How a contract is discharged

THE obligation arising from a contract may cease to exist in several ways:

By mutual agreement, by which each party renounces his rights under the contract. Cessation of contract by merger of one in another, or by substitution of one for another, may be classed under this head.

A contract ceases by performance when each party has wholly performed his duty under it.

When a contract consists of reciprocal promises, and one party fails to perform, or clearly expresses an intention not to perform, or disables himself from performing his promise, the other party may, at his option, treat the contract as at an end, and it is thereby discharged. Failing this, the injured party continues liable to perform his part, but he may claim damages for breach of contract by the other.

A contract which has for its object the rendering of a personal service is discharged by the death or incapacitating illness of the promisor.

There is no prescription against the obligation of a contract in English law, but a trustee in bankruptcy may repudiate the contracts of the bankrupt if they appear to be unprofitable.

667. 1. Various modes are enumerated. Obligation can be extinguished in many ways, namely:

(a) by prescription, concerning which it was said above, n. 243;

(b) by rescission of the contract, when a rescindable contract is dissolved by the authority of the judge; or by annulment, when it is declared invalid by the judge;

(c) by payment of the debt, or the furnishing of the thing concerning which agreement had been made;

(d) by condonation, when the creditor remits the debt;

(e) by compensation, which obtains place as often as both contracting parties owe to each other the same quantity of money or of fungible things;

(f) by confusion, when the obligation of the debtor and the right of the creditor come together in the same person, e.g., through testament or succession;

(g) by the destruction of the thing owed, namely as often as the certain and determinate thing which was owed is destroyed or lost without the fault and delay of the debtor.

Concerning these you will find more in the civil Codes.¹

¹ For France, Cod. civ., art. 1234-1314; Supplem., p. 84*-89*; Planiol, II, n. 399-629.

668. 2. Moral questions. But here moral questions occur concerning payment and cession of goods, when the debtor is unequal to paying all debts: 1. whether he can retain something; 2. what order must be preserved among creditors; 3. whether cession of goods removes the moral obligation of paying debts fully.

(A) Whether a debtor, unequal to paying all his debts, can retain something for himself?

It has already been said above (n. 600-602) that inability, whether absolute or moral, excuses from restitution as long as it lasts; from which it follows that the debtor by natural law can retain for himself those things which are necessary for the honorable support of himself and his own, yet living sparingly.² But he is bound honestly and sincerely to cede other goods to his creditors. Hence: -

² Not a few think, with Noldin (n. 509), that they are not guilty of injustice who reserve for themselves means by which they can begin another business from small beginnings. For the beginning of some business can be referred to honorable support; moreover the good of society itself demands that honorable cessionaries of goods be able to begin a new business, lest they fall into despair and be rendered useless or harmful to society. - As regards French civil law, cf. Cod. Commer., art. 530.

(a) Those gravely sin against justice who, besides the goods necessary for themselves and their own, conceal certain other goods and withdraw them from creditors, whether by carrying them elsewhere, or by selling them and placing the money obtained from this in safety; likewise husbands who fictitiously sell their own goods to their wives, so that they may afterward enjoy them; in one word, all those who by various frauds withdraw from creditors goods owed to them. - Yet those can be excused who secretly retain certain things most precious to themselves, on account of the memory of parents or friends, and which others esteem lightly, especially if there is a founded hope of afterward refunding the price to creditors.

(b) Those become participants in the injustice of the debtor, and therefore as unjust cooperators are bound to restitution, who concur with him in defrauding creditors, provided they are conscious of the bad faith of the debtor.

669. (B) On the order to be preserved among creditors. By natural law, the goods of debtors must be divided equally among the various creditors, unless some special reason stands in the way. Now certain creditors, from civil law, must be preferred to others; but the law, although it is diverse in various regions as regards certain particulars, commonly establishes the following, especially in France.

