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Business Law
Principles and Practices
Goldman, A., & Sigismond, W. (2014). Business Law: Principles and Practices (9th ed.). Western Cengage Learning.
Cengage Advantage Books
PRINCIPLES AND PRACTICES
he .Termination of Contracts: ischarue
CHAPTER PREVIEW
ischarge by Full Performance
ischarge by Substantial erformance
erformance to the Personal atisfaction of Another
ischarge by Agreement of e Parties
_ e SClSSlOn
_-ovation _ cord and Satisfaction
ischarge by Operation of Law JDpossibility or Impracticability
a nkruptcy --at ute of Limitations _ l aterial Alteration of a Written Contract
227
CHAPTER
HIGHLIGHTS
III IN A BUSINESS SETTING
Eventually, a valid enforceable contract comes to an end (terminates), and the
rights and duties that existed under the contract are no longer in effect.
Contracts terminate in either of four ways: by performance, by agreement of
parties, by operation of law, or by breach of contract. This chapter focuses on
the first three ways that contracts terminate. Termination by breach of c~ntract
is discussed separately in Chapter 14. The various methods of termination are
displayed in Figure 13.1.
An employer generally dislikes firing an employee. Yet she does do it, sometimes not considering both the legal and ethical issues that surface. While it is always difficult to take steps to terminate an employee, if it is done fairly, and for a solid reason or reasons, it certainly helps the employer feel that the decision is ethical.
Questions 1. What is an obvious and immediate impact on an employee who is fired? 2. Is an employee ever fired for an unlawful reason? 3. Should a terminated employee be given a severance package? 4. What steps should an employer take before the actual termination takes
place?
Discharge by Full Performance
LEARNING OBJECTIVE~ Distinguish between full performance,
substantial performance, and performance to the personal
satisfaction of another as ways of discharging a contract.
full performance: when both parties do all they agreed to do under a contract
tender of performance: offer to perform obligations of a contract
---- Full performance is the most common method by which contracts are discharge d. A contract is discharged by full performance when both parties do all that they agreed to do under the terms of the contract. This is often referred to as stric t performance . Any deviation from what was agreed upon is considered as a breach and discharges the other party's obligation to perform.
You hire a contractor to build you a storage shed in your backyard for $1,500. The contractor satisfactorily completes the shed, and you pay him the $1,500. Because both you and the contractor fully performed, the contract was discharged.
Performance must take place at the time and place stated in the contract. If no time is stated, the contract by law must be completed within a reasonable time. As is often the case, the definition of "reasonable" is sometimes left to the courts to decide.
Performance may be the doing of an act such as ending construction of a condominium complex or the paying of money. The offer by one party- who is ready, willing, and able to perform- to another party to perform an obligation to the terms of the contract is called a tender of performance. If the other party refuses to allow the tendering party to perform the act required, the contract is generally discharged and that other party becomes liable for breach of contract.
The Charisma Remodeling Company signed a contract to remodel MacLean's kitchen. The first day that the company employees appeared on the job to begin work, MacLean refused to let them begin because he had changed his mind about doing any remodeling. This refusal by MacLean discharged the contract and Charisma was no longer obligated to perform. In addition to not being required to perform, Charisma has a legal claim against MacLean for breach of contract.
•Full • Substantial • Satisfaction of another person
FIGURE 13.1
• Rescission •Novation •Accord and
satisfaction
Contracts Terminated
•Impossibility/ impracticability
• Bankruptcy •Statute of
limitations
Breach of Contract
• Anticipatory breach
•Material breach
When the tendering party (the debtor) is required to pay a sum of money and the other party refuses the debtor's offer to pay, the refusal does not discharge the contract. The refusal does, however, excuse the debtor from paying any inter- est charges or court costs in the event of a lawsuit. The debtor, however, must be ready to pay the money at any time.
·scharge by Substantial Performance
... EARNING OBJECTIVE 1:] Distinguish between full
performance, substantial performance, and
performance to the personal satisfaction of another as
ways of discharging a contract.
