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BREACH
When one party fails to perform its obligations, the nonperforming party breaches a contract. The
injured party may sue for damages resulting from the breach, and, if the breach is material, may be
discharged from the contract.
Material Breach
Some breaches are minor deviations from contracted performance, and do not give rise to discharge. A
material breach is a breach that substantially harms the innocent party.
Courts will discharge a contract if a party committed a material breach.
Case: O’Brien v. Ohio State University1
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 National Collegiate Athletic Association (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?
Decision: No, he did not materially breach his contract. Affirmed.
Reasoning: OSU suffered no substantial damage. The Buckeyes played poorly in the weeks leading up
to the announcement of the ban on postseason play, and they were unlikely to receive an NCAA bid.
The University's reputation was not significantly harmed because Radojevic never played for the
school. Also, OSU promptly recruited a top coach to replace O'Brien. Moreover, OSU presented no
evidence that O'Brien lied about the payment, tried to conceal it, or even knew that it was wrong.
Violations of NCAA rules are common. A minor violation is not necessarily a material breach. Coach
O'Brien remained entitled to his $2.5 million award.
Question: How did O’Brien breach the contract?
Question: If he breached the contract, why does OSU have to pay anyway?
1 2007 WL 2729077, Ohio Court of Appeals, 2007.
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
Anticipatory Breach
Anticipatory breach occurs when a party takes action to make it unmistakably clear that the party
will not honor the contract. The non-breaching is discharged and may immediately file suit for
breach of contract.
Statute of Limitations
A statute of limitations is a statutory time limit within which an injured party must file a lawsuit. A
statute of limitations begins to run at the time of injury. Statutes of limitations vary from state to
state, and from issue to issue within a state.
IMPOSSIBILITY
A court will discharge an agreement if performing the agreement is truly impossible. But if
honoring the deal merely imposes a financial burden, the law will generally enforce the contract.
True Impossibility
These cases are easy—and rare. True impossibility means that some event has happened making it
literally impossible to do what the promisor said he would do. It is typically caused by destruction
of the subject matter, the death of an essential promisor in a personal services contract, or
intervening illegality.
Commercial Impracticability and Frustration of Purpose
It is rare for contract performance to be truly impossible, but very common for it to become a
financial burden to one party. A court may discharge an agreement if performance would be so
dangerous, costly, or pointless to enforce. Courts use the related doctrines of commercial
impracticability and frustration of purpose to decide when a change in circumstances should permit
one side to escape its duties.
Commercial impracticability means some event has occurred that neither party anticipated and
fulfilling the contract would now be extraordinarily difficult and unfair to one party.
Frustration of purpose means some event has occurred that neither party anticipated and the
contract now has no value for one party.
Courts consider the following factors in deciding impracticability and frustration of purpose
claims:
Mere financial difficulties will never suffice to discharge a contract.
The event must have been truly unexpected by both parties.
If the promisor must use a different means to accomplish her task, at a greatly increased
cost, she probably does have a valid claim of impracticability.
A force majeure clause is significant but not necessarily dispositive.
Force Majeure Clauses
You are an executive vice-president of StikM, a company that manufactures various adhesive products
and sells them to manufacturers and retailers. Your company uses large quantities of Apocryphonium,
an essential chemical that is manufactured by only one corporation, ToxIck. You are negotiating with
ToxIck for a three-year requirements contract for Apocryphonium.
Question: First, a refresher: what is a requirements contract?
Answer: In a requirements contract, the buyer (StikM) agrees to purchase 100 percent of its needs for
Question: What problems might this force majeure clause cause you?
Answer: Its language is quite broad. Although such open-ended clauses are very common, you may
desire greater specificity. Exactly what are the “acts of God”—hurricanes? tornados? floods?
Question: What steps can one take to protect against non-performance based on force majeure?
Answer: Attempt to pass through the risk in contracts with your own buyers with a clause that
Multiple Choice Questions
1. CPA QUESTION: Nagel and Fields entered into a contract in which Nagel was obligated to
deliver certain goods by September 10. On September 3, Nagel told Fields that he had no intention
of delivering the goods. Prior to September 10, Fields may successfully sue Nagel under the
doctrine of:
(a) Promissory estoppel
(b) Accord and satisfaction
(c) Anticipatory breach
(d) Substantial performance
2. Most contracts are discharged by
(a) agreement of the parties
(b) full performance
(c) failure of conditions
(d) commercial impracticability
(e) a material breach
3. If a contract contains a condition precedent, the ___________________ has the burden of proving
that the condition actually happened. If a condition subsequent exists, the __________________
has the burden of showing that the condition occurred.
