Chapter 18 Contract Performance - Discharge

Discharge

The termination of an obligation to perform.

• Often by fully performing contractual obligations.

Performance

The fulfillment of one’s duties arising under a contract.

Most contracts are absolute promises to perform. However…

performance can be conditioned.

Condition

A possible future event, the occurrence or nonoccurrence of which will trigger the performance of a legal obligation or terminate an existing obligation under a contract.

• If the condition is not satisfied, the obligations of the parties are discharged.

Three types of conditions can be present in contracts:

1. Conditions precedent

2. Conditions subsequent

3. Concurrent conditions

Conditions can also be classified as:

• Express

• Implied

Condition precedent

A condition in a contract that must be met before a party’s promise becomes absolute.

If condition precedent is not met –

party is discharged from performance.

Example: Purchase of Home

• Loan Terms

• Appraisal

Condition subsequent

A condition in a contract that operates to terminate a party’s absolute promise to perform.

• The condition is after (follows) the time at which the absolute duty to perform arose.

• If the condition occurs, the party’s duty to perform is discharged.

• Example: Continued employment based upon passing the Bar Exam

Concurrent conditions

Conditions in a contract that must occur or be performed at the same time; they are mutually dependent.

• No obligations arise until these conditions are simultaneously performed.

Express and Implied Conditions

Conditions can also be classified as express or implied in fact.

Express conditions are provided for by the parties’ agreement

Express conditions are usually prefaced by the words “if,” “provided,” “after,” or “when.”

Implied conditions are understood to be part of the agreement, but they are not found in the express language of the agreement.

• Courts may imply conditions from the purpose of the contract or from the intent of the parties.

• Conditions are often implied when they are inherent in the actual performance of the contract.

The contract comes to an end when…

both parties fulfill their respective duties by performing the acts they have promised.

Performance can also be accomplished by…

tender

Tender

An unconditional offer to perform an obligation by a person who is ready, willing, and able to do so.

Once performance has been tendered…

the party making the tender has done everything possible to carry out the terms of the contract. If the other party refuses to perform, the party making the tender can sue for breach of contract.

There are two basic types of performance:

• Complete performance

• Substantial performance

When a party performs exactly as agreed…

the party’s performance is said to be complete.

• Normally, conditions expressly stated in a contract…

must fully occur in all respects for complete (strict) performance of the contract to take place.

Any deviation…

breaches the contract and discharges the other party’s obligation to perform.

A party who in good faith performs substantially all of the terms of a contract can…

enforce the contract against the other party under the doctrine of substantial performance.

The basic requirements for performance to qualify as substantial are as follows:

• The party must have performed in good faith.

• The performance must not vary greatly from the performance promised in the contract.

• The performance must create substantially the same benefits as those promised in the contract.

Courts decide whether the performance was substantial…

on a case-by-case basis, examining all of the facts of the particular situation.

Effect on Duty to Perform

If one party’s performance is substantial, the other party’s duty to perform remains absolute (the parties must continue performing under the contract).

Measure of Damages

Nonbreaching party is entitled to damages to compensate for the failure to comply with the contract.

• The measure of the damages is the cost to bring the object of the contract into compliance with its terms, if that cost is reasonable under the circumstances.

• If the cost is unreasonable, the measure of damages is the difference in value between the performance rendered and the performance that would have been rendered if the contract had been performed completely

When the subject matter of the contract is personal:

• The obligation is conditional.

• Performance must actually satisfy the party specified in the contract.

• Must act in good faith

Reasonable Person Standard:

Most other contracts need to be performed only to the satisfaction of a reasonable person unless they expressly state otherwise.

Breach of contract

The failure, without legal excuse, of a promisor to perform the obligations of a contract.

When there is a material breach, the nonbreaching party:

• Is excused from the performance of contractual duties

• Can sue the breaching party for damages resulting from the breach

Material Versus Minor Breach

If the breach is minor (not material), the nonbreaching party’s duty to perform is not entirely excused, but it can sometimes be suspended until the breach has been remedied.

• Once the minor breach has been cured, the nonbreaching party must resume performance of the contractual obligations.

Underlying Policy

Any breach entitles the nonbreaching party to sue for damages, but only a material breach discharges the nonbreaching party from the contract.

• The policy underlying these rules allows a contract to go forward when only minor problems occur but allows it to be terminated if major difficulties arise.

Anticipatory repudiation

An assertion or action by a party indicating that they will not perform an obligation that they are contractually obligated to perform at a future time.

Repudiation Is a Material Breach

Nonbreaching party is permitted to bring an action for damages immediately.

• The nonbreaching party can file a suit even if the scheduled time for performance under the contract is still in the future.

• Until the nonbreaching party treats an early repudiation as a breach, the repudiating party can retract the anticipatory repudiation by proper notice and restore the parties to their original obligations.

An anticipatory repudiation is treated as a present, material breach for two reasons:

• The non breaching party should not be required to remain ready and willing to perform when the other party has already repudiated the contract.

• The non breaching party should have the opportunity to seek a similar contract elsewhere and may have a duty to do so to minimize their loss.