- stantial performance: _ ormance in good faith of all but ,o rnin or details of a contract
--------------------------~------- The law does not always require full (complete) performance of a contract; it will allow minor deviations. This type of performance, called substantial perfor- mance, is slightly less than full performance. (Courts sometimes say 95 percent or better performance; this is often decided on a case-by-case basis). A person who in good faith substantially performs is considered to have fulfilled all the major requirements of the contract, leaving only minor details incomplete. (Intentional failure to comply would be considered a breach of contract.) One standard often applied to building contracts is that substantial performance means the building should be usable for the purpose intended. Consequently, the courts will permit the party who performed to recover the contract price less the amount needed to correct any defects in the performance. Recovery is permitted because it would be unfair to deny all payment when the performance is essen- tially complete. Recovery under the common law doctrine of substantial perfor- mance is more often applied to construction contracts than to sales contracts.
A building contractor agreed in writing to build Stern a house for $250,000. When the house was completed, Stern discovered that the front and back doors were not hung properly and that the bookcase in the family room was not flush against the wall. The contractor was not deliberately negligent but was behind schedule and failed to correct the defects. Stern hired a carpenter to make the changes at a cost of $2,000. Because the house was substantially completed and the defects were minor, the contractor can collect the entire $250,000 less the $2,000 paid by Stern to the carpenter.
It might also happen that a contractor makes minor deviations contrary to the terms of the contract. If, in the preceding example, the contractor deliberately used less expensive light fixtures and different designs from those called for in
the building contract because the required fixtures were not immediately ava - able, Stern would still be required to pay the contractor the $250,000 le ss amount of damages that could be shown for using inferior light fixtures with ferent designs from those called for in the building contract.
Substantial performance, however, does not apply to contracts calling for payment of money. If you borrow $2,000 with interest for ninety days, you ca::.- not repay $995 plus the interest. You must repay the full $1,000 plus interest.
Performance to the Personal Satisfaction of Another
LEARNING OBJECTIVE~ Distinguish between full
performance, substantial performance, and
performance to the personal satisfaction of another as
ways of discharging a contract.
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The contract you enter may require, as a condition, that your performanc_ personally satisfy the other party to the contract. Normally, satisfaction mea;;.. performing to the expectations of a reasonable person (at least substantial pe:- formance). If a personal satisfaction clause is inserted in a contract by the pa rri or the court in a particular state requires personal satisfaction (meaning co· - plete in every detail to the party's liking), the party making the personal jua~ ment must act in good fa ith and may not object to performance simply to am '.- carrying out his or her part of the bargain.
Colts, CEO of a large manufacturing company, made a special trip to New York City to order three made-to-order suits from a world- renowned tailor at a cost of $3,000 per suit. The specifications were da blue, medium grey, and brown; imported wool; four buttons; narrow lapels; one-half inch cuff on pants; tight fit; no break in the pant (fitted to the top of the shoe); silver buttons on the blue and grey suits and gold on the brown suit. The agreement with the tailor stated that the suits, when completed, must be to the full satisfaction of the customer. Colts, according to the agreement, would make the final decision as to whethe the suits were acceptable.
Answer True (T) or False (F) . 1. A contract is discharged by full performance when a person in
good fa ith fulfills all the major requ irements leaving only minor details incomp lete. T
2. Fu ll performance is the most common method by wh ich contracts are discharged. T
3. The offer to perform the terms of a contract or to pay money is ca lled tender of performance. T
4. When a contract ends, the rights and duties that existed under the contract also end. T
5. If a contract is discharged by substantial performance, the party who performed may recover the full contract price. T
=
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Discharge by Agreement of the Parties
LEARNING OBJECTIVE~ Distinguish among rescission,
novation, and accord and satisfaction as ways of
discharging a contract by agreement of the parties.
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- --- At the time they are made, some contracts state exactly when they will end . S-·- a contract would be discharged by mutual agreement on the specified date. - other contracts, the parties mutually agree to release each other on the happ ing of a certain event, even though the intended performance by one or both p.-- ties has not been completed. If the contract is completely executory, the rel ease one party is the consideration for the release of the other party.
