CHAPTER 6

Discharge of Contracts

The discharge or termination of a contract refers to the ending of the contract. At this point the parties to the contract are no longer constrained by their obligations and are freed from further duties and obligations. There are a number of ways in which a contract may come to an end. First, the parties may simply agree that they no longer wish to be bound by this agreement. As a contract is the freely assumed obligations by two or more parties, there is nothing controversial in the fact that they can equally agree to end their obligations under the contract. Unlike the formation of the contract, there are no specific required formalities that the parties must adhere to when agreeing to end the contract. The three other main ways in which a contract can be discharged are through performance, breach of contract and the doctrine of frustration in English law, or through similar concepts in the American and civilian systems; these are considered below as well. In addition, there are certain circumstances where the contract may be discharged by operation of law such as in mergers of securities or by a judgment of the court.1

Discharge of Contracts in English Law

Discharge by Performance

The general rule is that for a contract to be discharged by performance, the duties contained in the contract must be performed fully and exactly. Should there be any discrepancy in the obligations as set out and their performance, the other party will be entitled to assert that the contract has not been performed. In this scenario that party will be able to sue for damages for breach of contract (for failing to perform contractual duties) and in certain cases have the contract discharged. In Re Moore & Co and Landauer & Co the agreement was to purchase 3000 tins of fruit to be packed in cases of 30 tins. The consignment arrived containing cases packed with 24 tins.2 The court found that the entire consignment could be rejected as although the performance was no less commercially attractive it was a deviation from the agreed performance and therefore a breach of contract. Only where the deviation is “microscopic” will the contract be found to be correctly performed.3

Where one party’s obligation is contingent upon the other party’s performance, the general rule under common law is that the party cannot recover anything for incomplete performance, which can result in some harsh realities. For example, in Cutter v. Powell a seaman was contracted to work on a ship from Jamaica to Liverpool and to be paid 30 Guineas on completion of the journey.4 When the voyage was almost complete he died and his widow sought to recover payment for the portion of the journey before his death. Her claim was unsuccessful as the contract was seen as an entire obligation; only when the journey was completed would he receive any payment.

The effect of this rule is often unfair though justified on the basis that it holds people to their contracts and gives them a strong incentive to complete.5 The effects of cases such as this have been ameliorated by legislation such as the Law Reform (Frustrated Contracts) Act 1943 in the UK but prior to legislation being enacted the doctrine of substantial performance was created. This doctrine states that where the contract is substantially performed the injured party is not discharged from the obligation to pay, but rather can counterclaim in relation to any incomplete or defective performance. In order for this doctrine to apply the obligations must have been “substantially” performed. The performance must not fall too far short of what is required and the cost of remedying any defect or incomplete work must not be too great when compared to the overall contract price.6

An exception to these rules is where the innocent party accepts partial performance and waives the need for complete performance. Here, the party not in default must have the option of whether or not to accept. In Sumpter v. Hedges, Sumpter agreed to build two houses on Hedges’ land but failed to complete the contract.7 Hedges then completed the work himself using materials left by Sumpter, who then claimed for the value of the work done plus the building materials. The court found that he was entitled to recover the value of the building materials but not for the work done as Hedges had no option but to accept the partially erected buildings on his land. This has now been codified into legislation in the UK in respect of the purchase of goods under the Consumer Rights Act 2015 (formerly the Sale of Goods Act 1979).

Therefore, in order to bring a contract to a satisfactory end through performance (where the contract can be discharged in this manner) it is the generally accepted position that the contract must be wholly or substantially performed otherwise that party may find themselves in breach of contract and recover nothing from the other side.

Discharge by Breach

If one of the parties to a contract breaches a term contained therein they are in breach of contract. This term may relate to performance (considered above) or the timing or a variation of the term. Where this occurs, it brings with it a new obligation—the requirement to pay damages to the innocent party in respect of any loss or damage suffered as a result of the breach of contract. In certain circumstances, the innocent party may also be entitled to have the contract discharged in addition to seeking damages for breach. We consider the issue of damages in Chapter 7 and here we are only concerned about the circumstances in which a breach of contract will allow the innocent party to end the contract.

