CH 09

StudyGuidetoaccompanyCanadianBusinessandtheLaw,5thedition Chapter9

2014NelsonEducationLimited 147

CHAPTER 9

TERMINATION AND ENFORCEMENT OF CONTRACTS

Objectives After studying this chapter, you should have an understanding of the termination of a contract by performance the termination of a contract by agreement the termination of a contract by frustration the methods of enforcing contracts the concept of privity remedies for breach of contract

Learning Outcomes Understand that the best way to terminate a contract is through performance or agreement

(pages 195197) Understand the limited application of the doctrine of frustration to terminate an

agreement (page 198) Understand the concept of privity of contract as it relates to exclusion clauses

(page 201) Understand the significance of the difference between a breach of a condition and a

breach of a warranty (pages 202203) Understand the general principles of the recovery of damages (pages 206209) Understand when a court will grant an equitable remedy (page 210)

Chapter Summary In the vast majority of situations, a contract terminates or ends when the parties fully perform their obligations. Less common are situations where the contract ends because the parties find it impossible or tremendously difficult to perform their obligations. In such cases, prudent business parties will have addressed such a possibility through a force majeure clause or equivalent. A more usual and complicated situation, from a business perspective, occurs when one party breaches the contract by failing to perform or by performing inadequately. A contract can be terminated in several ways: by performance, by agreement, through frustration, and through breach. When a contract is terminated by performance, the parties have fulfilled all their implied and express promises. The work necessary to achieve performance may be done by the parties personally or through their agents/employees, unless a term to the contrary is included. Sometimes, parties terminate a contract by agreement. For example, the parties may agree to end the contract entirely or to replace it with a new one. Alternatively, the parties may vary certain terms of the contract or substitute a new party



who, in turn, assumes rights and duties under the contract. Contract law allows one party to assign his or her right under a contract but not the liabilities. The law of assignment permits the creditor to assign the right to collect under a contract to another (the assignee) without the agreement of the debtor. Once the creditor (assignor) has given notice to the debtor, the latter can perform the obligation only by paying the assignee. The doctrine of frustration terminates a contract, but only in very limited circumstances. It must be shown that an unanticipated event or change in circumstances is so substantial that performance has become functionally impossible or illegal. Provided the risk of such an event has not been allocated to one party or the other, and provided the event did not arise through either partys fault, the contract has been frustrated. When one party fails to perform its contractual obligations, it is in breach of contract and subject to a lawsuit. To succeed in its action for breach of contract, the innocent party must establish the existence of a contract, breach of contract, and entitlement to a remedy. Privity means that, with limited exceptions, only those who are parties to a contract can enforce the rights and obligations it contains. When a party to a contract fails to keep his or her promise, that party has committed a breach of contract and is liable for such damages as would restore the innocent party to the position he or she would have been in had the contract been performed. These are known as expectation damages. If there is an exclusion or a limitation of liability clause in the contract, the defendants liability will be reduced or eliminated, depending on the circumstances. Damages in contract are ordinarily pecuniary, but in some circumstances, the innocent party is entitled to non-pecuniary damages for mental suffering and distress. As well, punitive damages are exceptionally available. When one party suffers a breach of contract, he or she must take reasonable steps to mitigate it. If the party fails to do so, the damage award will be reduced accordingly. By the same token, any reasonable costs associated with mitigation are also recoverable from the party in breach. Contract law also offers equitable remedies, such as specific performance and injunction, when damages are an inadequate remedy. On occasion, the best solution is to rescind the contractthat is, return the parties to their pre-contractual positions. The law of restitution also provides remedies in a contractual context because its main objective is to remedy unjust enrichment. Unjust enrichment occurs when the defendant has undeservedly or unjustly secured a benefit at the plaintiffs expense. Whether the innocent party takes the contract breaker to court is as much a business decision as it is a legal one.



Study Outline Use this outline to prepare a complete set of notes for this chapter.

