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P A R T 3 Contracts Introduction to Contracts The Agreement: Offer The Agreement: P A R T 3 Contracts Introduction to Contracts The Agreement: Offer The Agreement: Acceptance Consideration Reality of Consent Mc. Graw-Hill/Irwin Business Law, 13/e © 2007 The Mc. Graw-Hill Companies, Inc. All rights reserved.

P A R T 3 Contracts Capacity to Contract Illegality Writing Rights of Third P A R T 3 Contracts Capacity to Contract Illegality Writing Rights of Third Parties Performance & Remedies Mc. Graw-Hill/Irwin Business Law, 13/e © 2007 The Mc. Graw-Hill Companies, Inc. All rights reserved.

C H A P T E R 18 Performance & Remedies “It is an 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 v Nature and types of conditions in contrac v Performance of contracts Learning Objectives v Nature and types of conditions in contrac v Performance of contracts v Breach of contract v Excuses for non-performance v Remedies for breach of contract 18 - 5

Overview v Entering into a contract evidences an intention t perform (complete) obligations under Overview v Entering into a contract evidences an intention t perform (complete) obligations under the contra w v If Generally, each party performs the promise and discharged (released) from further obligation a party fails to perform as expected, courts ma be asked to determine the respective rights and duties of the parties 18 - 6

Conditions in a Contract v Sometimes a promisor’s duty to perform depends on the Conditions in a Contract v Sometimes a promisor’s duty to perform depends on the occurrence of some eventcondition, an or uncertain, future event v A condition may be classified as a: Condition precedent w Condition subsesequent w Condition concurrent w 18 - 7

Condition Precedent v A future, uncertain event creating a duty to perform w 18 Condition Precedent v A future, uncertain event creating a duty to perform w 18 - 8 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 obtains financing

Condition Concurrent When the contract calls for parties to perform at the same time Condition Concurrent When the contract calls for parties to perform at the same time v w 18 - 9 Example: Bryan promises to buy Stevie’sguitar for $1000. Stevie must give Bryan the guitar when Bryan gives. Stevie $1000.

Condition Subsequent A future, uncertain event that discharges the du to perform v w Condition Subsequent A future, uncertain event that discharges the du to perform v w 18 - 10 Example: Lee agrees to work Wool. Countil he for returns to college. Lee returns to college in August an discharges his obligation under the contract.

Excuse of Conditions v Occurrence of a condition may be excused When occurrence of Excuse of Conditions v Occurrence of a condition may be excused When occurrence of condition was prevented or hindered by party benefiting from the condition w Waiver: when a person whose duty is conditional voluntarily gives up his right to the occurrence of the condition w Estoppel: when a person whose duty is conditional lea other party to rely on his noninsistence the condition on w When performance of the act that constitutes the condition becomes impossible w 18 - 11

Silvestri v. Optus Software v Facts: w Silvestri was hired under two-year employment contract Silvestri v. Optus Software v Facts: w 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 w Silvestri pleased the CEO for six months, but complaints against Silvestri began to increase w Three months later, the CEO fired Silvestri w Silvestri filed suit claiming the dissatisfaction was objectively unreasonable and a breach of contract 18 - 12

Silvestri v. Optus Software v Procedural w w w 18 - 13 History and Silvestri v. Optus Software v Procedural w w w 18 - 13 History and Legal Reasoning: Trial court found for Optus Appellate court reversed in favor of Silvestri Issue: whether the employer’s satisfaction is subject an objective or subjective evaluation A subjective standard typically is applied to satisfact clauses in employment contracts In a satisfaction clause employment setting, there mu be honest and genuine dissatisfaction with the employee’s performance

Silvestri v. Optus Software v Holding: Company supplied objective evidence of genuine dissatisfaction with Silvestri v. Optus Software v Holding: Company supplied objective evidence of genuine dissatisfaction with Silvestri’sperformance w 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 w Reversed in favor of Optus w 18 - 14

Performance of Contracts v To determine whetherpromisor discharged a is by performance, courts consider Performance of Contracts v To determine whetherpromisor discharged a is by performance, courts consider the standard o performance expected v A strict performance standard requires full or perfect compliance with the contract terms w 18 - 15 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 lega remedies to Seller for Buyer’s breach

Performance of Contracts v A substantial performance standard is slightly lower standard applied to Performance of Contracts v A substantial performance standard is slightly lower standard applied to duties that are difficu to perform without some deviation from perfection in minor respects w 18 - 16 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 contrac price less any damages (repainting) resulting from the defects in performance

Substantial Performance 18 - 17 Substantial Performance 18 - 17

Breach of Contract v Under theimplied covenant of good faith and fair dealing, every Breach of Contract v Under theimplied covenant of good faith and fair dealing, every contract includes an obligation to perform in good faith v If a promisor fails to perform, breach occurs v At minimum, breach of contract gives the nonbreaching party the right to sue and recover for damages caused by the breach v For a material (serious) breach, further legal remedies are available 18 - 18

Determining Materiality v Standard for determining materiality is flexible but generally based on the Determining Materiality v 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 w Example: if time for performance immaterial, promisee must accept late performance if within reasonable time after performance due, but may deduct costs of delay w 18 - 19

