Ch. 18: Performance and Discharge

Subjective Impossibility

"I'm sorry, I simply can't do it" - It is impossible for *me* to perform. Ex: When a party cannot deliver goods on time because of freight car shortages or cannot make payment on time because the bank is closed.

Objective Impossibilty

"It can't be done" - It is impossible for *anyone* to perform.

The requirements of a novation are as follows:

(1) A previous valid obligation. (2) An agreement by all parties to a new contract. (3) The extinguishing of the old obligation (discharge of the prior party). (4) A new contract that is valid.

Three types of conditions can be present in contracts:

(1) Conditions Precedent (2) Conditions Subsequent (3) Concurrent Conditions

Conditions can be classified as:

(1) Express (2) Implied

The basic requirements for performance to qualify as substantial are as follows:

(1) The party must have performed in good faith. Intentional failure to comply with the contract terms is a breach of the contract. (2) The performance must not vary greatly from the performance promised in the contract. An omission, variance, or defect in performance is considered minor if it can easily be remedied by compensation (monetary damages). (3) The performance must create substantially the same benefits as those promised in the contract.

[DEFINE] Discharge

(1) The termination of an obligation, such as occurs when the parties to a contract have fully performed their contractual obligations. (2) The termination of a bankruptcy debtor's obligation to pay debts.

Three basic types of situations may qualify as grounds for the discharge of contractual obligations based on impossibility of performance:

(1) When one of the parties to a personal contract dies or becomes incapacitated prior to performance. (2) When the specific subject matter of the contract is destroyed. (3) When a change in law renders performance illegal.

____ usually involves an event that increases the cost or difficulty of performance. In contrast, ____ typically involves an event that decreases the value of what a party receives under the contract.

*Commercial Impracticability* usually involves an event that increases the cost or difficulty of performance. In contrast, *Frustration of Purpose* typically involves an event that decreases the value of what a party receives under the contract.

___ conditions are provided for by the parties' agreement.

*Express conditions* are provided for by the parties' agreement.

____ conditions are understood to be part of the agreement, but they are not found in the express language of the agreement.

*Implied conditions* are understood to be part of the agreement, but they are not found in the express language of the agreement.

When concurrent parties are present, how can the parties recover from breach of contract?

*Neither can recover from the other for breach without first tendering performance* because the contract expressly or impliedly calls for the parties to perform their respective duties simultaneously.

Does subjective impossibility discharge a contract?

*No.* Subjective impossibility does not discharge a contract, and the nonperforming party is normally held in breach of contract.

Does a settlement agreement involve a third party?

*No.* Unlike a novation, a substitute agreement does not involve a third party.

How can the parties be restored to their original obligations when an anticipatory repudiation occurs?

*The repudiating party can retract the anticipatory repudiation by proper notice* and restore the parties to their original obligations until the nonbreaching party treats an early repudiation as a breach.

Can a nonbreaching party sue for anticipatory repudiation prior to the scheduled time for performance?

*Yes.* The nonbreaching party can file a suit even if the scheduled time for performance under the contract is still in the future.

If a contract states that performance must personally satisfy one of the parties or a third person, must it satisfy a reasonable person? Or actually personally satisfy the individual?

- *The subject matter of the contract is personal* = Performance must actually satisfy the specified party - *Most other contracts (unless expressly stated otherwise)* = Must satisfy a reasonable person - *Satisfaction of a third party with superior knowledge or training on the matter* = May be required to satisfy the third party, may only be required to satisfy a reasonable person

What are the two basic types of performance?

- Complete Performance - Substantial Performance

What happens when there is a minor breach?

- If the breach is minor, the nonbreaching party's duty to perform is not entirely excused, but it can sometimes be suspended until the breach has been remedied.

What are some examples of circumstances in which contractual duties may be discharged by operation of law?

- Material alteration of the contract - The running of the statute of limitations - Bankruptcy - The impossibility or impracticability of performance

What happens when there is a *material* breach?

- The nonbreaching party is excused from the performance of contractual duties. - The nonbreaching party can also sue the breaching party for damages resulting from the breach.

A ____ is the nonperformance of a contractual duty.

A *breach of contract* is the nonperformance of a contractual duty.

A ____ expressly or impliedly revokes and discharges a prior contract.

A *novation* expressly or impliedly revokes and discharges a prior contract.

A ____ occurs when both of the parties to a contract agree to substitute a third party for one of the original parties.

A *novation* occurs when both of the parties to a contract agree to substitute a third party for one of the original parties.

A ____ is the performance of the accord agreement.

