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Suggested Additional Assignments
Drafting Exercise: Substantial Performance Scenarios
Divide students into three groups. Have one group brainstorm a relatively simple residential construction
project, such as building a deck, installing an in-ground pool, or adding an addition containing a family
room. Ask them to list five or six design specifications they would like to see in the project: the
dimensions of the deck, pool, or family room, the building materials, the quality of the finish, etc. Give
the list to another group of students who will change any three of the specifications in a relatively small
way. Their goal is to make the specified item less valuable without breaching the contract. Each side
should then present its case to the court--the third group—arguing, respectively, that the change breaches
the contract and that the change is within the bounds of substantial performance. Can the third group
reach consensus on these questions?
Drafting Exercise: Defining Good Faith
This chapter contains several cases involving insurance companies, which is not surprising since these
companies frequently face suits alleging bad faith denial of claims. Students should draft a company
memo, intended for all employees, describing the company’s attitude toward “good faith.” They should
rely on the ethics checklist from Chapter 2, on public policy, and on the legal requirements of good faith.
Issues to be covered might include, for example, fairness in describing and selling policies, what specific
steps must be included in a claims analysis before it will be considered good faith, and the long-term
interests of the company versus short-term profits.
Chapter Overview
Chapter Theme
Good faith and reasonable conduct will prevent many contract disputes.
Quote of the Day
“If you can't give me your word of honor, will you give me your promise?” –Samuel Goldwyn
(1882-1974), Hollywood producer.
Performance and Discharge
If a party is discharged, she is "finished", and has no more duties under a contract. Most contracts are
discharged by full performance. In other words, the parties generally do what they promise.
Sometimes the parties discharge a contract by agreement.
Conditions
A condition is an event that must occur before a party becomes obligated under a contract.
How Conditions Are Created
Express Conditions
The parties may expressly state a condition. Notice that no special language is necessary to create the
condition. Phrases such as “provided that” frequently indicate a condition, but neither those nor any other
specific words are essential.
Implied Conditions
At other times, the parties say nothing about a condition, but it is clear from their agreement that they
have implied one.
Types of Conditions
Courts divide conditional clauses into three categories: (1) condition precedent, (2) condition subsequent,
and (3) concurrent conditions. But what they have in common is more important than any of their
differences. The key to all conditional clauses is this: If the condition does not occur, one party will
probably be discharged without having to perform his obligations under a contract.
Role Play: Negotiating Conditions in a Real Estate Sale
Divide the students into an even number of small groups. One set represents Igor and Tiffany Venderos,
who are selling their house. The Venderoses put it on the market for $415,000. The other group
represents Bronwyn and Wilhelm Compras, who have offered $350,000 for the property. The Comprases
really love the house and want to buy it if they can. The Venderoses counter-offered at $400,000. Both
seller and buyer would be willing to make a deal in the range of $370,000 to $380,000. It is now March
1. The Comprases are concerned about several other things:
The house has no garage and they are hoping to build one, but that will require a zoning variance,
because the garage will be closer to the side lot line than the town rules permit. A garage is not a
deal-breaker for the Comprases, but they would like one. It typically takes about 3 months to apply
for a variance and get a decision, but it could take a maximum of 6 months.
The Comprases must obtain financing to purchase the house. They are prepared to make a $50,000
deposit, maybe slightly more, but cannot buy the house without a mortgage for the rest of the money.
They will not sign the sales contract unless it protects their ability to seek a mortgage, and discharges
them if they fail to obtain one. The Comprases expect that it will take them 3 to 4 weeks to apply for
a mortgage and get a yes-or-no answer.
Finally, the Comprases would like the same “out” if they are unable to sell their current residence, a
condominium worth about $225,000. They realize that the seller may not agree, and this is not a
deal-breaker.
The Venderoses are eager to sell, but have several of their own concerns:
They would like the closing on May 1 but could wait until sometime in June. Anytime after July 1
becomes difficult or impossible for them.
They are willing to give the Comprases a reasonable amount of time to seek a mortgage, and would
release them from the contract if they cannot obtain one.
They are not willing to let the Comprases out of the deal if the buyers cannot sell their own house.
There is no way of knowing how long it might take for them to sell it or what a satisfactory price
might be.
The parties should be able to negotiate a successful sales contract. Possible terms include conditional
clauses permitting the Comprases to discharge the contract if they cannot obtain a mortgage after a good
faith effort to do so, and perhaps a slight reduction in sales price if they are unable to obtain the zoning
variance they seek.
