dynamic business law essentials 3e 2016 chapter 14

Chapter 14
Discharge and Remedies

© 2013 The McGraw-Hill Companies, Inc. All rights reserved.

Copyright © 2016 McGraw-Hill Education.  All rights reserved.

1


Chapter 14 Case Hypothetical and Ethical Dilemma
K. K. Legume, Incorporated is a reputable and popular sweater manufacturer. Based upon Legume’s
reputation and popularity, Arrow Stores, L. L. C. enters into a contract with Legume. The contract is a
“requirements” contract, stipulating that Arrow will purchase whatever number of “Arctic Ice” brand
100% wool sweaters it needs for a one-year period, at a “per-unit” price of $12.00.
Two developments result in litigation between Legume and Arrow. First, due to an unanticipated
sheep shortage, with substantially fewer sheep to shear, the price of wool skyrockets 1,000 percent.
Second, due to an unexpected “cold snap,” consumer demand for wool sweaters increases
dramatically, resulting in a 500% increase in Arrow’s wool sweater orders to Legume, compared to
order averages over the previous ten years (the parties have a long-standing business relationship.)
Legume implores Arrow to increase its per-unit purchase price to $36.00, but Arrow refuses to modify
the price term stipulated in the contract. When Arrow refuses to pay a higher price for the sweaters,
Legume ceases delivery, claiming that it would be bankrupted by continuing to fill Arrow orders;
further, Legume claims that based upon the longstanding business relationship between the parties,
Arrow has at least an ethical obligation to pay a higher price.
Who wins? Does Arrow have an ethical obligation to pay a higher price, based upon such an
unanticipated change in circumstances?

© 2013 The McGraw-Hill Companies, Inc. All rights reserved.

2

Chapter 14 Case Hypothetical
Hillman Brothers Construction, Inc. agreed to build a home for Maggie Sykes. The total contract
price for the home is $325,000. The home is complete in all respects except for the fact that shutters
have not been installed on the windows. The contract between the parties stipulated that Hillman
Brothers would install shutters on each window.
The day before the “closing” on the home’s purchase, Maggie noticed that Hillman Brothers had not
installed the shutters. She then called the owner, president and chief executive officer of the
company, Andrew Hillman, and a heated argument between the two ensued (Maggie is well-known
for her “anger management” issues, and she becomes especially angry when her requests as a
buyer are not met.) The conversation ended with Andrew proclaiming that “Hades would freeze over”
before he had his construction crew install the shutters, and with Maggie asserting that the “deal is
off.” Hillman Brothers expects to be paid the full contract price, $325,000, for the home, based on the
fact that “irreconcilable differences” between the parties make it impossible for the company to install
the shutters, and since Maggie’s incorrigible personality caused the impassible chasm between them.
For total “parts and labor,” it would cost $5,750 to install the shutters.
Is Maggie Sykes obligated to purchase the house? If so, is she obligated to pay the full contract price
of $325,000? Is Hillman Brothers Construction, Inc. required to install the shutters?

© 2013 The McGraw-Hill Companies, Inc. All rights reserved.

3


Circumstances Resulting in
Discharge of Contract
•Performance
•Happening of condition or its failure to occur
•Material breach by one/both parties

•Mutual Agreement
•Operation of law
© 2013 The McGraw-Hill Companies, Inc. All rights reserved.

4


Types of Conditions
•Condition Precedent: Particular event that
must occur for a party’s duty to arise
•Condition Subsequent: Future event that
terminates obligations of parties when it
occurs
•Concurrent Conditions: Each party’s
performance conditioned on simultaneous
performance of the other
© 2013 The McGraw-Hill Companies, Inc. All rights reserved.

5


Types of Conditions (Continued)
•Express Condition: Condition explicitly state
in contract (usually preceded by words such
as “conditioned on”, “if”, “provided that”, or
“when”)
•Implied Condition: Condition not explicitly
stated, but inferred from nature and language
of contract

© 2013 The McGraw-Hill Companies, Inc. All rights reserved.

6


Tender
Definition: An offer of performance;
making an offer to perform and being
ready, willing and able to perform

© 2013 The McGraw-Hill Companies, Inc. All rights reserved.

7


Types of Performance
•Complete Performance: Occurs when all
aspects of parties’ duties under contract are
carried out perfectly
•Substantial Performance: Occurs when:
-Completion of “nearly all” terms of
agreement;
-Honest effort to complete all terms; and
-No “willful departure” from terms of
agreement
© 2013 The McGraw-Hill Companies, Inc. All rights reserved.

