Contracts Tutorial 9-10 US LAW

8/13/2019 Contracts Tutorial 9-10 US LAW

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T.A.: Gordon Vuong,

[email protected]

Contracts TutorialUS Law
mailto:[email protected]:[email protected]


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Substantial Performance

Doctrine

Brown-Marx Asso ciates:

In a K where the parties agree to exchange

performances where one party must render

performance first, subs tant ial performance

rather than exact, strict or literal performance of

the terms of the contract is adequate to entitle

recovery.

The courts will allow recovery under the contract,

less amounts for deviations, where a party in

good faith has substantially performed its

obligation.


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Substantial Performance ContdPlante v. Jacobs: The test of what amounts to substantial performance is whether the

performance meets the essential purpose of the contract.

Substantial performance in house construction K does not mean thatevery detail must be in strict compliance with the specifications andplans. Something less than perfection can be enough UNLESS all

details are of the essence in the K terms. Diminished-Value Rule: Damages from faulty construction that

amounts to incomplete performance is the difference between the valueof the house with the faulty construction and the value of the house if ithad been constructed in strict accordance with the plans andspecifications.

Cost-of-Replacement Rule: Damages from faulty construction is thecost to repair/replace the items that are incorrectly built.

Whether damages from a defect should be calculated using the cost-of-replacement rule or the diminished-value rule depends upon the natureand magnitude of the defect.

When replacement would involve a substantial destruction of the work

and would cause additional damage, the cost-of-replacement rule isunreasonable and unjustified.


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Conditions versus Promises

Federal Crop Insurance Corp:

Insurance policies are generally construed against the

insurer.

When it is doubtful whether words in an insurance

policy create a promise or a condition precedent, theywill be construed as creating a promise.

Breaching a promise is a breach of a contract, but it

does not excuse performance of the other party. The

other party still must perform, although they can suefor damages due to the breach.

Lutt ing er v Rosen:

A condition precedent to performance must be met

before performance is required on a contract.


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Satisfaction Clause

Forman v Benson: Satisfaction clausea term in a K where the promisor

can refuse to pay if he is not subjectively satisfied withthe promisee's performance.

Courts generally favor objective standard for interpretingK terms.

Where the circumstances show that a satisfactionclause was added as a personal concession to one ofthe contracting parties, the subjective, rather than the

objective standard, should be applied to that clause. When evaluating the validity of a satisfaction clause, a

subjective standard does not allow a party in a contractto simply reject the performance of the other partypurely at their discretion. The rejection must be done ingood faith.


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Proof of Loss: Insurance

E.I. Du Pon t de Nemou rs Powder Co.:

For an insurance policy contract, proof of loss

requirement is valid and may be considered as a

condition precedent to recovery claim being

payable by the insurance company.

Connect icu t Fire Insurance:

The proof of loss requirement may be waived by

the insurer either directly or through the acts of itsagents, e.g. paying out an insurance claim many

times in the past, where the proof of loss was not

submitted.


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Default

Hol iday Inns of America:A contract that has been fully performed by one

party but not by the other party is classified as anexecutory contract.

When there is default (e.g. late payment) to thestrict terms of an executory contract, the contractshould be allowed to continue where: The default is not serious,

The non-defaulting party has not suffered any harm,and

The defaulting party is willing and able to continuewith his performance of the contract, and has actedin good faith to do so.


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Default Contd

PDQ Lube Center: To determine who must perform first under a K, look

at the language of the K itself.

If no order of performance is specified in the K, court

will construe the terms, to determine parties intention. Where there is no express indication of the intended

order for performance, the common law implies thatthe parties obligations will be performed concurrently.

Both parties under concurrent performance

obligations must perform before either can bring anaction against the other.

For a party to a K to be able to use legal processesagainst the other side, the party must tender his own

agreed performance first, and the other side must bein default.


