Discharge of contract by mutual agreement

Discharge of Obligations

A. Discharge of Contract Duties

A person is liable to perform agreed-to contract duties until or unless he or she is discharged. If the person fails to perform without being discharged, liability for damages arises. Here we deal with the second-to-the-last of the four broad themes of contract law: how contract duties are discharged.

Discharge by Performance (or Nonperformance) of the Duty

A contract can be discharged by complete performance or material nonperformance of the contractual duty. There is in every contract “an implied covenant of good faith” (honesty in fact in the transaction) that the parties will deal fairly, keep their promises, and not frustrate the other party’s reasonable expectations of what was given and what received.

Full Performance

Applies to the promises to answer personally for a duty of the deceased person made by the executor of the will, or by the administrator of the estate if there is no will.

Nonperformance, Material Breach

Under UCC Section 2-106(4), a party that ends a contract breached by the other party is said to have effected a cancellation. The cancelling party retains the right to seek a remedy for breach of the whole contract or any unperformed obligation. The UCC distinguishes cancellation from termination, which occurs when either party exercises a lawful right to end the contract other than for breach.

Substantial Performance

Logically, anything less than full performance, even a slight deviation from what is owed, is sufficient to prevent the duty from being discharged and can amount to a breach of contract. But under modern theories, an ameliorative doctrine has developed, called substantial performance: if one side has substantially, but not completely, performed, so that the other side has received a benefit, the nonbreaching party owes something for the value received.

Substantial Performance

The doctrine of substantial performance recognizes that the contractor has not completed construction, and therefore is in breach of the contract. Under the doctrine, however, the owner cannot use the contractor’s failure to complete the work as an excuse for non-payment. “By reason of this rule a contractor who has in good faith substantially performed a building contract is permitted to sue under the contract, substantial performance being regarded as full performance, so far as a condition precedent to a right to recover thereunder is concerned.”

Anticipatory Breach and Demand for Reasonable Assurances

When a promisor announces before the time his performance is due that he will not perform, he is said to have committed an anticipatory breach (or repudiation). Another type of anticipatory breach consists of any voluntary act by a party that destroys, or seriously impairs, that party’s ability to perform the promise made to the other side. These same general rules prevail for contracts for the sale of goods under UCC Section 2-610.

Related to the concept of anticipatory breach is the idea that the obligee has a right to demand reasonable assurances from the obligor that contractual duties will be performed. If the obligee makes such a demand for reasonable assurances and no adequate assurances are forthcoming, the obligee may assume that the obligor will commit an anticipatory breach, and consider it so.

B. Discharge by Conditions

Usually contracts consist of an exchange of promises—a pledge or commitment by each party that somebody will or will not do something. These promises are known as independent or absolute or unconditional, because their performance does not depend on any outside event. Such promises, if contractually binding, create a present duty to perform (or a duty to perform at the time stated). A condition is an event the happening or nonhappening of which gives rise to a duty to perform (or discharges a duty to perform). Conditions may be express or implied; they may also be precedent, concurrent, subsequent, or to the satisfaction of a party.

Conditions Classified Based on How They Are Created

Express conditions are stated in words in the contract, orally or written. Express conditions are usually introduced by language such as “provided that,” “if,” “when,” “assuming that,” “as soon as,” “after,” and the like. Implied conditions are unexpressed but understood to be part of the contract.

Conditions Classified Based on Their Effect on Duty to Perform

A condition precedent is a term in a contract (express or implied) that requires performance only in the event something else happens first. A concurrent condition arises when the duty to perform the contract is simultaneous: the promise of a landowner to transfer title to the purchaser and the purchaser to tender payment to the seller. The duty of each to perform is conditioned on the performance by the other.

Condition of Timeliness

If, as often occurs, it does not matter a great deal whether a contract is performed exactly on time, failure to do so is not a material breach, and the promisee has to accept the performance and deduct any losses caused by the delay. But even express clauses are subject to a rule of reason, and if the promisor would suffer greatly by enforcement of the clause (and the promisee would suffer only slightly or not at all from a refusal to invoke it), the courts will generally excuse the untimely performance, as long as it was completed within a reasonable time.

Condition That a Party Must Be Satisfied

“You must be satisfied or your money back” is a common advertisement. A party to a contract can require that he need not pay or otherwise carry out his undertaking unless satisfied by the obligor’s performance, or unless a third party is satisfied by the performance. The duty to make a contract payment may be conditioned on the satisfaction of a third party. Building contracts frequently make the purchaser’s duty to pay conditional on the builder’s receipt of an architect’s certificate of compliance with all contractual terms; road construction contracts often require that the work be done “to the satisfaction of the County Engineer.”

Discharge by Agreement of the Parties

Parties are free to agree to almost any contract they want, and they are free to agree to end the contract whenever they want. There are several ways this is done.

Mutual Rescission

The parties may agree to give up the duties to perform, called mutual rescission. This may be by a formal written release saying the obligor is discharged upon delivery of the writing or upon occurrence of a condition. Or an obligation may be discharged by a contract not to sue about it. An agreement to rescind will be given effect even though partial performance has been made or one or both parties have a claim for partial breach. The agreement need not be in writing or even expressed in words. By their actions, such as failure to take steps to perform or enforce, the parties may signal their mutual intent to rescind.

