Chapter 18 Performance Remedies It is an immutable

Chapter 18 Performance & Remedies “It is an immutable law in business that words are words, explanations are explanations, promises are promises – but only performance is reality. ” Harold S. Geneen, CEO of ITT, Managing (co-written with Alvin Moscow, 1984)

Learning Objectives • Nature and types of conditions in contracts • Performance of contracts • Breach of contract • Excuses for non-performance • Remedies for breach of contract 18 - 2

Overview • Entering into a contract evidences an intention to perform (complete) obligations under the contract – Generally, each party performs the promise and is discharged (released) from further obligation • If a party fails to perform as expected, courts may be asked to determine the respective rights and duties of the 18 - 3

Conditions in a Contract • Sometimes a promisor’s duty to perform depends on the occurrence of some event or condition, an uncertain, future event • A condition may be classified as a: – Condition precedent – Condition subsesequent – Condition concurrent 18 - 4

Condition Precedent • A future, uncertain event creating a duty to perform – Example: Tisha contracts to buy a house on the condition she is able to obtain financing. The contract arises and she is obligated to purchase the house once she obtains financing 18 - 5

Condition Concurrent • When the contract calls for parties to perform at the same time – Example: Bryan promises to buy Stevie’s guitar for $1000. Stevie must give Bryan the guitar when Bryan gives Stevie $1000. 18 - 6

Condition Subsequent • A future, uncertain event that discharges the duty to perform – Example: Lee agrees to work for Wool. Co until he returns to college. Lee returns to college in August and discharges his obligation under the contract. 18 - 7

Excuse of Conditions • Occurrence of a condition may be excused – When occurrence of condition was prevented or hindered by party benefiting from the condition – Waiver: when a person whose duty is conditional voluntarily gives up his right to the occurrence of the condition – Estoppel: when a person whose duty is conditional leads other party to rely on his noninsistence on the condition 18 - 8

Silvestri v. Optus Software • Facts: – Silvestri was hired under two-year employment contract with “satisfaction clause” reserving right to terminate employment for “failure [to perform] duties… to the satisfaction” of the company – Silvestri pleased the CEO for six months, but complaints against Silvestri began to increase – Three months later, the CEO fired Silvestri 18 - 9 – Silvestri filed suit claiming the dissatisfaction

Silvestri v. Optus Software • Procedural History and Legal Reasoning: – Trial court found for Optus – Appellate court reversed in favor of Silvestri – Issue: whether the employer’s satisfaction is subject to an objective or subjective evaluation – A subjective standard typically is applied to satisfaction clauses in employment contracts 18 - 10– In a satisfaction clause employment setting,

Silvestri v. Optus Software • Holding: – Company supplied objective evidence of genuine dissatisfaction with Silvestri’s performance – Thus, applying the test of genuineness, and not reasonableness, we conclude that Silvestri has not demonstrated that a dispute exists requiring submission of the matter to jury trial – Reversed in favor of Optus 18 - 11

Performance of Contracts • To determine whether a promisor is discharged by performance, courts consider the standard of performance expected • A strict performance standard requires full or perfect compliance with the contract terms – Example: Buyer agrees to finalize a home purchase (close) by 5: 00 pm on Nov. 21. If Buyer 18 - 12 does not close by that time, the contract ends.

Performance of Contracts • A substantial performance standard is slightly lower standard applied to duties that are difficult to perform without some deviation from perfection in minor respects – Example: Bob Builder built a home for Jason. Bob met the contract terms except he didn’t paint the baseboards the right shade of white. Bob is discharged and 18 - 13 Jason has the duty to pay the contract

Substantial Performance 18 - 14

Breach of Contract • Under the implied covenant of good faith and fair dealing, every contract includes an obligation to perform in good faith • If a promisor fails to perform, breach occurs • At minimum, breach of contract gives the non-breaching party the 18 - 15 right to sue and recover for

Determining Materiality • Standard for determining materiality is flexible, but generally based on the amount of the breach and timing for performance – Example: if contract contains a “time is of the essence” provision, any delay by either party may constitute a material breach – Example: if time for performance immaterial, promisee must accept late 18 - 16 performance if within reasonable time after

Arnhold v. Ocean Atlantic Woodland Corp. • Facts: – Sellers agreed to sell farmland to developer Ocean Atlantic (Buyer), but delays and extensions ensued – After more negotiation and litigation, Sellers and Buyer signed a settlement agreement containing a “time is of the essence” clause (basis of the lawsuit) – Shortly before the closing date, Buyers again tried to extend the contract and Sellers 18 - 17 refused, warning that “time is of the essence”

Arnhold v. Ocean Atlantic Woodland Corp. • Procedural History and Issue: – Buyers sued Sellers seeking specific performance – Trial court found for Sellers and Buyers appealed – Issue: whether Buyers materially breached the agreement by failing to tender the purchase funds and close on the property on the specified date 18 - 18

Arnhold v. Ocean Atlantic Woodland Corp. • Legal Reasoning and Holding: – The materiality inquiry focuses on two interrelated issues: (1) the intent of the parties with respect to the disputed provision; and (2) the equitable factors and circumstances surrounding the breach of the provision – Intent of the parties was clear – time was of the essence and timing was material 18 - 19

Arnhold v. Ocean Atlantic Woodland Corp. • Legal Reasoning and Holding: – In examining the totality of the circumstances, the facts do not support Buyer’s argument • “Sellers displayed the patience of Job by waiting nearly 3 1⁄2 years” – Buyer treated material deadlines as trivial, thus Buyer has lost any right to purchase Sellers’ land – Affirmed in favor of Sellers 18 - 20

Anticipatory Breach • When the promisor indicates before time for performance that promisor is unwilling or unable to carry out the contract, anticipatory repudiation or anticipatory breach occurs • The promisee has choices: – Withhold his/her own performance and sue for damages for total breach of contract immediately 18 - 21 – Wait to sue until time for performance in case

Excuses for Non-Performance • Nonperformance of a duty generally is a breach of contract, but nonperformance may be excused in certain circumstances: – Impossibility: “it cannot be done by anyone” • See Bush v. Pro. Travel International, Inc. – Impracticability: when unforeseen developments make performance highly impracticable, unreasonably expensive, or of 18 - 22 little value to promisee (UCC 2– 615)

Other Reasons for Discharge • Discharge by mutual agreement • Accord and satisfaction – Accord is an agreement in which a promisee who has existing claim agrees with promisor that s/he will accept some performance different from that originally agreed on. When promisor performs the accord, that is called a satisfaction. • Discharge by waiver of promisee 18 - 23

Other Reasons for Discharge • Discharge by alteration – One party alters and other does not consent • Discharge by statute of limitations – One party takes too long to bring lawsuit – UCC 2– 725: four-year statute of limitations for contracts involving the sale of goods • Discharge by decree of bankruptcy 18 - 24

Remedies for Breach of Contract • Legal remedies (money damages) – Compensatory damages, nominal damages, liquidated (contractual) damages, and in certain circumstances, punitive damages • Equitable remedies – Specific performance or injunction • Restitution 18 - 25