Chapter 8 © 2011, Tiffany M. Garrick

 Define the term condition and describe its role in contract law.  Explain the role of substantial performance in contracts.  Understand what anticipatory repudiation is and why it is important.  Identify and consider a few special contract clauses that might be included in a contract.  Understand the role of bankruptcy and its relationship in contract law.

 In contracts, parties make certain promises to each other. These promises may be classified as covenants or conditions.

 A covenant is an unconditional promise to perform. Nonperformance of a covenant is a breach of contract that gives the other party the right to sue.  For example, if Medcliff Corporation borrows $100,000 from a bank and signs a promissory note to repay this amount plus 10 percent interest in one year, this promise is a covenant. That is, it is an unconditional promise to perform.

 Not as definite as a covenant.  The promisor’s duty to perform (or not perform) arises only if the condition does (or does not occur).

As if On condition that Provided that When After As soon as

 Condition Precedent  Condition Subsequent  Concurrent Condition

 When a contract requires the occurrence (or nonoccurrence) of an event BEFORE a party is obligated to perform a contractual duty.  The happening of the event triggers the contract or duty of performance. If an event does not occur, no duty to perform arises because there is a failure of condition.

 Example: Suppose Company B offers Joan Andrews a job as an industrial engineer upon her graduation from college. If Andrews graduates, the condition has been met. If the employer refuses to hire Andrews at that time, she can sue Company B for breach of contract. If Andrews does not graduate, however, Company B is not obligated to hire her because there has been a failure of condition.

 When a contract provides that the occurrence or nonoccurrence of a specific event automatically excuses the performance of an existing duty to perform.  For example, many employment contracts include a clause that permits the employer to terminate the contract if the employee fails a drug test.

 When the parties to a contract must render performance simultaneously – that is, when each party’s absolute duty to perform is conditioned on the other party’s absolute duty to perform.  For example, suppose a contract to purchase goods provides that payment is due upon delivery. In other words, the buyer’s duty to pay is conditioned on the seller’s duty to deliver the goods, and vice versa.

 Most of the time, parties are excused from their contractual responsibilities when they have performed as promised.  Under certain circumstances, courts will discharge responsibilities even if the performance is not totally finished. Frustration of Purpose

 Complete – discharges a party’s duties under a contract.  Substantial – a minor breach of the contract.  Inferior – a MATERIAL breach of the contract.

 Occurs when a party to a contract renders performance EXACTLY AS REQUIRED by the contract.  A fully performed contract is called an executed contract.  Tender of performance = complete performance.  Tender = ability and willingness to perform

 Example: Suppose Ashley’s Dress Shops, Inc. contracts to purchase dresses from a manufacturer for $25,000. Ashley’s has performed its obligation under the contract once it tenders the $25,000 to the manufacturer. If the manufacturer fails to deliver the dresses, Ashley can sue it for breach of contract.

 Occurs when there has been a MINOR BREACH of the contract. In other words, occurs when the performance rendered DEVIATES SLIGHTLY from complete performance.  Minor Breach = Substantial Performance

 The nonbreaching party may try to convince the breaching party to elevate his/her performance to complete performance. If the breaching party does not correct the breach, the nonbreaching party can sue to recover damages by: (1) Deducting the cost to repair the defect from the contract price and remitting the balance to the breaching party. (2) Suing the breaching party to recover the cost to repair the defect if the breaching party has already been paid.

 Example: Suppose Donald Trump contracts with Big Apple Construction Co. to have Big Apple construct an office building for $50 million. The architectural plans call for installation of three-ply windows in the building. Big Apple constructs the building exactly to plan except that it installs 2-ply windows. There has been substantial performance. If Big Apple agrees to replace the windows, its performance is elevated to complete performance, and Trump must remit the entire contract price. However, if Trump has to hire someone else to replace the windows, he may deduct this cost of repair from the contract price and remit the difference to Big Apple.

