CIIAPIER 14ffinffiffidmffiffi

5 SThere are CHAPTER OUTTINE LEANil ING OBIECTIVES

n a perfect world, every party who signed a contract would perform his or her dutiescompletely and in a tiinely fashion, thereby discharging (terminating) the contract.

In the real world, however, as Willian-r Shakespeare suggests in the chapter-opening quo-tation, things frequently become complicated. Certainly, events often occur that mayaffect our performance or our ability to perform contractual duties.

In this chapter, we examine how a contract is discharged. The most common way todischarge, or terminate, one's contractual duties is by the performance of those duties.The duty to perform under a contract may be conditioned on the occurrence or nonoccur-rence of a certain event. or the dutv mav be absolute. As vou can see in Exhibit l4-l inaddition to performance, a contract'.rn t. discharged in numerous other ways, includingdischarge by agreement of the parties and discharge by operation of law.

In most contracts, promises of performance are not expressly conditioned or qualified.Instead, they are absolute promises. They must be performed, or the party promising theact will be ir-r breach of contract. lstxAMpTE t4ll JoAnne contracts to sell Alfonso a paint-ing for $10,000. The parties'promises are unconditional: JoAnne's transfer of the paint-ing to Alfonso and Alfonso's payment of $10,000 to JoAnne. The payment does not haveto be made i f the paint ing is not t ransferred. E

In some sifuations, however, contractual promises are conditioned. A condition is a pos-sible future event, the occurrence or nonoccurrence of which will trigger the performanceof a legal obligation or terminate an existing obligation under a contract. If tl"re conditionis not satisfied, the obligations of the parties are discharged. ITExAMFLE l4:l Alfonso, in the

occasions andcauses and whvand whereforein all things.l I

William Shakespeare, 1564 1616(English dramatist and poet)

-CONDITIONS OF PERFORMANCE

-DISCHARGE BY PERFORMANCE

-DISCHARCE BY ACREEMENT

-DISCHARCE BYOPERATION OF LAW

AFTER READING THIS CHAPTER, YOU SHOULD BE ABLE TOANSWER THE FOLLOWING QUESTIONS:

What is a condition precedent, and how does it affecta party's duty to perform a contract?

How are most contracts discharged?

What is substantial performance?

When is a breach considered material, and whateffect does that have on the other party's obligationto perforrn?

Will the courts allow parties to avoid performing theircontractual duties when performance becomesextremely difficult or expensive?

2

3

4

DISCHARGEThe termination of an obligation. lncontract law, discharge occurs whenthe parties have fully performed theircontractual obligations or whenevents, conduct of the parties, oroperation of law releases the partiesfrom performance.

PERFORMANCEIn contract law, the fulfillment ofone's duties arising under a contractwith another; the normal way ofdischarging one's contractualobligations.

CONDITIONA qualification, provision, or clausein a contractual agreement, theoccurrence or nonoccurrence ofwhich creates, suspends, orterminates the obligations of thecontracting parties.

546 IIEIINEICONTRACTS

I47 r{$rtEirfiPERFORMANCE AND DISCHARCE

above example, offers to purchase JoAnne's painting only if an independent appraisal indi-cates that it is worth at least $10,000. JoAr-rne accepts Alfonso's offer. Their obligations(promises) are conditioned on the outcome of the appraisal. Should this condition not besatisfied (for example, if the appraiser deerr-rs the value of the painting to be only $5,000),their obligatior-rs to each other are discharged and cannot be enforced. Ei

We look here at three types of conditions that can be present in any given contract:conditions precedent, conditions ntb s equent, and c oncurrent conditions.

Condit ions PrecedentA condition that nust be fulfilled before a partv's promise becomes absolute is called acondition precedent. The corrdit ion precedes lhe absolute duty to perfornr. as in the

JoAnne-Alfonso example just given. Real estate contracts freqr-rently are conditioned ontl-re br-ryer's ability to obtain financing. FrxAnrrer.r-r+rl Fisher promises to buy Calvin'shouse if Salvation Bank approves Fisher's mortgage application. The Fisher-Calvin con-tract is therefore subject to a condition precedent-the bank's approval of Fisher's mort-gage application. If the bank does not approve the application, the contract will failbecause the cor-rdition precedent was not met. El Insurance contracts frequently specifythat certain conditions, such as passing a physical examination, must be rnet before theinsurance company will be obligated to perform under the contract.

Condit ions SubsequentWhen a condition operates to terminate a party's absolute promise to perform, it is calleda condition subsequent. The condition follows, or is subsequent to, the absolute duty toperfonn. If the condition occurs, the party need not perform any further. IEEXAMilE r4nA law firm l-iires ]ulia Darby, a recent law school gradr-rate and a newly licensed attorney.Their contract provides that the fiim's obligation to continue employing Darby is dis-charged if she fails to maintain her license to practice law. This is a condition subsequentbecause a failure to maintain the license will discharee a duty that has alreadv arisen. Ej

CONDITION FRECFDENTln a contractual agreement,a condition that must be met beforea party's promise becomes absolute.

CONDITION SUBSEQUENTA condition in a contract that. if notfulfilled, operates to terminate aparty's absolute promise to perform.

548 lnllilTflilCONTRACTS

CONCURRENT CONDITIONSConditions that must occur or beperformed at the same time; theyare mutually dependent. Noobligations arise until theseconditions are simultaneouslvperformed.

TENDERAn unconditional offer to perform anobligation by a person who is ready,willing, and able to do so.

