Introduction to ContractsThe Agreement: Offer

The Agreement: AcceptanceConsideration

Reality of Consent

© 2010 The McGraw-Hill Companies, Inc. All rights reserved.

Capacity to ContractIllegality

WritingRights of Third Parties

Performance and Remedies

© 2010 The McGraw-Hill Companies, Inc. All rights reserved.

Performance and Remedies

It 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)© 2010 The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives

Nature and types of conditions in contracts

Performance of contractsBreach of contractExcuses for non-performanceRemedies for breach of contract

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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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Conditions in a Contract

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

event creating a duty to perform Condition Subsequent: a future, uncertain

event that discharges the duty to perform Condition Concurrent: when the contract

calls for parties to perform at the same time

Excuse of Conditions

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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

Excuse of Conditions

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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

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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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 Breach

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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 or injunction

Restitution

Remedies for Breach of Contract

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