Business Law

Chapter 10: Discharge, Performance and Cancellation

of a Contract

When and how does the contract end?

• Most contract suits are not brought over questions regarding the formation of a contract; they are brought because of what one party considers to be an improper termination of a contract.

Discharge of a contract

• When a contract has been discharged, it means that it has been performed and is no longer a pending, legal obligation.

• Discharge: To discharge a contract is to end the obligation by agreement or by carrying it out.

Discharging a Contract Through Performance

• A contract can be discharged through the performance of its terms.

• A discharged contract is a nullity.

Duty to Perform

• A party to a contract is under a legal obligation to perform.

Good Faith

• Good faith is a requirement of all parties to a contract.

What Duties Are Required?

• The party is only required to perform the actions contemplated in the contract, and any assumed duties, as well.

Discharging By Termination

• Many contracts contain provisions allowing the parties to terminate the contract under certain conditions.

• These are called “termination provisions.”

Contracts Without Termination Dates

• Contracts cannot last forever.

• Contracts without termination dates are revocable by either party after reasonable notice.

Automatic renewal

• Contracts can contain provisions that automatically renew the contract for another term.

Conditions Subsequent

• When a contract contains a condition subsequent provision, the contract is no longer capable of being terminated at will by the parties.

• Instead, the contract language will be enforced, i.e., the occurrence set out in the condition subsequent.

Termination For “Good Cause”

• When a contract contains a clause stating that it may only be terminated for good cause it is usually construed to be terminable at will by the parties.

Termination for Any Reason

• A contract is valid if it contains a provision stating that either party can revoke it at any time, for any reason.

Notice of Termination

• The method used to provide notice of termination can be set out in the contract.

Effect of Termination

• Once the contract terminates, the legal obligations of the parties are extinguished.

Ending a contract through other means

• Many contracts are not successfully discharged, leading to disputes between the parties.

Agreement

• After creating a contract, the parties are free to mutually abandon, modify or rescind the contract.

Abandonment

• When the parties abandon a contract, they are, in effect, agreeing to rescind the contract.

Rescission

• Rescission does not modify the contract terms; it eliminates them.

The Elements of Rescission

• In order to demonstrate a valid rescission, there must be a demand or tender of full performance.

• There must also be an unambiguous, affirmative act by a party showing the intention to rescind the contract.

Agreement to Rescind the Contract

• When the parties agree to abandon or rescind the contract, the agreement must be mutual and must be made prior to either party actually performing any actions

Who May Rescind

• Only the parties to the contract may rescind it.

What Types of Contracts May be Rescinded

• A fully discharged contract cannot be rescinded.

• Many jurisdictions also have a rule that prevents partially executed contracts from being rescinded.

Cancellation versus Rescission

• Canceling a contract is a formal declaration that a contract is legally ineffective and cannot form the basis of a legal duty.

• Rescission restores the parties to their positions prior to the creation of the contract.

Waiving the Right to Rescind

• When a party has a right and fails to exercise it, that right may be lost.

Suits Seeking Rescission

• Judges will usually not order rescission when the contract is illegal, or where the parties are equally at fault, or where someone other than the parties to the contract is seeking rescission.

Breach of Contract

• When a party breaches a contract, he or she violates some contractual duty.

Negotiating Types of Breach

• The parties are free to negotiate the possible remedies for a breach of a contract, and even to stipulate what types of actions will be considered a breach.

One Party’s Breach Does Not Relieve the Other Of Legal Duty

• When one party commits a breach the other party is not relieved of all contractual obligations.

Anticipatory Breach

• In some cases, a party may bring suit for a breach before the other party has actually committed one.

What is a Material Breach?

• Material breach gives the other party the right to rescind the contract.

• A material breach is the failure of one party to do some act that is so central to the agreement as to actually defeat the reason for having the contract in the first place.

When Failure to Perform Is Not Actionable: Legal Excuses

• The general rule followed in most jurisdictions is that performance under a contract will only be excused in “extreme” circumstances or when the performance falls under a legally recognized excuse from performance.

Categories of Legal Excuses

• Impossibility

• Subsequent Illegality

• Acts of God/Nature

• Death of a Party

• Destruction

• War

Impossibility

• There are two types of impossibility: subjective impossibility and objective impossibility.

Subjective Impossibility

• Under subjective impossibility, a party states that he or she cannot perform the duties outlined in the contract.

• In most jurisdictions, this claim is not a legal defense.

Objective Impossibility

• Objective impossibility is a claim that the action itself cannot be done by anyone.

Consequences of Impossibility

• When performance under a contract is impossible, a party cannot attempt to substitute a different type of performance.

Subsequent Illegality

• When the subject of the contract is ruled to be illegal after the contract was created, the courts have ruled that failure to perform in this situation is excusable.

Acts of God/Nature

• When the performance under a contract is made impossible by an act of God, the performance is excused.

Death of a Party

• Death of the party who was to perform the duty under the contract usually results in a legal excuse.

Destruction

• When the contract is based on the continued existence of a particular item and that item is destroyed, the obligation to perform under the contract is destroyed along with it.

War

• A contract may be cancelled when war breaks out in the country where the contract is to be performed.