P A R T
3
Contracts
Introduction to Contracts
The Agreement: Offer
The Agreement: Acceptance
Consideration
Reality of Consent
McGraw-Hill/Irwin Business Law, 13/e
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
P A R T
3
Contracts
Capacity to Contract
Illegality
Writing
Rights of Third Parties
Performance & Remedies
McGraw-Hill/Irwin Business Law, 13/e
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
C H A P T E R
18
Performance & 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)
Learning Objectives
 Nature
and types of conditions in
contracts
 Performance of contracts
 Breach of contract
 Excuses for non-performance
 Remedies for breach of contract
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Overview

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
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Conditions in a Contract
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:




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Condition precedent
Condition subsesequent
Condition concurrent
Condition Precedent

A future, uncertain event creating a duty to
perform

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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
When the contract calls for parties to perform
at the same time


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Example: Bryan promises to buy Stevie’s guitar for
$1000. Stevie must give Bryan the guitar when
Bryan gives Stevie $1000.
Condition Subsequent
A future, uncertain event that discharges the
duty to perform


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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

Occurrence of a condition may be excused
When occurrence of condition was prevented or
hindered by party benefiting from the condition
 Waiver: when a person whose duty is conditional
voluntarily gives up his right to the occurrence of
the condition
 Estoppel: when a person whose duty is conditional
leads other party to rely on his noninsistence on the
condition
 When performance of the act that constitutes the
condition becomes impossible

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Silvestri v. Optus Software

Facts:
 Silvestri was hired under two-year employment
contract with “satisfaction clause” reserving right
to terminate employment for “failure [to perform]
duties… to the satisfaction” of the company
 Silvestri pleased the CEO for six months, but
complaints against Silvestri began to increase
 Three months later, the CEO fired Silvestri
 Silvestri filed suit claiming the dissatisfaction was
objectively unreasonable and a breach of contract
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Silvestri v. Optus Software

Procedural History and Legal Reasoning:





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Trial court found for Optus
Appellate court reversed in favor of Silvestri
Issue: whether the employer’s satisfaction is
subject to an objective or subjective evaluation
A subjective standard typically is applied to
satisfaction clauses in employment contracts
In a satisfaction clause employment setting, there
must be honest and genuine dissatisfaction with
the employee’s performance
Silvestri v. Optus Software

Holding:
Company supplied objective evidence of genuine
dissatisfaction with Silvestri’s performance
 Thus, applying the test of genuineness, and not
reasonableness, we conclude that Silvestri has not
demonstrated that a dispute exists requiring
submission of the matter to jury trial
 Reversed in favor of Optus

18 - 14
Performance of Contracts
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


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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

A substantial performance standard is slightly
lower standard applied to duties that are
difficult to perform without some deviation
from perfection in minor respects

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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
Substantial Performance
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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


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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
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

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Arnhold v. Ocean Atlantic
Woodland Corp.

Procedural History and Issue:



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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
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

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Arnhold v. Ocean Atlantic
Woodland Corp.

Legal Reasoning and Holding:



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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
Anticipatory Breach
When the promisor indicates before time for
performance that promisor is unwilling or
unable to carry out the contract, anticipatory
repudiation or anticipatory breach occurs
 The 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 the
other party changes his mind and decides to perform
 Waive his/her rights to performance

18 - 24
Excuses for Non-Performance

Nonperformance of a duty generally is a
breach of contract, but nonperformance may
be excused in certain circumstances:


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Impossibility: “it cannot be done by anyone”
 See Bush v. ProTravel International, Inc.
Impracticability: when unforeseen developments
make performance highly impracticable,
unreasonably expensive, or of little value to
promisee (UCC 2–615)
Other Reasons for Discharge
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
18 - 26
Other Reasons for Discharge

Discharge by alteration


Discharge by statute of limitations



One party alters and other does not consent
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
18 - 27
Remedies for Breach of Contract

Legal remedies (money damages)


Equitable remedies


Compensatory damages, nominal damages,
liquidated (contractual) damages, and in certain
circumstances, punitive damages
Specific performance or injunction
Restitution
18 - 28
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
performed
18 - 29
Test Your Knowledge

True=A, False = B
 Legal remedies for breach of contract
include specific performance or injunction


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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.
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 above

18 - 31
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)
 (b)
 (c)
 (e)

18 - 32
is excused due to impossibility
engaged in anticipatory breach
is excused because of condition precedent
none of the above
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 - 33