In the same way that it was entered into by agreement, a contract can be discharged by agreement. Several different mechanisms exist by which this can be achieved.
If both parties concur, they can agree to discharge each other from the promises of the contract. This is discharge by mutual agreement and can arise at any time. Sometimes a mutual discharge mechanism is built into the contract, for example in a sale and purchase agreement, an offer to allow the return of the goods if they are deemed unacceptable. If the goods are returned the contract of sale is discharged by mutual agreement.
Equally, a mutual discharge may be a forgone conclusion and a contract may be drafted with a conditions precedent, meaning that the contract will not commence until a certain event takes place, and, if it does not, the party does not become subject to contractual obligations. A condition subsequent is a future event that, when it occurs, will terminate the contractual relationship between the parties irrespective or their performance.
Discharge by agreement can, at times, be effortless. If neither party fulfils their obligations over a substantial amount of time, or otherwise indicates a lack of intention to perform then, if presented to a Court, this non-participation will be viewed as discharge by agreement.
One party may also take it upon themselves to release the other from their contractual obligations, in which case a unilateral release occurs.
If the parties wish to continue their relationship in some way they can discharge the contract by novation, vary the terms of the contract or substitute a new contract.
Novation means that a new contract replaces the old. It can be between the same parties, but interestingly, this is not necessary. This frequently occurs in debtor/creditor scenarios, where the responsibility for a debt is shifted in order to discharge an obligation for payment. For example, if A owes money to B, they can agree that A pays money to C instead (if for example B owed money to C) and therefore A becomes bound to the new creditor. The consideration for the new contract is the mutual discharge of the obligations in the old contract
Merger of a lesser contract into a greater contract — whether it’s a smaller contract into a bigger contract or an informal agreement into a formal agreement, a contract can be subsumed into another in such way that the obligations under the original agreement will be discharged.
Discharge by accord and satisfaction occurs when there has been a breach by one party. It’s a way to continue the relationship and for the wronged party to make some level of recovery or gain without resorting to dispute resolution. In a discharge by accord and satisfaction, one party agrees to release the party who has breached the contract by requiring them to perform another action. Hence the name: discharge by accord (the new promise) and satisfaction (performance of the new promise).
As can be seen, there are endless shades of grey when dealing with contracts that don’t go to plan. It can be a worthwhile and profitable to consider all the options prior to resorting to a dispute or sacrificing potential gain for lack of a better alternative.
