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LEARNING OUTCOMES The five learning outcomes labeled LO1 through LO5 are designed to help improve your understanding of the chapter. After reading this chapter, you should be able to . . . LO1 Explain the difference between complete and substantial contractual performance. LO2 Describe how parties can discharge their contract by agreement.

FACING A LEGAL PROBLEM The DeLeons contract with a construction company to build a house. The contract specifies Brand X plasterboard. The builder cannot obtain Brand X, and the DeLeons are on a mountain-hiking vacation in Peru and are unreachable. The builder decides to install Brand Y instead, which she knows is identical in quality and durability to Brand X. All other aspects of construction conform to the contract. Does this deviation constitute a breach of contract? Can the DeLeons avoid their obligation to pay the builder because Brand Y plasterboard was used instead of Brand X?

LO3 Identify different types of damages. LO4 Define the remedy of rescission and restitution. LO5 Explain the remedy of specific performance. breach of contract Failure, without legal excuse, of a promisor to perform the obligations of a contract. discharge The termination of one’s obligation. In contract law, discharge occurs when the parties have fully performed their contractual obligations or when events, conduct of the parties, or operation of law releases the parties from further performance. performance In contract law, the fulfillment of one’s duties arising under a contract with another; the normal way of discharging one’s contractual obligations. tender A timely offer or expression of willingness to pay a debt or perform an obligation.

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Parties to a contract need to know when their contract is terminated. In other words, the parties need to know when their contractual duties are at an end. This chapter deals first with the discharge of a contract, which is normally accomplished when both parties have performed the acts promised in the contract. We look at the degree of performance required and at some other ways in which discharge can occur. When it is no longer advantageous for a party to fulfill his or her contractual obligations, breach of contract may result. A breach of contract occurs when a party fails to perform part or all of the required duties under a contract. Once this occurs, the other party—the nonbreaching party—can choose one or more of several remedies. These remedies are discussed in the last part of this chapter.

Contract Discharge The most common way to discharge (terminate) contractual duties is by performance (fulfillment) of those duties. As you can see in Exhibit 16–1, in addition to performance, there are numerous other ways in which a contract can be discharged. These include discharge by performance, agreement, and operation of law.

DISCHARGE BY PERFORMANCE The contract comes to an end when both parties fulfill their respective duties by performance of the acts they have promised. Performance can also be accomplished by tender. Tender is an unconditional offer to perform by a person who

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EXHIBIT 16–1 Contract Discharge

BY FAILURE OF A CONDITION If performance is conditional, duty to perform does not become absolute until that condition occurs.

CONTRACT DISCHARGE

of limitations • Statute of • Impossibility performance • Commercial Impracticability

is ready, willing, and able to do so. EXAMPLE 16.1 A seller who places goods at the disposal of a buyer has tendered delivery and can demand payment according to the terms of the agreement. A buyer who offers to pay for goods has tendered payment and can demand delivery of the goods.• Once performance has been tendered, the party making the tender has done everything possible to carry out the terms of the contract. If the other party refuses to perform, the party making the tender can consider the duty discharged and sue for breach of contract. Complete versus Substantial Performance. It is important to distinguish between complete performance and substantial performance. Normally, conditions expressly stated in the contract must fully occur in all aspects for complete (or strict) performance to take place. Any deviation breaches the contract and discharges the other party’s obligation to perform. Although in most contracts the parties fully discharge their obligations by complete performance, sometimes a party fails to fulfill all of the duties or completes the duties in a manner contrary to the terms of the contract. The issue then arises as to whether the performance was sufficiently substantial to discharge the contractual obligations. To qualify as substantial, the performance must not vary greatly from the performance promised in the contract. It must result in substantially the same benefits as those promised in the contract. If performance is substantial, the other party’s duty to perform remains absolute (minus damages, if any, for the minor deviations). If performance is not substantial, there is a material breach—the nonbreaching party is excused from performance and can sue for damages caused by the breach.

LO1 Explain the difference between complete and substantial contractual performance.