8

Discharge By Material Breach
•Occurs when party unjustifiably fails to
substantially perform his/her contractual
obligations
•Discharges non-breaching party from
his/her contractual obligations

© 2013 The McGraw-Hill Companies, Inc. All rights reserved.

9


Anticipatory Repudiation
•Definition: Party decides, before the actual
time of performance, not to complete contract
obligations
•Often occurs when market conditions change
and one party realizes it will not be profitable
to fulfill terms of contract

© 2013 The McGraw-Hill Companies, Inc. All rights reserved.

10


Anticipatory Repudiation
(Continued)
•Can occur either through express indication of
intent not to perform, or action inconsistent with
ability to carry out contract obligations when

performance due
•Once contract anticipatorily repudiated, nonbreaching party discharged from obligations under
contract, and can sue immediately for breach

© 2013 The McGraw-Hill Companies, Inc. All rights reserved.

11


Discharge By Mutual Agreement
•Mutual Rescission: Both parties agree to discharge
each other from their mutual obligations
•Substituted Contract: Parties agree to substitute new
contract in place of original contract
•Accord and Satisfaction: Used when one party
wishes to substitute a different performance for his/her
original contractual duty
-“Accord”: Promise to perform new duty
-“Satisfaction”: Actual performance of new duty
-Party’s duty under contract not discharged until
new duty performed
© 2013 The McGraw-Hill Companies, Inc. All rights reserved.

12


Discharge By Mutual Agreement
(Continued)
•Novation: Parties to contract wish to replace one
of the parties with a third party

•“Novation” is the substitution of a party
•Original duties remain same under contract,
but one party discharged, and third party
takes original party’s place
•All three parties must agree to the novation
for it to be valid
© 2013 The McGraw-Hill Companies, Inc. All rights reserved.

13


Discharge By Operation of Law
•Alteration of Contract
•Bankruptcy
•Tolling of statute of limitations
•Impossibility of performance
•Commercial Impracticability
•Frustration of Purpose

© 2013 The McGraw-Hill Companies, Inc. All rights reserved.

14


Legal Remedies (Monetary Damages) For Breach
of Contract
•Compensatory Damages: Damages designed to put plaintiff
in position he would have been in had contract been fully
performed
•Consequential (Special) Damages: Foreseeable damages

that result from special facts and circumstances arising
outside contract itself. These damages must be within
contemplation of parties at time breach occurs
•Punitive Damages: Damages designed to punish defendant
and deter him and others from engaging in similar behavior in
the future
-Primary factor in determining amount of punitive
damages is amount necessary to “punish” defendant
-Amount of punitive damages depends on factors such
as wealth and income of defendant
© 2013 The McGraw-Hill Companies, Inc. All rights reserved.

15


Legal Remedies (Monetary Damages) For
Breach of Contract
•Nominal Damages: Award (typically for only
$1 or $5) intended to signify that although no
actual damages resulted from defendant’s
breach of contract, plaintiff wronged by
defendant
•Liquidated Damages: Damages for breach
of contract specified in the contract itself
(either as fixed amount, or as formula for
determining money due)
© 2013 The McGraw-Hill Companies, Inc. All rights reserved.

16

Duty to Mitigate Damages
Definition: Obligation on non-breaching
party (plaintiff) to use reasonable efforts to
minimize damage resulting from
defendant’s breach of contract

© 2013 The McGraw-Hill Companies, Inc. All rights reserved.

17


Equitable Remedies For Breach of
Contract
•Rescission: Termination of contract
•Restitution: Return of any property transferred
under contract
•Specific Performance (Specific Enforcement):
Order requiring breaching party to fulfill
obligations under contract. Usually awarded only
when monetary damages inadequate, and subject
matter of contract unique (Example: Contract for
sale of real estate)
© 2013 The McGraw-Hill Companies, Inc. All rights reserved.

18


Equitable Remedies For Breach of
Contract (Continued)

•Injunction: Order forcing person to do
something, or prohibiting person from doing
something (usually a prohibition against certain
actions)
•Reformation: Contract rewritten to reflect parties’
actual agreement
•Quasi-Contract: “Contract-like” obligation
imposed on party to prevent “unjust enrichment”
© 2013 The McGraw-Hill Companies, Inc. All rights reserved.

19


Elements Necessary to Recognize
Quasi-Contractual Recovery
•Plaintiff conferred benefit on defendant
•Plaintiff reasonably expected to be
compensated for benefit conferred on
defendant
•Defendant would be “unjustly enriched” from
receiving benefit without compensating
plaintiff
© 2013 The McGraw-Hill Companies, Inc. All rights reserved.

20