Chapter 13 – Performance and Discharge
13.3 Discharge by Agreement
Parties are free to agree to almost any contract they want, and they are free to agree to end the contract whenever they want. There are several ways this is done.
Mutual Rescission
The parties may agree to give up the duties to perform, called mutual rescission. This may be by a formal written release saying the obligor is discharged upon delivery of the writing or upon occurrence of a condition; or an obligation may be discharged by a contract not to sue about it.
The Restatement calls this an agreement of rescission. An agreement to rescind will be given effect even though partial performance has been made or one or both parties have a claim for partial breach. The agreement need not be in writing or even expressed in words. By their actions, such as failure to take steps to perform or enforce, the parties may signal their mutual intent to rescind. Andy starts to mow Anne’s lawn as they agreed. He begins the job, but it is unbearably hot. She sees how uncomfortable he is and readily agrees with him when he says, “Why don’t we just forget the whole thing?” Andy’s duty to finish mowing is discharged, as is Anne’s duty to pay Andy, either for the whole job or for the part he has done.
Research on business executives suggest that in the great majority of cases in which one party wishes to “cancel an order,” the other party permits it without renegotiation, even though the cancellation amounts to a repudiation of a contract. Since the ‘order’ in this situation is the outcome of a contract, cancelling an order is the same as breaching a contract. This is why being able to agree to mutually rescind a contractual obligation is very important in doing business.
The legal consequences of most of these cancellations are an agreement of rescission. Would there still be damages as a consequence? Under UCC Section 2-720, the use of a word like “cancellation” or “rescission” does not by itself amount to a renunciation of the right to sue for breach of a provision that occurred before the rescission. If the parties mean to discharge each other fully from all duties owed, they must say so explicitly. Actions continue to speak more loudly than words, however, and in law, so can inactions. Legal rights under contracts may be lost by both parties if they fail to act; by abandoning their claims, they can affect rescission.
Waiver
A second means of discharge is by waiver, whereby a party voluntarily gives up a right she has under a contract but doesn’t give up the entire right to performance by the other side. Tenant is supposed to pay rent on the first of the month, but because his employer pays on the tenth, Tenant pays Landlady on that day. If Landlady accepts the late payment without objection, she has waived her right to insist on payment by the first of the month, unless the lease provides that no waiver occurs from the acceptance of any late payments.
Case 13.2
Minor v. Chase Auto Finance Corporation, 372 S.W.3d 762 (Ark. 2010)
SHEFFIELD, J.
We have been asked to determine whether non-waiver and no-unwritten-modifications clauses in a [contract] preclude a creditor from waiving future strict compliance with the agreement by accepting late payments.…
Appellant Mose Minor (Minor) entered into a Simple Interest Motor Vehicle Contract and Security Agreement with Appellee Chase Auto Finance Corporation (Chase) to finance the purchase of a 2003 Toyota Tundra. By the terms of the agreement, Minor was to make sixty-six payments of $456.99 on the fourteenth of each month.…The agreement also included the following relevant provisions:
G. Default: If you…default in the performance of any promise you make in this contract or any other contract you have with us, including, but not limited to, failing to make any payments when due, or become insolvent, or file any proceeding under the U.S. Bankruptcy Code,…we may at our option and without notice or demand (1) declare all unpaid sums immediately due and payable subject to any right of reinstatement as required by law (2) file suit against you for all unpaid sums (3) take immediate possession of the vehicle (4) exercise any other legal or equitable remedy.…Our remedies are cumulative and taking of any action shall not be a waiver or prohibit us from pursuing any other remedy. You agree that upon your default we shall be entitled to recover from you our reasonable collection costs, including, but not limited to, any attorney’s fee. In addition, if we repossess the vehicle, you grant to us and our agents permission to enter upon any premises where the vehicle is located. Any repossession will be performed peacefully.…
J. Other Agreements of Buyer:…(2) You agree that if we accept moneys in sums less than those due or make extensions of due dates of payments under this contract, doing so will not be a waiver of any later right to enforce the contract terms as written.…(12) All of the agreements between us and you are set forth in this contract and no modification of this contract shall be valid unless it is made in writing and signed by you and us.…
K. Delay in Enforcement: We can delay or waive enforcement of any of our rights under this contract without losing them.
Minor’s first payment was late, as were several subsequent payments. At times he failed to make any payment for months. Chase charged a late fee for each late payment, and sent several letters requesting payment and offering to assist Minor with his account. Chase also warned Minor that continued failure to make payments would result in Chase exercising its legal options available under the agreement, including repossession of the vehicle.…At one point, Minor fell so far behind in his payments that Chase was on the verge of repossessing the vehicle. However…the parties agreed to a two-month extension of the agreement.…The extension agreement indicated that all other terms and conditions of the original contract would remain the same.