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Performance to the Satisfaction of Another. Contracts often state that completed work must personally satisfy one of the parties or a third person. When the subject matter of the contract is personal, performance must actually satisfy the party whose satisfaction is required. EXAMPLE 16.2 Contracts for portraits, works of art, medical or dental work, and tailoring are personal.• Only the personal satisfaction of the party is sufficient to fulfill the contract— unless the party expresses dissatisfaction only to avoid payment or otherwise is not acting in good faith. Contracts that involve mechanical fitness, utility, or marketability (such as “the pump must be mounted on a platform”) need only be performed to the satisfaction of a reasonable person unless they expressly state otherwise. When contracts require performance to the satisfaction of a third party (such as “the road must be graded to the satisfaction of the supervising engineer”), the courts are divided. A majority of courts require the work to be satisfactory to a reasonable person, but some courts hold that the personal satisfaction of the third party must be met.

DISCHARGE BY AGREEMENT LO2 Describe how parties can discharge their contract by agreement.

Any contract can be discharged by the agreement of the parties. This agreement can be part of the original contract, or the parties can form a new contract for the express purpose of discharging the original contract. Discharge by Rescission. Rescission is a process in which the parties cancel the contract and are returned to the positions they occupied prior to the contract’s formation. For mutual rescission to take place, the parties must make another agreement that also satisfies the legal requirements for a contract— there must be an offer, an acceptance, and consideration. Ordinarily, if the parties agree to rescind the original contract, their promises not to perform those acts promised in the original contract will be legal consideration for the second contract. This occurs when the contract is executory on both sides (that is, neither party has completed performance). Contracts that are executed on one side (one party has performed) can be rescinded only if the party who has performed receives consideration for agreeing to call off the deal.

novation The substitution, by agreement, of a new contract for an old one, with the rights under the old one being terminated. Typically, there is a substitution of a new person who is responsible for the contract and the removal of the original party’s rights and duties under the contract.

Discharge by Novation. The process of novation substitutes a third party for one of the original parties. Essentially, the parties to the original contract and one or more new parties all get together and agree to the substitution. The requirements of a novation are as follows: 1. 2. 3. 4.

The existence of a previous, valid obligation. Agreement by all the parties to a new contract. The extinguishing of the old obligation (discharge of the prior party). A new, valid contract.

IN THE COURTROOM You contract with A. Logan Enterprises to sell it your office equipment business under an installment sales contract requiring twelve monthly payments. Logan later decides not to buy the business but knows of another party, MBI Corporation, interested in doing so. All three of you get together and agree to a new contract under which MBI agrees to purchase your business. Is the original contract discharged and replaced with the new contract? As long as the new contract is supported by consideration, the novation discharges the original contract between you and Logan and replaces it with the new contract between you and MBI. Logan prefers the novation over an assignment, because the

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novation discharges all the liabilities stemming from its contract with you. If Logan had merely assigned the contract to MBI, Logan would have remained liable to you for the payments if MBI defaulted. Discharge by Accord and Satisfaction. In an accord and satisfaction, the parties agree to accept performance different from the performance originally promised. An accord is defined as an executory contract (one that has not yet been performed) to perform some act in order to satisfy an existing contractual duty. The duty is not yet discharged. A satisfaction is the performance of the accord. An accord and its satisfaction (performance) discharge the original contractual obligation. Once the accord has been made, the original obligation is merely suspended. The obligor can discharge the original obligation by performing the obligation agreed to in the accord. Likewise, if the obligor refuses to perform the accord, the obligee can bring an action on the original obligation. EXAMPLE 16.3 Shep obtains a judgment against Marla for $8,000. Later, both parties agree that the judgment can be satisfied by Marla’s transfer of her automobile to Shep. This agreement to accept the auto in lieu of $8,000 in cash is the accord. If Marla transfers her automobile to Shep, the accord agreement is fully performed, and the $8,000 debt is discharged. If Marla refuses to transfer her car, the accord is breached. Because the original obligation is merely suspended, Shep can sue to enforce the judgment for $8,000 in cash or bring an action for breach of the accord.•

accord and satisfaction An agreement and payment (or other performance) between two parties, one of whom has a right of action against the other. After the agreement has been made and payment or other performance has been tendered, the “accord and satisfaction” is complete.