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Material BreachWalker & Co . v. Harr ison: In determining if a partys failure to fully perform a promise

constitutes a material breach, the following factors will beconsidered:

(a) The extent to which the injured party will obtain the substantialbenefit which he could have reasonably anticipated;

(b) The extent to which the injured party may be adequatelycompensated in damages for lack of complete performance;

(c) The extent to which the party failing to perform has alreadypartly performed or made preparations for performance;

(d) The degree of hardship on the party failing to perform byterminating the contract;

(e) The willful, negligent or innocent behavior of the party failing toperform;

(f) The degree of uncertainty that the party failing to perform willperform the remainder of the contract.


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Entire vs Severable Contracts

John v. Uni ted Ad vert is ing Inc.: Whether a number of promises constitute one

contract (an entire K), or more than one (severableKs) is to be determined by looking at the intent of theparties.

Did the parties assent to all the promises as a whole,so that there would have been no bargain if any of thepromises were struck out? If yes, then that would bean entire K.

Intent of the parties can be seen from the terms of the

contract itself, and how the terms are viewed in thelight of all the surrounding circumstances, e.g.including the conduct of the parties before any disputehas arisen.

Ask yourself: did the parties apportion the amount

consideration for each promise, or was there a singleconsideration for the completion of all the promises?


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Entire Contracts Contd

Carrig v. Gilbert-Varker Corp .:

Generally, a party who breaches an entire

contract cannot recover the K price or a quantum

meruit amount.

BUT, if the contract consists of several distinct

items to be performed by the party, and the

consideration is apportioned to each item

according to its value and as a separate unit

rather than as a part of the whole, then the

contract is severable.

Must look to the intention of the parties to see if

they meant for the agreement to be a severableor entire K.


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Entire Contracts Contd

K & G Const . Co.:

It is the general rule that where a total price for

work is fixed by a contract, the work is not

rendered divisible by progress payments.

So in this case, the failure of a contractor to make

a progress payment to the sub-contractor does

not give the sub-contractor the right to stop

performing work.


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Revocation of AcceptanceWilson v. Scampol i: Where a merchant is denied access and a reasonable opportunity to

repair non-conforming goods, the buyer cannot claim a breach ofwarranty that entitles him either to substitution or to rescission

UCC 2-608:

(1) The buyer may revoke his acceptance of a lot or commercial unitwhose non-conformity substantially impairs its value to him if he hasaccepted it

(a) on the reasonable assumption that its non-conformity would becured and it has not been seasonably cured; or

(b) without discovery of such non-conformity if his acceptance wasreasonably induced either by the difficulty of discovery beforeacceptance or by the seller's assurances.

(2) Revocation of acceptance must occur within a reasonable timeafter the buyer discoversor should have discovered the groundfor it (the non-conformity) and before any substantial change incondition of the goods which is not caused by their own defects. It isnot effective until the buyer notifies the seller of it.

(3) A buyer who so revokes has the same rights and duties with regardto the oods involved as if he had re ected them.


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Rejecting Delivery

Hubbard v. UTZ Qual ity Foods: In an installment contract, the rejection of goods is

governed by UCC 2-612(2) and (3).

UCC 2-612(2) states: buyer may reject any

installment which is non-conforming if the non-conformity substantially impairs the value of thatinstallmentand cannot be cured.

UCC 2-612(3) states: whenever non-conformity ordefault with respect to one or more installments

substantially impairs the value of the wholecontract, there is a breach of the whole.

Where quality standards are set forth with greatspecificity in the K, the failure to satisfy one of thespecifically enumerated standards is a "substantialimpairment.


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Repudiation Contd

UCC 2-610 - Anticipatory Repudiation: When either party repudiates the contract with respect

to a performance not yet due the loss of which willsubstantially impair the value of the contract to theother, the aggrieved party may

(a) for a commercially reasonable time awaitperformance by the repudiating party; or

(b) resort to any remedy for breach (Section 2-703 orSection 2-711), even though he has notified therepudiating party that he would await the latter's

performance and has urged retraction; and(c) in either case suspend his own performance or

proceed in accordance with the provisions of thisArticle on the seller's right to identify goods to thecontract notwithstanding breach or to salvage

unfinished goods (Section 2-704).


