CHAPTER 11 DISCHARGE AND BREACH

REVIEW QUESTIONS (ANSWERS)

1. If a contract is discharged, the parties no longer need to perform their primary

obligations. However, the contract may still be relevant insofar as it provides for the
enforcement of secondary rights, such as the right to damages. The contract may also
continue to be important, even after discharge, if it contains a limitation or exclusion
clause. Because discharge merely relieves the parties of the need to perform their
primary obligations in the future, it continues to exist. The exclusion or limitation clause
therefore also continues to have effect.

Discharging a contract is therefore different than rescinding or voiding a contract, as

those concepts were explained in Chapters 9 and 10. A contract that is rescinded or
voided is wiped out altogether – as if it never was. The contract therefore cannot
continue to affect the parties’ remedial rights and obligations.

2. The phrase “time is of the essence” means that the time or date of performance is of
fundamental importance to the contract. Failure to perform at the stipulated time will
entitle the innocent party to a remedy. Generally speaking, time is not of the essence
under most contracts, even if a contract states that performance must occur at a
particular time or by a particular date. Under those circumstances, the party who
performs late will merely be required to compensate the plaintiff for any losses it may
suffer. Under contracts where time is of the essence, late performance can be refused,
such that the contract will not be discharged by performance. Significantly, even if the
parties do not agree that performance must occur at a specific time or date, the courts
will find that the parties must perform within a reasonable time in light of all of the
circumstances, including the subject matter of the contract.

3. A contractual party will be relieved of the obligation to tender performance in the

following circumstances. First, the party owing the obligation need only attempt to
properly tender performance once. After the initial attempt, the obligation to seek
performance then falls on the other party. Second, performance need not be tendered if
it would obviously be rejected. The law does not require the performance of a useless
act. Third, in some situations, a party may be relieved of the need to tender full
performance, as long as it has tendered substantial performance. In that situation,
however, the other party is entitled to relief for the loss that it suffers as a result of the
incomplete tender.

4. Legal tender is payment that is offered in the form of bills and coins to a certain value.
Tender of payment is a method of discharging a contract by performance. Significantly,
a creditor can insist on receiving legal tender, as opposed to, say, a negotiable
instrument or payment by electronic means. In addition, the debtor is obliged to
provide exactly the correct amount of money, and if it fails to do so, the creditor is not

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 required to make change. Commonly, however, business people waive these strict
requirements and receive any acceptable form of payment. As a matter of risk
management, a business person who intends to tender payment by anything other that
the exact legal tender should provide for that possibility in the agreement.

5. Substantial performance refers to performance that generally conforms to the contract,

but that is defective or incomplete in some minor way. A contract may be discharged on
the basis of substantial performance. However, when that occurs, the recipient of the
deficient performance will be entitled to damages for any loss that arises as a result of
the shortfall or defect. To determine whether or not substantial performance has
occurred, a court will look at a number of factors, including the nature of the defect and
the difference between the contract price, and the cost of curing the defect.

6. A condition subsequent is a contractual term that states that the contract will be
terminated if a certain event occurs. A condition subsequent operates on its own and
does not have to be exercised by either party in order to be effective. Under a condition
subsequent, a contract may be automatically discharged as soon as the relevant event
occurs.

7. A condition precedent is a contractual term that states that a contract will come into
existence only if and when a certain event occurs. Like a condition subsequent, a
condition precedent operates on its own and does not have to be exercised by either
party to be effective.

8. The previous question dealt with “conditions precedent.” Confusingly, Canadian judges
use the phrase “true condition precedent” to refer to a much different situation. Under
a true condition precedent, a contract is formed immediately – its creation is not
postponed pending the satisfaction of a condition. However, unless and until the
operative condition is satisfied, neither party is required to perform the primary
obligations that arise under the agreement. For instance, a contract for the purchase
and sale of a house may be subject to a “true condition precedent” that the vendor
obtain planning approval or that the purchaser obtaining financing. A contract
immediately exists, but until the condition is met, the vendor need not transfer title and
the purchaser need not pay the price. However, in such circumstances, one or both
parties may be subject to a subsidiary obligation that does have to be immediately
performed (such a vendor’s duty to seek planning approval or a purchaser’s duty to seek
financing). And if that subsidiary obligation is not met, the party may be held liable for
breach.

9. Rescission occurs when parties agree to bring to an end a contract that is executory on
both sides (i.e. that contains outstanding primary obligations for both parties). In that
situation, there is no problem with consideration. The mutual agreement to terminate
the contract is enforceable because each party has given consideration insofar as each
party has agreed to release the other from the need to perform an outstanding

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 obligation. Release occurs when the parties agree under seal to terminate a contract.
Once again, there is no problem with consideration because, as discussed in Chapter 8, a
seal is a sufficient proxy for consideration. The agreement to terminate therefore is
enforceable. Finally, an accord and satisfaction occurs when party A gives up a right to
demand performance by party B. In that situation, A may have already fully executed its
obligations under the contract. Consequently, its promise to forgo its rights cannot be
supported by B’s promise to likewise forgo its rights under the contract. (B cannot forgo
rights that no longer exist. Performance of an obligation can only be demanded before
the obligation has been performed.) Consequently, B must provide some new form of
consideration in order to make enforceable A’s promise to forgo its rights. If so, there is
an accord and satisfaction. A’s promise to forgo its rights under the original agreement
is the “accord.” B’s new consideration is the “satisfaction.” In essence, the parties have
created a new contract to vary the old one.

