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Business LawChapter 10: Discharge,

Performance and Cancellationof a Contract

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When and how does the

contract end? Most contract suits are not brought over

questions regarding the formation of a

contract; they are brought because ofwhat one party considers to be an

improper termination of a contract.

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Discharge of a contract

When a contract has been discharged,

it means that it has been performed and

is no longer a pending, legal obligation.

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Discharge: To discharge a contract is

to end the obligation by agreement or

by carrying it out.

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Discharging a Contract

Through Performance A contract can be discharged through

the performance of its terms.

A discharged contract is a nullity.

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Duty to Perform

A party to a contract is under a legal

obligation to perform.

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Good Faith

Good faith is a requirement of all parties

to a contract.

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What Duties Are Required?

The party is only required to perform the

actions contemplated in the contract,

and any assumed duties, as well.

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Discharging By Termination

Many contracts contain provisions

allowing the parties to terminate the

contract under certain conditions. These are called termination

provisions.

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Contracts Without Termination

Dates Contracts cannot last forever.

Contracts without termination dates are

revocable by either party afterreasonable notice.

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Automatic renewal

Contracts can contain provisions that

automatically renew the contract for

another term.

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Conditions Subsequent

When a contract contains a condition

subsequent provision, the contract is no

longer capable of being terminated atwill by the parties.

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Instead, the contract language will be

enforced, i.e., the occurrence set out in

the condition subsequent.

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Termination For Good

Cause When a contract contains a clause

stating that it may only be terminated for

good cause it is usually construed to beterminable at will by the parties.

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Termination for Any Reason

A contract is valid if it contains a

provision stating that either party can

revoke it at any time, for any reason.

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Notice of Termination

The method used to provide notice of

termination can be set out in the

contract.

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Effect of Termination

Once the contract terminates, the legal

obligations of the parties are

extinguished.

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Ending a contract through

other means Many contracts are not successfully

discharged, leading to disputes between

the parties.

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Agreement

After creating a contract, the parties are

free to mutually abandon, modify or

rescind the contract.

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Abandonment

When the parties abandon a contract,

they are, in effect, agreeing to rescind

the contract.

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Rescission

Rescission does not modify the

contract terms; it eliminates them.

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The Elements of Rescission

In order to demonstrate a valid

rescission, there must be a demand or

tender of full performance. There must also be an unambiguous,

affirmative act by a party showing the

intention to rescind the contract.

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Agreement to Rescind the

Contract When the parties agree to abandon or

rescind the contract, the agreement

must be mutual and must be made priorto either party actually performing any

actions

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Who May Rescind

Only the parties to the contract may

rescind it.

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What Types of Contracts May

be Rescinded A fully discharged contract cannot be

rescinded.

Many jurisdictions also have a rule thatprevents partially executed contracts

from being rescinded.

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Cancellation versus

Rescission Canceling a contract is a formal

declaration that a contract is legally

ineffective and cannot form the basis ofa legal duty.

Rescission restores the parties to their

positions prior to the creation of thecontract.

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Waiving the Right to Rescind

When a party has a right and fails to

exercise it, that right may be lost.

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Suits Seeking Rescission

Judges will usually not order rescission

when the contract is illegal, or where the

parties are equally at fault, or wheresomeone other than the parties to the

contract is seeking rescission.

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Breach of Contract

When a party breaches a contract, he or

she violates some contractual duty.

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Negotiating Types of Breach

The parties are free to negotiate the

possible remedies for a breach of a

contract, and even to stipulate whattypes of actions will be considered a

breach.

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One Partys Breach Does Not

Relieve the Other Of Legal Duty When one party commits a breach the

other party is not relieved of all

contractual obligations.

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Anticipatory Breach

In some cases, a party may bring suit

for a breach before the other party has

actually committed one.

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What is a Material Breach?

Material breach gives the other party

the right to rescind the contract.

A material breach is the failure of oneparty to do some act that is so central to

the agreement as to actually defeat the

reason for having the contract in the firstplace.

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When Failure to Perform Is

Not Actionable: Legal Excuses The general rule followed in most

jurisdictions is that performance under a

contract will only be excused inextreme circumstances or when the

performance falls under a legally

recognized excuse from performance.

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Categories of Legal Excuses

Impossibility

Subsequent Illegality

Acts of God/Nature

Death of a Party

Destruction

War

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Impossibility

There are two types of impossibility:

subjective impossibility and objective

impossibility.

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Subjective Impossibility

Under subjective impossibility, a party

states that he or she cannot perform the

duties outlined in the contract. In most jurisdictions, this claim is not a

legal defense.

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Objective Impossibility

Objective impossibility is a claim that

the action itself cannot be done by

anyone.

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Consequences of Impossibility

When performance under a contract is

impossible, a party cannot attempt to

substitute a different type ofperformance.

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Subsequent Illegality

When the subject of the contract is ruled

to be illegal after the contract was

created, the courts have ruled thatfailure to perform in this situation is

excusable.

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Acts of God/Nature

When the performance under a contract

is made impossible by an act of God,

the performance is excused.

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Death of a Party

Death of the party who was to perform

the duty under the contract usually

results in a legal excuse.

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Destruction

When the contract is based on the

continued existence of a particular item

and that item is destroyed, theobligation to perform under the contract

is destroyed along with it.

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War

A contract may be cancelled when war

breaks out in the country where the

contract is to be performed.