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Anticipatory Repudiation

Hathaway v. Sabin: When a party to a K intentionally puts themselves in a

position where they are unable to perform their obligations,the other party can bring an action. The non-repudiating partydoes not need to tender performance in order to bring the

action. If a party becomes involved in difficulties that he is not

responsible for, and he is ultimately able to perform his Kobligations, he should not to be deprived of the benefits ofthe K just because the other party assumes that the

difficulties would prevent him from performing. Just because a party to a K has financial difficulties does

NOT mean they will be unable to perform their obligations. Aparty should be sure the other side will not be able performbefore anticipatorily repudiating the K. If the other side could

still perform, then party who anticipatorily repudiated the Kwould be in breach.


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Material Breach

Magnet Resou rces:

Where a contract calls for a series of acts over a

long term, a material breach may arise from a

single occurrence or consistent recurrences

which tend to defeat the purpose of the contract.

The materiality of a breach will be determined by

the facts of the case, including the relative value

of the breach compared to the contract as a

whole, and the degree of probability or

improbability that such a breach will occur again.


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Mistake

Sherwood v. Walker:

If there is a mistake as to the substance of the

thing bargained for, and the thing actually

received is different in substance from the thing

bargained for and intended to be sold, then thereis no contract.

If there is mere a difference in the quality of the

thing bargained for, the contract remains binding.


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Mistake Contd

Lenawee County Bd. of Health: Where a mistake of both parties at the time a contract

was made as to a basic assumption on which thecontract was made has a material effect on theagreed exchange of performances, the contract is

voidable by the adversely affected party. EXCEPTION: The contract is NOT voidable by the

adversely effected party if he bears the risk of themistake.

A party bears the risk of a mistake when:

the risk is expressly allocated to him by agreement ofthe parties; or he is aware, at the time the contract is made, that he has

only limited knowledge with respect to the facts to whichthe mistake relates, but treats his limited knowledge assufficient; or

the risk is allocated to him by the court if that is


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Unilateral Mistake

Triple A Contracto rs: Unilateral mistake: where only one party to a contract is mistaken as

to the terms or subject-matter of a contract.

In the absence of fraud, a unilateral mistake will not excuse the non-performance of a contract.

Donovon v. RRL Corporat ion:

Relief for unilateral mistake of law is authorized only where one partyknows of, does not correct, and takes advantage or enjoys the benefitof another party's mistake.

Where the plaintiff has no reason to know of and does not cause thedefendant's unilateral mistake of fact, the defendant must establishthe following facts to obtain rescission of the contract:

(1) the defendant made a mistake regarding a basic assumption uponwhich the defendant made the contract;

(2) the mistake has a material effect upon the agreed exchange ofperformances that is adverse to the defendant;

(3) the defendant does not bear the risk of the mistake; and

(4) the effect of the mistake is such that enforcement of the contractwould be unconscionable.


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Impossibility of Performance

Taylo r v. Caldwell: If contract performance depends on the continued

existence of a person or thing, and that person orthing ceases to exist, performance may be excusedfor impossibility of performance.

If the nature of the contract is such that the partiesmust have known at the time of contracting that itcould not be fulfilled unless some specified thingcontinued to exist, there is an implied condition that

the parties will be excused from performance if thatthing ceases to exist without fault of the parties.

EXCEPTION: if a party gives an express or impliedwarranty that that thing will continue to exist, thatparty is liable for breach if it ceases to exist.


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Impossibility of Performance

Contd

Canadian Indus tr ial A lcoho l:

When a middleman contracts to supply goods

that he will be getting from a third party, if the third

party cannot supply the goods, the supplier may

not use the impossibility defense if the supplier isstill able to contract to sell the items to the buyer.

e.g. if the supplier can still get the goods from a

different source, that is not an impossibility of

performance.


