Chapter 17
Performance and Discharge
in Traditional and E-Contracts
See Separate Lecture Outline System
INTRODUCTION
This chapter answers these questions—when have the parties to a contract done all that is required under the
contract? When is a party excused from doing what he or she promised in the contract to do?
402 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
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ADDITIONAL RESOURCES—
VIDEO SUPPLEMENTS
The following video supplements relate to topics discussed in this chapter—
PowerPoint Slides
To highlight some of this chapter’s key points, you might use the Lecture Review PowerPoint slides compiled for
Chapter 17.
Business Law Digital Video Library
The Business Law Digital Video Library at www.cengage.com/blaw/dvl offers a variety of videos for group or
individual review. Clips on topics covered in this chapter include the following.
• Ask the Instructor
• Drama of the Law
CHAPTER OUTLINE
I. Conditions
Sometimes performance is conditioned on a certain event. If the condition is not satisfied, the obligations of the
parties are discharged. There are three types of conditions.
ADDITIONAL BACKGROUND—
Restatement (Second) of Contracts, Section 224
The Restatement (Second) of Contracts is an authoritative source for some of the principles discussed in this
chapter. Specific sections of the Restatement are noted in the text. The following is the section that relates to and is
cited in this part of the text—Restatement (Second) of Contracts, Section 224.
§ 224. Condition Defined
A condition is an event, not certain to occur, which must occur, unless its non-occurrence is excused, before
performance under a contract becomes due.
A. CONDITIONS PRECEDENT
A condition that must be fulfilled before performance is required is a condition precedent.
B. CONDITIONS SUBSEQUENT
When a condition operates to terminate a party’s duty to perform, it is a condition subsequent. Generally,
conditions precedent are common; conditions subsequent are rare. The Restatement (Second) of Contracts does
not use the terms.
C. CONCURRENT CONDITIONS
II. Discharge by Performance
Most contracts are discharged by performance—by doing what was promised. Performance may also be accomplished
by tender.
A. TYPES OF PERFORMANCE
1. Complete Performance
2. Substantial Performance
When a party fulfills his or her contract obligation in good faith with substantial performance, the other
party may be held to his or her obligation to perform.
a. Confers Most of the Benefits Promised
CASE SYNOPSIS—
Case 17.1: Jacob & Youngs, Inc. v. Kent
Jacob & Youngs, Inc., built a house for Kent. A subcontractor’s oversight led to a failure to install pipe of “Reading
manufacture,” as the contract required. Kent ordered Jacobs to replace it. Jacobs refused on grounds that it would
mean demolishing the house. Kent did not make the final payment, and Jacobs sued. The court refused to accept
evidence that the installed pipe was of the same quality, appearance, market value, and cost as Reading pipe, and en–
tered a verdict for Kent. The appellate court reversed. The case was appealed.
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Notes and Questions
Kent’s “country residence” was built in 1913 and 1914 for $77,000. Kent took up residence in June 1914, but did
not complain about the plumbing until March 1915, when he learned that the pipe was stamped “Cohoes” instead of
“Reading.” He told his architect to have it replaced.
What might homeowners do in the future to avoid similar disappointments? The court added that it was not
holding that “the parties are not free by apt and certain words to effectuate a purpose that performance of every term
shall be a condition of recovery. That question is not here. This is merely to say that the law will be slow to impute the
purpose, in the silence of the parties, where the significance of the default is grievously out of proportion to the
oppression of the forfeiture. The willful transgressor must accept the penalty of his transgression. For him there is no
occasion to mitigate the rigor of implied conditions. The transgressor whose default is unintentional and trivial may
hope for mercy if he will offer atonement for his wrong.” Thus, if the parties had made the uncompleted details the
essence of the contract the homeowners may have been entitled to perfect performance (of course that was not the
holding in this case). Under that circumstance, however, might a court nevertheless rule as this court did, but on
grounds that the costs of compliance would amount to “economic waste”?
The New York Court of Appeals found that Jacob & Youngs had substantially performed the contract. To what, if
oversight was a mistake and not intentional.
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ANSWERS TO QUESTIONS AT THE END OF CASE 17.1
1. The New York Court of Appeals found that Jacob & Youngs had substantially performed the contract. To what, if
any, remedy was Kent entitled? Kent is entitled to be compensated for the difference between the value of the
“Reading manufacture” pipe specified in the contract and the pipe that was actually installed..
ADDITIONAL CASES ADDRESSING THIS ISSUE —
Recent cases considering whether there had been substantial performance or a material breach of a contract
include the following.
