Contract Discharge and Damages

A person is liable to perform the duties of the contract until or unless he or she is discharged. Discharge can occur through the following: 

Discharge by Full Performance

This probably goes without saying, but the most obvious way to end your obligations under a contract is to perform your obligations. There, that was easy.

Substantial Performance

While we may demand perfection, we usually don't get it. If you hire someone to remodel a kitchen, there are bound to be small deviations from the kitchen of your dreams - a tile that is chipped, an outlet cover that is slightly askew, etc. It would seem absurd to hold the builder in breach for these minor mistakes. Therefore, so long as the party performs in good faith (honestly and sincerely), the variance is small (using a reasonableness standard again), and the benefits conferred are essentially the same as full performance would have been, courts will not consider the variance to be a breach.

Discharge by Breach or Nonperformance

Breach of contract involves one party failing to fulfill the responsibilities under the agreement. Nonperformance would be considered a breach, as would failing to substantially perform under the contract. Once one party breaches, the contract is canceled and the non-breaching party has the right to seek remedies for breach of the entire contract or any unperformed obligation.

Anticipatory Breach

Let's suppose again that you've hired someone to remodel your kitchen. The agreement indicates that it will be completed on June 1. Suppose the contractor comes to you on May 1 and says, "I really don't think I'll have this completed by June 1." What do you make of this statement? You may be tempted to say that the contractor breached, but she hasn't breached just yet; the deadline is still a month away. But it also does not seem fair to have to wait another month to find the contractor in breach, especially where a deadline is involved. If there is no breach, then you are not at liberty to seek another contractor to finish the job you need done by June 1 - doing so would mean that you are in breach. You now see the dilemma. 

Fortunately, the law has carved out a legal theory that provides some clarity in such situations. Anticipatory breach occurs when one party, through words or actions, indicates that it will not perform its obligations under the contract. In such situations, the other party can immediately claim breach of contract and seek remedies such as payment. But note that the other party must be explicit in the repudiation of its obligations. Saying, "I will not be able to finish on time" would be adequate, but indicating that it's going to be difficult may not be sufficient to find an anticipatory breach.

Discharge by Conditions

Contracts can be straight forward - you do this and I'll do that. But sometimes contracts may come with a special kind of stipulation known as a condition. A condition is an event, the happening or nonhappening of which gives rise to a duty to perform or not perform. They can be express or implied, precedent or subsequent.

A common example involves the purchase of a home. Should I place my home on the market for sale, a potential purchaser may make an offer, but make the offer condition on the purchasers' ability to sell their existing home. Purchasers do this because they don't wish, or can't afford, to own two mortgages at once.

Express conditions are simple to spot. They are stated in the contract, oral or written. I might agree to mow a neighbor's lawn, but only if it does not rain on Saturday. Conditions are introduced through words such as "if," "when," "provided that," and other similar phrases. Implied conditions may not use these words, but are understood. If I agree to mow a neighbor's yard for $20, it's implied that my neighbor does not have to pay me until I have completed the job.

A condition precedent means that one party does not owe performance until something else happens first. If I agree to purchase your car only if I get financing, receiving the loan is the condition precedent. A condition subsequent, on the other hand, involves a condition that terminates an already existing duty of performance. You may agree to nanny the children of a neighbor until their mother returns home from her deployment. When the mother returns, the obligation ends.

Discharge by Agreement

Parties are free to end an agreement, and their mutual duties to perform, any time they wish. If both parties are in agreement, this is known as a mutual rescission. The parties may have a written document, known as a release, signed that formalizes their agreement to mutually discharge their obligations (and promise not to sue each other).

The parties may also enter into a waiver of rights. In this scenario, a party may voluntarily give up a right he or she has under the contract, but not release the other party from the obligations. For example, we have an agreement that you will turn in your paper on Friday by 5 pm. However, something comes up and you can't submit it by the deadline. If you write to me and explain the situation, I may agree to accept your assignment, in which case I may waive my right to fail you and accept your late assignment. You don't get out of your obligations completely. A waiver is a permission to deviate from the agreement; a release means that the parties let the whole thing go altogether.

Novation is another option. A novation occurs when a new person is substituted for the original obligor. Havey Specter was hired to represent Ava Hessington in a major merger deal. However, something comes up and he wishes to pass the job to Mike Ross. If Mike Ross and Ava Hessington agree, we have a novation and Harvey is not in breach when he steps away from the original agreement.

Discharge by Operation of Law

If performance becomes impossible, the duty is discharged. The underlying reasons for impossibility include the death or incapacity of a personal services contractor, destruction of a thing necessary for performance, and performance that is prohibited by law.

Impracticability may also give rise to discharge. Impracticability exists when there is a radical departure from the circumstances that the parties anticipated when they entered the contract. This is an equitable theory that holds that such a radical departure (often called "acts of God") from the circumstances that it would be unjust to hold the parties to their original obligations.

BYU-Idaho experienced such a scenario some years ago while building the I-Center. It took bids from numerous contractors that desired to build the I-Center. The winner placed a bid with the assumption that digging the foundation would not require the blasting of lava rock. This was a reasonable assumption because it even drilled several holes into the ground where the I-Center stands today and never encountered lava rock. Unfortunately, when it began excavating the land, it found a great deal of lava rock in areas where it did not drill. As such, it became impractical to fulfill its obligations under the contract. It was not impossible, but performing would likely cause bankruptcy. As a result, it was found to be impractical and the parties renegotiated a new deal to everyone's agreement.


Assuming breach has occurred and there is no excuse or discharge, the breaching party will have to pay damages. Damages are a legal remedy and involve one party paying money to the other party. Damages can be classified into the following types.

Compensatory Damages

Damages paid to make the non-breaching party whole are known as compensatory damages. If you agree to repair my car for $100 and then fail to uphold your obligations under the contract, compensatory damages would be assessed by calculating how much it would cost me to have another person fix my car. If XYZ Repair agrees to fix my car for $200, compensatory damages would be assessed at $100 (the difference between what I expected to pay and what I had to pay). Of course, if I find someone that would fix it for $50, there are no damages for the breach.

Consequential Damages

If the breach causes additional damages, this loss can be remedied using consequential damages. If you hire an accountant to assist with your books, suppose that the accountant did an exceedingly poor job, causing additional government fines, lost productivity, and extra expenses to bring in additional accountants. In your lawsuit against the original accountant for malpractice, you would be able to add all these additional expenses as damages because they were a consequence of the breach.

Liquidated Damages

Some damages are difficult to assess. In such circumstances, the parties may agree to how much should be paid in the event of a breach. These damages are known as liquidated damages and are enforced by courts so long as they are reasonable and that actual damages are, in fact, difficult to ascertain.

Punitive Damages

Punitive damages are awarded to punish the defendant in a civil case. They are proper in cases where the defendant has acted particularly badly and are thought to deter others from acting similarly. The recent Roundup case is one such example, where both parties were awarded 1 billion dollars in punitive damages (as well as 55 million in compensatory damages), by a California jury.

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