A party may be discharged from a valid contract by: A condition occurring -- or not occurring. ...

A party may be discharged A party may be discharged from a valid contract by:from a valid contract by:A condition occurring -- or not

occurring. Full performance or material

breach by the other party.Agreement of the parties.Operation of law.

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2

A possible future event, the A possible future event, the occurrence or nonoccurrence occurrence or nonoccurrence of which will trigger the of which will trigger the performance of a legal performance of a legal obligation or terminate an obligation or terminate an existing obligation under a existing obligation under a contract.contract.


CompleteComplete Performance. Performance.Parties perform exactly as agreed, or ‘perfect.’

All conditions satisfied.


SubstantialSubstantial Performance: Performance: party in good faith performs party in good faith performs substantially all of the terms, substantially all of the terms, can enforce the contract.can enforce the contract.Confers Most of the Benefits

Promised: performance must not vary greatly from what was promised.

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SubstantialSubstantial Performance Performance (cont’d):(cont’d):Entitles the Other Party to

Damages.Measure of damages is cost to

bring object of contract into compliance.

CASE 10.1 Jacob & Youngs v. Kent (1921). What remedy was Kent entitled to?


A breach of contract is the A breach of contract is the nonperformance of a nonperformance of a contractual duty.contractual duty.

A A materialmaterial breach occurs when breach occurs when performance is not substantial, performance is not substantial, and nonbreaching party is and nonbreaching party is excused from performance and excused from performance and entitled to damages. entitled to damages.


In a minor (non-material) In a minor (non-material) breach, the duty to perform is breach, the duty to perform is not excused and the non-not excused and the non-breaching party must resume breaching party must resume performance of the performance of the contractual obligations contractual obligations undertaken.undertaken.


Occurs when one party Occurs when one party refuses to perform his refuses to perform his contractual obligation, before contractual obligation, before performance is due.performance is due.Treated as a material breach, and

nonbreaching party may sue for damages immediately, even though performance is not due.


Notice by repudiating party Notice by repudiating party may restore parties to may restore parties to original obligations. original obligations. Rational for Treating Repudiation

as Breach.Anticipatory Repudiation and

Market Prices.


If no time is stated in the If no time is stated in the contract, a reasonable contract, a reasonable amount of time is implied. amount of time is implied. If time is “of the essence” it

becomes a condition precedent to performance.

Failure to complain may be a waiver.


Discharge by Discharge by RescissionRescission..Mutual Rescission: for executory

contract, parties must make a new contract, oral or written. Under UCC, contracts must be in writing.

If one party has performed, agreement to rescind must have additional consideration.


Discharge by Discharge by NovationNovation: parties : parties agree to substitute a third agree to substitute a third party for an original party. party for an original party. Requirements: previous valid

obligation, agreement by all parties, extinguishment of all old obligations, and new valid contract.


Discharge by Discharge by SettlementSettlement Agreement.Agreement.

Discharge by Discharge by Accord and Accord and SatisfactionSatisfaction..Accord: contract to perform

existing contractual duty not yet discharged.

Satisfaction: performance of the accord.


Alteration of The Contract: Alteration of The Contract: innocent party is discharged innocent party is discharged after material alteration. after material alteration.

Statutes of Limitations.Statutes of Limitations. Bankruptcy: generally bars Bankruptcy: generally bars

enforcement of non-exempt enforcement of non-exempt transactions.transactions.


ObjectiveObjective Impossibility: the Impossibility: the supervening event was supervening event was not not foreseeableforeseeable::Death or incapacitation in personal

contract prior to performance, Destruction of the subject matter;

orChange in law renders

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Temporary Impossibility. Temporary Impossibility. Commercial Impracticability.Commercial Impracticability.

Performance becomes extremely difficult or costly, and must not have been known by parties when contract made.

CASE 10.2 Merry Homes, Inc. v. Chi Hung Luu (2010). Why was the lease void and unenforceable?


Frustration of Purpose.Frustration of Purpose.Supervening event make it

impossible to attain purpose both parties had in mind.

Event must not have been reasonably foreseeable, and decreases value of what a party receives under contract.


Most common remedies for Most common remedies for breach of contract:breach of contract:Damages. Rescission and Restitution. Specific Performance. Reformation.


Compensates nonbreaching Compensates nonbreaching party for loss of the bargain.party for loss of the bargain.Out-of-pocket costs directly

arising from breach. Standard Measure: difference

between value of promised performance and value of actual performance.


