SOUTHERN NEW HAMPSHIRE UNIVERSITY

____________________________________________
BUSINESS LAW [BUS 206]

LECTURE 11
LAW OF CONTRACTS [4]

PERFORMANCE, BREACH & DISCHARGE

The subject of discharge of contracts concerns the termination of contractual duties

Performance of a contractual duty is only one method of discharge

Whatever causes a binding promise to cease to be binding constitutes a discharge of

the contract

In general, there are four (4) kinds of discharge:

[1] performance by the parties;
[2]; agreement of the parties;
[3] material breach by one or both of the parties; and
[4] operation of law

Many contractual promises are not absolute promises to perform but rather are
conditional , that is, they are dependent upon the happening or nonhappening of a
specific event

We shall discuss conditions first before we cover the four (4) kinds of discharge

CONDITIONS
CONDITIONS RELATING TO PERFORMANCE

Condition - stipulation or prerequisite in a contract, will or other instrument

Performance ordinary method of discharging obligations under a contract

[1] CLASSIFICATIONS OF CONDITIONS

[a] Express Condition

Explicitly set forth in language

Usually preceded by such words as if, provided that, when, after, as soon as, subject to, and
on the condition that
Basic rule they must be fully and literally performed before the conditional duty to perform arises

[b] Condition Precedent

Event that if unsatisfied would mean that no rights would arise under a contract
Condition that must occur before a party to a contract has an obligation to perform under the
contract

[c] Condition Subsequent

Event whose occurrence or lack thereof terminates a contract

Provision that relieves the obligation on the occurrence of a certain event such an event
extinguishes the duty to thereafter perform

[d] Concurrent Condition

Performances of the parties i.e. their mutual duties of performance under the contract are to take
place simultaneously

DISCHARGE BY PERFORMANCE

Most frequent method of discharging a contractual duty

Every contract imposes upon each party a duty of good faith and fair dealing in its performance
and its enforcement
Questions arise as to the nature, time, and sufficiency of the performance

[1] DISCHARGE BY PERFORMANCE

By the performance of the terms of the agreement

Parties perform their promises and the contract ceases to exist or is thereby discharged
Contract also discharged by the expiration of the time period specified in the contract
Washington National Ins. Co V. Sherwood Associates (1990)
[A] NATURE OF PERFORMANCE

Doing of an act or making of payment

(a) Tender

An offer by one party who is ready, willing, and able to perform to the other to perform his
obligation according to the terms of the contract
The refusal or rejection of a tender of performance may be treated as a repudiation that excuses
or discharges the tendering party from further duty of performance under the contract
(b) Payment
(i) Application of Payments

If the debtor specifies the debt to which the payment is to be applied and the creditor accepts the
money, the creditor is bound to apply the money as specified Oakes Logging, Inc. V. Green
Crow, Inc (1992)
(ii) Payment by Check

Ordinarily a conditional payment

Merely suspends the debt until the check is presented for payment

DISCHARGE BY PERFORMANCE
[B] TIME OF PERFORMANCE

When the date or period of time for performance is specified in the contract, performance should
be made on that date or within that time period

(a) No time specified

An obligation to perform within a reasonable time is implied First National Bank V. Clark
(1994)
Determined by the nature of the subject matter of the contract and the facts and circumstances
surrounding the making of the contract

(b) When Time is Essential

Time is of the essence

If performance of the contract on or within the exact time specified is vital
Failure to perform within the specified time is a breach of contract innocent party entitled to
damages

(c) When Time is not Essential

Performance within a reasonable time is sufficient

(d) Waiver of Essence of Time Limitation

Waived when the specified time has expired

DISCHARGE BY PERFORMANCE
[C] ADEQUACY OF PERFORMANCE

When a party renders exactly the performance called for by the contract, no question arises as to
whether the contract has been performed

(a) Substantial Performance

Equitable rule that if a good faith attempt to perform does not precisely meet the terms of the
agreement, the agreement will still be considered complete if the essential purpose of the
contract is accomplished

A party who in good faith has provided substantial performance of the contract may sue to
recover the payment specified in the contract

Question of degree to be determined by all of the facts, including the particular type of structure
involved, its intended purpose, and the nature and relative expense of repairs

(b) Fault of Complaining Party

A party cannot complain that a performance was defective when the performance follows the
terms of the contract required by the complaining party

(c) Performance to the Satisfaction of the Contracting Party or a Third Party

When the contract specifically stipulates that the performance must satisfy the contracting party,
the courts will ordinarily enforce the plain meaning of the language of the parties and the work
must satisfy the contracting party

Subject to the requirement that dissatisfaction be made in good faith

DISCHARGE BY AGREEMENT
[2] DISCHARGE BY AGREEMENT

By the operation of one of its provisions or by a subsequent agreement

May be discharged by:

(i) the terms of the original contract

such as a provision that the contract should end on a specified date;

(ii) a mutual cancellation

in which the parties agree to end their contract;

(iii) a mutual rescission

in which the parties agree to annul the contract and return both parties to their original positions
before the contract has been made;

(iv) the substitution of a new contract between the same parties

parties may decide that their contract is not the one they want may replace it with another
contract - original contract is then discharged by substitution;

(v) a novation or substitution of a new contract involving a new part y;

(vi) an accord and satisfaction

parties may agree to a different performance (accord) and when the accord is performed or
executed there is an accord and satisfaction discharges the original obligation

(vii) a release; or
(viii) a waiver

release or relinquishment of a known right or objection

DISCHARGE BY BREACH
WHAT CONSTITUTES A BREACH OF CONTRACT?