Termination through Performancepage 195

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Performance by Others: Vicarious Performance _______________________________

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Termination by Agreementpage 196

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By Agreement between Parties_____________________________________________

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Transfer of Contractual Rights _____________________________________________

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Assignment _________________________________________________________

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Termination by Frustrationpage 198

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Force Majeure Clause____________________________________________________

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Enforcement of Contractspage 200

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Privity of Contract_______________________________________________________

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Breach of Contract ______________________________________________________

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Condition________________________________________________________

Warranty ________________________________________________________

Exclusion or limitation of liability clause__________________________________

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Fundamental breach _______________________________________________

Timing of the breach__________________________________________________

Anticipatory breach________________________________________________



Remedy _______________________________________________________________

Damages __________________________________________________________

Purpose of damages __________________________________________________

Pecuniary and non-pecuniary damages_________________________________

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Duty to mitigate __________________________________________________

Equitable remedies ___________________________________________________

Specific performance ______________________________________________

Injunction _______________________________________________________

Interlocutory injunction _________________________________________

Rescission _______________________________________________________

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SELF-ASSESSMENT

Key Terms Briefly define each term in the space provided. Vicarious performancepage 196 ______________________________________________________________________

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______________________________________________________________________ Novationpage 196 ______________________________________________________________________

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______________________________________________________________________ Assignmentpage 197 ______________________________________________________________________

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______________________________________________________________________ Frustrationpage 198 ______________________________________________________________________

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______________________________________________________________________ Balance of probabilitiespage 200 ______________________________________________________________________

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______________________________________________________________________ Conditionpage 203 ______________________________________________________________________

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______________________________________________________________________ Warrantypage 203 ______________________________________________________________________

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______________________________________________________________________ Innominate termpage 203 ______________________________________________________________________

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Fundamental breachpage 204 ______________________________________________________________________

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______________________________________________________________________ Anticipatory breachpage 205 ______________________________________________________________________

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______________________________________________________________________ Damagespage 206 ______________________________________________________________________

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______________________________________________________________________ Expectation damagespage 206 ______________________________________________________________________

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______________________________________________________________________ Punitive damagespage 206 ______________________________________________________________________

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______________________________________________________________________ Duty to mitigatepage 209 ______________________________________________________________________

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______________________________________________________________________ Interlocutory injunctionpage 211 ______________________________________________________________________

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______________________________________________________________________ Restitutionary quantum meruitpage 212 ______________________________________________________________________

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______________________________________________________________________ Unjust enrichmentpage 212 ______________________________________________________________________

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Matching Match each term to its definition below by writing the correct letter in the space provided. Please note that you will use only 10 of the terms so choose the term that best matches the definition.

A Anticipatory breach B Assignment C Balance of probabilities D Condition E Duty to mitigate F Force majeure clause G Frustration H Fundamental breach I Injunction J Innominate term K Non-pecuniary damages L Novation M Pecuniary damages N Privity of contract O Vicarious performance P Warranty

1. ____ Performance of contractual obligations through others.

2. ____ The substitution of parties in a contract or the replacement of one contract with

another.

3. ____ The transfer of contractual rights to someone else.

4. ____ The termination of a contract by an unexpected event that makes performance of

the contract impossible or illegal.

5. ____ A term in a contract that allows a party to delay or terminate a contract because of

an unexpected event.

6. ____ Only the parties to a contract can enforce the rights and obligations of the

contract.

7. ____ An important term in a contract.

8. ____ A minor term in a contact.

9. ____ Financial loss.

10. ____ A court order to stop an activity.



Questions Write a short point-form answer for each question in the space provided. To help you understand the chapter, it is recommended that you also use additional paper to write a full and complete essay answer for each question. 1. Outline four ways a contract can be brought to an end.

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______________________________________________________________________ 2. Explain the contractual rule on vicarious performance.

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______________________________________________________________________ 3. When is a contract considered performed?

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______________________________________________________________________ 4. Explain four ways that a contract can be terminated by agreement.

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______________________________________________________________________ 5. Explain the law of assignment.

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6. What is the alternative to termination or amendment by agreement and why is cooperation preferred?

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______________________________________________________________________ 7. What elements must be established to succeed with a claim of termination by

frustration?

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______________________________________________________________________ 8. What is the purpose of a force majeure clause?

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______________________________________________________________________ 9. For what types of events is a force majeure clause relevant?

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______________________________________________________________________ 10. Have any exceptions been made to the doctrine of privity? Explain.

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______________________________________________________________________ 11. Outline what a plaintiff must establish to succeed with a breach of contract action.

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12. Explain when employees can rely on an exclusion clause in a contract between the employer and a customer.

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______________________________________________________________________ 13. Why it is important to distinguish between a breach of warranty and a breach of

condition?

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______________________________________________________________________ 14. What is the significance of an innominate term in a contract?

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______________________________________________________________________ 15. How are exemption clauses affected by a fundamental breach? Why?

