18-1 Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin.

18-1 Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

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3•Introduction to Contracts•The Agreement: Offer

•The Agreement: Acceptance•Consideration

•Reality of Consent

Contracts

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3•Capacity to Contract

•Illegality•Writing

•Rights of Third Parties•Performance and Remedies

Contracts

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Performance and Remedies

PA ET RHC 18It is an immutable law in business that words are words, explanations are explanations, promises are promises – but only performance is reality.

Harold S. Geneen, CEO of ITT Managing (co-written with Alvin Moscow, 1984)

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Learning Objectives

• Explain the effect of conditions on the duty to perform a contract

• Distinguish strict from substantial performance

• Discuss the various remedies for breach of contract

• List circumstances that can excuse performance

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• Entering into a contract evidences an intention to perform (complete) obligations under the contract– Generally, each party performs the

promise and is discharged (released) from further obligation

• If a party fails to perform as expected, courts may be asked to determine the respective rights and duties of the parties

Overview

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• Sometimes a promisor’s duty to perform depends on the occurrence of some event or condition, an uncertain, future event

• A condition may be classified as a:– Condition precedent– Condition subsesequent– Condition concurrent

Conditions in a Contract

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Condition Precedent

• A future, uncertain event creating a duty to perform– Example: Tisha contracts to buy a house on the

condition she is able to obtain financing. Contract arises and she is obligated to purchase the house once she obtains financing

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Condition Concurrent

• When the contract calls for parties to perform at the same time– Example: Bryan promises to buy Stevie’s guitar

for $1000. Stevie must give Bryan the guitar when Bryan gives Stevie $1000.

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Condition Subsequent

• A future, uncertain event that discharges the duty to perform– Example: Lee agrees to work for WoolCo until he

returns to college. Lee returns to college in August and discharges his obligation under the contract.

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Classification of Conditions Based Method of Creation

• Express condition: condition specified in the language of the parties’ contract

• Implied-in-fact condition: condition not specifically stated by the parties but implied by the nature of the parties’ promise

• Constructive condition: Also known as implied-in-law conditions; conditions imposed by law rather than by agreement of parties to do justice between the parties

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Excuse of Conditions

• Occurrence of a condition may be excused– Estoppel: when a person whose duty

is conditional leads other party to rely on his noninsistence on the condition

– Waiver: when a person whose duty is conditional voluntarily gives up his right to the occurrence of the condition

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• Occurrence of condition excused– When occurrence of condition

was prevented or hindered by party benefiting from the condition

– When performance of the act that constitutes the condition becomes impossible

Excuse of Conditions

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• To determine whether a promisor is discharged by performance, courts consider the standard of performance expected

• A strict performance standard requires full or perfect compliance with the contract terms– Example: Buyer agrees to finalize a home purchase

(close) by 5:00 pm on Nov. 21. If Buyer does not close by that time, the contract ends. Buyer is discharged from buying and Seller is discharged from turning over the house, but there may be legal remedies to Seller for Buyer’s breach

Performance of Contracts

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• A substantial performance standard is slightly lower standard applied to duties that are difficult to perform without some deviation from perfection in minor respects– Example: Bob Builder built a home for Jason.

Bob met the contract terms except he didn’t paint the baseboards the right shade of white. Bob is discharged and Jason has the duty to pay the contract price less any damages (repainting) resulting from the defects in performance

Performance of Contracts

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Substantial Performance

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Breach of Contract

• Under the implied covenant of good faith and fair dealing, every contract includes an obligation to perform in good faith

• If a promisor fails to perform, breach occurs

• At minimum, breach of contract gives the non-breaching party the right to sue and recover for damages caused by the breach

• For a material (serious) breach, further legal remedies are available

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Determining Materiality

• Standard for determining materiality is flexible, but generally based on the amount of the breach and timing for performance– Example: if contract contains a “time is of

the essence” provision, any delay by either party may constitute a material breach

– Example: if time for performance immaterial, promisee must accept late performance if within reasonable time after performance due, but may deduct costs of delay

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• When promisor indicates before time for performance that promisor is unwilling or unable to carry out the contract, anticipatory repudiation or anticipatory breach occurs

• Promisee has choices:– Withhold his/her own performance and sue for

damages for total breach of contract immediately– Wait to sue until time for performance in case

other party changes mind and decides to perform– Waive his/her rights to performance

Anticipatory Repudiation

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• Nonperformance of a duty generally is a breach of contract, but nonperformance may be excused in certain circumstances:– Impossibility: “it cannot be done by anyone”

• See East Capitol View Community Development Corporation v. Robinson

– Impracticability: when unforeseen developments make performance highly impracticable, unreasonably expensive, or of little value to promisee (UCC 2–615)

Excuses for Non-Performance

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• Discharge by mutual agreement• Accord and satisfaction

– Accord is an agreement in which a promisee who has existing claim agrees with promisor that s/he will accept some performance different from that originally agreed on. When promisor performs the accord, that is called a satisfaction.

• Discharge by waiver of promisee

Other Reasons for Discharge

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• Discharge by alteration – One party alters and other does not consent

• Discharge by statute of limitations– One party takes too long to bring lawsuit– UCC 2–725: four-year statute of limitations

for contracts involving the sale of goods

• Discharge by decree of bankruptcy

Other Reasons for Discharge

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• Legal remedies (money damages)– Compensatory damages, nominal

damages, liquidated (contractual) damages, and in certain circumstances, punitive damages

• Equitable remedies– Specific performance– Injunction

• Restitution

Remedies for Breach of Contract

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Thought Questions

• Should a non-breaching party always file suit against a breaching party?

• What are the ethical issues involved in a breach of contract?