Chapter 9

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University of Guelph
Marketing and Consumer Studies
MCS 3040
Joseph Radocchia

Chapter 9: Termination and Enforcement of Contracts Termination of Contracts: An Overview • When parties enter into a contract, there are several ways in which it can be brought to an end-known as “termination”: ◦ Through performance. When both parties fulfill their contractual obligations to each other, they have performed the contract. This is generally the ideal way of concluding a contractual relationship ◦ Through agreement. Parties are always free to voluntarily bring their contract to an end. Both parties could agree to simply walk away from their agreement, or one party could pay a sum to the other side by way of settlement in exchange for agreeing to end the contract. ◦ Through frustration. The doctrine of frustration applies when, after the formation of a contract, an important, unforeseen event occurs- such as the destruction of the subject matter of the contract or the death/incapacity of one of the contracting parties. The event must be one that makes performance functionally impossible or illegal ◦ Through breach. A breach of contract, when it is particularly serious, can release the innocent party from having to continue with the contract if that is his wish. Less significant breaches generally entitle such a party to damages only Termination through Performance • Amounts to termination by performance depends on the nature of the contract, for example: ◦ A contract to provide an audit of a corporation is performed when the audit is competently completed and the auditors account for service rendered is paid in full ◦ A contract to buy and sell a house is performed when the purchase price is paid and title to the property is transferred to the buyer ◦ A contract to provide a custom-designed generator is complete when a generator conforming with contract specifications is delivered and the purchase price is paid • A contract is performed when all of its implied and express promises have been fulfilled • When a contract is terminated through performance, this does not mean the end of the commercial relationship between the parties Performance by Others • Vicarious Performance: Performance of contractual obligations through others ◦ As long as personal performance by the particular contracting individual is not an express or implied term of contract ◦ read pg 202 for example Termination by Agreement By Agreement between Parties • Parties may enter into an agreement that becomes unfavorable for one or both of themselves. They may decide to: ◦ Enter into a whole new contract. This is known as novation. Provided both parties benefit from this arrangement, the agreement will be enforceable by the court as a new contract. For example, If the Owens decided that they want to buy an entirely more luxurious home than they have contracted for from Conlin, they and Conlin are free to negotiate a new contract and cancel the old one ◦ Vary certain terms of the contract. If the Owens decide that they would like upgraded bathroom fixtures installed instead of the ones provided for the plans and specificaitons, they can seek a variation of contract. Traditionally, the party benefiting from the variation must provide consideration to the other side. Typical consideration would be an increase in the content price, reflecting the additional cost of acquiring and installing the upgraded bathroom fixtures ◦ End the contract. The parties may decide to simply terminate the contract, with both parties agreeing not to enforce their rights or with one party paying the other to bring his obligations to an end ◦ Substitute a party. The law permits a more limited form of novation whereby one party's rights and obligations are transferred to someone else. A new party is substituted and the old party simply drops out of the contract altogether • An agreement between the parties is always the best way of dealing with events that make the contract disadvantageous in some respect Transfer of Contractual Rights • A party who wants to end his involvement in a particular contract has the option- to transfer it to someone else • This transfer does not terminate the contract but does have the effect of eliminating the transferor's role in it • While contractual duties or obligations cannot be transferred to someone else without agreement by the other side, contractual rights can be transferred without any such permission being required • In law, when one party transfers a contractual right to someone else, this is know as an assignment ◦ The person who is now or will be entitled to payment from a contract is known as a creditor ◦ The person who is obligated to make the payment is known as a debtor • The law of assignment of rights permits the creditor (the assignor) to assign the right to collect to another person (the assignee) without the agreement of the debtor • To be effective the debtor must have notice of the assignment so that she knows to pay the assignee rather than the creditor • The assignee is entitled to collect the debt despite not being involved in the creation of the contract that produced the debt • After receiving the notice of the assignment, the debtor can perform his obligation only by paying the assignee • If the same debt is assigned to more than one assignee, normally the assignee who first notifies the debtor is entitled to payment • In legal language, the rule is that the assignee who take in good faith rank in the order that they have given notice to the debtor ◦ Means that a later assignee may end up collecting from the debtor ahead of an earlier assignee simply by being the first to give notice to the debtor ◦ The disappointed assignees can sue the assignor for breach of the contract of assignment; doing so is usually pointless if the assignor has disappeared or has no resources to pay damages • Advantage: ◦ Creditor can “Sell” rights for cash now and let the assignee worry about collecting from debtor ◦ Creditor will pay a price for this advantage by accepting less