LEARNING OBJECTIVES
Recognize when alteration, power of avoidance, the statute of limitations, and bankruptcy discharge parties from contracts.
In addition to performance (or lack of it), agreement of the parties, the happening or nonhappening of conditions, and variations on the theme of impossibility, there are several other ways contract duties may be discharged.
Cancellation, Destruction, or Surrender
An obligee may unilaterally discharge the obligor’s duty toward him by canceling, destroying, or surrendering the written document embodying the contract or other evidence of the duty. No consideration is necessary; in effect, the obligee is making a gift of the right that he possesses. No particular method of cancellation, destruction, or surrender is necessary, as long as the obligee manifests his intent that the effect of his act is to discharge the duty. The entire document can be handed over to the obligor with the words, “Here, you don’t owe me anything.” The obligee can tear the paper into pieces and tell the obligor that he has done so because he does not want anything more. Or he can mutilate the signatures or cross out the writing.
Power of Avoidance
A contractual duty can be discharged if the obligor can avoid the contract. As discussed in Chapter 10 "Real Assent", a contract is either void or can be avoided if one of the parties lacked capacity (infancy, insanity); if there has been duress, undue influence, misrepresentation, or mistake; or the contract is determined to be unconscionable. Where a party has a power of avoidance and exercises it, that party is discharged from further obligation.
Statute of Limitations
When an obligor has breached a contract, the obligee has the right to sue in court for a remedy. But that right does not last forever. Every state has statutes of limitations that establish time periods within which the suit must be brought (different time periods are spelled out for different types of legal wrongs: contract breach, various types of torts, and so on). The time period for contract actions under most statutes of limitations ranges between two and six years. The UCC has a four-year statute of limitations. [10] The period begins to run from the day on which the suit could have been filed in court—for example, from the moment of contract breach. An obligee who waits until after the statute has run—that is, does not seek legal relief within the period prescribed by the statute of limitations—is barred from going to court thereafter (unless she is under some incapacity like infancy), but the obligor is not thereby discharged. The effect is simply that the obligee has no legal remedy. If the parties have a continuing relationship, the obligee might be able to recoup—for example, by applying a payment for another debt to the one barred by the statute, or by offsetting a debt the obligee owes to the obligor.
Bankruptcy
Under the federal bankruptcy laws as discussed in Chapter 30 "Bankruptcy", certain obligations are discharged once a court declares a debtor to be bankrupt. The law spells out the particular types of debts that are canceled upon bankruptcy.
KEY TAKEAWAY
Contract duties may be discharged by cancellation, destruction, or surrender of the written contract; by the running of the statute of limitations; or by bankruptcy.
[1] Uniform Commercial Code, Section 2-106(3).
[2] Restatement (Second) of Contracts, Section 237(d).
[3] Hochster v. De La Tour, 2 Ellis & Blackburn 678 (Q.B. 1853).
[4] Restatement (Second) of Contracts, Section 283.
[5] Stewart Macaulay, “Non-contractual Relations in Business: A Preliminary Study,”American Sociological Review 28, no. 1 (1963): 55, 61.
[6] Restatement (Second) of Contracts, Section 261.
[7] Autry v. Republic Productions, 180 P.2d 144 (Calif. 1947).
[8] Christy v. Pilkinton, 273 S.W.2d 533 (Ark. 1954).
[9] Uniform Commercial Code, Section 2-615.
[10] Uniform Commercial Code, Section 2-725.
15.2 Cases Substantial Performance; Conditions Precedent
TA Operating Corp. v. Solar Applications Engineering, Inc.
191 S.W.3d 173 (Tex. Ct. App. 2005)
TA Operating Corporation, a truck stop travel center company, contracted with Solar Applications Engineering, Inc. to construct a prototype multi-use truck stop in San Antonio for a fixed price of $3,543,233.…
[When the project was near] completion, TA sent Solar a “punch list” of items that needed to be finished to complete the building. Solar disputed several items on the list and delivered a response to TA listing the items Solar would correct.…Solar began work on the punch list items and filed a lien affidavit [a property that carries a lien can be forced into sale by the creditor in order to collect what is owed] against the project on October 2, 2000 in the amount of $472,392.77. TA understood the lien affidavit to be a request for final payment.
