Business Law Chapter 17 Homework A contract to do a thing which cannot be performed without a violation of the

412 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION

If circumstances arise that make performance extremely difficult or costly, the contract may be discharged

under the doctrine of commercial impracticability. The anticipated performance must become extremely

difficult or costly. Circumstances of which businesspersons at the time of contracting are or should be

aware, however, do not qualify.

CASE SYNOPSIS—

Case 17.3: Merry Homes, Inc. v. Chi Hung Luu

Chi Hung Luu leased premises in Houston, Texas, from Merry Homes, Inc. The lease provided that Luu could use

the promises only to operate a nightclub or bar. After he signed the lease, Luu applied for a liquor license. The

application was denied under a city ordinance that prohibited the sale of alcoholic beverages where the premises were

located (close to a public school). Luu asked Merry Homes to cancel the lease and refund his $6,000 security deposit,

but the landlord refused. Luu filed a suit in a Texas state court against Merry Homes. The court declared the lease void,

and Merry Homes appealed.

…………………………………………………………..…………………………………..………..……………………..

Notes and Questions

Contract liability is strict liability, or, as a Latin maxim expresses it, pacta sunt servanda (contracts are to be kept).

In the early years of the common law, courts made exceptions to this rule, and excused a party from fulfilling

contractual duties, when performance became impossible due to the first three situations outlined in the text. In early

cases, however, a supervening event that made performance more difficult or more costly, or that made the contract

less profitable, or even unprofitable, did not excuse performance. The general rule was that commercial

impracticability was not sufficient to excuse performance because excuse of performance required impossibility. As the

law developed through the centuries, this rule changed. Courts came to release parties from their contractual

obligations when performance was not impossible but was highly impracticable.

Literally, the doctrine of impossibility is intended to excuse the performance of a duty because of impossibility.

Could the lease of an apartment located on the top floor of a three-story building be canceled if the tenant became

permanently disabled and unable to reach the apartment? If the lease were assignable, it probably would not be

cancelable. Could an automobile lease be canceled if the lessee were hospitalized and unable to drive? If the lease

could be sold, it probably would not be cancelable.

Does a power failure constitute the kind of unexpected occurrence that relieves a party of the duty to perform a

contract? In what circumstances might a power failure have no effect on a contract? The answer to the first question is

no. In deciding whether a party should be relieved of the duty to perform a contract, a court determines whether the

existence of a specific thing is necessary for the performance of a duty and whether its loss or deterioration makes

performance impracticable. A power failure is the kind of unexpected occurrence that may relieve a party of the duty

CHAPTER 17: PERFORMANCE & DISCHARGE IN TRADITIONAL & E-CONTRACTS 413

to perform if the availability of electricity is essential for performance. Thus, the answer to the second question would

include circumstances in which electricity is not essential—a sale or lease of land, a delivery of goods, or the

performance of any service for which electricity is not necessary.

ANSWER TO “WHAT IF THE FACTS WERE DIFFERENT?” IN CASE 17.3

Suppose that Luu had decided to use the premises for a restaurant, but the wording of the lease was not changed.

In this situation, if Luu sought to cancel the lease, would Merry Homes succeed in a suit for breach of contract? That

Luu’s intended use of the premises (to operate a restaurant) would now be a legal use would not alter the fact that the

probably not be admissible.

ANSWER TO “THE ETHICAL DIMENSION” QUESTION IN CASE 17.3

“Ignorance of the law is no excuse.” How does this case affirm that adage? Merry Homes tried to argue that Luu’s

ignorance of the law did not justify voiding the contract. According to Merry Homes, Luu should have checked, before

signing the lease, on whether the premises could be used for a bar or nightclub. Luu’s failure to do so was no one’s

fault but his own, and thus he should held liable under the contract to Merry Homes for damages. The court, however,

stated that the contract called for an illegal act and was thus void—“whether the parties knew the law or not.”

ENHANCING YOUR LECTURE—

  IMPOSSIBILITY OR IMPRACTICABILITY

OF PERFORMANCE IN GERMANY

 

making the contract fair to the parties.

414 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION

FOR CRITICAL ANALYSIS

When a contract becomes impossible or impracticable to perform, which remedy would a businessperson prefer—

rescission or reformation? Why?

4. Frustration of Purpose

A contract is discharged if unforeseen circumstances make it impossible to attain its purpose.

TEACHING SUGGESTIONS

1. Students find the subject of conditions generally difficult. It may be made easier by emphasizing that there are

clearly implied conditions that exist of necessity in every contract. For example, a contract for the performance of

over their contract obligations.