Waiver

A second means of discharge is by waiver, whereby a party voluntarily gives up a right she has under a contract but doesn’t give up the entire right to performance by the other side.

Substituted Agreement

Discharge by substituted agreement is a third way of mutual rescission. The parties may enter into a novation, either a new contract or one whereby a new person is substituted for the original obligor, and the latter is discharged.

Accord and Satisfaction

Discharge by accord and satisfaction is a fourth way of mutual rescission. Here the parties to a contract (usually a disputed one) agree to substitute some performance different from what was originally agreed, and once this new agreement is executed, the original contract (as well as the more recent accord) is satisfied.

C. Discharge When Performance Becomes Impossible or Very Difficult

There are at least five circumstances in which parties may be discharged from contractual obligations because performance is impossible, difficult, or useless. Every contract contains some element of risk: the buyer may run out of money before he can pay; the seller may run out of goods before he can deliver; the cost of raw materials may skyrocket, throwing off the manufacturer’s fine financial calculations. Should the obligor’s luck run out, he is stuck with the consequences—or, in the legal phrase, his liability is strict: he must either perform or risk paying damages for breach of contract, even if his failure is due to events beyond his control.

Impossibility

The categories here are death or incapacity of a personal services contractor, destruction of a thing necessary for performance, and performance prohibited by government order.

Death or Incapacity of a Personal Services Contractor

If Buyer makes a contract to purchase a car and dies before delivery, Buyer’s estate could be held liable; it is not impossible (for the estate) to perform.

Destruction or Deterioration of a Thing Necessary for Performance

When a specific object is necessary for the obligor’s performance, its destruction or deterioration making its use impracticable (or its failure to come into existence) discharges the obligor’s duty.

Performance Prohibited by Government Regulation or Order

When a government promulgates a rule after a contract is made, and the rule either bars performance or will make it impracticable, the obligor’s duty is discharged. An obligor is not required to break the law and risk the consequences.

Impracticability

Less entirely undoable than impossibility, but still grounds for discharge, are common-law impracticability and its relative, commercial impracticability.

Common-Law Impracticability

Impracticability is said to exist when there is a radical departure from the circumstances that the parties reasonably contemplated would exist at the time they entered into the contract; on such facts, the courts might grant relief. They will do so when extraordinary circumstances (often called “acts of God” or “force majeure”) make it unjust to hold a party liable for performance. Impracticability refers to the performance, not to the party doing it. Only if the performance is impracticable is the obligor discharged.

The distinction is between “the thing cannot be done” and “I cannot do it.” The former refers to that which is objectively impracticable, and the latter to that which is subjectively impracticable. A buyer is liable for the purchase price of a house, and his inability to raise the money does not excuse him or allow him to escape from a suit for damages when the seller tenders the deed. But if the agreement was that he would transport her in his car, then the circumstances make his performance objectively impracticable—the equivalent of impossible—and he is excused.

Commercial Impracticability

This common-law concept of impracticability has been adopted by the UCC. [9]When performance cannot be undertaken except with extreme difficulty or at highly unreasonable expense, it might be excused on the theory of commercial impracticability. The courts allow a considerable degree of fluctuation in market prices, inflation, weather, and other economic and natural conditions before holding that an extraordinary circumstance has occurred. A manufacturer that based its selling price on last year’s costs for raw materials could not avoid its contracts by claiming that inflation within the historical range had made it difficult or unprofitable to meet its commitments.

Frustration of Purpose

If the parties made a basic assumption, express or implied, that certain circumstances would not arise, but they do arise, then a party is discharged from performing his duties if his principal purpose in making the contract has been “substantially frustrated.” This is not a rule of objective impossibility. It operates even though the parties easily might be able to carry out their contractual duties. The purpose that is frustrated must be the core of the contract, known and understood by both parties, and the level of frustration must be severe; that is, the value of the contract to the party seeking to be discharged must be destroyed or nearly destroyed.

D. Other Methods of Discharge

Cancellation, Destruction, or Surrender

An obligee may unilaterally discharge the obligor’s duty toward him by canceling, destroying, or surrendering the written document embodying the contract or other evidence of the duty. No consideration is necessary; in effect, the obligee is making a gift of the right that he possesses. No particular method of cancellation, destruction, or surrender is necessary, as long as the obligee manifests his intent that the effect of his act is to discharge the duty.

Power of Avoidance

A contractual duty can be discharged if the obligor can avoid the contract. As discussed in Chapter 10 "Real Assent", a contract is either void or can be avoided if one of the parties lacked capacity (infancy, insanity); if there has been duress, undue influence, misrepresentation, or mistake; or the contract is determined to be unconscionable.

Statute of Limitations

When an obligor has breached a contract, the obligee has the right to sue in court for a remedy. But that right does not last forever. Every state has statutes of limitations that establish time periods within which the suit must be brought (different time periods are spelled out for different types of legal wrongs: contract breach, various types of torts, and so on). The time period for contract actions under most statutes of limitations ranges between two and six years. The UCC has a four-year statute of limitations.

Bankruptcy

Under the federal bankruptcy laws as discussed in (Reference mayer_1.0-ch30 not found in Book), certain obligations are discharged once a court declares a debtor to be bankrupt. The law spells out the particular types of debts that are canceled upon bankruptcy.