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ACCT352 Study Guide - Novation, De Minimis, Debit Card

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Chapter 11 Textbook Notes
Discharge and Breach
We will now finish our general discussion of contracts by examining the end of the contractual process
A business person is often keenly interested in knowing whether a contract has been brought to an end
Most contracts are brought to an end through discharge
A contract is discharged when the parties are relieved of the need to do anything more under the
Discharge by performance
Most common method of discharge is performance. Performance occurs when the parties fufill all the
obligations contained in the contract
The parties must perform exactly as the contract requires
Time of performance
Time is not of the essence- in most situations
A contract dealing with perishable goods or a volatile market may therefore require the parties to act
Tender of Payment
Most contracts require a payment of money by at least one of the parties.
Business people should be aware of some specific rules that govern payments
1. The debtor has the primary obligation of locating the creditor and tendering (offering) payment, even if
the creditor has not asked for it.
A reasonable tender only has to be made once
Interest does not accrue on a payment once a reasonable tender has been made, even if that tender is
improperly rejected
2. Unless a contract says otherwise, a creditor can insist on receiving legal tender
Legal Tender is a payment of notes (bills) and coins to a certain value
The debtor must provide exactly the correct amount of money
3. Despite the usual rule, a debtor does not have to actually tender payment if it would obviously be refused
Discharge of a contractual debt by payment of money has both advantages and disadvantages
Money is advantageous because it is absolute
Money is not a means to an end, but rather an end in itself
Once money passes into the hands of a bona fide purchaser for value, it is wiped clean
Because of the risks associated with money, it has become common to discharge a contractual debt by
other means
Therefore we will look briefly at the three most common options: debit cards, credit cards, cheques
Payment by Debit Card
A debit card is a plastic card that allows a person to debit, or withdraw, funds from a bank account
While a debit card can be used at the bnk where the account is held, it usually is used at some distant
location, such as a store
The actual transfer of funds occurs a short time later through the clearing and settlement system
Payment by debit card is final
a debit card is different from a cheque, where the customer can countermand
The most common issue regarding debit cards concerns unauthorized use
As a general rule, the cardholder is liable I the ardholder is to blame
Card holders are also responsible if they fail to promptly report the loss of theft of the card to the bank
Payment by Credit Card
A credit card operates by allowing the cardholder to obtain credit, or a loan, for the purpose of paying for
goods or services
Credit is the ability to enjoy value now, with a promise to pay for it later
The use of credit cards involves three relationships, each one governed by contract.
o Card Issuer and Cardholder
The card issuer arranges credit by paying for goods or services on the cardholder’s behalf
o Card Issuer and Merchant
Once a transaction has been authorized by the card issuer, that credit card company is
obligated to transfer funds to the merchant
The merchant is paid in any event
o Cardholder and Merchant
The relationship between the cardholder and the merchant is not affected by the use of a
credit card (aside fro providing a means of payment)
The cardholder’s only option is to sue the merchant on the underlying sales contract
One of the most important legal issues for credit cards involves unauthorized use.
Other provinces, including Ontario, rely instead on judge-made rules.
Card issuers now often contact cardholders to inquire about sudden or unusual changes in patterns of
Payment by Cheque
Payment by cheque conditionally discharges a contractual debt
A cheque may be forged
Tender of Performance
Many of the same principles apply when a contract requires the provision of goods or services rather
than money
Damages- is the amount of money that the court may order the defendant to pay to the plaintiff
Substantial Performance
Occasionally, a party may be discharged from further obligations if it provides substantial performance
Substantial performance generally satisfies the contract but is defective or incomplete in some minor way
An entire contract says that no part of the price is payable unless all of the work is done
Discharge by Agreement
In some situations, one or both parties can discharge a contract even though it was not fully performed.
That type of discharge can occur in several ways.
Option to Terminate
When creating a contract, the parties can insert an option to terminate, which allows one or both of them
to discharge the contract without the agreement of the other. That sort of provision is often found in
employment contracts
In principle, however, an option to terminate can be inserted into any type of contract
Options to terminate are frequently subject to restrictionsex) need to give reasonable notice
Condition Subsequent and Condition Precedent
Condition subsequent is a contractual term that states that the agreement will be terminated if a certain
event occursparties can also insert this when creating a contract
A condition subsequent is different from an option to terminate because it does not have to be exercised
by either party to be effective
A contract that is subject to a condition subsequent exists until the relevant event occurs
A True Condition Precedent is a contractual term that states an agreement will come into existence
only if and when a certain event occurs.
A condition subsequent causes an existing contract to come to an end if a certain event occurs, whereas a
true condition precedent allows a contract to come into existence only if a certain event occurs
Unfortunately, Canadians also use the phrase condition precedent to refer to a contractual term that
states that while a contract is formed immediately, it does not have to be performed unless and until a
certain event occurs.
While A condition precedent may suspend the primary obligations under an existing contract, one or both
parties may have subsidiary obligations that they are required to perform right away .
Type of Condition
Time of Creation of Contract
Effect of Condition
Condition Subsequent
Discharge of existing contract
True Condition Precedent
if and when condition is satisfied
Creation of contract
Condition Precedent
Suspension of primary obligations
A contract is executory if a party has not fully performed its obligations.
A contract is executed if a party has fully performed its obligations
If a contract is executor on both sides, It can be discharged through recission
Recission occurs when the parties agree to bring their contract to an end
Accord and Satisfaction
The situation is more difficult if one party has fully performed, or executed, the contract.
Accord and satisfaction occurs when a party gives up its right to demand contractual performance in
return for some new benefit
Accord” refers to the parties new agreement
Satisfaction” refers to the new consideration
Accord and Satisfaction requires fresh consideration
The parties can agree to discharge a contract without fresh consideration if they enter into a release
A release is an agreement under seal to discharge a contract
A seal serves as a substitute for consideration
Variation involves an agreement to alter the terms of an existing contract
A variation requires fresh consideration on both sides of the agreement
Novation is a process in which one contract is discharged and replaced with another
Usually, however, novation involves a substitution of parties rather than obligations. The Supreme Court
of Canada has defined novation as “a trilaterizl agreement by which an existing contract is extinguished
and a new contract is brought into being in its place
A novation cannot occur unless all of the affected parties consent to the new arrangement
Whether new obligations or new parties are introduced, the agreement to discharge the old contract is
supported by consideration
Although novation can be achieved either expressly or impliedly, as a matter of risk management, the
agreement should always be clearly written
A promise to discharge or suspend a contractual obligation may be enforceable even without
consideration or a seal
Waiver occurs when a party abandons a right to insist on contractual performance
Waiver does not require consideration o a seal. It operations as an exception to the general rule
Waiver does not have to take any particular for
Because waiver allows a contractual party to obtain a benefit without providing anything in return, the
courts require clear evidence that the other party intended to waive its rights.
Waiver is effective only if the party who received the waiver relied upon it