Copyright © 2004 McGraw-Hill Ryerson Limited 1 PART 3 – THE LAW OF CONTRACTS  Chapter 12 – Performance of Contractual Obligations Prepared by Douglas H. Peterson, University of Alberta

Copyright © 2004 McGraw-Hill Ryerson Limited 2 THE NATURE AND EXTENT OF PERFORMANCE Performance – fulfillment of obligations Must be exact and precise Performance brings the contract to an end Non-performance creates a breach of contract by the non-performing party Complete performance = discharge of the contract

Copyright © 2004 McGraw-Hill Ryerson Limited 3 LAW OF CONTRACT TENDER FORM OF TENDER OBLIGATION Payment Performance

Copyright © 2004 McGraw-Hill Ryerson Limited 4 TENDER Tender – the act of performing a contract or the offer of payment of money due under a contract 2 Types Tender of payment Tender of performance of an act

Copyright © 2004 McGraw-Hill Ryerson Limited 5 TENDER OF PAYMENT Sum of money offered in payment must be in accordance with the terms of the contract If form of payment not specified must be in legal tender Debtor has primary obligation to tender payment Creditor can insist on legal tender

Copyright © 2004 McGraw-Hill Ryerson Limited 6 TENDER OF PAYMENT Legal Tender – official currency of Canada in the form of notes (bills) and coins to a certain value Legal tender may not be refused when offered in payment, if it is the exact amount required Other forms of payment may be rejected Tender must be at proper place and time If rejected debtor need not attempt payment again Interest ceases to run from point proper payment is tendered Debtor not free of debt, but need only hold it until creditor demands it

Copyright © 2004 McGraw-Hill Ryerson Limited 7 TENDER OF PERFORMANCE OF AN ACT Obligations must be exactly performed If tender rejected tender need not be made again Test: show willing and able to perform Refusal of tender allows suit for breach of contract to be brought Specific Performance – equitable remedy available for land when tender is refused

Copyright © 2004 McGraw-Hill Ryerson Limited 8 DISCHARGE BY MEANS OTHER THAN PERFORMANCE By terms of the agreement By operation of law By agreement of the parties Upon the happening of the event Condition Precedent Substituted Agreement

Copyright © 2004 McGraw-Hill Ryerson Limited 9 TERMINATION AS A RIGHT Option to terminate by either party giving notice to the other Usually a time period is attached, upon the expiry of which the agreement is terminated May include compensation for termination If done according to specific terms, may terminate without liability

Copyright © 2004 McGraw-Hill Ryerson Limited 10 EXTERNAL EVENTS – EXPRESS TERMS Condition subsequent – a condition that alters the rights or duties of the parties to a contract, or that may have the effect of terminating the contract if it should occur Usually something beyond the parties control Takes place subsequent to the formation of the contract Example would be a rain check on a baseball game

Copyright © 2004 McGraw-Hill Ryerson Limited 11 EXTERNAL EVENTS – EXPRESS TERMS Force Majeure – a major, unforeseen or unanticipated event that occurs and prevents the performance of a contract May be specific or general Something beyond the control of either party Normally referred to as acts of nature or acts of God War, insurrections, natural disasters, strikes

Copyright © 2004 McGraw-Hill Ryerson Limited 12 EXTERNAL EVENTS – IMPLIED TERMS Court may imply conditions subsequent from customs of the trade Common carriers not responsible for losses due to acts of God

Copyright © 2004 McGraw-Hill Ryerson Limited 13 DOCTRINE OF FRUSTRATION Frustrated Contract – a contract under which performance by a party is rendered impossible due to an unexpected or unforeseen change in circumstances affecting the agreement Key Elements Beyond the control of the parties Impossible not hardship Higher costs or loss is not grounds for frustration Not self-induced Event takes place after formation of the contract

Copyright © 2004 McGraw-Hill Ryerson Limited 14 DOCTRINE OF FRUSTRATION Circumstances Constituting Frustration Performance of a contract impossible because subject matter destroyed/unusable Sale of Goods Act Event forms basis of a contract fails to take place Personal services contract Death or illness of person to perform Act of govt. interference with performance Frustrating event must defeat common intention of both parties

Copyright © 2004 McGraw-Hill Ryerson Limited 15 COMMON LAW Relevance is the time frustration occurs Issue was return of deposit when given before occurrence of frustrating event Common law rule created hardships All or nothing rule

Copyright © 2004 McGraw-Hill Ryerson Limited 16 COMMON LAW If seller receives deposit and seller provides no benefit to buyer then deposit must be returned Benefit – a prototype, report – some benefit Problem was seller incurred expenses but had to give back whole deposit If seller receives deposit and seller provides a benefit to buyer, then seller keeps whole deposit Problem was buyer got nothing for deposit and could not recover deposit