2. Students often believe that only complete performance is valid. It is important to underscore that the law

recognizes various degrees of performance. Have students explain what is required of a party who wants to render

3. You might tell students that in taking notes, they may find it helpful to use some of the terms, abbreviations, and

symbols that law students, lawyers, an judges use in their note-taking and writing. Some of the abbreviations are those

that appear in case citations—”S.Ct.” for the United States Supreme Court, for example. “J.” can be shorthand for

“judge” and “JJ.” for “judges.” Symbols that are commonly used include “K,” which is used to refer to a contract. To

indicate a reference to a plaintiff, the pi symbol—””—is often used, and a defendant is noted by a triangle—”.”

Cyberlaw Link

What is the current state of technology for protecting online transactions? How can a party be assured that the

negotiation and transmission of a contract online is secure? How can the performance of a contract be monitored

online?

1. What is a condition? A condition is part of a contract, either expressly by the parties or impliedly by courts. A

2. What are the differences between express conditions and implied-in-fact conditions? Express conditions are provided

3. Discuss the degrees of performance. Complete performance is performance within the bounds of reasonable

expectations. Substantial performance is performance slightly below reasonable expectations. Complete Performance.

Generally, express or implied-in-fact conditions must be fully complied with for complete performance to occur. Any deviation

4. What is the effect of an anticipatory repudiation on the nonbreaching party? The nonbreaching party can treat an

5. What is the difference between a rescission and a novation? Rescission. By rescission a contract is canceled and the

6. How is a novation distinguished from a substituted agreement? Novation substitutes a new party for an original party

7. How does an accord and satisfaction work? An accord is an executory contract to perform an act to satisfy a contractual

8. When a contract’s performance is not impossible, how can it be discharged by operation of law? Alteration of

9. How does the impossibility of performance discharge a contract? Situations that generally qualify to discharge

contractual obligations under the doctrine of impossibility of performance include: (1) one of the essential parties to a personal

contract dies or becomes incapacitated before performing (an actor’s death before fulfilling a contract to make a film discharges

the contract); (2) the specific subject matter of a contract is destroyed (a fire that destroys a building discharges a contract for

its sale); (3) a change in law renders performance illegal (lowering the usury rate renders contracts to loan money at higher

rates illegal). Commercial Impracticability. To discharge a contract under the doctrine of impracticability, performance must

ACTIVITY AND RESEARCH ASSIGNMENT

Have students draft a simple contract for a small construction project (remodeling a kitchen, for instance) under which

a homeowner hires an independent contractor to do the work. Consider the points of view of (1) the homeowner, (2) the

contractor, and (3) a subcontractor. What clauses would each party want in his or her contract to assure satisfactory

performance by the others? How specific should the details regarding the work be? To whose advantage is it to be specific?

What recourse would each party have if the others did not perform? Should that be spelled out in the contract?

Provisions commonly included in personal service contracts concern amounts and methods of payment; descriptions of

the work to be done; materials that will be used and who will pay for them; deadlines; what constitutes completion of the work;

what happens if the work or payment is late or incomplete; the status of the party performing the work (independent

contractor); responsibility for any injury; indemnity for injury to others; and how disputes should be resolved.

CHAPTER 17: PERFORMANCE & DISCHARGE IN TRADITIONAL & E-CONTRACTS 417

418 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION

EXPLANATIONS OF SELECTED FOOTNOTES IN THE TEXT

Footnote 5: Su Yong Kim sold an apartment building in Portland, Oregon, to Chon Sik Park, Bok Soon Park, Johan Cen,

William Itzineag, Johnny Perea, and Patricia Maldonado. Kim promised to repair the building’s plumbing, which violated the

Portland Housing Code, within eight months. Twelve months after date of the contract, Kim cut holes in the walls to expose the

plumbing and, seven weeks later, sent plumbers to the building. The owners ordered the plumbers to leave and stopped making

payments under the contract. Kim filed a suit in an Oregon state court against the buyers, seeking the amount due. The buyers

asserted that Kim’s failure to repair the plumbing was a material breach that excused their performance. The court concluded

that Kim’s breach was not material. The buyers appealed.

Can the buyers keep the apartment building without making further payments under the contract? When a party

materially breaches a contract, a non-breaching party has a choice of remedies. He or she can elect rescission and restitution of

the money paid, or can affirm the contract and seek damages for the breach. If the non-breaching party chooses rescission, his

or her contractual obligations are entirely discharged. If, however, the non-breaching party chooses to affirm the contract and

seek damages, his or her obligations are reinstated once the breaching party performs or the failure to perform is otherwise

excused. How do these principles apply in this case? Here, the buyers sought to affirm their contract and obtain damages, and

the lower court awarded damages to them. The appellate court stated, “When plaintiff’s material breach is cured by the

satisfaction of the judgment for damages awarded to defendants, defendants’ obligation to make the payments due under the

contract will resume.