Anticipatory Repudiation and Market Prices

Quite often, anticipatory repudiation occurs when performance of the contract would be extremely unfavorable to one of the parties because of a sharp fluctuation in market prices.

If no time for performance is stated in a contract…

a reasonable time is implied.

If a specific time is stated…

the parties must usually perform by that time.

• Unless time is expressly stated to be vital, a delay in performance will not destroy the performing party’s right to payment.

• When time is expressly stated to be “of the essence,” or vital, the parties normally must perform within the stated time period, because the time element becomes a condition.

  • Even when the contract states that time is of the essence, a court may find that a party who fails to complain about the other party’s delay has waived the breach of the time provision.

Any contract can be discharged by agreement of the parties.

• The agreement can be contained in the original contract.

• The parties can form a new contract for the express purpose of discharging the original contract.

Mutual rescission

An agreement between the parties to cancel their contract, releasing the parties from further obligations under the contract.

Mutual rescission requires three elements:

• An offer

• An acceptance

• Consideration

Agreements to rescind most executory contracts (in which neither party has performed)…

are enforceable, whether the original agreement was made orally or in writing.

Agreements to rescind sales contracts or contracts involving transfers of realty must…

be evidenced by a writing or record.

When one party has fully performed…

an agreement to cancel the original contract normally will not be enforceable unless there is additional consideration.

Novation

The substitution, by agreement, of a new contract for an old one, with the rights under the old one being terminated.

The requirements of a novation are as follows:

• A previous valid obligation

• An agreement by all parties to a new contract

• The extinguishing of the old obligation (discharge of the prior party)

• A new contract that is valid

A novation expressly or impliedly revokes and discharges a prior contract.

• The parties involved may expressly state in the new contract that the old contract is now discharged.

• If the parties do not expressly discharge the old contract, it will be impliedly discharged if the new contract’s terms are inconsistent with the old contract’s terms.

A compromise, or settlement agreement, that arises out of a genuine dispute over the obligations under an existing contract…

will be recognized at law.

The agreement will be substituted…

as a new contract and will either expressly or impliedly revoke and discharge the obligations under the prior contract.

A substituted agreement does not involve a third party.

Rather, the two original parties to the contract form a different agreement to substitute for the original one.

In an accord and satisfaction

the parties agree to accept performance that is different from the performance originally promised.

• An accord is a contract to perform some act to satisfy an existing contractual duty that is not yet discharged.

• A satisfaction is the performance of the accord agreement.

• An accord and its satisfaction discharge the original contractual obligation.

  • Once the accord has been made, the original obligation is merely suspended until the accord agreement is fully performed (a satisfaction).

    • If it is not performed, the obligee (the one to whom performance is owed) can file a lawsuit based on either the original obligation or the accord.

Under specified circumstances, contractual duties may be discharged by operation of law. These circumstances include:

• Material alteration of the contract

• The running of the statute of limitations

• Bankruptcy

• The impossibility or impracticability of performance

Material Alteration of the Contract

To discourage parties from altering written contracts, the law allows an innocent party to be discharged when the other party has materially altered a written contract without consent.

Statutes of Limitations

A suit for breach of contract must be filed within the time permitted by applicable law.

Discharge in bankruptcy

The release of a debtor from all debts that are provable, except those specifically excepted from discharge by statute.

• A discharge in bankruptcy ordinarily prevents the creditors from enforcing most of the debtor’s contracts.

• Partial payment of a debt after discharge in bankruptcy will not revive the debt.

Impossibility of performance

A doctrine under which a party to a contract is relieved of their duty to perform when performance becomes impossible or impracticable (through no fault of either party).

• Applies only when the parties could not have reasonably foreseen, at the time the contract was formed, the event that rendered performance impossible.

Objective impossibility

(“It can’t be done”) must be distinguished from subjective impossibility (“I’m sorry, I simply can’t do it”).

Subjective impossibility

does not discharge a contract, and the nonperforming party is normally held in breach of contract.

When Performance Is Impossible

• One of the parties to a personal contract dies or becomes incapacitated prior to performance

• The specific subject matter of the contract is destroyed

• A change in law renders performance illegal

Temporary Impossibility

An occurrence or event that makes performance temporarily impossible operates to suspend performance until the impossibility ceases.

• Once the temporary event ends, the parties generally must perform the contract as originally planned.

• The contract is discharged if the lapse of time and the change in circumstances surrounding the contract make it substantially more burdensome for the parties to perform the promised acts.

Commercial impracticability

A doctrine under which a seller may be excused from performing a contract when:

• A contingency occurs;

• The contingency’s occurrence makes performance impracticable; and

• The nonoccurrence of the contingency was a basic assumption on which the contract was made.

For someone to invoke the doctrine of commercial impracticability successfully…

the anticipated performance must become significantly more difficult or costly.

The added burden must not have been foreseeable…

by the parties when the contract was made.

Frustration of purpose

A court-created doctrine under which a party to a contract will be relieved of their duty to perform when the objective purpose for performance no longer exists (due to reasons beyond that party’s control).

• typically involves an event that decreases the value of what a party receives under the contract.