Chapter 15 Discharge of Contracts

CHAPTER 15: DISCHARGE OF CONTRACTS 15.1 TERMINATION OF CONTRACTS Contracts may be terminated by (1) agreement (2) performance: substantial performance and tender of performance (3) impossibility of performance (4) alteration (5) operation of law (6) breach (7) laws and regulations protecting the consumer. 15.2 TERMINATION BY AGREEMENT A contract may provide for its termination after a certain period of time or upon the occurrence of a certain event. Occasionally, instead of agreeing to cancel a contract, both parties may agree to substitute a new contract in place of the original in order to maintain a working relationship. In such a case, the original contract is immediately terminated upon substitution of the new contract. 15.3 TERMINATION BY PERFORMANCE Complete and satisfactory performance of the terms of a contract will bring about termination. When a contract is fulfilled, there is no need to provide for contract termination. SUBSTANTIAL PERFORMANCE Substantial performance occurs when a party to a contract, in good faith, executes all of the promised terms and conditions of the contract with the exception of minor details that do not materially affect the intent of their agreement. ● If an important part of a contract is not performed within the period of time specified, the agreement may be canceled, but the omission of a small detail entitles the injured party to claim only a proportionate reduction in the payment. PERFORMANCE BY PAYMENT OF MONEY Contracts that require the payment of money are not complete until the amount agreed upon has been paid. If the agreement provides that payment may be made by check, as most payments are, payment by check is considered conditional and subject to collection in cash. TENDER AND ITS EFFECT A tender of performance is an offer to perform and is considered evidence of a party’s willingness to fulfill the terms of a contract. If a tender of performance of an act is refused, the person making the offer is relieved of the obligation to perform and may sue the other party for breach of contract. A tender of goods is an offer to provide the goods agreed upon and is considered evidence of a party’s willingness to fulfill the terms of a contract. As is true for a tender of performance, if a tender of goods is refused, the person making the offer of goods is relieved of the obligation to provide the goods and may sue the other party for breach of contract. A tender of payment is an offer of money in payment of an obligation and is considered evidence of a party’s willingness to fulfill the terms of a contract. If a tender of payment is refused by the creditor, the debt is not canceled, but penalties and interest cannot be charged beyond the date on which the offer of payment was made. ● Certain requirements must be met for tender of money or performance to be valid. ○ First, tender must be made as specified in the contract. If the contract specifies that payment or performance be made at a certain time or place, or to a particular person, these conditions must be met. ○ Second, when tender of payment is made, it must be for the exact amount. The mention of money in a contract implies payment in cash. ○ Third, if the contract calls for the delivery of specific goods, only the tender of these particular goods will satisfy the contract. The mention of money in a contract implies payment in cash. 15.4 TERMINATION BY IMPOSSIBILITY OF PERFORMANCE Unforeseen circumstances may make it impossible to fulfill the terms of a contract as originally agreed. In a case of impossibility of performance, the contract is considered void and the parties are discharged. PERSONAL-SERVICE CONTRACTS Death or disabling illness of a party to a contract also may render the contract impossible to perform if it can be shown that the contract calls for a special skill or talent possessed by the deceased or ill person. FRUSTRATION OF PURPOSE Closely related to impossibility is the doctrine of frustration of purpose. Where both parties know the purpose of a contract and, through no fault of either party, the reason for the contract no longer exists, the contract is terminated. 15.5 TERMINATION BY ALTERATION A deliberate change or alteration of an important element in a written contract that affects the rights or obligations of the parties is known as a material alteration and results in termination of the contract. 15.6 TERMINATION BY OPERATION OF LAW If a law or regulation makes the performance of a contract illegal, the contract is void from the beginning. In fact, there is no contract. If, however, a law is passed after the parties enter into a contract that makes performance illegal, the contract is terminated by operation of law. 15.7 TERMINATION BY BREACH OF CONTRACT A breach of contract occurs when a party to a contract refuses to perform as required by the contract or performs in an unsatisfactory manner. There are three common ways in which contracts are breached: ● Anticipatory breach, sometimes referred to as anticipatory repudiation. ● Breach resulting from a deliberate or negligent act. ● Failure to perform an obligation. ANTICIPATORY BREACH: the breach has not occurred yet but they told you they’re not showing up. A party who announces an intention to break a contract is said to create an anticipatory breach. He or she has given notice of intention to break the contract even before being required to perform. Court decisions have allowed the injured party to bring suit for damages at the time of the announcement and have not required the party to wait until the time for performance has passed. The law regarding anticipatory breach does not apply to promises to pay money at some future date. A person who renounces an obligation to pay on a promissory note (a written promise to pay a specified sum of money) cannot be sued until after the due date of the first payment on the note, even if such person announces his or her intention to breach before the first payment is due. BREACH RESULTING FROM A DELIBERATE OR NEGLIGENT ACT A contract is breached if one party deliberately or negligently stands in the way of performance. For example, if a party who has agreed to sell certain perishable foods negligently allows them to become damaged by freezing, he or she has breached the contract. FAILURE TO PERFORM AN OBLIGATION A party who fails to perform contractual obligations, within the time specified or within a reasonable time, has breached the contract. The breach occurs whether the party has completely or partially failed to perform. In the case of complete failure, the contract is terminated. Partial failure to perform may require the nonbreaching party to pay for the work that has already been completed. 15.8 TERMINATION TO PROTECT A CONSUMER To protect consumers against their own impulsiveness and various questionable sales techniques, a number of federal, state, and local laws and regulations allow consumers to terminate a contract under certain conditions. 15.9 REMEDIES FOR BREACH OF CONTRACT You can sue for... ● Damages: ○ Compensatory ○ Consequential ○ Nominal ● Specific performance ● Straining order or injunction Each party to a contract has the right to expect complete and satisfactory performance. When such performance is not made, the injured party may sue to recover compensatory damages, a sum of money that will compensate for his or her loss. In all such claims for damages, the injured party must determine the damage in terms of money, and the court will determine if the claim is fair and adequate. Compensatory damages are intended to return the injured party to the same position he or she was in before the contract was breached. Occasionally a court may award consequential damages to a plaintiff. Consequential damages are monetary compensation for losses resulting from the special circumstances of a plaintiff that are foreseeable by both parties to a contract. Nominal damages are small monetary awards, typically $1, that serve to indicate that a plaintiff was wronged by a defendant. The parties include a statement right in their contract wherein damages are explicitly set in the event one of the parties breaches the agreement. Such a statement is called a liquidated damages clause SPECIFIC PERFORMANCE Sometimes a judgment of money damages will not really repay an injured party for a breach of contract. In some cases, the injured party may sue for specific performance—that is, a court order directing a person to perform as he or she agreed to do. ● To obtain an order of specific performance, the injured party asks the court to order the other party to do what he or she promised to do. ● A court order for specific performance serves as a remedy in cases in which an award of money damages for a breach of contract cannot adequately compensate the injured party. ● An order for specific performance may be obtained not only in cases of breach of contract for the sale of unique goods or real estate, but also in cases where the purchaser is not able to obtain the goods called for by the contract elsewhere. RESTRAINING ORDER OR INJUNCTION Whereas a decree of specific performance is a court order requiring the performance of a certain act, a restraining order, or injunction, is a court order prohibiting the performance of a certain act. In some states, a restraining order is temporary and an injunction is permanent.