Chapter 20Discharge and Remedies

HypotheticalK. K. Legume, Incorporated is a reputable and popular sweater manufacturer. Based upon Legume’s reputation and popularity, Arrow Stores, L. L. C. enters into a contract with Legume. The contract is a “requirements” contract, stipulating that Arrow will purchase whatever number of “Arctic Ice” brand 100% wool sweaters it needs for a one-year period, at a “per-unit” price of $12.00.

Two developments result in litigation between Legume and Arrow. First, due to an unanticipated sheep shortage, with substantially fewer sheep to shear, the price of wool skyrockets 1,000 percent. Second, due to an unexpected “cold snap,” consumer demand for wool sweaters increases dramatically, resulting in a 500% increase in Arrow’s wool sweater orders to Legume, compared to order averages over the previous ten years (the parties have a long-standing business relationship.)

Legume implores Arrow to increase its per-unit purchase price to $36.00, but Arrow refuses to modify the price term stipulated in the contract. When Arrow refuses to pay a higher price for the sweaters, Legume ceases delivery, claiming that it would be bankrupted by continuing to fill Arrow orders; further, Legume claims that based upon the longstanding business relationship between the parties, Arrow has at least an ethical obligation to pay a higher price.

Who wins? Does Arrow have an ethical obligation to pay a higher price, based upon such an unanticipated change in circumstances?

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Introduction

o How does a party know when his or her obligations under the contract are at an end?

o A party may be discharged from a valid contract by:o A condition occurring or not occurring.o Full or substantial performance o Material breach by a party.o Agreement of the parties.o Operation of law.

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Performance and Discharge

o Conditions: Possible future event, the occurrence or nonoccurrence of which will trigger the performance of a legal obligation or terminate an existing obligation under a contract.

Types of Conditionso Condition Precedent: Particular event

that must occur for a party’s duty to arise

o Condition Subsequent: Future event that terminates obligations of parties when it occurs

o Concurrent Conditions: Each party’s performance conditioned on simultaneous performance of the other

o Express Condition: Condition explicitly state in contract (usually preceded by words such as “conditioned on”, “if”, “provided that”, or “when”)

o Implied Condition: Condition not explicitly stated, but inferred from nature and language of contract

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Discharge by Performance

o The contract comes to an end when both parties fulfill their respective duties by performing the acts they have promised.

o Types of Performance:o Complete Performance.o Substantial Performance (minor breach).

o Completion of “nearly all” terms of agreement;o Honest effort to complete all terms; ando No “willful departure” from terms of agreement

o Performance to the Satisfaction of One of the Parties or a Third Party.

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Elements of Breach of Contract Cause of Action

o Valid contract between the plaintiff and the defendant.

o The defendant’s “material” breach of the contract (failure to perform) – “substantial” performance is not Br/K (common abbreviation).

o The defendant’s breach of the contract causes damage (any financial loss, sometimes called injury) to the plaintiff.

o Plaintiff’s performance or excuse for nonperformance.

o Plaintiff must prove all elements or defendant will win.

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Material Breach of Contract

o Breach of Contract - the nonperformance of a contractual duty.

o Material breach occurs when performance is not at least substantial.

o Discharges the non breaching party from the contract.

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o In a minor (non-material) breach, the duty to perform is not excused and the non-breaching party must resume performance of the contractual obligations undertaken.

o Time for Performance.o If none specified, reasonable time is

implied.

Breach of Contract

Breach of Contract: Anticipatory Repudiation

o Definition: Party decides, before the actual time of performance, not to complete contract obligations

o Often occurs when market conditions change and one party realizes it will not be profitable to fulfill terms of contract

o Can occur either through express indication of intent, or action inconsistent with intent to fulfill contract when performance due

o Once contract anticipatorily repudiated, non-breaching party discharged from obligations under contract, and can sue immediately for breach

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Defenses to Breach of Contract Caseo One or more elements missing.o Capacity – was one of the parties

suffering from a disability at time of contract?

o Legality – contract must have legal purpose; contract with illegal purpose unenforceable (void).

o Assignment/delegation – transfer of contract rights/duties to 3rd party.

o Mitigation of damages – plaintiff’s obligation to take reasonable steps to reduce damages.

o Restraint of trade – non-compete clause (usually illegal in California; subject to reasonableness rule in other states).

o See other slides re mutual assent, statute of frauds and parol evidence rule.

