Managing The Law, 3/e Chapter 11.

Discharge and Breach

Chapter 11 Overview
the nature of discharge discharge by performance discharge by agreement discharge by operation of law discharge by breach

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Managing The Law, 3/e Chapter 11. Discharge and Breach

The Nature of Discharge

some contracts end in avoidance or rescission
treated as if they never existed (Chapters 9 & 10)

most contracts end in discharge

parties relieved of need to perform in future

grounds for discharge

performance agreement operation of law breach
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Managing The Law, 3/e Chapter 11. Discharge and Breach

Discharge by Performance
performance = fulfillment of obligations time of performance
time usually not of the essence (damages for lateness)

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Managing The Law, 3/e Chapter 11. Discharge and Breach

Discharge by Performance
tender of payment
general rule: creditor can insist on legal tender debtor has primary obligation to tender payment discharging a debt by payment of money can be risky because lost or stolen cash cannot usually be recovered other common payment options: debit cards, credit cards, cheques

tender of performance
general rule: obligations must be exactly performed discharge if substantially perform (damages for defect)
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Managing The Law, 3/e Chapter 11. Discharge and Breach

Discharge by Agreement
parties may agree to discharge contract
option to terminate conditions rescission accord and satisfaction release variation novation waiver
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Managing The Law, 3/e Chapter 11. Discharge and Breach

Option to Terminate
unilateral right to discharge
option inserted into contract at outset one party allowed to terminate contract often subject to restrictions
eg employment terminable on two months notice

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Managing The Law, 3/e Chapter 11. Discharge and Breach

Conditions
conditional contract
parties agree that contract is affected by event

types of conditions
condition subsequent true condition precedent condition precedent

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Managing The Law, 3/e Chapter 11. Discharge and Breach

Condition Subsequent
condition subsequent
contract ends if specified event occurs
eg open-air concert cancelled if bad weather

effect of condition
existing contract automatically terminated contrast: option requires decision by one party

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Managing The Law, 3/e Chapter 11. Discharge and Breach

True Condition Precedent

true condition precedent
contract exists only if specified event occurs
eg arms sale exists if government approves

effect of condition
contract automatically created if event occurs no further agreement by parties needed

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Managing The Law, 3/e Chapter 11. Discharge and Breach

Condition Precedent
condition precedent
contract must be performed only if event occurs
eg sale of house conditional on purchasers financing

effect of condition
contract created immediately performance of primary obligations suspended
eg purchaser need not pay price eg vendor need not transfer house

performance of secondary obligation required

eg purchaser must try to arrange financing
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Managing The Law, 3/e Chapter 11. Discharge and Breach

Rescission
rescission = agreement to terminate
arises after contract created note: distinguish rescinded contract (Chapter 9)

consideration required for enforcement executory contract = not fully performed

consideration if neither party has performed
each party gives up right to others performance

executed contract = fully performed

difficulty with consideration
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Managing The Law, 3/e Chapter 11. Discharge and Breach

Accord and Satisfaction

accord and satisfaction
accord = new agreement satisfaction = new consideration

discharge of partially executed contract

executed party gives up right to full performance executory party gives new consideration
eg original: $5 000 for two cars eg accord and satisfaction: $5 000 (paid) for car and boat

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Managing The Law, 3/e Chapter 11. Discharge and Breach

Release
release = discharge under seal
consideration required for enforcement seal is substitute for consideration

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Managing The Law, 3/e Chapter 11. Discharge and Breach

Variation
variation = alteration of existing contract
contract retained but on new terms

consideration required for enforcement

executory contract on both sides each party agrees to new terms each party gives up right to original performance
eg original: 20 lawns cut for $2 000 eg variation: 15 lawns cuts for $1 500

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Managing The Law, 3/e Chapter 11. Discharge and Breach

Novation
novation = replacement of old contract with new two-party novation
same parties but different contract
eg original: A agrees to sell B shares in Alpha Inc eg novation: A agrees to sell B shares in Beta Inc

three-party novation
different parties but same contract
eg original: contract between A and B eg novation: contract between A and C (B released)
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Managing The Law, 3/e Chapter 11. Discharge and Breach

Waiver
waiver = abandonment of right to performance
similar (perhaps identical) to promissory estoppel

requirements of waiver
enforceable without consideration or seal no particular form required likely requires reliance by other party retraction possible upon notice (unless unfair)

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Managing The Law, 3/e Chapter 11. Discharge and Breach

Discharge by Operation of Law

contract may be discharged by operation of law examples of operation of law
frustration: contract impossible to perform
impossibility must arise innocently

limitation period: lapse of time under statute

rights are unenforceable but not extinguished

bankruptcy: inability to pay debts

no discharge if bankruptcy caused by misconduct
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Managing The Law, 3/e Chapter 11. Discharge and Breach

Discharge by Breach
discharge by breach
breach = failure to fulfill contractual promise contract may be discharged for breach

discharge depends upon type of term

condition warranty intermediate
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Managing The Law, 3/e Chapter 11. Discharge and Breach

Condition
condition = relatively more important term
benefit substantially lost upon breach innocent party generally has option
affirm contract and claim damages discharge contract and claim damages

note: distinguish conditional contract (above)

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Managing The Law, 3/e Chapter 11. Discharge and Breach

Warranties
warranty = relatively less important term
benefit not substantially lost upon breach innocent party has no significant option
must affirm contract may claim damages

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Managing The Law, 3/e Chapter 11. Discharge and Breach

Intermediate
intermediate term = uncertain importance
significance of breach unclear at outset
benefit of contract may be substantially lost benefit of contract may not be substantially lost

wait and see approach

treated as condition if benefit substantially lost treated as warranty if benefit not substantially lost

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Managing The Law, 3/e Chapter 11. Discharge and Breach

Types of Breach
Breach of a condition, warranty or intermediate term can occur in one of the following four ways: 1) defective performance party fails to properly perform under the contract buyer is usually entitled to reject the delivery unless the defect in performance is truly trivial 2) deviation ship, train or truck departs from the agreed route in a contract for the carriage of goods by land or sea
Carrier in breach may lose benefit of limitation or exclusion clauses in contract
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Managing The Law, 3/e Chapter 11. Discharge and Breach

Types of Breach
3) anticipatory breach indication that breach will occur in future innocent party can take action immediately 4) self-induced impossibility party renders performance impossible contrast: frustration (neither party at fault)

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Managing The Law, 3/e Chapter 11. Discharge and Breach

The Effect of Discharge for Breach

parties relieved of need to perform in future
contract not wiped out altogether parties need not perform primary obligations but contract still effective for some purposes
eg exclusions clauses, liquidated damages

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