Section 11.1

Why It’s Important Understanding when contracts come to an end will help you determine your legal rights and obligations in such situations.

Ending a Contract When contracts eventually end, they are said to be discharged. Contracts can be discharged by performance and by agreement.

Discharge by Performance Most contracts are discharged by performance, meaning the parties fulfill the terms of the contract by doing what they promised earlier.

Discharge by Performance As long as all terms have been carried out properly and completely, the contract is discharged by complete performance.

Time for Performance The time for completing a contract may be important to one or both of the parties.

Time for Performance If the time is not stated in the contract and there is a question of performance, the courts will say the contract must be completed in a reasonable time.

Time for Performance Reasonable time will vary with the circumstances is defined as the time that is suitable, fair, and proper to the objective in view

Time for Performance A contract will specify that time is of the essence when it is a vital or essential element of the contract.

Satisfactory Performance When people perform services for others, the law requires that those services be done in a satisfactory manner.

Satisfactory Performance Regardless of whether or not a contract specifically states the work be performed “in a satisfactory manner,” if one party believes the job is unsatisfactory, the court uses the reasonable person test.

Reasonable Person Test 11.1 Reasonable Person Test The court asks, “Would a reasonable person consider the job to be completed in a satisfactory manner?” I’m a reasonable person. Has this job been completed in a satisfactory manner?

Reasonable Person Test The dispute will then be settled based on the answer to this question as determined by a judge or jury.

Satisfactory Performance If one party agrees to perform services for another “to the other’s satisfaction,” the other party must be satisfied to be bound to the contract.

Substantial Performance An exception to the rule of discharging a contract by complete performance is substantial performance. Substantial performance is slightly less than full performance.

Substantial Performance Someone who has fulfilled the major requirements of a contract in good faith, leaving only minor details incomplete, has substantially performed.

Substantial Performance The courts will allow the person to recover the amount agreed upon under the contract, minus the cost of completing the job. Substantial performance is often applied to construction contracts.

Tender of Performance A tender is an offer to do what you have agreed to do under a contract.

Tender of Performance For example: if buying a car—offering to pay money to the seller at the agreed time if selling a car—offering to give the car to the buyer at the agreed time

Tender of Performance If neither party has made tender, then neither party is in a position to bring suit against the other.

Tender of Performance The person offering to pay the required amount of money must offer legal tender—U.S. coins or currency. Offering a check, even if it is certified, is not a valid tender of payment.

Discharge by Agreement Contracts are created by mutual agreement and may be terminated by mutual agreement.

Mutual Release A mutual release is an agreement between two parties to end an agreement. By mutual agreement, the contract no longer exists.

Accord and Satisfaction A contract can also be discharged when one party to an agreement agrees to accept performance from the other party that is different from what was agreed upon in the original contract.

Accord and Satisfaction In effect, one contract is substituted for another, which is known as accord and satisfaction. It is often used to settle an honest disagreement or unforeseen circumstances regarding an amount owed. End of Section 11.1

Impossibility of Performance and Operation of Law Section 11.2 Impossibility of Performance and Operation of Law

Why It’s Important Understanding when contracts are discharged by impossibility and by operation of law will help you know your legal rights and obligations in such situations.

Involuntary Discharge Some contracts come to an end despite what the parties intend or what they actually do. In these situations, the obligations that exist under the contract may also expire.

Involuntary Discharge Two ways contracts are discharged: by impossibility of performance by operation of law

Discharge by Impossibility of Performance A contract that becomes legally impossible to perform generally may be discharged and both parties released from the obligation.

Discharge by Impossibility of Performance Three situations in which the courts will allow a discharge for impossibility of performance are: death or illness that prevents the performance of a personal service contract

Discharge by Impossibility of Performance destruction of the exact subject matter or the means for performance illegality, or situations in which the performance of a contract becomes illegal

Death or Illness in a Personal Service Contract The death or illness of a party to a contract may be an excuse for nonperformance only if the contract requires the personal service of the person who has died or become ill.

Destruction of the Exact Subject Matter If the subject matter that is essential to the performance of the contract is destroyed through no fault of either party, the contract is discharged.

Destruction of the Exact Subject Matter The destruction must occur after the contract is entered into, but before it is carried out.

Illegality A contract is considered void if its performance would be illegal at the time the agreement was initiated. The same general rule applies when performance becomes illegal after the contract has been initiated.

Discharge by Operation of Law At times, the best interests of society demand that a contract be terminated. Under these circumstances, the law declares contract discharged by operation of law.

Discharge by Operation of Law These include when a wrongful alteration has occurred when the statue of limitations has run its course in cases of bankruptcy

Wrongful Alteration Sometimes wrongful acts of one of the parties, such as altering, or changing, a contract, will discharge a contract by operation of law.

Statute of Limitations All states have a law that specifies in what time a legal action may be brought on a contract, which is called the statute of limitations.

Bankruptcy Congress has the authority to pass bankruptcy laws, which are set procedures for discharging a debtor’s obligations.

Bankruptcy Certain debts cannot be discharged under bankruptcy laws. education, during the first five years of the repayment period taxes

Bankruptcy alimony child support maintenance payments End of Section 11.2