A womon agrees to purchose a car.Suppose thot the ogreement isconditioned on the deoler's instollingcertoin optionol equipmenL Whenthe womon rcturns the next doy, shediscovers that the feotures that wereogreed on hove not been odded. lsshe still obligoted to buy the cor?Whot type of condition is this?(Brian Teutsch/Creative Commons)

ffiH i l i '=51

Generally, conditions precedent are common, and conditions subsequent are rare. TheRestatement (Second) of Contracts deletes the terms condition subsequent and conditionprecedent and refers to both simply as "conditions."l

Concurrent Condit ionsWhen each party's absolute duty to perform is conditioned on the other partyt absolute dutyto perform, concurrent conditions are present. These conditions exist only when the par-ties expressly or impliedly are to perform their respective duties simultaneously.

lffxAMpTE t4sl If a buyer promises to pay for goods when they are delivered by the seller,each party's absolute duf to perform is conditioned on the other party's absolute duty to per-form. The buyer's duty to pay for the goods does not become absolute until the seller eitherdelivers or attempts to deliver the goods. Likewise, the seller's duty to deliver the goods doesnot become absolute until the buyer pays or attempts to pay for the goods. Therefore, nei-ther can recover from the other for breach without first tendering performance. El

The contract comes to an end when both parties fulfill their respective duties by perform-ing the acts they have promised. Performance can also be accomplished by tender.Tender is an unconditional offer to perform by a person who is ready, willing, and able todo so. Therefore, a seller who places goods at the disposal of a br-ryer has tendered deliv-ery and can dernand payment according to the terms of the agreement. A buyer who offersto pay for goods has tendered payment and can demand delivery of the goods.

Once performance has been tendered, the party making the tender has done everythingpossible to carry out the terms of the contract. If the other party then refuses to perform, theparty making the tender can consider the duty discharged and sue for breach of conhact.

(omplete PerformanceWhen a party performs exactly as agreed, there is no question as to whether the contracthas been performed. When a party's performance is perfect, it is said to be complete.

Normally, conditions expressly stated in the conhact must fully occur in all aspects forcomplete performance (shict performance) of the contract to take place. Any deviationbreaches the conhact and discharges the other party's obligations to perform. For example,most construction conhacts require the builder to meet certain specifications. If the speci-fications are conditions, complete performance is required to avoid material breach.(Material breach w1ll be discussed shortly.) If the conditions are met, the other party to thecontract must then fulfill her or his obligation to pay the builder. If the specifications are notconditions and if the builder, without the other party's permission, fails to meet the specifi-cations, performance is not complete. What effect does such a failure have on the otherparty's obligation to pay? The answer is part of the doctrine of substantial performance.

Substant ial PerformanceA party who in good faith performs substantially all of the terms of a contract can enforcethe contract:igainst the other party under the doctrine of substantial performance. Notethat good faith is required. Intentionally failing to comply with the terms is a breach ofthe contract.

To qualify as substantial performance, the performance must not vary greatly from theperformance promised in the contract, and it must create substantially the same benefits

1. Restatement (Second) of Contracts, Section 224.

54e EImmEPERFORMANCE AND DISCHARGE

as those prornised in the contract. If the omission, variance, or defect in performance isunimportant and can easily be compensated for by awarding damages, a court is l ikely tohold tl-rat the contract has been substantially performed. Courts decide whether the per-ibrmance was substantial on a case-by-case basis, examining ali of the facts. of the partic-ular situation. If performance is substantial, the other party's duty to perform remainsabsolute (except that the party can slre for damages due to the minor deviations).

IEExAMPIE teCl A couple contracts rvith a construction cornpany to build a house. Thecontract specifies that Brand X plasterboard be used for the rvalls. The builder cannot obtainBrand X plasterboard, and the buyers are on holiday in the mountains of Peru and virtuallyunreachable. The builder knows that Brand Y plasterboard is identical in qualif and durabil-ih to Brand X, so he installs Brand Y instead. All other aspects of construction conform to theconhact. In this situation, a court will likely hoid that the builder has substantially performedhis end of the bargain, and therefore the couple will be obligated to pay the builder. E

What if the plasterboard substituted for Brand X was not of the same quality as Brand X,and the value of the house was reducecl by $10,000? Again, a court would 1ike1y hold thatthe contract was substantially performed and that the contractor should be paid the priceagreed on in the contract, less that $10,000.

The following classic case on substantial perforrnance emphasizes that there is noeract formula for decicling when a contract l-ras been substantially performed. The casealso indicates some of the factors that courts consider in deciclins whether a contract hasbeen materially breacl-ied or substantially performed

nriliirilFlr'rnrrr,t

iffit cARDozo, J. pudgel

The plaintiff built a country residence for the defenclant ata cost of upwards of $77,000, and now sues to recover a bal-ance of $3,483.46, remaining r-rnpaid. The work of construc-tion ceased in June, 1914, and the defendant then began tooccupy the dwelling. There was no complaint of defectiveperformance unti l March, 1915. One of the specifications forthe plumbing work provides that-

A11 wrought-iron pipe must be well galvanized, lap weldedpipe of tl're gracle known as "standard pipe" of Readir-rgmanufacture.

The defenclant learr-red in March, 1915, t l iat sorre of thepipe, instead of being made in Reading, was the product ofother factories. The plaintiff was accordingly directed by thearchitect to do the work anew. Tl-re pL-rmbing was thenencased within the walls except in a few places where it hadto be exposed. Obedience to the order ureant more than thesubstitution of other pipe. It rneant the demolition at greatexpense of substantial parts of the completed structure. T1-replaintiff left the work untouched, and asked for a certificatethat the fir-ral payrnent was due. Refusal of the certificate wasfollowed by this suit lin a New York state courtl

The evidence sustains a findins that the ornission of theprescribed brand of pipe was neither fraudulent nor willful. Itwas the result of the oversight and inaftention of the piaintiffssubcontractor. Reading pipe is distinguished frorn Cohoespipe and other brands only by the name of the manufacturerstamped upon it at intervals of between six and seven feet.Even the defendant's architect, tl-iough he inspected the pipeupon arrival, failed to notice the discrepancy. The plaintifftried to show that the brands installed, though made by othermanufacturers, \vere the same in qualif, in appearance, inntarket value, and in cost as the brand stated in the contract-that their were, indeed, the same tl'ring, though manufacturedir-r ar-iother place. The evidence was excluded, and a verdictdirected for the defendant. The fstate intermediate appellatecourtl reversed, and granted a new trial.