(a) plaintiff; plaintiff
(b) plaintiff; defendant
(c) defendant; plaintiff
(d) defendant; defendant
4. Big Co., a construction company, builds a grocery store. The contract calls for a final price of $5
million. Big Co. incurred $4.5 million in costs and stands to make a profit of $500,000. On a final
inspection, the grocery store owner is upset. His blueprints called for 24 skylights, but the finished
building has only 12. Installing the additional skylights would cost $100,000. Big Co. made no
other errors. How much must the grocery store owner pay Big Co.?
(a) $5,000,000
(b) $4,900,000
(c) $4,500,000
(d) $0
5. Lenny makes K2, a synthetic form of marijuana, in his basement. He signs an agreement with the
Super Smoke Shop to deliver 1000 cans of K2 for $10,000. After the contract is signed, but before
the delivery, Super Smoke Shop's state legislature makes the sale of K2 illegal. Lenny's contract
will be discharged because of ______________________.
(a) true impossibility
(b) commercial impracticability
(c) frustration of purpose
(d) none of the above
Essay Questions
1. ETHICS Commercial Union Insurance Co. (CU) insured Redux, Ltd. The contract made CU liable
for fire damage, but stated that the insurer would not pay for harm caused by criminal acts of any
Redux employees. Fire destroyed Redux’s property. CU claimed that the “criminal acts” clause
was a condition precedent, but Redux asserted it was a condition subsequent. What difference does
it make, and who is legally right? Does the insurance company’s position raise any ethical issues?
Who drafted the contract? How clear were its terms?
Answer: The type of condition determines who must prove the source of the fire. CU claimed that
the clause was a condition precedent, meaning that Redux had the burden of proving the fire was
not arson. Redux argued that the clause was a condition subsequent, meaning that CU became
liable to pay benefits as soon as the fire started, and could escape its duty only if the insurer proved
2. Stephen Muka owned U.S. Robotics. He hired his brother Chris to work in the company. His letter
promised Chris $1 million worth of Robotics stock at the end of one year, “provided you work
reasonably hard & smart at things in the next year.” (We should all have such brothers.) Chris
arrived at Robotics and worked the full year, but toward the end of the year Stephen died. His
estate refused to give Chris the stock, claiming their agreement was a personal satisfaction contract
and only Stephen could decide whether Chris had earned the reward. Comment.
Answer: The estate is right that this is a personal satisfaction contract, given the nature of Chris's
work and the “provided you work reasonably hard” language. But it errs in concluding that only
3. Ken Ward was an Illinois farmer who worked land owned by his father-in-law, Frank Ruda. To
finance his operation, he frequently borrowed money from Watseka First National Bank, paying
back the loans with farming profits. But Ward fell deeper and deeper into debt and Watseka became
concerned. When Ward sought additional loans, Watseka insisted that Ruda become a guarantor on
all of the outstanding debt, and the father-in-law agreed. The new loans had an acceleration clause,
permitting the bank to demand payment of the entire debt if it believed itself “insecure,” that is, at
risk of a default. Unfortunately, just as Ward’s debts reached more than $120,000, Illinois suffered a
severe drought, and Ward’s crops failed. Watseka asked Ruda to sell some of the land he owned to
pay back part of the indebtedness. Ruda reluctantly agreed but never did so. Meanwhile, Ward
decreased his payments to the bank because of the terrible crop. Watseka then “accelerated” the
loan, demanding that Ruda pay off the entire debt. Ruda defended by claiming that Watseka’s
acceleration at such a difficult time was bad faith. Who should win?
Answer: The bank won. Good faith in this setting requires that the bank honestly believe itself to
4. Loehmann’s clothing stores, a nationwide chain with headquarters in New York, was the anchor
tenant in the Lincoln View Plaza Shopping Center in Phoenix, Arizona, with a 20-year lease from
the landlord, Foundation Development, beginning in 1978. Loehmann’s was obligated to pay rent
the first of every month and to pay common area charges four times a year. The lease stated that if
Loehmann’s failed to pay on time, Foundation could send a notice of default, and that if the store
failed to pay all money due within 10 days, Foundation could evict. On February 23, 1987,
Foundation sent to Loehmann’s the common area charges for the quarter ending January 31, 1987.
The balance due was $3,500. Loehmann’s believed the bill was in error and sent an inquiry on
March 18, 1987. On April 10, 1987, Foundation insisted on payment of the full amount within 10
days. Foundation sent the letter to the Loehmann’s store in Phoenix. On April 13, 1987, the
Loehmann’s store received the bill and, since it was not responsible for payments, forwarded it to
the New York office. Because the company had moved offices in New York, a Loehmann’s officer
did not see the bill until April 20. Loehmann’s issued a check for the full amount on April 24 and
mailed it the following day. On April 28 Foundation sued to evict; on April 29 the company
received Loehmann’s check. Please rule.
