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Chapter 09 – Contractual Performance and Breach

9-1

CHAPTER 9

Contractual Performance and Breach

Learning Objectives

This chapter can be viewed as a continuation of the preceding one. Once again, students will

study various aspects of contracts. In particular, this chapter focuses on how contractual

provisions are interpreted, how contractual duties are discharged, the effects of nonperformance,

and the consequences of breach of contract. Included in the last section is an examination of how

contracts can benefit parties other than the original parties of the agreement.

References

 Benson, P., The Theory of Contract Law: New Essays. Cambridge University Press (2001).

 Calamari, J. and J. Perillo, Calamari and Perillo’s Hornbook on Contracts. Thomson West

(2003).

 Epstein, R.A., Contract: Freedom and Restraint. Garland Publishers, 2000.

 Gilmore, Grant, The Death of Contract. Ohio State University Press (1995).

 Treitel, G.H., Some Landmarks of Twentieth Century Contract Law. Clarendon (2002).

Teaching Outline

I. Interpretation of Contracts (LO 9-1)

A. Rules of Interpretation

Emphasize:

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 That in certain cases, courts interpret handwritten terms to control typed terms and typed

terms to control printed terms. See marginalia.

 Sidebar 9.1—“Macy’s v. Martha Stewart and J.C. Penney: What Is a Stand-Alone

Store?”

Cases for Discussion:

1. Weaver v. Royal Insurance Co., 674 A.2d 975 (Sup.Ct. N.H. 1996).

When a commercial painter’s son suffered lead poisoning from paint chips and dust

from his father’s clothing, the father’s business liability insurer denied coverage under

its pollution exclusion clause.

2. Phillips v. Lincoln Nat. Life Ins. Co., 978 F.2d 302 (7th Cir. 1992).

An insurance company refused to pay treatment expenses for an “organic brain

syndrome” which left the insured with “horrible social skills” and abusive tendencies.

The company asserted that the insured’s condition was a “mental illness” uncovered by

the policy.

condition.

3. New Hampshire Ins. Co. v. Gruhn, 670 P.2d 941 (Nev. 1983).

Appellant insurance company had agreed to pay “all damages suffered by any person …

.” When the insured incurred a $5,000 punitive damage award against it, the insurance

company refused to pay.

B. The Parol Evidence Rule

Emphasize:

 That it does not apply to oral modifications coming after the parties have made the

written contract (although statute of frauds may apply).

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 Why courts want to rely on the written contracts as opposed to having parties explain

what the writing was meant to say.

Additional Matters to Consider:

 The exception (or non-application) of the parol evidence rule as applied to oral

modifications of written contracts.

II. Performance (LO 9-2)

Emphasize:

 See Figure 9.1 on contractual performance flow chart.

 That the duty of performance becomes binding at the time parties reached agreement under

a contract.

 The different types of conditions that may appear in a contract, and note their importance.

A. Conditions of Performance

 Why the concept of concurrent conditions is important when the parties fail to specify

the order of performance.

 The application of express versus implied conditions related to determining how, when,

where a contract is performed.

B. Payment, Delivery, Services Tendered in Goods Contracts

Emphasize:

 How payment of money owed, delivery of items promised, and offering to do what is

required typically meets the condition stated in a contract.

 The meaning and importance of tender of performance.

Additional Matters to Consider:

 How a tender of performance might satisfy a contractual condition of performance.

 How tender of performance is generally required to prove clean hands prior to a breach

of contract suit.

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C. Substantial Performance (LO 9-3)

Emphasize:

 The differences between complete performance, substantial performance, and material

breach.

 Sidebar 9.2 on the levels of performance.

Additional Matters to Consider:

 Provide or ask for examples of when contractual performance is at least partially

satisfied even though full performance is not complete.

D. Divisibility of Performance

Emphasize:

 The reason why some contracts are divided into smaller increments of performance.

 The differences between entire and divisible contracts and how they relate to

III. Excuses for Nonperformance (LO 9-4)

A. Impossibility of Performance

Emphasize:

 That a party’s nonperformance is excused because of impossibility of performance.

 That mere increased difficulty or reduced profitability, however, does not constitute

service contracts and other executory contracts such as a sales contract. Obviously an

entertainer who dies can’t be forced to perform; however, if a party agrees to sell a car,

executes a valid contract, but dies before delivery, the purchaser may demand the car

from the heirs at the contract price.