On October 18, 2000, TA sent notice to Solar that Solar was in default for not completing the punch list items, and for failing to keep the project free of liens. TA stated in the letter that Solar was not entitled to final payment until it completed the remainder of the punch list items and provided documentation that liens filed against the project had been paid.…Solar acknowledged at least two items on the punch list had not been completed, and submitted a final application for payment in the amount of $472,148,77.…TA refused to make final payment, however, contending that Solar had not complied with section 14.07 of the contract, which expressly made submission of a [lien-release] affidavit a condition precedent to final payment:…
The final Application for Payment shall be accompanied by:…complete and legally effective releases or waivers…of all lien rights arising out of or liens filed in connection with the work.
Although Solar did not comply with this condition precedent to final payment, Solar sued TA for breach of contract under the theory of substantial performance.…TA [asserts that] the doctrine of substantial performance does not excuse Solar’s failure to comply with an express condition precedent to final payment.…
The first issue we must resolve is whether the doctrine of substantial performance excuses the breach of an express condition precedent to final payment that is unrelated to completion of the building. TA acknowledges that Solar substantially performed its work on the project, but contends its duty to pay was not triggered until Solar pleaded or proved it provided TA with documentation of complete and legally effective releases or waivers of all liens filed against the project.…TA contends that when the parties have expressly conditioned final payment on submission of [a liens-release] affidavit, the owner’s duty to pay is not triggered until the contractor pleads or proves it complied with the condition precedent.
Solar contends that although it did not submit [a liens-release] affidavit in accordance with the contract, it may still recover under the contract pursuant to the substantial performance doctrine. Solar argues that to hold otherwise would bring back the common law tradition that the only way for a contractor to recover under a contract is full, literal performance of the contract’s terms.…
While the common law did at one time require strict compliance with the terms of a contract, this rule has been modified for building or construction contracts by the doctrine of substantial performance. “Substantial performance” was defined by the Texas [court] in [Citation]:
To constitute substantial compliance the contractor must have in good faith intended to comply with the contract, and shall have substantially done so in the sense that the defects are not pervasive, do not constitute a deviation from the general plan contemplated for the work, and are not so essential that the object of the parties in making the contract and its purpose cannot without difficulty, be accomplished by remedying them. Such performance permits only such omissions or deviation from the contract as are inadvertent and unintentional, are not due to bad faith, do not impair the structure as a whole, and are remediable without doing material damage to other parts of the building in tearing down and reconstructing.
…The doctrine of substantial performance recognizes that the contractor has not completed construction, and therefore is in breach of the contract. Under the doctrine, however, the owner cannot use the contractor’s failure to complete the work as an excuse for non-payment. “By reason of this rule a contractor who has in good faith substantially performed a building contract is permitted to sue under the contract, substantial performance being regarded as full performance, so far as a condition precedent to a right to recover thereunder is concerned.” [Citation]…
Solar argues that by agreeing substantial performance occurred, TA acknowledged that Solar was in “full compliance” with the contract and any express conditions to final payment did not have to be met. [Citation]: “[a] finding that a contract has been substantially completed is the legal equivalent of full compliance, less any offsets for remediable defects.” Solar argues that TA may not expressly provide for substantial performance in its contract and also insist on strict compliance with the conditions precedent to final payment. We disagree. While the substantial performance doctrine permits contractors to sue under the contract, it does not ordinarily excuse the non-occurrence of an express condition precedent:
The general acceptance of the doctrine of substantial performance does not mean that the parties may not expressly contract for literal performance of the contract terms.…Stated otherwise, if the terms of an agreement make full or strict performance an express condition precedent to recovery, then substantial performance will not be sufficient to enable recovery under the contract.