Arnhold v. Ocean Atlantic Woodland Corp. v Facts: w Sellers agreed to sell farmland Arnhold v. Ocean Atlantic Woodland Corp. v Facts: w Sellers agreed to sell farmland to developer Ocean Atlant (Buyer), but delays and extensions ensued w After more negotiation and litigation, Sellers and Buyer signed a settlement agreement containing a “time is of th essence” clause (basis of the lawsuit) w Shortly before the closing date, Buyers again tried to exte the contract and Sellers refused, warning that “time is of essence” w Buyers assured Sellers they would close, but failed to do Sellers notifed. Buyers of contract termination 18 - 20

Arnhold v. Ocean Atlantic Woodland Corp. v Procedural History and Issue: Buyers sued Sellers Arnhold v. Ocean Atlantic Woodland Corp. v Procedural History and Issue: Buyers sued Sellers seeking specific performance w Trial court found for Sellers and Buyers appealed w Issue: whether Buyers materially breached the agreement by failing to tender the purchase funds an close on the property on the specified date w 18 - 21

Arnhold v. Ocean Atlantic Woodland Corp. v Legal Reasoning and Holding: The materiality inquiry Arnhold v. Ocean Atlantic Woodland Corp. v 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 provisi w Intent of the parties was clear – time was of the essen and timing was material w 18 - 22

Arnhold v. Ocean Atlantic Woodland Corp. v Legal Reasoning and Holding: In examining the Arnhold v. Ocean Atlantic Woodland Corp. v Legal Reasoning and Holding: In examining the totality of the circumstances, the fa do not support Buyer’s argument w “Sellers displayed the patience of Job by waiting nearly 3 1⁄2 years” w Buyer treated material deadlines as trivial, thus Buye has lost any right to purchase Sellers’ land w Affirmed in favor of Sellers w 18 - 23

Anticipatory Breach v When thepromisor indicates before time for performance that promisor unwilling or Anticipatory Breach v When thepromisor indicates before time for performance that promisor unwilling or unable is to carry out the contract, anticipatory repudiation or anticipatory breach occurs v The promisee has choices: Withhold his/her own performance and sue for damages total breach of contract immediately w Wait to sue until time for performance in case the other party changes his mind and decides to perform w Waive his/her rights to performance w 18 - 24

Excuses for Non-Performance v Nonperformance of a duty generally is a breach contract, but Excuses for Non-Performance v Nonperformance of a duty generally is a breach contract, but nonperformance may be excused i certain circumstances: Impossibility: “it cannot be done by anyone” w See Bush v. Pro. Travel International, Inc. w Impracticability: when unforeseen developments mak performance highly impracticable, unreasonably expensive, or of little value promisee to (UCC 2– 615) w 18 - 25

Other Reasons for Discharge v Discharge by mutual agreement v Accord and satisfaction w Other Reasons for Discharge v Discharge by mutual agreement v Accord and satisfaction w Accordis an agreement in whichpromisee a who has existing claim agrees with promisor that s/he will accept some performance different from that origina agreed on. When promisor performs the accord, that is called asatisfaction. v Discharge 18 - 26 by waiver of promisee

Other Reasons for Discharge v Discharge w by alteration One party alters and other Other Reasons for Discharge v Discharge w by alteration One party alters and other does not consent v Discharge by statute of limitations One party takes too long to bring lawsuit w UCC 2– 725: four-year statute of limitations for contracts involving the sale of goods w v Discharge 18 - 27 by decree of bankruptcy

Remedies for Breach of Contract v Legal w remedies (money damages) Compensatory damages, nominal Remedies for Breach of Contract v Legal w remedies (money damages) Compensatory damages, nominal damages, liquidat (contractual) damages, and in certain circumstances, punitive damages v Equitable w remedies Specific performance or injunction v Restitution 18 - 28

Test Your Knowledge v True=A, False = B w When a condition precedent occurs, Test Your Knowledge v True=A, False = B w When a condition precedent occurs, the contract arises, creating duties to perform w John agrees to work as Katy’s realtor until he sells her house. Katy closed on her house sal yesterday, so the contract has been discharge w 18 - 29 The standard for materiality of a breach is when only 50% of a contract has been performed

Test Your Knowledge v True=A, False = B w Legal remedies for breach of Test Your Knowledge v True=A, False = B w Legal remedies for breach of contract include specific performance or injunction Nonperformance of a duty is always a breach of contract w Performance that falls short of complete performance in some minor respect, but does no deprive the other party of a material part of the consideration for which s/he bargained is know substantial performance. w 18 - 30

Test Your Knowledge v Multiple w Steve promised to work for his employer on Test Your Knowledge v Multiple w Steve promised to work for his employer on Saturday morning. Steve didn’t show up for wo on Saturday because he decided he didn’t need t overtime money. Steve: (a) w (b) w (c) w (d) w (e) w 18 - 31 Choice is excused due to impracticality breached his contract breached the implied covenant of good faith both B and C none of the above

Test Your Knowledge v Multiple Choice w Robert contracted to paint Stan’s house by Test Your Knowledge v Multiple Choice w 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 th contract. Robert : (a) w (b) w (c) w (e) w 18 - 32 is excused due to impossibility engaged in anticipatory breach is excused because of condition precedent none of the above

Thought Questions v Should a non-breaching party always file suit against a breaching party? Thought Questions v Should a non-breaching party always file suit against a breaching party? v What are the ethical issues involved in a breach of contract? 18 - 33