Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
1
Chapter 18
Performance and Discharge
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?
When contracting parties do what they promised to do, their duties are discharged, and their contract is
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.
2 UNIT THREE: CONTRACTS AND E-CONTRACTS
ADDITIONAL BACKGROUND—
Conditions of Performance
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. 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. Gener-
C. CONCURRENT CONDITIONS
Concurrent conditions exist when each party’s performance is conditioned on the other’s simultaneous
performance.
D. EXPRESS AND IMPLIED CONDITIONS
II. Discharge by Performance
Most contracts are discharged by performance—by doing what was promised. Performance may also be
accomplished by tender.
A. COMPLETE PERFORMANCE
B. SUBSTANTIAL PERFORMANCE
To qualify as substantial—
• The party must have performed in good faith.
• Performance must not vary greatly from that promised in the contract.
• Performance must create substantially the same benefits.
1. Courts Must Decide
CHAPTER 18: PERFORMANCE & DISCHARGE 3
Courts decide whether performance was substantial on a case-by-case basis.
2. Effect on Duty to Perform
3. Measure of Damages
Substantial performance entitles the other party to sue for damages for the failure to comply with
the contract.
• The measure of the damages is the cost to bring the object of the contract into compliance
with its terms, if that cost is reasonable
CASE SYNOPSIS—
Case 18.1: 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 entered a verdict for Kent. The appellate court reversed. The case was
appealed.
..................................................................................................................................................
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
4 UNIT THREE: CONTRACTS AND E-CONTRACTS
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
A requirement of substantial performance is good faith. Did Jacob & Youngs substantially perform all
ADDITIONAL CASES ADDRESSING THIS ISSUE —
Substantial Performance
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).
C. PERFORMANCE TO THE SATISFACTION OF ANOTHER
1. When the Contract Is Personal
When the subject matter of a contract that requires personal satisfaction is personal, personal
2. Reasonable Person Standard
Other contracts need only be performed to the satisfaction of a reasonable person. When a contract
D. MATERIAL BREACH OF CONTRACT
CHAPTER 18: PERFORMANCE & DISCHARGE 5
When performance is not substantial, a breach is material—the nonbreaching party is excused from
performing and can sue for damages.
1. Material versus Minor Breach
CASE SYNOPSIS—
Case 18.2: Kohel v. Bergen Auto Enterprises, L.L.C.
Marc and Bree Kohel agreed to buy a used 2009 Mazda from Wayne Mazda Inc. The Kohels were
credited $7,000 as a trade-in for their 2005 Nissan Altima. They still owed $8,118.28 on the Nissan, which
Wayne agreed to remit. But later when Wayne discovered that the Nissan was missing a vehicle identification
(VIN) tag, the dealer refused to make the payment and also refused to give the Kohels the permanent plates
..................................................................................................................................................
Notes and Questions
What is the most basic way of determining whether a breach of contract is material? The most
basic way of determining whether there has been a material breach of a common law contract is to ask
What effect does a material breach have on the nonbreaching party? Performance far below
reasonable expectations is a material breach of contract. The nonbreaching party is excused from performing
Was there a difference in the degree to which the plaintiffs and the defendant failed to perform the
6 UNIT THREE: CONTRACTS AND E-CONTRACTS
2. Underlying Policy
Any breach entitles the party to sue for damages, but only a material breach discharges him or her
from the contract.
ADDITIONAL BACKGROUND—
Material Breach
The following is from the 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;
E. ANTICIPATORY REPUDIATION
If, before either party to a contract has a duty to perform, one of the parties refuses to perform, the other
party is discharged.
1. Repudiation is a Material Breach
The anticipatory repudiation can be treated as a present, material breach and damages can be
CHAPTER 18: PERFORMANCE & DISCHARGE 7
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—
Anticipatory Repudiation of a Contract
The following is a section of the Restatement (Second) of Contracts that is cited in, and relates, to this
part of the text—Restatement (Second) of Contracts, Section 253.
(1) Where an obligor repudiates a duty before he has committed a breach by non-performance and before he
(2) Where performances are to be exchanged under an exchange of promises, one party’s repudiation of a
duty to render performance discharges the other party’s remaining duties to render performance.
F. 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
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 MUTUAL RESCISSION
• To mutually rescind, the parties must make another contract. Their promises not to perform
constitute consideration for the new agreement.
8 UNIT THREE: CONTRACTS AND E-CONTRACTS
ADDITIONAL BACKGROUND—
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
(a) Disclosure of obligor’s right to rescind
Except as otherwise provided in this section, in the case of any consumer credit transaction (including
opening or increasing the credit limit for an open end credit plan) in which a security interest, including any
such interest arising by operation of law, is or will be retained or acquired in any property which is used as the
(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, becomes void upon such a rescission. Within 20 days after receipt of a notice of rescission,
the creditor shall return to the obligor any money or property given as earnest money, down payment, or
(e) Exempted transactions; reapplication of provisions
CHAPTER 18: PERFORMANCE & DISCHARGE 9
This section does not apply to—
(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
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.
C. DISCHARGE BY SETTLEMENT AGREEMENT
A compromise, or settlement agreement may be substituted as a new contract, and revoke and
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.
