Practical Application: Methods of Discharging Contracts

Instructor: Scott Tuning

Scott has been a faculty member in higher education for over 10 years. He holds an MBA in Management, an MA in counseling, and an M.Div. in Academic Biblical Studies.

Contracts are foundational because they require parties to act in a certain way and damages can be sought if the parties fail to live up to their obligations. Let's look at a few situations in which a contract can be discharged for lawful reasons.

Discharging Contracts

Contracts, legally binding agreements between parties, are the bedrock of honest, good faith business relationships. Contracts can exist in many forms (such as written, verbal, and implied), but one common theme is that there are only a limited number of circumstances that will allow the parties to be relieved of their obligations under the contract. Although a contract is nearly always a legally enforceable document, there are certain conditions under which a contract is no longer valid.

The six elements that make a contract legal include:

Validity Element Example of Presence Example of Absence
Entity Making an Offer Company A asks Company B to consider a business relationship. Company A never makes a proposal to Company B
Entity Accepting the Offer Company B agrees that a relationship with Company A is a good idea as well. Company B never responds to the offer from Company A
Consideration Both Company A and B agree to the thing(s) of value upon which the contract is based. Company A refuses to pay more than $100, but Company B refuses to accept less than $500.
Capacity Both parties to the contract are legally permitted to enter into a contract. One or more parties is a minor, not mentally competent, or under the influence of a mind-altering substance at the time of the contract.
Mutually Acceptable When the contract negotiation is complete, both Company A and B are satisfied with the provisions. Despite a hopeful start to negotiations, the final terms are unsatisfactory to one of the parties.
Legally Binding The contract's terms are all legal and enforceable. The contract contains conditions that would be illegal to enforce, such as an agreement to work for $1.00 per hour or to work for a minimum of 21 hours each day.

Here are a few scenarios that illustrate some of these conditions.

Scenario 1: Time for a New Provider

A contract between a hospital and mental health provider organization provides that (in 90% of the eligible cases) patients with mental illness will be seen by a psychiatrist within 48 hours of being admitted to the hospital. For three months in a row, the mental health provider group has failed to meet the 48-hour provision on more than a dozen cases each month. There were also three instances in which the provider evaluation the patient was, in fact, not a psychiatrist. The hospital wants to hire a new psychiatry group to meet their needs.

  • What are the current conditions that will allow the hospital to discharge the contract?

Scenario 2: We Won't Be Needing That After All

A company that mitigates asbestos and other hazardous chemicals in occupied buildings has executed a contract with the school district to remove the asbestos from its ceiling tiles as part of a larger renovation project. However, after the school district reviewed the increasing costs associated with removing the asbestos, it became clear that the project to renovate might actually exceed the cost of replacing the entire building. The school district discharged their contract for asbestos mitigation and updated the contract to include removal of asbestos and all contaminated materials exposed during the old building's demolition.

  • What method did the school district employ to discharge the first contract and execute the updated agreement?

Scenario 3: Never Misuse a Federal Grant

A medium-sized commercial airport won a federal grant to lengthen the runway so that it could accommodate larger aircraft. After being awarded the grant, the airport's board of directors determined that a new terminal building was actually a more pressing need. They voted to use the grant to expand the terminal rather than lengthen the runway. The airport signed a contract with a local construction company to make the new terminal building improvements. Unfortunately, about halfway through the project, regulators came to inspect progress on the runway expansion. Upon realizing the funds had been improperly re-allocated, the government sued the airport for the misuse of the grant money.

  • Does this discharge the construction contract? If so, under what provision(s)?

Questions and Answers

Using what you learned in the lessons Methods of Discharging Contracts and Other Contract Discharge Options, review the table below and then review your answers to the questions posed above to make sure that your answers were accurate.

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