978-1305575080 Chapter 19 Solution Manual

Chapter 19

BREACH OF CONTRACT AND REMEDIES

RESTATEMENT

A breach is the failure to perform the obligations required under a contract. A breach can occur when the party

fails to perform on the date performance is due, or it can occur through anticipatory repudiation which is a breach

in advance of the performance date. A breach can be cured if the non-breaching party waives its rights to timely

performance and allows the performance.

Once a breach has occurred, the non-breaching party has the right to remedies which include an action for

damages in the form of compensatory and consequential damages, and in some circumstances, punitive

damages. Other remedies available for breach include rescission of the contract, an action for specific

performance or an injunction to enforce a contract prohibition (as in a covenant not to compete).

The parties can limit the available remedies by agreement and provide formulas for damage in the event of a

breach including liquidated damage clauses, limitation of liability clauses and exculpatory or hold harmless

clauses. Courts examine these damage clauses before enforcing them to determine their fairness and

enforceability.

STUDENT LEARNING OUTCOMES

LO.1: Explain what constitutes a breach of contract and an anticipatory breach of contract.

LO.2: Describe the effect of a waiver of a breach.

LO.3: Explain the range of remedies available for breach of contract.

LO.4: Explain when liquidated damages clauses are valid and invalid.

LO.5: State when liability-limiting clauses and releases are valid.

INSTRUCTOR’S INSIGHTS

Break the chapter down into four components – related Learning Outcomes are indicated in ( ):

1. What constitutes a breach of contract?

Define breach of contract (LO.1)

2. When is a breach of contract waived?

Cover the issues of waiver and breach (LO.2)

3. What are the remedies for breach of contract and when are they used?

Discuss the remedies available when there is anticipatory repudiation (LO.3)

Explain rescission and when it is available (LO.3)

4. What types of contract provisions relating to remedies and damages can the parties agree to in their contract?

Explain limitation of remedies in contracts and their validity

CHAPTER OUTLINE

I. What Constitutes a Breach of Contract?

A. Definition of breach

B. Anticipatory breach

1. Anticipatory repudiation – a breach in advance of the performance date

2. The party states that performance will not be made when required

CASE BRIEF: Tips v. Hartland Developers, Inc.

961 S.W. 2d 618 (Tex. App. 1998)

FACTS: Hartland agreed to build an airplane hanger for Robert Tips for $300,000 payable in three

installments of $100,000. Tips’ representative told Hartland to stop work because Tips could no

longer afford payments. Hartland stopped work after being paid $200,000. Hartland sued for

breach and was awarded the remaining $100,000 less the cost of completion plus attorneys’

fees and interest.

ISSUE: What can Hartland recover for the anticipatory breach?

HOLDING: Hartland is entitled to the contract price less the cost of completion plus damages such as

REASONING: The case involved anticipatory repudiation, not substantial performance. Hartland did not

breach. Hartland was halted in his performance by the other side’s breach.

DISCUSSION POINTS: Have the students discuss the Tips v. Hartland Developers, Inc. case in which damages

are assessed for anticipatory repudiation of a contract.

II. When is a Breach of Contract Waived?

A. Cure of breach by waiver

B. Existence and scope of waiver

CASE BRIEF: Harms v. Northland Ford Dealers

602 N.W. 2d 58 (S.D. 1999)

FACTS: In 1995, Northland Ford Dealers, an association of dealerships, offered to sponsor a

“hole-in-one” contest at Moccasin Creak Country Club. A banner announced that a hole-in-one

would win a car, but gave no other details, and the local dealer parked a Ford Explorer near the

banner. Northland paid a $4,602 premium to Continental Hole-in-One, Inc. to insure the award

of the contest prize. The insurance application stated in capital letters that “ALL AMATEUR

MEN AND WOMEN WILL UTILIZE THE SAME TEE”. Jennifer Harms registered for the

tournament and paid her entrance fee. At the contest hole she teed off from the amateur

women’s red marker which was a much shorter distance to the pin than the 170 yards from the

men’s marker and made a hole-in-one. When she inquired about the prize she was told that

due to insurance requirements all amateurs had to tee off from the amateur men’s tee box, and

since she had not done so, she was disqualified. Harms, a collegiate golfer at Concordia

College sued Northland for breach of contract. Northland contends that under NCAA rules

accepting a prize or agreeing to accept a prize would have disqualified Harms from NCAA

competition.

