example, if the new agreement were be found to be a substituted agreement rather than an executory accord, and Debtor then failed to make the payment in 60 days, Creditor would have to sue on the new promise, not the old promise.) 1. Distinguishing: In determining whether a given agreement is a substitute agreement or executory accord, the most important factor is whether the claim is a disputed one as to liability or amount — if the debtor in good faith disputes either the existence of the debt or its amount, the presumption is that there is a substituted agreement. If the amount and obligation are undisputed, the presumption will be that there is an executory accord. Also, the more deliberate and formalized the agreement, the more likely it is to be a substituted agreement. 1. Consideration: Some (but not most) states hold that where a substituted agreement operates solely to the benefit of one party, it is ineffective because it is not supported by consideration. (In sales cases, the UCC provides that a "modification," which is what a substituted agreement really is, needs no consideration to be binding.) 2. Writing: If the substituted agreement would have to satisfy the Statute of Frauds were it an original contract, the substituted agreement must be in writing. (Some states also require the substituted agreement to be in writing if the original is in writing, even where neither falls within the Statute of Frauds.) IV. NOVATION A. Definition: A "novation" occurs where the obligee under an original contract (the person to whom the duty is owed) agrees to relieve the obligor of all liability after the duty is delegated to some third party. A novation thus substitutes for the original obligor a stranger to the original contract, the delegatee. (Example: Contractor agrees to paint Owner's house for $10,000. Contractor does not have enough time to get the job done, so with Owner's consent he recruits Painter to do the job instead. If Owner agrees to release Contractor from liability, the result is a novation: Painter steps into the shoes of Contractor, and only Painter, not Contractor, owes a duty to Owner.) B. Consent: The obligee must consent to the novation. But the obligor, who is being discharged, need not consent. (Example: On the facts of the above example, Owner must consent to the novation, but Contractor need not consent, at least to the delegation/release aspect of it.) A. Generally: Where a party who has sold goods or services to another sends a bill, and the buyer holds the bill for an unreasonably long time without objecting to its contents, the seller will be able to use the bill as the basis for a suit on an "account stated." The invoice is not dispositive proof that that amount is owing, but the burden of proving that the invoice is wrong shifts to the buyer. VI. RELEASES A. Generally: Where a contract is executory only on one side, the party who has fully performed may give up his rights by virtue of a release, a document executed by him discharging the other party. B. Formal requirements: In most states, a release must either be supported by consideration, or by a statutory substitute (e.g., a signed writing). 1. UCC view: Under the UCC, a signed writing can release a claim for breach of contract, even without consideration.
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