10. Variation involves an agreement to vary the terms of an existing contract, whereas
novation is the process by which one contract is discharged and another is introduced in
its place. The issue of consideration causes problems under variation because variation
requires that both parties provide fresh consideration. That requirement is usually
satisfied because each party either abandons rights under the old contract or assumes
new obligations under the modified terms of the contract. The issue of consideration
does not cause similar problems under novation because the consideration that
supports the agreement to discharge the old contract is simply the parties’ willingness
to release their rights under that agreement.

11. Waiver occurs when a party abandons a right to insist on contractual performance.
Unlike other situations in which parties agree to discharge their obligations, waiver does
not require consideration or a seal. Significantly, however, since waiver allows a
contractual party to obtain a benefit without providing something in return, the courts
require clear evidence that the other party intended to waive its rights. It is also
important to note two other rules concerning waivers. First, waiver is effective only if
the party who received the waiver relied on it. And, second, a party can retract its
waiver if it gives reasonable notice and if the effect on the other party would not be
unfair. Waiver therefore is similar to (if not identical with) the concept of promissory
estoppel that was considered in Chapter 8.

12. Statutes of limitation require a party who has suffered a breach of contract to sue within
a certain period of time (usually six years). If that party fails to do so, it will lose its right
to sue. That right may be revived, however, even after the lapse of the limitation period,
if the party that broke the contract in the first place acknowledges the fact that it is still
liable. That may occur, for example, if a debtor pays part of an outstanding debt.

13. In many situations there is no sure way of distinguishing between conditions,

warranties, and intermediate terms. Provided that the parties have not stipulated
whether the breach of a certain term will or will not support a right of discharge, and

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 provided that a governing statute has not classified a particular term, the courts use an
objective test to distinguish between conditions, warranties, and intermediate terms.
The test asks whether the parties, as reasonable people, would have intended that the
breach that occurred should allow the innocent party to bring the contract to an end.
The judge will be influenced by all of the circumstances of the case, including: (i) the
portion of the total performance that is defective, (ii) the likelihood that the breach will
be repeated in the future, and (iii) the seriousness of the breach to the innocent party.

14. A term is a condition if the innocent party would be substantially deprived of the
expected benefit of the contract in the event of breach. Because it would be unfair to
require a party to carry on with the performance of an agreement if it has already been
substantially deprived of the expected benefit, the innocent party generally has an
option. It can either choose to carry on with the performance of the agreement or it can
choose to discharge the agreement. That option is lost, however: (i) once the innocent
party has made its choice, or (ii) if the innocent party received a benefit from the party
in breach that cannot be returned. In any event, the innocent party can claim damages
for the losses that it suffers as a result of the breach.

15. A term is a warranty if the innocent party would not be substantially deprived of the
expected benefit of the contract in the event of breach. Given the relatively insignificant
nature of that type of breach, it is fair to require the innocent party to carry on with the
contract. The innocent party can, however, claim damages for any losses that it suffered
as a result of the breach.

16. Sometimes it is not possible to determine, at the time a contract is formed, whether a
particular term is a condition or a warranty. To avoid the difficulties that arise in that
sort of situation, the courts have recognized a third type of term called an intermediate
term. The breach of an intermediate term will support the option of discharge if, on the
facts, the innocent party is deprived of the essence of what it expected to receive under
the agreement. In that case, the innocent party can choose to either discharge the
contract and claim damages or carry on with the contract and claim damages. In
contrast, if the breach, on the facts, did not substantially deprive the innocent party of
the expected benefit of the contract, it does not have the option of discharge. It must be
content with a claim for damages.

17. Anticipatory breach occurs when a party indicates in advance, by words or conduct, that
it does not intend to fulfill an obligation when it falls due under a contract. An
anticipatory breach therefore differs from a regular breach because the wrongdoer has
not yet rendered defective or late performance; it has merely indicated that it will do so
in the future. In other respects, however, an anticipatory breach is similar to a regular
breach. For instance, depending upon the nature of the term and the nature of the
breach, it may or may not support the right of discharge, along with the right to
damages.

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18. A breach will arise from self-induced impossibility if a party, through its own fault,
makes the contract impossible to perform. The difference between that situation and
one involving frustration is that a contract is discharged for frustration if, through no
fault of either party, it becomes impossible to perform.

19. Unlike the situation that occurs when a contract is rescinded or voided, a contract
continues to exist for some purposes if a contract is discharged for breach of a
condition. The parties are merely relieved of the need to perform their primary
obligations in the future. The agreement does, however, continue to exist for the
purposes of contractual liability. It may, for instance, provide for liquidated damages or
it may limit or eliminate damages through a limitation or exclusion clause.

20. The right to discharge may be lost even if there has been a breach of condition: (i) if the
innocent party chooses to continue on with the agreement, or (ii) if the party in breach
provided a benefit that the innocent party cannot return. Under the latter situation, the
innocent party must perform its own obligations and claim damages for its losses as a
result of the breach.