ISSUE: Could Harms get the car?

REASONING: Northland must abide by the rules it announced, not by the ones it left unannounced that

disqualified all amateur women from the contest. This was a vintage unilateral contract with

performance by the offeree as acceptance. Harms earned the prize when she sank her winning

shot.

C. Waiver of breach as modification of contract

1. Repeated breaches and waivers may show modification (e.g., continued acceptance of late

payment)

2. Antimodification clause

a. Acceptance of late payment does not waive rights

D. Reservation of rights

1. Willingness to accept defective performance, but do not wish to give up any damage claim

III. What are the Remedies for Breach of Contract and When Are They Used?

A. Remedies upon anticipatory repudiation

1. Do nothing and wait an amount of time for performance

B. Remedies in general and the measure of damage (See Figure 19-1 in text)

1. Contract damages or damages for breach should place the injured party in the position he or she

2. The idea behind an action for damages is to place the injured party in the position he or she should

3. Monetary damages and specific performance are available

4. Monetary damages

a. Compensatory damages – provide non-breaching party with a restoration to original position,

b. Nominal damages – breach with minimum damages

c. Bring out that the usual remedy available for a minor breach of contract is damages unless the

d. Punitive damages (exemplary)

i. Punitive damages are not generally available to the injured party in a breach of contract

e. Direct and consequential damages

i. Direct loss: caused by the breach

ii. Consequential loss: must be within the defendant’s contemplation; foreseeable by

reasonable person

Students usually do not have a major difficulty determining direct loss, but do have some

problems in determining whether consequential loss is recoverable by the injured party. The

case of Hadley v. Baxendale (1854), 9 Ex. 341, 156 Eng. Rep. R. 145, is a mainstay to

illustrate this point. The plaintiffs operated a flour mill, and the mill’s crankshaft broke. The

plaintiffs contracted with the defendants to ship the crankshaft to another city, where a

duplicate shaft would be made. However, the defendants delayed delivery of the shaft for

CASE BRIEF: Birkel v. Hassebrook Farm Service, Inc.

363 N.W. 2d 148 (Neb. 1985)

FACTS: Jerry Birkel was a grain farmer. Hassebrook Farm Service, Inc., made a contract with Jerry to

sell to him and install a grain storage and drying bin. Jerry’s old dryer was traded in to the

seller. The new equipment did not work properly, and Jerry had to pay other persons for drying

and storing his grain. Jerry sued Hassebrook for damages and claimed the right to be repaid

what he had paid to others for drying and storage.

ISSUE: Can Jerry recover the drying and storage fees?

REASONING: Jerry was entitled to recover what he had paid others for drying and storage. Since Jerry had

traded in his old dryer to the seller, it was obvious to the seller that if the new equipment did not

work properly, Jerry would be forced to pay for alternative drying and storage to prevent the

total loss of his crops. The cost of such an alternative was therefore within the contemplation of

the seller when the contract was made, and so the buyer could recover this cost as an element

of damages for the seller’s breach of contract.

iii. Limitations on consequential damages

(a) Foreseeability

5. Mitigation of damages

a. Make the loss as small as possible by reasonable effort

CASE BRIEF: Fischer v. Heymann

12 N.E. 3d 867 (Ind. 2014)

FACTS: On February 4, 2006, the Heymanns agreed to buy a condominium from Fischer for $315,000.

Both parties signed a purchase and sale agreement. The Agreement authorized the Heymanns

to terminate if Fischer refused to fix any “major defect.” The Heymanns demanded Fischer fix

an electrical problem after an inspection report revealed electricity was not flowing to three

power outlets. The Heymanns thought this was a “major defect”. Fischer failed to timely

respond to their demand – even though she eventually fixed the problem for $117 on February

20th, by having an electrician push the reset button on three outlets and change a light bulb.

