When a valid contract is created, the contract may be discharged for a number of reasons: The
terms of the contract may be fully carried out by the parties, the parties may mutually agree not
to go forward, one party may decide not to perform (breach), or the contract may be discharged
by law.
1. Conditions: A condition is an event whose happening or non-happening will determine
whether a requirement in a contract will have to be performed or not.
Example: Tom will receive 10% of the sale price of Vivian’s car for his help in selling it if
the car can be sold for $5,000 or more. Selling the car for at least $5,000 is a condition for
Tom to receive his commission.
a. Result if the condition is not met: If a condition is not met, the entire contract may fail.
In the above example, if the car is sold for $4,500, the contract agreement that Tom had
with Vivian would never mature to the point where Vivian would have to perform.
1) If a contract promise is not performed: If a party to a contract does not perform a
term in the contract, the contract would still exist and the other party would be able to
sue for breach of contract and receive damages or have the court enforce the contract.
2. Express conditions: This is a condition that is agreed upon by the parties to the contract and
specifically indicated in the contract. An express condition must be fully performed.
a. Personal satisfaction of the contracting party: One common express condition is a
condition that one party to a contract must be satisfied with the performance of the other
party before his or her duty to pay under the contract matures.
Example: Art paints Erica’s portrait with the understanding that Erica will pay Art
$10,000 if she is satisfied with the finished painting. Erica’s satisfaction with the painting
is a condition for her duty to pay. What is the result if Erica is not satisfied with the
painting and refuses to pay even though the painting is an excellent work of art?
1) Subjective standard: Where the subject of the agreement involves a matter where
the “personal tastes” of one party are very important, the party may use his or her
personal judgment in deciding whether he or she is satisfied with the work. The party
must make the judgment in good faith. Professional services (doctors and lawyers)
and painting a portrait are examples of contracts where the personal element is
important.
2) Objective standard: In contracts where the personal taste is not a significant factor,
the objective standard is used. If the finished work would satisfy a reasonable person,
the courts would rule that the condition of personal satisfaction has been satisfied.
3) Result: In the above example, painting a portrait is a matter where the personal taste
of a person would be very important. The facts show that the painting was expertly
made, but Erica was not happy with the result. As long as Erica made her evaluation
in good faith, she would not have to pay.
4) However: If the painting would have satisfied a reasonable person, that evidence may
be important in determining whether Erica was acting in good faith in making her
evaluation.
b. Satisfaction of a third party: A contract may specify that a third party must be satisfied
with the way in which the contract terms were carried out before payment must be made.
Example: Betty signs a contract with Triple-A Home Builders to build a house for her at
a cost of $300,000. The contract states that upon completion of the house, Stewart, the
architect, must issue a certificate of completion before the final payment will be made.
The issuance of the certificate is a condition to Betty having to make the payment.
c. Implied in fact condition: Some conditions are implied from the terms of the contract.
Example: Zack signs a contract to have his piano moved to his brother’s house for $200.
The piano is to be left in the brother’s garage. The garage having sufficient space to
accommodate the piano is an implied condition of this contract.
d. Implied in law condition: Implied in law condition or constructive conditions are used
to fill in missing gaps in contracts. There are two types of constructive conditions:
1) The contract does not state when certain things must be carried out by the parties.
But if the task of each party can be carried out at the same time, the concept of
constructive condition would require that the tasks be performed at the same time.
Example: Eleanor sells her car to Brook for $1,000. Who must perform first? The
contract does not say. Since Eleanor could bring her car, the registration, and key and
Brook could bring the $1,000 at the same time (both parties can perform at the same
time), the concept of constructive condition requires that they both perform at the
same time.
2) When parties sign a contract where one party must do a series of things and the other
party must do just one thing, but the contract does not state who must perform first,
the concept of constructive condition requires that the party who must do a number of
things perform first (condition) and then the other party must perform.
Example: José agrees to pay $10,000 to have a new kitchen installed by Jack. The
contract did not say when the payment must be made. Since Jack must perform
several things (bring the cabinets, prepare the site, etc.), while José need only make
the payment, Jack must perform his part first before Jose’s duty to pay matures.
e. Condition concurrent: When the contract specifies that the parties are to perform their
contractual duties at the same time, each party’s performance is a condition to the other
party’s performance. In the example where Eleanor sold her car to Brook, Eleanor
bringing her car, the keys, and registration is a condition for Brook to pay. Brook
bringing the $1,000 payment is a condition for Eleanor to hand over the car, keys, etc.
Both Brook and Eleanor must perform at the same time.
f. Condition precedent: A condition precedent is a condition that must take place first
before the duty to perform under the contract matures.
Example: Cynthia signs a contract to borrow $200,000 from the Bank of America at 8%
interest. B of A insists that Cynthia’s house, the collateral for the loan, be worth $250,000
before the loan is made. Cynthia’s home being appraised at $250,000 or more is a
condition precedent to the bank making the loan. g. Condition subsequent: A condition subsequent is a condition that attaches to a contract,
and which may invalidate the contract if the condition is violated.