We think the evider-rce, if admitted, would have suppliedsorne basis for the inference that the defect was insienificantin its relation to the project. The courts never say ihrt ot .who makes a contract fills the measure of his duty,by lessthan ftrll performance. They do say, however, that an omis-sion, both trivial and innocent, rvill sometirles be atoned forby allorvance of the resulting damage, and will not always bethe breach ofa condition * * x.

CASE l4. l -Cont inues next page

552 IIEIIUUCONTRACTS

Appellate Court of Connecticut, 36 Conn.ApP.71,859 A2d 959 (2004).

BACKGROUND AND TACTSIn November l99Z Coverlt, lnc.,

hired Khalid Shah to work as its structural engineeringmanager. Shah agreed to work a flexible schedule of thirty-five

hours per week. In exchange, he would receive an annual

salary of gTO,OOo for five years, a 2 percent commission on the

sales of products that he designed, three weeks of paid

vacation after one year, a comPany car, time off to attend toprior professional obligations, and certain other benefits. Eitherparty could terminate the contract with ninety days'writtennotice. but if Cover-lt terminated it, Shah would receive

f N THE WORDS 0F THE COURT . . . SIHALLER, J. pudgel

monthly payments for the rest of the five-year term.a In June

1998, Shah went on vacation and did not return unti lSeptember. In mid-October, Brian Goldwitz, Cover-lt's owner

and president, terminated Shah's contract. Shah fi led a suit in

a Connecticut state court against Cover-lt and others. The

court determined that Shah had breached the contract andrendered a judgment in the defendants'favor. Shah appealedto a state intermediate appellate court.

a. The contract provided that for up to two years of service, Shah would be .

paid $20,000 per year; for three years of service, $30,000 per year; and for

four years of service, $40,000 per year.

On appeal, the plaintiff claims that the court improperly found that he had breached

the contract or, in the alternative, that any breach was not material. Specifically, the plain-

tiff argues that the court failed to identify an express term or condition that was breached

and instead merely found that certain acts, considered together, demonstrated a material

breach prior to the termination of his employment. Therefore, according to the plaintiff,

the defendants were not relieved of their obligations, under the terms of the contract, to

pay his full salary for ninety days and to pay his post-termination salary pursuant to the

r.TOJt: set forth in the contract.

It is a general rule of contract law that a total breach of the contract by one party relieves

the injured party of any further duty to peform further obligations under the contract.

IEmphasis added.]* * * Section Z4l of the Restatement (Second) of Contracts provides:

In determining whether a failure to render or to offer performance is material, the following circum-

stances are significant: (a) the extent to which the injured party will be deprived of the benefit which

he reasonably expected; (b) the ertent to which the injured party can be adequately compensated for

the part of that benefit of which he will be deprived; (c) the extent to which the party failing to per-

form or to offer to perform will suffer forfeiture; (d) the likelihood that the party failing to perform or

to offer to perform will cure his failure, taking account ofall the circumstances including anv reason-

able assurances; fand] (e) the extent to which the behavior ofthe party failing to perform or to offer

to perform comports with standards of good faith and fair dealing.

The standards of materiality are to be applied in the light of the facts of each case in such

d way as to further the purpose of securing for each party his expectation of an exchange ofperformances. Section 211 therefore states circumstdnces, not rules, which are to be consid'

ered in determiningwhether a particular failure is material. [Emphasis added.]

In the present case, the court found that the plaintiff took a ten-week vacation, which

exceeded the'time authorized. After the plaintiff returned, he reported for work only hvo

or three days per week and spent long periods of time visiting Internet Web sites that were

unrelated to his professional duties. Additionally, after being instructed by fCover-It's]human resources manager to document his attendance by use of a time clock, the plain-

tiff refused and simply marked his time sheets with a "P" for present. Last, the court found

that when Goldwitz asked when certain designs would be completed, the plaintiff

CASE 14.2-Cont inued

responded that he was not sure and that he would take his time in completing them.When reviewing those findings in light of the factors set forth in fsection] 241 of theRestatement (Second) of Contracts, we conclude that the court's finding of a materialbreach was not clearly erroneous.

It is clear from the court's findings that the plaintiff failed to perform under the obliga-iions of the employment contract. x * * One cannot recover upon a contract unless hehas fully performed his own obiigation under it, has tendered performance or has somelegal excuse for not performing. As a result of the material breach by the plaintiff, thedefendants were excused from further performance under the contract, and were relievedof the obligation to pay the plaintiff his full saiary for ninety days and to pay his post-termination salary pursuant to the schedule set forth in the contract.

DECISI0N AND REMEDY rtre state intermediateappellate court affirmed the judgment of the lower court. Theappellate court held that Shah had materially breached hiscontract with Cover-lt and that this breach excused Cover-ltfrom further performance of its contractual duties, includingany obligation to continue paying Shah's salary.