The Heymanns tendered a mutual release to void the Agreement. Fischer refused to sign the

release and sued for specific performances or damages. After the deal fell through in 2006,

Fischer attempted to mitigate damages by selling the condo, but the housing market entered a

major downturn. On February 13, 2007, she received an offer to purchase the condo for

$240,000, but her counter-offer of $286,000 was rejected. She eventually sold the condo in

November 2011 for $180,000. Fischer seeks damages for the difference between the Heymann

purchase price of $315,000 and the sale in 2011 of $180,000, plus the cost of maintaining the

condo from 2006 through 2011, and attorney’s fees for a total of $306,616.

ISSUES: Did the Heymanns breach the Purchase Agreement? If so, did Fischer properly mitigate damages?

REASONING: The $117 repair consisting of pushing the reset button on three outlets and the change of a light

bulb was not a “major defect” which would allow for the voiding of a contract. Accordingly, the

Heymanns were in breach of the Purchase Agreement. Fischer, the non-breaching party, had a

duty to mitigate the damage caused by the breach. Fischer acted unreasonably when she could

have mitigated damages and sold the condo for $240,000. She was awarded a total of $93,977,

not $306,616.

c. Excuse for failure to mitigate damages – non-breaching party can’t mitigate

6. Rescission

a. Right to rescind

i. Recovery for value given cannot be returned

b. Judicial rescission – party breaching refuses to recognize right of non-breaching party to end

performance

CASE BRIEF: ZAN, LLC v. Ripley Cove, LLC

751 S.E. 2d 664 (S.C. App. 2013)

FACTS: Buck owns Rookie IV, a boat requiring a dock slip 20 feet in width. Buck’s daughter, Susanne,

owns ZAN, LCC, and Buck has authority to act on behalf of ZAN. Buck wanted a boat slip out of

the Intercoastal Waterway. ZAN (Buck) agreed to purchase a slip for Buck’s boat and lot 3 for

Susanne. Just prior to the closing, Buck discovered that the slip designated as B1 was actually

two slips, B1 and B2, and Rookie IV would not fit into B1. Buck was informed by Ripley Cove’s

agent that the sellers owned B2 and that it would be no problem to give Buck the 20 foot

clearance he needed and to place two pilings in the adjoining slip. Buck then agreed to close on

the property. It was later discovered that at the time of the closing, Ripley Cove no longer

owned B2. Since Rookie IV could not fit into the slip, ZAN sued for rescission of the contract for

the lot and slip and damages. The trial court determined that ZAN proved its claims, awarded

$10,000 for breach of contract and negligent misrepresentation, but refused to rescind the

contract. ZAN appealed.

ISSUE: Was ZAN entitled to rescission of the entire contract?

REASONING: The main purpose of the contract was to provide Buck with a slip for Rookie IV. ZAN was

entitled to rescission of the contract in toto, both the slip and the land. A breach of contract claim

warranting rescission of the contract must be so substantial and fundamental as to defeat the

purpose of the contract. Such was the nature of the breach in this case

7. Action for specific performance

a. Available when subject matter is unique, and monetary damages would be inadequate

b. Some students believe that specific performance should always be a remedy available for the

injured party. Challenge their thinking with a hypothetical case similar to the following:

Months ago, A and B entered into a contract whereby A agreed to purchase, and B agreed to

sell, 1,000 crates of Valencia oranges at a price of x dollars per crate, with delivery no later than

a certain date. Just prior to the last day for delivery, A calls B and is informed that B has enough

Valencia oranges to make the delivery, but has decided to hold on to them, and offers 1,000

crates of navel oranges in their place. A wants to know what alternatives are available. Can A

Relief may be refused by the court when the contract is not definite; when there is an adequate

legal remedy exists (usually a monetary award); when it works an undue hardship or an

injustice on the defaulting party or the consideration is inadequate; when the agreement is

Generally not used for a personal service contract. Challenge the students by having them

solve the following problem:

Bill Slick has signed a contract to play professional basketball for the Magic Hoops.