Example: Bill buys a pair of shoes which is sold with a condition that if Bill is not happy
with the performance of the shoes at anytime during the next six months, he may return
them. Bill buys and pays for the shoes, but if the condition subsequent is violated (his not
being happy with the shoes), Bill may return the shoes and void the contract.
3. Discharge by performance: When both parties have completed their requirements under
the contract, the contract has been discharged.
4. Discharge by breach: A breach takes place when one party refuses to perform his or her part
of the agreement. When a breach takes places, the responsibilities of the other, non-
breaching, party will depend upon several factors.
a. Material breach: A material breach takes place when a party, due to the other party’s
refusal to perform the agreement, does not receive the substantial benefit of the contract.
Example: Grace agrees to pay $6,000 for her house to be painted. The painters paint 1/3
of the house and stop. A material breach has taken place. Grace is excused from
performing her part of the agreement (pay the $6,000).
1) Prevention of performance: When one party takes steps that make it impossible or
very difficult for the other party to perform, a material breach has taken place.
Example: Nolan hires Sam to prepare his daughter, Sherrie, for an important piano
recital. Payment is to be made when the recital is completed. Nolan is not happy with
Sam’s teaching methods and persuades Sherrie not to cooperate. Nolan has made it
difficult or impossible for the contract to be performed.
b. Substantial performance: If one party has breached the contract, but substantially
performed his or her part of the contract, the law will require the other party to perform.
Of course, the other party will be able to sue for damages that he or she suffered because
the first party did not completely perform.
Example: In the example where José contracted with Jack to install a new kitchen, if
Jack did everything in the contract except that the light switches were placed one inch
higher than Jose wanted, Jack has substantially performed. José must pay the contract
price. He can also sue Jack for damages for the improper placement of the switches.
c. Anticipatory repudiation: An anticipatory repudiation is an act by one party to a
contract that lets the other party know that he or she does not intend to carry out his or
her contractual agreement.
Example: Kay hires the firm of Party Guys to provide catering services for her husband’s
70th birthday for $5,000. A week before the party, Party Guys informs Kay that it will
not be able to provide the service. Party Guys has breached the agreement. Kay does not
have to perform her part of the agreement and can sue immediately.
d. Material alteration of a written contract: If one party, without authorization, makes a
material changes in the contract, the entire contract has been discharged. The change or
changes must be material and made fraudulently, and made by a party to the contract or
by someone who is acting for a party to the contract.
5. Discharge by agreement of the parties: The parties to a contract may always negotiate with
one another for the existing contract to be discharged. The discharges can take place in a
number of ways.
a. Mutual rescission: This is simply a contract (an agreement) to end an existing contract.
For it to be enforceable, it must be supported by consideration.
b. Substituted contracts: The parties to an existing contract may negotiate a second
contract to replace the existing one.
c. Accord and satisfaction: An accord and satisfaction is an agreement whereby one party
agrees to do something in order to discharge an existing debt.
d. Novation: A novation is a new contract that replaces the terms of the existing agreement.
In a novation, a new promisee or a new promisor will be appointed.
Example: Blake promised to pay Ed $500 for a painting that Ed completed. Subsequently
Ed and Blake make a new agreement in which Blake will make the payment to Sid.
Example: In the above example, Blake and Ed enter into a new agreement whereby
Blake’s friend Patricia will make the payment to Ed.
e. Discharge by operation of law: Under certain conditions, a party may be discharged
from performing his or her part of the agreement by law.
1) Impossibility: Because of the happening of an event, it may be impossible for anyone
to perform the terms of an agreement. Such objective impossibility would discharge
the contract.
Example: Carley signs an agreement with Chevron to buy 40,000 gallons of gasoline
each month for her service station. Ten days after the agreement is signed, the federal
government issues a moratorium on the sale of all gasoline products. The contract
between Carley and Chevron would be rescinded.
2) Subsequent illegality: When the subject of a contract becomes illegal after the
contract is signed but before it is to be performed, the parties to the contract are
excused from performance.
3) Frustration of purpose: After the contract is signed, the parties’ primary reason for
making the contract can no longer be carried out (or performed at great cost) due to
no fault of either party. In this case, the parties are discharged from the contract.
Example: Roy buys a ticket from Tickets.com to a Tony Bennett concert. Tony
breaks a leg on the morning of the concert and decides to cancel the performance. The
contract has been rescinded.
4) Commercial impracticability: The restatement and the UCC have relaxed the rule
regarding contractual impossibility by excusing performance if unforeseen hardships
would make it very difficult for one party to a contract to perform. Any unforeseen
hardship will not suffice. The hardship could not have been anticipated, was not the
fault of either party, neither party assumed the risk that the event would take place,
and the event would make performance impractical.
5) Discharge by bankruptcy: If a party to a sales contract files for bankruptcy, the
party’s obligation to pay under the contract will be discharged.
6) Statute of Limitations: All states have a time limit within which law suits for breach
of contracts must be made. If the time is allowed to lapse, action cannot be brought to
enforce the agreement.
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