Chapter 15 Discharge of Contracts

Termination of Contracts Contracts may be terminated by: 1. Agreement 2. Performance 3. Impossibility of performance 4. Alteration 5. Operation of law 6. Breach 7. Laws and regulations protecting the consumer Learning Outcome 15-1: Identify seven ways in which a contract may be terminated. Page: 234

Termination by Agreement 15-3 Termination by Agreement A contract may provide for its termination either: After a certain period of time. Upon the occurrence of a certain event. Contracts may also be terminated by mutual agreement of both parties. Occasionally both parties agree to substitute a new contract in place of the original contract. In such case, the original contract is immediately terminated. Learning Outcome 15-2: Discuss termination of a contract by agreement. Page: 234

Termination by Performance 15-4 Termination by Performance Complete and Satisfactory Performance will bring about termination. Substantial Performance All terms and conditions are executed with the exception of minor details. If an important contract term not performed within time specified agreement may be canceled. However, the omission of a small detail entitles injured party to claim only proportionate reduction in the payment. Learning Outcome 15-3: Explain the three types of termination by performance. Page: 235

Termination by Performance 15-5 Termination by Performance Performance by Payment of Money: Contracts that require the payment of money are not complete until agreed amount paid. If the agreement provides that payment may be made by check, payment received by check is considered conditional and subject to collection in cash. A party to a contract who pays by check is not relieved of the obligation for contractual payment until the cash is paid by the bank on which the check is drawn. Learning Outcome 15-3: Explain the three types of termination by performance. Page: 235

Termination by Performance (cont.) 15-6 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. Learning Outcome 15-3: Explain the three types of termination by performance. Page: 235

Termination by Performance (cont.) 15-7 Tender of Goods: 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. 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. Learning Outcome 15-3: Explain the three types of termination by performance. Page: 235

Termination by Performance (cont.) 15-8 Tender of Payment An offer of money in payment of an obligation. Evidence of a party’s willingness to fulfill the terms of a contract. Refusal of a tender of payment does not cancel the debt. Penalties and interest cannot be charged beyond the date of the offer of payment. Learning Outcome 15-3: Explain the three types of termination by performance. Page: 236

Termination by Performance (cont.) 15-9 Valid Tender Must be made as specified in the contract. Tender of payment must be for the exact amount. Tender of goods must be for the specific goods specified in contract. Learning Outcome 15-3: Explain the three types of termination by performance. Page: 236

Termination by Impossibility of Performance 15-10 Unforeseen circumstances may make a contract impossible to fulfill. Voids contract. Parties are discharged from obligations. Learning Outcome 15-4: Explain termination by impossibility of performance. Page: 237

Termination by Impossibility of Performance (cont.) 15-11 The Uniform Commercial Code (UCC) states the following regarding performance failure when contract goods destroyed: If contract covers identified goods and goods destroyed without either party fault , contract canceled. If seller’s supply source or production means creates partial performance inability, seller may tender portion of goods under contract. If partial loss, buyer may inspect damaged goods to decide whether to reject or accept in damaged state and claim damage allowance. Learning Outcome 15-4: Explain termination by impossibility of performance. Page: 237

Termination by Impossibility of Performance (cont.) 15-12 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. Learning Outcome 15-4: Explain termination by impossibility of performance. Page: 237

Termination by Impossibility of Performance (cont.) 15-13 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. Learning Outcome 15-4: Explain termination by impossibility of performance. Page: 237

Termination by Alteration 15-14 Termination by Alteration Material 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. Learning Outcome 15-5: Describe when termination by alteration occurs. Page: 238

Termination by Operation of Law 15-15 Termination by Operation of Law If a law or regulation makes the performance of a contract illegal, the contract is void from the beginning. If a law is passed after the parties enter into a contract that makes performance illegal, the contract is terminated by operation of law. Learning Outcome 15-6: Identify the circumstances under which a contract would be terminated by operation of law. Page: 238

Termination by Breach of Contract 15-16 Termination by Breach of Contract When a party to a contract refuses to perform as required by the contract. When a party performs in an unsatisfactory manner. Three common ways contracts are breached: Anticipatory breach. Breach resulting from deliberate or negligent act. Failure to perform an obligation. Learning Outcome 15-7: Provide examples of contracts terminated by breach. Page: 239

