Performance and Discharge
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In a contract setting, what does discharge mean?
- A party is discharged when (s)he has no more duties under a contract.
- Most contracts are discharged by full performance.
- Sometimes the parties discharge a contract by agreement. For example, the parties may agree to rescind their contract, meaning that they terminate it by mutual agreement.
- At times a court may discharge a party who has not performed. When things have gone amiss, a judge must interpret the contract and issues of public policy to determine who in fairness should suffer the loss.
Parties often put conditions in a contract. What is a condition?
- A condition is an event that must occur before a party becomes obligated under a contract.
- If that event never happens, or, in contract language, the condition fails, then the party is discharged.
How are conditions created?
- Expressed: The parties may expressly state a condition, but no special language is necessary to create the condition. Phrases such as “provided that” frequently indicate a condition, but neither those nor any other words are essential. As long as the parties intended to create a condition, a court will enforce it.
- Implied: The parties may say nothing about a condition, but it is clear from their agreement that they have implied one. 'If this happens, the other will do this about it.'
Courts divide conditional clauses into three categories: (1) condition precedent, (2) condition subsequent, and (3) concurrent conditions. What do they all have in common and how are they different?
- The key to all conditional clauses is that if the condition does not occur, one party will probably be discharged without performing.
- Condition Precedent: An event must occur before a duty arises. If the event never happens, the duty is discharged.
- Condition Subsequent: The only difference here is that the condition must occur after the particular duty arises. If the condition does not occur, the duty is discharged.
- Concurrent Conditions: Here, both parties have a duty to perform simultaneously. If either one comes up short on their end of the bargin, the duties are discharged.
The difference between condition precedent and condition subsequent is important for what reason?
- It tells us who must prove whether the condition occurred.
- If the parties agreed to a condition precedent, the plaintiff has the burden to prove that the condition happened, and hence that the defendant was obligated to perform.
- But with a condition subsequent, it is normally the defendant who must prove that the condition occurred, relieving him of any obligation.
Depending on how complex a contract is, sometimes the question is how well a party performed its contract obligations. The more complex a contract, the more certain that at least one party will perform imperfectly. What are the two types of contract performance?
- Strict Performance: A party might say that the other did not strictly performed their obligations. They may be right but courts dislike strict performance because it enables one party to benefit without paying, and sends the other one home emptyhanded. A party is generally not required to render strict performance unless the contract expressly demands it and such a demand is reasonable.
- Substantial Performance: Courts often rely on the substantial performance doctrine, especially in cases involving services as opposed to those concerning the sale of goods or land. In a contract for services, a party that substantially performs its obligations will receive the full contract price, minus the value of any defects. On the other hand, a party that fails to give substantial performance may get nothing. A party that fails to perform substantially receives nothing on the contract itself and will only recover the value of the work, if any.
When is performance substantial?
- There is no perfect test, but courts look at these issues:
- How much benefit has the promisee received?
- If it is a construction contract, can the owner use the thing for its intended purpose?
- Can the promisee be compensated with money damages for any defects?
- Did the promisor act in good faith?
What is personal satisfaction contract, and when taken to court, what two standards might a court apply to their ruling?
- It is a contract in which the promisee makes a personal, subjective evaluation of the promisor’s performance.
- A subjective standard means that the promisee’s personal views will greatly influence her judgment, even if her decision is foolish and unfair. A court applies a subjective standard only if assessing the work involves personal feelings, taste, or judgment and the contract explicitly demanded personal satisfaction.
- An objective standard means that the promisee’s judgment of the work must be reasonable. A court applies an objective standard to the promisee’s decision. In other words, the objective standard will be used if assessing the work does not involve personal judgment or ifthe contract failed to explicitly demand personal satisfaction.
Explain good faith.
- The parties to a contract must carry out their obligations in good faith.
- The Restatement (Second) of Contracts §205 states: “Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.”
Time of the Essence Clauses
- Such clauses are common in real estate transactions and in any other agreement where a delay would cause serious damage to one party.
- A time of the essence clause will generally make contract dates strictly enforceable, but merely including a date for performance does not make time of the essence.
- Courts dislike time of the essence arguments because even a short delay may mean that one party forfeits everything it expected to gain from the bargain.
- If the parties do not clearly state that prompt performance is essential, then both are entitled to reasonable delays.
What does breach mean in contract terms and what different types are there? Are there any limitations on breach?
- When one party breaches a contract, the other party is discharged. The discharged party has no obligation to perform and may sue for damages.
- A material breach is one that substantially harms the innocent party and for which it would be hard to compensate without discharging the contract. Courts will only discharge a contract if a party committed a material breach.
- An anticipatory breach is one made by making it unmistakably clear that the party will not honor the contract. Sometimes a promisor will actually inform the promisee that it will not perform its duties. At other times, as here, the promisor takes some step that makes the breach evident.
- Statute of Limitations A party injured by a breach of contract should act promptly. A statute of limitations begins to run at the time of injury and will limit the time within which the injured party may file suit. Statutes of limitation vary from state to state and even from issue to issue within a state.
Explain the issue of Impossibility in contracts and its limitations.
- If performing a contract was truly impossible, a court will discharge the agreement. But if honoring the deal merely imposed a financial burden, the law will generally enforce the contract.
- True impossibility means that something has happened making it utterly impossible to do what the promisor said he would do.
- If it is possible for a party to perform, just undesirable, they must fulfill their agreement.
- True impossibility is generally limited to these three causes:
- Destruction of the Subject Matter, Death of the Promisor in a Personal Services Contract, and Illegality
It is rare for contract performance to be truly impossible, but common for it to become a financial burden to one party. Explain Commercial Impracticability and Frustration of Purpose.
- Commercial impracticability means some event has occurred that neither party anticipated and fulfilling the contract would now be extraordinarily difficult and unfair to one party.
- Frustration of purpose means some event has occurred that neither party anticipated and the contract now has no value for one party.
- Courts consider the following factors in deciding impracticability and frustration claims:
- Mere financial difficulties will never suffice to discharge a contract.
- The event must have been truly unexpected.
- If the promisor must use a different means to accomplish her task, at a greatly increased cost, she probably does have a valid claim of impracticability.
- A force majeure clause is significant but not necessarily dispositive. To protect themselves from unexpected events, companies sometimes include a force majeure clause, allowing cancellation of the agreement in case of extraordinary and unexpected events. A typical clause might permit the seller of goods to delay or cancel delivery in the event of “acts of God, fire, labor disputes, accidents or transportation difficulties.” A court will always consider a force majeure clause, but may not enforce it if one party is trying to escape from routine financial problems.
- The UCC permits discharge only for major, unforeseen disruptions. UCC §2-615 endorses commercial impracticability as a ground for discharge, but emphasizes that mere cost increases will not justify discharge, nor will simple inconvenience or financial loss.
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