McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 13 Discharge and Remedies

13-2 Chapter 13 Case Hypothetical Hillman Brothers Construction, Inc. agreed to build a home for Maggie Sykes. The total contract price for the home is $325,000. The home is complete in all respects except for the fact that shutters have not been installed on the windows. The contract between the parties stipulated that Hillman Brothers would install shutters on each window. The day before the “closing” on the home’s purchase, Maggie noticed that Hillman Brothers had not installed the shutters. She then called the owner, president and chief executive officer of the company, Andrew Hillman, and a heated argument between the two ensued (Maggie is well-known for her “anger management” issues, and she becomes especially angry when her requests as a buyer are not met.) The conversation ended with Andrew proclaiming that “Hades would freeze over” before he had his construction crew install the shutters, and with Maggie asserting that the “deal is off.” Hillman Brothers expects to be paid the full contract price, $325,000, for the home, based on the fact that “irreconcilable differences” between the parties make it impossible for the company to install the shutters, and since Maggie’s incorrigible personality caused the impassible chasm between them. For total “parts and labor,” it would cost $5,750 to install the shutters. Is Maggie Sykes obligated to purchase the house? If so, is she obligated to pay the full contract price of $325,000? Is Hillman Brothers Construction, Inc. required to install the shutters?

13-3 Chapter 13 Case Hypothetical and Ethical Dilemma K. K. Legume, Incorporated is a reputable and popular sweater manufacturer. Based upon Legume’s reputation and popularity, Arrow Stores, L. L. C. enters into a contract with Legume. The contract is a “requirements” contract, stipulating that Arrow will purchase whatever number of “Arctic Ice” brand 100% wool sweaters it needs for a one-year period, at a “per-unit” price of $ Two developments result in litigation between Legume and Arrow. First, due to an unanticipated sheep shortage, with substantially fewer sheep to shear, the price of wool skyrockets 1,000 percent. Second, due to an unexpected “cold snap,” consumer demand for wool sweaters increases dramatically, resulting in a 500% increase in Arrow’s wool sweater orders to Legume, compared to order averages over the previous ten years (the parties have a long-standing business relationship.) Legume implores Arrow to increase its per-unit purchase price to $36.00, but Arrow refuses to modify the price term stipulated in the contract. When Arrow refuses to pay a higher price for the sweaters, Legume ceases delivery, claiming that it would be bankrupted by continuing to fill Arrow orders; further, Legume claims that based upon the longstanding business relationship between the parties, Arrow has at least an ethical obligation to pay a higher price. Who wins? Does Arrow have an ethical obligation to pay a higher price, based upon such an unanticipated change in circumstances?

13-4 Circumstances Resulting in Discharge of Contract Performance Happening of condition or its failure to occur Material breach by one/both parties Mutual Agreement Operation of law

13-5 Types of Conditions Condition Precedent: Particular event that must occur for a party’s duty to arise Condition Subsequent: Future event that terminates obligations of parties when it occurs Concurrent Conditions: Each party’s performance conditioned on simultaneous performance of the other

13-6 Types of Conditions (Continued) Express Condition: Condition explicitly state in contract (usually preceded by words such as “conditioned on”, “if”, “provided that”, or “when”) Implied Condition: Condition not explicitly stated, but inferred from nature and language of contract

13-7 Tender Definition: An offer of performance; making an offer to perform and being ready, willing and able to perform

13-8 Types of Performance Complete Performance: Occurs when all aspects of parties’ duties under contract are carried out perfectly Substantial Performance: Occurs when: -Completion of “nearly all” terms of agreement; -Honest effort to complete all terms; and -No “willful departure” from terms of agreement

13-9 Discharge By Material Breach Occurs when party unjustifiably fails to substantially perform his/her contractual obligations Discharges non-breaching party from his/her contractual obligations

13-10 Anticipatory Repudiation Definition: Party decides, before the actual time of performance, not to complete contract obligations Often occurs when market conditions change and one party realizes it will not be profitable to fulfill terms of contract

13-11 Anticipatory Repudiation (Continued) Can occur either through express indication of intent not to perform, or action inconsistent with ability to carry out contract obligations when performance due Once contract anticipatorily repudiated, non- breaching party discharged from obligations under contract, and can sue immediately for breach

13-12 Discharge By Mutual Agreement Mutual Rescission: Both parties agree to discharge each other from their mutual obligations Substituted Contract: Parties agree to substitute new contract in place of original contract Accord and Satisfaction: Used when one party wishes to substitute a different performance for his/her original contractual duty -“Accord”: Promise to perform new duty -“Satisfaction”: Actual performance of new duty -Party’s duty under contract not discharged until new duty performed

13-13 Discharge By Mutual Agreement (Continued) Novation: Parties to contract wish to replace one of the parties with a third party “Novation” is the substitution of a party Original duties remain same under contract, but one party discharged, and third party takes original party’s place All three parties must agree to the novation for it to be valid

13-14 Discharge By Operation of Law Alteration of Contract Bankruptcy Tolling of statute of limitations Impossibility of performance Commercial Impracticability Frustration of Purpose

13-15 Legal Remedies (Monetary Damages) For Breach of Contract Compensatory Damages: Damages designed to put plaintiff in position he would have been in had contract been fully performed Consequential (Special) Damages: Foreseeable damages that result from special facts and circumstances arising outside contract itself. These damages must be within contemplation of parties at time breach occurs Punitive Damages: Damages designed to punish defendant and deter him and others from engaging in similar behavior in the future -Primary factor in determining amount of punitive damages is amount necessary to “punish” defendant -Amount of punitive damages depends on factors such as wealth and income of defendant

13-16 Legal Remedies (Monetary Damages) For Breach of Contract Nominal Damages: Award (typically for only $1 or $5) intended to signify that although no actual damages resulted from defendant’s breach of contract, plaintiff wronged by defendant Liquidated Damages: Damages for breach of contract specified in the contract itself (either as fixed amount, or as formula for determining money due)

13-17 Duty to Mitigate Damages Definition: Obligation on non-breaching party (plaintiff) to use reasonable efforts to minimize damage resulting from defendant’s breach of contract

13-18 Equitable Remedies For Breach of Contract Rescission: Termination of contract Restitution: Return of any property transferred under contract Specific Performance (Specific Enforcement): Order requiring breaching party to fulfill obligations under contract. Usually awarded only when monetary damages inadequate, and subject matter of contract unique (Example: Contract for sale of real estate)

13-19 Equitable Remedies For Breach of Contract (Continued) Injunction: Order forcing person to do something, or prohibiting person from doing something (usually a prohibition against certain actions) Reformation: Contract rewritten to reflect parties’ actual agreement Quasi-Contract: “Contract-like” obligation imposed on party to prevent “unjust enrichment”

13-20 Elements Necessary to Recognize Quasi-Contractual Recovery Plaintiff conferred benefit on defendant Plaintiff reasonably expected to be compensated for benefit conferred on defendant Defendant would be “unjustly enriched” from receiving benefit without compensating plaintiff