Essentials of Business Law, 9th edition
INSTRUCTOR’S MANUAL
Chapter 15 Discharge of Contracts
LESSON OVERVIEW
The previous chapters dealt with the formation of contracts and their operation. Chapter 15 discusses
the various ways to terminate contracts, and through the use of examples, depicts their relevance in real
life situations. Students will learn that contracts can be terminated—by agreement, by performance, by
impossibility of performance, by alteration, by operation of law, by breach of contract, and to protect a
customer. The chapter also covers remedies for breach of contract relating to incomplete or
unsatisfactory performance of contract terms by either party. Finally, students’ understanding of the
topics is evaluated through objective-type questions, discussion questions, and case scenarios. Students
are encouraged to conduct their own research through the use of the Internet and other sources.
CHAPTER OUTLINE
A. TERMINATION OF CONTRACTS (p. 232)
B. TERMINATION BY AGREEMENT (p. 232)
C. TERMINATION BY PERFORMANCE (p. 232)
1. Substantial Performance (p. 233)
2. Performance by Payment of Money (p. 233)
3. Tender and Its Effect (pp. 233-234)
D. TERMINATION BY IMPOSSIBILITY OF PERFORMANCE (pp. 234-236)
1. Personal-Service Contracts (p. 235)
2. Frustration of Purpose (p. 236)
E. TERMINATION BY ALTERATION (p. 238)
F. TERMINATION BY OPERATION OF LAW (pp. 236-238)
G. TERMINATION BY BREACH OF CONTRACT (pp. 237-238)
1. Anticipatory Breach (pp. 237-238)
2. Breach Resulting from a Deliberate or Negligent Act (p. 238)
3. Failure to Perform an Obligation (p. 238)
H. TERMINATION TO PROTECT A CONSUMER (p. 239)
I. REMEDIES FOR BREACH OF CONTRACT (pp. 239-241)
1. Specific Performance (p. 240)
2. Restraining Order or Injunction (pp. 240-241)
J. CHAPTER SUMMARY (p. 241)
K. CHAPTER ASSESSMENT (pp. 242-248)
1. Matching Legal Terms (p. 242)
2. True/False Quiz (pp. 242-243)
3. Discussion Questions (pp. 243-244)
4. Thinking Critically About the Law (pp. 244-245)
5. Case Questions (pp. 245-246)
6. Case Analysis (pp. 246-248)
7. Legal Research (p. 248)
KEY TERMS
Key terms are listed at the beginning of the chapter, posted in the student textbook margins, and placed
in bold in the copy. They are listed here for your quick reference.
§ substantial performance (p. 233)
§ tender of performance (p. 233)
§ tender of goods (p. 233)
§ tender of payment (p. 234)
§ impossibility of performance (p. 234)
§ frustration of purpose (p. 236)
§ material alteration (p. 236)
§ breach of contract (p. 237)
§ anticipatory breach (p. 237)
§ mitigate (p. 237)
§ promissory note (p. 238)
§ liquidated damages clause (p. 240)
§ specific performance (p. 240)
§ restraining order (p. 240)
§ injunction (p. 240)
LEARNING OUTCOMES
The chapter Learning Outcomes will help you and the students discover the concepts and information
that should be understood upon completion of the chapter. You may want to access the PowerPoint
(PPT) slides for Chapter 15 when you begin the study of the chapter and discuss each Learning
Outcomes. Each Learning Outcome will be covered separately in the Instructor Notes, but they are
shown here in total as an overview of the sections being presented in Chapter 15. The corresponding
text page numbers and PPT slides are listed next to each outcome. These slides should be used to
reinforce the main points of the lecture.
After completing this chapter, the students will be able to:
1. Identify seven ways in which a contract may be terminated. (p. 232, PPT slide 2)
2. Discuss termination of a contract by agreement. (p. 232, PPT slide 3)
3. Explain the three types of termination by performance. (pp. 232-234, PPT slides 4-9)
4. Explain termination by impossibility of performance. (pp. 234-236, PPT slides 10-13)
5. Describe when termination by alteration occurs. (p. 236, PPT slide 14)
6. Identify the circumstances under which a contract would be terminated by operation of law. (p.
239, PPT slide 21)
7. Provide examples of contracts terminated by breach. (pp. 237-238, PPT slides 16-20)
8. Explain how contracts can be terminated to protect consumers. (p. 241, PPT slide 21)
9. Discuss the remedies for breach of contract, and provide examples of situations that would be
appropriate for each remedy. (pp. 239-241, PPT slides 22-27)
LECTURE OUTLINE
A. TERMINATION OF CONTRACTS
Contracts may be terminated by (1) agreement, (2) performance, (3) impossibility of performance, (4)
alteration, (5) operation of law, (6) breach, and (7) laws and regulations protecting the consumer.