Brody agreed in writing to act as a chauffeur for Eastman for two years. Both parties changed their minds before Brody started work and mutua agreed to cancel the contract. This executory contract was thus discharg.
RYou t eac
res cind: to cancel a contract and sru rn parties to the position that
o: ·sted prior to the making of the : 11tract
~ vati on: substitution of a new party :• one of the original parties to a :-ntract
Montgomery hired Christa Construction Company to bui ld her a summer residence in a popular summer resort area several hundred miles from her hom e but near a town where Christa Construction was located. After several meetings, Christa prepared a blueprint that contained all the specifications requested by Montgomery, right down to the high-quality brand of pipes that were to be installed throughout the residence. Montgomery then made a substantial down payment, consisting of more than half of the price for building the residence quoted to her by Christa. Upon completion of the summer resi dence, Montgomery discovered that Christa did not use the brand of pipes that Montgomery had requested because that particular brand was not avail- able . Howeve r, Christa did purchase and use an equally good brand (same quality and strength, and the same cost). When Montgomery discovered the switch had been made, she refused to pay the balance due on the summer residence until Christa totally replaced the pipes throughout the summer residence. Christa said that the brand of pipes she requested still was not available and that he acted in good faith as an experienced builder when he purchased the pipes that he did. He sued for the remaining payment of $50,000 due, claiming that it would be a major project to re- place all the pipes embedded in the walls and in other areas of the house where the pipes had been installed.
Questions 1. What is the legal effect of Christa not using the correct brand of pipes requested
by Montgome ry? 2. Does Montgomery have any cause for legal action against Christa? 3. Do you see any unfairness in Montgomery's refusal to pay the remaining balance
due to Ch rista for the construction costs for the summer residence?
Another way that a contract ends through agreement is that the parties may make a new agreement that will discharge or modify the obligations of one or both parties under the origina l agreement. The new agreement could take the form of a rescission, a novation, or an accord and satisfaction.
Rescission T he pa r ties may mutually agree to call off the contract before either party has perfor med and revert back to the position they were in prior to forming their agreement. To call it off legally means to rescind the contract. In plain English, it means fo rget it. T he mutual rescission is binding as long as each party agrees to give up the consideration received, which is the promised performance of the other party. If one party has already performed his or her part of the agreement, a reque st by the other party to cancel would not be enforceable because the per- forming party has received no consideration for the request to call off the origi- na l contract. Additional consideration would need to be offered by the party attempting to end the contract.
You entered into a contract with Flannigan, owner of Kitchen's Unlimited, to completely remodel your kitchen for $20,000 and made a down payment of $2,000. Before starting the project, Flannigan asked to be relieved from the contract. Since you were able to hire another contractor, you agreed to release Flannigan from his obligation to work for you, and Flannigan agreed to return your $2,000. This was a case of mutual rescission, and the original contract between Flannigan and you was discharged.
Novation After entering into a contract, the parties may agree to release one party from the obligation to perform. A new, third party would be substituted who would then assume this obligat ion by means of a novation. In a novation, the original contract
accord: agreement to accept performance different from that in original contract
satisfaction: performance of the terms of a new agreement resulting from an accord
substitute contract: new contract entered into to replace a contract before a breach occurs
is actually terminated and a new contract formed between the remaining pa rry : . the original contract and a new party. The other terms of the new contract gene-- ally remain the same as those in the original contract. This substitution requir~ the consent of both original parties and the new, third party.
Just before completing law school, Vincent purchased a set of law books from the Laramie Law Book Company. Vincent signed a contract to ma- monthly payments over a two-year period. Six months later, Vincent discovered that he could not keep up the monthly payments. Washingtor. Vincent's college roommate, agreed to assume responsibility for the payments. The Laramie Law Book Company agre~d to cancel its contrac' with Vincent and enter into a new contract with Washington. This substitution of parties is a novation.