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B. Commercial Impracticability

Emphasize:

 That the impracticability standard is not as difficult to meet as the impossibility

standard.

 Examples of when unforeseen circumstances may cause the performance of a contract to

become impractical.

 What constitutes impracticability or performance depends upon the circumstances of the

situation.

Case for Discussion:

1. Kennedy v. Reece, 37 Cal. Rptr. 708 (1964).

The plaintiff contracted with the defendants to drill a well for them. He assured the

defendants he could reach the 400-foot level contemplated by the written contract. After

two attempts the plaintiff abandoned further efforts to drill the well because of a rock

formation. Evidence indicated that the rock could have been drilled through, however.

Held: The defendants are liable on a counter claim in the sum of $1,307.15. The court

ruled that the plaintiff was not properly discharged from performance under the contract

by either the impossibility or impracticability doctrines. The court stated: “Increased

difficulties and heightened costs of a reasonable nature, even though unforeseen, do not

render the performance of a contract ‘impracticable.’”

C. Waiver or Release

Emphasize:

 The technical distinction between a waiver and a release.

 Why it is not important to focus on this technical distinction.

Additional Matters to Consider:

 When a party to a contract is discharged, the party is released from all further

obligations of performance.

Case for Discussion:

1. Barwick v. General American Life Ins. Co. 324 S.E.2d 758 (1984).

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The deceased was insured under a policy that provided for reduction by one-half in

coverage when insured reached age 65. Although deceased had retired at age 65, the

insurance company continued to bill his law firm for full premium and continued to list

full coverage. However, when the deceased died, the company denied full coverage and

sought to refund the excess premiums.

IV. Breach of Contract (LO 9-5)

Emphasize:

 There are several remedies or solutions available for breach of contract. Figure 9.2

provides a summary of the remedies for breach of contract.

 Discuss the importance of the negotiated settlement.

 The importance of mitigation of damages.

 See Sidebar 9.3 on opening the door to related liability.

 How a so called efficient breach can save money and be an effective business decision

under certain circumstances.

Effective Breach

Emphasize:

 On what is meant by effective breach.

 Sidebar 9.5—“Walking Away from a Mortgage”

Case for Discussion:

1. Mobil Oil Exploration and Producing Southeast, Inc. v. United States, 120 S.Ct. 2423

(2000).

Mobil and other oil companies received the right to explore and develop oil found off the

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U.S. government could not perform the contract as originally written.

Issue: Are the oil companies entitled to the return of the $158 million lease payments?

Held: Yes. Due to the change in laws, the United States in fact delayed in responding to

V. Practical Perspective on Contracts

Emphasize:

 Sidebar 9.6 offers some concluding guidance on how to maintain a balanced relationship

with one’s lawyer.

Answers to Review Questions and Problems

Interpretation of Contracts

1. Rules of Interpretation

2. The Parol Evidence Rule

The parol evidence rule prevents Caryn from proving in court there was an oral agreement

3. Conditions of Performance

a. Conditions determine when a party becomes obligated to perform the promises made.

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implied by the courts.

4. Payment, Delivery, Services Tendered

a. Tendering performance means a party offers to perform its contractual obligations.

5. Substantial Performance

a. Since there has been substantial contractual performance by Ace, Realty cannot rescind

6. Divisibility of Performance

Employment contracts can be viewed as installments divided into pay periods. Construction

contracts may involve payments due at certain points of progress; however, a finished

structure or remodeling job is the desired end result. Because the typical employment

relationship is not for a prescribed product to be produced; it is viewed as divisible. Because

construction contracts are usually for a finished result, it is not viewed as divisible.

Excuses for Nonperformance

7. Impossibility of Performance

8. Commercial Impracticability

9. Waiver or Release

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Business Discussion #1

1. Is the “deal” you make an enforceable contract?

Because of the Statute of Frauds writing requirement for a sale of goods of $500 or more,

this agreement is not likely to be enforceable. Point out that many sales representatives lack

2. Does the mistake you made permit you to get out of an enforceable contract?

Generally, a party cannot rescind an enforceable agreement due to a unilateral mistake. If the

3. What do you think will happen in this situation?

With most business agreements, the parties work out their differences rather than sue on