The contract is for four years at $300,000 per year. Slick does not like the way things

are working out and quits halfway through the first year. What remedies are available

to the injured party? Can the Magic Hoops force Slick to play? Can they prevent Slick

8. Action for injunction

a. Used to prevent damages or a breach

9. Reformation of contract by a court

a. Contract is incorrect

CASE BRIEF: In re Owens Corning et al., Debtors in Possession

291 B.R. 329 (2003)

FACTS: New York Packaging Corp. (NYPC) manufactured plastic sheets used by Owens

Corning (OC) at its asphalt plants throughout the country as dividers to separate asphalt

containers and prevent them from sticking to one another. Janet Berry, a customer service

representative at OC called and received a price from NYPC of “ $172.50 per box,” with a box

containing 200 plastic sheets. Ms. Berry put the information into OC’s computer systems, which

in turn generated a purchase order. She mistakenly believed that the unit of measurement

designated as “EA” on the purchase order was per box, when it in fact was per sheet. As a

result, the purchase orders likewise reflected a price of $172.50 per sheet rather than per box.

The computer automatically calculated the total price of the purchase order and faxed it to

NYPC as $1,078,195.00, without Ms. Berry seeing the huge total price. NYPC filled the order

which included overrun sheets and billed OC $1,414,605.60. NYPC sought payment at the

contract price of $172.50 per sheet. It points out that the purchase order contained a “no oral

modification” clause and by its terms, the order was binding when accepted by NYPC. The

buyer contended that NYPC was attempting to take advantage of this huge and obvious

mistake, and the contract should be reformed.

ISSUE: May a court reform the terms of a contract even after performance of both parties?

HOLDING: Yes. Where a unilateral mistake is made and it is of such consequence that enforcing the

REASONING: A unilateral mistake was made by Ms. Berry which was or should have been known by NYPC.

OC used the sheets after their offer to return the sheets to NYPC was refused. Therefore the

contract could not be rescinded. The drafting error in this case was so huge that to enforce the

written contract would be unconscionable. No reasonable person would have drafted this

contract without laboring under a mistake as to the price and no honest and fair person would

have accepted it as written. Accordingly, the unit of measurement is amended to read “per box”

rather than “EA”, the “Order Qty” is amended to read “41 boxes of 200 sheets per box” and the

overall price is modified to read “$7,072.50” not $1,078,195.00.

IV. What Types of Contract Provisions Relating to Remedies and Damages Can the Parties Agree to in Their

Contract?

A. Limitation of remedies

1. Limit to right of repair or replacement

B. Liquidated damages

1. Formula or amount of damages agreed to in advance

2. Valid if

3. Can’t collect both compensatory and liquidated damages

Most students will be fascinated with the concept of liquidated damages. Bring to class examples of

liquidated damages provisions in contracts, and create situations to challenge the students to

determine whether the liquidated damages provisions would be enforceable in court. Emphasize

that such a provision will be enforced if the amount agreed to is reasonable under the

circumstances and, by the nature of the agreement, if it would be very difficult to determine the

actual damages. Remind them that if the liquidated damages provision is enforceable, it will be the

sole remedy of the injured party. Create a hypothetical case showing when liquidated damages

would be appropriate and when they would not. You may wish to use the following as a guide:

A, a chef, does some marketing research and decides to open a toy store. A and his CPA

project on income and expenses; perform site selection studies; and research product

lines, advertising approaches, etc. A locates L, who plans to construct a small shopping

Ask your students who wins and why. Typically, they will want to know such things as whether L knew

that a toy store was to be located there (yes), whether the contractor knew this, and whether the

contractor knew that occupancy by November 1 had been guaranteed. In most instances, the court

would award A losses that A could show resulted from the failure to gain occupancy by November 1.

These would include items like storage costs, but would they include the loss of profits? Loss of

C. Attorneys’ fees

1. A significant factor in contract litigation

2. Go over Medistar example in textbook

D. Limitation of liability

1. Exculpatory clauses

2. Content and construction

a. Must be clear and unambiguous

3. Validity

a. Generally valid, particularly between experienced business people

CASE BRIEF: Hamill v. Cheley Colorado Camps, Inc.

262 P. 3d 945 (Colo. App. 2011)

FACTS: Fifteen year old Chelsea Hamill was injured when she fell off a horse at Camp Cheley,

and she brought a negligence and gross negligence action against the camp. The camp

contended that an exculpatory agreement signed by the mother of this minor child barred the

action for negligence against the camp, and the camp asserts no evidence supports the charge

of gross negligence.

ISSUE: Did the exculpatory agreement bar the action for negligence against the

camp?