The innocent party must decide whether to accept the breach or continue with the contract. Where the decision to continue is made it is irrevocable. Where the breach relates to the performance of the contract it is open to the innocent party to either treat the contract as ongoing or to accept the substandard performance. In such cases it is often said that the innocent party has affirmed the contract and waived their right to discharge the contract (although they still retain their right to damages). This affirmation may be express or implied (where the innocent party performs an act which shows their intention to carry on with the contract regardless of the breach of which they have knowledge).8 If the party decides to accept the breach it discharges all future contractual obligations of both parties. This is supplanted by the obligation to pay damages imposed on the party in default. In Moschi v. Lep Air Services Ltd the court found that while upon acceptance of the breach the obligation to pay future instalments was discharged, this was replaced with the obligation to pay damages for the loss suffered by the innocent party as a result of the breach.9

Forms of Breach that Justify Discharge

1. Renunciation
   Renunciation (or repudiation) occurs where one party makes their intention not to carry on with the contract known. This can occur either expressly or through the conduct of the party. In order for renunciation by conduct to occur the test is “whether the party renunciating has acted in such a way as to lead a reasonable person to the conclusion that he does not intend to fulfil his part in the contract.”10 The key element here is the intention, it must be clear that the other party no longer intends to fulfill their obligations. The importance of this element was discussed in Freeth v. Burr as
   
         It is not a mere refusal or omission of one of the contracting parties to do something which he ought to do that will justify the other in repudiating the contract; but there must be an absolute refusal to perform his part of the contract.11
   
   Parties to a contract which is wholly executory (not yet performed) have the right not only to performance when the time for such arrives, but also to maintenance of the contract until that time. The renunciation of a contract prior to the performance time (i.e., a statement that I am not going to pay you when your invoice arrives in two months’ time) entitles the innocent party to choose to have the contract discharged and to sue for damages immediately for this anticipatory breach. The reason for this is that the contract exists from the time it is made, not from the time that performance becomes due. One of the leading cases for this proposition is ­Hochster v. De La Tour where the Hochster was engaged to act as a courier for the defendant and accompany him on a tour.12 Prior to the commencement of this employment he received a letter stating that his service was not needed. He brought an action seeking damages for breach of contract and the court found that he was entitled to do so even though performance had not yet begun.
   Once an anticipatory breach has been accepted, this breach cannot then be withdrawn. However, the innocent party can insist on performance of the contract refusing to accept the anticipatory breach and thereby lose their right to have the contract discharged.
   If renunciation takes place during the performance of the ­contract the innocent party is entitled to be immediately released from ­further obligations and to sue.13
2. Impossibility created by one party
   If the performance of the contract is made impossible by virtue of the act of one party (if the contractual performance is rendered impossible by virtue of an external factor outside of the control of either party it can be discharged on the grounds of frustration considered in the next section) even though he has not renounced the contract, the innocent party will be freed from further obligations.
   Renunciation is easier to prove as here what must be shown is an intention not to perform whereas here it needs to be shown that the contract was impossible to perform due to the actions or default of the other party.
   As with renunciation, the impossibility may occur prior to or during performance. If the act which makes the contract impossible to perform occurs before the scheduled time of performance it is treated as though the contract was renounced at that time. Such impossibility need not be deliberately created and the wronged party may sue at once. In Lovelock v. Franklyn, Franklyn promised to assign interest in his lease to Lovelock at the expiration of a seven year period.14 Prior to this he assigned his interest to a third party. The court found that Lovelock did not need to wait until the expiration of the seven years to bring his case.

