Chapter 11 – Discharge and Breach
- A contract is discharged when the parties are relieved of the need to do anything more under
- There a number of ways in which a contract can be discharged.
o Some involve performance; others reflect the parties’ agreements or intentions; still
others arise by operation of law; and one particularly important type of discharge occurs
when one party fails to perform as expected.
Discharge by Performance
- Performance occurs when the parties fulfill all of the obligations contained in the contract.
- In some situations, however, it may be difficult to determine whether proper performance has
- As a general rule, the parties must perform EXACTLY as the contract requires.
o Any deviation from the terms of the contract, however small, is considered a breach,
rather than performance, and will entitle the innocent party to a remedy.
Time of Performance
- Courts usually hold that time is not of the essence.
- Even if a contract states that performance must occur by a particular date, a party may be
entitled to perform late.
- However, if it does so, it can be held liable for losses that the other party suffers as a result of
- In some situations, time is of the essence. If so, late performance can be refused, and if that
happens, the contract will not discharged by performance.
- Furthermore, even if time is initially not of the essence, a party can insist upon timely
performance by giving reasonable notice that performance must occur by a specific date.
Tender of Payment
- Business people should be aware of some specific rules that govern payments.
- First, the debtor has the primary obligation of locating the creditor and tendering (offering)
payment, even if the creditor has not asked for it.
o Method of tendering payment must be reasonable.
- However, a reasonable tender has to be made only once. If such a tender is rejected, the debtor
still has to pay the debt but it can wait for the creditor to come by.
- Furthermore, interest does not accrue on a payment once a reasonable tender has been made,
even if the tender was rejected.
o If the case goes to trial, the judge may punish a creditor who improperly rejected a
reasonable tender by holding that party liable for debtors cost of litigation.
- Second, unless a contract says otherwise, a creditor can insist on receiving legal tender.
o Legal tender is a payment of bills and coins to a certain value. - Consequently, a creditor does not have to accept payment via cheque or electronic debit. Nor
does it have to accept payment from a disgruntled customer who tries to pay with an enormous
bag of pennies.
- Of course, creditors usually waive the strict requirements regarding legal tender and happily
receive any acceptable form of payment.
- Third, despite the usual rule, a debtor does not actually have to tender payment if it would
obviously be refused. Consequently, if the creditor indicates beforehand that it intends to reject
payment, the debtor does not have to waste time on a useless gesture.
- Money is advantageous because it is absolute. The recipient of money has nothing more to do.
Unlike a debit card, credit card, or cheque, money is not a means to an end, but rather an end in
itself. However, the disadvantage is that money is risky. If money is misplaced or stolen, the
owner usually cannot do anything about the loss, even if the owner locates them.
o Once money passes into the hands of a bona fide purchaser for value, it is wiped clean.
Payment by Debit Card
- A debit card is a plastic card that allows a person to debit, or withdraw, funds from a bank
- Like a payment by cash, a payment by debit card is final. Once a bank authorizes or refuses
payment, the system no longer plays any role in the transaction that occurs between the
merchant and the debit cardholder.
- The most common issue regarding debit cards concerns unauthorized use.
- As a general rule, the cardholder is liable if the cardholder is to blame.
- Cardholders are also liable if they fail to promptly report the loss or theft of the card to the
Payment by Credit Card
- The difference between a debit and credit card can be seen by focusing on their names.
o Debit card works by debiting, or withdrawing funds from, the cardholder’s bank
account. The entire process is completed almost immediately.
o In contrast, a credit card operates by allowing the cardholder to obtain credit, or a loan,
for the purpose of paying for goods or services.
In effect, credit is the ability to enjoy value now, with a promise to pay for it
- The use of credit cards involves three relationships, each one governed by contract.
- Card Issuer and Cardholder:
o The relationship is simple: the issuer arranger credit by paying for goods and services on
the cardholders behalf. The cardholder, in exchange, promises to repay both the value
of each purchase and an agreed amount of interest. - Card Issuer and Merchant:
o In exchange for a small fee and a promise to fulfil a number of other obligations, the
merchant is relieved of the need to chase after customers for payment of goods or
services. As well, by offering a customer another payment option, sales will increase.
- Cardholder and Merchant:
o Once a transaction has been authorized by the card issuer, the cardholder cannot
revoke payment if the merchant’s goods or services turn out to be defective. The
merchant is entitled to retain the funds received from the card issuer and the
cardholder remains liable to the card issuer.
Payment by Cheque
- Payment by cheque conditionally discharges a contractual debt. That cheque discharges a debt
unless something goes wrong.
- Issues that could arise could be: forged cheques, stop payment orders, or an overdrawn bank
Tender of Performance
- Many of the same principles apply when a contract requires the provision of goods or services
rather than money.
- A tender