DISCHARGE BY OPERATION OF LAW Under some circumstances, contractual duties may be discharged by operation of law. These circumstances include the running of the relevant statute of limitations and impossibility of performance. Statute of Limitations. A statute of limitations limits the time during which a party can sue on a particular cause of action. After the time has passed, a suit based on that cause can no longer be brought. EXAMPLE 16.4 The statutory period for bringing a suit for breach of a written contract is typically four or five years.• When Performance Is Impossible or Impracticable. After a contract has been made, performance may become impossible in an objective sense. This is known as impossibility of performance and may discharge a contract. This objective impossibility (“It can’t be done”) must be distinguished from subjective impossibility (“I simply can’t do it”). Examples of subjective impossibility include contracts in which goods cannot be delivered on time because of freight car shortages and contracts in which money cannot be paid on time because the bank is closed. In effect, the party in these cases is saying, “It is impossible for me to perform,” not “It is impossible for anyone to perform.” Accordingly, such excuses do not discharge a contract, and the nonperforming party is normally held in breach of contract. Impossibility of Performance. Certain situations generally qualify under the objective-impossibility rules to discharge contractual obligations: 1. When one of the parties to a personal contract dies or becomes incapacitated prior to performance. EXAMPLE 16.5 Fred, a famous dancer, contracts with Ethereal Dancing Guild to play a leading role in its new ballet. Before the ballet can be performed, Fred becomes ill and dies. His personal performance was essential to the completion of the contract. Thus, his death discharges the contract.•

statute of limitations A statute setting the maximum time period during which a certain action can be brought.

impossibility of performance A doctrine under which a party to a contract is relieved of his or her duty to perform when performance becomes impossible or totally impracticable (through no fault of either party).

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2. When the specific subject matter of the contract is destroyed. EXAMPLE 16.6 A-1 Farm Equipment agrees to sell Gudgel a specific tractor on its lot and promises to have it ready for Gudgel to pick up on Saturday. On Friday night, a bus veers off the nearby highway and smashes into the tractor, destroying it beyond repair. The accident renders A-1’s performance impossible.• 3. When a change in the law renders performance illegal. EXAMPLE 16.7 A contract to build an apartment building becomes impossible to perform when the zoning laws are changed to prohibit the construction of residential rental property at the planned location.•

commercial impracticability A doctrine under which a party may be excused from performing a contract when (1) a contingency occurs, (2) the contingency’s occurrence makes performance impracticable, and (3) the nonoccurrence of the contingency was a basic assumption on which the contract was based.

Commercial Impracticability. Performance becomes commercially impracticable when it turns out to be significantly more difficult or expensive than anticipated. A party may sometimes be excused from performing a contract under the doctrine of commercial impracticability. EXAMPLE 16.8 In one case, a court held that a contract was discharged because a party would otherwise have had to pay ten times more than the original estimate to excavate (remove from the ground) a certain amount of gravel.• Caution should be used in invoking the doctrine of commercial impracticability. The added burden of performing must be extreme and must not have been foreseeable by the parties at the time the contract is made. Temporary Impossibility. An occurrence or event (such as war) that makes it temporarily impossible to perform the act for which a party has contracted operates to suspend performance until the impossibility ceases. Then, ordinarily, the parties must perform the contract as originally agreed. If, however, the lapse of time and the change in circumstances make it substantially more burdensome for the parties to perform the promised acts, the contract is discharged.

Contract Remedies remedy The relief given to innocent parties, by law or by contract, to enforce a right or to prevent or compensate for the violation of a right.

A remedy is the relief provided for an innocent party when the other party has breached the contract. It is the means employed to enforce a right or to redress an injury. The most common remedies are damages, rescission and restitution, and specific performance.

LO3 Identify different types of damages.

A breach of contract entitles the nonbreaching party to sue for damages (money). Damages are designed to compensate the nonbreaching party for the loss of the bargain. Generally, innocent parties are to be placed in the position they would have occupied had the contract been performed. Several types of damages are discussed in the sections that follow.

damages Money sought as a remedy for a breach of contract or for a tortious act. compensatory damages A money award equivalent to the actual value of injuries or damages sustained by the aggrieved party.

DAMAGES

Compensatory Damages. Damages compensating the nonbreaching party for the loss of the bargain are known as compensatory damages. These damages compensate the injured party only for injuries actually sustained and proved to have arisen directly from the loss of the bargain due to the breach of contract. Compensatory damages simply replace the loss caused by the wrong or injury. The amount of compensatory damages is the difference between the value of the breaching party’s promised performance and the value of his or her actual performance. This amount is reduced by any loss that the injured party has avoided. EXAMPLE 16.9 If you are hired to perform certain services during August for $3,000, but the employer breaches the contract and you find another job that pays only $500, you can recover $2,500 as compensatory damages.

