Welcome to the final installment of chapter 3! In today’s lesson I will explain everything you need to know about Discharge, Breach, and Remedies as it relates to contracts. Here are today’s learning outcomes.
- Explain the different ways in which a contract can be discharged (e.g. performance, agreement, operation of the law, etc.).
- Summarize the different remedies available to a party for breach of contract.
- Identify situations involving breach of contract.
- Identify whether a contract has been discharged given a specific scenario.
- Identify the remedy available to a party for breach of contract given a specific scenario.
Types of Discharge
Discharge of duty – (that just doesn’t sound right) when one party in a contract is relived of its performance obligation this is called discharge of duty. There are different ways duty can be discharged and I’ll discuss them below:
- Performance – the easiest way to discharge duty is by actual performance. If I hold up my end of the contract then my duty is discharged.
- Substantial Performance – I might not have completed my entire side of the deal but I did a substantial portion.
- I built your house to specifications but I forgot to put gutters on the garage. I will have to reduce the price by the cost of installing the gutters but you need to hold up your end of the deal and buy this house.
- Precedent does not occur – remember in the last chapter that a precedent is something that has to happen first before performance can be made? Well what if the precedent never happens?
- Example: A tax accountant agrees to do the current year tax return for a set fee. The client never sends their tax data to the accountant so the tax accountant loses his sh*t (talk about discharged his duty). In other words, he doesn’t have to file the tax return if he never got the tax data.
- Mutual Breakup – what if both parties want to end the contract? Well there are several options.
- Mutual Rescission – Both sides agree to end the contract before any party performs.
- Release – One party releases the other party from their obligation to perform. This usually occurs when someone wants to buy out of a contract (think sports teams).
- Waiver – One party waives all their rights for the other party to perform. This is when one party rips up the contract and agrees to release the other party.
- Replacement (Novation) – this is when one party wants out of the deal but agrees to put in a replacement.
- Bob promises to buy Jake’s cool shoes. After some thinking, Bob realizes the shoes are not cool at all. To get out of the deal Bob convinces Jim to buy the shoes and Jake says it’s ok. Bob is discharged from the duty of buying those uncool shoes.
- You come to an agreement – let’s say you have $10,000 worth of credit card debt but can’t pay it off. You might come to an agreement to pay $5,000 to settle the remaining balance and you’ll be discharged of your duty.
- Discharge By Operations of Law – there are several instances where a party will discharge duty based on operations of law rather than actual performance.
- The contract was illegal
- One party died
- One party became insane
- One party files for bankruptcy
- Statutes of limitation expires
- Performance is impractical
- The property you want to buy is hit by an asteroid (“destruction of subject matter”)
Remedies For Breach
So what if performance does not occur? If performance does not occur then there is a breach of contract. For example, if you signed a contract to have someone mow your lawn but they never mow your lawn then there is a breach of contract. If breach of contract occurs then there are five basic remedies for the injured party: monetary damages, restitution, rescission, reformation, and specific performance.
- Monetary Damages – if you lost money from the contract then you can sue to be made whole. However, you get monetary damages for the amount that you lost not the entire portion of the contract.
- Example 1: Bob pays Bill $100 to cut down a tree. Bill never cuts down the tree. Bob can sue for $100 worth of monetary damages.
- Example 2: Bill promises to cut down Bob’s tree for $100. No money is transferred until the tree is cut down. Bill never cuts down the tree so Bob hires Jim to cut down the tree for $110. Bob would sue Bill for the additional $10 in cost (not the entire $100)
- Example 3: Bob pays Bill $100 to cut down a tree and clean up the property afterwards. Bill cuts down the tree but doesn’t clean up the property. Bob hires Jim to clean up the property for $20. Bob can sue Bill for $20.
- Restitution – parties are brought back in time as if the contract never happened. This usually happens when a contract is considered void by a court of law.
- Example: Bill buys a vintage car from Bob for $10,000. Bob has dementia and has a court ordered power of attorney. The car is actually worth $100,000 but Bill took advantage of Bob’s incapacitated state. A court voided the contract and Bob gets his car back and Bill gets his $10,000 back (as if the deal never happened).
- Rescission – terminates performance of both parties.
- Reformation – court rewrites the contract to correct inequities that were suffered. Courts stray away from doing this because either side of a contract has a due diligence to review the contract for errors.
- Example: Bob signs a contract to sell 100 bags of Doritos to Paul for $100.00. A typo in the contract had $100.00 written as $10,000. The court would hold that Paul doesn’t have to pay $10,000 for 100 bags of Doritos.
- Specific Performance – This is when monetary damages would not be sufficient and one party is forced into performance of the contract. This can never be the case for services providers and will typically be for buying/selling antiques or collectibles.
- Example 1: Jim signs a contract with Rob to buy a rare limited edition coin that is valued at $10,000. Rob decides he doesn’t want to sell the coin anymore so Jim sues for specific performance. If it is a rare collectible and can’t be easily obtained than Rob has to give Jim the coin for $10,000.
- Example 2: Jim signs a contract with Rob to buy a $4,000 Honda Civic. Rob realizes he can’t give up his Honda because the car has a lot of sentimental value. Since finding a $4,000 Honda Civic is relatively easy, Jim would have to buy a similar car and sue Rob for the difference in price.
- Example 3: Jill wants to have her house painted by Susan. Susan and Jill get into a fight because Jill wants to paint her house pink. Susan thinks pink is a terrible color and it will ruin her reputation as a house painter. Jill can’t sue Susan and force her to paint the house Pink. However, Jill can hire another painter and sue Susan for the difference in price.
- Know the different ways duty can be discharged.
- Know the 5 remedies for breach of contract.
- You can’t force someone to perform a service but you can force them to sell a rare item if it was stipulated in the contract.
- If you sue someone for non-performance you can recoup monetary damages for hiring another person. However, these costs need to be reasonable (you can’t sue someone for not installing an above ground pool for the price of installing an olympic sized swimming pool in your back yard). Compare apples to apples.
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