A contractor entered into a contract with a homeowner to renovate the homeowner's property for $50,000. Before work began, both parties decided to replace the original contract with a new agreement under which the contractor would build a guest house on the property for $60,000 instead of performing the renovation. The contractor later refused to construct the guest house. Under these facts, what is the BEST explanation of the legal effect of the new agreement?
The original contract remains in effect because the new agreement was only a modification of the terms.
The original contract was discharged because the parties mutually rescinded it without replacing it.
The original contract was discharged because the new agreement constituted a valid substituted contract.
The original agreement was not discharged because there was no accord and satisfaction.
When parties who are already bound to each other enter into a new contract that they intend to substitute for and immediately discharge the prior one, the new contract is called a substituted contract. Restatement (Second) of Contracts §279 provides that a substituted contract extinguishes the original duties, and any remedy lies only on the new agreement. Because the homeowner and contractor mutually agreed to the guest-house contract as a replacement, the renovation contract was discharged at that moment.
The choice describing the transaction as a mere modification is wrong because a modification leaves the original contract in force (as modified). The mutual-rescission answer is wrong because rescission cancels duties without replacing them with new ones; here the parties clearly intended continuing obligations. Accord and satisfaction is inapplicable because that doctrine concerns settlement of an existing obligation by different performance, typically contingent on actual satisfaction, rather than an immediate discharge by substituted contract.
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