Accord and Satisfaction An accord is an agreement by one party in an original contract to accept fro the other party performance that is different from the performance agreed on =- the original contract. Actually, the old contract is breached by one of the partieJ and they make a new contract. Satisfaction is the actual performance of the ac- cord. An accord alone is not enough to discharge the original contract. Ther:: must be both an accord and a completed satisfaction to discharge the origi na. contract. If the new agreement is made before the original contract is breached. this new agreement is called a substitute contract.
You borrowed $300 from Santos for your college fees. When you were unable to repay the loan when it was due, Santos agreed to accept your stereo set in place of the $300 (the accord). The original agreement was discharged only after Santos received and accepted the stereo set (the satisfaction).
An accord and satisfaction are often used to settle an honest disagreemen;: about the amount of money that a debtor owes to a creditor.
Discharge by Operation of Law
LEARNING OBJECTIVE~ Distinguish among impossibility/
impracticability, bankruptcy, the statute of limitations, and material alteration as
ways of discharging a contract by operation of
law.
objective impossibility: performance becomes absolutely impossible and therefore unavoidable because of some extreme difficu lty
Up to this point in the chapter, only the discharge of contracts resulting from t he action of one or both parties to the contract has been considered. This sectior: examines how contractual obligations may be discharged by operation of law.
Impossibility or Impracticability Once a contract has been made, performance may become impossible. Impossi- bility refers to an unforeseen event that prevents a party from performing a con- tract as promised. Objective and subjective impossibility, however, must be distinguished . Objective impossibility excuses parties from their contractua: duties as long as there is proof that the contract absolutely could no longer be performed by either party or by anyone else. In other words, nonperformance is unavoidable. The following situations generally qualify under the common law as objective impossibility to legally discharge contractual obligations:
1. Destruction of the subject matter of the contract 2. Death, serious illness, or other incapacity in a personal services contract 3. Change in the law
Destruction of the Subject Matter If the subject matter that is essential to the performance of the contract is destroyed through no fault of either party, the contract is discharged because there is no way for the contract to be fulfilled. Such a situation is considered an objective impossibility.
mmercial impracticability: trine recognizing those
anticipated events in which -::1o rmance, while still possible, ·eates a hardship for the party
gated to perform and as a result sch arges the contract
If the contract had been partly performed before the impossibility arose, the courts usually permit recovery for work performed up to the t ime of the impossibility.
The Detrex Company contracted to paint the exterior of Lunt's house for $900. After Detrex had applied one coat of paint, the house was destroyed by fire. The contract was discharged. Detrex could, however, recover for labor and paint used before the fire occurred.
Death or Serious Illness A personal services contract (a contract involving a person who has specia l ski lls and talents, e.g., a rock star} is discharged if the person obligated to perform that personal service dies or becomes seriously ill or disabled.
Hind, a country music star, was rushed to Rock Memorial Hospital after collapsing from severe stomach pains in his hotel room two hours before his scheduled concert at Arlan College. Hind's serious illness discharged this personal services contract.
Change in the Law Sometimes a law is passed after a legally constituted contract is made that makes performance illegal. In this case, the contract is discharged. This law could be a local ordinance, a state statute, a court decision, or a government regulation.
Ibsen contracted to sell Hilton ten cases of fireworks for use at a July 4 celebration. Because of the increasing number of accidents resulting from the use of fireworks, the state passed a law making the sale of fireworks illegal. Because performance of this contract was made impossible by the passage of the state law, the contract was discharged.
Sometimes unforeseen circumstances, such as strikes, fires, insolvency, shortages of materials, riots, droughts, and price increases, arise after the con- tract has been formed, making performance by one of the parties unreasonably (ex tremely) difficult but not impossible to perform. In such cases, even though the contract can be performed, the individual required to perform says, "I am unable to fulfill the obligations required in the contract." This situation, referred to as subjective impossibility, will not discharge a contract unless there is a con- tingency clause in the contract.
Morna, who was to be married in a few months, made arrangements for her wedding reception at Planters' Party House. Planters' was a chain that had Party Houses in several locations. Morna picked one of Planters' three locations in the city in which she lived. Five days before the wedding was scheduled, Morna was notified by the manager of all the Planters' Party Houses in her city that the Party House that she had selected for her wedding had accidentally burned down and that Planters' could no longer accommodate her.
