Business Law - Chapter 7: Contract law part 3 - Ending a contract

In what ways can a contract end?

1. Performance of the contractual obligations

2. By mutual agreement

3. As a result of a frustrating event

4. Upon the breach of the contract

Contractual performance

When the parties completely satisfy and fulfill their contractual obligations

e.g. When a construction company has finished building a house for a homeowner, the contract between the parties would come to an end assuming full and final payment is made

Contractual performance (con’t)

The contract would still have effect for purposes of resolving later controversies or disputes between the parties, with no further obligations

e.g. The contract between a construction company and homeowner would still persist and still be relevant for some purposes like determining if there were deficiencies in the construction and what the homeowner can do about it

Substantial performance

A situation where a party to a contract has fulfilled the majority of their obligations under the contract, but there may be minor or immaterial deviations or defects in that performance

Substantial performance (con’t)

The non-breaching party is still obligated to pay the performing party for their work, but may be entitled to damages or a reduction in payment to account for any remaining deficiencies or defects

When is substantial performance invoked?

When there is a minor breach of contract where the party has not fully complied with all the terms and conditions of the contract that isn’t significant enough to undermine the purpose of the contract or deprive the other party of the benefits they expected to receive

Mutual agreement

Parties to a contract may wish to mutually agree to bring their contract to an end, and they’re released from the contract’s obligations if successful

Mutual agreement (con’t)

The parties fully satisfy the legal requirements to actually end the contract

Contractual terms providing for termination

Including specific provisions regarding the termination of that contract

1. Options to terminate

2. Condition subsequent clauses

3. Condition precedent clauses

Option(s) to terminate

Allows one or both parties the ability to terminate the contract by exercising the option. Provided the party wishing to exercise their option does so in complete compliance with its language, then the contract will be discharged

Condition subsequent clauses

A type of term that states the contract will be discharged if certain conditions are met

Condition subsequent clauses (con’t)

The parties are only relieved of their contractual obligations if the events stated in the condition subsequent actually occur

Condition subsequent clauses example

This lease shall terminate automatically and immediately upon the revocation or forfeiture of any necessary license, permit, or governmental approval required to operate the business conducted by the tenant on the premises.

• The lease is discharged not because of a choice by either party but, rather, because an event has occurred: the revocation of the necessary licenses or permits.

Condition precedent clauses (subject to clause)

An event or action that must occur or be fulfilled before a contract becomes effective or before a party is required to perform their obligations

Condition precedent clauses [subject to] (con’t)

If a condition precedent clause is expressed in the contract and the condition precedent event does not occur, the contract is immediately terminated.

Condition precedent clauses examples

The sale contract might state for a piece of property that it is subject to the buyer receiving satisfactory financing.

In this case, the buyer receiving financing is a condition precedent to the performance of the contract.

If the buyer is unable to obtain financing then the parties’ contractual obligations are discharged

Reaching a New Agreement to Discharge the Original Contract

Requires the parties to comply with all the requirements for forming a contract (offer, acceptance, consideration, capacity, legality, etc) for it to be valid

Ways to reach a new agreement or discharge the original contract

1. Rescission

2. Accord

3. Variation

4. Novation

5. Release

6. Waiver

Rescission

Allows the parties to a contract to agree to cancel their contract and is used when both parties agree that the contract is no longer desirable or necessary

Rescission (con’t)

Each party gives up their rights and promises that existed under the first contract

Accord and Satisfaction

Involves one party accepting something different from what was originally agreed upon in the first contract

Accord and Satisfaction (con’t)

It must be agreed to by both parties and must be supported by consideration to be valid.

Variation

A change or modification to an existing contract that does not create a new contractual relationship between the parties; the terms of the original contract are amended

Novation

The substitution of a new contract for an existing one where the original contract is replaced with a new one

Novation (con’t)

Usually involves the substitution of one party to the contract with another, such that the new party assumes the obligations and liabilities of the original party

e.g. If A contracts with B to build a fence, but B is unable to perform the service, A may agree to novate the contract by replacing B with C, who’ll assume B’s obligations and liabilities under the contract.

Release

A legal document that acts as a form of settlement in which one party (the releasor) agrees to give up their right to make a claim against another party (the releasee) in exchange for some form of consideration (e.g. Money, goods, services) to be effective

Waiver

When one of the parties voluntarily and intentionally gives up their legal right; doesn’t have to be in writing to be enforceable 

What must the waiving party do to make a waiver valid?

1. Must have had full knowledge of their rights

2. Had an unequivocal and conscious intention to abandon those rights

Common law frustration

Relieves parties from their contractual obligations when an unforeseen event occurs that makes the performance of the contract impossible or radically different from what was originally agreed

Legal Test for Common Law Frustration

1. The alleged frustrating event must have occurred after the formation of the contract and cannot be self-induced.

2. The contract must, as a result, be totally different from what the parties had intended.

3. The act or event that brought about such radical change must not have been foreseeable.

A force majeure (clause)

A contractual provision that addresses unforeseen circumstances which make the contract impossible to perform meant to allocate the risk of unexpected events between the parties to the contract   

A force majeure clause (con’t)

The clause excuses the affected party from performance of its obligations under the contract for the duration of the force majeure event

A force majeure clause (III)

The party will not be liable for any damages or other consequences that arise as a result of its failure to perform

Methods of breach

1. Anticipatory breach

2. Defective performance

Anticipatory breach

A statement or action by one of the contracting parties that they do not intend to fulfill their obligations

Anticipatory breach (con’t)

If a breaching party has provided the advance notice of an intended breach, the non-breaching party does not need to wait for the breach to actually occur

Anticipatory breach (III)

The breaching party will get an advanced warning (in writing or words) that they will be breaching the contract

Defective Performance

When a contracting party fails to meet the obligations or standards set out in the contract

Defective Performance (con’t)

It can occur when one party to the contract fails to deliver goods or services as agreed upon or if the goods or services delivered do not meet the required specifications

Types of Contractual Terms that have Been Breached

1. Conditions

2. Warranties

3. Innominate terms

Conditions

Serious or fundamental terms that go to the very root of the contract

Conditions (con’t)

Ff a condition is breached, it means that the contract has been undermined in a significant way

Warranties

Collateral or minor terms which do not substantially undermine the contract if breached

Warranties (con’t)

The other party can only claim damages but cannot terminate the contract if the warranty is breached

Innominate terms

An in between of conditions and warranties, and its impact depends on the seriousness of the breach 

What conditions determine if a clause is a condition

1. A statute can set a certain provision as a condition. If the government has passed a law making a certain provision a condition, then we can treat it as such.

2. If a court decision (precedent) has determined that specific clauses are conditions rather than warranties, then the precedent can be relied upon for support.

What conditions determine if a clause is a condition (con’t)

3. The parties’ contract may expressly state that a certain type of clause is a condition. In such a case, the parties know the impact of the clause in advance and have certainty of the effects if breached.

4. It may be necessary to determine if a clause is a condition by implication. This means looking at the nature of the contract, the subject matter of the contract, or the circumstances of the contract to determine if the clause is a major one and thus is a condition.