Chapter 11 - Discharge and Breach

Question 1

Rescinded

Answer 1

Contracts that are treated “as if they never existed”

Question 2

Discharge

Answer 2

Contract still exists, but the parties are relieved of the obligation to do anything further

Question 3

4 Methods of Discharging a Contract

Answer 3

1. Discharge by performance
2. Discharge by agreement
3. Discharge by operation of law
4. Discharge by breach

Question 4

Performance

Answer 4

Parties fulfill the obligations specified in the contract

Question 5

Performance

General Rule:

Answer 5

The parties must perform exactly as the contract specifies.

Question 6

Time of Performance

General Rule:

Answer 6

Time is not of the essence!

A party is entitled to perform late even if the contract sets a specific date. However, you could make a claim for any damages that you suffer, as a result of the other party’s delay in performing their contractual obligations

Question 7

There are 3 circumstances in which time is of the essence

Answer 7

1. If parties have expressly or implicitly specified in their contract, “Time is of the essence”.
2. Even if not stipulated in contract, a party insisted upon timely performance by giving reasonable notice that performance must occur by a specific date/time.
3. Even if neither 1 or 2 occurred, the Court may yet determine that, in all the circumstances, time should be of the essence (i.e.. Contract dealing with perishable goods)

Question 8

Tender of Payment

Answer 8

Usually payment of money in the form of:
 Debit cards: payment is final
 Credit cards: payment made using credit card company
 Cheques: conditional payment as bank may not honour, or customer may countermand cheque before cashed
 PayPal: 3PPS (third party payment system)

A reasonable tender has to made only once; if rejected, debtor still has to pay for debt but can wait for creditor to “come to him” for payment

Question 9

Legal Tender

Answer 9

A payment of notes (bills) and coins to a certain value

Use of legal tender risky because lost or stolen cash extremely difficult to recover

Question 10

Tender of Performance

Answer 10

When performance involves provision of goods or services:

The party who owes the obligation to provide goods or services need only offer these once
If impossible performance, the party with the obligation is discharged

Question 11

Tender of Performance

General Rule:

Answer 11

Tender of goods or services must conform precisely with terms of contract

Question 12

Tender of Performance

General Rule Exception:

Answer 12

A party may be discharged from further obligations if it provides substantial performance.

(Substantial performance generally satisfies the contract but is defective or incomplete in some minor way)

Question 13

Substantial Performance

Answer 13

Substantial performance generally satisfies the contract but is defective or complete in some minor way.

o In deciding whether substantial performance has occurred, a Court will consider: nature of defect, difference between contract price and cost of curing defect.

Question 14

Entire Contract

Answer 14

An entire contract says that no part of the price is payable unless all of the work is done

Courts have a bias towards finding a contract to be an entire contract because they would rather see workers get paid for their work rather than not getting paid at all

Question 15

Single Contract to Deal with Series of Tasks

Answer 15

The parties may have used a single contract to deal with a series of tasks; In this case, as part of the overall price is earned each time a task is performed, the builder would only get compensation for the work/task(s) that he actually completed.

i.e. Builder is supposed to be paid $50,000 for task #1, $100,000 for task #2; If he leaves after just completing task #1, he’ll only get paid $50,000.

Question 16

Discharge by Agreement

Answer 16

Options to terminate, conditions subsequent, conditions precedent and true condition precedent are ways in which the parties can agree, when initially creating a contract, that their obligations can be discharged in certain circumstances

Agreements can also be reached to discharge an obligation after a contract has been created: rescission, accord and satisfaction, release, variation, novation and waiver.

Question 17

-Option to Terminate-

Answer 17

A contractual provision that allows either party to act unilaterally, to discharge a contract without the agreement of the other.

Negotiated and agreed upon in the contract (employee contracts)

Question 18

-Conditions- (Conditional Contract)

Answer 18

o Parties agree that a contract is affected by an event

o Inserted into contract at the outset, like an option to terminate.

Question 19

3 Types of Conditional Contracts

Answer 19

1. Condition subsequent
2. True condition precedent
3. Condition precedent

Question 20

Condition Subsequent

Answer 20

A condition subsequent is a contractual term that states that the contract will come to an end if a specified event occurs.

Eg.) outdoor concert ticket cancelled because of weather and the refunded

Effect of Condition: Both parties must perform unless and until the specified event occurs, in which case the contract is terminated

Question 21

True Condition Precedent

Answer 21

A True Condition Precedent is a contractual term that states an agreement will only come into existence if a specified event occurs.

Eg.) Selling a gun, contract will be valid only if our weapon receives government approval

Effect of Condition: a contract is created automatically if the event occurs

Question 22

Condition Precedent

Answer 22

A Condition Precedent is a contractual term in which the contract is formed immediately but certain obligations do not have to be performed unless and until a specified event occurs.

