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

18 - 4

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

18 - 5

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

18 - 6

Condition Precedent

18 - 7

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. The contract arises and she is obligated to purchase the house once she obtains financing

Condition Concurrent

18 - 8

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.

Condition Subsequent

18 - 9

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.

Excuse of Conditions

18 - 10

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

18 - 11

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

Harbor Park Market v. Gronda

Facts: Grondas agreed to sell assets to Harbor Park

Market (Harbor) expressly conditioned: “This Purchase Agreement is subject to review &

approval of attorney Lynn Stedman…” Before Stedman approved Harbor contract,

Gronda conditionally accepted another offer, also expressly conditioned on Stedman’s approval

Stedman approved second contract and Harbor sued for specific performance, winning at trial

18 - 12

Harbor Park Market v. Gronda

Issue and Reasoning: Issue on appeal is whether Grondas

interfered with (and waived) the condition precedent by submitting to second contract to Stedman

Contract language gave attorney complete discretion to approve or disapprove the agreement for whatever reason, and Grondas performed condition as required

Reversed and remanded in favor of Grondas

18 - 13

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

18 - 14

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

18 - 15

Substantial Performance

18 - 16

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

18 - 17

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

18 - 18

Arnhold v. Ocean Atlantic Woodland Corp.

Facts: Sellers agreed to sell farmland to developer Ocean

Atlantic (Buyer), but delays and extensions ensued After more negotiation and litigation, Sellers and

Buyer signed a settlement agreement containing a “time is of the essence” clause (basis of the lawsuit)

Shortly before the closing date, Buyers again tried to extend the contract and Sellers refused, warning that “time is of the essence”

Buyers assured Sellers they would close, but failed to do so; Sellers notifed Buyers of contract termination

18 - 19

Procedural History and Issue: Buyers sued Sellers seeking specific

performance Trial court found for Sellers and Buyers

appealed Issue: whether Buyers materially breached

the agreement by failing to tender the purchase funds and close on the property on the specified date

18 - 20

Arnhold v. Ocean Atlantic Woodland Corp.

Legal Reasoning and Holding: The materiality inquiry focuses on two

interrelated issues: (1) the intent of the parties with respect to the disputed provision; and (2) the equitable factors and circumstances surrounding the breach of the provision

Intent of the parties was clear – time was of the essence and timing was material

18 - 21

Arnhold v. Ocean Atlantic Woodland Corp.

Legal Reasoning and Holding: In examining the totality of the

circumstances, the facts do not support Buyer’s argument “Sellers displayed the patience of Job by

waiting nearly 3 1⁄2 years” Buyer treated material deadlines as trivial,

thus Buyer has lost any right to purchase Sellers’ land

Affirmed in favor of Sellers

18 - 22

Arnhold v. Ocean Atlantic Woodland Corp.

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

18 - 23

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

18 - 24

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

18 - 25

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

18 - 26

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

18 - 27

Test Your Knowledge

True=A, False = B When a condition precedent occurs, the

contract arises, creating duties to perform

John agrees to work as Katy’s realtor until he sells her house. Katy closed on her house sale yesterday, so the contract has been discharged.

The standard for materiality of a breach is when only 50% of a contract has been performed18 - 28

Test Your Knowledge

True=A, False = B Legal remedies for breach of contract

include specific performance or injunction Nonperformance of a duty is always a

breach of contract Performance that falls short of complete

performance in some minor respect, but does not deprive the other party of a material part of the consideration for which s/he bargained is known as substantial performance.

18 - 29

Test Your Knowledge

Multiple Choice Steve promised to work for his employer

on Saturday morning. Steve didn’t show up for work on Saturday because he decided he didn’t need the overtime money. Steve: (a) Is excused due to impracticality(b) Breached his contract (c) Breached the implied covenant of good

faith (d) Both B and C(e) None of the above18 - 30

Test Your Knowledge

Multiple Choice Robert contracted to paint Stan’s house

by the end of June, but realized after signing the contract that he had too many jobs to do and could not finish by the end of June. Robert called Stan and told him he could not fulfill the contract. Robert: (a) Is excused due to impossibility(b) Engaged in anticipatory breach(c) Is excused because of condition

precedent(d) None of the above

18 - 31

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?

18 - 32