Chapter Twelve | Performance And Discharge

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Most contractual relations will be terminated or ended according to the provisions or terms of the agreement, i.e., by performance of the parties. However, some contracts will be terminated or ended by certain acts of the parties, by operation of law, by impossibility of performance (an issue discussed previously in the chapter on consideration), mutual rescission or agreement of the parties, or through some legally recognized excuse.

When payment of money is called for in a contract, the contract will be completed by the payment of money. If a check is tendered by a debtor or by a purchaser, the payment by the check is a conditional payment and the underlying obligation is not discharged until the check is actually “paid” or honored by the bank. Unless the agreement stipulates otherwise, a creditor can refuse to accept a check because technically a check is not legal tender. Rather, a check is a substitute for money. [See UCC §2 511.]  If payment is only to be accepted in cash or in some other form (for example, a barter transaction), this should be clearly stated in the contract.

A tender is defined as an “unconditional offer of a debtor to pay to the creditor the exact amount due on the date due.”

If a creditor refuses to accept a tender by the debtor, the debt is not discharged, but the refusal to accept the tender stops the running of any interest charges, may lift any liens filed against property held by the debtor, and may also prevent charging court costs and attorney’s fees to the debtor in the event a suit is filed.

Time For Performance

Where a time of performance is stated in the contract and the time is clear and unambiguous, performance must be made on or before that date.

When no time is specified in the contract, a party has a reasonable time to perform. Where the nature of the contract is such that time is not an important factor, reasonable delay may be permitted by a court.

Where a clause in a contract expressly states “time is of the essence” or the nature of the contract itself is such that time is obviously an important factor (construction contracts or contracts for purchase or sale of perishable goods), the failure to perform on time may be actionable as a breach and may under certain circumstances permit a party to rescind a contract, cancel a contract, seek a substitute performance, seek the remedy of cover or resale, or seek monetary damages.

The Doctrines Of Material Breach And Substantial Performance

When a party fails to perform a promise according to its terms, it is important to determine if the breach is material. If the breach is material, the aggrieved party may sue for “total breach” and the aggrieved party may have the power to cancel the contract. If the breach is not material, the aggrieved party may sue for “partial breach,” but may not cancel the contract. While the rules may seem clear, there is no simple test to determine whether the breach is material. Materiality is ordinarily a question of fact for a jury. Among the factors to be considered are:

  1. To what extent, if any, the contract has been performed at the time of the breach. “A breach which occurs at the very beginning [of a contract] is more likely to be deemed material even if it is relatively small.” (Note, 21 Colum. L. Rev. 358 (1921)).
  2. A willful breach is more likely to be considered as material than a breach caused by negligence or other circumstances.
  3. A quantitatively serious breach is more likely to be considered material.

It is recognized that full performance is required in most cases to discharge a contractual obligation. It is also recognized that some agreements (for example, certain construction contracts) are quite complex. In such cases, a court may apply the doctrine of substantial performance to determine if a breach has occurred. This doctrine permits recovery where there has been substantial performance, subject to an offset (deduction) for a nominal, trifling, or technical breach, or a departure from the strict letter of the contract. In order to apply the substantial performance doctrine, the part of the contract that is unperformed must not destroy the value or the purpose of the contract and the doctrine does not apply where the breach is willful or intentional. 

Performance Subject To The Standard Of Satisfaction

When one party to an agreement contracts to “personally satisfy” the promisee, courts will apply one of two tests, depending on the nature of the contract:

When a contract involves personal taste, skill or fancy, the promisee has, in effect, the final word and may reject a performance, even if it is alleged that such a rejection is subjectively arbitrary or capricious. However, most courts will require at least a “good faith” standard in the rejection; that is, a court will require an “honest or good faith reason” for the rejection. The interesting case of former Secretary of State Henry Kissinger and his rejection of an official portrait on ground that he “just didn’t like it” provides an application of this rule. 

Where the subject matter of the contract concerns matters that are not purely personal in nature, the courts will apply an objective standard; that is, if a reasonable person would be satisfied with the performance, the promisor may be permitted to recover under the terms of the contract. This issue would be one for a jury to determine.

Example

A manufacturer of pre-fabricated housing offers the following statement:  “All windows, doors, and other parts of the home all made to your satisfaction.”

In this case, most courts would apply the objective or reasonable person standard to judge a rejection of the items described in the contract.Contracts may also contain a provision that completion of the contract “depends upon the satisfaction of a third party” (an architect, a building inspector, an appraiser, etc.). In such a case, the court would apply an objective test and might permit recovery of amounts due under the contract if the court determines that the certificate of approval is unnecessary, or was withheld due to “bad faith,” fraud, mistake, or gross error on the part of the third party.

Read the Plante case. What standard did the court apply?  Note especially the measure of damages.

 

Case Study

Plante v. Jacobs

Supreme Court Of Wisconsin, 10 WIS. 2D 567, 103 N.W. 2D 296 (1960)

Overview

The Jacobs’ entered into a written contract with the plaintiff, Plante, to furnish the materials and to construct a house on their lot, in accordance with plans and specifications, for a sum of $26,756. During the course of construction, the plaintiff was paid $20,000. Disputes arose between the parties concerning the work being done. The Jacobs refused to continue paying. The plaintiff did not complete the house. The trial court found that the contract was substantially performed. The Jacobs were told to pay $4,152.90 plus interest and court costs.