Eg.) You agree to buy someone’s house, but not unless you sell your own house within 30 days.

Effect of Condition: contract created immediately, but performance of primary obligations suspended. The subsidiary obligations however must be performed right away

Question 23

Executed Contract:

Answer 23

A party has fully performed its obligations (i.e. You’ve done what you’re supposed to do)

Question 24

Executory Contract:

Answer 24

A party has not fully performed its obligations (i.e. You haven’t yet done what you’re supposed to do).

Question 25

Contracts which are not executed on both sides could be:

Answer 25

1. Executory on both sides (neither party has fully performed).
2. A mixture of executory and executed (one party has fully performed, the other hasn’t).

Question 26

Rescission

Answer 26

Agreement to terminate existing contract.

Question 27

Rescission

General Rule:

Answer 27

The Rule: A contract that is executory on both sides may be discharged through agreement, by the process of “Rescission”. Both sides agree, expressly or implicitly, not to demand the performance required by their contract- since neither party has yet performed its obligation, both parties provide consideration by giving up their right to the other’s performance (suffering a detriment). Therefore, the agreement that is reached is binding.

Question 28

Void vs. Discharged

Answer 28

• A discharge means that the parties are relieved of their need to perform any further contractual obligations. However, the contract still exists, and the parties may rely or “use” their contract some purpose (i.e. exclusion clause or liquidated damages clause).
• In contrast, if a contract is rescinded or voided, that means that the contract is treated as “never having existed” and no party can rely upon any term in the contract, for any purpose.

Question 29

Accord and Satisfaction

General Rule:

Answer 29

The general rule is that an agreement to discharge a contract which is executory on one side and executed on the other side is unenforceable due to lack of consideration.

Eg.) Fred built garage for Bob, and Bob owes money to Fred, but Fred says don’t worry about paying. That is just a gratuitous promise because there is no consideration, so he can change his mind at any point

Question 30

Accord and Satisfaction

Answer 30

Under an agreement as per Accord and Satisfaction, the executed party gives up their right to demand performance of the obligation owed by the executory party to them, in return for the executory party giving new or “fresh” consideration.

Eg.) If Fred tells Bob, “You don’t have to pay me, but how about you give me $5000 worth of steaks from your grocery store” and Bob agrees to this, now the agreement has been varied, and the varied agreement is enforceable.

Question 31

Release

Answer 31

Release: an agreement under seal to discharge a contract. A seal is a substitute for consideration

Question 32

Variation

Answer 32

Variation: agreement used to introduce small changes to an existing contract. A party either gives up its right under the original terms of agreement or accepts new obligations under the modified or varied terms of the agreement

Unlike Accord and Satisfaction, agreement should be Executory on both sides (i.e.. neither party has yet performed their obligations).

Question 33

Novation

Answer 33

Novation: used to make substantial changes that greatly effect an existing contract. Basically, the novation process is used to discharge the original contract and replace it with a new contract.

Contract can be executory on one side or both

Question 34

Two-party novation

Answer 34

Same parties, but new obligations/different subject matter.

Eg. Original contract: A agrees to sell B land in Cold Lake - novation: new contract: A agrees to sell B land in St. Paul

Question 35

Three-party novation:

Answer 35

Same subject matter, but different parties.

Eg.) Original contract: A sells land to B, A has a mortgage at the bank. B agrees to assume or “take on” A’s mortgage. The bank consents to this.. - novation: new contract: the mortgage contract between A and the bank is replaced with a mortgage contract between B and the bank.

Question 36

Novation

3 Requirements:

Answer 36

1. Cannot occur unless all of affected parties consent to new arrangement; i.e.. Bank must agree to allow a mortgagor to be discharged from their mortgage agreement with the Bank, and consent to allow purchaser to assume the original mortgagor’s debt;
2. Whether it is substitution of obligations, or substitution of parties, the agreement to discharge the old contract must be supported by consideration which is satisfied by the parties to the original contract agreeing to give up their rights under the original contract (suffering a detriment).
3. Novation can be achieved expressly or impliedly but as a matter of risk management, the revised agreement should be in writing.

Question 37

Waiver

Answer 37

Waiver occurs when one party abandons a right to insist on contractual performance. It is an exception to the general rule that the courts will not enforce a gratuitous promise.

Written, oral, express, or implied

Courts require evidence that the other party intended to waive its rights

Question 38

Waiver

Requirements:

Answer 38

1. Plaintiff must prove Defendant clearly understood the nature and consequence of waiving his right to demand performance
2. Reliance by Plaintiff upon Defendant’s promise not to demand performance.

o Note: there is no consideration needed for waiver (it’s a gratuitous promise that the Court enforces).