B. TERMINATION BY AGREEMENT
A contract may provide for its termination after a certain period of time or upon the occurrence of a
certain event.
C. TERMINATION BY PERFORMANCE
Complete and satisfactory performance of the terms of a contract will bring about termination. When a
contract is fulfilled, there is no need to provide for contract termination.
1. Substantial performance occurs when a party to a contract, in good faith,
executes all of the promised terms and conditions of the contract with the exception of
minor details that do not materially affect the intent of their agreement.
2. Performance by Payment of Money
Contracts that require the payment of money are not complete until the amount agreed
upon has been paid.
3. Tender and Its Effect
A tender of performance is an offer to perform and is considered evidence of a party’s
willingness to fulfill the terms of a contract. A tender of goods is an offer to provide the
goods agreed upon and is considered evidence of a party’s willingness to fulfill the
terms of a contract. A tender of payment is an offer of money in payment of an
obligation and is considered evidence of a party’s willingness to fulfill the terms of a
contract.
a) Valid Tender
Requirements for validity of tender of money or performance:
i. Tender must be made as specified in the contract.
ii. When tender of payment is made, it must be for the exact amount.
iii. If the contract calls for the delivery of specific goods, only the
tender of these particular goods will satisfy the contract.
D. TERMINATION BY IMPOSSIBILITY OF PERFORMANCE
In a case of impossibility of performance, the contract is considered void and the parties are discharged.
1. Personal-Service Contracts
Death or disabling illness of a party to a contract may render the contract impossible to
perform if it can be shown that the contract calls for a special skill or talent possessed by
the deceased or ill person. On the other hand, a personal-service contract that does not
call for a special skill or talent possessed by the deceased or ill person does not excuse
performance.
2. Frustration of Purpose
Where both parties know the purpose of a contract and, through no fault of either party,
the reason for the contract no longer exists, the contract is terminated.
E. TERMINATION BY ALTERATION
A deliberate change or alteration of an important element in a written contract that affects the rights or
obligations of the parties is known as a material alteration and results in termination of the contract.
F. TERMINATION BY OPERATION OF LAW
If a law or regulation makes the performance of a contract illegal, the contract is void from the
beginning. In fact, there is no contract. If, however, a law is passed after the parties enter into a contract
that makes performance illegal, the contract is terminated by operation of law. Laws and regulations
that increase the cost of performance, however, do not absolve the parties from their contractual
obligations.
G. TERMINATION BY BREACH OF CONTRACT
A breach of contract occurs when a party to a contract refuses to perform as required by the contract
or performs in an unsatisfactory manner. Three common ways contracts are breached:
1. Anticipatory Breach
A party who announces an intention to break a contract is said to create an anticipatory
breach. When one party has received notice from the other party of intent to breach, he
or she cannot continue with the performance of the work or service covered by the
contract; doing so would only increase the amount of damages. When a party breaches a
contract, the injured party has the duty to mitigate, or lessen, the amount of damages.
The law regarding anticipatory breach does not apply to promises to pay money at some
future date.
2. Breach Resulting from a Deliberate or Negligent Act
A contract is breached if one party deliberately or negligently stands in the way of
performance.
3. Failure to Perform an Obligation
A party who fails to perform contractual obligations, within the time specified or within
a reasonable time, has breached the contract. The breach occurs whether the party has
completely or partially failed to perform.
H. TERMINATION TO PROTECT A CONSUMER
To protect consumers against their own impulsiveness and various questionable sales techniques, a
number of federal, state, and local laws and regulations allow consumers to terminate a contract under
certain conditions.
I. REMEDIES FOR BREACH OF CONTRACT
Each party to a contract has the right to expect complete and satisfactory performance. When such
performance is not made, the injured party may sue for a sum of money that will compensate for his or
her loss.
At times, the parties include a statement right in their contract wherein damages are explicitly set in the
event one of the parties breaches the agreement. Such statement is called a liquidated damages clause.