On November 2, 2004, Minor filed for bankruptcy [after which] Chase sent Minor a letter acknowledging that Minor’s debt to Chase had been discharged in bankruptcy. The letter further stated that Chase still had a valid lien on the vehicle, and if Minor wished to keep the vehicle, he would have to continue to make payments to Chase. Otherwise, Chase would repossess the vehicle.…
On September 28, 2006, a repossession agent…arrived at Minor’s home some time in the afternoon to repossess the vehicle.…[Notwithstanding Minor’s insistence that the agent stop] the agent removed Minor’s possessions from the vehicle and towed it away. Chase sold the vehicle. The amount of the purchase price was reflected on Minor’s account.…
On January 7, 2008, Minor filed a complaint against Chase [alleging] that, during the course of the contract, the parties had altered the provisions of the contract regarding Chase’s right to repossess the vehicle and Chase had waived the right to strictly enforce the repossession clause. Minor further claimed that the repossession agent committed trespass and repossessed the vehicle forcibly, without Minor’s permission, and through trickery and deceit, in violation of [state law]. Also, Minor asserted that he was not in default on his payments, pursuant to the repayment schedule, at the time Chase authorized repossession. Therefore, according to Minor, Chase committed conversion, and breached the Arkansas Deceptive Trade Practices Act [Citation], and enhanced by Arkansas Code Annotated section 4-88-202, because Minor is an elderly person. Minor sought compensatory and punitive damages.…
After hearing these arguments, the circuit court ruled that Minor had presented no evidence that the conduct of Chase or the repossession agent constituted grounds for punitive damages; that by the express terms of the contract Chase’s acceptance of late payments did not effect a waiver of its rights in the future; that at the time of repossession, Minor was behind in his payments and in breach of the contract; that Chase had the right under the contract to repossess the vehicle and did not commit conversion; and that there was no evidence to support a claim that Chase had violated the Arkansas Deceptive Trade Practices Act.…
[W]e affirm our previous decisions that when a contract does not contain a non-waiver and a no-unwritten-modification provision and the creditor has established a course of dealing in accepting late payments from the debtor, the creditor waives its right to insist on strict compliance with the contract and must give notice to the debtor that it will no longer accept late payments before it can declare default of the debt. However, we announce today that, if a contract includes non-waiver and no-unwritten-modification clauses, the creditor, in accepting late payments, does not waive its right under the contract to declare default of the debt, and need not give notice that it will enforce that right in the event of future late payments.…
In arriving at this conclusion, we adhere to the principle that “a [contract] is effective according to its terms between the parties.”…We have long held that non-waiver clauses are legal and valid. See [Citations] Also, [the Arkansas UCC 2-209(2)] declares that no-unwritten-modification provisions are binding.
We acknowledge that there is a difference of opinion amongst the courts in other jurisdictions over the effect of non-waiver and no-unwritten-modification clauses.…
We concur with the Supreme Court of Indiana’s decision in [Citation], that a rule providing that non-waiver clauses could themselves be waived by the acceptance of late payments is “illogical, since the very conduct which the [non-waiver] clause is designed to permit[,] acceptance of late payment[,] is turned around to constitute waiver of the clause permitting the conduct.” We also agree that the approach of jurisdictions that require creditors who have accepted late payments in the past to notify debtors that they expect strict compliance in the future, despite the existence of a non-waiver provision in the contract, is not “sound.” Such a rule, we recognize, “begs the question of validity of the non-waiver clause.” Finally, our holding is in line with the Indiana Supreme Court’s ruling that it would enforce the provisions of the contract, since the parties had agreed to them, and that it would not require the creditor to give notice, because the non-waiver clause placed the [creditor] in the same position as one who had never accepted a late payment. [Citations]…
Certified question answered; remanded to court of appeals.
Case questions
- What is a nonwaiver clause?
- Why did Mose think his late payments were not grounds for repossession of his truck?
- Why would a creditor accept late payments instead of immediately repossessing the collateral?
- Why did Mose lose?
Substituted Agreement
The parties may enter into a novation, either a new contract or one whereby a new person is substituted for the original obligor, and the latter is discharged, with the consent of all involved parties. If Mr. Olson is obligated to deliver a car to Jack, Jack and Mr. Olson may agree that Dewey Dealer should deliver the car to Jack instead of Mr. Olson; the latter is discharged by this novation. A substituted agreement may also simply replace the original one between the original parties.
Accord and Satisfaction
In an accord and satisfaction the parties to a contract (usually a disputed one) agree to substitute some performance different from what was originally agreed, and once this new agreement is executed, the original contract (as well as the more recent accord) is satisfied. But before then, the original agreement is only suspended: if the obligor does not satisfy the accord, the other side can sue on the original obligation or on the accord. This process is described more fully in the Chapter on Consideration.
cancellation of a contract by mutual agreement of the parties
the intentional and voluntary giving up of a right, either by an express statement or by conduct (such as by not enforcing a right)
the voluntary substitution of a new contract for an old one, usually to change the parties, duties, or payment terms
an agreement to accept less than is legally due in order to wrap up the matter