3. Failure of Performance
   The total or partial failure to perform duties is the most common ground for having a contract discharged. Not every failure will entitle the injured party to have the contract discharged (though all will result in damages) and several questions need to be asked to determine whether the contract should be discharged. The first question that must be answered is whether the promises are independent of each other, whether enforcement of one obligation is dependent or independent of the other. For example, in a rental contract, the tenant’s obligation to pay rent is independent to the landlord’s obligation to repair. The tenant cannot withhold rent if the landlord fails to repair—the two obligations are independent of each other.15 The foremost example of obligations that are interdependent arise where the parties agree that their performance will occur ­simultaneously. Second, is the breached term a condition, warranty, or an innominate term? Does the contract contain a termination clause? This clause will set out the circumstances in which either party may seek to discharge the contract.

The effects of discharging a contract by breach are that future obligations are no longer enforceable. However, all those which accrued up to the time of the breach are still enforceable.

Discharge by Frustration

The doctrine of frustration operates to allow a contract to be discharged where an unforeseen intervening act outside the control of either party has resulted in the contract becoming impossible to perform.

Prior to the establishment of this doctrine it was a rule of contract law that the person was obliged to perform every duty in the contract and could not be excused by the mere fact that it was now impossible to perform. In Paradine v. Jane, lands leased by Paradine to Jane were possessed by the British Cavaliers during the English Civil War which they held for three years.16 Paradine then sought the rent for this period and Jane claimed that it should not be payable as, through events outside of his control, he did not have possession of the property. The court found this was no excuse and stated:

when a party by his own contract creates a duty or charge upon himself, he is bound to make it good, if he may, notwithstanding any accident be inevitable necessity, because he might have ­provided against it by his contract. And therefore if the lessee ­covenant to repair a house, though it be burnt by lightning or thrown down by enemies, yet he ought to repair it.17

It has always been open to the parties to include in their contract a provision stating if or when liability will be discharged and, in certain circumstances the court will imply this term. It was the use of this implied term that began the doctrine of frustration. The case of Taylor v. Caldwell involved the hire of a music hall which, the day before the performance, was destroyed by a fire.18 Under the old rules from Paradine, Caldwell would be liable to pay for the hall even though he could now not use it for the performance. The court found that he was not liable as:

the contract is not to be construed as a positive contract, but as subject to an implied condition that the parties shall be excused in case, before breach, performance becomes impossible from the perishing of the thing without default of the contractor.19

This began the process of the courts reading into all contracts the implied term that the contract’s continuance would be dependent on the possibility of its performance. Initially for a case to succeed there had to be a literal impossibility of its performance, but before long the courts extended this into other areas, as follows:

Destruction of the subject matter of the contract: this is the most straightforward and, as in Taylor v. Caldwell relates to destruction of something integral to the performance of the contract.

Nonoccurrence of an event: these cases center on the underlying ­reason for entering into a contract and whether the contract becomes frustrated if that underlying reason evaporates. In Krell v. Henry, Henry hired out a room for two days in order to watch the coronation procession of King Edward VII.20 The coronation procession was then cancelled due to the ill health of the King and Krell, who had received only one-third of the rent payable under the contract, sought to recover the rest. While technically the contract was still capable of being performed (the room was available and could have been used) the Court of Appeal found that it had been discharged as the entire purpose of the contract was to view the procession.

However, the same court came to a different conclusion in Herne Bay Steam Boat Co v. Hutton.21 Here Hutton had chartered a boat to see the coronation naval review and to tour the fleet. As with the coronation procession, the naval review was cancelled, but the fleet remained. The court did not hold this contract as discharged as only part of the purpose had been cancelled, it was still possible to sail around the fleet.

Thus, the difference is that in order for the contract to be discharged for frustration on this ground, the reason must be the basis upon which the contract was entered into and not merely a motive or inducement.

Death or Incapacity (for personal service): the contract will be ­frustrated where the obligation is one of personal service which can no longer be performed due to death or incapacity of that person. In Stubbs v. Holywell Railway Co it was held that a contract for personal services was discharged due to death.22 Further, in Robinson v. Davison a piano player failed to perform due to ill health and was sued for breach of contract.23 The court found that there was no breach and the contract was frustrated due to ill health.