OPTION 1OPTION 2  Nonbreaching party asks the breaching party to complete performance.  Breach is corrected and Nonbreaching party pays the agreed-upon contract price.  Breach is not corrected: Price Paid = Contract Price – Cost to Repair Defect OR Sue to recover the cost to repair the defect (if payment already made to breaching party)

 MATERIAL BREACH  Occurs when a party renders inferior performance of contractual obligations that impairs or destroys the essence of the contract.  No clear line between minor breach (substantial performance) and material breach (inferior performance). A case- by-case determination.

 When there has been a material breach of a contract, the nonbreaching party may: 1.Rescind the contract and seek restitution of any compensation paid under the contract to the breaching party; OR 2.Recover damages.

 An action to undo a contract.  Available where there has been a material breach of contract, fraud, duress, undue influence, or mistake.  Purpose is to restore the parties to the positions they occupied prior to the contract.

 Consists of returning the goods, property, money, or other consideration received from the other party.  If possible, the actual goods or property must be returned. If the goods or property have been consumed or are otherwise unavailable, restitution must be made by conveying a cash equivalent.  Purpose is to restore the parties to the positions they occupied prior to the contract.

 Example: Suppose a university contracts with a general contractor to build a new three-story building with classroom space for 1,000 students. However, the completed building can support the weight of only 500 students because the contractor used shoddy materials. The defect cannot be repaired without rebuilding the entire structure. Because this is a material breach, the university may rescind the contract and require removal of the building. The university is discharged of any obligations under the contract and free to employ another contractor to rebuild the building. Alternatively, the university could accept the building and deduct from the contract price damages caused by the defect.

INFERIOR PERFORMANCE SUBSTANTIAL PERFORMANCE  Material Breach  Options Recover damages 1.Contract Price – Cost to Repair Defect = Price Paid 2.Sue to recover the cost to repair the defect, if breaching party already paid. Rescind the contract  Minor Breach  Recover Damages 1.Contract Price – Cost to Repair Defect = Price Paid 2.Sue to recover the cost to repair the defect, if breaching party already paid.

 If one party has reason to believe that the other party will not perform, then the nonbreaching party can suspend their own performance without it being considered a breach of contract.  May be express or implied from conduct.  Can ask for an adequate assurance of performance.

 End of contractual responsibilities.  A party’s duty to perform under a contract may be discharged by: Rescission/Mutual Agreement – parties to a contract mutually decide to discharge their contractual duties. Accord and Satisfaction – the agreement whereby the parties agree to accept something different in satisfaction of the original contract is called an accord. The performance of an accord is called a satisfaction. Bankruptcy – a means of allocating the debtor’s nonexempt property to satisfy his or her debts. In most cases, the debtor’s assets are insufficient to pay all the creditor’s claims. In this case, the debtor receives a discharge of the unpaid debts. The debtor is then relieved of legal liability to pay the discharged debts. Discharges contractual obligations.

Impossibility of Performance – occurs if a contract becomes impossible to perform. The impossibility must be objective impossibility (“it cannot be done) rather than subjective impossibility (“I cannot do it.”) Novation – substitutes a third party for one of the original contracting parties. The new substituted party is obligated to perform the contract. All three parties must agree to the substitution. In a novation, the existing party is relieved of liability on the contract. Unilateral Alteration – can excuse the nonbreaching party if undertaken in bad faith.

 Satisfaction Clauses – i.e., money-back guarantees  Morals clauses  Best Efforts Clauses  Hazardous Activity (a.k.a. Dangerous Activity) Clauses  Force Majeure Clauses

 The parties may agree in a contract that certain events will excuse nonperformance of the contract. These clauses are called force majeure clauses.  Usually, force majeure clauses excuse nonperformance caused by natural disasters such as floods, tornadoes, earthquakes, and such. Modern clauses often excuse performance due to labor strikes, shortages of raw materials, and the like.

 The amount of time one has to bring a lawsuit following an injury for breach of contract in contract law.  Governed by state law.

 Based on settled rules of fairness, justice, and honesty.  If a party wants a remedy other than economic compensation, or if the court concludes that a remedy at law is not appropriate or adequate, the court may award an equitable remedy.

 A party who has acted in bad faith or unethically will not be granted the relief sought.  Must “come to court with clean hands.”