Public Policy
At times, a court will refuse to enforce an express condition on the grounds that it is unfair and harmful to
the general public.
You Be the Judge: Anderson v. Country Life Ins. Co.1
1 180 Ariz. 625, 886 P.2d 1381, 1994 Ariz. App. LEXIS 240 Arizona Court of Appeals, 1994
Facts: A Country Life Insurance agent persuaded Donald and Anna Mae Anderson to buy a life insurance
policy, accepting from them a check for $1,600. He gave the Andersons a “conditional receipt for
medical policy,” which stated that the Andersons were covered, effective November 26, but only when all
conditions were met. The most important was that the Country Life home office accept the Andersons as
medical risks.
Donald Anderson died of a heart attack a few weeks later. Country Life declined the Andersons as
medical risks. Anna Mae Anderson sued. Country Life responded that medical approval was a condition
precedent to the policy taking effect. The trial court gave summary judgment for Country Life. Ms.
Anderson appealed, claiming that the conditional clause violated public policy.
You Be the Judge: Did the conditional clause violate public policy?
Holding: Judgment for Country Life reversed. The court held that the policy was grossly unfair and a
violation of public policy. The insurer was being paid for an extended period during which it had no risk.
The court held the conditional clause void, and ordered Country Life to pay the full benefits.
Question: What public policy did this insurance policy violate?
Answer: Public policy prohibits an insurer from taking an advance premium and placing conditions
Performance
People speak of “dotting the i’s and crossing the t’s” when discussing contract performance, yet that is not
the standard the law generally imposes to determine whether a party has performed or breached its
contract obligations. A party is generally not required to render strict performance unless the contract
expressly demands it and such a demand is reasonable.
In a contract for services, a party that substantially performs its obligations will generally receive the
full contract price, minus the value of any defects.
Additional Case: Strategic Resources Group v. Knight-Ridder2
Facts: Brighton Homes developed residential housing in the Miami area and contracted with
Knight-Ridder to run advertisements in the Miami Herald newspaper. The contract required Brighton to
designate the size of the ad and stated that Knight-Ridder would print them and “bill for the exact space
published.” Brighton assigned to Strategic Resources Group all rights the developer might have for
overpayments made to Knight-Ridder and Strategic sued Knight-Ridder, claiming that for three years the
newspaper had routinely printed ads that were 3.83% smaller than the copy submitted by Brighton. The
trial court ruled that Knight-Ridder had substantially performed and granted its motion for summary
judgment. Strategic appealed.
Issue: Did Knight-Ridder substantially perform its advertising contract?
Holding: Judgment for Knight-Ridder affirmed. Substantial performance is that performance of a
contract which, while not full performance, is so nearly equivalent to what was bargained for that it would
be unreasonable to deny the promisee the full contract price subject to the promisor's right to recover
whatever damages may have been occasioned him by the promisee's failure to render full performance.
For six years, Knight-Ridder ran the advertisements without any complaint from Brighton.
Brighton never requested tear sheets or advertising proofs before publication, nor did it measure the
advertisements after publication. The size reduction was not easily discernible, even in a side-by-side
comparison. Even after discovering the reduction, Brighton continued its business relationship with
Knight-Ridder, using the same advertisements under the same terms and conditions. While
Knight-Ridder intentionally reduced the size of the advertisements, it did not intentionally breach the
contract. It relied on contractual language which authorized it "to revise, alter, or reject any
advertisement."
2 870 So.2d 846 Court of Appeal of Florida, 2003
Question: Why is Strategic the plaintiff in this case when the dispute arose with Brighton’s ads?
Answer: Brighton assigned to Strategic its rights in overpayments made to Knight-Ridder for the
Question: What if the ads had been 10% smaller? Would the result have been different?
Answer: We don’t know. The court doesn’t address at what point Knight-Ridder’s performance
Question: What facts does the court rely on in ruling for Knight-Ridder?
Answer: The court notes that the practice which is the basis for Strategic’s claims continued for six
Question: In some of the other contract chapters we discussed cases in which the rules favored form
over substance. Is it fair to say the opposite is true here—that courts do not favor a standard of strict
performance?
Personal Satisfaction Contracts
A court applies a subjective standard only if assessing the work involves personal feelings, taste, or
judgment and the contract explicitly demanded personal satisfaction. A “subjective standard” means that
the promisee’s personal views will greatly influence her judgment, even if her decision is foolish and
unfair.
