Contracts Chapter 17   Performance & Discharge

The key points in this chapter include:

1. The difference between degrees of contractual performance.

2. Material breach of contract.

3. Anticipatory breach.

4. Methods by which parties discharge their contracts by agreement.

5. Ways in which contracts are discharged by law.

This chapter discusses performance and discharge of contracts. Performance of a contract (when the parties do what they agreed to do) discharges it. Discharging a contract terminates it. Discharge usually results from performance but can occur in other ways: (1) the occurrence or failure of a condition on which a contract is based, (2) breach of the contract, (3) agreement of the parties, and (4) operation of law.

I. CONDITIONS
A condition is a possible future event, occurrence or nonoccurrence of which triggers
performance of an obligation or terminates an obligation. If performance is contingent on a
condition that is not satisfied, neither party has to perform.

A. CONDITION PRECEDENT
A condition that must be fulfilled before a party’s performance can be required. Such
conditions are common. For example, a real estate contract is usually conditioned on the
buyer’s ability to get financing.

B. CONDITION SUBSEQUENT
A condition that operates to terminate an obligation to perform. The condition follows a
duty to perform. Such conditions are rare.

C. CONCURRENT CONDITION
When each party’s duty to perform is conditioned on the other party’s duty to
perform. Occurs only when the parties are to perform their duties simultaneously (for
example, paying for goods on delivery). No party can recover for breach unless he or she
first tenders performance.

D. EXPRESS AND IMPLIED CONDITIONS

1. Express Condition
Provided for by the parties’ agreement. Usually prefaced by the word “if,” “provided,” “after,” or “when.”

2. Implied-in-Fact Condition
Understood to be part of the agreement but not found in the express language of the agreement. The court infers them from the promises (notice is an implied condition to correct a defect under an warranty).

II. DISCHARGE BY PERFORMANCE
Most contracts are discharged by the parties’ doing what they promised to do.

A. TENDER OF PERFORMANCE
Discharge can be accomplished by tender (an unconditional offer to perform by one who is ready, willing, and able to do so). If performance has been tendered and the other party refuses to perform, the party making the tender can sue for breach.

B. TYPES OF PERFORMANCE

1. Complete versus Substantial Performance

a. Complete Performance
Express conditions fully occur in all aspects.

b. Substantial Performance
Performance that does not vary greatly from the performance promised in the contract. If one party fulfills the terms of the contract with substantial performance, the other party is obligated to perform (but may obtain damages for the deviations).

2. Performance to the Satisfaction of Another

a. Personal Satisfaction of One of the Parties
When the subject matter of the contract is personal, performance must actually satisfy the party (a condition precedent).

b. Satisfaction of a Reasonable Person
Contracts involving mechanical fitness, utility, or marketability need only be performed to the satisfaction of a reasonable person.

c. Satisfaction of a Third Party
When the satisfaction of a third party is required, most courts require the work to be satisfactory to a reasonable person

C. MATERIAL BREACH OF CONTRACT
A breach of contract is the nonperformance of a contractual duty. It is material when performance is not at least substantial; the nonbreaching party is excused from performing. If a breach is minor (not material), the nonbreaching party’s duty to perform may be suspended until the breach is remedied.

D. ANTICIPATORY REPUDIATION
Before either party has a duty to perform, one party refuses to perform.

1. Damages and a Similar Contract
This can discharge the nonbreaching party, who can sue to recover damages immediately and can also seek a similar contract elsewhere.

2. Retraction
Until the nonbreaching party treats a repudiation as a breach, the repudiating party can retract his or her repudiation by proper notice.

E. TIME FOR PERFORMANCE
If a specific time is stated, the parties must usually perform by that time. If time is stated to be vital or construed to be “of the essence,” it is a condition of the contract. If no time is stated, a reasonable time is implied, and a delay will not affect the performing party’s right to payment.

III. DISCHARGE BY AGREEMENT

A. DISCHARGE BY RESCISSION
Rescission is the process by which a contract is canceled and the parties are returned to the positions they occupied prior to forming it.

1. Executory Contracts
Contracts that are executory on both sides can be rescinded.

a. Requirements
The parties must make another agreement, which must satisfy the legal requirements for a contract. Their promises not to perform are consideration for the second contract.

b. Form
A rescission agreement is enforceable if oral (even if the original agreement was in writing), except an agreement must be in writing if it (1) falls within the Statute of Frauds or (2) is subject to the UCC and the contract requires written rescission.

2. Executed Contracts
Contracts that are executed on one side can be rescinded only if the party who has performed receives consideration to call off the deal.

B. DISCHARGE BY SUBSTITUTED AGREEMENT

1. Novation
Occurs when the parties to a contract and a new party get together and agree to substitute the new party for one of the original parties. Requirements are (1) a previous valid obligation, (2) an agreement of all the parties to a new contract, (3) the extinguishment of the old obligation (discharge of the prior party), and (4) a new, valid contract .

2. Compromise, or Settlement Agreement
Parties to a contract can execute a new agreement with different terms. The new agreement can either expressly or impliedly revoke and discharge the previous contract’s obligations.

C. DISCHARGE BY ACCORD AND SATISFACTION
To discharge by accord and satisfaction, the parties must agree to accept performance that is different from the performance originally promised.

1. Accord
An accord is an executory contract to perform an act that will satisfy an existing duty. An accord suspends, but does not discharge, the duty.

2. Satisfaction
Satisfaction is the performance of the accord, which discharges the original contractual
obligation.

3. If the Obligor Refuses to Perform
The obligee can sue on the original obligation or seek a decree for specific performance on the accord.

IV. DISCHARGE BY OPERATION OF LAW

A. ALTERATION OF THE CONTRACT
An innocent party can treat a contract as discharged if the other party materially alters a term (such as quantity or price) without consent.

B. STATUTES OF LIMITATIONS
Statutes of limitations limit the period during which a party can sue based on a breach of contract.

1. UCC 2–725
An action for the breach of a contract for a sale of goods must be commenced within four years after the breach occurs, whether the innocent party knows of the breach. The parties can shorten this period to one year but cannot extend it.

2. New Promise to Perform Starts the Period Again
If the party who owes the obligation makes a new promise to perform, the cause of action barred by the statute of limitations is revived.

C. BANKRUPTCY
A discharge in bankruptcy (see Chapter 32) will ordinarily bar enforcement of most of a debtor’s contracts.

D. DISCHARGE BY IMPOSSIBILITY OR IMPRACTICABILITY OF PERFORMANCE

1. Objective Impossibility of Performance
A contract may be discharged if, after it is made, performance becomes objectively impossible, as in the following: (1) death or incapacity of one of the parties, (2) specific subject matter of the contract is destroyed, or (3) change in the law that renders performance illegal.

2. Commercial Impracticability
Performance may be excused if it becomes much more difficult or expensive than contemplated when the contract was formed.

3. Frustration of Purpose
A contract will be discharged if supervening circumstances make it impossible to attain the purpose the parties had in mind.

4. Temporary Impossibility
An event that makes it temporarily impossible to perform will suspend performance until the impossibility ceases.