Business Law Chapter 18 Homework A breach is material when performance is not at least substantial

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CHAPTER 18

PERFORMANCE AND DISCHARGE

ANSWER TO CRITICAL THINKING QUESTION

IN THE FEATURE

ETHICS TODAY—CRITICAL THINKING

Why might those entering into contracts be worse off in the long run if the courts in-

ANSWERS TO QUESTIONS

AT THE ENDS OF THE CASES

CASE 18.1—CRITICAL THINKING

LEGAL ENVIRONMENT

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

CASE 18.2—LEGAL REASONING QUESTIONS

1A. What is a material breach of contract? On a material breach, what are the non-

breaching party’s options? A breach of contract is the nonperformance of a contractual duty.

2 UNIT THREE: CONTRACTS AND E-CONTRACTS

2A. What is a minor breach of contract? On a minor breach, is the nonbreaching party

excused from performance? Explain. A breach of contract is the nonperformance of a con-

tractual duty. If a breach is not material, it is minor. The nonbreaching party’s duty to perform

3A. In this case, the defendant—Wayne Mazda—argued that the plaintiffs should not

be granted relief for the plaintiff’s breach. What were the defendant’s main arguments in

support of this position? In this case, Wayne Mazda (the defendant) argued that the Kohels’

(plaintiffs) delivery of their Nissan as a trade-in without a vehicle identification (VIN) tag was a

CASE 18.3—CRITICAL THINKING

LEGAL ENVIRONMENT

What advantage does the discharge of a contractual obligation under the rule applied in

this case offer to the parties to the contract? Discuss. In the Hampton case, an employ-

ment contract between Hampton Road Bankshares (HRB), a financial institution, and Scott Har-

vard, one of its senior executive officers, contained a “golden parachute” payment. Later, Con-

CHAPTER 18: PERFORMANCE AND DISCHARGE 3

ETHICAL

Did HRB violate any ethical duty by refusing to pay Harvard’s “golden parachute?” Ex-

plain. No, HRB (Hampton Road Bankshares) did not violate any ethical duty by refusing to

make the “golden parachute” payment that the employer had originally agreed to make to its

employee, senior executive officer Scott Harvard. The payment was made illegal by the federal

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 inde-

pendent inspection for chemical residue). Because the basil did not pass inspection, Val’s is not

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2A. Destruction of the subject matter

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

when the performance becomes much more difficult or expensive than originally contemplated

3A. Substantial performance

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

and confers the same benefits as promised in the contract. Sun Farms acted in good faith and

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 respect-

ed. 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 up hurting

ANSWERS TO ISSUE SPOTTERS

AT THE END OF THE CHAPTER

1A. Ready Foods contracts to buy two hundred carloads of frozen pizzas from Speedy

Distributors. Before Ready or Speedy starts performing, can the parties call off the deal?

What if Speedy has already shipped the pizzas? Explain your answers. Contracts that are

CHAPTER 18: PERFORMANCE AND DISCHARGE 5

2A. C&D Services contracts with Ace Concessions, Inc., to service Ace’s vending ma-

chines. Later, C&D wants Dean Vending Services to assume the duties under a new con-

tract. Ace consents. What type of agreement is this? Are Ace’s obligations discharged?

Why or why not? Novation substitutes a new party for an original party, by agreement of all the

parties. The requirements are a previous valid obligation, an agreement of all the parties to a

ANSWERS TO BUSINESS SCENARIOS

AT THE END OF THE CHAPTER

18-1A. Conditions of performance

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 recover the contract price. Until Faithful does so, the Caplans are not ob-

18-2A. Discharge by agreement

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

by the substitution of a party. Accord and satisfaction exists when the parties agree that the

original obligation can be discharged by a substituted performance. In this case, Fred’s agree-

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18-3A. Impossibility of performance

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 discharge a party’s liability for failure to fully perform. If such events make perfor-

mance so extremely difficult or burdensome that it is, in effect, impossible, impractical, or unrea-

sonably expensive to perform, however, the contract is discharged. The basic problem is de–

termining when this degree of difficulty or burdensomeness is reached.

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

(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.