Substantial Interruption: this relates to circumstances where an intervening event pauses or interrupts the performance of the contract. In wartime ships are often requisitioned by governments and if that ship is under charter at the time, the question arises as to whether the requisition frustrates the rights of the shipowner and the charterer. In FA Tamplin Steamship Co Ltd v. Anglo-Mexican Petroleum Products Co Ltd, the FA Tamplin was chartered for five years to December 1917.24 In February 1915 the government requisitioned the ship to be used as a troopship and made alterations. The charterers were willing to continue with their obligations but the shipowners wanted to declare the contract as frustrated so as to obtain a higher level of compensation from the state. The House of Lords held that the contract continued as the interruption to the contract was not substantial enough in duration.

In National Carriers Ltd v. Panalpina (Northern) Ltd involved the lease of a building for a 10 year period.25 Due to the possible collapse of a nearby building, the government closed the street for two years so that structural repairs could be conducted. In this case the court did not hold the lease frustrated as again the interruption was not substantial enough.

Extreme Impracticality: In order for a contract to be frustrated on these grounds it must be shown that it was virtually impossible to comply with the contract. Delay, inconvenience, or additional expense will not be sufficient grounds. In Tsakiroglou & Co Ltd v. Noblee Thorl GmbH the contract was to ship groundnuts from Sudan to Hamburg during ­November or December 1956.26 Due to the Anglo-French invasion of Egypt in 1956 the Suez Canal closed on November 2, 1956 and remained closed for five months. The contract was priced on the basis of shipment through the canal and it was claimed that it was frustrated due to its ­closure. The court found that there was no frustration as it was still ­possible to perform the contract through another route. While this second route (around the Cape of Good Hope) would be more expensive and take longer this was not sufficient to have it discharged.

Again in Davis Contractors Ltd v. Fareham UDC the delay of 16 months in completing the contract with an additional £20,000 expenditure was not sufficient to frustrate the contract.27

Additionally, a contract may be frustrated here where a change in the law would make performance of the contract illegal.28

The doctrine has evolved as a means for dealing with unforeseen events which render the performance of the contract impossible, ­illegal, or substantially different from that which was agreed upon. Where parties make provision for certain situations within their contract they then ­cannot rely on the doctrine as the incident would not qualify as an unforeseen event. This is due to the fact that the basis of the doctrine as arrived at in ­Taylor was an implied term based on the intention of the parties. Although the doctrine operates in this manner generally, there may be times when the court departs from this general rule, as in Jackson v. Union Marine ­Insurance Co Ltd and interprets an express provision in such a way that the doctrine will still operate.29 In this case a contract hiring a ship stated that it was to proceed with all possible speed (dangers and accidents of navigation excepted) from Liverpool to Newport. The ship ran aground close to Liverpool and was delayed for eight months. It was held that this contract was frustrated as the clause was interpreted restrictively with the court finding that the delay was such as to make it an entirely different adventure.

Generally, the doctrine does not apply to situations which were foreseeable by the parties. The rationale here is that if the parties foresaw the possibility of a particular event occurring they should then make provision for it in their contract. This rule was until recently strictly interpreted and applied. However, in Edwinton Commercial Corporation v. Tsavliris Russ Ltd the court found that it was not an absolute exclusion and stated:

in a sense, most events are to a greater or lesser degree foreseeable. That does not mean that they cannot lead to frustration … However … the less than an event, in its type and impact, is foreseeable, the more likely it is to be a factor which, depending on other factors in the case, may lead onto frustration.30

The doctrine only applies where the event is outside of the control of the parties—you cannot rely on self-induced frustration. In Ocean Tramp Tankers Corp v. V/O Sofracht, the ship The Eugenia was delivering cargo to India and in breach of contract travelled through the Suez Canal and into a war zone (the contract contained a war clause).31 The ship was detained in the canal when it closed and the owners sought to have the contract frustrated. The court found that they could not rely on the closure of the canal and subsequent trapping of the ship in the canal as it was their own fault.