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You can also recover expenses you incurred in finding the other job. These are incidental damages—damages directly resulting from a breach of contract, including expenses incurred because of the breach.• The measurement of compensatory damages varies by type of contract. In a contract for a sale of goods, the usual measure of compensatory damages is an amount equal to the difference between the contract price and the market price at the time and place of delivery.

IN THE COURTROOM MediQuick Laboratories contracts with Cal Computer Industries to purchase ten model X-15 computer work stations for $8,000 each. If Cal Computer fails to deliver the ten work stations, and the current market price of the work stations is $8,500 each, what is MediQuick’s measure of damages? MediQuick’s measure of damages is $5,000 (10 ✕ $500), plus incidental damages. In cases in which the buyer breaches and the seller has not yet produced the goods, compensatory damages normally equal the lost profits on the sale, not the difference between the contract price and the market price.

Consequential Damages. Consequential damages, which are also referred to as special damages, are foreseeable damages that result from a party’s breach of contract. They differ from compensatory damages in that they are caused by special circumstances beyond the contract itself. When a seller does not deliver goods, knowing that a buyer is planning to resell those goods immediately, consequential damages are awarded for the loss of profits from the planned resale. EXAMPLE 16.10 Marty contracts to buy a certain quantity of Quench, a specialty sports drink, from Nathan. Nathan knows that Marty contracted with Ruthie to resell and ship the Quench within hours of its receipt. The beverage is then to be sold to fans attending the Super Bowl. Nathan fails to timely deliver the Quench. Marty can recover the consequential damages—the loss of profits from the planned resale to Ruthie—caused by the nondelivery.• For a nonbreaching party to recover consequential damages, the breaching party must know (or have reason to know) that special circumstances will cause the nonbreaching party to suffer an additional loss.

consequential damages Special damages that compensate for a loss that is not direct or immediate (for example, lost profits). The special damages must have been reasonably foreseeable at the time the breach or injury occurred.

IN THE COURTROOM Gilmore contracts to have a specific item shipped to her—one that she desperately needs to repair her printing press. Gilmore tells the shipper that she must receive the item by Monday or she will not be able to print her paper and will lose $750. If the shipper is late, what can Gilmore recover? Gilmore can recover the consequential damages caused by the delay (the $750 in losses).

Mitigation of Damages. In most situations, when a breach of contract occurs, the injured party has a duty to mitigate, or reduce, the damages that he or she suffers. Under this doctrine of mitigation of damages, the required action depends on the nature of the situation. EXAMPLE 16.11 In the majority of states, wrongfully terminated employees have a duty to mitigate damages suffered as a result of the employer’s breach. The damages that the employees will be awarded are their salaries less the incomes they would have received in similar jobs obtained by reasonable means.•

mitigation of damages A rule requiring a plaintiff to have done whatever was reasonable to minimize the damages caused by the defendant.

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punitive damages Compensation in excess of actual or consequential damages. They are awarded in order to punish the wrongdoer and usually will be awarded only in cases involving willful or malicious misconduct.

Punitive Damages. Punitive damages, which are also known as exemplary damages, generally are not recoverable in an action for breach of contract. Punitive damages are designed to punish and make an example of a wrongdoer for the purpose of deterring similar conduct in the future. Such damages have no legitimate place in contract law because they are, in essence, penalties, and a breach of contract is not unlawful in a criminal sense. A contract is, after all, a civil relationship between the parties. The law may compensate one party for the loss of the bargain—no more and no less. In a few situations, a person’s actions can cause both a breach of contract and a tort. EXAMPLE 16.12 The parties can establish by contract a certain reasonable standard or duty of care. Failure to live up to that standard is a breach of contract, and the act itself may constitute negligence.• An intentional tort (such as fraud) may also be tied to a breach of contract. In such a case, it is possible for the nonbreaching party to recover punitive damages for the tort in addition to compensatory and consequential damages for the breach of contract.

liquidated damages An amount, stipulated in the contract, that the parties to a contract believe to be a reasonable estimation of the damages that will occur in the event of a breach.