(c) The contract called for apples to come from a specific orchard. Through no fault of

(d) Major discussion should center on the doctrine of commercial impracticability or

frustration of commercial purpose. For the doctrine to be applied, most courts would need proof

ANSWERS TO BUSINESS CASE PROBLEMS

AT THE END OF THE CHAPTER

18–4A. Material breach

Yes, STR breached the contract with NTI. A breach of contract is the nonperformance of a con-

tractual duty. A breach is material when performance is not at least substantial. On a material

breach, the nonbreaching party is excused from performance. If a breach is minor, the non-

breaching party’s duty to perform can sometimes be suspended until the breach has been rem-

CHAPTER 18: PERFORMANCE AND DISCHARGE 7

18–5A. Conditions of performance

No, Humble is not entitled to specific performance. The equitable remedy of specific perfor-

mance calls for the performance of an act promised in a contract. In a case involving an interest

in real property, specific performance can be the appropriate remedy when money damages

18–6A. Discharge by operation of law

Lambert’s best defense to Baptist’s allegation of breach of contract is the doctrine of impossibil-

ity. Under this doctrine, if, after a contract has been made, a supervening event makes perfor-

mance impossible in an objective sense, the contract is discharged. The doctrine applies only

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18–7A. Conditions

The requirement that the contractor obtain an engineer’s certificate of final completion before

the final payment will be made under the contract is a condition precedent. In most contracts,

promises of performance are not expressly conditioned—they are absolute and must be per-

formed to avoid a breach of the contract. In some situations, however, performance is contin-

18-8A. 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 rea-

sonable cost of its repair, and $324,417.58 for attorneys’ fees and litigation costs. King County

appealed to a state intermediate appellate court, which affirmed the lower court’s judgment. The

CHAPTER 18: PERFORMANCE AND DISCHARGE 9

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 re-

sponsibilities to procure the proper insurance and to “promote and sponsor” all–risk builder’s risk

(b) DBM filed a suit in a Washington state court against King County, alleging breach

of contract and other claims. The court dismissed the complaint, and on DBM’s appeal, a state

intermediate appellate court affirmed the dismissal. The appellate court held that DBM was not a

third-party beneficiary to the project contract between King County and FCCC.

DBM could not maintain an action on the King County–FCCC contract because DBM was

not an intended third party beneficiary to it. An intended third-party beneficiary can be specifical-

(c) To recover under an “all risk” insurance policy, the determination of whether a loss

is “fortuitous” has three parts, all in relation to the time at which the policy was issued: (1) the

loss must not have been certain to occur; (2) the loss must not have been reasonably foreseea-

ble; and (3) the parties’ perception of the risk must be considered.

It could be argued that faulty workmanship cannot constitute an “accident” within the

meaning of a typical “all risk builder’s risk” policy. But courts have held such policies to cover

damages that poor 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 ex-

10 UNIT THREE: CONTRACTS AND E-CONTRACTS

18-9A. SPECIAL CASE ANALYSIS—Material breach

Case No. 18.2

Kohel v. Bergen Auto Enterprises, L.L.C.

Superior Court of New Jersey, Appellate Division, 2013.

2013 WL 439970.

(a) Issue: This case involved allegations of breach of contract involving which parties

and for what actions? Marc and Bree Kohel were the plaintiffs. Bergen Auto Enterprises, L.L.C.,

doing business as Wayne Mazda Inc., was the defendant. The Kohels agreed to buy a used

2009 Mazda from Wayne Mazda. Part of the payment of the purchase price was a credit of

(b) Rule of Law: What is the difference between a material breach and a minor

breach of contract? A breach of contract is the nonperformance of a contractual duty. A breach

is material when performance is not at least substantial. On a material breach, the nonbreaching

party is excused from performance.

(c) Applying the Rule of Law: How did the court determine which party was in mate-

rial breach of the contract in this case? The court distinguished the Kohels’ conduct from Wayne

Mazda’s actions. The Kohels’ (plaintiffs) delivered a Nissan as a trade-in on their purchase of a

Mazda without a vehicle identification (VIN) tag. But the trial court found that the Kohels were

CHAPTER 18: PERFORMANCE AND DISCHARGE 11

ANSWERS TO LEGAL REASONING GROUP ACTIVITY QUESTIONS

AT THE END OF THE CHAPTER

18–10A. Anticipatory repudiation

(a) When either party repudiates the contract with respect to a performance not yet

due, the party’s repudiation constitutes an anticipatory breach. An anticipatory breach legally

(b) Taylor senior is correct. He can immediately file suit for breach of contract, even

though actual performance is not due until May 1. He does not have to wait until May 1, as Tom

(c) From Taylor & Sons’s perspective, the chief consideration is the effect that their

choice of action will have on their business. Should they cut their losses by immediately finding

another party to suit their needs and suing ABC for breach? Could they obtain damages?