Contracts can be discharged in various ways, from performance to agreement to operation of law. Understanding these methods is crucial for grasping how contractual obligations end. This knowledge helps navigate complex situations where parties seek to terminate or modify their agreements.

Full performance, substantial performance, and accord and satisfaction are key concepts in contract discharge. These ideas show how parties can fulfill their duties or reach new agreements to resolve disputes. Impossibility, impracticability, and frustration of purpose illustrate how unforeseen events can impact contracts.

Discharge of Contractual Obligations

Methods of contractual discharge

• Performance
  • Full performance occurs when all contractual obligations are completed exactly as specified in the contract, leaving the non-performing party with no further duties or liabilities
  • Substantial performance happens when most of the contractual obligations are fulfilled, with only minor deviations, entitling the performing party to payment, subject to a reduction for any damages caused by the minor deviations, while the non-performing party may still have some remaining duties or liabilities
• Agreement
  • Mutual rescission takes place when both parties agree to terminate the contract and release each other from their obligations
  • Novation substitutes a new contract for an existing one, with the consent of all parties involved (original parties and new party)
  • Accord and satisfaction reaches a new agreement to settle a disputed claim, discharging the original contract, with the "accord" being the new agreement and the "satisfaction" being the performance of the new agreement
• Operation of law
  • Impossibility occurs when performance becomes impossible due to unforeseen circumstances beyond the parties' control, such as destruction of the subject matter (building collapse), death of a necessary party (personal services contract), or change in law (prohibition of the contracted activity)
  • Impracticability arises when performance becomes excessively burdensome or costly due to unforeseen events, which the parties assumed would not occur when entering the contract, and the burden of performance is so severe that it would be unreasonable to require it (sudden price increase of raw materials)
  • Frustration of purpose happens when the main purpose of the contract is destroyed by an unforeseen event, which the parties assumed would not occur when entering the contract, and the purpose is so central to the contract that without it, the transaction would make little sense (renting a room to view a coronation that gets canceled)

Full vs substantial performance

• Full performance
  • All contractual obligations are completed exactly as specified in the contract, with no deviations
  • The non-performing party has no further duties or liabilities under the contract once full performance is achieved
  • Example: A contractor builds a house exactly according to the agreed-upon specifications and timeline
• Substantial performance
  • Most of the contractual obligations are fulfilled, with only minor deviations that do not significantly impact the overall value or purpose of the contract
  • The performing party is entitled to payment, subject to a reduction for any damages caused by the minor deviations
  • The non-performing party may still have some remaining duties or liabilities under the contract, such as making the final payment or addressing any defects
  • Example: A contractor builds a house with minor deviations (slightly different paint color) that do not affect the functionality or overall value of the house

Accord and satisfaction concept

• Accord and satisfaction is a method of discharging a contract by agreement when there is a dispute between the parties
• The "accord" is the new agreement reached between the parties to settle the disputed claim
• The "satisfaction" is the performance of the new agreement, which discharges the original contractual obligations
• The new agreement must be supported by consideration to be valid, meaning both parties must give up something of value or take on a new obligation
• Example: A contractor and a homeowner have a dispute over the final payment for a renovation project. They reach a new agreement (accord) where the contractor accepts a reduced payment in exchange for the homeowner waiving any claims for defects. Once the reduced payment is made (satisfaction), the original contract is discharged.

Discharge through impossibility or frustration

• Impossibility
  1. Performance becomes literally impossible due to unforeseen circumstances beyond the parties' control
  2. The impossibility must be objective and not just a subjective inability of one party to perform
  3. Examples: destruction of the subject matter (unique artwork), death of a necessary party (personal services contract), or change in law (prohibition of the contracted activity)
• Impracticability
  1. Performance becomes excessively burdensome or costly due to unforeseen events
  2. The event must be one that the parties assumed would not occur when entering the contract
  3. The burden of performance must be so severe that it would be unreasonable to require it
  4. Example: A sudden and drastic increase in the price of raw materials makes the production of goods commercially impracticable
• Frustration of purpose
  1. The main purpose of the contract is destroyed by an unforeseen event
  2. The event must be one that the parties assumed would not occur when entering the contract
  3. The purpose must be so central to the contract that without it, the transaction would make little sense
  4. Example: A person rents a room to view a royal wedding procession, but the wedding is canceled due to the death of the monarch, frustrating the purpose of the rental agreement