CHAPTER 18
PERFORMANCE AND REMEDIES
Outline
I. Introduction
If a dispute arises between parties to a contract, several important questions may arise. Many of these questions deal with the parties’ duty to perform under a contract.
II. Conditions
A. Definition
The parties may provide that a party’s duty to perform is qualified by the happening of some event, or condition.
B. Types of Conditions
1. Conditions precedent exist if the event must occur before a party’s duty to perform arises.
2. A condition subsequent exists if the happening of a condition discharges an existing duty to perform.
3. Concurrent conditions exist is the contract calls for the parties to perform their duties simultaneously.
Example: Rockford Mutual Insurance Company v. Pirtle: The court found Pirtle was not bound by a condition precedent to repair the building in order to receive payment under the insurance policy. Where the insurer fails to advance the necessary fund, the condition that requires repair to receive payment is excused.
C. The Creation of Conditions
1. Express conditions are created by oral or written statements in the contract.
2. Implied conditions are created by the nature of the contract or the parties’ actions.
III. Standards of Performance
A. Complete or Satisfactory Performance
Promisors who completely perform contractual duties are entitled to receive the full contract price in return. Promisors in complete performance contracts who do not completely perform cannot recover the contract price.
B. Substantial Performance
Substantial performance is performance that falls short of complete performance in minor respects but does not deprive the promise of a material part of the bargained for consideration.
C. Material Breach
A material breach has occurred if the promisor fails to reach the degree of perfection the other party is justified in expecting under the circumstances of the contract.
Example: Arnhold v. Ocean Atlantic Woodland Corp.: The court found that Ocean Atlantic’s failure to tender the $7.26 million was a material breach in the contract. A party that fails to perform its contractual duties is liable for breach.
D. Anticipatory Breach
Anticipatory repudiation occurs when a promisor, prior to time for performance, indicates an intent not to perform his or her duties under the contract
E. Special Performance Problems
1. A "personal satisfaction" clause arises when the promisor agrees to perform to the promisee's personal satisfaction.
2. Building and construction contracts commonly require the builder to give the owner a certificate issued by a specific engineer or architect before the owner has a duty to pay the builder.
F. The Time for Performance
1. Failure to perform on time is a breach of the contract.
2. "Time is of the essence" creates a "strict performance" standard so that failure to perform as required by the contract results in a material breach.
IV. Excuses for Non-Performance
Promisors who fail to perform satisfactorily may be able to avoid liability for breach of contract if they can show some legal excuse.
A. Prevention
If the promisee causes the promisor’s failure of performance, the promisor is excused from the contract.
B. Impossibility
1. Illness or Death of Promisor
The promisor’s death will terminate a personal service contract.
2. Intervening Illegality
If the subject matter of the contract becomes illegal, the promisor is excused from the contract.
3. Destruction of Subject Matter
If the subject matter of the contract is destroyed through no fault of the promisor, the promisor is excused from the contract.
4. Commercial Impracticability
When unforeseen events make performance highly or unreasonably expensive, the promisor is excused from the contract.
5. Commercial Frustration
Performance is excused when events occur after the formation of the contract that would make the return performance of the other party worthless.
Example: East Capitol View Community Development Corp. v. Robinson: East Capitol’s financial inability to perform the contract does not fall under the doctrine of impossibility and does not excuse performance. A party generally assumes the risk of its own inability to perform.
V. Discharge
A. The Nature of Discharge
Release of contractual obligations occurs through performance, agreement, waiver, or intentional alteration of the instrument.
B. Discharge by Agreement
Both parties mutual agree to end the contract.
C. Discharge by Waiver
Either party to a contract may waive his right to insist on complete performance.
D. Discharge by Alteration
If one party intentionally alters the writing of the contract, the other party is discharged from performance.
E. Discharge by Statute of Limitations
All states statutorily establish the reasonable time within which a lawsuit may be filed.
VI. Remedies
A. The Theory of Remedies
If one party breaches a contract, the nonbreaching party is entitled to a remedy. The court will attempt to put the injured party in status quo.
B. Damages in Contract Cases
The amount and type of damages awarded to the nonbreaching party will vary depending on the circumstances of the case. Damages must be proven with reasonable certainty. Losses that are purely speculative are not recoverable.
Example: Sargon Enterprises v. University of Southern California: The court found that the evidence about future profits was too speculative and could not be the basis for damages.
1. Compensatory damages compensate the nonbreaching party for the loss of the bargain. These damages are measured by the loss in value of the promised performance.
2. Consequential damages are awarded if special circumstances of the plaintiff cause him to suffer losses as a result of the breach.
Example: Rockford Mutual Insurance Company v. Pirtle: The consequential damages in this case reflect foreseeable economic loss.
3. Nominal damages are very small amounts of money, usually no more than $1.
4. Liquidated damages are a stipulated sum agreed on by the parties at the time they enter into their contract.
Example: Dean v. Kruse Foundation, Inc.: The court found that the provision in the contract was not a liquidated damage clause, but rather a penalty provision and not enforceable. There was intent to penalize the purchaser for a breach of contract. The amount was not a reasonable forecast of damages.
5. Punitive damages are used to punish the breaching party and not usually recoverable in contract cases.
C. The Duty to Mitigate
Plaintiffs have a duty to avoid or minimize their damages.
Example: Equal Employment Opportunity Commission v. Dresser Rand Co.: The court found that Davis did not have a duty to get more training in order to mitigate his damages. Employee must undertake reasonably diligent efforts to find comparable employment but are not required to pursue retraining or alternative education.
D. Equitable Remedies
Equitable remedies may be ordered when damages at law (money damages) are inadequate. The most common equitable remedies are specific performance and injunction.