Incidental Damages: Incidental Damages: expenses expenses cause directly by breach of cause directly by breach of contract.contract.

Measurement of Damages:Measurement of Damages:• Sale of Goods: difference between contract and market price.

• Sale of Land: specific performance.

• Construction Contracts.© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 22

Measurement of Damages Measurement of Damages for Construction Contracts: for Construction Contracts: varies (below).varies (below).


Consequential (Special) Consequential (Special) Damages—foreseeable Damages—foreseeable losses.losses.Breaching party is aware or

should be aware, cause the injury party additional loss.


Punitive Damages—punish or Punitive Damages—punish or deter future conduct.deter future conduct.Generally not available for mere

breach of contract. Usually tort (e.g., fraud) is also involved.

Nominal Damages—no Nominal Damages—no financial loss. financial loss.


When breach of contract When breach of contract occurs, the innocent injured occurs, the innocent injured party is held to a duty to party is held to a duty to reduce the damages that he reduce the damages that he or she suffered.or she suffered.

Duty owed depends on the Duty owed depends on the nature of the contract.nature of the contract.


Liquidated Damages: Liquidated Damages: specific specific amount agreed to be paid as amount agreed to be paid as damages in the event of future damages in the event of future breach.breach.

Penalties: Penalties: designed to designed to penalize, generally penalize, generally unenforceable.unenforceable.


Enforceability. Court asks two Enforceability. Court asks two questions:questions:When contract was entered into, was it

apparent damages would be difficult to estimate in the event of a breach?

Was the amount set as damages a reasonable estimate and not excessive?


Sometimes damages are Sometimes damages are inadequate remedy. inadequate remedy.

Court can create equitable Court can create equitable remedies: remedies: RescissionRescission and and RestitutionRestitution


Rescission: Rescission: remedy whereby a remedy whereby a contract is canceled and the contract is canceled and the parties are restored to the parties are restored to the original positions that they original positions that they occupied prior to the occupied prior to the transactions. transactions.


Restitution: Restitution: both parties must both parties must return goods, property, or return goods, property, or money previously conveyed. money previously conveyed. Note: Rescission does not always call for restitution. Restitution is called for in some cases not involving rescission.


Specific Performance:Specific Performance:Equitable remedy calling for the

performance of the act promised in the contract.

Provides remedy in cases involving unique subject matter: Sale of Land. Contracts for Personal Services.


Reformation:Reformation:Equitable remedy allowing a

contract to be reformed, or rewritten to reflect the parties true intentions.

Available when an agreement is imperfectly expressed in writing.

Used when fraud or mutual mistake occurs.


CASE 10.3 Drake v. Hance (2009). Was this really a mutual mistake?

Also used in Oral Contracts and Covenants Not to Compete.


Purpose of the Doctrine: to Purpose of the Doctrine: to prevent double recovery. prevent double recovery. Nonbreaching party chooses Nonbreaching party chooses which remedy to pursue.which remedy to pursue.

UCC Rejects Election of UCC Rejects Election of Remedies.Remedies.

Pleading in the Alternative.Pleading in the Alternative.


Occurs when nonbreaching Occurs when nonbreaching party accepts defective party accepts defective performance of contract.performance of contract.

Consequences:Consequences:Party waiving the breach cannot

take later action on that particular issue; contract continues.


Reasons for Waiving A Breach.Reasons for Waiving A Breach. Waiver of Breach and Waiver of Breach and

Subsequent Notices. Subsequent Notices. Generally, a single waiver will not

waive subsequent, additional, or future breaches, especially when unrelated to the initial breach.


Waiver of Breach and Waiver of Breach and Subsequent Notices (cont’d). Subsequent Notices (cont’d). Waiver extended to subsequent

breaches when similar defective performances would be acceptable.

Non-waiving party remains liable for damages, but contract continues.


Exculpatory and Limitation of Exculpatory and Limitation of Liability clauses.Liability clauses.

UCC Allows Sales Contracts to UCC Allows Sales Contracts to Limit Remedies.Limit Remedies.

Enforceability of Limitation-of-Enforceability of Limitation-of-Liability Clauses: depends on type Liability Clauses: depends on type of breach excused by provision.of breach excused by provision.


A party may be discharged from a valid contract by: A condition occurring -- or not occurring. ...

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