Performance and Breach -Module 5 of 5

Performance and Breach -Module 5 of 5


Module 5: Performance and Breach

 

            In this module, we will look at performance under a contract and conditional promises. We will also consider defenses to performance such as impossibility, impracticability, and frustration of purpose. Lastly, we will consider available remedies when one party breaches a contract.


Conditions

            Sometimes contractual promises may be conditional. A condition “is an event, not certain to occur, which must occur, unless its non-occurrence is excused, before performance under a contract becomes due.”[1]        An express condition is one that is explicitly stated in the agreement. An implied condition is one that arises by implication based on the nature of the transaction or conduct by the parties.

            A condition precedent is a fact or event which must exist or take place before there can be a duty to perform. If the condition does not occur, a party is not obligated to perform. Non-occurrence of the condition is not a breach of contract.[2] For example, if a party agrees to purchase a home on the condition that he successfully secures a mortgage with certain provisions, if the party is then unable to secure the mortgage, the purchase promise is not binding. Obtaining the mortgage is a condition precedent to duty to pay for the house.[3] 

A condition concurrent is when two conditions occur simultaneously with one another. Each party’s promise is conditional on the other party’s simultaneous performance. For example, two parties can agree that payment for goods and delivery of goods are due at the same time. In such a case, each party’s duty is contingent on the other party’s being “ready, willing and able” to perform at that time. 

            A condition subsequent is a condition that occurs after performance has begun. Once a condition subsequent is satisfied there is no longer a duty to perform. For example, a party may contract with a bank to make mortgage payments until the house is paid off in full. Once the party pays off the bank in full – fulfilling the condition subsequent – there is no longer an obligation to make further payments. 

            A court can excuse the non-occurrence of a condition when necessary to prevent injustice, though a court is much less likely to excuse a condition if it was an important part of the negotiating process.[4] The parties can also waive the requirement of a condition by language or conduct. 


Material Breach

            A breach occurs when a party fails to carry out a contractual duty in the time limitations imposed by the agreement (or a reasonable time if there is none called for by the agreement). The other party may suspend performance if there has been a material breach. If, on the other hand, the breaching a party has substantially performed under the agreement and has committed only a minor, or non-material, breach, the other party must perform and can later sue for damages caused by the breach or deduct damages from her payment, if applicable.

A court will consider several factors to determine whether there is a material breach, including: 

  • The extent to which the injured party will be deprived of the benefit which he reasonably expected;
  • The extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived;
  • The likelihood that the party failing to perform can or will be able to cure his failure, taking account of all the circumstances including any reasonable assurances;
  • The extent to which the behavior of the party failing to perform comports with standards of good faith and fair dealing.[5] 

Under the Uniform Commercial Code, the rule of substantial performance does not apply. Rather, both parties are subject to the perfect tender rule. Under the perfect tender rule, each party must meet the requirements for delivery, date, quantity, and quality as required by the contract. If a party does not meet all the requirements under the contract, the other party may suspend performance and recover damages.[6] 


Impossibility, Impracticability, and Frustration of Purpose

Impossibility, impracticability or frustration of purpose can excuse a party from performance. These normally apply in three situations:

           

·         Death or incapacity of a person necessary to performance;

·         Destruction of something necessary for performance; or

·         Prohibition or prevention by law.

 

A party may be excused from performance if performance has become impossible. Performance may become impossible if the property involved in the contract has been destroyed by natural forces, such as a tornado or fire.

            A contract becomes impracticable when it becomes unreasonably difficult due to additional expense, injury or loss to one of the parties involved. A contract is not impracticable simply because of an increase in wages, raw materials, or cost alone unless it is well beyond the normal range. Furthermore, a party is required to take reasonable efforts to perform despite these difficulties.[7] For example, say that Brian contracts with Christopher to purchase raw materials from overseas. Subsequently, a war breaks out and Russia threatens to shoot any vessels delivering raw materials to the United States. Christopher will likely be discharged from performance because it has now become impracticable because of the war.[8]