Good Faith
Case: Brunswick Hills Racquet Club Inc. v. Route 18 Shopping Ctr.
Associates3
Facts: Brunswick Hills Racquet Club (Brunswick) owned a tennis club on property that it leased from
Route 18 Shopping Center Associates (Route 18). The lease ran for 25 years, and Brunswick had spent
about $1 million in capital improvements. The lease expired, and Brunswick had the option of either
buying the property or purchasing a 99-year lease, both on very favorable terms. To exercise its option,
Brunswick had to notify Route 18 no later than September 30, and had to pay the option price of
$150,000. If Brunswick failed to exercise its options, the existing lease automatically renewed as of
September 30, for 25 more years, but at more than triple the current rent.
Nineteen months before the option deadline, Brunswick’s lawyer wrote to Rosen Associates, the
company that managed Route 18, stating that Brunswick intended to exercise the option for a 99-year
lease. He requested that the lease be sent well in advance so that he could review it. He did not make the
required payment of $150,000.
Rosen replied that it had forwarded Spector’s letter to its attorney, who would be in touch. In April,
Spector again wrote, asking for a reply from Rosen or its lawyer.
Over the next six months, the lawyer continually asked for a copy of the lease, or information, but
neither Route 18’s lawyer nor anyone else provided any data. Eventually, the September deadline passed.
Route 18’s lawyer notified Brunswick that it could not exercise its option to lease, because it had
failed to pay the $150,000 by September 30.
Brunswick sued, claiming that Route 18 had breached its duty of good faith and fair dealing. The trial
court found that Route 18 had no duty to notify Brunswick of impending deadlines, and gave summary
judgment for Route 18. The appellate court affirmed, and Brunswick appealed to the state supreme court.
Issue: Did Route 18 breach its duty of good faith and fair dealing?
3 182 N.J.210, 864 A.2d 387 Supreme Court of New Jersey, 2005
Holding: Judgment for Route 18 reversed.
Excerpts from Justice Albin’s Decision: Courts generally should not tinker with a finely drawn and
precise contract entered into by experienced business people that regulates their financial affairs.
[However,] every party to a contract is bound by a duty of good faith and fair dealing in both the
performance and enforcement of the contract. Good faith is a concept that defies precise definition.
Good faith conduct is conduct that does not violate community standards of decency, fairness, or
reasonableness. The covenant of good faith and fair dealing calls for parties to a contract to refrain
from doing anything which will have the effect of destroying or injuring the right of the other party to
receive the benefits of the contract.
Our review of the undisputed facts of this case leads us to the inescapable conclusion that
defendant breached the covenant of good faith and fair dealing. Nineteen months in advance of the
option deadline, plaintiff notified defendant in writing of its intent to exercise the option to purchase
the 99-year lease. Plaintiff mistakenly believed that the purchase price was not due until the time of
closing.
During a 19-month period, defendant, through its agents, engaged in a pattern of evasion,
sidestepping every request by plaintiff to discuss the option and ignoring plaintiff’s repeated written
and verbal entreaties to move forward on closing the 99-year lease despite the impending option
deadline and obvious potential harm to plaintiff.
Defendant never requested the purchase price of the lease. Indeed, as defendant’s attorney
candidly admitted at oral argument, defendant did not want the purchase price because the successful
exercise of the option was not in defendant’s economic interest.
Ordinarily, we are content to let experienced commercial parties fend for themselves and do not
seek to introduce intolerable uncertainty into a carefully structured contractual relationship by
balancing equities. But there are ethical norms that apply even to the harsh and sometimes cutthroat
world of commercial transactions. We do not expect a landlord or even an attorney to act as his
brother’s keeper in a commercial transaction. We do expect, however, that they will act in good faith
and deal fairly with an opposing party. Plaintiff’s repeated letters and telephone calls to defendant
concerning the exercise of the option and the closing of the 99-year lease obliged defendant to
respond, and to respond truthfully.
[Plaintiff is entitled to exercise the 99-year lease.]
Question: Brunswick failed to pay the option price of $150,000 when it notified Route 18 of its
exercise of the 99-year lease option. Why doesn’t that end the case, in favor of Route 18?
Answer: The court states that Brunswick’s failure to pay arose from a mistaken belief. Implicit in
Question: The definition of good faith is nebulous. What standard does the court apply?