(a) Things belonging to another, namely stolen, deposited, rented, lent, found things, etc., which still exist in themselves, must be restored to their owner, even if nothing remains for satisfying the creditors; for the thing cries out for its owner. - But if the thing exists only in an equivalent, the creditor is not to be preferred to others, because he has only a personal right, and not a real one.¹ - These prescriptions indeed are altogether consonant with reason.

¹ Cod. civ., art. 2092-2093.

(b) Secondly, judicial expenses must be paid for the operations by which the goods of the debtor have been changed into money.²

² Cod. civ., art. 2101. Planiol, II, 2552-2553, 2623-2624.

670. (c) Thirdly, the chief taxes must be paid (contributions directes, impot du timbre, contributions indirectes).³

³ Planiol, II, 2643.

(d) In the fourth place come creditors privileged by a special privilege, who are compensated by means of money brought in from movable things, e.g., pledge-holders (gagistes), lessors of immovables (bailleurs d'immeubles), according to the order fixed by law.⁴

⁴ Planiol, II, 2542, 2627, 2634, 2636.

(e) In the fifth place, creditors privileged by a general privilege, who are compensated from the remaining movable goods and then from immovables, the following order being observed: 1. funeral expenses; 2. physicians' fees; 3. expenses for the nourishment of an infant (mois de nourrice pour enfants eleves hors de la maison); 4. wages; 5. debts for sustenance (fournitures de subsistances); 6. indemnities for fortuitous cases (accidents industriels).⁵

⁵ Planiol, II, 2642.

(f) In the sixth place, mortgage creditors by a privileged mortgage, e.g., vendeur d'immeuble, copartageant, architects, contractors.⁶

⁶ Planiol, II, 2628, 2886.

(g) Seventh, mortgage creditors by an ordinary mortgage, with the order of the day of registration of the mortgages being preserved, if registration is required.

(h) Eighth, the other taxes (debets des comptables, droits de douane, frais en matiere penale).

(i) Ninth, merely chirographic or common creditors.

671. N. B. From what has been said, there are nine orders of creditors; now the civil law, in force in France and many other States, decrees: (a) that the prior class of creditors must be satisfied fully before creditors of a later class receive anything; (b) that in the same class of creditors, each must be satisfied according to the proportionate part of the debt.

672. Things to be noted for the forum of conscience. (a) The prescriptions of civil law in this matter are determinative of the right of property, and therefore bind in conscience, at least more probably, even before the sentence of the judge.

(b) Moreover, in many regions, it is established by civil law that the payment of debts not yet demandable is invalid, or even the payment of demandable debts made in another manner than in money or commercial notes, after the date of cessation of payments defined by the judgment of the tribunal, indeed within a few days (in France, within ten days) before this declaration; and rightly so, lest the debtor unjustly favor certain creditors before others; accordingly these statutes bind in conscience, at least after the sentence of the judge.¹

¹ Moreover it is provided by civil law, in the case of judicial cession of goods, that certain creditors should not enter into any pact with the debtor favoring themselves, to the detriment of others. For France, cf. Cod. commerc., art. 597-598; ibid., art. 437-614, one may read those things which regard la faillite, la banqueroute; cf. Law of March 4, 1889, on judicial liquidation, in Riviere, Lois usuelles, p. 1019-1021.

(c) Outside the cases determined by law: 1. it seems certain that debts from an onerous title must be paid before debts from a gratuitous title; 2. it is commonly admitted that certain debts are to be preferred to uncertain debts, and a certain creditor to an uncertain one; 3. charity and equity counsel that the poor be preferred to the rich, and that older debts be paid first, but it is not established that this is required from justice. - Hence probably it is permitted to satisfy first a creditor who petitions first, even if he is later in time, even with prejudice to others.

673. (C) Whether cession of goods or an agreement with creditors extinguishes the moral obligation of paying debts?