Frustration of purpose occurs when there is a change in circumstances that makes one party’s performance essentially worthless to the other party thereby frustrating the purpose of the contract.[9] This purpose must have been a basic assumption of both parties at the time of contracting. For example, say Julie rented a room in her friend’s house to host a viewing party of the royal wedding. Julie rented her friend’s room because it is across from the chapel where the royal wedding will take place. The bride becomes sick on the day of the wedding and the couple postpones the wedding indefinitely. On the day of performance, Julie is not obligated to rent the room because she is discharged from performance on the grounds of frustration of purpose.[10] 


Contract Remedies

Remedies for breach of contract are typically monetary and designed to compensate the victim of the breach for the damages suffered because of it. The party claiming a breach of contract has the burden to prove damages with reasonable certainty.[11] Damages cannot be speculative, possible, or imaginary. Rather, damages “must be reasonably certain and directly traceable to the breach, not remote or the result of intervening causes.”  Furthermore, damages must have been contemplated by the parties at the time the contract was made.[12]

The Restatement of Contracts lists different types of breach of contract damages.

Expectation damages are designed to give the non-breaching party “the benefit of his bargain” by putting him in the same position that he would have been in had the contract been performed properly. For example, assume that Samantha contracts with Alyssa to pay $500.00 for five hundred apples, which she will then be able to sell for $1,000.00. Alyssa never delivers the apples. Samantha’s expectation interest is $500.00. This is the amount of money Samantha would have made if Alyssa was not in breach and she was able to sell the apples for a $500.00 profit.[13] 

            Expectation damages are the preferred contract remedy. These will be awarded unless they cannot be measured or are too uncertain to calculate with reasonable certainty. In such cases, courts may award “reliance” or “restitution” damages instead.

Restitution is the party’s “interest in having restored to him any benefit that he has conferred on the other party.” Assume Alyssa is the party in breach and never delivered the apples. Samantha’s restitution interest is also $500.00, but for different reasons than in the first example. Here, Samantha would recover $500.00 because this is the amount Samantha paid Alyssa expecting her to perform under the contract. Samantha is entitled to the $500.00 because she has given this amount to Alyssa. 

Reliance damages protects the non-breaching party’s interest “in being reimbursed for loss caused by reliance on the contract by being put in as good as a position as he would have been in had the contract not been made.” Assume Alyssa grows and attempts to deliver the apples to Samantha, but Samantha refuses to accept delivery. Alyssa is unable to sell the apples because they are rotten by the time there is another buyer. Alyssa is entitled to the costs of producing the apples because this will restore her to the same position as before the contract was made, assuming a reliance remedy. 

Note that these three remedies are mutually exclusive, and the plaintiff is entitled to only one, with expectation being preferred when measurable. In our case, reliance or restitution damages may be appropriate, for example, where it was uncertain that Samantha was going to be able to re-sell the apples later on. 

Sometimes a contract involves incomplete or defective performance. In these cases, the proper measure of damages is typically the cost to repair the defects. If the defects are not remediable, the proper measure of damages is typically the difference in value if performance was properly undertaken and the performance as is.[14] These types of damages are commonly referred to as consequential damages. Consequential damages can also refer to lost profits caused by a breach when those profits were reasonably certain.

Still, a non-breaching party has a duty to mitigate damages. If loss can be avoided without undue risk, burden, or humiliation, a party is obligated to avoid the loss. If a party fails to do so, she may not be able to recover the portion of the loss that could have been avoided through mitigating steps.[15] However, if the party makes reasonable efforts to avoid loss but is unsuccessful, she is still entitled to damages. 

For example, assume a farmer leases land for a few years. Towards the end of the lease, the landlord wrongfully evicts the farmer. The farmer incurs damages over this period since he cannot continue his normal farming practices. The farmer has a duty to mitigate by attempting to find new farmland to work on. If he does not attempt to find new land, he may not be allowed to recover. However, if the farmer makes reasonable efforts, but finds no comparable land available, and is unsuccessful in his efforts to find new land, he will still be able to recover.[16] 

            Even if a party has sustained no loss, the party may recover nominal damages for a breach of contract.[17] Nominal damages are typically very minimal and symbolic in nature.[18] However, nominal damages are relevant because a court may not award punitive damages unless a party is first awarded compensatory, nominal or restitution damages.[19] Punitive damages, though, are rare in contracts and normally only awarded if a party acts in bad faith.[20]