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______________________________________________________________________ 16. Explain the bad man theory of breach of contract.

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______________________________________________________________________ 17. What argument does Robert Larmer make in support of ethics having a role in contracts

(even if limited)?

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18. Can someone breach a contract before the time for performance has arrived? Explain.

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______________________________________________________________________ 19. What is the purpose of damages?

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______________________________________________________________________ 20. Outline the rule on damages in a breach of contract action.

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______________________________________________________________________ 21. How does contract law view non-pecuniary damages?

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______________________________________________________________________ 22. What must a plaintiff show when seeking recovery for mental distress in a breach of

contract claim?

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______________________________________________________________________ 23. What is the significance of the duty to mitigate in contract claims?

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24. Outline the equitable remedies available in breach of contract actions.

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______________________________________________________________________ 25. When might a court refuse to order specific performance?

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______________________________________________________________________ 26. In what situation is an injunction regularly used?

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______________________________________________________________________ 27. What is the significance of an interlocutory injunction?

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______________________________________________________________________ 28. What is the main objective of restitution?

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______________________________________________________________________ 29. How can a court respond to situations of unjust enrichment?

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______________________________________________________________________ 30. Identify two things that could limit the ability to seek the equitable remedy of rescission.

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ANSWERS

Key Terms Vicarious performancepage 196 Performance of contractual obligations through others. Novationpage 196 The substitution of parties in a contract or the replacement of one contract with another. Assignmentpage 197 The transfer of a contractual right by an assignor to an assignee. Frustrationpage 198 Termination of a contract by an unexpected event or change that makes performance functionally impossible or illegal. Balance of probabilitiespage 200 Proof that there is a better than 50 percent chance that the circumstances of the contract are as the plaintiff contends. Conditionpage 203 An important term that, if breached, gives the innocent party the right to terminate the contract and claim damages. Warrantypage 203 A minor term that, if breached, gives the innocent party the right to claim damages only. Innominate termpage 203 A term that cannot easily be classified as either a condition or a warranty. Fundamental breachpage 204 A breach of contract that affects the foundation of the contract. Anticipatory breachpage 205 A breach that occurs before the date for performance. Damagespage 206 Monetary compensation for breach of contract or other actionable wrong. Expectation damagespage 206 Damages that provide the plaintiff with the monetary equivalent of contractual performance. Punitive damagespage 206 An award to the plaintiff to punish the defendant for malicious, oppressive, and high-handed conduct. Duty to mitigatepage 209 The obligation to take reasonable steps to minimize the losses resulting from a breach of contract or other wrong. Interlocutory injunctionpage 211 An order to refrain from doing something for a limited period of time. Restitutionary quantum meruitpage 212 An amount that is reasonable given the benefit the plaintiff has conferred. Unjust enrichmentpage 212 Occurs when one party has undeservedly or unjustly secured a benefit at the other partys expense.



Matching 1. Opage 196 2. Lpage 196 3. Bpage 197 4. Gpage 198 5. Fpage 200 6. Npage 201 7. Dpage 203 8. Ppage 203 9. Mpage 208 10. Ipage 211 Questions 1. Outline four ways a contract can be brought to an end. Page 195: A contract can be brought to an end, or terminated, in four ways: Performance: both parties perform their contractual obligations. Agreement: both parties agree to end the contract. Frustration: an important, unforeseen event occurs after the contract has been made that

makes performance of the contract impossible or illegal. Breach: when one party does not perform contractual obligations, the innocent party may

be entitled to damages, or in more serious breaches, the innocent party may be released from continued performance.

2. Explain the contractual rule on vicarious performance. Page 196: Ordinarily, an employee is not a party to a contract between the employer and a customer. The employee lacks privity of contract and cannot sue or be sued on the contract. However, it is permissible for employers to use employees to perform the employers contractual obligations, or vicariously perform a contract, as long as personal performance by the employer is not an express or implied term of the contract. 3. When is a contract considered performed? Page 195: A contract is considered performed when all of its implied and express promises have been fulfilled. Completion of the contract is not necessarily the end of the commercial relationship. 4. Explain four ways that a contract can be terminated by agreement. Page 196: (1) Through novation, the parties enter into a completely new contract. (2) The existing parties vary certain terms of the contract. (3) The parties simply agree to terminate the contract. (4) Another party is substituted for an existing partya limited form of novation. 5. Explain the law of assignment. Pages 197198: Contractual rights, but not obligations, can be transferred, or assigned, to someone else without agreement by the other contracting party. For example, the law of assignment of rights permits a creditor to assign the right to collect a debt to another person without the agreement of the debtor. To be effective, the creditor must inform the debtor of