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Discharge of a Contract

o Discharge – no further performance per the contract required; ways to obtain discharge of a contract:o By full or “substantial”

performance – most common.o By subsequent agreement – accord

and satisfaction (new contract); novation (new party).

o By operation of law – statute of limitations; bankruptcy.

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Discharge by Agreement

o Discharge by Rescission.o Both parties agree to discharge each other from

their mutual obligationso Discharge by Novation: Previous obligation

o All parties agree to new contract.o Extinguishment of old obligations.o New Contract Formed.

o Discharge by Substituted Agreement.o Parties agree to substitute new contract in place of

original contracto Accord and Satisfaction: Used when one party

wishes to substitute a different performance for his original contractual duty

o “Accord”: Promise to perform new dutyo “Satisfaction”: Actual performance of new dutyo Party’s duty under contract not discharged until new duty

performed

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Discharge by Operation of Law

o Alteration of The Contract. o Statutes of Limitations.o Bankruptcy.o Impossibility or Impracticability.

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Impossibility or Impracticability of Performance

o Objective Impossibility of Performance.o Death or incapacitation prior to

performance;o Destruction of the Subject Matter; oro Illegality in performance.

o Commercial Impracticability.o Key: Circumstances not foreseeable.

o Frustration of Purpose.o Temporary Impossibility.

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Breach of Contract and Remedies

o Most Common Remedies:o Damages.o Rescission and Restitution.o Specific Performance.o Reformation.o Recovery Based on Quasi Contract.

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Damages

o Compensatory Damages—direct losses.o Designed to put the plaintiff in position they would

have been in if the contract had been performedo Sale of Goods: difference between contract and

market price.o Sale of Land: specific performance.o Construction Contracts: varies.

o Consequential (Special) Damages—foreseeable losses.o Foreseeable damages that result from special facts

and circumstances arising outside contract itself.

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Damages

o Punitive Damages—punish or deter future conduct.o Generally not available for mere

breach of contract.o Usually tort (e.g., fraud) is also

involved.

o Nominal Damages—no financial loss.o Defendant is liable but only a

technical injury.

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Liquidated Damages

o Liquidated Damages.o A contract provides a specific amount to be

paid as damages in the event of future default or breach of contract.

o Penalties.o Specify a certain amount to be paid in the

event of a default or breach of contract and are designed to penalize the breaching party.

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Mitigation of Damages

o When breach of contract occurs, the innocent injured party is held to a duty to reduce the damages that he or she suffered.

o Duty owed depends on the nature of the contract.

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Equitable Remedies (Court-Ordered Action) for Breach of Contract

o Rescission.o Contract is canceled and the parties

are restored to the original positions that they occupied prior to the transactions.

o Restitution.o Both parties must return goods,

property, or money previously conveyed.

o Note: Rescission does not always call for restitution. Restitution is called for in some cases not involving rescission.

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Equitable Remedies - Specific Performance

o Equitable remedy calling for the performance of the act promised in the contract.

o Remedy in cases where the consideration is:o Unique (land);o Scarce; oro Not available remedy in contracts

for personal services.

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Equitable Remedies - Reformation

o Equitable remedy allowing a contract to be reformed, or rewritten to reflect the parties true intentions.

o Available when an agreement is imperfectly expressed in writing.

Equitable Remedies

o Injunction: Order forcing person to do something, or prohibiting person from doing something (usually a prohibition against certain actions)

o Quasi-Contract: “Contract-like” obligation imposed on party to prevent “unjust enrichment”

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Election of Remedies

o Doctrine created to prevent double recovery.

o Nonbreaching party must choose which remedy to pursue.