15 Williston on Contracts § 44.53 (4th Ed.2000) (citing Restatement (Second) of Contracts, § 237, cmt. d (1981)).…
TA, seeking protection from double liability and title problems, expressly conditioned final payment on Solar’s submission of a [liens-release] affidavit. Solar did not dispute that it was contractually obligated to submit the affidavit as a condition precedent to final payment, and it was undisputed at trial that $246,627.82 in liens had been filed against the project. Though the doctrine of substantial performance permitted Solar to sue under the contract, Solar did not plead or prove that it complied with the express condition precedent to final payment. Had Solar done so, it would have been proper to award Solar the contract balance minus the cost of remediable defects. While we recognize the harsh results occasioned from Solar’s failure to perform this express condition precedent, we recognize that parties are free to contract as they choose and may protect themselves from liability by requesting literal performance of their conditions for final payment.…
[T]he trial court erred in awarding Solar the contract balance [as] damages, and we render judgment that Solar take nothing on its breach of contract claim.
CASE QUESTIONS
Why did Solar believe it was entitled to the contract balance here?
Why did the court determine that Solar should not have been awarded the contract damages that it claimed, even though it substantially complied?
How has the common law changed in regard to demanding strict compliance with a contract?
Minor v. Chase Auto Finance Corporation
—S.W.3d——, 2010 WL 2006401 (Ark. 2010)
Sheffield, J.
We have been asked to determine whether non-waiver and no-unwritten-modifications clauses in a [contract] preclude a creditor from waiving future strict compliance with the agreement by accepting late payments.…
Appellant Mose Minor (Minor) entered into a Simple Interest Motor Vehicle Contract and Security Agreement with Appellee Chase Auto Finance Corporation (Chase) to finance the purchase of a 2003 Toyota Tundra. By the terms of the agreement, Minor was to make sixty-six payments of $456.99 on the fourteenth of each month.…The agreement also included the following relevant provisions:
G. Default: If you…default in the performance of any promise you make in this contract or any other contract you have with us, including, but not limited to, failing to make any payments when due, or become insolvent, or file any proceeding under the U.S. Bankruptcy Code,…we may at our option and without notice or demand (1) declare all unpaid sums immediately due and payable subject to any right of reinstatement as required by law (2) file suit against you for all unpaid sums (3) take immediate possession of the vehicle (4) exercise any other legal or equitable remedy.…Our remedies are cumulative and taking of any action shall not be a waiver or prohibit us from pursuing any other remedy. You agree that upon your default we shall be entitled to recover from you our reasonable collection costs, including, but not limited to, any attorney’s fee. In addition, if we repossess the vehicle, you grant to us and our agents permission to enter upon any premises where the vehicle is located. Any repossession will be performed peacefully.…
J. Other Agreements of Buyer:…(2) You agree that if we accept moneys in sums less than those due or make extensions of due dates of payments under this contract, doing so will not be a waiver of any later right to enforce the contract terms as written.…(12) All of the agreements between us and you are set forth in this contract and no modification of this contract shall be valid unless it is made in writing and signed by you and us.…
K. Delay in Enforcement: We can delay or waive enforcement of any of our rights under this contract without losing them.
Minor’s first payment was late, as were several subsequent payments. At times he failed to make any payment for months. Chase charged a late fee for each late payment, and sent several letters requesting payment and offering to assist Minor with his account. Chase also warned Minor that continued failure to make payments would result in Chase exercising its legal options available under the agreement, including repossession of the vehicle.…At one point, Minor fell so far behind in his payments that Chase was on the verge of repossessing the vehicle. However…the parties agreed to a two-month extension of the agreement.…The extension agreement indicated that all other terms and conditions of the original contract would remain the same.
