Business Law Chapter 17 Homework For The Doctrine Applied Most Courts Would

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145

CHAPTER 17

PERFORMANCE AND DISCHARGE

IN TRADITIONAL AND E-CONTRACTS

ANSWER TO CRITICAL ANALYSIS

QUESTION IN THE FEATURE

INSIGHT INTO ETHICS—CRITICAL THINKING—INSIGHT INTO THE SOCIAL ENVIRONMENT (PAGE 328)

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 im-

possibility of performance to avoid their contract obligations are better off. In the long run, in contrast,

those who enter into such contracts will spend more time and effort to make sure that this avenue is

either a very remote possibility or if it isn’t, they simply won’t enter into the contract at all. In the alter-

native, all such contracts may include a premium to take care of expected higher losses for those con-

tracts that are not honored.

ANSWERS TO QUESTIONS

AT THE ENDS OF THE CASES

CASE 17.1—QUESTIONS (PAGE 322)

1A. The New York Court of Appeals found that Jacob & Youngs had substantially performed the con-

tract. 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.

2A. A requirement of substantial performance is good faith. Did Jacob & Youngs substantially per-

form all of the terms of the contract in good faith? Why or why not? Probably. The failure to fully per-

146 UNIT THREE: CONTRACTS AND E-CONTRACTS

CASE 17.2—QUESTIONS (PAGE 324)

THE ECONOMIC DIMENSION

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 might have negotiated a higher rate.

THE ETHICAL DIMENSION

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

CASE 17.3—QUESTIONS (PAGE 348)

WHAT IF THE FACTS WERE DIFFERENT?

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 lease agreement stated that the premises could only be used

for a bar or a nightclub and for “no other” purpose. The lease agreement still called for an illegal use of

the premises and thus was void. Merry Homes’ only chance of succeeding would be to convince the

court to admit parol evidence that would prove that the lease did not reflect the true intentions of the

parties. Because the contract itself left no doubt of its meaning, however, parol evidence would proba-

bly not be admissible.

THE ETHICAL DIMENSION

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

148 UNIT THREE: CONTRACTS AND E-CONTRACTS

ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE

AT THE END OF THE CHAPTER

1A. Condition

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 condition (that it pass an independent inspec-

tion for chemical residue). Because the basil did not pass inspection, Val’s is not obligated to perform.

This condition of the contract would be precedent rather than subsequent or concurrent: the basil must

pass the inspection before Val’s is obligated to buy.

2A. Destruction of the subject matter

The theory of commercial impracticability can excuse parties from their performance obligations when

3A. Substantial performance

Substantial performance is good faith performance that does not vary greatly from the contract and con-

fers the same benefits as promised in the contract. Sun Farms acted in good faith and shipped as much

chemical-free basil as it could obtain, which was only 25 pounds less than the contracted amount. A

court would likely find that it had substantially performed its obligation to Val’s.

4A. Novation

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.

ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE AT THE END OF THE

CHAPTER

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

CHAPTER 17: PERFORMANCE & DISCHARGE IN TRADITIONAL & E-CONTRACTS 149

cannot perform because in so doing, that party would lose large sums and maybe go out of business, the

courts should step in an allow that party to avoid the contract.

ANSWERS TO QUESTIONS AND CASE PROBLEMS

AT THE END OF THE CHAPTER

17-1A. Conditions of performance

(Chapter 17—Pages 320 & 321–322)

If the specifications are considered to be express conditions to the Caplans’ acceptance and payment

under the contract, Faithful must perform fully—that is, must install Crane brand plumbing fixtures—to

17-2A. QUESTION WITH SAMPLE ANSWER: Discharge by agreement

A novation exists when a new, valid contract expressly or impliedly discharges a prior contract by the

17-3A. Anticipatory repudiation

(Chapter 17—Pages 324–325)

When either party repudiates the contract with respect to a performance not yet due, the party’s repu-

17-4A. Impossibility of performance

(Chapter 17—Pages 327–330)

Normally, events that take place after the formation of the contract and that make performance of the

contract more difficult or burdensome do not render the contract impossible to perform and do not dis-

charge a party’s liability for failure to fully perform. If such events make performance so extremely diffi-

cult or burdensome that it is, in effect, impossible, impractical, or unreasonably expensive to perform,

however, the contract is discharged. The basic problem is determining when this degree of difficulty or

burdensomeness is reached.