A *satisfaction* is the performance of the accord agreement.

[DEFINE] Condition Precedent

A condition in a contract that must be met before a party's promise becomes absolute.

[DEFINE] Condition Subsequent

A condition in a contract that operates to terminate a party's absolute promise to perform.

A condition that must be fulfilled before a party's performance can be required is called a ____.

A condition that must be fulfilled before a party's performance can be required is called a *condition precedent*. - The condition *precedes* the absolute duty to perform.

[DEFINE] Frustration of Purpose

A court-created doctrine under which a party to a contract will be relieved of his or her duty to perform when the objective purpose for performance no longer exists (due to reasons beyond that party's control).

[DEFINE] Impossibility of Purpose

A doctrine under which a party to a contract is relieved of his or her duty to perform when performance becomes impossible or totally impracticable (through no fault of either party).

[DEFINE] Commercial Impracticability

A doctrine under which a seller may be excused from performing a contract when (1) a contingency occurs, (2) the contingency's occurrence makes performance impracticable, and (3) the nonoccurrence of the contingency was a basic assumption on which the contract was made.

Anticipatory repudiation is treated as what type of performance?

A material breach of contract

If the parties to the contract did not expressly make the conditions, what effect does failure to meet a condition have on the other party's obligation to pay?

A party who in good faith performs substantially all of the terms of a contract can enforce the contract against the other party under the doctrine of substantial performance.

[DEFINE] Condition

A possible future event, the occurrence or nonoccurrence of which will trigger the performance of a legal obligation or terminate an existing obligation under a contract.

A ___ is a contract to perform some act to satisfy an existing contractual duty that is not yet discharged.

An *accord* is a contract to perform some act to satisfy an existing contractual duty that is not yet discharged.

An accord and its satisfaction does what?

An accord and its satisfaction *discharge the original contractual obligation.*

What is an example of a condition subsequent?

An accounting firm hires a recent Bauer graduate and their contract provides that the firm's obligation to continue employing the individual is discharged if they do not pass the CPA exam by their second attempt.

[DEFINE] Mutual Rescission

An agreement between the parties to cancel their contract, releasing the parties from further obligations under the contract. The object of the agreement is to restores the parties to the positions they would have occupied had no contract ever been formed.

[DEFINE] Anticipatory Repudiation

An assertion or action by a party indicating that he or she will not perform an obligation that he or she is contractually obligated to perform at a future time.

[DEFINE] Temporary Impossibility

An occurrence or event that makes performance temporarily impossible operates to suspend performance until the impossibility ceases.

An omission, variance, or defect in performance is considered minor if....

An omission, variance, or defect in performance is considered minor if it *can easily be remedied by compensation (monetary damages)*.

[DEFINE] Tender

An unconditional offer to perform an obligation by a person who is ready, willing, and able to do so.

Under what circumstances are conditions implied?

Conditions are often implied when they are inherent in the actual performance of the contract

[DEFINE] Concurrent Conditions

Conditions in a contract that must occur or be performed at the same time; they are mutually dependent. No obligations arise until these conditions are simultaneously performed.

Express conditions are normally prefaced by...

Express conditions are normally prefaced by the words *if, provided, after* or *when*. - Although no particular words are necessary

For someone to invoke the doctrine of commercial impracticability, what must occur?

For someone to invoke the doctrine of commercial impracticability successfully, the anticipated performance must become significantly more difficult or costly. - Additionally, the added burden of performing must not have been foreseeable by the parties when the contract was made.

Generally, conditions precedent are ___, and conditions subsequent are ___.

Generally, conditions precedent are *common*, and conditions subsequent are *rare*.

If no time for performance is stated in a contract, what time frame is implied?

If no time for performance is stated in a contract, a *reasonable time* is implied.

If one party's performance is substantial, what is the other party's duty to perform?

If one party's performance is substantial, the other party's duty to perform remains absolute. - In other words, the parties must continue performing under the contract.

In a ____, the parties agree to accept performance that is different from the performance originally promised.

In an *accord and satisfaction*, the parties agree to accept performance that is different from the performance originally promised.

[DEFINE] Performance

In contract law, the fulfillment of one's duties arising under a contract, the normal way of discharging one's contractual obligations.

What must occur for complete performance of the contract to take place?

Normally, conditions *expressly* stated in a contract must fully occur in all respects. - Any deviation breaches the contract and discharges the other party's obligation to perform.

Once the accord has been made, what happens to the original obligation?

