Business Law
Chapter 10: Discharge,
Performance and Cancellation
of a Contract
When and how does the
contract end?
• Most contract suits are not brought over
questions regarding the formation of a
contract; they are brought because of
what one party considers to be an
improper termination of a contract.
Discharge of a contract
• When a contract has been discharged,
it means that it has been performed and
is no longer a pending, legal obligation.
• Discharge: To discharge a contract is to
end the obligation by agreement or by
carrying it out.
Discharging a Contract
Through Performance
• A contract can be discharged through
the performance of its terms.
• A discharged contract is a nullity.
Duty to Perform
• A party to a contract is under a legal
obligation to perform.
Good Faith
• Good faith is a requirement of all parties
to a contract.
What Duties Are Required?
• The party is only required to perform the
actions contemplated in the contract,
and any assumed duties, as well.
Discharging By Termination
• Many contracts contain provisions
allowing the parties to terminate the
contract under certain conditions.
• These are called “termination
provisions.”
Contracts Without Termination
Dates
• Contracts cannot last forever.
• Contracts without termination dates are
revocable by either party after
reasonable notice.
Automatic renewal
• Contracts can contain provisions that
automatically renew the contract for
another term.
Conditions Subsequent
• When a contract contains a condition
subsequent provision, the contract is no
longer capable of being terminated at
will by the parties.
• Instead, the contract language will be
enforced, i.e., the occurrence set out in
the condition subsequent.
Termination For “Good Cause”
• When a contract contains a clause
stating that it may only be terminated for
good cause it is usually construed to be
terminable at will by the parties.
Termination for Any Reason
• A contract is valid if it contains a
provision stating that either party can
revoke it at any time, for any reason.
Notice of Termination
• The method used to provide notice of
termination can be set out in the
contract.
Effect of Termination
• Once the contract terminates, the legal
obligations of the parties are
extinguished.
Ending a contract through
other means
• Many contracts are not successfully
discharged, leading to disputes between
the parties.
Agreement
• After creating a contract, the parties are
free to mutually abandon, modify or
rescind the contract.
Abandonment
• When the parties abandon a contract,
they are, in effect, agreeing to rescind
the contract.
Rescission
• Rescission does not modify the
contract terms; it eliminates them.
The Elements of Rescission
• In order to demonstrate a valid
rescission, there must be a demand or
tender of full performance.
• There must also be an unambiguous,
affirmative act by a party showing the
intention to rescind the contract.
Agreement to Rescind the
Contract
• When the parties agree to abandon or
rescind the contract, the agreement
must be mutual and must be made prior
to either party actually performing any
actions
Who May Rescind
• Only the parties to the contract may
rescind it.
What Types of Contracts May
be Rescinded
• A fully discharged contract cannot be
rescinded.
• Many jurisdictions also have a rule that
prevents partially executed contracts
from being rescinded.
Cancellation versus
Rescission
• Canceling a contract is a formal
declaration that a contract is legally
ineffective and cannot form the basis of
a legal duty.
• Rescission restores the parties to their
positions prior to the creation of the
contract.
Waiving the Right to Rescind
• When a party has a right and fails to
exercise it, that right may be lost.
Suits Seeking Rescission
• Judges will usually not order rescission
when the contract is illegal, or where the
parties are equally at fault, or where
someone other than the parties to the
contract is seeking rescission.
Breach of Contract
• When a party breaches a contract, he or
she violates some contractual duty.
Negotiating Types of Breach
• The parties are free to negotiate the
possible remedies for a breach of a
contract, and even to stipulate what
types of actions will be considered a
breach.
One Party’s Breach Does Not
Relieve the Other Of Legal Duty
• When one party commits a breach the
other party is not relieved of all
contractual obligations.
Anticipatory Breach
• In some cases, a party may bring suit
for a breach before the other party has
actually committed one.
What is a Material Breach?
• Material breach gives the other party
the right to rescind the contract.
• A material breach is the failure of one
party to do some act that is so central to
the agreement as to actually defeat the
reason for having the contract in the first
place.
When Failure to Perform Is
Not Actionable: Legal Excuses
• The general rule followed in most
jurisdictions is that performance under a
contract will only be excused in
“extreme” circumstances or when the
performance falls under a legally
recognized excuse from performance.
Categories of Legal Excuses
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Impossibility
Subsequent Illegality
Acts of God/Nature
Death of a Party
Destruction
War
Impossibility
• There are two types of impossibility:
subjective impossibility and objective
impossibility.
Subjective Impossibility
• Under subjective impossibility, a party
states that he or she cannot perform the
duties outlined in the contract.
• In most jurisdictions, this claim is not a
legal defense.
Objective Impossibility
• Objective impossibility is a claim that
the action itself cannot be done by
anyone.
Consequences of Impossibility
• When performance under a contract is
impossible, a party cannot attempt to
substitute a different type of
performance.
Subsequent Illegality
• When the subject of the contract is ruled
to be illegal after the contract was
created, the courts have ruled that
failure to perform in this situation is
excusable.
Acts of God/Nature
• When the performance under a contract
is made impossible by an act of God,
the performance is excused.
Death of a Party
• Death of the party who was to perform
the duty under the contract usually
results in a legal excuse.
Destruction
• When the contract is based on the
continued existence of a particular item
and that item is destroyed, the
obligation to perform under the contract
is destroyed along with it.
War
• A contract may be cancelled when war
breaks out in the country where the
contract is to be performed.