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Impracticability of Performance

Marcov ich Land Co.; Mishara Cons truct ion Co.: Even if performance is not impossible, it may be excused

due to commercial impracticability.

To be excused of performance obligation due toimpracticability, something unexpected must have

occurred, and the risk of the unexpected occurrence mustnot have been allocated either by agreement or bycustom. The occurrence must have rendered performancecommercially impracticable.

Commercial impracticability must be something more than

the fact that performance is bad business risk or even a"very poor deal" for the party.

Look to see if there was "extreme difficulty, expense,injury, or loss" as result of the occurrence which goes wellbeyond the normal range of what might have been

expected. AGAIN, the parties must not have not allocatedthe risk of the occurrence in the K terms.


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Frustration If an event that is unforeseen occurs that makes the K

impossible or impractical, then the K performance is

excused.

Four conditions must be present to excuse K

performance: Occurrence of the event has made performance

impossible or impracticable;

Event occurred without fault of, and beyond the

control of the party seeking relief. Occurrence of the event defeats basic assumption of

the K; and

Risk of event was not assumed by party seeking

relief.


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Frustration Contd

Lloyd v. Murphy:Acts by the government that make performance

under a contract unprofitable or more difficult donot excuse the duty to perform due to frustration

of purpose. Frustration of Purpose:To invoke the doctrine

of frustration of purpose a party must show:

1) the change in circumstances (supervening

event) has made performance different from whatwas reasonably expected;

2) the risk was unforeseeable; and

3) the underlying value of the bargained for

exchange was destroyed by a supervening event.


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Excuse of Performance

Mineral Park Land Co.: Where performance depends upon the existence of a

given thing, and such existence was assumed as thebasis of the agreement, performance is excused tothe extent that the thing ceases to exist or turns out to

be nonexistent.Transatlant ic Financin g Corp .:

When performance of a contract is deemedimpossible it is null. In the case of a charter carryinggoods, if a the intended port is closed, the carrier may

go to an appropriate alternate port and unload itscargo, as long as it takes steps to minimize damages.

If the performance rendered has value, recovery inquantum meruitfor the entire performance is proper. Aparty cannot claim the entire K price and quantummeruit on top of that price.


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Assignment

Unless there are provisions in a K that preventassignment, rights (e.g right to payment) and

duties (e.g. to perform) under an executory

bilateral contract generally may be assigned.

The duty to perform under a K can only beassigned to another party if the performance

rendered by the other party will be substantially

the same thing as performance by the original

promisor.

Duties under a contract to provide personal

services may never be assigned.


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Assignment Contd

Langel v. Betz: The party that is assigned the obligations of a contract

(the assignee) is not personally liable to the contractvendor if there is no privity between the assignee andthe vendor.

Bri t ish Waggon Co and the Parkgate Waggon Co.:

When a party is hired to do work or to performservices, and that party has been selected based onhis individual skill, competency or other personal

qualifications, then the contract is at an end if thatperson refuses to perform the contract.

The contract ends even if that the party assigns theduty to perform to another person who is equallyqualified to do the work.


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Assignment Contd

Pizza of Gaithersburg, Inc .: If a party is hired to do a job based on their

specific, extraordinary skills, then contract for

their employment is personal, and their duty to

perform cannot be assigned.


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Novation

Novationis the act of replacing an obligation toperform with a new obligation, or replacing aparty to an agreement with a new party.

Utica Mutual Insurance Co.:

Under the four corners rule, a court must notdelve below a contract's surface in interpretingthe terms, unless the contract is ambiguous

A novation can be implied only if there is an

ambiguity as to whether a newly writtenagreement is a novation that modifies a previouscontract, or if the new written agreement is merelya supplement to the earlier agreement.

Contracts Tutorial 9-10 US LAW

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