Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning Chapter 19 Discharge of Contracts Twomey Jennings Anderson’s Business Law and the Legal Environment, Comprehensive 20e Anderson’s Business Law and the Legal Environment, Standard 20e Business Law: Principles for Today’s Commercial Environment 2e

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 2 Conditions Relating to Performance Classification of Conditions: If the occurrence or non-occurrence of an event affects the duty of a party to perform, the event is called a condition. Condition Precedent is a condition that must occur before the party is obligated to perform.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 3 Conditions Relating to Performance Condition Subsequent is a condition that, if it occurs after an agreement is reached, may cancel the contract. Concurrent Conditions are conditions that must happen simultaneously in order for the contract to be completely executed.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 4 Discharge by Performance Most contracts are discharged by performance. An offer to perform is called a tender of performance. Payment is performance. –If a tender of performance is wrongfully refused, the duty to perform is terminated, except when the duty was the payment of money.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 5 Time of Performance If time for performance is stated in the contract, the contract must be performed at the time specified if such time is essential, or within a reasonable time if the specified time is not essential. “Time is of the essence.” Waiver of time.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 6 Adequacy of Performance Substantial Performance: A party who substantially performs in good faith is entitled to payment, offset by any defect or damages. Fault of Complaining Party. Satisfaction Contracts. –To original party. –To third party.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 7 Discharge by Action of Parties Ordinarily cannot be discharged by one party. –Exception: Unilateral Action. Consumer Credit Protection Act gives right to cancel the contract within three days. By Agreement. A contract may be terminated by agreement, either a provision in the original contract or a subsequent agreement.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 8 Discharge by Action of Parties A contract may also be discharged by the substitution of a new contract for the original contract; by a novation (a new contract with a new party); by accord and satisfaction; by release; or by waiver.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 9 Impossibility A contract is discharged when it is objectively impossible to perform due to unforeseeable conditions events. –the destruction of the subject matter, –the adoption of a new law that prohibits performance, –the death or disability of a party whose personal action was required for performance of the contract, or –the act of the other party to the contract.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 10 Commercial Impracticability A contract may be discharged when its performance is impractical by subsequent occurrence of event(s) which was a material aspect to the contract. Generally the event must not be foreseeable.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 11 Increased cost ordinarily has no effect on a contract, but if the increase is grossly disproportionate to the original cost, some courts will classify the situation as one of commercial impracticability and discharge the contract. C.I. was not recognized at common law. Commercial Impracticability

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 12 Frustration of Purpose In the case of frustration of purpose, the contract can be performed, but the performance has ceased to have any significant value to the party who originally contracted to obtain that performance.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 13 Temporary Impossibility Temporary impossibility, such as a labor strike or bad weather, has no effect on a contract. It is common, though, to include protective clauses that excuse delay caused by temporary impossibility.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 14 Discharge by Operation of Law A contract may be discharged by operation of law. This occurs when: –(1) the liability arising from the contract is discharged by bankruptcy, –(2) suit on the contract is barred by the applicable statute of limitations, or –(3) a time limitation stated in the contract is exceeded.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 15 Bankruptcy Statute of Limitations Contractual Limitations Commercial Impracticability Economic Frustration Consumer Protection Rescission Substitution Accord and Satisfaction Destruction of Subject Matter Change of Law Death or Disability - Personal Service Act of Other Party Unilateral Action Agreement Impossibility Economic Disappointment Operation of Law OR Performance Review: Discharge

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 16 Consumer Rescission Rights Agreement Substitution of Parties Accord & Satisfaction Tender Payment Timely Adequate (substantial performance) Discharge by Action of Parties Discharge by Performance Review: Discharge

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 17 Bankruptcy Statutes of Limitations Contract Time Limitations Impossibility Commercial Impracticability Temporary Impossibility, like Weather Frustration of Purpose Destruction of Subject Matter Death or Disability Change of Law Discharge by External Factors Discharge by Operation of Law Review: Discharge