Discharge and Substitution of a Contract


Sometimes parties may decide that their contract is not the one they want.  They may want to replace it with another contract.  If they do, the original contract is discharged by substitution.  It is not necessary for the parties to state that they are making a substitution.  If they make a new contract that is clearly inconsistent with a former contract, a court will hold that the earlier contract has been superseded by the later contract.  It is preferable, however, to expressly state in the later contract that the earlier one has been superseded.

The fact that a second contract has been made does not always mean that the original contract has been canceled.  The second contract may merely supplement or modify the original contract.  In order for the later contract to take the place of the first, the parties should put language similar to the following in the second agreement: “This contract completely supersedes and replaces that certain contract entered into by the under­signed on March 5, 1989, dealing with the sale of the materials referred to in Exhibit “A.”

The parties may agree to a different performance.  This is called an accord.  When the accord is performed, this is called an accord and satisfaction.  The original obligation is discharged.

In order for there to be an accord and satisfaction, there must be a bona fide dispute; an agreement to settle the dispute; and the performance of the agreement.

An example would be settlement of a lawsuit for breach of contract. The parties might settle for less than the amount called for under the contract.

Circumstances beyond the control of the contracting parties may discharge the contract. Impossibility of performance refers to external conditions as opposed to someone’s personal inability to perform the contract.  For example, the fact that a debtor does not have the money to pay a debt, and therefore cannot pay the debt, does not discharge the debt.  This is not a case of impossibility. Even riots and shortages of raw materials, even though external factors, do not necessarily excuse the failure to perform a contract.

What if a seller cannot obtain the goods he needs from any supplier to meet his contractual obligation to sell the goods to a buyer?  This will not discharge the seller’s obligation unless the inability to obtain the goods was a condition subsequent to the contract. What if a road contractor is unable to obtain gravel from his usual source and would have to get it from a supplier at a much higher price?  The contractor would not be discharged.  If there is nothing in the contract requiring that the gravel be obtained from the usual source, there is no “impossibility of performance.”  Just because performance would be more costly or burdensome than originally planned, this does not mean that the obligation is discharged.

When the parties expressly refer to particular subject matter in a contract, the contract is discharged if the subject matter is destroyed through no fault of either party (assuming there is no insurance on the subject matter).  When a contract calls for the sale of a wheat crop growing on a specific parcel of land, the contract is discharged if the crop is destroyed.

A farmer made a contract to sell and deliver 10,000 bushels of soybeans.  A flood destroyed his entire crop.  He claimed that he was discharged from his obligation under the contract.  Was he correct?  No.  The contract obligated the farmer to deliver a stated quantity of soybeans.  It did not require the delivery of the soybeans that were grown on the farmer’s land.  Therefore, the fact that the beans on his land were destroyed did not discharge the contract.  The fact that the farmer probably intended to fill the contract by using the crop grown on his land had no signifi­cance because that intent was not made a term of the contract.

A contract is discharged when its performance is made illegal by a subsequent change in the law.  For example, suppose there is a contract to construct a three story  building at a particular place.  Prior to beginning construction, a zoning law is passed which prohibits such a building in this area.  The contract would be discharged.

However, a change of law that merely increases the cost of one of the parties is not a “change of law” that discharges the contract. For example, Mack made a contract with Richard to build an apartment house for a specific price.  A number of serious apartment house fires later occurred in the city, and an ordinance was adopted by the city council increasing the fire precautions that had to be taken in the construction of a new building.  Compliance with these new requirements would make the construction of the apartment house for Richard more expensive than Mack had originally contemplated.  Is Mack discharged from the contract to build the apartment house?  No.  Mack must perform the contract even though it has been made more expensive to do so because of the change of law.  Mack is not discharged from the contract, because the change of law did not prohibit the construc­tion of the building but merely made it more expensive to build. 

If a contract obligates a party to perform an act that requires personal skill of a particular person, the death or disability of that person would discharge the contact.

For example, if an all pro NFL quarterback was killed in a car accident, the contract would be discharged. However, if the act called for by the contract could be performed by others, or by the estate of the decedent (e.g., executor hiring some­one), this rule does not apply.