The effects of frustration are to discharge the contract and both parties are absolved from their future obligations without incurring any liability for breach of contract (as it is something outside of the control of either party). However, up until the frustrating act the contract was still in force and questions arose as to the liability for obligations already performed. Initially, as a result of the judgment in Chandler v. Webster the position was that as the contract was not void ab initio (not in its entirety but only from the frustrating event) and monies already paid under a contract prior to that frustrating event could not be recovered, the loss lay where it fell.32 This was overruled in Fibrosa where the House of Lords found that once it could be shown that the basis upon which money was paid had totally failed, money could be recovered.33 This means that where you received some service or goods for the money paid, you would get nothing back. You needed to show that you received absolutely nothing in return for your money and that there was a total failure of performance.

In the UK the Law Reform (Frustrated Contracts) Act 1943 allows for recovery of moneys to be returned less any deduction for part services or goods received.

Discharge of a Contract in American Law

Termination of a contract refers to those instances where a contract loses its practical effectiveness between the parties; stated simply, it no longer governs their conduct toward one another. It does not mean that the contract loses its legal effectiveness—parties can still sue one another for breach, seek performance of the contract, or simply collect damages for breach of contractual duties where law permits. As a general observation, we might say that the performance of a contract as foreseen depends on two elements: the will of each party subjectively to render performance per the agreed terms (the volitional element); alongside this are the continued viability, economic or otherwise, of the contract and, objectively, the continued mutuality of interests of each party thereto of seeing the contract performed (the perfunctory element). Where either element is absent, courts or the parties themselves may terminate a contract—either consensually, or, more frequently, by failing or refusing performance, or though judicial resolution. In some cases, parties can come to an accord which allows a party who would otherwise breach their contractual obligation to offer an amended performance.34

Extinction by Performance

Contractual duties are extinguished when the performance due from either party to the contract is completed.35 Parties must perform exactly as they promised to do in the contract or that performance is without effect, and the other party might still insist on exact performance, sue for damages, or both. Generally, a party to a contract does not have to accept a performance by its counterparty that does not match that which was outlined in the contract. For example, if I contract a painter for $100.00 to paint my study red, and he paints it in blue, he has breached our contract; even though he painted the study, he painted it the wrong color, so his performance is ineffective, and the painter has breached our contract.

There are two exceptions to this rule which merit further discussion: the doctrine of substantial performance and the “perfect tender” rule.36 Under the “perfect tender” rule, where the seller in a contract renders imperfect performance, the other party may seek to repudiate (not perform) the contract for breach and sue for damages.37 The more general rule is the “substantial performance” doctrine, which operates to protect parties who have rendered an imperfect performance, but have complied as to the substance, just not to the letter of the contract and in turn allows them to sue to enforce the contract. The doctrine has economic and practical implications. If a court finds that the party has substantially performed their part of a contract, then it can still collect the full ­payment due under the contract, save for the diminution in value caused by the imperfect performance. If substantial performance has not been rendered, the party is only entitled to a calculation of the value of the benefit conferred, less the cost to the other party of having the work competed. Returning to the painter example, a court would likely find that painting a room the wrong color is a material breach, thus the painter would only be entitled to the benefit provided, less the cost of completion. If the court finds that the paint job is of no benefit to me, then I can sue the painter for the cost of having someone correct his mistake and I can successfully repudiate the contract. If the court finds that the painter did substantially perform the contract, the painter is entitled to the full $100.00, less any diminution in value to the home by the differing color, which will usually be a nominal value when compared with the cost of correcting the work in the other scenario. Accordingly, the second option works out much better for the painter.

