6.2 Performance and Discharge
Key Takeaways
- A condition precedent must occur before a duty arises; concurrent conditions are due at the same time; a condition subsequent cuts off an already-arisen duty.
- Common-law construction contracts are satisfied by substantial performance; UCC §2-601 requires perfect tender of goods, subject to the seller's right to cure under §2-508.
- A contract is discharged by complete performance or proper tender, by agreement (rescission, novation, accord and satisfaction, release, waiver), by impossibility, impracticability, or frustration of purpose, or by operation of law (bankruptcy, statute of limitations).
- Under UCC §2-509, FOB origin (shipment) passes risk of loss when conforming goods are duly delivered to the carrier; FOB destination passes risk on due tender at the named destination.
- Rights are generally assignable and duties generally delegable, but a delegator remains liable unless the obligee agrees to a novation that releases the original party.
6.2 Performance and Discharge
A formed contract still has to be performed or discharged. REG Blueprint II.B.2 tests whether both parties fulfilled their performance obligations and, if not, whether the contract is nonetheless discharged. Formation rules stay in /study-guides/cpa-reg/contracts/contract-formation; this section assumes a contract exists.
Conditions
A condition is an event, not certain to occur, that must occur before a duty becomes due, or that extinguishes a duty.
- Condition precedent. Must occur before a duty arises. "Payment is due when the architect issues a certificate" — the certificate is a condition precedent to the owner's duty to pay. If the condition never occurs, the duty never arises, unless the party who would benefit wrongfully prevents it.
- Concurrent conditions. Each party's performance is due at the same time; each is a condition of the other. In a cash sale of goods, tender of the goods and tender of the price are concurrent.
- Condition subsequent. An event that cuts off an already-arisen duty. "Liability ends if the buyer does not give written notice of defect within 10 days of delivery." Failure to give notice discharges the seller's remaining duty on that claim.
Express conditions require strict compliance. Constructive (implied-in-law) conditions of exchange are satisfied by substantial performance at common law, which is why construction cases come out the way they do.
Substantial performance versus perfect tender
Common law — substantial performance. In construction and other service contracts, a party who has substantially performed — a good-faith effort that leaves only a relatively small, compensable defect — has a right to the contract price minus damages for the defect. The owner may not walk away from a 95%-complete building because a fixture is the wrong brand, unless the defect is material (wrong location, unsafe structure, a different building). Material failure to perform is a total breach and discharges the other party's remaining duties.
UCC §2-601 — perfect tender. Unless otherwise agreed, if the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may reject the whole, accept the whole, or accept any commercial unit and reject the rest. "Close enough" is not the goods rule.
UCC §2-508 — cure. Perfect tender is not a trap with no exit. If the time for performance has not expired, a seller whose tender is rejected as nonconforming may seasonably notify the buyer of an intention to cure and may then make a conforming delivery within the contract time. If the seller had reasonable grounds to believe the nonconforming tender would be acceptable (with or without a money allowance), the seller may have a further reasonable time to substitute a conforming tender after seasonable notice. Installment contracts (§2-612) use a substantial-impairment test, not perfect tender, for rejecting a single installment.
Anticipatory repudiation
Anticipatory repudiation is a party's definite statement or voluntary act, before performance is due, indicating that the party will not perform. A vague expression of doubt is not enough; a clear "we will not ship" or a sale of unique subject matter to someone else is. The nonrepudiating party may:
- treat the repudiation as an immediate total breach and sue,
- wait for the performance date (and urge retraction), or
- suspend its own performance and demand adequate assurance (UCC §2-609; a commercially reasonable analog is used at common law).
A repudiation can be retracted until the other party has materially changed position or indicated that the repudiation is treated as final. Continuing to perform after a clear repudiation creates mitigation problems developed in /study-guides/cpa-reg/contracts/breach-remedies.
Ways a contract is discharged
REG's representative task lists performance, agreement, and operation of law. Teach the catalog:
| Method | What it is | REG trap |
|---|---|---|
| Performance | Complete performance of all duties | Substantial performance still discharges the builder's remaining construction duty, with a damages offset |
| Tender | An offer of complete performance that the other party refuses | Proper tender discharges the tendering party's duty to do more; it does not, by itself, pay the contract price. The refusing party is in breach |
| Mutual rescission | Both parties agree to cancel remaining executory duties | If one side has fully performed, a rescission needs new consideration |
| Novation | A new party is substituted and the original obligor is released | Assignment or delegation without a release is not a novation |
| Accord and satisfaction | Accord = agreement to take a different performance; satisfaction = carrying it out | Until satisfaction, the original duty is only suspended, not discharged |
| Release | A writing discharging a claim, typically for consideration | An oral "forget about it" is a waiver question, not a release |
| Waiver | Voluntary relinquishment of a known right | Can be inferred from conduct; may be retracted as to future duties if the other party has not relied |
| Impossibility | Objective impossibility: destruction of identified subject matter, death in a personal-services contract, later illegality | "More expensive than I thought" is not impossibility |
| Impracticability | UCC §2-615 and the common-law analog: an unforeseen contingency, the non-occurrence of which was a basic assumption, makes performance impracticable | A market-price swing the seller could have hedged is usually the seller's problem |
| Frustration of purpose | Performance is still possible, but the principal purpose known to both parties is destroyed | Hall rental for a cancelled event; a tax-law change that merely makes a deal less profitable is usually not enough |
| Operation of law | Bankruptcy discharge of the contractual duty; statute of limitations barring the remedy | Discharge in bankruptcy is a defense, not a statement that the contract never existed. Limitations bar the suit. Bankruptcy types are covered in /study-guides/cpa-reg/bankruptcy-aca-fcpa/bankruptcy |
UCC risk of loss — §2-509, FOB origin versus destination
Blueprint Area II includes UCC contracts, so risk of loss is in scope even though it sits next to performance rather than formation.