Question: What does that mean in practical terms?
Answer: It means that courts must examine each claim of breach of the covenant of good faith and
Question: It seems in these cases that courts could wind up interfering with legitimate competitive
business practices.
Answer: That is a valid concern, one that courts recognize. As the court states here, “courts
Additional Case: Hinc v. Lime-O-Sol Company4
Facts: Through his experience in the paint industry and as an employee handling claims for the
Sherwin-Williams Company, a paint manufacturer, Hinc became aware of the recurring problems of
surfactant leaching and tannin bleeding, which cause brown surface stains on painted exteriors. Often,
because of this discoloration, paint manufacturers and insurance companies were forced to repaint entire
commercial complexes at their own expense. Hinc's product, which he named Less Work Painted Surface
Stain Remover ("Stain Remover"), combined a certain proportion of a secret ingredient with a
shower-cleaning product manufactured by LOS ("Shower Cleaner"). Lacking knowledge of the Shower
Cleaner formula but understanding the commercial potential of Stain Remover, Hinc contacted LOS
about his invention in early 1999.
The parties discussed whether Hinc’s product would be viable. Hinc visited LOS's facility in Ashley,
Indiana at least two times to discuss potential applications of Stain Remover. Negotiations led to a
contract providing that while Hinc would retain ownership of the secret ingredient, he would divulge it to
LOS. LOS would manufacture and distribute the product while keeping Hinc’s secret ingredient
confidential. Without discussion between the parties as to its meaning, the contract contained a term
obligating both parties to use their "best efforts" to market the product "in a manner that seems
appropriate."
Hinc supplied LOS with the secret ingredient and secured orders for Stain Remover with
Sherwin-Williams. LOS filled these orders with its Shower Cleaner, not the combined product containing
Hinc's secret ingredient. LOS claims production difficulties prohibited filling the orders with Stain
Remover, and, in order to deliver the orders on time, Hinc agreed to allow LOS to ship Shower Cleaner
instead of Stain Remover. Hinc denies he ever agreed to this. Ultimately, LOS never produced,
marketed, or sold Stain Remover during the duration of the contract.
The relationship between the parties eventually broke down and Hinc sued LOS for breach of contract.
The district court granted LOS's motion for summary judgment and dismissed Hinc's suit, ruling that the
"best efforts" clause was vague and unenforceable under applicable law.
Issue: Was the “best efforts” clause vague and therefore unenforceable?
Holding: Judgment for LOS reversed. After ruling that Indiana law governed the contract the court
stated “[w]here possible, Indiana courts will construe contracts as being valid, rather than void.” The
phrase "in a manner that seems appropriate," is obviously indefinite and could mean different things to
different people, but we do not believe that the clause as a whole is so vague as to be unenforceable as a
matter of law. LOS, which drafted this provision of the contract, agreed to put forth its "best efforts" to
market Stain Remover and required the same of Hinc. "Best efforts," as commonly understood, means, at
the very least, some effort. It certainly does not mean zero effort --the construction LOS urges here to
escape any obligation under its contract. Cf. E. Allen Farnsworth, On Trying to Keep One's Promises:
The Duty of Best Efforts in Contract Law, 46 U. Pitt. L. Rev. 1, 8 (1984) (noting that fifty years ago it was
generally accepted that a duty defined only in terms of best efforts was too indefinite to be enforced, but
that such a view is no longer widely held today). We believe that Indiana's highest court would take the
approach that "best efforts" provisions can be contractually enforced.
Note: As the quote from the Farnsworth law review article cited above points out, the trend in recent
decades has been to define and enforce concepts such as “best efforts” and good faith.
Time of the Essence Clause
A time of the essence clause will generally make contract deadlines strictly enforceable.
4 382 F.3d 716; 2004 U.S. App. LEXIS 18345 United States Court of Appeals for the Seventh Circuit,
2004
Breach
When one party breaches a contract, the other party is discharged. The discharged party has no
obligation to perform and may sue for damages.
As we know, parties frequently perform their contract duties imperfectly, which is why courts accept
substantial performance rather than strict performance, particularly in contracts involving services. In a
more general sense, courts will discharge a contract only if a party committed a material breach.
Anticipatory Breach
Anticipatory breach is committed by one party making it unmistakably clear that he will not honor the
contract.