Determine if contract has been violated or breached before deciding on the remedies

DEFINITION OF BREACH

Failure to act or perform in the manner called for in a contract

[1] ANTICIPATORY BREACH

Promisors repudiation of the contract prior to the time that performance is required when such
repudiation is accepted by the promisee as breach of the contract

(a) Anticipatory Repudiation

Repudiation made in advance of the time for performance of the contract obligations

Must be clear, absolute, unequivocal refusal to perform the contract according to its terms

A party making an anticipatory repudiation may retract or take back the repudiation if the other
party has not changed position in reliance on the repudiation

(b) Anticipatory Repudiation By Conduct

Anticipatory repudiation may be expressed by conduct that makes it impossible for the
repudiating party to perform subsequently.

DISCHARGE BY BREACH (contd)

[2] WAIVER OF BREACH

Breach of contract may have no importance because the other party to the contract waives the breach
Waiver release or relinquishment of a known right or objection

[3] CURE OF BREACH BY WAIVER

One party may ignore or waive the breach for practical business reasons
Party waiving breach cannot take any action on the theory that contract was broken
Waiver erases the past breach contract continues as though the breach had not existed
Waiver express or implied

[4] EXISTENCE AND SCOPE OF WAIVER

A question of fact whether there has been a waiver

(a) Existence of Waiver

Party may express or declare that the breach of contract is waived

A party allowing the other party to continue performance without objecting that the performance is not
satisfactory, waives the right to raise that objection when sued for payment by the performing party

(b) Scope of Waiver

Extends only to the matter waived

Does not show any intent to ignore other provisions of the contract

(c) Antimodification Clause

Modern contract specify that the terms of a contract shall not be deemed modified by waiver as to
any breaches.
Means original contract remains as agreed to

DISCHARGE BY OPERATION OF LAW

DISCHARGE BY IMPOSSIBILITY

Impossibility of performance external or extrinsic conditions

Shortages of materials and similar factors, even though external, ordinarily do not
excuse performance under a contract

A contract is not discharged merely because performance proves to be burdensome

or costly than was originally contemplated

However, if the parties specified the source of supply in their contract, that would
constitute an impossibility that would excuse performance
(a) Destruction of Particulars Subject Matter

Contract is discharged if the subject matter is destroyed through no fault of either

party

However, if there was an unqualified undertaking for e.g. to deliver wheat of a

specified grade and no restrictions or qualifications were imposed as to the source,
the seller is liable for damages should he not deliver the goods called for by the
contract

Parties may by their contract, allocate the risk of loss

E.g. a contract for the sale of a building and land may specify that the seller should
bear any loss from damage to the building

DISCHARGE BY OPERATION OF LAW

(b) Change of Law

Contract is discharged when its performance is made illegal by a subsequent change in the law

However, mere inconvenience or temporary delay caused by the new law, does not excuse
performance

(c) Death or Disability

Excuses both sides from a duty to perform

Sometimes said that the death of either party is the death of the contract

Rule does not apply when the acts called for by the contract are of such a character that (i) the
acts may be as well performed by others, such as the promisors personal representatives; or (ii)
the contracts terms contemplates continuance of the obligations after the death of one of the
parties

(d) Act of Other Party

Every contract contains an implied covenant of good faith and fair dealing

As a result of this covenant, a promisee is under an obligation to do nothing that would interfere
with the promisors performance

When the promisee prevents performance or otherwise makes performance impossible, the
promisor is discharged from the contract

(e) Commercial Impracticability

The doctrine of commercial impracticability developed to deal with harsh rule that a party must
perform its contracts unless it is absolutely impossible

Only available when the performance is made impractical by the subsequent occurrence of an
event whose nonoccurrence was a basic assumption on which the contract was made

DISCHARGE BY OPERATION OF LAW

(f) Frustration of Purpose Doctrine

Because of a change in circumstances, the purpose of the contract may have no value to the party
entitled to receive performance

Performance may be excused if both parties were aware of the purpose and the event that frustrated
the purpose was unforeseeable

BANKRUPTCY

Eliminates ordinary contract claims against the debtor

Procedure by which one unable to pay debts may surrender all assets in excess of any exemption claim
to the court for administration and distribution to creditors, and the debtor is given a discharge that
releases him from the unpaid balance due on most debts

STATUTE OF LIMITATIONS

Statute that restricts the period of time within which an action may be brought

Provides that after a certain number of years have passed, a contract claim is barred

Time limitation provided by state statutes of limitations varies widely

CONTRACTUAL LIMITATIONS

Some contracts contain a time limitation within which suit must be brought

In effect a private statute of limitations created by the agreement of the parties

A contract may also require that notice of any claim be given within a specified time failure to adhere
barred from suing on the contract