Key Takeaways

  • Contracts may be discharged by performance, mutual agreement, breach, frustration, or operation of law, but performance is the most natural and common method.
  • A contract is discharged by performance when both parties fulfill their obligations precisely or when tender of performance is validly made and refused.
  • Standards of performance may involve actual performance, substantial performance, or tender of performance, with legal consequences if obligations are only partially met.
  • Mutual agreement allows discharge through novation, alteration, remission, rescission, waiver, or merger.
  • Exceptions exist where full performance is excused, such as divisible contracts, substantial performance, or prevention by the promisee.
  • Understanding how can contracts be discharged by performance? helps parties avoid disputes and enforce their rights if obligations are not properly carried out.

Discharge by performance occurs when one or both parties agreeing to a contract fail to perform their obligations. This is one of the more natural modes for discharging a contract. If both parties have properly completed their obligations that were set forth by the contract, they are then free from any further liability. If one party fails to perform their obligations, then the other party has the right to take action against the party that did not perform. There are three primary things to consider when determining if performance has been met.

  • Actual performance: A contract is considered to have been performed if both parties involved in the contract have made good on their promises.
  • Offer to tender or perform: Tender is a term used to refer to an offer of performance under a contract. If one of the parties to a contract offers to perform and the receiving party refuses to accept their performance, the first party is then discharged from the requirement to complete their obligations.
  • Standard of performance: The performance obligation of a contract is strict and is required to be performed precisely and completely.

Discharging a Contract by Mutual Agreement

When both parties agree to end a contract, the contract is said to have been terminated under mutual consent. An example would be when a consumer purchases an item and they find it unsatisfactory, they return it within the agreed upon return period. This would mean that the contract has been discharged by a mutual agreement.

Other Modes of Discharge Beyond Agreement

While mutual agreement is a recognized way of ending contracts, it is not the only method. In addition to agreement and performance, contracts may be discharged through:

  • Breach of Contract: When one party fails to honor their obligations, the other party may treat the contract as terminated and seek remedies.
  • Frustration or Impossibility: If unforeseen circumstances make performance legally or physically impossible (such as destruction of the subject matter or change in law), the contract may be discharged without fault by either party.
  • Operation of Law: Certain legal events, such as bankruptcy, merger of rights, or death of a party in personal service contracts, can automatically terminate contractual obligations.

These alternative forms of discharge highlight that contract law recognizes both voluntary and involuntary ways an agreement may come to an end.

Ways a Mutual Discharge of Contract Can Occur

There are multiple ways in which two parties can come to a mutual discharge of a contract. Some of the ways in which this can occur include:

  • Novation: This refers to the substitution of a newer contract in lieu of the previous one. When the new contract is created, the old one is discharged by mutual consent.
  • Alteration of contract: This means that the parties to a contract have agreed to change one or more of the terms in the original contract. For an alteration to be valid, both parties must consent to it.
  • Remission: This means one of the parties has accepted less than was originally contracted for.
  • Rescission: This term means that some or all of the terms of the contract have been canceled. This can occur under a variety of circumstances such as mutual consent, failure to perform obligations, or a contract that is voidable.
  • Waiver: When a waiver occurs, one of the parties has abandoned their rights to the contract. The contract is discharged, and the parties are no longer bound by the terms.
  • Merger: A merger occurs when there is a meeting of an inferior and superior right in the same person. In this event, the inferior right vanishes.

Practical Examples of Mutual Discharge

To better understand mutual discharge, consider these common scenarios:

  • Novation Example: A tenant under a lease agreement transfers obligations to a new tenant with the landlord’s consent. The original tenant is released.
  • Rescission Example: Two businesses agree to cancel a supply contract due to changing market conditions, freeing both parties from further obligations.
  • Waiver Example: A service provider waives their right to collect late fees, effectively discharging that term of the contract.

These examples show how mutual discharge operates in real-world commercial and consumer contexts.

Discharge by Performance

A contract can be discharged by performance, thus ending the agreement. When a party offers to perform, this offer is referred to as a tender. If one party meets the terms and obligations of the contract and the other party fails to do so, or if one party fails to accept, then the contract can be discharged by performance. When the offer is a tender of payment for a contract, the tender must be considered legal tender such as cash, check, or wire transfer.

Complete vs. Substantial Performance

When exploring how can contracts be discharged by performance?, it’s important to distinguish between complete and substantial performance:

  • Complete Performance: All contractual obligations are carried out exactly as specified. This fully discharges the contract.
  • Substantial Performance: A party fulfills the contract in all essential respects, but with minor deviations or defects. In such cases, the performing party may still recover payment, minus any deduction for defects.

For example, if a contractor builds a house according to contract specifications but uses slightly different materials for non-essential fittings, this may be deemed substantial performance.

Courts generally assess whether the deviations go to the root of the contract or are relatively minor.

Lecture Notes on Discharge of a Contract

A party has the right to discharge a contract based on:

  • Performance
  • Breach
  • Frustration

An exception to the general rule is that performance can be mitigated in certain instances. These instances include:

  • Divisible contracts: In a divisible contract, one part of the party's performance is set off against a part of the performance by the other party.
  • Acceptance of partial performance: If one of the parties receives benefits from the partial performance of a contract, the other party is able to either accept or reject the work and promise to pay a set price for the benefit of the portion received.
  • Completion of performance prevented by the promisee: In this event, one of the parties to a contract is prevented in some way from performing their obligations so that they can receive payment.
  • Substantial performance: If a party fully performs their contract but there are some defects in the performance, they are still considered to have substantially fulfilled their obligations. This can allow them to receive at least a reduced price depending on the extent to which the contract was breached.

Tender of Performance and Its Legal Effect

Tender of performance plays a critical role in discharging obligations:

  • Valid Tender: If one party offers to perform their contractual duty in full and the other party refuses, the offering party is discharged and not liable for breach.
  • Tender of Payment: Must be in lawful money or acceptable form. Once refused, the debtor is freed from further liability for non-payment.
  • Partial Tender: Usually insufficient to discharge the contract unless expressly accepted by the other party.

This principle protects parties who act in good faith and prevents an unreasonable refusal from leaving one side perpetually bound.

Frequently Asked Questions

1. How can contracts be discharged by performance?

Contracts are discharged by performance when both parties fulfill their obligations exactly, or when one offers valid tender of performance that is refused.

2. What is the difference between complete and substantial performance?

Complete performance means every term is met precisely. Substantial performance allows minor deviations, but the main purpose of the contract must be fulfilled.

3. Can a contract be discharged if one party prevents performance?

Yes. If one party actively prevents the other from performing, the non-breaching party may treat the contract as discharged and seek remedies.

4. Is tender of performance the same as actual performance?

Not exactly. Tender is the offer to perform. If validly made and refused, it discharges the offering party even if actual performance doesn’t occur.

5. What happens if performance becomes impossible?

If unforeseen circumstances make performance impossible, the contract may be discharged under the doctrine of frustration or impossibility, without fault of either party.

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