Liquidated Damages. A liquidated damages provision in a contract specifies a certain amount of money to be paid in the event of a future default or breach of contract. (Liquidated means determined, settled, or fixed.) Liquidated damages differ from penalties. A penalty specifies a certain amount to be paid in the event of a default or breach of contract and is designed to penalize the breaching party. Liquidated damages provisions normally are enforceable; penalty provisions are not. To determine whether a particular provision is for liquidated damages or for a penalty, answer two questions: First, when the contract was formed were the potential damages that would be incurred if the contract was not performed on time difficult to estimate? Second, was the amount set as damages a reasonable estimate of those potential damages? If both answers are yes, the provision is for liquidated damages and will be enforced. If either answer is no, the provision is for a penalty and normally will not be enforced.

penalty A sum named in a contract not as a measure of compensation for its breach but rather as punishment for a default. The agreement as to the amount will not be enforced, and recovery will be limited to actual damages.

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IN THE COURTROOM ACTUAL CASE EXAMPLE Allen and Patsy McCain own the Green Park Inn in North Carolina. They lease the Inn to Gary and Gail Moore. The lease provides that if the Moores default, the McCains are entitled to “liquidated damages” to cover “restoration of the physical plant,” “lost lease payments,” “harm to the reputation of the hotel,” and other items. The lease states that $500,000 is “a fair and reasonable estimate” of these damages. The Moores default on the rent and vacate the hotel. The McCains file a suit against the Moores to obtain $500,000. Is the lease clause an enforceable liquidated damages provision? Yes. In a 2002 case, Green Park Inn, Inc. v. Moore, a North Carolina state court ordered the defendants to pay the McCains. The lease provision satisfied the two-part test for liquidated damages: the amount of the damages would have been difficult to determine at the time that the lease was signed, and the estimate of the damages was reasonable.

RESCISSION AND RESTITUTION LO4 Define the remedy of rescission and restitution. restitution A remedy under which a person is restored to his or her original position prior to formation of a contract.

Rescission essentially is an action to undo, or cancel, a contract—to return nonbreaching parties to the positions that they occupied prior to the transaction. When fraud, mistake, duress, or failure of consideration is present, rescission is available. The failure of one party to perform entitles the other party to rescind the contract. The rescinding party must give prompt notice to the breaching party. To rescind a contract, the parties must make restitution to each other by returning goods, property, or money previously conveyed.

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If the goods or property can be returned, they must be. If the goods or property have been consumed, restitution must be an equivalent amount of money. Essentially, restitution refers to the recapture of a benefit conferred on the defendant through which the defendant has been unjustly enriched.

IN THE COURTROOM Alima pays $10,000 to Milos in return for Milos’s promise to design a house for her. The next day Milos calls Alima and tells her that he has taken a position with a large architectural firm in another state and cannot design the house. Alima decides to hire another architect that afternoon. If Alima sues Milos for restitution, what can Alima recover? Alima can obtain restitution of $10,000, because an unjust benefit of $10,000 was conferred on Milos.

SPECIFIC PERFORMANCE The equitable remedy of specific performance calls for the performance of the act promised in the contract. This remedy is quite attractive to the nonbreaching party, because it provides the exact bargain promised in the contract. It also avoids some of the problems inherent in a suit for money damages. First, the nonbreaching party need not worry about collecting the judgment. Second, the nonbreaching party need not look around for another contract. Third, the actual performance may be more valuable than the monetary damages. Although the equitable remedy of specific performance is often preferable to other remedies, it is not granted unless the party’s legal remedy (monetary damages) is inadequate. EXAMPLE 16.13 Contracts for the sale of goods, such as wheat or corn, that are readily available on the market rarely qualify for specific performance. Damages ordinarily are adequate in such situations because substantially identical goods can be bought or sold in the market.• If the goods are unique, a court of equity will decree specific performance. EXAMPLE 16.14 Paintings, sculptures, or rare books or coins are so unique that damages will not enable a buyer to obtain substantially identical goods in the market.• The same principle applies to contracts relating to sales of land or interests in land—each parcel of land is unique. Courts of equity normally refuse to grant specific performance of personalservice contracts. Public policy strongly discourages involuntary servitude. Moreover, the courts do not want to monitor a personal-service contract. EXAMPLE 16.15 If you contract with a brain surgeon to perform brain surgery on you, and the surgeon refuses to perform, the court would not compel (and you certainly would not want) the surgeon to perform under these circumstances. There is no way the court can ensure meaningful performance in such a situation.•

