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Chapter9
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
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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.
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Study Outline
Use this outline to prepare a complete set of notes for this chapter.
Termination through Performancepage 195
______________________________________________________________________
______________________________________________________________________
Performance by Others: Vicarious Performance _______________________________
______________________________________________________________________
Termination by Agreementpage 196
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By Agreement between Parties_____________________________________________
______________________________________________________________________
Transfer of Contractual Rights _____________________________________________
______________________________________________________________________
Assignment _________________________________________________________
______________________________________________________________________
Termination by Frustrationpage 198
______________________________________________________________________
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Force Majeure Clause____________________________________________________
______________________________________________________________________
Enforcement of Contractspage 200
______________________________________________________________________
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Privity of Contract_______________________________________________________
______________________________________________________________________
Breach of Contract ______________________________________________________
______________________________________________________________________
Condition________________________________________________________
Warranty ________________________________________________________
Exclusion or limitation of liability clause__________________________________
______________________________________________________________________
Fundamental breach _______________________________________________
Timing of the breach__________________________________________________
Anticipatory breach________________________________________________
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Remedy _______________________________________________________________
Damages __________________________________________________________
Purpose of damages __________________________________________________
Pecuniary and non-pecuniary damages_________________________________
______________________________________________________________________
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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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
B
C
D
E
F
G
H
I
J
K
L
M
N
O
P
Anticipatory breach
Assignment
Balance of probabilities
Condition
Duty to mitigate
Force majeure clause
Frustration
Fundamental breach
Injunction
Innominate term
Non-pecuniary damages
Novation
Pecuniary damages
Privity of contract
Vicarious performance
Warranty
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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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______________________________________________________________________
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______________________________________________________________________
5. Explain the law of assignment.
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
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12. Explain when employees can rely on an exclusion clause in a contract between the
employer and a customer.
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
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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______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
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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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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.
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Matching
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Opage 196
Lpage 196
Bpage 197
Gpage 198
Fpage 200
Npage 201
Dpage 203
Ppage 203
Mpage 208
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
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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.
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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
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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
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