than the face value of the debt from the assignee ◦ This discount will reflect the cost of early receipt, as well as the risk that the debtor cannot or will not pay ◦ The assignee's right to payment is no greater than the right possessed by the assignor ◦ objective is to ensure that the debtor is not disadvantaged by the assignment • look at figure 9.1 Termination by Frustration • Unexpected event or change occurs that makes performance of a contract functionally impossible or illegal, the contract between the parties may be frustrated • Frustrated: Termination of a contract by an unexpected event or change that makes performance functionally impossible or illegal • Both parties are excused from the contract and it comes to an end • Neither side is liable to the other for breach • Unlike the doctrine of mistake – which relates to severely erroneous assumptions concerning existing or past circumstances surrounding a contract at its formation- frustration deals with events that occur after the contract has been formed • The defense of frustration is difficult to establish, given that the purpose of contract law is to enforce voluntarily chosen agreements • The person claiming frustration must establish that the event or change in circumstances: ◦ Was dramatic and unforeseen ◦ Was a matter that neither party had assumed the risk of occurring ◦ Arose without being either party's fault ◦ Makes performance of the contract functionally impossible or illegality • Events that would amount to frustration are expressly dealt with in the contract through a force majeure or other clause ◦ Rather than leaving it to the judge, the parties contractually define for themselves – in advance – what events would frustrate the contract • In rare cases, when the contract expressly states that the goods to be supplied must come from a particular source, which fails – the consequences for the parties are often unsatisfactory • Frustration occurs, any further obligations under the contract cease • If neither party has performed, they are left where they were before the contract was formed • If one party has begun to perform and incurred costs, there is no easy way to compensate that party, the reason being that, the contract has ended through the fault of neither party • Read case on pg 206 Force Majeure Clauses • The risk of unforeseen events is particularly great in international transactions • Storms, earthquakes and fires may destroy the subject matter of the contract • Wars, blockades, and embargoes may prevent the performance of the contracted • Hyperinflation, currency devaluation, and changes in government regulation may create hardship for the parties to the contract • Legal systems recognize that the occurrence of some unforeseen events may be a valid excuse for non-performance • This notion finds expression in various doctrines, such as commercial impracticality, impossibility, and frustration • The difficulty for traders is that, although legal systems recognize this kind of defense, there are varying rules governing when non-performance is excused without liability on the part of the non=performing party • Exemption from performance is normally restricted to situations where it is impossible to perform- hardship or additional expense involved in performance is usually not an excuse • Force Majeure Clauses deals with the risk of unforeseen events ◦ It allows a party to delay or terminate a contract in the event of unexpected, disruptive events such as the following: ▪ Fire, flood, tornado, or other natural disaster ▪ War, invasion, blockage, or other military action ▪ Strike, labor slowdown, walkout, or other labor problems ▪ in convertibility of currency, hyperinflation, currency devaluation or other monetary changes ▪ Rationing of raw materials, denial of import or export licences, or other governmental action Enforcement of Contracts • When one party fails to perform its contractual obligations, it is in breach of contract and subject to a lawsuit • To succeed in its action for breach of contract, the plaintiff is obligated to demonstrate the following elements to the courts satisfaction, on the balance of probabilities: ◦ Privacy of contract. The plaintiff has to establish that there is a contract between the parties ◦ Breach of contract. The plaintiff must prove that the other party (the defendant) has failed to keep one or more promises or terms of the contract ◦ Entitlement to a remedy. The plaintiff must demonstrate that it is entitled to the remedy claimed or is otherwise deserving of the court's assistance • Balance of Probabilities: Proof that there is a better than 50% chance that the circumstances of the contract are as the plaintiff contends Privity of Contract • Privity is a critical ingredient to enforcing a contract • Generally speaking, only those who are parties to a contract can enforce the rights and obligations it contains • Because a strict application of the doctrine of Privity can lead to serious injustices, courts have recently shown a willingness to allow third parties to rely on contractual clauses placed in the contract for their benefits • For example: A contract between a business and a customer may have an exclusion clause protecting employees from liability in the event that the customer suffers a loss. Under a classical approach of privity, employees would not be permitted to rely on such clauses as defense to any action brought by a disgruntled customer because they are not parties to the contract – only their employer and the customer are. • Read case on pg 208 • read page 209 for more understanding Statutory Modifications of the Doctrine • The common law of privity has been modified by statute in two important areas: ◦ Consumer purchases ◦ Consumer insurance • Consumer protection legislation provides that a lack of privity is no defense to an action brought under the act for breach of warranty brought against a manufacturer • Insurance legislation across the country permits the beneficiary under a life insurance contract to sue the ins
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