555 EIEEEPERFORMANCE AND DISCHARCE

WHAT IF THE IACTS WERE DIFFERENT?ffi Suppose that during his ten-week obsence Shoh wos

fulfilling prior professionol obligotions and that on his returnhe met Cover-lt's hours and timekeeping requirements.Further suppose that Shoh responded to Goldwitz's questionsobout his projeds with reqsonoble estimotes. Would theoutcome of the case hove been different? Why or why not?

tr

Antic ipatory Repudiat ion of a ContractBefore either party to a contract has a duty to perform, one of the parties may refuse toperform her or his contractuai obligations. This is called anticipatory repudiation.3When anticipatory repudiation occurs, it is treated as a material breach of contract, andthe nonbreaching party is permitted to bring an action for damages immediately, eventhough the scheduled time for performance under the contract may still be in the future.4Until the nonbreaching party treats this early repudiation as a breach, however, thebreaching party can retract the anticipatory repudiation by proper notice and restore theparties to their original obligations.s

An anticipatory repudiation is treated as a present, material breach for tlvo reasons.First, the nonbreaching party should not be required to remain ready and willing to per-form when the other party has already repudiated the contract. Secor-rd, the nonbreach-ing party should have the opportunity to seek a similar contract elsewhere and r-r-ray havethe duty to do so to minirnize his or her loss.

Quite often, an anticipatory repudiation occrlrs when a sharp fluctuation in marketprices creates a situation in which performance of the contract would be extremely unfa-vorable to one of the parties. lrExAMptE r4.Z Martin Corporation contracts to manufac-tr-rre and sell ten thousand personal computers to ComAge, a retailer of computerequipment that has five hundred outlet stores. Delivery is to be made six months from the

3. Restatement (Second) of Contracfs, Section 253; and UCC 2 610 and 2-6 I 1.4. The doctrine of anticipatory repudiation first arose in the landmark case of Hochster y. De La Tour,2 Ellis andBlackburn Reports 678 (1853), when an English court recognized the delay and expense inherent in a rule requiringa nonbreaching party to wait until the time of performance before suing on an anticipatory repudiation.5. See UCC 2-611.

ANTICI PATORY REPU DIATIONAn assertion or action by a partyindicating that he or she will notperform an obligation that the partyis contractually obligated to performat a future time.

lillffi':IfilTllffl The risks that priceswill fluctuate and values willchange are ordinary business riskfor which the law does not oroviderelief.

554 IINIIIECONTRACTS

MUTUAT RESCISSIONAn agreement between the partiesto cancel their contrac! releasing theparties from further obligationsunder the contract. The object of theagreement is to restore the Parties tothe positions they would haveoccupied had no contract ever beenformed.

NOVATIONThe substitution, by agreement, ofa new contract for an old one, withthe rights under the old one beingterminated. Typically, novationinvolves the substitution of a newperson who is responsible for thecontract and the removal of theoriginal party's rights and dutiesunder the contract.

date of the conhact. The contract price is based on Martin's present costs of Purchasinginventory parts from others. One month later, three suppliers of computer parts raise their

prices to Martin. Because of these higher prices, Martin stands to lose $500,000 if it sells

ihe computers to ComAge at the contract price. Martin writes to ComAge, stating that it

cannot deliver the ten thousand computers at the contract price. Martin's letter is an

anticipatory repudiation of the contract. ComAge has the option of treating the repudia-

tion ai a material breach and proceeding immediately to pursue remedies, even though

the contract delivery date is still five months away. E

Any contract can be discharged by agreement of the parties. The agreement can be con-

tained in the original contract, or the parties can form a new contract for the exPress Pur-pose ofdischarging the original contract.

Discharge by RescissionAs mentioned in previous chapters, rescission is the process in which the parties cancel

the contract and are returned to the positions they occupied prior to the contract's forma-

tion. For mutual rescission to take place, the parties must make another agreement that

also satisfies the legal requirements for a contract-there must be an offer, an acceptance,

and consideration. Ordinarily, if the parties agree to rescind the original contract, their

promises not to perform those acts promised in the original contract will be legal consid-

eration for the second contract.Agreements to rescind executory conhacts (in which neither party has performed) are

generally enforceable, even if the agreement is made orally and even if the original agree-

ment was in writing. An exception applies under the Uniform Commercial Code to

agreements rescinding a contractfor the sale of goods, regardless of price, when the con-

tract requires a written rescission. Also, agreements to rescind contracts involving transfers

of realty must be evidenced by a writing.When one party has fully performed, an agreement to cancel the original contract nor-

mally will not be enforceable. Because the performing party has received no considera-

tion for the promise to call off the original bargain, additional consideration is necessary.

Discharge by Novat ionThe process of novation substitutes a third party for one of the original parties. Essentially,

the parties to the original contract and one or more new parties all get together and agree

to the substitution. The requirements of a novation are as follows:

I A previous valid obligation.

2 An agreement by all the parties to a new contract.

3 The extinguishing of the old obligation (discharge of the prior party).

4 A new contract that is valid.

lrExAMnE r45l Union Corporation contracts to sell its pharmaceutical division to

Brit ish Pharmaceuticals, Ltd. Before the transfer is completed, Union, Brit ish

Pharmaceuticals, and a third company, Otis Chemicals, execute a new agreement to

transfer all of British Pharmaceutical's rights and duties in the transaction to Otis

Chemicals. As long as the new contract is supported by consideration, the novation will

discharge the original contract (between Union and British Pharmaceuticals) and replace

it with ihe new c-ontract (between Union and Otis Chemicals). E

A novation expressly or impliedly revokes and discharges a prior contract. The partiesinvolved may expressly state in the new contract that the old contract is now discharged.If the parties do not expressly discharge the old contract, it will be impliedly discharged ifthe new contract's terms are inconsistent with the old contract's terms.

