Transcript CHAPTER 15 CONTRACTUAL DISCHARGE AND REMEDIES DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8th Ed.)

CHAPTER 15
CONTRACTUAL DISCHARGE
AND REMEDIES
DAVIDSON, KNOWLES & FORSYTHE
Business Law: Cases and Principles
in the Legal Environment (8th Ed.)
BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
TERMINATION OF THE CONTRACT

Contracts can be terminated (discharged) in
four ways:
– By Performance.
– By Agreement of the Parties.
– By Operation of Law.
– By Nonperformance.
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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
DISCHARGE BY PERFORMANCE

Complete Performance.
– Exact fulfillment of the terms of the contract.

Substantial Performance.
– Minor deviations from contract specifications.
– Two criteria must be met:
 1) Breach must not have been material.
 2) Breach must be non-willful and devoid of bad
faith conduct.
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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
DISCHARGE BY AGREEMENT
OF THE PARTIES

Release.
 Rescission.
 Accord and Satisfaction.
 Novation.
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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
DISCHARGE BY AGREEMENT
OF THE PARTIES

Release.
– Discharging the legal rights one party has against
another.
– To be valid, should be in writing, supported by
consideration, and should effect immediate
relinquishment of rights or claims.

Rescission.
– Voluntary, mutual surrender and discharge of
contractual rights and duties whereby parties are
returned to the original status quo.
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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
DISCHARGE BY AGREEMENT
OF THE PARTIES

Accord and Satisfaction.
– Agreement to accept performance different from that
required in original bargain.
– When parties comply with the accord, satisfaction has
occurred.

Novation.
– Creates a new contractual duty and involves substitution
of a party who was neither owed a duty nor obligated to
perform in the original bargain.
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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
DISCHARGE BY OPERATION OF LAW

Bankruptcy automatically discharges the
party’s contractual obligations.
 Statutes of Limitations sets limits on the
length of time a contracting party may wait
to bring suit.
 Any contract materially altered by one party
without the consent of the other will also be
discharged.
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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
DISCHARGE BY NONPERFORMANCE

Impossibility.
 Commercial Frustration.
 Actual Breach.
 Anticipatory Breach.
 Conditions.
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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
DISCHARGE BY NONPERFORMANCE

Impossibility.
– An unforeseen event or condition which
precludes performance.
– Conduct by one party which makes
performance by the other party impossible is
objective impossibility.
– Subjective impossibility consists of
nonperformance owing to personal
impossibility.
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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
DISCHARGE BY NONPERFORMANCE

Commercial Frustration.
– This doctrine excuses performance in cases
where the essential purpose and value of the
contract have been frustrated.
– If the event causing the frustration could have
been foreseen, no discharge allowed.

Actual Breach.
– Occurs when one or more of the contracting
parties fails to perform the obligations set up by
the contract.
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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
DISCHARGE BY NONPERFORMANCE

Anticipatory Breach.
– Involves giving advanced notice, through
words or conduct, that one does not intend to
fulfill a contract as written.
– Anticipatory repudiation, UCC sanctions a
demand that adequate assurances of due
performance. Allows one to suspend
performance for 30 days or until assurances are
put forth.
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BUSINESS LAW: Cases & Principles
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DISCHARGE BY NONPERFORMANCE
 Conditions.
– Conditions may result in nonperformance
which justifies discharge.
Condition is act/event that limits or qualifies a
promise.
 Condition must occur before promissor has a
duty to perform or refrain from performing.

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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
DISCHARGE BY NONPERFORMANCE

Courts classify conditions in two ways:
–
Timing.



Conditions Precedent.
Concurrent Conditions.
Conditions Subsequent.
– Stems from the manner in which the conditions
arise.


Constructive (or implied) Conditions.
Expressed Conditions.
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BUSINESS LAW: Cases & Principles
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TYPES OF REMEDIES

Legal Remedies (money damages):
damages resulting from a court’s exercise of
its power “at law.”
–
–
–
–
–
–
Compensatory Damages.
Consequential Damages.
Punitive Damages.
Nominal Damages.
Liquidated Damages.
Mitigation of Damages.
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BUSINESS LAW: Cases & Principles
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TYPES OF REMEDIES

Equitable Remedies: remedies arising from
a court’s use of its powers of equity.
– Rescission and Restitution.
– Specific Performance.
– Quasi Contract.
– Reformation.
– Injunction.
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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
DAMAGES

Most common legal remedy sought by
injured party.
 Courts ask, when computing damages
whether breaching party, as a reasonable
person, should have foreseen the injuries
that would result from breach.
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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
DAMAGES

Compensatory Damages.
– Sums of money which will place the injured
party in the same economic position that would
have been attained had the contract been
performed.

Consequential Damages.
– Indirect or special damages arising from the
effects of the breach itself.
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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
DAMAGES

Duty to Mitigate.
– To measure damages the courts place on the
injured party the duty to mitigate (or minimize)
these damages.

Punitive Damages.
– Imposed not to compensate the injured party
but to punish the wrongdoer so as to deter
future conduct.
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BUSINESS LAW: Cases & Principles
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DAMAGES

Liquidated Damages.
– When parties agree in advance to a certain sum
of money that will be paid to the injured party
should breach of contract occur.

Nominal Damages.
– Small amount of compensation for the breach.
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BUSINESS LAW: Cases & Principles
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EQUITABLE REMEDIES
Plaintiff’s eligibility to receive fairness
depends on the absence of bad faith on the
plaintiff’s part and similar factors.
 Court’s power to award equitable remedies
is discretionary.

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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
EQUITABLE REMEDIES

Rescission and Restitution.
– Voluntary agreement to rescind, or set aside the
contract before rendering performance.
– Can result from a material breach in which case
a restoration of parties to the status quo is
sought.
– Restitution, or the return of goods, money, or
property involved in the contract or recovery of
a reasonable value of the services rendered is
equitable.
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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
EQUITABLE REMEDIES

Specific Performance.
– When restitution is inadequate or unjust.
– Court compels the breaching party to perform
according to the exact terms of the contract.

Quasi Contract.
– Creation of contract for the parties to prevent
the unjust enrichment of one party.
– One party knowingly has received a benefit to
which party is not entitled.
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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
EQUITABLE REMEDIES

Reformation.
– Rewriting a contract in order to remove a
mistake and to make the agreement conform to
the terms to which the parties originally agreed.

Injunction.
– A court order directing a person to do or refrain
from doing some specified act.
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LIMITATIONS OF REMEDIES

Contract language may actually limit
remedy options available.
 Uniform Commercial Code impact remedy
options in sale of goods.
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BUSINESS LAW: Cases & Principles
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WAIVER OF BREACH

Contracting party may agree to accept less
than complete performance by waiving a
breach of contract that is committed by
another party.
 Waiver eliminates the breach.
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