THE DISCHARGE OF

CONTRACTS.

CHAPTER XVI.

DISCHARGE BY AGREEMENT.

191. Modes of discharge.-Having considered the elements which enter into the formation of a contract, the operation of the agreement when formed, its interpretation in case of dispute, and its performance, it remains to study the modes in which the contract may be discharged.

A party who fails to perform his promises under a contract thereby commits a breach of the contract. Upon every breach of a contract the injured party acquires a right of action for compensation. But it is not every breach by one of the parties that will discharge the other party from performing his part of the contract. Thus, the contract may be broken wholly or in part, and the breach may or may not operate as a discharge. Moreover, the injured party need not insist upon its discharge, but may choose to disregard the breach, and merely reserve to himself the right to bring an action for damages.

"By discharge, we must understand, not merely the right to bring an action upon the contract because the other party has not fulfilled its terms, but the

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right to consider oneself exonerated from any further performance under the contract, the right to treat the legal relations arising from the contract as having come to an end, and given place to a new obligation, a right of action." 19

A contract may be discharged in various ways: namely, (1) by agreement; (2) by performance; and, (3) by operation of law. The right of action arising from a breach of contract may also be discharged.

192. Discharge by agreement. The parties to a contract may agree that it shall no longer bind them. Since the contract is the result of agreement, the parties may agree to put an end to its obligations.

Such an agreement may either rescind the contract altogether, or merely alter some of the terms of the old agreement, Any claim arising under the original contract may then be met by setting up the new contract, so far as the latter operates to rescind or alter the former. Thus, if A contracts to build a house for B, the contract may be terminated by mutual agreement. Thereby A and B give up their respective rights under the original contract.

In discharging a contract by a new agreement, the new agreement must have all the requisites of a valid and enforcible contract. If the contract is executory, the consideration for the promise of each party consists of the abandonment by the other party of his rights. This will be sufficient, for the promise of A to discharge B is a consideration for B's promise to discharge A.20 An instrument under seal, as in

19 Anson, Contracts (Huffcut's 2d ed.), § 356. 20 Dreifus v. Salvage Co., 194 Pa. St. 475.

the case of other contracts, will dispense with the necessity for a consideration,21 except where seals have been abolished.

Waiver and gift. But if the contract has been executed on one side, for instance in a unilateral contract, an agreement of discharge requires a new consideration. Thus if A has performed, a bare waiver of his claim would not discharge B.22 This rule also applies to promissory notes in the United States, 23 but not in England. But a surrender or cancellation of the note, although without a consideration, is an effective discharge, because it is an executed gift.24

Thus the promisee may make a gift of the obligation to the promisor, provided the gift is executed. That is, there must be an act done sufficient in law to a transfer of the property given. A chose in action being the subject of a gift, if it is evidenced by a written instrument, the delivery of such instrument is necessary.25 In the event the delivery of the proper evidence of the obligation is impossible, a receipt in full is sufficient.

193. Discharge by substituted agreement.-As indicated, a contract may be discharged by such an alteration in its terms that a new contract is substituted for the old one; or, the old contract may be expressly waived in the new agreement. In such cases, the new agreement takes the place of the old,

21 Anson, Contracts (Huffcut's 2d ed.) §§ 88, 351.

22 Davidson v. Burke, 143 Ill. 139; Collyer & Co. v. Moulton, 9 R. I. 90, LEADING ILLUSTRATIVE CASES.

23 Seymour v. Minturn, 17 Johns. 169 (N. Y.).

24 Slade v. Mutrie, 156 Mass. 19.

25 Hart v. Strong, 183 Ill. 349; Stewart v. Hidden, 13 Minn. 43.

either entirely, or only as to such terms as have been changed. Thus, a new agreement, upon proper consideration, may be made to lengthen the time for payment under the original contract. No action may be maintained until the expiration of this time.26 If A and B contract for the building of a house, and later another agreement is made whereby the plans are changed, the old contract is discharged to that extent.

When a new contract is made between the same parties concerning the same matter, and its terms are inconsistent with the original contract, the new agreement will be construed to discharge the original contract.27 But the intention of the parties must so appear. Furthermore, a mere postponement of performance for the convenience of one of the parties does not discharge the contract. Should the original agreement never be acted upon, a rescission will be implied from lapse of time, or because a new agreement has been acted upon.28

194. Release.-A release discharges an obligation. It must be distinguished from a covenant not to sue, which is an independent contract, not affecting the right of action on the original claim. A covenant not to sue is a personal defense, available only between the parties to the covenant. As pointed out in a prior section, a covenant never to sue may be pleaded in bar of the action by the covenantee.

A release at common law being under seal required

26 Green v. Paul, 155 Pa. St. 126.

27 Rogers v. Rogers, 139 Mass. 440.

28 Rushbrook v. Lawrence, L. R. 5 Ch. 3 (Eng.).

no corsideration. But in those states where seals have been abolished, a release without consideration is invalid.

195. Novation.-A substitution may consist not only of terms but also of parties. A enters into a contract with X and Y. The latter two agree between themselves that Y shall be released from his liability. A may insist that Y continue to be bound by the contract, or he may treat the contract as broken and discharged, or he may continue to deal with X alone after he has notice of Y's act. If he accepts the latter agreement, he may enter into a new contract to accept the sole liability of X. He may not then hold Y.29 This is called novation.30

Similarly, the creditor may accept a new debtor in place of the old one. Thus, if one partner goes out of a firm and another comes in, the debts of the old firm may, by the consent of all the three parties, -the creditor, the old firm, and the new firm,-be transferred to the new firm.31 Such consent may be implied by conduct, if it is not expressed in words or writing.

In order that the novation shall be valid, it is essential that the original obligation shall be an enforcible one, otherwise the surrender of it will not constitute a sufficient consideration for the new agreement.32 Moreover, all of the parties to the contracts must be parties to the new agreement. However, very

29 Anson, Contracts (Huffcut's 2d ed.), § 355.

30 See § 128.

31 Hart v. Alexander, 2 M & W. 484 (Eng.); Collyer & Co. v. Moulton, 9 R. I. 90, LEADING ILLUSTRATIVE CASES.

32 Scott v. Atchison, 36 Tex. 76.