1. Specific Performance
Sometimes a judgment of money damages will not really repay an injured party for a
breach of contract. In some cases, the injured party may sue for specific performance,
that is, a court order directing a person to perform as he or she agreed to do. Courts
almost never order specific performance of a contract for personal services, partly
because it is difficult to ensure the performance of someone who is being forced to work
after a dispute, in that any loyalty or normal relationship is nearly impossible to achieve.
2. Restraining Order or Injunction
A restraining order, or injunction, is a court order prohibiting the performance of a
certain act. In some states, a restraining order is temporary and an injunction is
permanent.
INSTRUCTOR NOTES
A resulting answer or explanation is provided below for each Learning Outcome in Chapter 15. Every
outcome is also mapped to corresponding text page numbers, PPT slides, and relevant chapter
assessment exercises and activities for ease of reference and use.
LO1. Identify seven ways in which a contract may be terminated.
Seven ways in which a contract can be terminated are by (1) agreement, (2) performance, (3)
impossibility of performance, (4) alteration, (5) operation of law, (6) breach, and (7) laws and
regulations protecting the consumer.
Text Pages: 232
PowerPoint: Slide 2
LO2. Discuss termination of a contract by agreement.
A contract can be terminated by agreement if both parties agree that cancellation was the best course of
action. If, however, only one party wants to end the contract, both parties are still bound by the terms of
the agreement until the period specified in the contract has passed.
Text Pages: 232
PowerPoint: Slide 3
Discussion Questions: 26
Case Analysis: 42
LO3. Explain the three types of termination by performance.
Three types of termination by performance are (a) substantial performance, in which the contract has
been largely completed and only small details remain; (b) performance by payment of money, in which
the agreed-upon payment has been paid; and (c) tender of performance, in which there has been an
offer to pay the required sum or to perform the required acts.
Text Pages: 232-234
PowerPoint: Slides 4-9
Discussion Questions: 27
Thinking Critically About the Law: 32
Case Questions: 38
Case Analysis: 43
LO4. Explain termination by impossibility of performance.
Contracts can be terminated by impossibility of performance when unforeseen circumstances make it
impossible to fulfill the terms of a contract as originally agreed.
Text Pages: 234-236
PowerPoint: Slides 10-13
Discussion Questions: 28
Thinking Critically About the Law: 33
Case Analysis: 41
LO5. Describe when termination by alteration occurs.
Termination by alteration occurs when an important element in a written contract that affects the rights
or obligations of the parties is changed.
Text Pages: 236
PowerPoint: Slide 14
LO6. Identify the circumstances under which a contract would be terminated by operation of law.
A contract can be terminated by operation of law if a law passed after the parties had entered into a
contract makes performance illegal.
Text Pages: 239
PowerPoint: Slide 21
LO7. Provide examples of contracts terminated by breach.
Contracts terminated by breach occur when a party to a contract refuses to perform as required by the
contract or performs in an unsatisfactory manner. Three common ways in which contracts are breached
are by (a) anticipatory breach, (b) a deliberate or negligent act, and (c) failure to perform an obligation.
Text Pages: 237-238
PowerPoint: Slides 16-20
Discussion Questions: 29
Thinking Critically About the Law: 34
Case Questions: 40
Case Analysis: 44
LO8. Explain how contracts can be terminated to protect consumers.
Some contracts can be terminated to protect consumers because the law hopes to protect them against
their own impulsiveness, questionable sales techniques, and similar problems. For example, the
Consumer Credit Protection Act of 1968 gives consumers the right to cancel a credit transaction within
three days when the contract requires that the consumer pledge his or her home as a security deposit.
Similarly, an FTC regulation gives consumers a “cooling-off” period of three days and the right to
cancel contracts made in the consumer’s home and to receive a full refund.
Text Pages: 241
PowerPoint: Slide 21
Discussion Questions: 30
Thinking Critically About the Law: 36
Case Questions: 37, 39
LO9. Discuss the remedies for breach of contract, and provide examples of situations that would
be appropriate for each remedy.
The remedy of specific performance is a court order that a person perform as he or she agreed to do.
The remedy of injunction is a court order that prohibits performance of a certain act.
Text Pages: 239-241
PowerPoint: Slides 22-27
Discussion Questions: 31
Case Questions: 38, 40