ADDITIONAL BACKGROUND—
Accord and Satisfaction
The following is a section of the Restatement (Second) of Contracts that is cited in, and relates, to this
part of the text—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
(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. MATERIAL ALTERATION OF THE CONTRACT
An innocent party is discharged when another party to the contract materially alters it without consent.
B. STATUTES OF LIMITATIONS
The UCC provides that an action for breach of a sales contract must be initiated within four years after
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 OF PERFORMANCE
If contractual performance becomes impossible in an objective sense, the contract may be discharged.
1. When Performance Is Impossible
Situations that generally qualify include—
• One of the parties to a personal contract dies or becomes incapacitated before performing.
CASE SYNOPSIS—
Case 18.3: Hampton Road Bankshares, Inc. v. Harvard
Scott Harvard was a senior executive officer of Hampton Roads Bankshares (HRB). His employment
contract included a “golden parachute”—a payment of approximately three times his average annual
compensation if he quit. In 2008, during the Great Recession, Congress enacted the Emergency Economic
The Virginia Supreme Court reversed. Under the doctrine of impossibility of performance, a promisor is
CHAPTER 18: PERFORMANCE & DISCHARGE 11
excused from performing his or her contractual obligations when that performance is made impossible by a
change in the law. EESA was enacted during the term of the employment contract between HRB and
Harvard. At that time, the parties agreed to amend the contract to state that it “will be interpreted,
administered and construed to, comply with EESA.” Under EESA, payment of the “golden parachute” would
be in violation of the law.
..................................................................................................................................................
Notes and Questions
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
ADDITIONAL BACKGROUND—
Commercial Impracticability
The following is a section of the Restatement (Second) of Contracts that states the principle of law
explained in this part of the text—Restatement (Second) of Contracts, Section 261.
§ 261. Discharge by Supervening Impracticability
Where, after a contract is made, a party’s performance is made impracticable without his fault by the
2. Temporary Impossibility
a. Performance Normally Delayed
An event that makes it temporarily impossible to perform a contractual act suspends perfor-
b. Performance Can Be Discharged
ENHANCING YOUR LECTURE—
12 UNIT THREE: CONTRACTS AND E-CONTRACTS
IMPOSSIBILITY OR IMPRACTICABILITY
OF PERFORMANCE IN GERMANY
In the United States, when a party alleges that contract performance is impossible or impracticable
because of circumstances unforeseen at the time the contract was formed, a court will either discharge the
party's contractual obligations or hold the party to the contract. In other words, if a court agrees that the
FOR CRITICAL ANALYSIS
When a contract becomes impossible or impracticable to perform, which remedy would a
businessperson prefer—rescission or reformation? Why?
E. COMMERCIAL IMPRACTICABILITY
If circumstances arise that make performance extremely difficult or costly, the contract may be dis-
F. 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 personal services includes an implied condition that the promisor will be alive and able to per-
form the obligation.
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
CHAPTER 18: PERFORMANCE & DISCHARGE 13
3. You might tell students that in taking notes, they may find it helpful to use some of the terms, ab-
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?
DISCUSSION QUESTIONS
1. What is a condition? A condition is part of a contract, either expressly by the parties or impliedly by courts.
2. What are the differences between express conditions and implied-in-fact conditions? Express
conditions are provided by the parties in their agreement (and often begin “if,” “provided,” “after,” or “when”). Implied-
3. Discuss the degrees of performance. Complete performance is performance within the bounds of rea-
sonable expectations. Substantial performance is performance slightly below reasonable expectations. Complete
4. What is the effect of an anticipatory repudiation on the nonbreaching party? The nonbreaching party
can treat an anticipatory repudiation as a material breach and sue for damages immediately—a nonbreaching party is
14 UNIT THREE: CONTRACTS AND E-CONTRACTS
5. What is the difference between a rescission and a novation? Rescission. By rescission a contract is
canceled and the parties are returned to the positions they were in before the contract was formed. The parties may
6. How is a novation distinguished from a substituted agreement? Novation substitutes a new party for an
original party by agreement of all the parties (for instance, before completing a sale of a firm’s assets, the seller,
7. How does an accord and satisfaction work? An accord is an executory contract to perform an act to satisfy
a contractual duty that has not been discharged. Satisfaction is performance of the accord. An accord suspends the
8. When a contract’s performance is not impossible, how can it be discharged by operation of law?
Alteration of Contract. An innocent party is discharged when another party to the contract materially alters it (changes
a quantity or price term, for instance) without the innocent party’s consent. Statute of Limitations. Statutes 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
CHAPTER 18: PERFORMANCE & DISCHARGE 15
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
EXPLANATION OF A SELECTED FOOTNOTE IN THE TEXT
Footnote 13: 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 commercial impracticability and is cited in this part of the text—Restatement (Second) of Contracts, Section
261. § 261. Discharge by Supervening Impracticability
Where, after a contract is made, a party’s performance is made impracticable without his fault by the
occurrence of an event the non-occurrence of which was a basic assumption on which the contract was
made, his duty to render that performance is discharged, unless the language or the circumstances indicate
the contrary.
