Performance and Discharge Chapter 8

Discharge Discharge usually results from performance but can occur in other ways: (1) the occurrence or failure of a condition on which a contract is based, (2) breach of the contract, (3) agreement of the parties, and (4) operation of law.

Discharge by Performance Types of Performance : –Complete Performance. –Substantial Performance. –Performance to the Satisfaction of a Third Party. –Material Breach

Complete Performance. When a party performs exactly as agreed, there is no question as to whether the contract has been performed. When a party's performance is perfect, it is said to be complete.

Substantial Performance. Generally, performance that provides a party with the important and essential benefits of a contract, in spite of any omission or deviation from the terms, is substantial performance. *Good faith is required *Willfully failing to comply is a breach of the contract.

Substantial Performance 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. –If the cost is unreasonable, the measure of damages is the difference in value between the performance that was rendered and complete performance.

Material Breach of Contract A breach of contract is the nonperformance of a contractual duty. The breach is material when performance is not at least substantial

Performance to the Satisfaction of a Party When the subject matter of contract is personal, a contract to be performed to the satisfaction of one of the parties is conditioned, and performance must actually satisfy that party. Contracts that involve mechanical fitness, utility, or marketability need only be performed to the satisfaction of a reasonable person.

Performance to the Satisfaction of a Third Party Courts are divided. A few courts require the personal satisfaction of the third party. A majority of courts require the work to be satisfactory to a reasonable person.

Anticipatory Repudiation An anticipatory repudiation occurs when one of the parties refuses to carry out his or her contractual obligations before either party to the contract has a duty to perform The repudiation can discharge the nonbreaching party from performance.

Anticipatory Repudiation There are two reasons for allowing the nonbreaching party to treat an anticipatory repudiation as a present, material breach: 1.The nonbreaching party should not be required to remain ready and willing to perform when the other party has already repudiated the contract. 2.The nonbreaching party should have the opportunity to seek a similar contract elsewhere.

Time for Performance If no time for performance is stated in the 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, however, a delay in performance will not destroy the performing party's right to payment. When it is construed to be "of the essence," the parties must perform within the stated time period. The time element becomes a condition.

Conditions In some situations, performance is contingent on the occurrence or nonoccurrence of a certain event. A condition is 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.

Conditions Three types of conditions can be present in contracts: conditions precedent, conditions subsequent, and concurrent conditions. Conditions are also classified as express or implied.

CONDITION PRECEDENT A condition that must be fulfilled before a party's performance can be required is called a condition precedent. Example: Real estate contracts frequently are conditioned on the buyer's ability to obtain financing.

CONDITION SUBSEQUENT A condition subsequent is a condition which operates to terminate a party's absolute promise to perform. Example: A law firm hires a recent law school graduate and newly licensed attorney. Their contract provides that the firm's obligation to continue employment is discharged if the employee fails to maintain her license to practice law.

Concurrent Conditions Concurrent conditions occur when each party's absolute duty to perform is conditioned on the other party's absolute duty to perform. Concurrent conditions occur only when the parties expressly or impliedly are to perform their respective duties simultaneously. Example: Buyer promises to pay for goods when they redelivered

Express and Implied Conditions if, provided, after, or when.Express conditions are provided for by the parties' agreement. An express condition is usually prefaced by the word if, provided, after, or when. Conditions implied in fact are understood to be part of the agreement, but they are not found in the express language of the agreement. The court infers them from the promises.Conditions implied in fact are understood to be part of the agreement, but they are not found in the express language of the agreement. The court infers them from the promises.

Discharge by Agreement Discharge by Rescission Discharge by Novation Discharge by Substituted Agreement Discharge by Accord and Satisfaction

Discharge by Rescission Rescission is the process by which a contract is canceled or terminated and the parties are returned to the positions they occupied prior to forming it. For mutual rescission to take place, the parties must make another agreement, which satisfies the legal requirements for a contract. There must be an offer, an acceptance,and consideration.

Discharge by Novation A novation occurs when both of the parties to a contract agree to substitute a third party for one of the original parties. The requirements of a novation are as follows: –1.A previous valid obligation. –2.An agreement of all the parties to a new contract. –3.The extinguishment of the old obligation (discharge of the prior party). –4.A new contract that is valid.

Discharge by Substituted Agreement A compromise, or settlement agreement, that arises out of a genuine dispute over the obligations under an existing contract.

Discharge by Accord and Satisfaction For a contract to be discharged by accord and satisfaction, the parties must agree to accept performance that is different from the performance originally promised.

Discharge by Operation of Law Alteration of the Contract Statutes of Limitations Bankruptcy Impossibility Impracticability of Performance

Alteration of the Contract An innocent party can treat a contract as discharged if the other party materially alters a term (such as quantity or price) without consent.

Statutes of Limitations Statutes of limitations limit the period during which a party can sue based on a breach of contract. After the applicable limitations period has passed, a suit can no longer be brought.

Bankruptcy A discharge in bankruptcy will ordinarily bar enforcement of most of a debtor's contracts.

Impossibility A contract may be discharged if, after it is made, performance becomes objectively impossible, as in the following: (1) death or incapacity of one of the parties, (2) specific subject matter of the contract is destroyed, or (3) change in the law that renders performance illegal.

Commercial Impracticability For someone to invoke successfully the doctrine of commercial impracticability, however, the anticipated performance must become extremely difficult or costly due to the occurrence of an event the nonoccurrence of which was assumed when the contract was entered into.