Discharge by Accord and Sat isfact ionAs Chapter l0 explained, in an accord and satisfaction, Ihe parties agree to accept perfor-mance different from the performance originally promised. An accord is an executorycontract (one that has not yet been performed) to perform some act to satisfi, an existingcontractual duty that is not yet discharged.6 A satisfaction is the performance of the

"."ordagreement. An accord and its satisfoction discharge the original contractual obligation.Once the accord has been made, the original obligation is merely suspended until the

accord agreement is fully performed. If it is not performed, the party to whom perfor-mance is owed can bring an action on the original obligation or for breach of the accord.fnnnrtne rrs t Shea obtains a judgment against Marla for $8,000. Later, both partiesagree that the judgment can be satisfied by Marla's transfer of her automobile to Shea.This agreement to accept the auto in lieu of $8,000 in cash is the accord. If Marla trans-fers her automobile to Shea, the accord agreement is fully performed, and the $8,000 debtis discharged. If Marla refuses to transfer her car, the accord is breached. Because the orig-inal obligation is merely suspended, Shea can sue to enforce the judgment for $8,000 incash or bring an action for breach of the accord. lEl

Under some circumstances, contractual duties may be discharged by operation of law.These circumstances include material alteration of the contract, the running of the rele-vant statute of limitations, bankruptcy, and impossibility of performance.

Contract Al terat ionTo discourage parties from altering written contracts, the law allows an innocent party tobe discharged when one party has materially altered a written contract without the knowl-edge or consent of the other party. For example, if a party alters a material term of the con-tract-such as the quantity term or the price term-without the knowledge or consent ofthe other party, the party who was Llnaware of the alteration can treat the contract as dis-charged or terminated.

Statutes of I imi tat ionsAs mentioned earlier in this text, statutes of limitations limit the period during which a partycan sue on a particular cause of action. After the applicable limitations period has passed, asuit can no longer be brought. For example, the limitatior-rs period for bringing lawsuits forbreach of oral contracts is r-rsually hvo to three years; for written contracts, four to five years;and for recovery of amounts awarded in judgment, ten to trvenf years, depending on statelaw. Lawsuits for breach of a contract for the sale of goods must be brought within four yearsafter the cause of action has accrued. By original agreement, the parties can agree to reducethis four-year period to not less than a one-year period. They cannot, howeve.r, agree toextend it beyond the four-year limitations period.

T55 EIMHNPERFORMANCE AND DISCHARCE

.a , ,Law is a practical matter,

Roscop Pouxo,I 870-1964

(American jurist)

6. Reslalement \Second) ofContructs, Section 281

556 EiIUrCONTRACTS

IMPOS9IBIIIfY OF PERFORMAHCEA doctrine under which a Party toa contract is relieved of her or hisduty to perform when Performancebecomes objectivelY imPossibleor totally impracticable (throughno fault of either PartY).

tf a fire incapocitated a commerciol

bokery's oven, would the bakery

be excused from Performing its

conttocts until the oven wos fixed?

If the bokery hod a controct for a

speciol holidoY order ond the oven

could not be fixed until oftet the

holidoy, would that contrad be

dischorged? WhY or whY not?

(Matt Biddulph/Creative Commons)

BankruptcyA proceeding.in bankruptcy attempts to allocate the debtor's assets to the creditors in a

faii and equ"itable fashion.'Once ihe assets have been allocated, the debtor receives a

discharge in bankruptcy (see chapter 7J) A discharge in bankruptcy ordinarily bars the

creditors from enforcing most of the debtor's contracts'

When Performance ls lmpossibleAfter a contract has been made, performance may become impossible in an obieciive

sense. This is known ,r-ir"forrifiiity of perform"rr"" "nd

may discharge the contract'7

P.rfor-rn.. may also b."-n. so difficult or costly due to so.me unforeseen event that a

court will consider it commercially unfeasible, or impracticable, as discussed later in the

chapter.

Objective Impossibility Obiective impossibili\t ("It can't be. done") must be distin-

g,rirh.d from subjective impossibllity ('JI'm sorry, I simply can't do i]") ,A",TlTfl:ff

s"ublective impossibility is the inability to pay firnds on time because the bank is closed'o

In effect, the.ronperforming party is'saying, "It is impossible{or me to perform," rathet

than "lt i, i-porribl. fo, onionn; perform." Accordingly, such excuses do not discharge

a conttact, "r,d

th. ,tonp.rior,,'i'tg party is normally held in bre-ach of contract' Three

basic types of situations *itt g.,."titiy qualifi, as grounds for the discharge of contractual

oblig^iio,t, based on lmpossibility of performance'9

I When d pdrty whose personal performance is essential to the completion of the contract

dies or becomes incapdcitatu; prior to performance' |iEinMTfitTl Fred' a fqm-9us

dancer, contracts witir Ethereai Dr.,.irrg Guild to play a leading role in its newballet'

Before the ballet can be performed," Fred becomes ill and dies. His personal

oerformance was essential to the completion of the contract. Thus, his death

il;.g*;h. .o,rtrr.t and his estate's llatility for his nonperformance' E

2 When the specific subiect matter of the contract is destroyed. FErAqIE*t.m A-l Farm.Equiprrrentagreestosel lGudgel thegreentractoroni ts lotandpromises