Conversely, the “perfect tender” rule, found in the UCC at §2-601,38 operates in a stricter manner. Under this rule, even minor deficiencies in goods delivered will allow a buyer to reject goods dispatched by the seller.39 The wisdom of this doctrine arises from the fact that the value of goods is linked to their qualities being exactly as described; even slight variations from the description can cause the value to plummet. For example, in Filley v. Pope,40 the United States Supreme Court confirmed that

in a mercantile contract, a statement descriptive of the subject matter or of some material incident such as the time or place of shipment is ordinarily to be regarded as a warranty or condition precedent, upon the failure or nonperformance of which the party aggrieved may repudiate the whole contract.41

The case involved the sale of a quantity of iron which was due to be shipped from Glasgow, Scotland, but was shipped from Leith, ­Scotland instead. The buyer sought to repudiate the contract and the court affirmed this action, as it considered that the seller had breached their warranty by shipping from another port, even though there was no difference in the materials themselves. Arising from its potential harshness, over time, the rule illustrated in Filley has been tempered. The UCC at §2-508 allows the seller to cure (make good) its performance under the contract in certain circumstances.42 Additionally, the circumstances under which a buyer can revoke their acceptance of goods after they are delivered is even more limited, and the defect must be of the type which “substantially impairs”43 the interests of the buyer. Moreover, in either instance, the buyer has a duty to act in good faith when accepting, rejecting, or attempting to revoke its acceptance of the goods in question.44

Breach of a Condition

As in our discussion of contractual terms in Chapter 4, conditions within a contract outline the circumstances in which performance becomes due and are of four types: precedent, subsequent, express, or implied. A condition precedent outlines when a duty to perform for a party arises; one subsequent tells of when that duty is extinguished. An express condition is evidenced in writing of the contract; one implied is taken as a basic assumption of the parties at the time of making the contract, the nonoccurrence of which would release them from their duties to perform under the contract. When a condition is unfulfilled, the parties may lose their right to demand performance; a condition must also occur in full—therefore the substantial performance doctrine does not apply to conditions. For example, if A, under the terms of his contract with B, requires that a certified copy of a search for title to land be furnished to him in the form of a certified copy of city records within 30 days for him to execute a lease of that property; B must comply with the exact terms of the condition. Even if he makes the search and notifies A of the contents of the records by phone before the 30 days elapse, he cannot force A to execute the lease on day 45, as he has breached a condition of their agreement and forfeited his right to demand performance. Conversely, the Restatement holds that the non-occurence of an event may be excused where the condition was not a material party of the transaction and this would not result in a disproportionate forfeiture (loss of right to demand performance) for the party who is due performance under that condition. However, performance dependent upon a condition will be due unless the condition does occur or fulfillment of the condition is excused, or the fulfillment of the condition is rendered impossible. The non-occurence of the condition will not result in breach unless the occurrence of the condition made dependent on the party seeking to avoid performance.45

Material Breach

The clearest circumstances in which the other party has breached their obligations under the contract arises from nonperformance in part or whole.46 In such instances, the question arises as to what amounts to a material and immaterial breach; in the event of a material breach of the contract by one party, the duty to perform for the other party is discharged. This determination is a fact-intensive one, the outcome of which may be unclear to the parties themselves.47 This uncertainty should give pause to the party who has not received performance from the other party in deciding not to render their performance in return, for they could be liable for wrongful repudiation. Even in the case where the other party has not performed, a party may still be required to render its performance or risk breaching the contract itself. For example, a delay in performance is not always a material breach, but a repudiation (refusal) by the other party of its duty to perform is always a material breach. A party may also refuse its contractual duties in advance of performance becoming due; as in English law, this is known as anticipatory breach and in such an event, the other party can proceed readily to an action to remedy (i.e., through damages) the anticipated breach by the other party as though it had occurred.48

Impracticability/Impossibility, Frustration of Purpose, (Non-)Occurrence of a Condition

The Restatement, at §261, states that if the performance of a contract is rendered impracticable for one of the parties, by the occurrence of an event the non-occurrence of which was an assumption at the time of contracting, they may be discharged from their contractual duties. The occurrence of the event cannot be caused by the party seeking to rely on impracticability. There are a myriad of circumstances under which performance on a contract will be rendered impossible or impracticable, death of a person or nonexistence or destruction of a thing necessary for performance a change in legal regulations. Performance does not have to be impossible, just excessively and unreasonably onerous. The UCC makes similar provision at §2-615.

