Contract Termination

Question 1

Condition Precedent

Answer 1

A condition in a contract that qualifies the contractual obligation before it comes into existence

When a condition precedent is part of a contract, the condition must be fulfilled before the contract can come into existence

Words such as when, if, before, after, on condition that, subject to, provided that, so long as

The contingency must be performed before the contract comes into existence

Most typical contract with conditions is a real estate contract

Question 2

Concurrent Condition

Answer 2

Conditions that occur at the same time

Question 3

Condition Subsequent

Answer 3

A condition in a contract that triggers the contractual obligation after the contract comes into existence

A specific condition that occurs after the contract has been made will terminate the contract

This type of condition also relates to performance of future contractual obligations: if it occurs, it will extinguish a party’s contractual obligations

Found commonly in insurance policies

Example: Tom agrees to buy certain property for commercial purposes, provided that Sheila, the seller, obtains proper zoning by an agreed-upon date. The zoning must be obtained before Tom becomes obligated

Question 4

Express Condition

Answer 4

A condition that is stated

Normally stated on the face of the contract and is part of the obligations between the parties

Question 5

Implied in Fact Condition

Answer 5

Also known as an implied condition

A condition that is inferred by the law from the act of the parties; inferred or presumed under the law

The parties of a contract understand that the implied condition exists, although it is not specifically stated in the contract

Question 6

Implied in Law Condition

Answer 6

Also known as constructive condition

The court will imply a condition, even though neither parties expressly or impliedly agreed to it, because the existence of the condition is implied in the parties’ respective duties

The rule suggests that one party’s performance is a necessary (constructive) condition of another party’s responsive performance

Question 7

Termination

Answer 7

A method of discharging or ending contractual obligations

Implies that the contractual obligations of the parties have ended; whether the termination has positive or negative results depends on how the performance was discharged

Question 8

Discharge

Answer 8

Release from a contract either by agreement or carrying out the obligations

Discharge creates a valid termination of contractual duties

Discharge can occur in several forms: by performance, by agreement, by non-performance, and by operation of law

Question 9

Discharge by Performance

Answer 9

Most common type of discharge

This means the parties to the contract have fully performed their duties and obligations to the contract without incident

Expectations have been fulfilled, and all the legal obligations have been fully completed

There are times when performance is “mostly” complete

Question 10

Substantial Performance

Answer 10

Also known as substantial compliance

Less than full performance of a contract; performance with minor defects or deviations in performance

The court will determine whether the deviation was minor or material to the contract; that is, the court will ask whether the deviation in the performance is inconsequential or whether it goes to the heart of the contract

Question 11

Court Considerations in Substantial Completion Exists

Answer 11

Expectation of the nonbreaching party: What was the principal reason for entering into the contract?

Compensation to the injured party: If the injured party’s loss is easily calculated and the deviation is not material, a court could find substantial performance; when the loss is speculative and virtually cannot be calculated, the likelihood diminishes that a court will find substantial performance

Willfulness of the act: When the party’s acts are willful, deliberate, and intentional, the excuse of substantial performance will not be afforded; the court looks closely at the actions of the nonperforming party to determine the nature of the acts

Timing of performance or delay: Unless time is crucial to the completion of the contract, a delay or time lag when full performance has otherwise been completed may result in a court finding substantial performance; the courts closely examine the performance and any damage resulting from a delay

Question 12

Discharge by Agreement

Answer 12

By agreement of the parties; in this instance, the parties’ agreement to discharge the obligations absolves the parties from any future liability under the original contract

May occur through rescission, release, novation, accord and satisfaction, or operation of the terms of the contract

Question 13

Mutual Rescission

Answer 13

The voluntary mutual agreement of the parties to discharge their contractual obligations and duties, and thus return to the same position they were in prior to entering into the contract

Mutual Rescission: when both parties agree to cancel the contract

Question 14

Release

Answer 14

The act of giving up or discharging a claim or right to the person against whom the claim exists or against whom the right is enforceable

Must be in writing and supported by some form of consideration

When parties agree to a release, the law will not allow them to pursue any legal action against each other once the agreement has been signed

Question 15

Novation

Answer 15

The extinguishment of one obligation by another

A substituted contract that dissolves a previous contractual duty and creates a new one

The original parties to the contract are discharged and new parties are substituted under the new contract for the prior obligations

Discharges any obligations of the prior parties to the contract

All parties in a novation are required to assent to the terms, and it must be supported by consideration

Question 16

Accord and Satisfaction

Answer 16

An agreement between two persons, one of whom has a cause of action against the other, in which the claimant accepts a compromise in full satisfaction of a claim

The parties can agree to terminate the rights and obligations under the contract and settle any claims or disputes between them through use of this method

The new agreement created between the parties is known as the accord; when the obligations of that new agreement are complied with by the parties, satisfaction occurs

Example: Arthur owes Beth $1,000, which he cannot pay. Arthur agrees to repair the roof on Beth’s house in lieu of paying the $1,000. The agreement to accept the repair is the accord; performance of the repair is the satisfaction.