to i*" the tr"actor ready for Cudgel to pick up on Saturday' On Friday

,rlgtrt, ho*.uer, a truck u".r, off tlt. ,r."tby highway and smashes into the

trr".tor, destroying it beyond repair. Because the contract was for this

specific tractor, ,{-tt p.tfot*ance is rendered impossible owing to the

accident. lll

! when a change in the law renders performance illegal.l-lTxrffiFlETr2l A

contract io build an apartment building becomes impossible to perform

when the zoning laws are changed to prohibit the construction of residen-

tial rental property at the plan"ned lotation. A contract to paint a bridge

using iead paint beco*es impossible when ihe q:uttlpgt Passes new

,"gr.ilntior't, forbidding the use of lead paint on bridges'" lll

Temporary tmpossibility An occurrence or event that makes perfor-

"*"rri. temporaiily impossible operates to suspend performance until the

imoossibilitv ceases. Then, ordinarily, the parties must perform the contract

7. Restatement (,Second) of Contracts, Section 261'

8. InghamLumberCo.t ' - Ingersol l &Co,93 Ark 417,125 SW l39 (1910) '

9. Ristatement (Second) ofContracts, Sections 267-266; and UCC 2-615'

10.M. I .Paquet, Inc. t , .NewlerseyDepartmentofTransportat ion'171 NJ 378'794A"2d141 (2002) '

as originally planned. lTExNvtpLE r4rr-1 On August 22,200r, Keefe Hurwitz contracted tosell his home in Madisonville, Louisiana, to Wesley and Gwendolyn Payne for a price of$241,500. On August 26- just four days after the parties signed the conhact-HurricaneKatrina made landfall and caused extensive property damage to the house. The cost ofrepairs was estimated at $60,000 and Hurwitz would have to make the repairs before theclosing date (see Chapter 44). Hurwitz did not have the funds and refused to pay $60,000for the repairs only to sell the property to the Paynes for the previously agreed-on price of

$241,500. The Paynes filed a lawsuit to enforce the contract. Hurwitz claimed thatHurricane Katrina had made it impossible for him to perform and had discharged hisduties under the contract. The court, however, ruled thai Hurricane Katrina had causedonly a temporary impossibility. Hurwitz was required to pay for the necessary repairs andto perform the contract as written. In other words, he could not obtain a higher purchaseprice to offset the cost ofthe repairs.ll E

In contrast, if the lapse of time and the change in circumstances surrounding ihe con-tract make it substantially more burdensome for ihe parties to perform the promised acts,the contract is discharged. A leading case on the subject, Autry v. Republic Productions,tzinvolved an actor who was drafted into the army in 1942.Being drafted rendered theactor's contract temporarily impossible to perform, and it was suspended until the end ofthe war. When the actor got out of the army, the purchasing power of the dollar had sodiminished that performance of the contract would have been substantially burdensometo him. Therefore, the contract was discharged.

Should the courts ollow the defense of inpossibility of performonce to be used more often?The doctrine of impossibility of performance is applied only when the parties could not have rea-sonably foreseen, at the time the contract was formed, the event or events that rendered perfor-mance impossible. ln some caset the courts may seem to go too far in holding that the partiesshould have foreseen certain events or conditions, thus precluding the parties from avoiding con-tractual obligations under the doctrine of impossibility of performance. Even though the courtsrarely excuse parties from performance under the doctrine of impossibility, they allow parties toraise this defense more often than they once did. lndeed, until the latter part of the nineteenthcentury courts were reluctant to discharge a contract even when performance appeared to beliterally impossible. Generally, the courts must balance the freedom of parties to contract (andassume the risks involved) against the injustice that may result when certain contractual obliga-tions are enforced. lf the courts allowed parties to raise impossibility of performance as a defenseto contractual obligations more often, freedom of contract would suffer.

lsl

(ommercial lmpract icabi l i tyCourts may excuse parties {iom their performance obligations when the performancebecomes much more difficult or expensive than originally contemplated at the time the con-tract was formed. For someone to invoke the doctrine of commercial imoracticabilitv suc-cessfully. however. the anticipated performance musl become extremely diff;cult or. .oiily.lt

The added burden of performing not only must be extreme but also must not haye beenknown by the parties when the contract was made. For example, in one classic case, a courtheld that a contract could be discharged because a pafty would have to pay ten times

I57 GINEEEPERFORMANCE AND DISCHARGE

COMMERCIAT IMPRACTICABILITYA doctrine under which a couft mayexcuse the parties from performing acontract when the performancebecomes much more difficult orcostly due to an event that theparties did not foresee or anticipateat the time the contract was made.

11. Payne t Hurwitz,978 So.2d 1000 (La.App. lst Cir., 200E).12. l0 Cal.2d 144, 180 P.2d 888 (1947).13. Restdtement (Second) of Contracts, Section 264.

358 IIEIIUUCONTRACTS

IEE rhe doctrine of commercialimpracticability does not providerelief from such events as ordinaryprice increases or easily predictablechanges in the weather.

14. Mineral Park Land Co. v.15. Cape-France Enterprises t

BACK6ROUND AND FACTSLeo and Elizabeth Facto

contracted with Snuffy Pantagis Enterprises, Inc., for the use ofPantagis Renaissance, a banquet hall in Scotch Plains, NewJersey, for a wedding recePtion in August 2002. The Factospaid the $10,578 price in advance. The contract excusedPantagis from performance "if it is prevented from doing so byan act of God (for example, flood, power failure, etc.), or otherunforeseen events or circumstancesi' Soon after the recePtionbegan, there was a power failure. The lights and the air-

a. In the "search by party name" section, select the 'Appellate Division," type

"Pantagis" in the "First Name:" box, and click on "submit Form." In the result,

click on the "click here to get this case" link to access the oPinion. The Rutgers

Universitv School of Law in Camden, New Jersey. maintains this Web site.

more than the original estimate to excavate a certain amount of gravel.14 In another case,

the court allowed a party to rescind a contract for the sale of land because of a potential

oroblem with contaminated sroundwater under the land. The court found that "the

potential for substantial and unbargained-for" liability made contract performance eco-

nomically impracticabie. Interestingly, the court in that case also noted that the possibil-

ity of "environmental degradation with consequences extending well beyond the parties'

land sale" was justas importantto its decision as the economic considerations.t)The contract dispute in the following case arose out of the cancellation of a wedding

reception due to a power failure. Is a power failure sufficient to invoke the doctrine of

commercial impracticability?

