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Lecture 12

LAW 122 Lecture 12: Lecture 12 _ discharge contracts and Remedies

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Ryerson University
Law and Business
LAW 122
Nick Iannazzo

LAW122 April 13, 2017 Lecture 12_ Discharging a contract, Remedies (chapter 12) Discharge = no more contract Discharge and Remedy ● Discharge ○ discharge by performance ○ discharge by agreement (another contract) ○ discharge by breach ● Frustration ● Remedy (Remedies!) Discharge Discharge: a contract is discharged when the parties are relieved of the obligation to do anything further under the contract Pro tip: ● Issue spotting Q: HOw can I tell when I am dealing with a discharge of contract situation? ● When the issue is discharge of contract, the parties are not fighting about whether there is a contract (there is) or what is in the contract (i.e., the terms). Instead, something has happened and now one of the parties wants to know, “Can I be done with this contract now? Is it discharged?” ● Defect Versus Discharge Q: Discharge and defect problems sort of sound alike. How to tell them apart? ● Defect problems usually revolve around an issue that existed as soon as the contract was created. (E.g., one of the parties was a minor or maybe there was a misrepresentation.) But in a discharge problem, the issue usually comes up during the life of the contract. Maybe someone actually performs or perhaps a party breaches. Defect vs. Discharge Defect Problem (learned last class/chapter) ● The formal requirements for create a contract are met; the parties are not fighting about the terms, either. ● However, now A wants out. A will try to avoid the contract by pointing to a problem with the wider circumstances when the contract was formed: a misrepresentation; capacity; unfairness; or illegality. Discharge Problem ● The formal requirements for create a contract are met; the parties are not fighting about the terms, either. ● Something happens during the life of the contract (e.g, performance or a frustrating event). ● After the event, A wants to know, “Can I walk away, given this event?” 4 ways to get to discharge LAW122 April 13, 2017 1. Performance 2. Agreement 3. Breach* 4. Operation of Law a. Frustration 1) Discharge contract through Performance ● A contract can be discharged through the performance of its terms (obligations) ● Rule: parties must perform exactly as contract requires Performance: Exceptions 1. Late Performance a. Eg. payment for service, paying at 10 am. But the payment comes at 11am. This is a late performance, so technically you have breached the contract, but courts would be lenient with this sort of issue b. But not if “time is of the essence” i. This is a clause that is put in the contract, and therefore has to be meet 2. Substantial Performance a. When person performs almost all agreed upon terms b. But not if “entire contract” clause Case Builders and Doorknobs ● Facts: You contract with a builder to build ten houses to full completion. Builder builds the ten houses and completes everything but the doorknobs. Can the Builder treat the contract as “discharged”? What am I required to do in terms of payment? ● Issue: did the builder perform the contract exactly ● Law: performance meet or not ● Application: this was a substantial performance and therefore buyer still needs to pay, but buyer can sue the builder for remedies after since builder did breach contract 2) Discharge by Agreement ● Parties can agree to end their contractual agreement ● 2 possible solutions: 1. Find new consideration: “accord and satisfaction” a. Example: Parties agree (accord) that one party will give the other some new consideration (satisfaction)to give up right to performance. b. Arises where one party has completed their contractual promise and agrees to discharge the second party from further performance if the second party gives some new consideration. 2. Put the promise under seal. “Release” a. Example: Parties agree (under seal) to “release” each other from their obligations (without fresh consideration) b. Arises where one party has completed their contractual promise, and agrees to discharge the other party from further performance of the contract LAW122 April 13, 2017 Case study: “let’s break up” ● Suppose that Alex and Ben enter into the following contract: in return for Alex shingling Ben’s roof, Ben will dig a well on Alex’s property. Now suppose that Alex has finished shingling Ben’s roof. Ben, however, has not even started digging the well. It turns out that the soil on Alex’s property is not very good for digging wells. Both parties want to wrap things up. They want to settle this contractual matter asap. The problem here is consideration: they need a contract to end their contract. Can you suggest a solution? What can Alex and Ben each offer as consideration? ● Agreement - known as accord and satisfaction ○ Ben agrees to build a water tank for Alex, and Alex agrees to give up his right to Ben’s construction of a well ○ Accord = agreement that well no longer needs to be built ○ Satisfaction = new consideration, Ben has to give something in return even if it is a dollar ● Release ○ Alex promises to release Ben from the obligation to build the well, and he writes the promise down and writes “SEAL” across the same page ○ Needs to be under SEAL to make the contract legal, if there is no consideration Case continued “Let’s Break Up” - Risk Management Issue ● Suppose that Alex just wants to forget about the whole thing. (At least, that’s what Alex says now.) Alex tells Ben not to worry about their contract. Of course, nothing is put into writing. Ben says, “Ok!” He is happy to forget about the whole matter. But then the economy sours. Alex loses his job. Maybe he cannot afford bottled water anymore. Or maybe he is just angry and needs to take out his frustrations. For whatever reason, Alex calls up Ben and says, “Hey, you still owe me a well. You never performed. Now I am going to sue.” ● Now what happens? Well, Ben might have an equitable remedy available to him. Still, there is going to be litigation, lawyers’ expenses and general ugliness. ● How could Ben have managed this risk in the first place? 3) Discharge By Breach ● Q: When there is a breach (failure to fulfill contractual promise) when con the innocent party discharge? ● A: It depends upon type of term breach: ○ Condition: substantial term; ○ Warranty: lesser term; or ○ intermediate : hybrid term ● The innocent party only has the right to discharge if the other party has breached a condition, i.e., if the other party has done something that substantially deprives the innocent party of the benefit of the contract. Breach of Condition v. Warranty ● Condition ○ Relatively more important term LAW122 April 13, 2017 ○ Cuts to the heart of the K ○ Innocent party would be substantially deprived of expected benefit of contract due to its breach ○ Innocent party generally has option: ■ affirm contract and claim damages; or ■ discharge contract and claim damages ● Warranty ○ Relatively less important term ○ Innocent party would NOT be substantially deprived of expected benefit of contract due to its breach ○ Innocent party has no significant option: ■ must affirm contract, no option to discharge agreement, but ■ may claim damages Case 8 on page 285 ● Is this a breach of condition or warranty ○ This was a warranty because he did perform and he was a seasoned performer ● The second question would also still be a warranty ● However if he was not seasoned, then this would be a condition since he would need that practice to give a good performance that meets the opera house standards Effect of Discharge ● Parties relieved of need to perform in future ○ contract not wiped out altogether, as it survives for purposes of contractual liability ○ parties need not perform primary obligations ○ but contract still effective for some purposes ■ E.g. exclusion clauses, liquidated damages 4) when contract is Frustrated (when it looks like a breach but isn’t) ● Test: Contract is frustrated when a (faultless) event makes performance impossible or radically undermines its purpose ● Does not apply if performance just more difficult or expensive ● Example: After contract is signed beach house burned down (look below) Eg. (from board) tenant and landlord ● Tenant pays rent and the landlord gives then the use of the cottage for 1 month starting July 1, 2017. Signed april 13, 2017 ● What if a storm goes by before july 1 and therefore damages the cottage ○ This contract has not been frustrated since performance is still possible ● What if the cottage catches on fire and burns down ○ In this case this contract is frustrated ● Statutory rules vs. Force majeure LAW122 April 13, 2017 Statutory rules (variations between provinces) Situation Rule Remedy Purchase paid deposit to Court’s discretion to divide Refund to purchaser or seller between parties reimburse seller for expenses Purchaser received some Seller can retain money or Neither claim can exceed benefit from the seller make fresh claim for value of purchaser’s benefit
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