Anticipatory Breach of Contract 15-17 Anticipatory Breach of Contract When one party receives notice from other party of intent to breach, he or she cannot continue performance called for in the contract as doing so would increase damages. When a party breaches a contract, the injured party has the duty to mitigate, or lessen, the amount of damages. Learning Outcome 15-7: Provide examples of contracts terminated by breach. Page: 239

Example: Anticipatory Breach of Contract 15-18 Example: Anticipatory Breach of Contract Facts: Zikmund, an actress, agreed to appear in a supporting role in a play scheduled to open on February 1. On December 1, she announced that she would not be available. The producer has a right to initiate a suit on December 1 for anticipatory breach without waiting until February 1, the time the contract was to commence. Learning Outcome 15-7: Provide examples of contracts terminated by breach. Page: 239

Breach Resulting from Deliberate or Negligent Act. 15-19 Breach Resulting from 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. Learning Outcome 15-7: Provide examples of contracts terminated by breach. Page: 239

Failure to Perform an Obligation. 15-20 Failure to Perform an Obligation. A party failing to perform contractual obligations, within the time specified or within a reasonable time, breaches the contract. The breach occurs whether party has completely or partially failed to perform. If complete failure, the contract is terminated. If partial failure, nonbreaching party required to pay for completed work received. Learning Outcome 15-7: Provide examples of contracts terminated by breach. Page: 239

Termination to Protect a Consumer 15-21 Termination to Protect a Consumer Various laws and regulations allow consumers to terminate a contract under certain conditions. Federal Consumer Credit Protection Act Applies to contracts that require consumers to pledge their home as a security deposit. Gives consumers the right to cancel a credit transaction within three days. Federal Trade Commission Gives the consumer a “cooling-off” period of three days. Consumer has the right to cancel contracts for either goods or services made in the consumer’s home. Learning Outcome 15-8: Explain how contracts can be terminated to protect consumers. Page: 241

Remedies for Breach of Contract 15-22 The injured party may sue for compensatory damages, a sum of money that will compensate for the loss. Injured party must determine the damage in terms of money. The court will determine if the claim is fair and adequate. Compensatory damages intended to return injured party to same position he or she in before contract breached. Learning Outcome 15-9: Discuss the remedies for breach of contract, and provide examples of situations that would be appropriate for each remedy. Page: 241

Remedies for Breach of Contract (cont.) 15-23 Consequential damages: Monetary compensation for losses resulting from special circumstances of plaintiff foreseeable by both parties. Example: Contractor breaches by not completing the renovations to a business on time. In such a case, a court may award consequential damages to the business to compensate for revenues lost as a result of the business remaining closed. Learning Outcome 15-9: Discuss the remedies for breach of contract, and provide examples of situations that would be appropriate for each remedy. Page: 241

Remedies for Breach of Contract (cont.) 15-24 Nominal damages: Small monetary award to a plaintiff where no actual damages incurred to indicate plaintiff was wronged. Liquidated damages clause: Clause in contract wherein damages explicitly set in the event one of the parties breaches. Generally enforceable so long as closely related to actual damages. Not enforceable if penalty or forfeiture. Learning Outcome 15-9: Discuss the remedies for breach of contract, and provide examples of situations that would be appropriate for each remedy. Page: 241

Remedies for Breach of Contract (cont.) 15-25 Specific performance: Court order directing party to perform as agreed. Courts almost never order specific performance of a contract for personal services as difficult to ensure performance of someone being forced to work after a dispute. Learning Outcome 15-9: Discuss the remedies for breach of contract, and provide examples of situations that would be appropriate for each remedy. Page: 241

Remedies for Breach of Contract (cont.) 15-26 Restraining order or injunction: Court order prohibiting the performance of a certain act. In some states, a restraining order is temporary and an injunction is permanent. Learning Outcome 15-9: Discuss the remedies for breach of contract, and provide examples of situations that would be appropriate for each remedy. Page: 241

Example: Specific Performance 15-27 Example: Specific Performance Facts: Segal sold wooded parcel of land to Hargett. Hargett agreed not to cut down trees for 15 years. One year later Hargett sought to build shopping mall on property which would require cutting down the trees. Segal began legal action but was concerned trees would be destroyed by the time case heard. Segal therefore sought temporary restraining order to stop work at site until case heard. Because real estate unique, the court is likely to grant specific performance. Learning Outcome 15-9: Discuss the remedies for breach of contract, and provide examples of situations that would be appropriate for each remedy. Page:242