Chapter 19 Discharge of Contracts

1. Chapter 19Discharge of Contracts Twomey, Business Law and the Regulatory Environment (14th Ed.)

2. Discharge of Performance Obligations [19-1] Tender Discharge by Performance Payment Timely Adequate (substantial performance) Consumer Rescission Rights Discharge by Action of Parties Agreement Substitution of Parties Accord & Satisfaction Chapter 19

3. Discharge of Performance Obligations (cont’d) Destruction of Subject Matter Discharge by External Factors Impossibility Death or Disability Commercial Impracticability Economic Frustration Economic Instability Risk Weather Bankruptcy Discharge by Operation of Law Statutes of Limitations Contract Time Limitations Chapter 19

4. Causes of Contract Discharge Consumer Protection Rescission Performance Substitution Unilateral Action Accord and Satisfaction Agreement Destruction of Particular Subject Matter Change of Law Discharge of Contract Impossibility Death or Disability in Personal Service Contract Act of Other Party Economic Disappointment Commercial Impracticability Economic Frustration Bankruptcy Operation of Law Statute of Limitations Contractual Limitations Chapter 19

5. Chapter 19 Summary Most contracts are discharged by performance. An offer to perform is called a tender of performance. If a tender of performance is wrongfully refused, the duty of the tenderer to perform is terminated. If the performance required was the payment of money, the refusal of a proper tender does not discharge the debt. Chapter 19

6. Chapter 19 Summary [2] It does, however, prevent the creditor from recovering interest or costs if suit is thereafter brought against the tenderer to recover the amount owed. When the performance called for by the contract is the payment of money, it must be legal tender that is offered. In actual practice it is common to pay and to accept payment by checks or other commercial paper. Chapter 19

7. Chapter 19 Summary [3] When the debtor owes the creditor on several accounts and makes a payment, the debtor may specify which account is to be credited with the payment. If the debtor fails to specify, the creditor may choose which account to credit. Chapter 19

8. Chapter 19 Summary [4] When a contract does not state when it is to be performed, it must be performed within a reasonable time. If time for performance is stated in the contract, the contract must be performed at the time specified if such time is essential (is of the essence). Performance within a reasonable time is sufficient if the specified time is not essential. Ordinarily, a contract must be performed exactly in the manner specified by the contract. Chapter 19

9. Chapter 19 Summary [5] A less-than-perfect performance is allowed if it is a substantial performance and if damages are allowed the other party. The other contracting party or a third person may guarantee a perfect performance. Such a guarantor is then liable if the performance is less than perfect. Chapter 19

10. Chapter 19 Summary [6] A contract cannot be discharged by unilateral action unless authorized by the contract itself or by statute, as in the case of consumer protection rescission. Chapter 19

11. Chapter 19 Summary [7] As a contract arises from an agreement, it may also be terminated by an agreement. This may be a provision in the original contract or a subsequent agreement to rescind the contract. A contract may also be discharged by the substitution of a new contract for the original contract; by a novation, or making a new contract with a new party; by accord and satisfaction; by release; or by waiver. Chapter 19

12. Chapter 19 Summary [8] A contract is discharged when it is impossible to perform. Impossibility may result from the destruction of the subject matter of the contract, the adoption of a new law that prohibits performance, the death or disability of a party whose personal action was required for performance of the contract, or the act of the other party to the contract. Chapter 19

13. Chapter 19 Summary [9] Some courts will also hold that a contract is discharged when its performance is commercially impracticable or there is economic frustration. Although increased cost of performance ordinarily has no effect on a contract, if that increase is grossly disproportionate to the original performance cost, some courts will classify the situation as one of commercial impracticability and hold that the contract is discharged. Chapter 19

14. Chapter 19 Summary [10] In the case of economic frustration, the contract can be performed, but the performance has ceased to have any significant value to the party who originally contracted to obtain that performance. Temporary impossibility, such as a labor strike or bad weather, has no effect on a contract. It is common, though, to include protective clauses that excuse delay caused by temporary impossibility. Chapter 19

15. Chapter 19 Summary [11] A contract may be discharged by operation of law. This occurs when (1) the liability arising from the contract is discharged by bankruptcy, (2) suit on the contract is barred by the applicable statute of limitations, or (3) a time limitation stated in the contract is exceeded. Chapter 19