Outcome

The appellate court upheld the trial court’s judgment. Although there were some twenty items of incomplete or faulty performance by the builder, none of these was made the essence of the contract. Therefore the court held that substantial performance was evident. The court held, however, that the correct rule for determining damages due to faulty construction amounting to incomplete performance “is the difference between the value of the house as it stands with faulty and incomplete construction, and the value of the house if it had been constructed in strict accordance with the plans and specifications. This is the diminished value rule.”

What standard did the court apply in the Plante case? Note especially the measure of damages.

Discharge By Acts Of The Parties (Conditions)

The legal distinction between a covenant and a condition is very important. A covenant is a promise and determines what must be performed in order to discharge a contractual duty. Conditions determine when and if a duty must be performed at peril of breach of contract. The failure of a promisor to perform a covenant may be a breach of contract. If circumstances arise which leave a condition unsatisfied, the legal consequence is that the dependent promise does not become a matter of any contractual duty. Failure to satisfy a condition, on the other hand, is never a breach of contract. 

Many contracts contain conditions, either express or implied, that control performance. A condition is traditionally defined as an act or an event, other than a lapse of time, which affects a duty to render a promised performance. These conditions are termed concurrent, precedent, or subsequent.

Concurrent conditions are those conditions that require that the performance of both parties take place at the same time. Thus, neither party can demand that the other party perform first. Most bilateral contracts contain concurrent conditions (i.e., the sale of goods, which requires both payment and delivery to occur simultaneously; or a real estate transaction where the buyer tenders the money and the seller tenders the deed).

A condition precedent is an act, an event, circumstance, or contingency that must occur according to the express or implied terms of the agreement or be satisfied or excused before a duty of performance is required under a contract. A non-technical formulation of a condition precedent might be: “I am not liable to perform this promise unless _______________.”  In the case of a unilateral contract, Smith’s performance is a condition precedent to Jones’ duty of payment. As an example, an insurance policy may require that an insured driver must give notice of a loss within a certain specified period after the occurrence of the loss. Failure to provide the insurance carrier with the required notice may permit the insurer to deny liability or coverage. A second example occurs in many real estate contracts: “This contract is contingent upon the buyer securing a suitable mortgage….”

A condition subsequent is any fact, the existence or occurrence of which by agreement of the parties, operates to discharge or terminate an existing duty of performance. For example, a contract may provide that a party will be released from “any and all obligations” upon the happening of a certain event  (for example, “if interest rates rise to 10% or more by June 1, 2012, the borrower may withdraw from this transaction”). A simple example can be found in the following: “I am liable to perform this promise until or unless __________ [a factual circumstance will be inserted].”

Parties to a contract may mutually agree to terminate or rescind an agreement and place each other in their original positions. The surrender of rights under the original agreement by each party is the consideration for the mutual agreement of rescission. It should be noted that the mutual rescission of a contract to sell or buy land would be required to be in writing under the Statute of Frauds.

Other Acts Of Termination

Novation

The abandoning of a prior contract and substituting a new contract in its place is termed a novation. A novation is accomplished by an agreement to discharge a previous contractual duty or to release the party who was originally bound to a contract and substitute a new party who agrees to undertake performance and to be bound by the contract. A novation may never be presumed (even from the passage of a significant amount of time) and must always be affirmatively proven by the party who is claiming a release from a prior contract. If the original contract was required to be in writing under the Statute of Frauds, so too must the novation be in writing. This is sometimes called the “equal dignity” doctrine. 

Accord And Satisfaction

An accord is an agreement to substitute performance in satisfaction of an original debt or obligation. When the agreement is executed and satisfaction has been made, it is called an accord and satisfaction (discussed earlier in the case of A. G. King Tree Surgeons v. Deeb).

Anticipatory Breach

At common law, a breach of contract could not occur until the time for performance had arrived. However, since the English case of Hochester v. DeLaTour (1853), courts have recognized that a total breach of a contract may occur if a party unequivocally repudiates the contract—even prior to the date stipulated in the contract. A repudiation is a “positive statement to the promisee or other person having a right under the contract, indicating that the promisor will not or cannot substantially perform his contractual duties.”  (Martin v. Kavanewsky, 157 Conn. 514 (1969)).

The facts of Hochester v. DeLaTour (118 Eng. Rep. 922 (1853)) are illuminating. In April of 1852, the plaintiff and defendant entered into a contract under which the plaintiff was to work for a fixed period of time commencing on June 1, 1852. On May 11, 1852, the defendant stated he would not perform. The plaintiff filed suit for breach of contract. The defendant contended that no breach could occur until the time for performance (June 1, 1852) had arrived. The court disagreed and in so doing created the doctrine of anticipatory breach.

Under the common law, when an anticipatory breach occurs, the aggrieved party has the right to elect between two remedies. An aggrieved party may:

  • Wait until the time for performance and sue for the actual breach; or 
  • Treat the repudiation as an anticipatory breach and sue immediately.