State of the question. Sometimes a debtor unequal to paying all his debts hands over all his goods to the creditors, so that from them the debts may be paid according to a proportionate part; this is called voluntary when it is done spontaneously and accepted by the creditors; but judicial when it is imposed by the judge even against the will of the creditors; culpable or inculpable, according as the debtor has become unequal to paying debts from his own fault or from mere misfortune. Sometimes also an agreement is made with the creditors, by force of which the debtor promises to pay a proportionate part of the debts, according to his means. - These things being posited, the question arises whether the debtor who has handed over all his goods to the creditors, or has entered into an agreement, but has not paid the debts fully, is excused in conscience from the obligation of restitution if afterward he becomes richer.

674. Principles. By natural law, cession of goods of itself does not remove the obligation of paying debts fully, but only excuses from restitution for a time, on account of the debtor's inability (above, n. 600); whence the obligation afterward to make restitution remains, unless the creditors explicitly or implicitly remit the debt (above, n. 606).

(a) Moreover, according to all, if someone by his own fault has become unable to pay debts, he is not dispensed from the obligation of making restitution, since he is an unjust damager, and besides, the creditors are not judged to condone the debt in such a case.

(b) But if someone has become unequal to paying through mere misfortune, a distinction must be made; if the cession is voluntary, and the creditors freely and explicitly declare that they wish to demand nothing further, there is no difficulty, since such a declaration is rightly held as a remission of the debt. But if it is judicial, the solution depends on the intention itself of the legislator; thus, in France, it is established that the debtor is not freed except according to those things which he pays, so that if he acquires new goods, he is bound to give them up until full payment.¹ But in certain other regions,² the law does not decide the matter so openly, and the common persuasion has prevailed that a debtor who has honestly handed over all his goods to the creditors is immune from every obligation of restoring anything further; for, on the one hand, merchants receive greater profit because of the peril of the lot, and therefore readily consent to such a loss; and on the other, the public good demands that unfortunate debtors, otherwise honest, should be enticed to begin a new business by the hope of retaining profit for themselves. This indeed can be tolerated where the law is really so understood or where custom prevails.

¹ Cod. civ., art. 1270, in Supplem., p. 86*. We think that this also holds in the case of an agreement with creditors.

² Thus in England, according to Crolly, III, n. 1202; cf. Lehmk., n. 1035; id., Casus, t. I, n. 773; Noldin, n. 509.

But an honorable man will strive with all his powers to pay his debts fully; moreover, if any creditors have fallen into poverty thereby, charity and equity demand that full satisfaction be given to them, insofar as this can be done.

The remaining matters we shall now explain in the chapter on contracts in particular.

476. The obligation of contract ceases (a. 1234):

1. by payment of the debt or execution of that concerning which there had been an agreement;

2. by novation or substitution of a new debt, debtor, or creditor, by which the preceding debt is extinguished or the debtor is freed (a. 1271);

3. by condonation, by which the creditor remits the debt;

4. by legal compensation, which obtains place whenever both contracting parties owe to each other the same quantity of money or of fungible things;

5. by confusion, when the obligation of the debtor and the right of the creditor come together in the same person, as if the debtor becomes heir of the creditor;

6. by the perishing of the thing owed (a. 1302), without fault or delay of the debtor, or by fortuitous case;

7. by rescission or annulment of the contract, according as it is dissolved by the authority of a judge or declared invalid;

8. by the event of a resolutory condition (a. 1183);

9. by liberative prescription, as was said above (n. 233).

CONCERNING the obligation resulting from contract — something of which I said in quaest. 6., which is to preserve the contract — cases can nevertheless arise in which either party may be able to withdraw.

FIRST I bring forward: when satisfaction has been made on both sides for any contract whatever, it is licit for neither contracting party to withdraw from the contract, in any forum, even in conscience, whether by civil or by Canon law.

This is COMMON with D. Bonaventure in 4. dist. 35. passim, Sanchez Tom. 1. decal. lib. 3. cap. 15. num. 11. Meres de maioratu, p. p. quaest. 23. Molina tomo 1. de iustitia, tract. 2. disp. 258. The Gloss in Leg. ex placito, Cod. de rerum permut., where it is asserted that each is bound to the other concerning eviction.