Question 17

Discharge by Contract Terms

Answer 17

Parties to the contract may agree that certain events or happenings will discharge the parties’ duties and obligations under a contract

Parties agree that the occurrence of certain events will discharge the contractual obligations

Both parties must agree

Question 18

Discharge by Nonperformance

Answer 18

Can occur through:

Impossibility of Performance

Frustration of Purpose

Failure of a Condition

Breach

Question 19

Impossibility of Performance

Answer 19

Results when some act or event makes it impossible for the contract to be performed under the terms set forth in the contract

In analyzing an impossibility of performance case, you may see the term impracticability rather than impossibility

Common occurrences involving impossibility are: destruction of the subject matter, supervening illegality, death, or disability of the party

Question 20

Force Majeure

Answer 20

A provision in a contract that excuses nonperformance because of the occurrence of an unforeseeable event, such as an act of God

Question 21

Impracticability

Answer 21

Excuses a party from an obligation in a contract that has become unrealistic because of unforeseen circumstances

Usually applied in the commercial context

The party alleging this defense must show that the burden of performance would be extreme

Question 22

Frustration of Purpose

Answer 22

An event that may excuse nonperformance of a contract because it defeats or nullifies the objective of the parties under which they entered into the contract

This doctrine discharges performance by excusing it because of an unanticipated event the parties could not have contemplated

Courts will not impose this method of discharge readily, especially when parties are simply trying to avoid a bad bargain

A party must show that the circumstance frustrating the purpose was unforeseeable, and that, because of that unforeseeability, the party will not derive the benefit anticipated by the contract

Question 23

Failure of a Condition

Answer 23

Nonperformance is the failure of a condition to a contract

Common method of terminating a contract

Question 24

Breach of Contract

Answer 24

This is the result of a party failing to perform its contractual obligations; a breach occurs when the acts of nonperformance are no material to the transaction that the nonbreaching party can treat the obligation as terminated

The key in a breach of contract case is often determining whether a breach was material

The party who has been injured by the breaching party can hold them to their contractual duties through enforcement of a court action

Question 25

Anticipatory Breach

Answer 25

Also known as anticipatory repudiation

The announced intention of a party to a contract that it does not intend to perform its duties under the contract

The nonbreaching party believes that the other party will not perform its obligations and, rather than waiting for the actual breach to occur, the nonbreaching party may either substitute performance with another party in anticipation of the breach or immediately bring an action for breach

Indications of performance difficulties, unhappiness with the contract, or an uncertainty as to whether performance will be timely are not sufficient to manifest an anticipatory breach

Question 26

Discharge by Operation of Law

Answer 26

Contracts can be discharged because of a legal technicality

Two methods of discharge by operation of law are: bankruptcy and statutes of limitations

Question 27

Bankruptcy

Answer 27

When a party files bankruptcy and seeks the court’s protection from creditors, contractual obligations may be discharged without providing the creditors much resource

The Bankruptcy Act, which sets out the circumstances under which contractual obligations can be discharged, is applied by the federal courts

Question 28

Statute of Limitations

Answer 28

The time period in which a party must file a claim or lawsuit is regulated by state or federal statutes

If a party fails to file a lawsuit or claim within the time period set forth in the statute, and the defending party claims running of the statute of limitations as an affirmative defense, the contractual obligation could be discharged

Question 29

Compensatory Damages (Monetary)

Answer 29

Awarded to compensate the aggrieved party for what has been lost through the breach of contract

Intended to make the aggrieved party whole as though the contract was fulfilled

Question 30

Consequential Damages (Monetary)

Answer 30

Foreseeable damages that occur as a result of a breach

Example: if an aggrieved party is intending to sell an item and the breaching party fails to deliver the item, the aggrieved party is entitled to the profit he or she would have received from reselling the item

Question 31

Punitive Damages (Monetary)

Answer 31

Damages awarded to punish a party

Courts rarely award punitive damages in contractual disputes

When there is a tort (i.e., injury or wrongful act) and breach of contract, punitive damages may be available

Question 32

Nominal Damages (Monetary)

Answer 32

May be awarded for a contractual breach that does not lead to an economic loss

The court can award minimal damages to punish the breaching party

Question 33

Liquidated Damages (Monetary)

Answer 33

Damages that can occur in the event of a future breach of contract

These future damages are incorporated into the contract in advance

Usually enforceable in court

Question 34

Specific Performance (equitable)

Answer 34

Aggrieved party can force the other party to abide by the contract

Specific performance will generally be awarded only if the good is unique, such as the sale of a property

Courts typically will not grant specific performance as a remedy for breach of service contracts that require one party to provide personal services to another

Compelling someone to perform work could be construed as involuntary servitude, which is unconstitutional

Question 35

Reformation (equitable)

Answer 35

Occurs when the parties fail to express their contract terms accurately in writing

In this case, courts will rewrite the contract to reflect the parties’ true intentions

Question 36

Waiver of Breach

Answer 36

Nonbreaching party has the right to accept defective or incomplete contractual performance

Businesses will waive a breach when it is advantageous to have partial performance of a contract

In most circumstances, a waiver of a contractual breach will not act as a waiver for subsequent, additional, or future breaches of contract

A waiver of a contractual breach does not terminate the contract; the contract remains in place, and the non breaching party can still recover any monetary loss from the incomplete or defective performance

Exceptions

Waiver can be extended to a future breach if a reasonable party would conclude that similar or identical breaches would be acceptable - this is known as a pattern-of-conduct exception

If the aggrieved party gives notice that full performance will be required in the future, the pattern-of-conduct except does not apply

Question 37

Tender of Performance

Answer 37

Occurs when a party tenders (presents) an unconditional offer to perform, and the party is truly ready, willing, and able to perform

If the other party rejects the tender, it is as if the first party performed