Recover y Based on Quasi Contract In some situations, when no actual contract exists, a court may step in to prevent one party from being unjustly enriched at the expense of another party. As discussed in Chapter 8, quasi contract is a legal theory under which an obligation is imposed in the absence of an agreement. The courts can also use this theory when the parties entered into a contract, but it is unenforceable for some reason. EXAMPLE 16.16 Ericson contracts to build two oil derricks for Petro Industries. The derricks are to be built over a period of three years, but the parties do not create a written contract. Therefore,

specific performance An equitable remedy requiring exactly the performance that was specified in a contract. Usually granted only when money damages would be an inadequate remedy and the subject matter of the contract is unique (for example, real property). LO5 Explain the remedy of specific performance.

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the Statute of Frauds (see Chapter 14) will bar the enforcement of the contract. After Ericson completes one derrick, Petro Industries informs him that it will not pay for the derrick. Ericson can sue Petro Industries under the theory of quasi contract.• To recover on a quasi contract theory, a party must show the following: 1. The party conferred a benefit on the other party. 2. The party conferred the benefit with the reasonable expectation of being paid. 3. The party did not act as a volunteer in conferring the benefit. 4. The party receiving the benefit would be unjustly enriched by retaining the benefit without paying for it.

ANSWERING THE LEGAL PROBLEM In the legal problem set out at the beginning of this chapter, a contract specified Brand X plasterboard, but the builder substituted Brand Y, which is identical in quality and durability. Does this deviation from the contract constitute a breach? Can the buyers (the DeLeons) avoid the contract on this basis? Very likely, a court will hold that the builder has substantially performed her end of the bargain, and the buyers are therefore obligated to pay. What if the plasterboard substituted for Brand X had been inferior in quality, reducing the value of the house by $20,000? A court would likely hold that the contract had been substantially performed and the contract price should be paid, less the $20,000.

Linking the Law to Your Career: Per formance and Compromise In any career field, if you become a contractor, you may take on a job that you cannot or do not wish to perform. Simply walking away from the job and hoping for the best normally is not the most effective way to avoid litigation—it can be costly, time consuming, and emotionally draining. Instead, you should consider various options that may reduce the likelihood of litigation. Suppose that you are a building contractor and you sign a contract to build a home for the Andersons. Performance is to begin on June 15. On June 1, Central Enterprises offers you a position that will yield you two and a half times the amount of income you could earn as an independent builder. To take this new job, you would have to start on June 15.

Consider Your Options When You Cannot Perform What can you do in this situation? One option is to subcontract the work on the Andersons’ home to another builder and oversee the work to make sure it conforms to the contract. Another option is to negotiate with the Andersons for a release. You can offer to find another contractor who will build a house of the same quality at the same price. Or, you can offer to pay any additional costs if another builder takes the job but is more expensive. In any event, this additional cost would be one measure of damages that a court would impose on you if the Andersons prevailed in a lawsuit for breach of contract (in addition to any costs the Andersons suffered as a result of the breach, such as costs due

to the delay in construction). Thus, by making the offer, you might be able to avoid the expense of litigation—if the Andersons accept. What to Consider When You Make an Offer Often, parties are reluctant to propose compromise settlements because they fear that what they say will be used against them in court if litigation ensues. Generally, offers for settlement will not be admitted in court to prove that you are liable for a breach of contract, but at times, they are admissible to prove that a party breached the duty of good faith. For this reason, the best course might be to work with your attorney in making an offer unless an insignificant amount of money is involved.

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Terms and Concepts for Review accord and satisfaction 199 breach of contract 196 commercial impracticability 200 compensatory damages 200 consequential damages 201 damages 200 discharge 196

impossibility of performance 199 liquidated damages 202 mitigation of damages 201 novation 198 penalty 202 performance 196 punitive damages 202

remedy 200 restitution 202 specific performance 203 statute of limitations 199 tender 196

Chapter Summary—Contract Discharge and Remedies LO1

Explain the difference between complete and substantial contractual performance. A contract may be discharged by complete (strict) per formance or by substantial per formance. Complete per formance takes place when conditions expressly stated in a contract fully occur in all aspects. Substantial per formance does not var y greatly from the per formance promised in a contract and must result in substantially the same benefits. If per formance is substantial, the other party’s duty to per form remains absolute (less damages for the deviation). Totally inadequate per formance constitutes a material breach of the contract—the other party is excused from per formance and can sue for damages caused by the breach.