The doctrine of frustration is present in the Restatement at §265. By this, if the common design of the parties is substantially frustrated by the occurrence or nonoccurrence of an event which is outside the control of the party seeking discharge, courts have ruled that performance will not be due. In a holding similar to Krell in English law, the plaintiff in Alfred Marks Realty Co. v. “Churchills” 49 contracted with a printer to place an advertisement in a souvenir booklet to be distributed at a racing event. The event never occurred, even though the booklets were printed, due to disturbances arising from the spreading war in Europe. The court held that the common design of the parties was frustrated because “a souvenir cannot recall what has not taken place.”50 As seen here, performance (payment) on the part of advertiser was possible (not impracticable), but its interest in the performance of the other side was greatly reduced by the foreseen nonoccurrence of the races. Changes to the law or regulatory regime may also result in a frustration of a contract. In Johnson v. Atkins, a buyer of copra in Colombia successfully sought discharge of a contract where the laws of his nation subsequently were altered to exclude such imports.51

Good Faith in the Performance of a Contract

Parties must perform in good faith. Both the UCC and the Restatement have codified the requirements good faith and fair dealing in the performance of contracts. This means parties cannot act to cause the default of the other party, as good faith is taken by courts as an implied covenant (obligation) in all contracts. In Lach v. Cahill,52 the plaintiff sued for the return of a deposit on a home, he had agreed to the purchase of the home on the condition that he could secure a mortgage. The court found this satisfied an implied covenant to make a good faith effort to obtain a mortgage, so the deposit must be returned, and no contract existed. The UCC, in the context of “exclusive dealings” contracts, or contracts where a buyer and seller agree to deal with each other exclusively in a certain type of good, provides that good faith also requires the “best efforts” in certain respects of both the buyer and the seller.

Discharge of a Contract in the Civilian Tradition

In the civilian tradition, discharge of contractual obligations operates within roughly the same strictures as in the Anglo-American tradition. However, even in the event of nonperformance or where circumstances arise which would hinder the common design of the parties, the provisions of the code which have regard to these situations do not necessarily force the conclusion of the contract itself. For example, as we will see, the German code allows the court to modify a contract where the foundation of the transaction has collapsed.53 Only where such adaptation is impossible, or it is unfair to expect of a party, can the party avoid its obligations under the contract.54

Convention of the Parties/Terms of Contract

The most natural manner in which a contract terminates is by its own terms or mutual assent of the parties. Under French law, a contract can end where its terms provide a time;55 though the parties can agree to renew it upon expiration.56 Similarly, it can end where parties decide to modify or extinguish their obligations under the contract in accordance with the law.57 Under German law, the considerations are similar: parties may discharge their contract through express terms indicating the period for which the contract is effective or upon notice by one party if no duration is fixed.58 Under both systems, certain contracts may not exceed a fixed duration or where no duration is fixed, either party may withdraw in good faith and in the manner set out by the terms of the contract and in law. In French law, contracts in perpetuity are prohibited,59 and parties may withdraw from a contract of indefinite duration after a reasonable delay period, if none is stated in the contract.60 German law also provides that a party to a contract may withdraw without notice for a compelling reason.61

General Distinction: Nonperformance vs. Breach

A crucial distinction to evoke in the civilian tradition is the difference between breach and nonperformance. Delayed or defective performance from a party when it falls due does not immediately give rise to a claim for damages as it might in the common law tradition. Rather, the “essence of modern civilian doctrine is that mere unexcused failure to perform at the proper time (i.e., a ‘breach’ in our sense of the word) ordinarily gives rise only to a claim for performance. An action for damages, rescission, or restitution will lie only if the obligor is in default.”62 This requirement of placing the nonperforming party in default is unique to the civilian tradition, and its purpose is to render evident the fact that breach has occurred and establish a time-period within which performance must occur to avoid damages in lieu of performance. A nonperforming party may also be placed in default by an express contractual term stating the necessity that performance is rendered at the expressed time, or where placing in default would be meaningless (i.e., where a party refuses to perform under the contract).63 The contract by its nature may also be discharged by action of one of the parties, such as the payment of a debt in full.64