Howard,172 Cal. 289, 156 P. '158 (1916).

Estate of Peed, 105 Mont. 5 13, 29 P.3d l0 I 1 (2001 )

.:i!::i,,Eii!::1-jrtirijr:i:i:i!;;tliif:tiit:;+t:::i:t:.:.i.:!iri:i:ti:iii.F:ij:':i+!rr:r!i:ti::l:+-.r.!::r;lr.i:ilir,:.rir

Superior Court of NewJersey, Appellate Division, 590 N.J.SuPer. 227,915 A.2d59 (2OO7).lawlibrarv.rutgers,edu/search.shimla

conditioning shut off. The band hired for the reception refusedto play without electricity to power their instruments, and thelack of lighting prevented the photographer and videographerfrom taking pictures. The temperature was in the 9Os, thehumidity was high, and the guests quickly becameuncomfortable. Three hours later, after a fight between a Suestand a Pantagis employee, the emergency lights began to fade,and the police eva€uated the hall. The Factos filed a suit in a

New Jersey state court against Pantagis, alleging breach ofcontract, among other things. The Factos sought to recovertheir prepayment, plus amounts paid to the band, thephotographer, and the videographer. The court concluded thatPantagis did not breach the contract and dismissed thecomplaint. The Factos appealed to a state intermediateappellate court.

lN THE W0RDS 0F THE C0URT . . . SKILLMAN, P.J.A.D. [PresidingJudge,Appellate Division]

Even if a contract does not expressly provide that a party will be relieved of the duty to

perform if an unforeseen condition arises that makes performance impracticable, a court

may relieve him of that duty if performance has unexpectedly become impracticable as a

result ofa supervening event. In decidingwhether d pdrty shouldbe relieved ofthe duty to

'berform a contract, a court must determine whether the existence of a specific thing is nec-

essaryfortheperformanceof adutyanditsx x * destructionorx x x deterioration* * x

makes performance impracticable. * * * A power failure is the kind of unexpected occur-rence that may relieve a parly of the duty to perform if the availability of electricity is

esln;ia| f;r satisfactory performance. lEmphasis added.l

The * x x Pantagis Renaissance contract provided: "Snuffy's will be excused from per-

formance under this contract if it is prevented from doing so by an act of God (e.g., flood.

CASE 14.!-Cont inued

power failure, etc.), or other unforeseen events or circumstances." Thus, the contractspecifically identified a "power failure" as one of the circumstances that would excuse thePantagis Renaissance's performance. We do not attribute any significance to the fact the* * * clause refers to a power failure as an example of an "act of God." This term has beenconstrued to refer not just to natural events such as storms but to comprehend aII misfortunesand accidents arising from inevitable necessity which human prudence could not foresee orprcyent. Furthermore, the * * * clause in the Pantagis Renaissance contract excuses per-formance not only for "acts of God" but also "other unforeseen events or circumstances."Consequently, even if a power failure caused by circumstances other than a natural eventq,ere not considered to be an "act of God," it still would constitute an unforeseen eventor circumstance that would excuse performance. [Emphasis added.]

The fact that a power failure is not absolutely unforeseeable during the hot summermonths does not preclude relief from the obligation to perform. * * * ,\bsolute unforesee-ability of a condition is not a prerequisite to the defense of impracticability. The party seek-ing to be relieved of the duty to perform only needs to show that the deshuction, or * * *

deterioration of a specific thing necessary for the performance of the contract makes perfor-mance impracticable. In this case, the Pantagis Renaissance sought to eliminate any possi-ble doubt that the availability of elechicity was a specific thing necessary for the weddingreception by specifically referring to a "power failure" as an example of an "act of God" that*'ould excr,rse performance. lEmphasis added.]

It is also clear that the Pantagis Renaissance was "prevented from" substantial perfor-mance of the contract. The power failure began less than forty-five minutes after the startof the reception and continued until after it was scheduled to end. The lack of electricityprevented the band from playing, impeded the taking of pictures by the photographer andtideographer and made it difficult for guests to see inside the banquet hall. Most signifi-cantly, the shutdown of the air conditioning system made it unbearably hot shortly afterthe power failure began. It is also undisputed that the power failure was an area-wideevent that was beyond the Pantagis Renaissance's control. These are precisely the kind ofcircumstances under which the parties agreed * * *

lin their contract] that the PantagisRenaissance would be excused from performance.

* * * Where one party to a contract is excused from performance as a result of anunforeseen event that makes performance impracticable, the other party is also generallyexcused from performarrce.

* * * Therefore, the power failure that relieved the Pantagis Renaissance of the obli-gation to furnish plaintiffs with a wedding reception also relieved plaintiffs of the obliga-tion to pay the contract price for the reception.

Nevertheless, since the Pantagis Renaissance partially performed the contract by start-ing the reception before the power failure, it is entitled *c * {c 1o recover the value of theservices it provided to plaintiffs.

DECISI0N AND REMEDY rtre state intermediateappellate court agreed that the power failure relieved Pantagisof its contractual obligation, but held that Pantagis's inability toperform also relieved the Factos of their obligation. The courtreversed the dismissal and remanded the case for an award tothe Factos of the amount of their prepayment less the value ofthe services they received.

I59 EIEESPERFORMANCE ANO DISCHARCE

F0R CRITICAt Al{Al .YSlS-Social€onsideratiafi ff eontogis offered to reschedule

the reception, should it be obsolved of the obligotion to refundthe Foctos' prepayment? Exploin.