LO2

Describe how parties can discharge their contract by agreement. Any contract can be discharged by an agreement of the parties. This may occur as part of the original contract, or the parties may form a new contract that expressly or impliedly discharges the original contract. Parties may also agree to discharge their contract by (1) rescission—cancelling their contract and returning to the positions they held before its formation; (2) novation—substituting a new party for one of the original parties and a new contract for the old one; or (3) accord and satisfaction— agreeing to accept per formance different from what was originally promised.

LO3

Identify different types of damages. Damages are designed to compensate a nonbreaching party for the loss of a bargain on the breach of a contract. Damages attempt to place the parties in the positions they would have occupied had the contract been per formed. Types of damages include the following: (1) Compensator y damages—Damages that compensate a nonbreaching party for injuries actually sustained from a breach and proved to have arisen directly from the loss of a bargain, which is the difference between the value of the promised per formance and the value of the actual per formance. (2) Consequential damages—Damages that result from special circumstances beyond a contract, which a breaching party knew or had reason to know would cause a nonbreaching party to incur an additional loss. (3) Punitive damages—Damages that punish a breaching party but that are normally awarded only in a case of willful or malicious misconduct involving a tort. (4) Liquidated damages—Damages that a contract specifies as the amount to be paid on its breach as a reasonable estimate of potential damages.

LO4

Define the remedy of rescission and restitution. Rescission is an action to cancel a contract and return the parties to the positions that they occupied before the transaction. It is a remedy available when fraud, mistake, duress, or failure of consideration is present. The rescinding party must give prompt notice to the breaching party. When a contract is rescinded, the parties must make restitution—return to each other the goods, property, or money previously conveyed.

LO5

Explain the remedy of specific performance. Specific per formance is an equitable remedy requiring the per formance of an act promised in a contract. It is available when monetar y damages would be an inadequate remedy and the subject matter of the contract is unique. It usually is not available as a remedy on the breach of a contract for personal ser vices.

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Issue Spotters 1. George contracts to build a storage shed for Ron. Ron pays George in full, but George completes only half the work. Ron pays Paula $500 to finish the shed. If Ron sues George, what would be the measure of recovery? 2. Amy contracts to sell her ranch to Mark, who is to take possession on June 1. Amy delays the transfer

until August 1. Mark incurs expenses in providing for cattle that he bought to stock the ranch. When they made the contract, Amy had no reason to know of the cattle. Is Amy liable for Mark’s expenses in providing for the cattle? Explain your answer.

Before the Test Check your answers to the Issue Spotters and, at the same time, take the interactive quiz for this chapter. Go to www.cengage.com/blaw/te and click on “Chapter 16.”

First, click on “Answers to Issue Spotters” to compare your answers. Next, select “Interactive Quiz” to assess your mastery of the concepts in this chapter.

Hypothetical Questions 16–1. Damages. Ken owns and operates a famous candy store and makes most of the candy sold in the store. Business is particularly heavy during the Christmas season. Ken contracts with Sweet, Inc., to purchase ten thousand pounds of sugar to be delivered on or before November 15. Ken has informed Sweet that this particular order is to be used for the Christmas season business. Because of problems at the refinery, the sugar is not tendered to Ken until December 10, at which time Ken refuses it as being too late. Ken has been unable to purchase the quantity of sugar needed to meet his Christmas orders and has had to turn down numerous regular customers, some of whom have indicated that they will purchase candy elsewhere in the future. What sugar Ken has been able to purchase has cost him 10 cents per pound more than the price contracted for with

Sweet. Ken sues Sweet for breach of contract, claiming as damages the higher price paid for sugar from others, lost profits from this year’s lost Christmas sales, future lost profits from customers who have indicated that they will discontinue doing business with him, and punitive damages for failure to meet the contracted delivery date. Sweet claims Ken is limited to compensatory damages only. Discuss who is correct, and why. 16–2. Impossibility of Performance. Millie contracted to sell Frank 1,000 bushels of corn to be grown on Millie’s farm. Owing to drought conditions during the growing season, Millie’s yield was much less than anticipated, and she could deliver only 250 bushels to Frank. Frank accepted the lesser amount but sued Millie for breach of contract. Can Millie defend successfully on the basis of objective impossibility of performance? Explain.