1. Specific performance is only implemented by the court if the subject matter of the contract is unique.
Example: i.Lan Systems, Inc. v. NetScout Service Level Corp.: Specific performance is allowed when items are unique or not replaceable le as a practical matter. i.Lan could purchase comparable software on the open market; therefore, i.Lan is not entitled to specific performance.
2. Injunctions are available when a breach of contract threatens to produce an irreparable injury. The court may order a party to refrain from performing certain acts.
Learning Objectives
1. You should understand that performance and remedies are really separate topics.
2. You should understand that performance issues arise in determining whether there has, in fact, been a breach. These issues include the question of whether performance was due (or whether there are conditions to performance), the standard of performance, and excuses for performance.
3. You should note that a court will always award damages at law (money damages) rather than impose equitable remedies (such as an injunction or specific performance) in a breach of contract case, so long as the non-breaching party can be adequately compensated by money damages.
4. You must understand what a condition is, what conditions precedent, subsequent, and concurrent are, and how each type of condition affects the duty to perform under a contract.
5. You must know the difference between complete performance, substantial performance, and material breach, and the effects of each on the rights and duties of the parties to the contract.
6. You should know the rules governing contracts to perform to personal satisfaction.
7. You should know the rules concerning the time for performance.
8. You should know all of the different ways in which the doctrine of impossibility can excuse the duty to perform.
9. You must know all of the different ways in which a party can be discharged from the duty to perform.
10. You must know what compensatory, consequential, nominal, liquidated, and punitive damages are and when each type is available in a contract case.
Learning Hints
1. Performance conditions may be express, implied in fact, or implied by law. An example of a condition implied by law is the condition that performance obligations should occur simultaneously. This means that a person must be ready, willing, and able to tender his performance in order to successfully sue the other party for breach if the other party fails to perform as promised.
2. All contracts are eventually discharged. A contract is either discharged by performance or discharged by nonperformance. In order to be discharged by performance, the contract must be completely or substantially performed.
3. There are two standards of performance: complete performance and substantial performance. Courts generally adopt a substantial performance standard in contract cases where it is very difficult to perform perfectly. For example, construction contracts generally impose a substantial performance standard on the parties.
4. Just because a court imposes a substantial performance standard does not mean that a party may not sue the other party for breach. However, in the event the breach is non-material, the non-breaching party will still be obligated to perform (for example, to pay the contract price for construction), but he may be entitled to subtract from that contract price the loss caused by the breach.
5. Keep in mind that conditions precedent and subsequent have the same practical result: both make the duty to perform conditional upon the occurrence of some future event.
6. In contracts to perform to the personal satisfaction of the other party, the standard of performance is a subjective one (whether the other party is honestly dissatisfied) when the contract involves matters of personal taste, comfort, or judgment, and objective (whether the other party's dissatisfaction is reasonable) when the contract involves matters of mechanical fitness, utility, or marketability. An example of a contract involving matters of personal taste, comfort, or judgment would be a contract for the painting of a portrait, and an example of a contract involving matters of mechanical fitness, utility, or marketability would be a contract for the installation of a furnace.
7. In order for impossibility to excuse the duty to perform, the contract must be for a personal service and the promisor must die or fall victim to an incapacitating illness. If the promisor's duty to perform could be carried out by someone else, performance will not be excused.
8. If the contract is executory, compensatory damages can be computed by subtracting the plaintiff's cost of performance from the value of the promised performance. If A is to sell B a bike for $100, B's recovery (if any) when A breaches would be the reasonable value of the promised bike minus $100. If the contract is executed and the performance is defective, compensatory damages are computed by subtracting the value of the defective performance from the value of the promised performance. In the above example, if A sells B a defective bike, B could recover the reasonable value of the bike as promised minus the actual value of the defective bike he received.
9. It is hard to give a general definition of consequential damages, but examples of consequential damages are easy to name. They include personal injury, damage to property that is not the subject of the contract, lost profits, and lost business good will.
10. The general test of whether an equitable remedy is appropriate is whether there is an adequate legal remedy available to the plaintiff. This usually means that the types of money damages discussed in the textbook are inadequate.
11. Keep two things in mind about liquidated damages provisions: the reasonableness of the stipulated figure is determined from what the parties knew or should have known at the time the contract was entered, not from the plaintiff's actual damages; and once the two tests for the enforcement of a liquidated damages provision are met, the court will enforce the provision even if the plaintiff's actual damages are higher or lower than that figure.
True-False
In the blank provided, put "T" if the statement is True or "F" if the statement is False.
____1. If the subject matter of a contract is destroyed through no fault of a party, a contracting party may be excused from performance.
____2. A strict (or complete) performance standard violates public policy and therefore is not applied in breach of contract actions.
____3. Mary promises to pay Herb $1,000 if he graduates from college with honors. This is a condition
subsequent.
____4. A "Time is of the essence" clause in a breach can lead to material breach if performance is not timely.
____5. A condition precedent is a condition that must occur before a party is obligated to perform a contract.
____6. A contractor who substantially performs is normally entitled to the contract price less any damages for less than complete performance.
____7. Joe tells Siding Co. he will not be able to pay for the vinyl siding that the company had contracted
with Joe to install on Joe’s home next month. Siding Co. can anticipate Joe’s repudiation of the
contract and sue him for breach of contract.
____8. The object of compensatory contract damages is to put the plaintiff in the position he would have been in had the contract been performed as promised.
____9. Jones was to sell a large quantity of oranges to Smith. Several hurricanes have severely damaged the orange crop. Jones may be able to argue commercial impracticability as an excuse for non-performance.