CHAPTER Microsoft ® PowerPoint ® Presentation Prepared By Gail McKay, LLB, Thompson Rivers University © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved. © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved. 5 Performance and Breach of Contract

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved.4-1 OBJECTIVES 1.To discern the nature and extent of performance required to discharge a contract 2.To determine the types of events that prevent performance of a contract 3.To establish what conduct comprises a breach of contract 4.To survey remedies for breach of contract

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved.4-2 NATURE AND EXTENT OF PERFORMANCE Less than complete performance of a contract is a failure to respect its terms If performance of the promise is not exact and precise, the contract may not be discharged Offering to perform a promise is formally called tender of performance and may arise by either 1.Tender of payment, or 2.Tender of performance of an act described in the contract

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved.4-3 Tender of payment occurs when the debtor formally offers payment to the creditor in the exact amount due, at the required time, and in the proper place If anything other than legal tender is to be used to pay, there must be prior arrangements in the contract permitting payment by cheque, credit card or bill of exchange Interest ceases to run after the tender of payment, whether it is accepted or not TENDER OF PAYMENT

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved.4-4 TENDER OF PERFORMANCE Performance of a promised act creates the expectation of tender of payment The performance must be in accordance with the contract terms, including the appointed time and place for delivery of goods, transfer of land, or accomplishment of a service A failure to perform is a breach, entitling the other party to damages or specific performance in the case of land or unique goods

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved.4-5 DISCHARGE BY OTHER MEANS Full and satisfactory performance by both parties is the ideal way to discharge a contract, but discharge may also occur by other means The option to terminate gives each of the parties the opportunity to end the contract by providing the other party with a specific period of notice Similarly, a condition subsequent specified in the contract may, when it occurs, discharge all contractual rights and duties

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved.4-6 ACT OF GOD AND FRUSTRATION An act of God is a manifestation of the force of nature which could not have been precluded by human intervention and which prevents the performance of a contract The doctrine of frustration is the inability to discharge a contract by performance due to unforeseen circumstances beyond the control of both of the parties, and is often the destruction of something critical to performance of the contract

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved.4-7 CONDITION PRECEDENT The opposite of a condition subsequent, a condition precedent delays or prevents a prepared and signed contract from coming into force and effect until the happening of a specified event If the specified event never occurs, both parties to the contract are discharged from any duty to perform Without the fulfillment of the condition precedent, no enforceable contract ever exists

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved.4-8 OPERATION OF LAW A change in the law is another method by which a contract may be discharged The subject matter of a contract may, for example, become illegal, or the Bankruptcy and Insolvency Act may absolve one of the parties to a contract from indebtedness Further, if a limitation period for filing a lawsuit under a provincial or territorial limitation act expires, a remedy for a breach of contract may be statute barred

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved.4-9 MERGER Informal contracts are sometimes replaced by a formal agreement made under seal As long as the content or substance of the written agreement remains the same, the original informal contract can be said to be discharged when it is merged or incorporated into a formal contract having an identical effect

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved.4-10 AGREEMENT Parties who mutually agree to abandon their rights and obligations under a contract can offer each other, as consideration for their promises, a waiver of their right to enforce a contract Similarly, both parties can agree to discharge an existing agreement and, by process of novation, enter a new one with fresh terms or different parties if they so choose

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved.4-11 MATERIAL ALTERATION OF TERMS When a change goes to the root of the contract, it is known as a material alteration which can be said to alter the character of the agreement Such a change has the legal effect of discharging the original contract and giving rise to a new agreement containing the material term

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved.4-12

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved.4-13 BREACH OF CONTRACT A breach of contract is a failure by one of the parties to honour and complete an express or implied term This conduct results in the entitlement of the innocent person to commence an action for damages and to treat the contract, in some circumstances, as discharged

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved.4-14 TYPES OF BREACH OF CONTRACT Express repudiation is the refusal verbally, in writing, or by conduct to perform contractual duties; and anticipatory breach occurs before the performance is actually due when it becomes apparent that one party is not likely to perform The doctrine of substantial performance protects a party who breaches some aspect of a contract after completing all essential terms associated with its purpose from an attempt by the other party to avoid performance

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved.4-15 BREACH OF WARRANTY Where a repudiation is of a subsidiary promise rather than of an essential term, there is a breach of warranty The breach of a minor term which is not a condition entitles the victim to damages but not to rescission of the contract A victim of a breach of warranty, in other words, must nevertheless fulfill his or her part of the contract

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved.4-16 IMPLIED REPUDIATION Unlike an express repudiation, an implied repudiation must be discerned from the conduct of one of the parties or from various statements he or she makes prior to the time when performance is due Implied repudiation is the most difficult type of anticipatory breach to identify If a condition in a contract has been breached, the non performance may entitle the innocent party to treat the contract as ended

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved.4-17 FUNDAMENTAL BREACH A fundamental breach is one that is so serious that it goes to the very root of the contract, allowing the innocent party to escape his or her obligations to perform An exemption clause generally attempts to limit the liability of someone who has breached a contract; however if the breach is of a fundamental nature, courts will construe the exemption clause strictly against the person who drafted it – to the extent that the clause may provide no protection at all

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved.4-18

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved.4-19 REMEDIES FOR BREACH OF CONTRACT Compensation for loss for breach of contract is available to the injured party, but the loss must be proven to the court The goal of damages is to place the victim of the breach in the same position he or she would have been in if the contract had been performed as initially contemplated Remedies besides damages include specific performance and quantum meruit

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved.4-20 THE EXTENT OF LIABILITY FOR LOSS A whole series of contracts may be adversely affected when someone commits a single breach of contract that causes a chain reaction The defence of remoteness may be raised by a defendant, but “any damages actually caused by a breach of any kind of contract are recoverable, providing that when the contract was made such damage was reasonably foreseeable as liable to result from the breach” Czarnikow v. Koufos, [1966] 2 WLR 1397

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved.4-21 DUTY TO MITIGATE & LIQUIDATED DAMAGES Reasonable steps to lessen the loss must be taken by the victim of a breach of contract A defendant who can show that a plaintiff did nothing to mitigate loss may have the amount of his or her liability reduced according to the degree of neglect by the plaintiff Liquidated damages represent an authentic estimate, at the time a contract is entered into, of what the amount of damages will be upon a breach and may be inserted as a clause

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved.4-22 RESCISSION & SPECIAL REMEDIES Rescission sets aside an agreement, restoring the parties to their pre-contractual positions Specific performance is an equitable remedy requiring the defendant to carry out his or her promises under the contract when damages are inappropriate An injunction is a preventative remedy which requires the defendant to refrain from committing certain future acts adverse to the purpose of the contract

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved.4-23 QUANTUM MERUIT When a contract is for services, the services are partially complete, and then it is learned that the contract will be repudiated by the other party, the person who has benefitted from the partial services must pay for them The amount required to be paid is based on the equitable principle of quantum meruit: what the performing party deserves for the amount of work completed

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved.4-24

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved.4-25 SUMMARY If tender of performance is not exact and precise, the contract may not be discharged An act of God, the doctrine of frustration, conditions precedent or subsequent, and operation of law may all prevent a contract from being performed Express and implied repudiation may constitute a breach of contract, giving rise to an award of damages or an array of equitable remedies