Case: O’Brien v. Ohio State University5
Facts: The Ohio State University (OSU), experiencing a drought in its men’s basketball program,
brought in coach Jim O’Brien, to turn things around. The plan was successful.. In only his second year,
he guided the team to its best record ever. The team advanced to the Final Four, and O'Brien was named
national coach of the year. OSU’s athletic director promptly offered the coach a new, multiyear contract,
worth about $800,000 per year.
Section 5.1 of the contract included termination provisions. The University could fire O’Brien for
cause if (a) there was a material breach of the contract by the coach, or (b) O’Brien’s conduct subjected
the school to NCAA sanctions. OSU could also terminate O’Brien without cause, but in that case it had to
pay him the full salary owed.
O’Brien began recruiting a talented 21-year-old Serbian player named Alex Radojevic. While getting
to know the young man, O’Brien discovered two things. First, it appeared that Radojevic had been paid to
play briefly for a Yugoslavian team, meaning that he was ineligible to play college basketball. . Second, it
was clear that Radojevic’s family had suffered terribly during the strife in his homeland.
O’Brien concluded that Radojevic would never play for OSU or any major college. He also decided
to loan Radojevic’s mother some money. Any such loan would violate an NCAA rule if done to recruit a
player, but O’Brien believed the loan was legal, since Radojevic could not play in the NCAA anyway.
Several years later, the University learned of the loan, and realized that O’Brien had never reported it.
Hoping to avoid trouble with the NCAA, OSU imposed sanctions on itself. The University also fired the
coach, claiming he had lied, destroyed the possibility of postseason play, and harmed the school’s
reputation.
O’Brien sued, claiming he had not materially breached the contract. The trial court awarded the coach
$2.5 million, and the University appealed.
Issue: Did O’Brien materially breach the contract?
Holding: No, judgment for O’Brien affirmed.
Excerpts from Judge Tyack’s Decision: OSU argued that it was substantially injured by the
self-imposed sanctions, which included a ban from post-season and NCAA tournament play [during
the current season], and relinquishing two basketball scholarships from the [next] recruiting class.
Contrary to OSU’s argument, however, the trial court found these sanctions to be insubstantial.
[Athletic Director] Geiger announced the one-year post-season ban in December, and it appears from
the timing of that announcement that Geiger made the decision based on the fact that the team was
unlikely to be invited to a post-season tournament in the first place.
5 2007 WL 2729077, Ohio Court of Appeals, 2007.
The second alleged harm was harm to OSU’s reputation. The trial court found that any
reputational harm was similarly exaggerated, at least as it specifically related to the Radojevic matter.
Radojevic never enrolled at OSU, and never played a single second for OSU’s basketball team.
NCAA violations happen all the time. It’s the nature of the beast. Also relevant to the issue of
OSU’s allegedly-damaged reputation is the fact that almost immediately after firing O’Brien, OSU
was able to lure one of the nation’s top coaching prospects, [Thad Matta], to assume O’Brien’s former
position. Shortly thereafter, Matta successfully recruited possibly the best recruiting class ever. Based
on this evidence, the trial court could reasonably find the Radojevic loan did not cause serious harm
to OSU.
OSU argues that O’Brien acted in bad faith by covering up his misconduct for several years. In
the words of OSU’s counsel at oral argument: “If lying to your employer for four years is not a
material breach, it’s hard to imagine what would be!” Although the premise for counsel’s argument is
sound, it is unsound in application because it assumes facts not in evidence. Counsel for OSU
assumes for the purposes of the argument that O’Brien systematically either denied allegations about
the Radojevic loan, or took affirmative steps to conceal it from OSU. The evidence does not support
such a conclusion. After Radojevic was drafted by the NBA, there is not a single inference that can be
drawn from the record to suggest that O’Brien even thought about the loan. In O’Brien’s own mind,
he did not believe he had done anything wrong, thus, he would not have had a motive to conceal what
he had done.
[There was no material breach.]
Affirmed.
Question: How did O’Brien breach the contract?
Question: If he breached the contract, why does OSU have to pay anyway?
Question: But, if the parties agreed to the terms of the contract, and O’Brien did not honor those
terms, isn’t it unfair that he collects damages?
Answer: The theory of material breach recognizes the fact that frequently performance of a contract
Statute of Limitations
A party injured by a breach of contract should act promptly. A statute of limitations begins to run at
the time of injury and will limit the time within which the injured party may file suit. These laws set
time limits for filing lawsuits.