Real-World Case Problems 16–3. Quasi Contract. Middleton Motors, Inc., a struggling Ford dealership in Madison, Wisconsin, sought managerial and financial assistance from Lindquist Ford, Inc., a successful Ford dealership in Bettendorf, Iowa. While the two dealerships negotiated the terms for the services and a cash infusion, Lindquist sent Craig Miller, its general manager, to assume control of Middleton. After about a year, the parties had not agreed on the terms, Lindquist had not invested any money, Middleton had not made a profit, and Miller was fired by Middleton without being paid. Lindquist and Miller filed a suit in a federal district court against Middleton based on quasi contract, seeking to recover Miller’s pay for his time. What are the requirements to recover on a quasi-contract theory? Which of

these requirements is most likely to be disputed in this case? Why? [Lindquist Ford, Inc. v. Middleton Motors, Inc., 557 F.3d 469 (7th Cir. 2009)] 16–4. Breach of Contract. Roger Bannister was the director of technical and product development for Bemis Company. A covenant not to compete prohibited his working for a “conflicting organization” for eighteen months following his termination, but required Bemis to pay his salary if he was unable to find a job “consistent with his abilities and education.” Bemis terminated Bannister. Mondi Packaging, a Bemis competitor, told him that it would offer him a job but for the noncompete agreement. Bemis released Bannister from the agreement with respect to “all other companies than Mondi” and refused

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Contract Discharge and Remedies

to pay his salary. Nine months later, Bannister accepted a position with Bancroft Bag, Inc., another Bemis competitor. He filed a suit in a federal district court against

207 his former employer. Do these facts show a breach of contract? If so, what is the appropriate remedy? Explain. [Bannister v. Bemis Co., 556 F.3d 882 (8th Cir. 2009)]

Ethical Questions 16–5. Should the courts allow the defense of impossibility of performance to be be used more often? 16–6. Should liquidated damages clauses be enforced when no actual damages have been incurred? 16–7. Tamara Cohen, a real estate broker, began showing property in Manhattan to Steven Galistinos, who represented comedian Jerry Seinfeld and his wife, Jessica. Cohen spoke with Maximilian Sanchez, another broker, about a townhouse owned by Ray and Harriet Mayeri. On a Friday, Cohen showed the townhouse to Jessica. Later that day, Galistinos asked Cohen to arrange for the Seinfelds to see the premises again. Cohen replied that her religious beliefs prevented her from showing property on Friday evenings or Saturdays before sundown. She suggested the following week, but Galistinos said

that Jerry would not be available. Over the weekend, despite repeated attempts, the Seinfelds were unable to contact Cohen. They toured the building on their own and agreed to buy it. The contract between the Seinfelds and the Mayeris stated that the sellers would pay Sanchez’s fee and the “buyers will pay buyer’s real estate broker’s fees.” The Seinfelds refused to pay Cohen. She filed a suit in a New York state court against them, asserting breach of contract. Is Cohen entitled to payment even though she was not available when the Seinfelds wanted to see the townhouse? What obligation do parties in business deals owe to each other with respect to their religious beliefs? How might the situation in this case have been avoided? [Cohen v. Seinfeld, 15 Misc.3d 1118(A), 839 N.Y.S.2d 432 (Sup. 2007)]

Video Question 16–8. Go to this text’s Web site at www.cengage.com/ blaw/te, and select “Chapter 16.” Click on “Video Questions,” and view the video titled Midnight Run. Then answer the following questions. 1. In the video, Eddie (Joe Pantoliano) and Jack (Robert DeNiro) negotiate a contract for Jack to find The Duke, a mob accountant who embezzled funds, and

bring him back for trial. Assume that the contract is valid. If Jack breaches the contract by failing to bring in The Duke, what kinds of remedies, if any, can Eddie seek? Explain your answer. 2. Would the equitable remedy of specific performance be available to either Jack or Eddie in the event of a breach? Why or why not?