Discharge of Contract by Operation of Law: An Example

In the world of contracts, there are various ways in which a contract may be discharged. One of these ways is known as “discharge by operation of law.” This simply refers to situations where a contract is ended not because the parties intended to end it, but because of certain legal events or circumstances that arise. In this article, we’ll explore an example of what this type of discharge looks like in practice.

Suppose that two parties, Alice and Bob, enter into a contract whereby Alice agrees to sell Bob a piece of property. They sign a purchase agreement that specifies the terms of the sale, including the purchase price, the closing date, and other details. Alice agrees to transfer ownership of the property to Bob upon receipt of the full purchase price, and Bob agrees to pay the purchase price by the closing date.

However, before the closing date arrives, a flood damages the property. The damage is so severe that the property is no longer habitable, and Alice is unable to repair it. Because of this, Alice is unable to fulfill her obligation to transfer ownership of the property to Bob, and Bob is unable to fulfill his obligation to pay the full purchase price. In effect, the contract has been frustrated by the unforeseen circumstance of the flood.

In this case, the contract may be discharged by operation of law. Specifically, the doctrine of frustration may apply. Frustration occurs when an unforeseen event occurs that makes it impossible for the parties to fulfill their obligations under the contract. When this occurs, the contract is essentially terminated automatically, without the need for any action by the parties to end it.

In the example above, the flood makes it impossible for Alice to transfer ownership of the property to Bob, as she had originally agreed to do. Similarly, it makes it impossible for Bob to pay the full purchase price, since the property is no longer habitable. Because of this, the contract is considered frustrated, and it is discharged by operation of law.

It’s important to note that frustration is not the only way that a contract may be discharged by operation of law. Other examples include:

1. Bankruptcy: If one of the parties to the contract files for bankruptcy, the contract may be discharged automatically.

2. Illegality: If the subject matter of the contract becomes illegal, the contract may be terminated automatically.

3. Death: If the parties to the contract are individuals and one of them dies, the contract is terminated automatically.

In conclusion, discharge by operation of law is an important concept for anyone involved in the creation or enforcement of contracts to understand. While frustration is just one example of this type of discharge, it illustrates the way in which unforeseen circumstances can impact the validity and enforceability of contracts. By being aware of the various ways in which contracts may be discharged by operation of law, you can better protect yourself and your business from potential legal problems down the road.