Question 39

Discharge by Operation of Law

Answer 39

A Contract may be discharged by operation of law, in which event the parties are relieved from the necessity of performing any remaining contractual obligations.

Question 40

Discharge by Operation of Law

By Frustration

Answer 40

 Contract impossible to perform: no further obligations.

 Might be a clause in the contract that is still applicable

Question 41

Discharge by Operation of Law

By Bankruptcy

Answer 41

Bankrupt debtor discharged from any outstanding contractual obligations:

Question 42

Discharge by Operation of Law

By Lapse of a Limitation Period

Answer 42

Statutes of Limitation require a party to sue within a certain period of time. i.e. 6 years for breach of contract.

Note: technically, rights are not extinguished, just unenforceable so, if you sue me for breach of contract 8 years after we signed a contract, the contract is still valid, but the court will not enforce the obligations within the contract because you sued after the prescribed deadline. However, if the party that breached the contract acknowledges that it is still liable, evidenced by paying part of its outstanding debt, your right to sue may be revived.

Question 43

Breach

Answer 43

Failure to fulfill contractual promise (contracting party has not performed as promised)

Whether the innocent party is discharged from contract depends upon the type of term that other side breached

Question 44

Discharge by Breach

Condition:

Answer 44

Condition: important contractual term

o A term is a condition if the innocent party would be substantially deprived of expected benefit of contract due to its breach

Question 45

If the other party breaches a condition in the contract, the innocent party has a choice:

Answer 45

o He can affirm contract (“carry on”) and claim damages; OR
o He can discharge the contract (“stop doing any obligations pursuant to contract”) and claim damages.
o Note damages will likely be significantly greater if the innocent party chooses to discharge the contract than if he simply affirms the contract and “carries on”.

Question 46

Discharge by Breach

Warranties:

Answer 46

Warranty: relatively less important term

o A term is a warranty if innocent party would not be substantially deprived of expected benefit of contract due to its breach
• Innocent party has no significant option - must affirm contract, no option to discharge, but may of course claim damages

Question 47

Discharge by Breach

Intermediate:

Answer 47

Intermediate term: uncertain importance

o Term is intermediate if, depending upon the circumstances, innocent party may or may not be substantially deprived of expected benefit of contract due to its breach

Question 48

Discharge by Breach
Intermediate:
“Wait and see” approach

Answer 48

o Treated as condition if benefit substantially lost

o Treated as warranty if benefit not substantially lost

Question 49

To guard against the difficulty distinguishing between conditions, warranties and intermediate terms, and as a matter of risk management:

Answer 49

o Parties should consider expressly defining types of terms in their contract;
o Parties could state expressly that the breach of a certain term will or will not support a right of discharge;
o Parties should also be aware that a statute which is relevant to their contract may also classify a term in the contract as either a condition or warranty.

Question 50

If the parties are before the court, asking the court to determine whether a particular term will support a right of discharge, and the above does not answer the issue, a judge may decide the issue by a Test:

Answer 50

The Judge will consider what portion of the total performance is defective, the likelihood that the breach will be repeated in the future if the contract calls for performance by installments, and the seriousness of the breach to the innocent party.

Question 51

Types of Breach/How a Breach May Occur:

1. Defective performance:

Answer 51

Party fails to properly perform its obligations under contract. May refer to complete lack of performance or may refer to a more trivial item that does not comply with the terms of the contract. Buyer usually entitled to discharge of contract unless defect truly trivial.

Question 52

Types of Breach/How a Breach May Occur:

2. Deviation:

Answer 52

Occurs when a ship, train, or truck departs from the route agreed upon by the parties

Carrier in breach may lose benefit of limitation or exclusion clauses in contract

Question 53

Types of Breach/How a Breach May Occur:

3. Anticipatory breach:

Answer 53

Occurs when a party indicates in advance, by words or conduct that it does not intend to fulfill an obligation when it falls due under a contract.

 Same rules apply to anticipatory breach as other types of breach (i.e. if “bad party” threatens to breach a condition of the contract, rather than a warranty, innocent party has the option to discharge the contract).

Question 54

Types of Breach/How a Breach May Occur:

4. Self-induced impossibility:

Answer 54

A contract is discharged for frustration if, through no fault of either party, it becomes impossible to perform. A self-induced impossibility, however, is caused by a party.

Question 55

If an anticipatory breach is serious enough to support discharge, then:

Answer 55

 The innocent party may reject breach (“I don’t believe that you will actually not deliver my goods, as you threaten”), carry on with contract and claim damages, if the breach does occur; or, ;
 Innocent party may discharge the other party from future performance and claim resultant damages. If so, the Innocent party is entitled to seek relief immediately (i.e. no need to wait until the date the obligation was to be performed).