Answer: Loehmann's violated the lease by failing to pay common charges within 10 days of the
default letter, regardless of whether 10 days is measured from the day of mailing or receipt. But the
You Be the Judge: WRITING PROBLEM Kuhn Farm Machinery, a European
company, signed an agreement with Scottsdale Plaza Resort of Arizona to use the resort for its
North American dealers’ convention during March 1991. Kuhn agreed to rent 190 guest rooms and
spend several thousand dollars on food and beverages. Kuhn invited its top 200 independent dealers
from the United States and Canada and about 25 of its own employees from the United States,
Europe, and Australia, although it never mentioned those plans to Scottsdale.
On August 2, 1990, Iraq invaded Kuwait and on January 16, 1991, the United States and allied
forces were at war with Iraq. Saddam Hussein and other Iraqi leaders threatened terrorist acts
against the United States and its allies. Kuhn became concerned about the safety of those traveling
to Arizona, especially its European employees. By mid-February, 11 of the top 50 dealers with
expense-paid trips had either cancelled their plans to attend or failed to sign up. Kuhn postponed
the convention. The resort sued. The trial court discharged the contract under the doctrines of
commercial impracticability and frustration of purpose. The resort appealed. Did commercial
impracticability or frustration of purpose discharge the contract?
Argument for Scottsdale Plaza Resort: The resort had no way of knowing that Kuhn anticipated
bringing executives from Europe, and even less reason to expect that if anything interfered with
their travel, the entire convention would become pointless. Most of the dealers could have attended
the convention, and the resort stood ready to serve them.
Argument for Kuhn: The parties never anticipated the threat of terrorism. Kuhn wanted this
convention so that its European executives, among others, could meet top North American dealers.
That is now impossible. No company would risk employee lives for a meeting. As a result, the
contract has no value at all to Kuhn, and its obligations should be discharged by law.
Answer: Reversed. Summary judgment granted for Scottsdale Plaza, with the case remanded to the
trial court to assess damages. Kuhn has no legitimate claim for impossibility or impracticability.
Kuhn does not and cannot allege that it was impossible for it to perform, but rather that the resort's
Discussion Questions
1. Evans built a house for Sandra Dyer, but the house had some problems. The garage ceiling was too
low. Load-bearing beams in the “great room” cracked and appeared to be steadily weakening. The
patio did not drain properly. Pipes froze. Evans wanted the money promised for the job, but Dyer
refused to pay. Comment.
Answer: This case creates an issue of substantial performance. The court held that the low garage
ceiling was a minor problem and would not defeat substantial performance. But the cracked beams
2. Krug International, an Ohio corporation, had a contract with Iraqi Airways to build aeromedical
equipment for training pilots. Krug then contracted for Power Engineering, an Iowa corporation, to
build the specialized gearbox to be used in the training equipment, for $150,000. Power did not
know that Krug planned to resell the gearbox to Iraqi Airways. When Power had almost completed
the gearbox, the Gulf War broke out and the United Nations declared an embargo on all shipments
to Iraq. Krug notified Power that it no longer wanted the gearbox. Power sued. Please rule.
Answer: Power wins. Although it was impossible for Krug to complete its deal with Iraqi Airways,
it was entirely possible for Krug to accept and pay for the gearbox. Defenses of commercial
3. The death of a promisor in a personal services contract discharges an agreement. But if a promisor
dies, other kinds of contracts live on. Is this sensible? Would it be better to discharge all kinds of
agreements if one of the parties passes away?
4. Is commercial impracticability (such as the shipping strike described earlier in the chapter) a good
reason for discharge? What about frustration of purpose (such as the cancellation of the
construction project in Saudi Arabia)? Is one more justified than the other? Are parties who back
out of contracts on these grounds acting reasonably?
5. Franklin J. Moneypenny hires Angela to paint his portrait. She is to be paid $50,000 if the painting is
acceptable "in Franklin's sole judgment." At the big unveiling, 99 of 100 attendees think that
Angela has done a masterful job. Franklin disagrees. He thinks the painting makes him look like a
toad. (He does in fact look like a toad, but he does not like to contemplate this fact.) Franklin
refuses to pay, and, because he signed a personal satisfaction contract, Angela gets nothing. Is this
fair? Should the law allow personal satisfaction contracts?
Bonus Exam Strategy:
Question: Harry agreed to pay $550 to rent a rooftop spot in downtown Seattle to watch the New
Year's Eve festivities. The building, on top of which the rooftop is located, was unexpectedly
closed due to unusually high winds. Does Harry still owe the $550?
Strategy: This is a contract question focusing on performance. Does Harry still have to perform his
part of the contract and pay $550 for the rooftop, even though the roof has been closed due to
high winds. We know that a party is relieved of their obligation to perform under certain
circumstances. Generally, a force majeure clause allows parties to walk away from their
obligations if there has been a natural disaster or act of God.
Result: Here, Harry can no longer use the rooftop because of unusually high winds. This condition
was not created by him and is more likely the result of nature. As a result, Harry is relieved of
his obligation to pay $550 for the rent.