(a) Jiminez’s contract is personal, requiring his services for full performance of the con-

tract. His death makes performance totally impossible, thereby discharging his estate from liabil-

ity.

(b) The passage of title to this land can be by Raglione or any person so authorized.

Therefore, the death of Raglione does not render the contract impossible to perform, because a

representative of her estate can perform it in her place. The contract is not discharged.

17-5A. Implied conditions

(Chapter 17—Pages 319 & 320)

The court should refuse to imply a condition precedent in the settlement agreement, and order Heuble-

17-6A. Frustration of purpose

(Chapter 17—Page 330)

Under the doctrine of frustration of purpose, a contract will be discharged if supervening circumstances

17-7A. CASE PROBLEM WITH SAMPLE ANSWER: Material breach

The court concluded that FB & I materially breached its contract with Superior when FB & I entered into

an agreement with Component. This justified Superior’s canceling its contract with FB & I. But Superior

also breached the contract when it refused to let FB & I retain its Superior customers. The court calcu–

lated FB & I’s unpaid commissions at 5.243 percent, “representing a fair rate because FB & I did not incur

any expenses when Superior did business with FB & I’s customers,” and awarded FB & I $122,032.29,

plus interest. Superior appealed to the South Dakota Supreme Court, which affirmed the lower court’s

17–8A. Material breach

(Chapter 17—Page 324)

Bemis breached the covenant not to compete, and its breach was material (the performance was not at

least substantial). Under the agreement, if Bemis chose to enforce the non-compete provision, Bannister

17–9A. Condition precedent

(Chapter 17—Pages 319–320)

Summary judgment for Mike. JH breached the contract because it failed to fulfill the condition prece-

17-10A. A QUESTION OF ETHICS: Conditions

(a) The court issued a judgment in FCCC’s favor, ruling that it was entitled to an award of

$1,501,426.21, including interest, for the damage caused by the blow-in and the reasonable cost of its

repair, and $324,417.58 for attorneys’ fees and litigation costs. King County appealed to a state inter-

mediate appellate court, which affirmed the lower court’s judgment. The appellate court reiterated the

The appellate court also cited the finding that King County did not act in good faith or deal fairly

with respect to FCCC and DBM’s claims for builder’s risk coverage. In assuming the responsibilities to

procure the proper insurance and to “promote and sponsor” all–risk builder’s risk claims, but then deny-

ing these claims, “the County elected and pursued a course intended only to protect the County’s posi-

tion and interests, to the detriment of FCCC and DBM. . . . King County was dishonest in fact and pre-

cluded FCCC from receiving the full benefit of performance under the Project contract by falsely repre-

senting that it had procured an all-risk policy for the Project . . . , by failing to adjust the builder’s risk

claims in good faith, and by colluding with [the general property damage insurer] to avoid coverage.

in the contract, or it may be considered an intended beneficiary if it has the right to control the details of

performance or the performance is rendered directly to it. Arguably, the parties to the project contract

intended any subcontractors to benefit from the all-risk insurance clause, but the court held that this

was not the case here. The subcontractor was only an incidental third-party beneficiary, and an inci-

dental beneficiary does not have a right to sue to enforce a contract as a third party.

workmanship causes. For example, risks that courts have determined to be covered “accidents” within

the meaning of such policies include water damage resulting from the removal of a roof and from the

mislocation of a house on a lot. Courts have also held that expenses involved in replacing broken pipe

and repairing leaking collars improperly installed by a contractor’s employees are covered. Even the neg-

ligence of a party unrelated to the contractor has not worked to deny coverage in all cases.