Non-Fruition of a Condition as Excuse for Nonperformance

If performance by one party is made dependent upon the fulfillment of a condition which lies outside its control,65 it may be excused from performance—equivalent to the concept of a conditions precedent and subsequent in the Anglo-American tradition. For instance, under French law, a distinction is drawn between a suspensive condition (condition suspensive), which trigger performance, and a subsequent condition (condition résolutoire), which extinguishes an obligation to perform.66 In the case of the non-fruition of a suspensive condition, the obligation is deemed never to have existed,67 whereas the fulfillment of a subsequent condition discharges the obligation to perform retroactively.68 If for example, I make the sale of my home conditional upon the transfer of my position to a university in a different city, I do not have an obligation to perform if the condition (my transfer to another university) never happens. The obligation is retroactively invalidated (the effects are undone). Similar provisions are made under German law. 69

Impossibility as Excuse for Nonperformance

In contrast, impossibility results from the invalidation of factual assumptions underlying the contract. Indeed, certain factual scenarios will allow parties to a contract to avoid their obligations arising under the contract. Such circumstances are outside the control of the parties and denature the common design of the parties or render performance impossible. Under French law, a party to a contract may avoid contractual liability if they evidence a sufficient supervening event between the time when the contract was formed and the time when performance is due which excuses the nonperformance: these are termed as force majeure (overwhelming force) and cas fortuit (fortuitous occurrence).70 In either case, the event must be unforeseeable at the time of contract, unpreventable, and not caused by either party. Such events relieve parties of their obligations; however, if the circumstance rendering the performance impossible is temporary, the contract is not immediately dissolved, if the delay does not justify this result.71 Additionally, a party may refuse performance to the extent that it has become impossible.72 If the contract was impossible at the time of contracting, no claim for damages will lie, but if it subsequently becomes impossible, the party responsible for the impossibility may have to pay damages.73 German law also excuses performance where the expense and effort would be “grossly disproportionate” to the interest of the counterparty in the performance,74 or where the it is a contract of personal service and, given an examination of the obstacle to the performance and the interest of the other party in such performance, it is not reasonable to require it of the party.75

Unforeseen Circumstances in German and French Law

German law also will alter or dissolve contracts where intervening events have denatured or changed the purpose or performance (Störung der Geschäftsgrundlage (roughly: failure of contractual foundation) required under the contact, or where enforcing the contract would prove unfair for one or both parties.76 These intervening circumstances must be of such gravity that the foundation of the contract is fundamentally altered, and had the parties foreseen the change of circumstances, they would not have entered into the contract at all.77 Of note in such cases, is the reluctance of courts to retrospectively deprive the contract of its effect, and, by the language of the provisions of the code, the court may do so only where modification of the terms of the agreements to rescue the agreement would not be reasonable to expect of a party.78 In the latter case, a party may withdraw from the contract. Circumstances in which this provision could be invoked would relate to profound changes in the legal, political, or economic climate in which the contract was intended to be operative. There are both parallels and differences to be drawn from §313 and the Anglo-American doctrine of frustration. The principle difference stems from the preference within the German code for maintaining the contract through modification of terms—it is only where accession to the new terms would be unreasonable for one of the parties that withdrawal will be allowed. Both, however, operate to embrace circumstances where the underlying agreements are denatured and devalued. Similarly, the French code79 provides that a party may seek a renegotiation where intervening events have rendered performance under the contract especially onerous. Parties agree to new terms; a new contract comes into effect; alternatively, they can agree to end the contract. If no agreement is reached, as a last resort, a judge may either modify the contract or end it.80