E

560 IINIIEETCONTRACTS

FRUSTRATION OF PURPOSEA court-created doctrine under whicha party to a contract will be relieved ofher or his duty to perform when theobjective purpose for performance nolonger exists (due to reasons beyondthat party's control).

Val's Foods signs acontract to buy 1,500pounds of basil fromSun Farms, a smallorganic herb grower,

as long as an independent organization inspects the crop and

certif ies that it contains no pesticide or herbicide residue' Val's

has a contract with several restaurant chains to supply pesto

and intends to use Sun Farms' basil in the pesto to fulf i l l these

contracts. While Sun Farms is preparing to harvest the basil, an

unexpected hailstorm destroys half the crop. Sun Farms

attempts to purchase additional basil from other farms, but it

is late in the season and the price is twice the normal market

price. Sun Farms is too small to absorb this cost and

immediately notif ies Val's that it wil l not fulf i l l the contract.

Using the information presented in the chapter, answer the

following questions.

Frustrat ion of PurposeClosely allied with tl-re doctrine of commercial irnpracticability is the doctrine of frustration

of purpose. In principle, a contract will be discharged if supervening circumstances make

it iinpossible to attain the purpose both parties had in mind when making the contract. As

with commercial impracticability, the supervening event must not have beer-r foreseeable at

the time of the contracting. The doctrine of frustration of purpose relieves a party's obliga-

tion to perforrn only in extreme circumstances.to

lG. See, for eranple, East Capitot View Communil Derelopment Corp., Inc. v. Robinson,94l A.zd 1036 (D C App

2008).

I Suppose that the basil does not pass the chemical-residue

inspection. Which concept discussed in the chapter might

allow Val's to refuse to perform the contract in this situation?

2 Under which legal theory or theories might Sun Farms claim

that its obligation under the contract has been discharged

by operation of law? Discuss fullY.

5 Suppose that Sun Farms contacts every basil grower in the

country and buys the last remaining chemical-free basil

anywhere. Nevertheless, Sun Farms is able to ship only

1,475 pounds to Val's. Would this fulf i l l Sun Farms'

obligations to Val's? Why or why not?

4 Now suppose that Sun Farms sells its operations to Happy

Valley Farms. As a part of the sale, all three parties agree

that Happy Valley wil l provide the basil as stated under the

original contract. What is this type of agreement called?

ant ic ipatory repudiat ion 555breach of contract 551commercial impract icabi l i tY 557concurrent condit ions 548condit ion 546

condit ion precedent 547condit ion subsequent 547discharge l+sfrustration of purpose 550impossibility ol performance 555

mutual rescission 554novat ion 554performance 546tender l+8

Conditions ofPerformance(See pages 346-348.)

Contract obligations may be subject to the following tyPes of conditions:

L Condition precedent-Acondition that must be fulfilled before a party's promise becomes

abso\ute.

2. Condition subsequent-A condition that operates to terminate a party's absolute promise to

perform.

3. Concurrent conditions-Conditions that must be performed simultaneously' Each party's

absolute duty to perform is conditioned on the other party's absolute duty to perform'

16I GIMHNPERFORMANCE AND DISCHARCE

Disqharge byPerformance(See pages 348-354.)

Discharge byAgreement(Ste pages 354-355.)

Dischatee byoperati6n ol Law(S'ee pages 355-360.)

A contract may be discharged by complete (strict) performance or by substantial performance. Insome instances, performance must be to the satisfaction of another. Totally inadequateperformance constitutes a material breach of the contract. An anticipatory repudiation of acontract allows the other pafi to sue immediately for breach of contract.

Parties may agree to discharge their contractual obligations in several ways:

1. By rescission-The parties mutually agree to rescind (cancel) the contract.

2. By novation-A new party is substituted for one of the primary Parties to a contract.

3. By occord ond satisfoction-The parties agree to render and accept performance different fromthat on which they originally agreed.

parties' obligations under contracts may be discharged by operation of law owing to one of thefollowing:

1. Contract alteration.

2. Statutes of limitations.

5. Bankruptcy.

4. lmpossibility of performance.

5. Impracticability of performance.

6. Frustration of purpose.

':'it

Answers for the even-numbered questions in this tot Review section con be found on this text's accompanying Web site ot

www.cengage.com/blaw/blt. Select "Chopter 14" and click on "For Review."

I What is a condition precedent, and how does it affect a party's duf to perform a contract?

2 How are most contracts discharged?

5 What is substantial performance?

4 When is a breach considered material, and what effect does that have on the other par["s obligation to perform?

5 Will the courts allow parties to avoid perforr-ning their contractual duties when perforrnance becomes exhen-rely diffictrlt or

expensive?

ffi HypoTHETlcAt scENARtos AND cAsE pRoBtEMs

i4.! Anticipatory Repudiation' ABC Clothiers, Inc., has a contract

with Tayior & Sons, a retailer, to deiiver one thousand sum-

ner suits to Taylor's place of business on or before May 1.

On Aprii 1, Taylor senior re ceives a letter from ABC inforrn-

ing him that ABC will r-rot be able to make the delivery as

scheduled. Taylor is very upset, as he had planned a big ad

campaign. He wants to fiie a suit against ABC immediately

(April 2). Taylor's son, Tom, tells his father that filing a law-

suit is not proper until ABC actually fails to deliver the suits

on May I. Discuss fully who is correct, Thylor senior or Tom.

t4.3 Hypothetical Question with Sample Answer. In tl-re following sit-

uations, certain events take place after the contracts are

forned. Discuss which of these contracts are discharged

because the events render the contracts impossible to perform.

I Jirnenez, a famous singer, contracts to perform in your

nightclub. He dies prior to performance.