• Peterson Contractors, Inc. v. Herd Producing Co., 811 So.2d 130 (La.App. 2 Cir. 2002) (a contractor substantially
performed a contract to construct a road and a work pad, when the project was 85 percent completed and the only
remaining task was to dump and spread rock over the work pad).
3. Performance to the Satisfaction of Another
a. When the Contract Is Personal
When the subject matter of a contract that requires personal satisfaction is personal, personal
satisfaction is a condition—performance must actually satisfy the party. The party to be satisfied must
act honestly and in good faith
CASE SYNOPSIS—
Case 17.2: Wisconsin Electric Power Co. v. Union Pacific Railroad Co.
Wisconsin Electric Power Co. (WEPCO) contracted with Union Pacific Railroad Co. to transport coal. The contract
required WEPCO to notify Union Pacific monthly how many tons of coal (within a certain maximum) it wanted shipped
406 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
the next month, and Union Pacific was to make “good faith reasonable efforts” to meet the schedule. The contract also
required WEPCO to supply the railcars. When WEPCO did not supply the railcars, Union Pacific used its own to deliver
84 percent of the requested coal. Claiming that the minimum percentage should have exceeded 90 percent and that
Union Pacific was shipping less because other customers paid higher rates, WEPCO filed a suit in a federal district court
against the railroad. The court issued a judgment in the defendant’s favor. WEPCO appealed.
The U.S. Court of Appeals for the Seventh Circuit affirmed—“84 percent” constituted substantial performance of
this contract. The contract did not require Union Pacific to comply strictly with WEPCO’s schedule—Union Pacific only
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Notes and Questions
Rail is the most common method of moving coal long distances. Rail transport is capital-intensive, due to its
infrastructure costs, but the possible long life of those assets and the potential large volume of the shipments, among
other factors, offset the expense. One hundred or more railcars can carry as much as 15,000 tons of coal in a single
shipment. When loading and unloading terminals are dedicated at either end of a line for this purpose, the movement
of coal by rail can be highly efficient and relatively cheap.
that technology will reduce power-plant emissions of carbon dioxide.
Under the reasoning in this case, could another customer of Union Pacific have charged it with bad faith if Union
Pacific had denied service because “we prefer WEPCO”? No. The court in this case does not apply a standard that
requires a contracting party to put the needs of one customer ahead of others for any reason. The duty of good faith
does not require a contracting party to act to its own detriment to benefit another party to the contract, nor does it
require acting to the detriment of a third party with which it also has a contract.
ANSWER TO “THE ECONOMIC DIMENSION” QUESTION IN CASE 17.2
Why would a different customer have paid a higher rate than WEPCO to Union Pacific for the transport of
resources or other products? Another customer of the railroad might have been paying a higher rate because it had an
urgent need for service. The movement of other commodities or finished goods might have been less economically
efficient than the transport of coal because of infrastructure costs or other barriers to cheaper shipping. Or the parties
CHAPTER 17: PERFORMANCE & DISCHARGE IN TRADITIONAL & E-CONTRACTS 407
might have negotiated a higher rate.
ANSWER TO “THE ETHICAL DIMENSION” QUESTION IN CASE 17.2
Should a contracting party relax the terms of the contract if the other party has trouble performing them? A
contracting party is not legally obligated to “relax” the terms of a contract if the other party has difficulty performing
his or her side of the bargain. But what that difficulty means for the performing party should reasonably be taken into
ADDITIONAL BACKGROUND—
Restatement (Second) of Contracts, Section 241
§ 241. Circumstances Significant in Determining Whether a Failure Is Material
In determining whether a failure to render or to offer performance is material, the following circumstances are
significant:
(a) the extent to which the injured party will be deprived of the benefit which he reasonably expected;
(b) the extent to which the injured party can be adequately compensated for the part of that benefit of which he will
be deprived;
(c) the extent to which the party failing to perform or to offer to perform will suffer forfeiture;
(d) the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the
circumstances including any reason-able assurances;
(e) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of
B. MATERIAL BREACH OF CONTRACT
When performance is not substantial, a breach is material—the nonbreaching party is excused from performing
and can sue for damages. If a breach is not material, the innocent party’s duty to perform may be only
suspended until the breach is remedied. Any breach entitles the party to sue for damages, but only a material
breach discharges him or her from the contract.
C. ANTICIPATORY REPUDIATION
1. Rationale for Treating Repudiation as Breach
2. Anticipatory Repudiation and Market Prices
This often occurs because a fluctuation in market prices would make performance unfavorable for one of
the parties.
