1 Introduction * How does a party know when his or her obligations under the contract are at an end? A party may be discharged from a valid contract by: –A condition occurring or not occurring. –Full performance or material breach by the other party. –Agreement of the parties. –Operation of law.

2 Discharge and Performance Discharge: The termination of a party’s obligations arising under a contract. Discharge occurs either when: 1. Both parties have fully performed their obligations; or 2. Events, conduct of the parties, or operation of law release the parties from their obligations to perform. A party’s obligations to perform under a contract may be either absolute or conditioned on the occurrence or non-occurrence of some event.

3 §1: Conditions Possible future event, the occurrence or nonoccurrence of which will trigger the performance of a legal obligation or terminate an existing obligation under a contract.

4 Conditions * Types of Conditions: –Conditions Precedent. –Conditions Subsequent. –Conditions Concurrent. Express. Implied in Fact. Implied in Law.

5 Conditions

6 §2: Discharge by Performance The contract comes to an end when both parties fulfill their respective duties by performing the acts they have promised. Types of Performance: –Complete Performance. –Substantial Performance (minor breach). –Performance to the Satisfaction of One of the Parties or a Third Party. Case : Jacobs & Young v. Kent (1921).

7 SATISFACTION CONTRACTS Some contracts require one party to perform to the satisfaction of the other. When a contract so provides, courts will apply one of two tests depending on the circumstances: Subjective Satisfaction: When the purpose of the performance is to satisfy personal taste, aesthetics, and the like (e.g., painting a portrait of a customer’s beloved), the court will ask whether the party to be satisfied was, in good faith, satisfied or dissatisfied with the performance.

8 SATISFACTION CONTRACTS (Cont.) Objective Satisfaction: When the purpose of the performance is to serve some function (e.g., roofing a warehouse to keep out the elements), the court will ask whether a reasonable person would be satisfied or dissatisfied with the performance. Satisfaction of a Third Party: Some contracts require that the performance satisfy some non-party (e.g., an art critic, or an independent lab). Courts tend toward the objective satisfaction standard in these cases, but some have applied the subjective satisfaction test when the third party’s expertise goes to the same factors that would lead a court to apply the subjective test if a party’s satisfaction was at stake.

9 Material Breach of Contract Breach of Contract - the nonperformance of a contractual duty. Material breach occurs when there has been a failure of consideration. Discharges the non breaching party from the contract.

10 In a non-material breach, the duty to perform is not excused and the non- breaching party must resume performance of the contractual obligations undertaken. Case : Van Steenhouse v. Jacor Broadcasting of Colorado, Inc. (1998). Material Breach of Contract

11 Anticipatory Repudiation If before performance is due, one party refuses to perform his or her contractual obligation. Results in material breach.

12 Anticipatory Repudiation The nonbreaching party should not be required to remain ready and willing to perform when the other party has repudiated the contract. The nonbreaching party should have the opportunity to seek a similar contract elsewhere. Time For Performance. –Case : Manganaro Corp v. Hitt Contracting Inc. (2002).

13 §3: Discharge by Agreement Discharge by Rescission. Discharge by Novation (four requirements) –Previous Obligation (with the original party). –All parties agree to new contract (with the new party). –Extinguishment of old obligations. –New Contract Formed. Discharge by Substituted Agreement. Accord and Satisfaction.

14 Novation Novation: Substituting a new contract, replacing on or more of the original parties for the old contract, thereby terminating the original parties’ rights and duties under the old contract. Novation requires (1)a valid, prior agreement, for which (2)all parties agree to substitute a new contract; (3)discharge of the prior obligation; and (4)a valid, new agreement.

15 DISCHARGE BY OPERATION OF LAW Material Alteration: If the material terms of a contract are altered, an innocent party (i.e., one who neither altered nor consented to the alteration of the contract) may be discharged from their contractual obligations. Statutes of Limitations: The running of limitations (e.g., in the case of claims under Article 2 of the Uniform Commercial Code, four years from the date of the breach, regardless of the injured party’s knowledge of the breach) does not technically discharge the parties, but it prevents the wronged party from seeking judicial remedies. Bankruptcy: A discharge in bankruptcy, afforded to a debtor after its liquidation or reorganization plan is approved, bars subsequent enforcement against the debtor of any contracts that pre-date the discharge. Unlike promises to pay or partial payment of a debt barred by Statutes of Limitations, promises to pay or partial payment of a debt following discharge (in bankruptcy) does not revive the debt.

16 IMPOSSIBILITY, IMPRACTICABILITY, AND FRUSTRATION OF PURPOSE A party may be excused when performance becomes either impossible or impracticable through no fault of either party. The following will generally excuse performance as objectively impossible or impracticable: (1)death or incapacitation prior to performance of a personal services contract; (2)destruction of the subject matter of the contract prior to performance; (3)a change in the applicable law that makes performance illegal;

17 IMPOSSIBILITY, IMPRACTICABILITY, AND FRUSTRATION OF PURPOSE (Cont.) (4)changing market conditions make performance commercially impracticable; and (5)frustration of purpose – supervening circumstances making it impossible for both parties to achieve the purpose of the contract. Temporary vs. Permanent: A change in circumstances that makes performance temporarily impossible or impracticable will act to suspend, but not excuse, performance.