The Discharge Of Contracts

When a contract is discharged, all obligations under it are brought to an end. Figure 3-24 illustrates the various ways a contract may be discharged.

Discharge by Performance

Discharge results when adequate performance in accordance with the contract has been completed by both sides. Of course, when the contracting parties enter into an agreement, this is the anticipated outcome. In some contracts, time is not of the essence and late performance will be allowed, although the party who performs late will be liable for any losses the other party suffers as a result. In other instances, time is of the essence and late performance can be refused.

Tender of Payment

Most contracts require payment of money by at least one of the parties. Unless a contract states otherwise, a creditor can insist on receiving legal tender, payments of notes and coins to a certain value (e.g., up to $25 in one-dollar coins). As well, the debtor has the primary obligation of locating the creditor and tendering payment, but he is not required to actually tender payment if the creditor has indicated beforehand that it would be refused. There are also specific rules governing payment by debit card, credit card, and cheque. For debit and credit cards, the most common issue is unauthorized use. In the case of cheques, the discharge is conditional until the cheque has cleared the bank.

Figure: Ways a Contract May Be Discharged

Tender of Performance

Performance may also take the form of tendering performance. A party is discharged of its duty to perform if the other party renders performance impossible. It becomes necessary for one party to demonstrate that it was willing and able to perform a contract in order to show that the other party was in breach. For example, one party may have a contract to make repairs to a house, but the other party denies access to the premises when the person arrives to do the work. In this case, the repairer has tendered performance, which may be used as evidence when he sues the defaulting party.

When a person tenders performance, she should have the tender acknowledged or least witnessed by a third party who can testify to the person's willingness to complete her contractual obligations. Tendering performance can be of vital importance in contracts concerning land if a party seeks the equitable remedy of specific performance.

Discharge by Agreement

A contract can also be discharged when the parties agree not to perform the contract, as illustrated in Figure.

Figure: Discharge of a Contract by Agreement

Discharge by Frustration

Discharge by frustration results when performance of the contract becomes impossible or purposeless. Frustration is similar to mistaken assumptions, but it relates to future events rather than events that existed at the time the contract was made. Figure 3-26 compares the two basic types of frustration: impossibility and undermining of purpose. The doctrine of frustration excuses a party from performance when external circumstances make performance impossible or have changed so much that performance would mean something much different than originally intended by the parties.

Figure: Discharge by Frustration

There are several key elements to frustration:

1. The frustrating event occurred after the making of the contract.

2. The frustrating event makes performance impossible or undermines the purpose of the contract—it does not just create an unforeseen hardship, such as making something more expensive to do.

3. The frustration must not be self-induced

If the contract is for sale of goods, the Sale of Goods Act112 will apply if 1) the goods are specific, 2) the risk or responsibility for their safety still lies with the seller, and 3) the frustration is caused by the goods perishing. Both parties are immediately discharged from liability under the contract.

Otherwise, the Frustrated Contracts Act applies in provinces like Ontario that have enacted such a statute to apportion the loss when a payment has been made or remains owing by one party. The performing party who has incurred expenses can retain or recover an amount not exceeding the payment made or due. The performing party can recover a just proportion of any valuable benefit already received by the other party regardless of whether a deposit has been paid.

In provinces without a Frustrated Contracts Act, the common law position is that:

·         The contract is discharged, and both parties are freed from further performance under its terms; any performance already due under the contract is still enforceable.

·         If the buyer has paid a deposit for goods/services, he can recover the deposit as long as he has received no benefits from the other party when the frustrating event occurs. If he has received even the slightest benefit, the deposit is forfeited.

Discharge by Operation of Law

Discharge also results in certain circumstances described by statute, such as when the statute of limitations has passed (for example, in Ontario, a party who has suffered a breach of contract must typically sue within two years) or when a bankrupt debtor receives a certificate of discharge because his or her discharge was caused by misfortune instead of misconduct.

Breach of Contract

A breach of contract occurs when one or other of the parties fails to live up to its obligations under the contract. Although breach of contract is another way to discharge a contract, not all breaches are serious enough to warrant termination, and even those breaches that are sufficiently serious do not lead to automatic termination but instead give the injured party the right to elect to end the contract. Therefore, breach of contract will be dealt with in a separate section below.