If the contract requires or authorizes the seller to ship by carrier:
- Shipment contract / FOB origin (FOB seller's city). The seller's job is to put conforming goods into the carrier's possession and make a reasonable contract for transportation (§2-504). Risk of loss passes to the buyer when the goods are duly delivered to the carrier (§2-509(1)(a)), even if the seller reserves a security interest. If the truck burns on the highway, the buyer bears the loss and still owes the price (unless the seller was in breach — then §2-510 keeps risk on the seller).
- Destination contract / FOB destination (FOB buyer's city). The seller must transport to the named destination and tender there. Risk passes when the goods are duly tendered at destination so the buyer can take delivery (§2-509(1)(b)).
If there is no carrier term and the seller is a merchant, risk passes on the buyer's receipt of the goods; if the seller is a nonmerchant, risk passes on tender of delivery (§2-509(3)). Absence of an FOB term is generally treated as a shipment contract. FOB is a delivery and risk term under §2-319, not a title-magic word. REG will name a city. If it is the seller's city, think shipment. If it is the buyer's city, think destination.
Assignment and delegation
Assignment transfers rights. Contract rights are generally assignable. Exceptions: a right that is personal to the obligee, an assignment that would materially change the obligor's duty or increase the burden or risk, or a valid anti-assignment clause (under the UCC, a clause barring assignment of the right to payment is generally ineffective as to that assignment). The assignee steps into the assignor's shoes and takes subject to defenses.
Delegation transfers duties. Duties are generally delegable unless they involve the personal skill, judgment, or reputation of the delegator (a portrait painter, a particular surgeon, a named expert). The delegator remains liable after a delegation. Only a novation — the obligee's agreement to release the original party and look solely to the new one — discharges the delegator.
An assignment of "the contract" is generally both an assignment of rights and a delegation of duties. Do not confuse this with Article 9 security interests in accounts; those are the next chapter, /study-guides/cpa-reg/debtor-creditor/ucc-article-9, and they are not this topic.
Worked scenario: builder 95% complete with a small defect
Facts. Northridge Construction agrees, in a written common-law contract, to build an office annex for $800,000, completion June 1. Specifications call for a particular grade of interior door hardware. Northridge finishes on May 28. An inspector finds that three interior doors have a commercially equivalent but different hardware set that can be swapped for $2,400 in parts and labor. The annex is occupied and used. The owner has paid $600,000 on progress bills and now refuses to pay the $200,000 balance, claiming perfect tender and material breach. Northridge sues for the balance.
Analysis.
- This is a services/construction contract, not a sale of goods. UCC §2-601 perfect tender does not apply.
- Northridge has substantially performed. The annex is complete and usable. The hardware deviation is small relative to an $800,000 job and is curable for $2,400. There is no indication of bad faith.
- The owner's remaining duty to pay is not discharged. Northridge is entitled to the contract price minus damages for the defect: $800,000 − $2,400 − $600,000 already paid = $197,600, plus or minus any other proven defect damages.
- If the defect had been a structural failure that made the annex unsafe, or a willful refusal to follow a specification that went to the essence of the bargain, the breach would be material. The owner could then treat the contract as at an end, refuse the balance, and pursue cost-of-completion and other remedies (next section).
- If this had been a sale of 1,000 specified doors rather than a construction job, the buyer could have rejected the nonconforming lot under §2-601, subject to the seller's §2-508 cure if time remained or if the seller reasonably believed the substitute hardware would be acceptable.
Northridge agrees in a written construction contract to build an office annex for $800,000. It finishes on time. Three interior doors have commercially equivalent but non-specified hardware that can be replaced for $2,400. The owner is using the annex, has paid $600,000, and refuses the unpaid balance, citing UCC perfect tender and material breach. Which statement is correct?
Apex, a merchant, sells 10,000 conforming widgets to Beacon under a contract that reads "FOB Apex's warehouse" and authorizes shipment by carrier. Apex duly delivers the widgets to the carrier. The truck is destroyed in a collision before reaching Beacon. Assuming Apex was not in breach, who had the risk of loss when the goods were destroyed?
Prime Contractors delegates its remaining construction duties on Job A to Subco and assigns the right to payment, without the owner's agreement to release Prime. Later, on Job B, the owner, Prime, and Newco execute a writing in which Newco takes over the remaining work and the owner expressly releases Prime. If Subco defaults on Job A, who is liable to the owner?