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Chapter 11

Chapter 11 Review - Discharge & Breach.doc

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Law and Business
LAW 122
Anita John

Chapter 11: Discharge & Breach  As we learned in chapter 9 & 10, some contracts come to an end when they are voided or rescinded. Most contracts, however, are brought to an end via discharge. o Discharged: a contract is discharge when the parties are relieved of the need to do anything more under the contract. D ISCHARGE BY P ERFORMANCE  The most common form of discharge is performance. o Performance: occurs when the parties fulfill all of the obligations contained in the contract.  However, in some situations it is difficult to determine whether proper performance has occurred.  As a general rule the parties must performance exactly as the contract requires. A deviation from the terms is considered a breach. Time of Performance  Although the parties generally have to perform exactly as the contract says, the courts usually hold that time is not of the essence. In other words, 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 for the delay.  In some situations, time is of the essence. If so late performance can be refused, and if that happens, the contract will not be discharged by performance.  Finally, even if the parties do not agree on a specific time or date, the court s will find that performance must occur within a reasonable time, having regard to all of the circumstances, including the subject matter of contract. (E.g. A contract dealing with perishable items) Tender of Payment  Most contracts require a payment of money by at least one of the parties.  Business people should be aware of some very specific rules that govern payments. i. The debtor has the primary obligation of location the creditor and tendering (offering) payment, even if the creditor has not asked for it. → Must be reasonable, cannot occur at an inconvenient time or under inconvenient circumstance. o A reasonable tender has to be made only once. ii. Unless the contract says otherwise, a creditor can insist on receiving legal tender. o Consequently, a creditor generally does not have to accept payment by ways of cheque or electronic debit. o As a precaution, business people who intend to pay by anything other than a precise amount of legal tender may want to provide for that possibility in the contract. o Legal Tender: is a payment of notes (bills) and coins to a certain value. Tender of Performance  Many of the same principle apply when a contract requires the provision of goods & services rather than money.  While the party who owes the obligation is required to properly tender performance, it only has to do so once.  Furthermore, that party is discharged of its duty to perform if the other party renders performance impossible. o Damages: is the amount of money that the court may order the defendant to pay to the plaintiff. 1 of 7 Chapter 11: Discharge & Breach Substantial Performance  A tender is usually effective only if the goods or services conform precisely with terms of the contract. Occasionally, however, a party may be discharged from further obligations if it provides substantial performance. o Substantial Performance: generally satisfies the contract but is defective or incomplete in some minor way.  In deciding whether substantial performance has occurred, the court will consider a number of factors, including the nature of the defect, and the differences b/t the contract price & the cost of curing the defect.  E.g. many building contracts stat that payment is due only once construction is completed. But, if the builder leaves a work site w/o having installed say, several door knobs, it will likely be discharged from its obligations and entitled to payment.  Of course, if a contract is discharged by performance, the innocent party is not required to pay for work that was not done.  Difficulty may arise if a builder leaves a work site w/o providing at least substantial performance. There are two possibilities. i. The parties may have used a single contract to deal with a series of tasks. In that situation, part of the overall price is earned each time that a task is performed. o E.g. Cut the plaintiffs lawn 10 times = $100, but if only cut twice, the court may say you’re only entitled to $20. ii. Even if the agreement requires a number of tasks to be performed, the parties may create an entire contract. o Entire Contracts: says that no part of the price is payable unless all of the work is done.  E.g. A builder agreed to construct a house in exchange for $100,000. After doing half the job, he ran out of money and stopped work. The landowner used the materials (lumber & nails) that the builder left behind and finished the house. If the builder demands payment, the owner will probably only have to pay for the materials, but will not be liable to pay for the work the builder performed. The landowner had agreed to pay for a whole house – not half. D ISCHARGE BY A GREEMENT  In some situations, one or both parties can discharge a contract even thought it was not fully performed. Option to Terminate  When creating a contract, the parties can insert an option to terminate. o Option to Terminate: is a contractual provision that allows one or both parties to discharge a contract w/o the agreement of the other.  Commonly found in employment contracts.  Can be inserted into any type of contracts.  Frequently subjected to restrictions. E.g. a party may be entitled to terminate only after giving reasonable notice that is intends to do so. Condition Subsequent and Condition Precedent  When creating a contract, the parties can also insert a condition subsequent. o Condition Subsequent: is a contractual term that states the agreement will be terminated if a certain event occurs.  Different from option to terminate b/c it does not have to be exercised by either party to be effective.  E.g. the contract represented by a ticket to an open air concert may stat that the musicians’ obligation to perform is discharged in the event of rain. 2 of 7 Chapter 11: Discharge & Breach  However, it is possible to make a contract subject to a true condition precedent. o Condition Precedent: is a contractual term that states that an agreement will come into existence only if and when a certain event occurs.  E.g. suppose that you & I want to deal in a specific type of weapon, but we are concern that such a contract may be illegal. We can settle the terms of agreement but state that our contract will actually be created only if it receives gov’t approval. In that situation, we would not have a contract, and therefore would not break the law if gov’t approval was refused.  Unfortunately, Canadian courts also use the term “condition precedent” to refer to a contract that is formed immediately, but that does not have to be performed until later of perhaps not at all.  Note two more things about the type of condition precedent. BD 11.1 pg 241 i. B/c the contract exists from the outset, Yuri is not entitled to sell his house to another person during the 30-day period. If he does he will be in breach of his contract. ii. While a condition precedent may suspend the primary obligations under an existing contract, one or both parties pay have subsidiary obligations that they are required to perform right away. Rescission  Options to terminate, condition subsequent, and condition precedent are ways in which the parties can agree, when initially creating a contract, that their obligations will be discharged in certain circumstances. The same sort of agreement can also be reached after a contract has been created. o Executory: a contract is executory if a party has not fully performed its obligations o Executed: a contract is executed if a party has full performed its obligations. o Rescission: occurs when the parties agree to bring a contract to an end. The agreement may be expressed or implied.  E.g. if neither party performs under a contract for a very long time, the court may infer that they agreed to abandon it. Accord and Satisfaction  The situation is more difficult if one party has fully performed, or executed, the contract. In that case, mere agreement to discharge a contract may be unenforceable for lack of consideration. o Accord and Satisfaction: occurs when a party gives up its rights to demand contractual performance in return for some new benefit.  Accord – the parties’ new agreement  Satisfaction – new consideration provided by the party that is relieved of the need to perform the original contract.  Accord & satisfaction requires fresh consideration. However, it is sometimes difficult to determine whether or not a party has given something new. Thus, we must remember some of the rules in Chpt 8. Release  Parties can agree to discharge a contract w/o fresh consideration if they enter into a release. o Release: is an agreement under seal to discharge a contract.  A seal serves as a substitute for consideration. Variation  Parties usually use an accord & satisfaction or a release when they want to terminate a contractual relationship. In some situations, however, parties may want to retain their agreement, but in a modified form. 3 of 7 Chapter 11: Discharge & Breach o Variation: involves an agreement to vary the terms of an existing contract.  Requ
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