The UCC incorporated the common law rule concerning anticipatory repudiation in UCC §2-610. The UCC notes that the aggrieved party may “for a commercially reasonable time await performance by the repudiating party” or “may immediately resort to any remedy for breach.”  As we will see in the discussion on sales, the Code also provides that when reasonable grounds for insecurity arise, a party may demand “adequate assurances of performance,” and in the interim, may suspend his performance until he receives such assurances. (UCC §2-609). The Code further provides that 

“After receipt of a justified demand, failure to provide within a reasonable time not exceeding thirty days such assurance of due performance as is adequate under the circumstances of the particular case is a repudiation of the contract.”  Grounds for insecurity will be judged according to “reasonable commercial standards” of “good faith” and “honesty in fact.”

Operation Of Law

A contract may be discharged by operation of law when a statute has made the subject matter of the agreement unlawful, where the contract is judged to be in a violation of public policy, or where a statute may excuse performance. Chapter 12 discusses the area of the legality of the subject matter of a contract.

For example, a discharge in bankruptcy is the result of a proceeding in which the debtor is released from an obligation to pay a debt. By law, the discharge, properly granted, terminates the obligation to pay the debt.

Impossibility

Review the materials presented earlier on the termination of offers relating to objective and subjective impossibility. Here is another “dance lesson” case. It is far less dramatic than the Vokes case! 

 

Case Summary

Parker v. Arthur Murray, Inc.

Appellate Court Of Illinois, 2D Div., 1St Dis.

10 Ill. App. 3D 1000, 295 N.E. 2D  487 (1973)

BACKGROUND AND FACTS

Plaintiff Parker, a thirty seven year old college educated bachelor who lived alone, contracted over two years for a total of 2,734 hours of dance lessons for which he had paid $24,812.80. Each contract, and each extension, contained the same boldface words, “NON CANCELABLE CONTRACT,” and some included a statement that no refunds would be made. Parker was seriously injured in an automobile accident and rendered incapable of continuing his dance lessons. Parker sued Arthur Murray to recover money paid for unused lessons.

DECISION AND RATIONALE

The trial court’s ruling that impossibility of performance was grounds for rescission was upheld, and despite the contract provisions Parker was allowed to recover the prepaid sums of money for unused lessons. The appellate court held that the plaintiff never contemplated waiving the right to invoke the doctrine of impossibility of performance. “Although neither party to a contract should be relieved from performance on the ground that good business judgment was lacking, a court will not place upon language a ridiculous construction. We conclude that plaintiff did not waive his right to assert the doctrine of impossibility.”

The modern doctrine of impossibility can be traced to the 1863 case of Taylor v. Caldwell (122 Eng. Rep. 309 (K.B. 1863). In this case, the defendant had promised to allow the plaintiff to use his music hall for giving concerts. Prior to the time of performance, a fire destroyed the music hall. The English court held that the defendant was excused from performance and that his failure to perform did not constitute a breach of contract. Since this case, American courts have held that objective impossibility is an excuse for non-performance of a contract where there has been a destruction, material deterioration, or unavailability of the subject matter or means of performance of the contract through no fault of a party seeking the excuse. In some cases, a court will require the parties to have contemplated a particular source of supply or the condition when the parties entered into an agreement.

It is interesting to note that the principle of impossibility is well illustrated by a number of cases involving the closing of the Suez Canal in 1956 and in 1967. (See 23 Rutgers L. Rev. 41 (1969). Because a substitute route around Africa was available, the court held that canal closings neither excused performance nor were grounds for the recovery of additional compensation under the theory of unforeseen difficulties. 

Finally, the Restatement, Section 281, basically mirrors Section 2-615 of the Uniform Commercial Code and has introduced the concept of “commercial impracticability” into the discussion. It suggests that increases in costs “well beyond the normal range” that create “extreme and unreasonable difficulty” or “expense” could trigger the application of the doctrine of commercial impracticability, thus excusing performance or permitting a party to seek additional consideration.

Ethical Considerations

Time Is Of The Essence

Contracts frequently contain a “time is of the essence” clause. Are there any circumstances where a court should ignore such a clause and refuse to enforce it?

Debt Discharge

Sonny owes his Dad $10,000. One night, Sonny offers his Dad $5,000 to completely settle the debt and Dad accepts this offer. Later, Dad brings suit against Sonny for the remaining $5,000. Should Dad’s acceptance of the $5,000 discharge Sonny’s debt?

 

Questions

  1. Explain the doctrine of substantial performance.
  2. How do courts address performance subject to the satisfaction of one of the parties?
  3. Many contracts contain conditions. Explain conditions concurrent, precedent, or subsequent.
  4. What are the requirements for the creation of a novation?
  5. What is required to create an accord and satisfaction (refer to A.G. King Tree Surgeons v. Deeb)?
  6. In the case of anticipatory breach of contract, an aggrieved party may select from which two options?
  7. Explain how the doctrine of impossibility was applied in Parker v. Arthur Murray, Inc.

 

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