On November 2, 2004, Minor filed for Chapter 7 "Introduction to Tort Law" bankruptcy [after which] Chase sent Minor a letter acknowledging that Minor’s debt to Chase had been discharged in bankruptcy. The letter further stated that Chase still had a valid lien on the vehicle, and if Minor wished to keep the vehicle, he would have to continue to make payments to Chase. Otherwise, Chase would repossess the vehicle.…
On September 28, 2006, a repossession agent…arrived at Minor’s home some time in the afternoon to repossess the vehicle.…[Notwithstanding Minor’s insistence that the agent stop] the agent removed Minor’s possessions from the vehicle and towed it away. Chase sold the vehicle. The amount of the purchase price was reflected on Minor’s account.…
On January 7, 2008, Minor filed a complaint against Chase [alleging] that, during the course of the contract, the parties had altered the provisions of the contract regarding Chase’s right to repossess the vehicle and Chase had waived the right to strictly enforce the repossession clause. Minor further claimed that the repossession agent committed trespass and repossessed the vehicle forcibly, without Minor’s permission, and through trickery and deceit, in violation of [state law]. Also, Minor asserted that he was not in default on his payments, pursuant to the repayment schedule, at the time Chase authorized repossession. Therefore, according to Minor, Chase committed conversion, and breached the Arkansas Deceptive Trade Practices Act [Citation], and enhanced by Arkansas Code Annotated section 4-88-202, because Minor is an elderly person. Minor sought compensatory and punitive damages.…
After hearing these arguments, the circuit court ruled that Minor had presented no evidence that the conduct of Chase or the repossession agent constituted grounds for punitive damages; that by the express terms of the contract Chase’s acceptance of late payments did not effect a waiver of its rights in the future; that at the time of repossession, Minor was behind in his payments and in breach of the contract; that Chase had the right under the contract to repossess the vehicle and did not commit conversion; and that there was no evidence to support a claim that Chase had violated the Arkansas Deceptive Trade Practices Act.…
[W]e affirm our previous decisions that when a contract does not contain a non-waiver and a no-unwritten-modification provision and the creditor has established a course of dealing in accepting late payments from the debtor, the creditor waives its right to insist on strict compliance with the contract and must give notice to the debtor that it will no longer accept late payments before it can declare default of the debt. However, we announce today that, if a contract includes non-waiver and no-unwritten-modification clauses, the creditor, in accepting late payments, does not waive its right under the contract to declare default of the debt, and need not give notice that it will enforce that right in the event of future late payments.…
In arriving at this conclusion, we adhere to the principle that “a [contract] is effective according to its terms between the parties.”…We have long held that non-waiver clauses are legal and valid. See [Citations] Also, [the Arkansas UCC 2-209(2)] declares that no-unwritten-modification provisions are binding.
We acknowledge that there is a difference of opinion amongst the courts in other jurisdictions over the effect of non-waiver and no-unwritten-modification clauses.…
We concur with the Supreme Court of Indiana’s decision in [Citation], that a rule providing that non-waiver clauses could themselves be waived by the acceptance of late payments is “illogical, since the very conduct which the [non-waiver] clause is designed to permit[,] acceptance of late payment[,] is turned around to constitute waiver of the clause permitting the conduct.” We also agree that the approach of jurisdictions that require creditors who have accepted late payments in the past to notify debtors that they expect strict compliance in the future, despite the existence of a non-waiver provision in the contract, is not “sound.” Such a rule, we recognize, “begs the question of validity of the non-waiver clause.” Finally, our holding is in line with the Indiana Supreme Court’s ruling that it would enforce the provisions of the contract, since the parties had agreed to them, and that it would not require the creditor to give notice, because the non-waiver clause placed the [creditor] in the same position as one who had never accepted a late payment. [Citations]…
Certified question answered; remanded to court of appeals.
CASE QUESTIONS
What is a nonwaiver clause?
Why did Mose think his late payments were not grounds for repossession of his truck?
Why would a creditor accept late payments instead of immediately repossessing the collateral?
Why did Mose lose?
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