the assignment. After receiving the notice of assignment, the debtor is obligated to pay the assignee, not the original creditor. 6. What is the alternative to termination or amendment by agreement and why is

cooperation preferred? Page 197: The alternative is likely litigation, which is expensive and uncertain. 7. What elements must be established to succeed with a claim of termination by

frustration? Pages 198199: When a significant and unexpected event happens after a contract is formed and makes performance of the contract impossible, the contract may be frustrated. Both parties are excused from the contract and it comes to an end, with no liability for damages. The party claiming frustration must establish the following: The event was dramatic and unforeseen. Neither party had assumed the risk of such an event in the contract. The event was not the fault of either party. As a result of the event, the contract was illegal or impossible to perform. 8. What is the purpose of a force majeure clause? Page 200: A contract is not frustrated through hardship or additional expense in performing the contract. These are just the normal risks of performance. However, the parties may include a provision in the contract, called a force majeure clause, that allows a party to delay or terminate a contract in the event of an unexpected, disruptive event, including the following: natural disasters, such as fire or flood labour problems, such as strike or lockout monetary changes, such as currency devaluation or currency controls government action, such as denial of an import or export licence 9. For what types of events is a force majeure clause relevant? Page 200: A force majeure deals with unforeseen events, including natural disasters, such as fire, flood, or tornado; labour problems, such as strikes, slowdowns, or walkouts; monetary crises, such as hyperinflation or currency devaluation; and government actions that ration raw materials or deny imports or exports. 10. Have any exceptions been made to the doctrine of privity? Explain. Page 202: Yes, some exceptions have been made since a strict application of the doctrine of privity can lead to serious injustices. Courts have recently shown a willingness to allow third parties to rely on contract clauses placed in the contract for their benefit. Some statutory modifications have also been made in certain jurisdictions. 11. Outline what a plaintiff must establish to succeed with a breach of contract action. Page 201: To succeed in an action for breach of contract, the plaintiff is obligated to demonstrate the following on a balance of probabilities: Privity of contract: there is a contract between the parties. Breach of contract: the defendant failed to perform the contract as promised. Entitlement to a remedy: the plaintiff suffered a loss as a result of the breach or is

otherwise deserving of the courts assistance.



12. Explain when employees can rely on an exclusion clause in a contract between the employer and a customer.

Page 201: Privity of contract means that only those who are parties to a contract can enforce the rights and obligations it contains. Under a strict approach to privity, employees would not be permitted to rely on an exclusion clause protecting them from liability in the event that the customer suffers a loss when the contract is between the business and the customer, but not the employee. However, the Supreme Court of Canada held that employees could rely on a limitation of liability clause if both of the following requirements are satisfied: The limitation of liability clause must, expressly or impliedly, extend its benefits to

employees seeking to rely on it. The employees seeking the benefit of the limitation of liability clause must have been

acting in the course of their employment and must have been performing the services provided in the contract between their employer and the customer when the loss occurred.

13. Why it is important to distinguish between a breach of warranty and a breach of

condition? Pages 202203: A condition is an important term of a contract. If breached, it gives the innocent party the right to sue for damages and treat the contract as ended, meaning that the innocent party has no further obligations under the contract. A warranty is a less important term of a contract. When a warranty is breached, the innocent party is entitled to damages only but is still obligated to perform the contract as promised. 14. What is the significance of an innominate term in a contract? Page 203: An innominate term is one that cannot easily be classified as either a condition or a warranty. The court must look at exactly what has happened in light of the breach before deciding whether contract repudiation is an option for the innocent party. 15. How are exemption clauses affected by a fundamental breach? Why? Page 203: Historically, courts have been reluctant to allow a party in breach to rely on an exemption if the breach was fundamental in nature. The argument is that such a breach automatically renders the entire contract (including the exemption clause) inoperative. 16. Explain the bad man theory of breach of contract. Page 205: The bad man theory implies that a contract breaker must pay damages if it does not perform a contract, but it means nothing else. This is contrary to those who think that there is an ethical basis for upholding contracts. 17. What argument does Robert Larmer make in support of ethics having a role in contracts