In this example, it was not impossible for Planters' to perform. It could have scheduled the wedding at one of its other city locations, assuming there was room. This case is one of subjective impossibility; consequently, Planters' is not discharged because there was a reasonable opportunity to provide a substitute location. Planters' could have guarded against the risk of fire by including a con- tingency clause in the contract stating that the contract is discharged and perfor- mance excused for circumstances beyond its control.
Because of the harshness of the common law rule, modern case law supported by UCC Section 2-615 allows a discharge under the doctrine of commercial impracticability, which is a less rigid doctrine than impossibility. This doctrine recognizes those unanticipated events in which performance (while still possible) would create an unforeseen and unjust hardship and possibly cause a serious risk to life and health for the party obligated to perform. Consequently, performance
statute of limitations: law fixing a time limit within which lawsuits must be started
. . is excused and the contract is discharged. Although modern law deliberate refrains from listing all possible unanticipated occurrences, the doctrine h been cautiously applied to events that radically alter the original performance = certain cases, for example, those involving severe shortages of raw materials due to an act of God, a war, an embargo, a local crop failure, or an unforeseen shu:- down of major sources of supply or that must not have been within the cogr_- zance of the parties when the contract was made. These factors must either ha,·.c caused a marked increase in price quite disproportionate to what would reas or:- ably have been contemplated (e.g., ten times more than an original estimate) o:- have precluded the seller totally from obtaining the supplies necessary for his a- her performance.
Alco Oil Co. agreed to supply 3,000 barrels of jet fuel to Monsoon Airlines. Alco's supply of crude oil (the source of jet fuel) from Alaska, however, was cut off because the destruction of equipment used to obtain the oil resulted in a severe shortage. The destruction was caused by a sudden series of earth tremors (act of God). To fulfill the terms of the contract with Monsoon Airlines, Alco would have to obtain oil from other sources at a price at least ten times the original cost. In these circumstances, Alco may be excused from performance.
Relief on grounds of impracticability is unavailable if a party seeking to be discharged did not employ all due measures to ensure that his or her source would not fai l, that he or she willfully did something to cause the event to occ ur. failed to foresee at the time the contract was made that the event could happen (negligence), or agreed in the contract to assume an obligation to perform despite impracticabi lity. The common law rule is opposed to the concept of commercia: imprac ticability, claiming that it weakens the stability of a contract.
Bankruptcy A person who is hopelessly in debt may resort to bankruptcy to be relieved of many, but not all, of those contract debts. Bankruptcy technically does not dis - charge a debt. It simply prevents a creditor from suing to collect the money from a person who has more contract debts than money to pay them. Bankruptcy i_ discussed in Chapter 35.
Statute of Limitations All states have a statute of limitations, which fixes a time limit within which a lawsuit must be filed after a contract has been breached. This time limit varies fro m state to state (see Table 13.1). After the time limit has passed, any action for breach of contract is outlawed, or barred, by statute. The contract is not discharged. but the legal means to enforce the contract is lost. What this generally means i that a valid claim filed after the statute has expired is usually denied. The person responsible for the breach may, after the right of action is outlawed, choose to ful- fill the contract but is not legally obligated to do so. Many states permit the debt to be revived if a new promise is made in writing or there is evidence of partia: performance. The following examples bring out these points.
It is important to determine when the contract is legally breached. In the case of money owed, the t ime of the breach is figured from the due date of the debt.
Your doctor charged you $150 for a physical examination made on March 3, 2004. She requested full payment within thirty days (by April2, 2004). The doctor tried to collect from you and then, on july 1, 2010, finally sued you to recover the money. The statute of limitations in your state was six years. Because the doctor had only until April1, 2010, to collect from you, she is barred from suing you after that date.
Collection agencies sometimes aggressively try to collect by threatening to sue even after the statute of limitations has expired. If an agency follows this
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