Once the accord has been made, *the original obligation is merely suspended until the accord agreement is fully performed* (a satisfaction). If it is not performed, the obligee (the one to whom performance is owed) can file a lawsuit based on either the original obligation or the accord.

When the event that makes performance temporarily impossible ends, what must occur?

Once the temporary event ends, the parties ordinarily must perform the contract as originally planned. - However, sometimes, the lapse of time and the change in circumstances surrounding the contract make it substantially more burdensome for the parties to perform the promised acts. In that situation, the contract is discharged.

What is typically the consideration in mutual rescission?

Ordinarily, if the parties agree to rescind the original contract, *their promises not to perform the acts stipulated in the original contract will be legal consideration* for the second contract (the rescission).

What effect does partial payment of a debt after discharge in bankruptcy have?

Partial payment of a debt after discharge in bankruptcy will not revive the debt.

What types of agreements to rescind contracts must be in writing?

Per the Uniform Commercial Code... - Agreements to rescind a sales contract must be in writing (or contained in an electronic record) when the contract requires a written rescission - Agreements to rescind contracts involving transfers of realty also must be evidenced by a writing or record

How is a party's duty to perform affected by the following? *Material Breach*

The contract is discharged and there is not further duty to perform. The nonbreaching party can sue immediately for breach.

When does the doctrine of impossibility of performance apply?

The doctrine of impossibility of performance applies ONLY *when the parties could not have reasonably foreseen, at the time the contract was formed, the event that rendered performance impossible.*

How is a party's duty to perform affected by the following? *Substantial Performance*

The duty to perform continues and a party can recover damages due to the other party's failure to comply with the contract.

[DEFINE] Breach of Contract

The failure, without legal excuse, of a promisor to perform the obligations of a contract.

What distinguishes a novation from both an accord and satisfaction and an assignment of all rights?

The immediate discharge of the prior contract

What is the measure of damages for substantial performance?

The measure of the damages is the cost to bring the object of the contract into compliance with its terms, if that cost is reasonable under the circumstances. - If unreasonable, then the measure of damages is the difference in value between the performance rendered and the performance that would have been rendered if the contract had been performed completely.

The most common way to discharge, or terminate, contractual duties is...

The most common way to discharge, or terminate, contractual duties is by *performance* of those duties.

What happens once the minor breach has been cured?

The nonbreaching party must resume performance of the contractual obligations.

If performance is conditioned...

The occurrence or nonoccurrence of the event will trigger the performance of a legal obligation or terminate an existing legal obligation.

What must occur for mutual rescission to take place?

The parties must make another agreement that also satisfies the legal requirements for a contract. - There must be an offer, an acceptance, and consideration.

Why is a party entitled to damages if the other party substantially performs?

The party is entitled to damages because substantial performance is not perfect and these damages are to compensate for the *failure to comply with the contract*.

[DEFINE] Discharge in Bankruptcy

The release of a debtor from all debts that are provable, except those specifically excepted from discharge by statute.

[DEFINE] Novation

The substitution, by agreement, of a new contract for an old one, with the rights under the old one being terminated. Typically, there is a substitution of a new party who is responsible for the contract and the removal of an original party's rights and duty's under the contract.

What happens if performance is not substantial?

There is a material breach and the nonbreaching party is excused from further performance.

How is a party's duty to perform affected by the following? *Complete Performance*

There is no breach with complete performance and the contract is discharged.

When are concurrent conditions present?

These conditions exist only when the contract expressly or impliedly calls for the parties to perform their respective duties simultaneously.

Material Alteration of the Contract

To discourage parties from altering written contracts, the law allows an innocent party to be discharged when the other party has materially altered a written contract without consent.

What happens if there is a delay in performance?

Unless time is expressly stated to be vital, a delay in performance will not destroy the performing party's right to payment.

When a condition operates to terminate a party's absolute promise to perform, it is called a ____.

When a condition operates to terminate a party's absolute promise to perform, it is called a *condition subsequent*. - The condition follows, or is *subsequent to*, performance.

What happens when anticipatory repudiation occurs?

When an anticipatory repudiation occurs, it is treated as a material breach of the contract, and the nonbreaching party is permitted to bring an action for damages immediately.

When each party's performance is conditioned on the other party's performance or offer to perform, ____ are present.

When each party's performance is conditioned on the other party's performance or offer to perform, *concurrent conditions* are present.

When one party has fully performed, an agreement to cancel the original contract normally will not be enforceable unless...

When one party has fully performed, an agreement to cancel the original contract normally will not be enforceable unless *there is additional consideration*.

When is a breach material?

When performance is not at least substantial