(even if limited)? Page 205: Larmer points out that if breaking contracts became general behaviour, business would become impossible. Shady business practices are advantageous only if most people recognize the existence of moral obligations. Immorality is parasitic because it tends to destroy the moral environment that makes the very existence of immorality possible. 18. Can someone breach a contract before the time for performance has arrived? Explain. Page 205: Yes, such a breach can occur. It is referred to as an anticipatory breach and is actionable because each party to a contract is entitled to a continuous expectation that the



other will perform during the entire period between the date the contract is entered and the time for performance. 19. What is the purpose of damages? Page 206: The purpose of damages in contract law is to compensate the plaintiff for loss, not to punish the defendant for breach. Damages are intended to put the injured party in the position that she or he would have been in had the obligations been performed. 20. Outline the rule on damages in a breach of contract action. Page 207: The usual remedy for breach of contract is damages, or monetary compensation. A defendant is responsible for damages that are reasonably foreseeable. Any claim for damages must pass one of the following remoteness tests: The damages could have been anticipated, having arisen naturally from the breach. The damages, although difficult to anticipate in the ordinary case, are reasonably

foreseeable because the unusual circumstances were communicated to the defendant at the time the contract was being formed.

Subject to the test of remoteness, those who have suffered a breach of contract can recover all their resulting monetary losses unless a clause is included in the contract that limits, excludes, or sets liability at a particular amount. Recovery for non-pecuniary damages, such as for mental distress, is rare in contract law. Everyone who suffers a breach of contract has a duty to mitigate it. This means that the plaintiff must take reasonable steps to minimize losses that might arise from the breach. If the plaintiff fails to mitigate the loss, the damage award will be reduced accordingly. 21. How does contract law view non-pecuniary damages? Page 208: Recovery of non-pecuniary damages, such as for mental distress, is traditionally viewed with suspicion in contract law, although it has been challenged recently in at least one Supreme Court decision. 22. What must a plaintiff show when seeking recovery for mental distress in a breach of

contract claim? Page 208: The plaintiff must show that the object of the contract was to secure a psychological benefit that brings distress on breach. In addition, the plaintiff must show that the degree of mental suffering caused by the breach is sufficient to warrant compensation. 23. What is the significance of the duty to mitigate in contract claims? Page 209: Everyone who suffers a breach of contract has a duty to mitigate it. This means that the person must take reasonable steps to minimize losses that might arise from the breach. 24. Outline the equitable remedies available in breach of contract actions. Pages 210211: In rare situations, damages are not an adequate remedy for breach of contract, and the court may exercise its discretion to grant one of the following equitable remedies: Specific performance: the court orders the party who breached to do exactly what was

promised in the contract. This remedy is available only when the item in question is unique and cannot be replaced by money. The court can refuse to order specific



performance because of improper behaviour by the plaintiff, impossibility, or severe hardship or in employment contracts.

Injunction: if a contract contains promises not to engage in specified activities, the only effective remedy for disregarding contractual promises is a court order to stop the continued violation of the contract.

Rescission: the court can order the parties to be restored to the situation they were in before the contract was formed, rather than use compensation to put the innocent party in the position it would have been in had the contract been completed.

25. When might a court refuse to order specific performance? Page 210: A court might refuse to award specific performance as a remedy in the following circumstances: improper behaviour by the plaintiff, delay by the plaintiff, impossibility, severe hardship to the parties or a third party, and employment contracts. 26. In what situation is an injunction regularly used? Page 211: Injunctions are commonly ordered to restrain a party from breaching a promise not to do something. 27. What is the significance of an interlocutory injunction? Page 211: An interlocutory injunction is an order to refrain from doing something for a limited time. Typically, it applies until the dispute can be resolved by a trial. 28. What is the main objective of restitution? Page 211: The main objective of restitution is to remedy unjust enrichment. Unjust enrichment occurs when one party has undeservedly or unjustly secured a benefit at another partys expense. 29. How can a court respond to situations of unjust enrichment? Page 212: It can require payment on the basis of restitutionary quantum meruit, which will constitute payment of an amount that is reasonable given the benefit the plaintiff has conferred, or it can order payment of compensation. 30. Identify two things that could limit the ability to seek the equitable remedy of rescission. Page 211: Rescission can be limited when parties cannot restore each other to pre-contractual positions because, for example, the subject matter of the contract has been altered, or the plaintiff has delayed in seeking the courts assistance.

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CH 09