This case might serve to initiate a discussion as to what students expect from the law. Do they believe that it should

guarantee perfection by all parties? Total absolute performance? How far might a contracting “push the envelope” before

being in breach of contract?.

Footnote 21: Cape-France Enterprises owns real property in Bozeman, Montana. Lola Peed and Marthe Moore

In Cape-France Enterprises v. Estate of Peed, the Montana Supreme Court affirmed. Rescission was appropriate

because Cape-France would otherwise be forced to expose itself to substantial and unbargained-for economic risks, to expose

CHAPTER 17: PERFORMANCE & DISCHARGE IN TRADITIONAL & E-CONTRACTS 419

the public to potential health risks, and to expose the environment to possible degradation. “[A]n act is impracticable when it

can only be done at an excessive, unreasonable and unbargained-for cost.” This doctrine applies where, as here, “the public

policy underlying the strict enforcement of contracts is outweighed by the senselessness of requiring performance.”

Literally, the doctrine of impossibility is intended to excuse the performance of a duty because of impossibility. Could

the lease of an apartment located on the top floor of a three-story building be canceled if the tenant became permanently

disabled and unable to reach the apartment? If the lease were assignable, it probably would not be cancelable. Could an

automobile lease be canceled if the lessee were hospitalized and unable to drive? If the lease could be sold, it probably would

not be cancelable.

Why is the risk to Cape-France of the cost of a clean up not interpreted as the same as a risk in the rise or fall in the

price of the land? Here, in the eyes of the court, the rise in cost is due to an unforeseen contingency, which alters the essential

nature of performance. A rise or fall in a market price is the type of risk for which contracts are made, however.

ANSWERS TO ESSAY QUESTIONS IN

STUDY GUIDE TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION

BY HOLLOWELL & MILLER

1. How are most contracts discharged? Most contracts are discharged by performance: by doing what was promised

would be done or by unconditionally offering to do what was promised (a seller placing goods at a buyer’s disposal).

2. What effect does a material breach have on the nonbreaching party? What is the effect of a nonmaterial breach?

420 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION

 PERFORMANCE AND DISCHARGE

IN TRADITIONAL AND E-CONTRACTS 

Val’s Foods signs a contract to buy 1,500 pounds of basil from Sun Farms, a small organic herb grower, as long as

an independent organization inspects and certifies that the crop contains no pesticide or herbicide residue. Val’s has a

number of contracts with different restaurant chains to supply pesto and intends to use Sun Farms’ basil in its pesto to

fulfill these contracts. While Sun Farms is preparing to harvest the basil, an unexpected hailstorm destroys half the

crop. Sun Farms attempts to purchase additional basil from other farms, but it is late in the season and the price is

twice the normal market price. Sun Farms is too small to absorb this cost and immediately notifies Val’s that it will not

fulfill the contract. Ask your students to answer the following questions, using the information presented in the

chapter.

1. Suppose that the basil does not pass the chemical-residue inspection. Which concept discussed in the chapter

might allow Val’s to refuse to perform the contract in this situation? The appropriate concept would be discharge by

failure of a condition. Under the contract, Val’s does not have to perform (pay) unless the basil meets the stated

2. Under which legal theory or theories might Sun Farms claim that its obligation under the contract has been

discharged by operation of law? Discuss fully. The theory of commercial impracticability can excuse parties from their

price meets this requirement: doing so would bankrupt Sun Farms.

3. Suppose that Sun Farms contacts every basil grower in the country and buys the last remaining chemical-free basil

anywhere. Nevertheless, Sun Farms is only able to ship 1,475 pounds to Val’s. Would this fulfill Sun Farms’ obligations

to Val’s? Why or why not? Substantial performance is good faith performance that does not vary greatly from the

4. Now suppose that Sun Farms sells its operations to Happy Valley Farms. As a part of the sale, all three parties

agree that Happy Valley will provide the basil as stated under the original contract. What is this type of agreement

called? This is a novation—an agreement between the contracting parties to substitute a third party for one of the

original parties. Under a novation, the new contract extinguishes the old contract and discharges the obligations of the

prior party to the contract.

 DEBATE THIS: 

The doctrine of commercial impracticability should be abolished. Contracts are not made to be broken, even if

that is a popular saying. Contracts are made to be respected. Those who seek to avoid their contractual obligations

by using the excuse of commercial impracticability, if successful, reduce the certain of contractual obligations and end