Performance and Discharge

Chapter 18: Performance and Discharge

Introduction

  • The most common way to discharge or terminate contractual duties is by the performance of those duties.
  • Discharge: The termination of an obligation when parties fully perform their contractual obligations.
  • Performance: The fulfillment of one's duties arising under a contract, which is the normal way of discharging contractual obligations.
  • Events can affect performance or the ability to perform contractual duties.
  • The duty to perform under a contract is not always absolute; it may be conditioned on the occurrence or nonoccurrence of a certain event.

18-1 Conditions

  • In most contracts, promises of performance are not expressly conditioned or qualified but are absolute promises that must be performed; otherwise, the parties promising the acts will be in breach of contract.
  • Condition: A possible future event that triggers the performance of a legal obligation or terminates an existing obligation under a contract if it occurs or does not occur.
  • If the condition is not satisfied, the obligations of the parties are discharged.
  • Three types of conditions can be present in contracts:
    • Conditions precedent
    • Conditions subsequent
    • Concurrent conditions
  • Conditions can also be classified as:
    • Express
    • Implied
18-1a Conditions Precedent
  • Condition precedent: A condition in a contract that must be met before a party's promise becomes absolute.
  • The condition precedes the absolute duty to perform.
  • Example: Life insurance contracts often require passing a physical examination before the insurance company is obligated to perform.
  • Generally, conditions precedent are common.
18-1b Conditions Subsequent
  • Condition subsequent: A condition in a contract that operates to terminate a party's absolute promise to perform.
  • The condition follows the time at which the absolute duty to perform arose.
  • If the condition occurs, the party's duty to perform is discharged.
  • Conditions subsequent are rare.
18-1c Concurrent Conditions
  • Concurrent conditions: Conditions in a contract that must occur or be performed at the same time and are mutually dependent.
  • No obligations arise until these conditions are simultaneously performed.
18-1d Express and Implied Conditions
  • Conditions can be classified as express or implied in fact.
  • Express conditions are provided for by the parties' agreement and are usually prefaced by words such as "if," "provided," "after," or "when."
  • Example: A cooperation clause in an automobile insurance policy states that if the insured person is involved in an accident, he or she must cooperate with the insurance company in the defense of any claim or lawsuit.
  • Implied conditions are understood to be part of the agreement but 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.

18-2 Discharge by Performance

  • The great majority of contracts are discharged by performance.
  • The contract ends when both parties fulfill their duties by performing the promised acts.
  • 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.
  • Example: A seller who places goods at the disposal of a buyer has tendered delivery and can demand payment.
  • 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
18-2a Complete Performance
  • When a party performs exactly as agreed, the party's performance is said to be complete.
  • 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.
18-2b Substantial Performance
  • 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.
  • If one party's performance is substantial, the other party's duty to perform remains absolute, and the parties must continue performing under the contract.
  • Because substantial performance is not perfect, the other 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.
18-2c Performance to the Satisfaction of Another
  • Contracts often state that completed work must personally satisfy one of the parties or a third person.
  • The question is whether this satisfaction becomes a condition precedent, requiring actual personal satisfaction or approval for discharge, or whether the performance need only satisfy a reasonable person.
  • When the subject matter of the contract is personal, the obligation is conditional, and performance must actually satisfy the party specified in the contract. Examples include contracts for portraits, works of art, and tailoring.
  • Most other contracts need to be performed only to the satisfaction of a reasonable person unless they expressly state otherwise.
18-2d Material Breach of Contract
  • Breach of contract: The failure, without legal excuse, of a promisor to perform the obligations of a contract.
  • The breach is material when performance is not at least substantial.
  • 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
  • If the breach is minor (not material), the nonbreaching party's duty to perform is not entirely excused but 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.
  • 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.
18-2e Anticipatory Repudiation
  • Anticipatory repudiation: An assertion or action by a party indicating that he or she will not perform an obligation that he or she is contractually obligated to perform at a future time.
  • When an anticipatory repudiation occurs, it is treated as a material breach of the contract, and the 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 nonbreaching party should not be required to remain ready and willing to perform when the other party has already repudiated the contract.
    • The nonbreaching party should have the opportunity to seek a similar contract elsewhere and may have a duty to do so to minimize his or her loss.
  • Anticipatory repudiation often occurs when performance of the contract would be extremely unfavorable to one of the parties because of a sharp fluctuation in market prices.
18-2f Time for Performance
  • 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.

18-3 Discharge by Agreement

  • Any contract can be discharged by agreement of the parties.
  • The agreement can be contained in the original contract, or the parties can form a new contract for the express purpose of discharging the original contract.
18-3a Discharge by Mutual Rescission
  • Mutual rescission: An agreement between the parties to cancel their contract, releasing the parties from further obligations under the contract.
  • The object of the agreement is to restore the parties to the positions they would have occupied had no contract ever been formed.
  • 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.
18-3b Discharge by Novation
  • Novation: The substitution, by agreement, of a new contract for an old one, with the rights under the old one being terminated.
  • Typically, there is a substitution of a new party who is responsible for the contract and the removal of an original party’s rights and duties under the contract.
  • 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.
18-3c Discharge by Settlement Agreement
  • 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.
18-3d Discharge by Accord and Satisfaction
  • 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.

18-4 Discharge by Operation of Law

  • 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
18-4a 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.
18-4b Statute of Limitations
  • Statutes of limitations restrict the period during which a party can sue on a particular cause of action.
  • The limitations period for bringing suits for breach of contracts is usually:
    • Two to three years for oral contracts
    • Four to five years for written contracts
    • Four years after the cause of action has accrued for sales contracts
  • A cause of action generally accrues when the breach occurs, even if the aggrieved party is not aware of the breach.
  • A breach of warranty normally occurs when the seller delivers the goods to the buyer.
  • In their original contract, the parties can agree to reduce this four-year period to not less than one year, but they cannot agree to extend it.
  • Parties generally have ten to twenty years to file for recovery of amounts awarded in judgments, depending on state law.
18-4c Bankruptcy
  • A proceeding in bankruptcy attempts to allocate the debtor’s assets to the creditors in a fair and equitable fashion.
  • Once the assets have been allocated, the debtor receives a discharge in bankruptcy.
  • 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.
18-4d Impossibility of Performance
  • Impossibility of performance: A doctrine under which a party to a contract is relieved of his or her duty to perform when performance becomes impossible or totally impracticable (through no fault of either party).
  • The doctrine of impossibility of performance 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.
  • Three basic types of situations may qualify as grounds for the discharge of contractual obligations based on impossibility of performance:
    • When one of the parties to a personal contract dies or becomes incapacitated prior to performance
    • When the specific subject matter of the contract is destroyed
    • When a change in law renders performance illegal
  • An occurrence or event that makes performance temporarily impossible operates to suspend performance until the impossibility ceases.
  • Once the temporary event ends, the parties ordinarily 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.
18-4e Commercial Impracticability
  • 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.
  • In addition, the added burden of performing must not have been foreseeable by the parties when the contract was made.
18-4f Frustration of Purpose
  • Frustration of purpose: A court-created doctrine under which a party to a contract will be relieved of his or her duty to perform when the objective purpose for performance no longer exists (due to reasons beyond that party’s control).
  • There are some differences between the doctrine of commercial impracticability and the doctrine of frustration of purpose.
  • Commercial impracticability usually involves an event that increases the cost or difficulty of performance.
  • Frustration of purpose typically involves an event that decreases the value of what a party receives under the contract.