I ASSERT second, the other party objecting, that it is unlawful in both forums, Poli, and Soli, to withdraw from nominated contracts entered into by mutual consent. It is gathered from cap. qualiter de pactis, according to leg. iuris gentium 7. ff. de pactis, Leg. si pecuniam, ff. de condict. causa data.

I ASSERT third, that although a pact has been confirmed by stipulation, if nevertheless one of the contracting parties has been unwilling to fulfill it on his side, it will be lawful for the other party, according to either law, to withdraw from such a pact and to reclaim whatever he gave. So Molina tract. 2. disput. 158. It is clear ex leg. 3. §. idem erit, ff. de condict. causa data, non secuta.

I ASSERT fourth. If we attend precisely to the disposition of the civil law, any one of the contracting parties can, the other unwilling, withdraw from any INNOMINATE contract (provided the matter is still intact), so that satisfaction has been made on neither side, and they remain within the limits of a bare pact, Molina disp. 258. It is clear ex leg. 3. §. praesertim in principio, and §. 1. and Leg. si pecuniam, ff. de condict. causa data, and from the Gloss, and Bartol. there; and it is the common opinion of all. Indeed, if the matter has been fulfilled on one side, but not yet on the other, you can withdraw without penalty according to the cited laws, even if the other is ready to fulfill on his side.

RIGHTLY, however, from the same laws Molina observes that, according to the same civil law, there is no place for repentance for him who has not fulfilled, with respect to him who has fulfilled.

I ASSERT fifth. Meanwhile, while one of the contracting parties does not dissent, the other cannot withdraw, against his will, both in the forum of conscience and according to either the civil or the Canon law, from a nominated contract already entered into and perfected, leg. sicut 5. Cod. de act. et obligat., joined with those laws which the Gloss there enumerates, verbo minime. LIMITED, however, are the contracts of precarium, mandate, and deposit, which do not forbid the grantor, the mandator, and the depositor from withdrawing.

Concerning PRECARIUM the matter is plain, ex Leg. cum precario, ff. de precario. Concerning the contract of mandate it is clear ex Leg. si mandavero, 2. §. finali, and Leg. si quis alieni, §. qui suscepit, ff. mandati. Concerning the contract of deposit it is gathered ex leg 1. §. penult. ff. de depositi.

ADD also the contract of partnership not having some determinate time affixed, Leg. verum, §. finali, ff. pro socio.

I ASSERT sixth, when a contract, consent having been given to it, does not receive from it some specific name, but in order to vindicate it further desires traditio of the thing, either on both sides, or on one side only; and it is not yet perfect by such traditio — one can meanwhile, while it is thus imperfect, if we attend to the civil law, withdraw. So Couar. in cap. quamvis pactum, 2. part. § 4. num. 14. Molina Tom. 2. tract. 2. disp. 257.

It is PROVEN, because a contract of this kind remains within the boundaries of a bare pact; but a bare pact does not give rise to an obligation in the CIVIL forum. leg. Iuris gentium 7. §. finali, ff. de pactis, there: nuda pactio obligationem non parit, sed parit exceptionem, leg. ex placito, Cod. de rerum permut.

IN the forum of conscience, however, from the natural law the obligation follows in all contracts, and before the civil law was introduced they already bound; as Vallaens teaches de iure emphyt. quaest. 6., Molina alleged above, Padella in Leg. Naturalis, §. etsi quidem, num. 17. ff. de praescript., Gomez Tom. 2. var. and others at Fagundez lib. 1. de contract. cap. 15.

I ASSERT seventh. The Canon law does not permit, at its own tribunal, withdrawing from a contract, even a bare one, cap. 1. de pactis, and cap. iuramenti 22. quaest. 5.

