Contract Performance: Conditions, Breach, and Remedies Chapter 7 Contract Performance: Conditions, Breach, and Remedies McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Overview How conditions are used in a contract to allocate risk between parties. Requirements to meet the standard of good faith performance, substantial performance, and events that discharge a party. The consequences of failing to perform as promised, known as a breach of contract, and the options of the damaged party after a breach.

Basic Purpose of Contract Law This chapter continues the survey of contract law with attention to rules that govern performance and consequences of nonperformance.

NATURE AND EFFECT OF CONDITIONS A condition is categorized as a condition precedent (event that must occur before performance under a contract is due), or A condition subsequent (event occurs after the performance under the contract and discharges the parties obligations).

GOOD FAITH PERFORMANCE Substantial Performance The law recognizes a party’s good faith effort to perform by allowing substantial performance rather than perfect performance. This satisfies the requirements of the agreement and triggers the other party’s obligation to perform.

Jacob and Youngs v. Kent, 129 N.E. 889 (Ct. App. N.Y. 1921) In its opinion, the court focused on practical application of the law to obtain fairness rather than a strict application of performance requirements and pointed out that trivial and innocent omissions may not always be a breach of a condition.

DISCHARGE The most common way for the parties’ obligations under a contract to be discharged is by good faith performance. However, there are other circumstances under which the parties may be discharged from obligations.

Mutual Consent If neither party has fully performed, the parties may agree to cancel the contract - a rescission. Or the parties may agree to accept performance that is different from the original performance - an accord and satisfaction. Or the parties may agree to substitute a third party for one of the original parties to the contract - a novation.

Operation of Law Contract obligations may also be discharged through operation of law. Despite the fact that the parties have formed a valid contract, the law provides a discharge under certain circumstances where fairness demands it.

Impossibility After the parties have entered an agreement, the contemplated performance of the obligations may become impossible and, therefore, may be subject to discharge.

Impracticability In order for a contract to be discharged under impracticability, the burden of performance must be unforeseeable and be extreme in terms of cost burden.

Frustration of Purpose Where one party’s purpose is completely or almost completely frustrated by such supervening events, courts will discharge her from performance.

Other Examples of Discharge by Law (1) a contract is unilaterally altered by a party (2) a contract is subject to relief of the bankruptcy code (3) expiration of the statute of limitations where state law imposes a time limit on enforcement of contract obligations

Anticipatory Repudiation After the parties have entered into an agreement but before performance has occurred, it may become apparent that one party does not intend to perform. Known as anticipatory repudiation.

Mobil Oil Exploration & Producing Inc. v. United States, 530 U. S “Repudiation of contract is a statement by the obligor to the obligee indicating the obligor will commit a breach that would give the obligee a claim for damages.”

Breach of Contract Total breach occurs when one party fails to perform its duties under the contract; Partial breach is a failure to perform that is not substantial enough to discharge the non-breaching party.

REMEDIES For most contracts, the remedy at law will be money damages awarded by the court to the non-breaching party to compensate the innocent party for losses related to the breach.

Compensatory Damages Compensatory damages cover a broad spectrum of losses for recovery of actual damages. These damages put the non-breaching party in the same position she would have been in if the other party had performed.

Consequential Damages Compensate the nonbreaching party for foreseeable indirect losses not covered by compensatory damages.

Restitution Designed to prevent unjust enrichment. If one party is in the process of performing the contract and the other party commits breach, the non-breaching party is entitled to rescind (cancel) the contract and receive fair market value for any services rendered.

Liquidated Damages It may be very difficult to determine actual damages, so parties may agree at the time of the contract that a breach would result in a fixed damage amount.

Specific Performance Remedy whereby a court orders the breaching party to render the promised performance by ordering the party to take a specific action. Only available when the subject matter of the contract is sufficiently unique.

Injunctive Relief A court order to refrain from performing a particular act is known as injunctive relief.

Reformation When the parties have imperfectly expressed their agreement and this imperfection results in a dispute, a court may change the contract by rewriting it to conform to the parties’ actual intentions. This contract modification is called reformation.

MITIGATION OF DAMAGES The law imposes an obligation on the parties in a contract to take appropriate steps in order to avoid incurring losses. So long as a party can avoid the damages with reasonable effort, they may be barred from recovery through a lawsuit.

RIGHTS OF A THIRD PARTY In some cases, a party to an existing contract wishes to substitute another party in their place.

Assignment An assignment is a transfer of current rights (not future rights) under a contract by one party in a contract to a third party.

Delegation Parties to a contract may also substitute another party to perform any duties owed under the agreement. A delegation is a transfer of current duties owed by one party under a contract to a third party.

Third-Party Beneficiaries A third party who benefits from a contractual promise between two other parties may only seek damages if she is an intended beneficiary as opposed to an incidental beneficiary.

learning outcome checklist 7 - 1 Define what a condition is used for in a contract and distinguish conditions precedent from conditions subsequent. 7-2 Apply the doctrines related to good faith performance, discharge of a contract, and substantial performance.

learning outcome checklist 7-3 Identify the ethical dilemmas that a manager faces in the context of good faith performance. 7-4 Articulate circumstances that give rise to events of discharge via mutual consent and operations of law. 7-5 Recognize events that result in breach of contract and explain anticipatory repudiation.

learning outcome checklist 7-6 Identify the appropriate remedy available to nonbreaching parties and understand the responsibilities of an injured party to avoid and mitigate damages. 7- 7 Explain the rights of third parties who have rights in a contract through assignment or delegation and third-party beneficiaries.