Liquidated Damages

            Sometimes the parties may agree in advance as to what damages should be assessed in the event of breach. This is known as a liquidated damages clause. Although courts generally prefer to assess remedies in accordance with principles of contract law, liquidated damages are enforceable when the circumstances are such that precisely measuring the loss may be difficult and the estimated amount is reasonable considering the anticipated loss caused by the breach. If a liquidated damages clause assesses damages that are unreasonably high or designed to be a “penalty,” they are unenforceable on the grounds of public policy.[21]

            Liquidated damages clauses are common in land sale cases. The buyer typically pays a deposit of a percentage of the purchase price at the signing of the agreement. The contract stipulates that if the buyer breaches the agreement, the seller can keep the deposit money. These liquidated damages clauses are generally considered valid because the seller’s damages are difficult to measure when a house sale falls through. The seller unquestionably suffers some loss by taking the house off the market and having to spend extra time and money to market the house after the buyer breaches but measuring the damages with precision would be difficult. Note that the liquidated damages clause will be enforced even if the house goes up in value and the seller actually turns a profit because of the breach as long as the damages were reasonable at the time of the contract.[22]


Specific Performance

            Specific performance is an equitable remedy where the party is obligated by the court to perform the contract’s terms. Courts are hesitant to require specific performance unless monetary damages would be insufficient or incapable of giving the non-breaching party the “benefit of his bargain.”[23] Under the Uniform Commercial Code, a court may order specific performance if goods are unique because, when dealing with unique goods, monetary damages may not truly compensate the victim of the breach who contracted for those unique goods not a monetary replacement.[24]

            For example, in a 1981 case, the Sedmaks contracted with Charlie’s Chevrolet to purchase a Corvette for about $15,000. This car was made to commemorate the selection of the Corvette as the pace car for the Indianapolis 500. However, after delivery, an agent for Charlie’s Chevrolet informed the Sedmaks that they could not purchase the car for $15,000, but would have to bid on the vehicle.[25] The court ordered specific performance because, although the vehicle was not a one-of-a-kind, it would be nearly impossible to find a similar vehicle with its mileage, condition, ownership and appearance without serious expense, delay, and inconvenience.[26] Only 6,000 vehicles were produced and only one vehicle was available from each dealer. Furthermore, Charlie’s received two other bids ten to fourteen thousand dollars over the sticker price, which demonstrated the limited demand for this vehicle.

            Specific performance is typically available in land sale cases where the seller breaches because each parcel of land is inherently considered distinct from every other parcel of land due to its unique location.

            Sometimes a court will order negative specific performance through an injunction. The court can prohibit a breaching party from undertaking some act as a remedy for breach of contract. Common examples include confidentiality agreements, wherein courts can order parties to avoid breaching agreements by disclosing information that they are contractually obligated to keep confidential.


            Thank you for participating in our contracts video-course. We hope that this survey course has introduced you to the most important aspects of contract law and we encourage you to take advantage of our other more advanced courses in this area. Best of luck.



[2] Restatement (Second) of Contracts § 225.

[4] Restatement (Second) of Contracts § 229.

[5] Restatement (Second) § 241.

[6] Unif. Comm. Code §2-601.

[7] Restatement (Second) § 250.

[9] Restatement (Second) of Contracts § 265.

[13] Restatement (Second) of Contracts § 344.

[14] Hodgesv. Cusanno, 94 A.D.3d 1168, 1169 (N.Y. App. Div. 2012).

[15] Restate (Second) of Contracts § 350.

[16] See Hanson v. Boeder, 727 N.W.2d 280 (N.D. 2007).

[17] 3 Williston, Contracts § 1340.

[18] Jessica Tran, What are Damages?, Legal Match, (March 12, 2018),https://www.legalmatch.com/law-library/article/nominal-damages-in-a-contracts-claim.html.

[19] Id.

[20] Id.

[21] Restatement (Second) of Contracts § 356; Unif. Comm. Code §2-718.

[24] Id. at 700.

[25] Id. at 695.

[26] Id. at 700.