I ASSERT eighth. When one party is in default of fulfilling, he can withdraw according to every law, as the Doctors commonly teach in regula mora, de regul. iur. in 6.

I ASSERT ninth. The Donator can, according to every law, withdraw from a donation as long as the Donatarius has not accepted it. See Couar. in rubr. de testament. 3. part. numero 13. Sanchez lib. 1. de matrim. disput. 6. Molina above disput. 258. Fagundez lib. 1. cap. 15. num. 11.

They treat here: whether contracts are confirmed by oath; but of this below, disp. de Iuramento.

HERE, in passing, NOTE, from Bonacina disput. 3. de contract. quaest. 1. part. 1. num. 4., that one who promises something with an OATH can, before it is accepted, revoke his promise. The reason is that then the oath is accessory to the promise, whose nature it follows as of its principal; but no promise obliges before acceptance.

An OATH, moreover, affixed to a contract, has various effects; it first gives rise to a twofold obligation, one toward God, the other toward man: truly, if the contract is not affected by the oath, the second perishes and only the first subsists. Then it gives rise to an action of the party against the one swearing. Third, it makes the obligation confirmed by oath pass to the heirs; for it is real, not personal: understand this, however, when the oath affects the very contract. So Bonacina above, with Sanchez, alleged by him.

The following case was sent me recently for discussion.

An agent employed by an insurance company was commissioned to investigate the cause of a fire, and discovered a store of paraffin in the house that had been burnt down. According to the terms of the insurance policy, no payment can be claimed from the company by any one storing paraffin on his premises, but in this case the paraffin was certainly not the cause of the fire, as the agent found it had not been touched by the flames. The shopkeeper, in order to avoid any difficulty with the insurance company, gave the agent £50 to say nothing about the paraffin, and the company paid £500, the sum for which the house was insured, without demur. Is the agent bound to refund (1) the money that was the price of his silence, (2) the money paid by the company? If so, to whom ought it to be refunded?

Answer.—From the wording of the question I infer that the insurance agent has accused himself in the confessional of his trickery. Otherwise we should have to begin by considering the case of the shopkeeper, and ask whether he ought not to refund the money received. The agent and the shopkeeper are cooperatores ad damnum, but in such a transaction the jubens et consulens comes first, and the mutus or at least non obstans second.

The shopkeeper is guilty of breach of contract. An insurance policy is a bilateral contract: “You pay me so much annually, and I undertake to pay you a proportionate sum if your house is burnt down accidentally, or by some one else's fault." Both parties are bound conscientiously to observe the terms of the contract.

In the case before us a flagrant breach of contract has occurred on a point upon which the company insists as a conditio sine qua absolute non. The shopkeeper has no right at all to his £500, he is enriched by means of res aliena; and that being so, as he has been the cooperator jubens in the transaction, he is especially bound to make restitution.

In a less degree the agent is also bound to refund the money.1 He is not bound, if the causa principalis has made restitution (Alph., lib. 3, n. 581); but, on the other hand, the causa principalis is required to indemnify the agent, if he has made good the whole loss.

In case the shopkeeper refuses to refund the money, and the agent has not the means to do so, he must at least pay the company the £50 that he received as hush money.

If the shopkeeper makes restitution, common sense would probably suggest that the two cooperatores should refund pro rata in solidum; the consulens £450 and the mutus the £50 hush money. The tacit condition that the £50 is to be paid only if the insurance money is secured is worthless. I suppose, however, that the agent might keep the £50 if the shopkeeper refunded the £500 in full, and made no claim upon him; for (1) the latter was sciens and volens, and must have been prepared for a possible frustration of his designs; (2) the agent was, quite apart from that, bound to make full restitution in case the shopkeeper refused to do so.— Professor Gspann.

1 For the mutus contra justitiam to be held responsible, three things are requisite: (a) that he be bound by his office, (b) that he culpably failed to prevent it, and (c) that he could have averted the harm without grave inconvenience.