ADDITIONAL BACKGROUND—
Restatement (Second) of Contracts, Section 253
§ 253. Effect of a Repudiation as a Breach and on Other Party’s Duties
(1) Where an obligor repudiates a duty before he has committed a breach by non-performance and before he has
received all of the agreed exchange for it, his repudiation alone gives rise to a claim for damages for total breach.
D. TIME FOR PERFORMANCE
If no time for performance is stated, a reasonable time is implied. If a time is stated, the parties must normally
perform by that time. Unless time is stated to be vital, however, a delay will not destroy a party’s right to
payment. When time is stated or construed to be essential, it is a condition and must normally be strictly
complied with.
III. Discharge by Agreement
Most contracts are discharged by performance—by doing what was promised. Performance may also be accomplished
by tender.
A. DISCHARGE BY RESCISSION
ADDITIONAL BACKGROUND—
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Rescission of Certain Sales of Goods to Consumers
Under 15 U.S.C. Section 1635, certain sales made to consumers at their homes can be rescinded within three days.
The following is an excerpt from the text of 15 U.S.C. Section 1635.
TITLE 15. COMMERCE AND TRADE
CHAPTER 41—CONSUMER CREDIT PROTECTION
SUBCHAPTER I—CONSUMER CREDIT COST DISCLOSURE
PART B—CREDIT TRANSACTIONS
§ 1635. Right of rescission as to certain transactions
accordance with regulations of the Board, appropriate forms for the obligor to exercise his right to rescind any
transaction subject to this section.
(b) Return of money or property following rescission
When an obligor exercises his right to rescind under subsection (a) of this section, he is not liable for any finance or
other charge, and any security interest given by the obligor, including any such interest arising by operation of law,
(e) Exempted transactions; reapplication of provisions
(1) a residential mortgage transaction as defined in section 1602(w) of this title;
(2) a transaction which constitutes a refinancing or consolidation (with no new advances) of the principal balance then
(3) a transaction in which an agency of a State is the creditor; or
(4) advances under a preexisting open end credit plan if a security interest has already been retained or acquired and
such advances are in accordance with a previously established credit limit for such plan.
B. DISCHARGE BY NOVATION
Novation substitutes a new party for an original party by agreement of all the parties. Novation requires —
• A previous valid obligation.
• An agreement of all the parties to a new contract.
• The extinguishment of the old obligation (discharge of the prior party.
• A new valid contract.
C. DISCHARGE BY SETTLEMENT AGREEMENT
A compromise, or settlement agreement may be substituted as a new contract, and revoke and discharge the
D. DISCHARGE BY ACCORD AND SATISFACTION
An accord is an executory contract to perform an act to satisfy a contractual duty that has not been discharged. A
satisfaction is the performance of the accord. An accord suspends the original obligation. The obligor discharges
the obligation by performing the accord. If the obligor refuses to perform the accord, the obligee can sue on the
original obligation or on the accord.
ADDITIONAL BACKGROUND—
Restatement (Second) of Contracts, Section 281
§ 281. Accord and Satisfaction
(1) An accord is a contract under which an obligee promises to accept a stated performance in satisfaction of the
obligor’s existing duty. Performance of the accord discharges the original duty.
(2) Until performance of the accord, the original duty is suspended unless there is such a breach of the accord by the
(3) Breach of the accord by the obligee does not discharge the original duty, but the obligor may maintain a suit for
specific performance of the accord, in addition to any claim for damages for partial breach.
IV. Discharge by Operation of Law
A. ALTERATION OF THE CONTRACT
An innocent party is discharged when another party to the contract materially alters it without consent.
B. STATUTES OF LIMITATIONS
C. BANKRUPTCY
A discharge in bankruptcy will ordinarily bar enforcement of most of a debtor’s contracts by the creditors. Partial
payment of a debt after discharge in bankruptcy will not revive the debt.
D. IMPOSSIBILITY OR IMPRACTICABILITY OF PERFORMANCE
1. Objective Impossibility of Performance
If contractual performance becomes impossible in an objective sense, the contract may be discharged.
2. Temporary Impossibility
An event that makes it temporarily impossible to perform a contractual act suspends performance until the
impossibility ceases. If the lapse of time and any change in circumstances surrounding the contract make it
substantially more burdensome to perform, however, the parties will be discharged.
ANSWER TO CRITICAL ANALYSIS QUESTION IN THE FEATURE—
INSIGHT INTO ETHICS
Why might those entering into contracts be worse off in the long run if the courts increasingly accept impossibility
of performance as a defense? Certainly, in the short run, those who are allowed to use impossibility of performance to
expected higher losses for those contracts that are not honored.
3. Commercial Impracticability