REASONING: The parent’s decision to waive the child’s claims was voluntary and informed. Hamill’s mother

had sufficient information to allow her to assess the risks involved in horseback riding and the

extent of injury possible for the activity. The release stated the intent to release “all claims”

including prospective negligence claims. While an exculpatory agreement does not bar liability

for gross negligence, the record is devoid of evidence of gross negligence.

ANSWERS TO QUESTIONS AND CASE PROBLEMS

1. Waiver of breach; ethics of counterclaim. Textor may defend against the district’s counterclaim by asserting

that the school district waived its right to assess the liquidated damages clause in the contract. The

Textor had a valid claim to pursue in the courts for payment for the grading work on the softball field. When

the school district’s attorney reviewed the case, the possibility of an apparently viable counterclaim became

2. Mitigation of damages. Baker admitted that he breached his contract with New Boston. New Boston, however,

had an obligation to mitigate damages and it took no action to do so. The jury determined that New Boston

3. Basis for rescission. No. A contract will not be rescinded for a minor breach. The insignificance of the breach

was indicated by the amount involved ($863) compared with the amount that could be due under the contract

4. Liquidated damages. Because of the difficulty of forecasting the loss that might be caused by breach of a real

estate purchase contract, it is held that a liquidated damage clause of 10 percent of the sale price is valid

5. Specific performance of contract for the sale of stock; action by seller. No. Difficulty in valuation of stock alone

is not a sufficient ground for the granting of specific performance. The seller sought only money; therefore,

6. Effect of liquidated damages clause. The buyer could not recover the down payment and the seller could not

Authors’ Comment: No question was raised as to whether the liquidated damages clause was invalid. The

case thus states the law when a liquidated damages clause is binding. If it were decided that the clause was

7. Liquidated damages as contrasted with a penalty. No. Under the circumstances, it was clear that the amount

far exceeded the damages sustained. Therefore, the provision was void as a penalty clause, and the seller

8. Attorney’s fees. Attorney fees are generally not allowable unless authorized by statute or contractual

agreement. A written contract must contain a clear and express provision regarding attorney fees in order for

9. Validity of limitation of liability. No. The court took the position that in such a contract, there could be no

limitation of liability unless the consumer was given the option of paying a higher rate in order to obtain

10. Liquidated damages. Actual damages were clearly ascertainable and not difficult to determine. The amount

sought was excessive. The court deemed the liquidated damages clause an unenforceable penalty and PDS

11. Validity of limitation of liability. The release provision of the contract under which the scuba diving course was

offered by Madison and YMCA provided “a complete defense ” to the plaintiff’s lawsuit. Under the course

12. Limitation of damages. Yes. The limitation satisfied the two requirements of (a) circumstances in which it

would be very difficult to determine the actual damages suffered and (b) the specification of an amount that

13. What is breach of contract?; interpretation of contract. Yes. The word “default” is to be given its ordinary,

usual meaning in the absence of any evidence that the parties used the word in a peculiar or different sense.

Because the contractor did not offer any evidence of such a special use, the usual meaning is controlling. By

14. Validity of limitation of liability. Judgment for the alarm company. The provision in the contract was clearly a

limitation of liability because the amount specified was not intended by the parties to bear any reasonable

relationship to the possible loss that could be sustained. The validity of the limitation of liability clause

15. Specific performance as a remedy. Judgment for Shepherd-Will. It is true that equity has for centuries

specifically enforced contracts for the sale of land. However, this means that initially there must be a

Note that parol evidence could not be introduced to indicate that there was an oral agreement as to which

five acres were intended, as that would be prohibited by the statute of frauds.

It may be pointed out that the written agreement of the parties could be held to give Emma an option to

select the acres she wanted. If that construction were made, she could have had those acres surveyed and

If a student questions whether the result of this decision is just, fair, ethical, the short answer is that

Anglo-American law has always been concerned with the protection of title to land. Therefore, the law will not

LAWFLIX

The Goodbye Girl (1977) (PG)

Richard Dreyfuss plays Elliott Garfield, a struggling Shakespearean actor who lands into New York with a

The students can review all aspects of contracts as the characters discuss subleases, rent payment, living

arrangements and food costs.

management system for classroom use.