Copyright © 2004 McGraw-Hill Ryerson Limited 17 FRUSTRATED CONTRACTS ACT Reply to the unfairness and harshness of the common law rule Enacted in England in 1943 and similar acts in Alberta, Manitoba, New Brunswick, Newfoundland, Ontario, British Columbia, and P.E.I. Other provinces subject to the common law Not apply to specific sale of goods under Sale of Goods Act or to other types of contracts such as insurance

Copyright © 2004 McGraw-Hill Ryerson Limited 18 FRUSTRATED CONTRACTS ACT Removes all or nothing rule of common law Court apportions loss equitably Allows for: Recovery of deposits Retention of whole or part of deposit to cover incurred expenses A party who has received no benefit and paid no deposit will not be obliged to compensate the other party for work done prior to frustrating event A party works without an advance or deposit at their own risk

Copyright © 2004 McGraw-Hill Ryerson Limited 19 CONDITION PRECEDENT A condition that must be satisfied before a contract or agreement becomes effective Two views First View – an agreement exists but enforcement of it is suspended until condition precedent is fulfilled, not fulfilled, or waived If met – performance required If not met – contract discharged Second View – agreement does not come into existence until condition is met

Copyright © 2004 McGraw-Hill Ryerson Limited 20 OPERATION OF LAW Contract may be discharged by an operation of law Bankruptcy – bankrupt debtor discharged from all debts owed Merger – informal agreement discharged when formal agreement signed Must be identical to informal agreement

Copyright © 2004 McGraw-Hill Ryerson Limited 21 OPERATION OF LAW Statutory Time Limits Common law – must bring actions within a reasonable period of time Statute Barred– must bring actions within the stipulated time set forth in limitations legislation Contracts not void, just deny a remedy Contract may be revived with part payment or acknowledgment of the debt

Copyright © 2004 McGraw-Hill Ryerson Limited 22 AGREEMENT Waiver – an express or implied renunciation of a right or claim One or both of the parties has not performed but parties mutually agree to terminate the agreement May mutually agreed to discharge each other by way of a waiver Each party agreed to abandon their rights to insist on performance If neither has fully performed – requires consideration If one has fully performed – must be in writing under seal

Copyright © 2004 McGraw-Hill Ryerson Limited 23 NOVATION Mutual agreement by the parties to: Change the terms of an agreement Change the parties to the agreement Requires consent of all parties involved Effect is to replace original contract with new one Difference from merger Merger – terms and parties remain the same – replacement of a simple contract with a written one Novation – change of parties or change of terms

Copyright © 2004 McGraw-Hill Ryerson Limited 24 MATERIAL ALTERATION OF TERMS Material alteration of terms of an existing contract Discharges contract and replaces it with a new one containing the alterations Alternations must be significant, must go to the root of the contract Several minor alterations taken together may constitute a discharge of old contract

Copyright © 2004 McGraw-Hill Ryerson Limited 25 SUBSTITUTE AGREEMENT Substitution may effect the discharge of an agreement Can discharge a written agreement with a verbal agreement under the Statute of Frauds Must be careful not to replace a written agreement with a verbal agreement which may become unenforceable under the Statute of Frauds

Copyright © 2004 McGraw-Hill Ryerson Limited 26 BREACH OF CONTRACT The failure to perform a contract according to its terms A breach of contract may give rise to a discharge of the contract Examined in subsequent chapter

Copyright © 2004 McGraw-Hill Ryerson Limited 27 SUMMARY Various methods to discharge a contract Discharge by performance Must be precise and exact Main method of discharge Discharge by option of parties Discharge on occurrence of particular event Force majeure Frustration Frustrated Contracts Act

Copyright © 2004 McGraw-Hill Ryerson Limited 28 SUMMARY Discharge by Operation of Law Upon occurrence of particular events set out in legislation or common law Discharge by Agreement Wavier, substitution, novation Discharge by Breach Not automatic discharge, depends on severity of breach

Copyright © 2004 McGraw-Hill Ryerson Limited 29 LAW OF CONTRACT DISCHARGE BY MEANS OTHER THAN PERFORMANCE OBLIGATION METHOD OF DISCHARGE NATURE BY AGREEMENT AS A RIGHT DOCTRINE OF FRUSTRATION OPERATION OF LAW CONDITION PRECEDENT CONDITION SUBSEQUENT Before Both Parties Have Fully Performed Option to Terminate as a Term in Agreement Performance Rendered Impossible by External Event Eg: War Declared, etc. Bankruptcy Limitations Act Express or Implied Term Which Must Be Fulfilled before Contract May Be Performed — Act of God — Implied Term — Express Term