McGraw-Hill/Irwin
18-1
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
P
A
R
T
Contracts
3
•Introduction to Contracts
•The Agreement: Offer
•The Agreement: Acceptance
•Consideration
•Reality of Consent
18-2
P
A
R
T
Contracts
3
•Capacity to Contract
•Illegality
•Writing
•Rights of Third Parties
•Performance and Remedies
18-3
C H A P T E R
18
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)
18-4
Learning Objectives
• Explain the effect of conditions on
the duty to perform a contract
• Distinguish strict from substantial
performance
• Discuss the various remedies for
breach of contract
• List circumstances that can excuse
performance
18-5
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
18-6
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:
– Condition precedent
– Condition subsesequent
– Condition concurrent
18-7
Condition Precedent
• 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. Contract
arises and she is obligated to purchase the house
once she obtains financing
Duty subject
to condition
precedent
Condition fails
to occur
Duty to
perform is
discharged
Condition
occurs
Duty to
perform arises
18-8
Condition Concurrent
• 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.
Duty subject
to concurrent
condition
Condition fails
to occur
Duty to
perform is
discharged
Condition
occurs
Duty to
perform arises
18-9
Condition Subsequent
• 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.
Duty subject to
condition subsequent
(performance is due)
Condition fails
to occur
Duty to perform
continues
Condition
occurs
Duty to perform
is discharged
18-10
Classification of Conditions Based
Method of Creation
• Express condition: condition specified in the
language of the parties’ contract
• Implied-in-fact condition: condition not
specifically stated by the parties but implied
by the nature of the parties’ promise
• Constructive condition: Also known as
implied-in-law conditions; conditions imposed
by law rather than by agreement of parties to
do justice between the parties
18-11
Excuse of Conditions
• 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
18-12
Excuse of Conditions
• 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
18-13
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
– 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
18-14
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
– 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
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
Anticipatory Repudiation
• 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
18-19
Excuses for Non-Performance
• 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)
18-20
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
18-21
Other Reasons for Discharge
• 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
18-22
Remedies for Breach of Contract
• Legal remedies (money damages)
– Compensatory damages, nominal
damages, liquidated (contractual)
damages, and in certain circumstances,
punitive damages
• Equitable remedies
– Specific performance
– Injunction
• Restitution
18-23
Thought Questions
• Should a nonbreaching party
always file suit
against a breaching
party?
• What are the ethical
issues involved in a
breach of contract?
18-24