1 By agreement

When the parties prepare their contracts, they may agree that it will terminate:

a) on a specified date or upon the expiration of a specified period of time;

b) upon the happening of a specified event;

c) upon the failure of a certain event to happen;

d) when one partner decides to retire from business and gives the required notice.

The parties who have made a contract may later mutually agree to change either the terms of the contract or the nature of their relationship. They may do so without any liability for breach.

By rescission the contracting parties may agree to terminate the existing contract entirely, returning any consideration received and placing the parties in their original positions. Or they may agree that the present contract is not what they want, and so they may replace it with a new one. This is discharge by substitution. The parties may also agree to change the obligation required by the original contract. An agreement to make such a change is known as an accord. Performance of the new obligation is called a satisfaction. A compromise of a disputed claim or a composition of creditors is an accord. Carrying out the new agreement is the satisfaction. Thus, the previous obligation is discharged by an accord and satisfaction. Also, a contract can be terminated, and a new one formed, through novation.

2 By Impossibility of Performance

As a general rule, a contract is not discharged when some unforeseen event makes performance more costly or difficult for one of the parties. For example, increased prices of needed supplies, a strike of needed workers, difficulty in obtaining materials or equipment, or some natural disaster such as a flood or earthquake may delay performance. But, generally, these events do not discharge the contractual obligations; they should be anticipated as possibilities when the contract is made. A party who fails to perform because of these events could be held liable for breach of contract.

However, the parties may, and commonly do, include “escape clause” in the contract. It permits modification, or even termination of performance without liability for damages in the event of inability to perform on schedule because of specified conditions such as foul weather and labour strikes.

Under unusual circumstances a contract for goods may be discharged by conditions, which make performance impracticable. But a possibility not thought of by the parties, such as a surprise war or an unexpected embargo (legal stoppage of commerce) may suffice. Even a shutdown of major supply sources could discharge the contract if it prevented the seller from getting supplies or if it caused an extreme increase in cost beyond what could be reasonably anticipated.

Other situations in which a contract is discharged by impossibility include:

Destruction of the subject matter. Sometimes performance depends upon the continued existence of some specific thing. The destruction of that thing terminates the contract if the destruction was not the fault of the party who is sued for nonperformance.

The result of destruction of the subject matter is different if the seller has many sources of supply and the parties did not specify one and only one source as acceptable. For example, suppose a wholesale broker of lumber loses one supply source, perhaps because of a fire. However, the broker has access to other sources of lumber. In addition, the broker’s contract does not specify any one source. Thus, the broker is required to perform at no higher price to the buyer. This is true even if the resulting cost is much higher to the broker.

Performance declared illegal. If a contract, which is legal when made, later becomes illegal, it is discharged. Illegality might be caused by a new statute, by a court ruling, or by an administrative decision.

Death or disability. If the contact requires personal services, the death or the disability of the party who was to provide such services terminates the agreement. This rule would not apply when other persons are available to perform, as in partnerships or corporations which continue to do business. Likewise, it would not apply where the contract simply called for payment of money, delivery of goods, or transfer of title to land by the decedent. In each such case, the decedent’s personal representative is required to perform.