Contracts

2. 3 Contracts Introduction to Contracts The Agreement: Offer The Agreement: Acceptance Consideration Reality of Consent McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

3. 3 Contracts Capacity to Contract Illegality Writing Rights of Third Parties Performance & Remedies McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

4. Performance & Remedies 18 C H E A P T R “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)

5. 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 - 5

6. 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 parties 18 - 6

7. 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 - 7

8. 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 - 8

9. 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 - 9

10. Condition Subsequent • A future, uncertain event that discharges the duty to perform • Example: Lee agrees to work for WoolCo until he returns to college. Lee returns to college in August and discharges his obligation under the contract. 18 - 10

11. 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 • When performance of the act that constitutes the condition becomes impossible 18 - 11

12. 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 • Silvestri filed suit claiming the dissatisfaction was objectively unreasonable and a breach of contract 18 - 12

13. 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 • In a satisfaction clause employment setting, there must be honest and genuine dissatisfaction with the employee’s performance 18 - 13

14. 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 - 14

15. Performance of Contracts • To determine whether a promisor is discharged by performance, courts consider the standard of performance expected • A strict performancestandard 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 does not close by that time, the contract ends. Buyer is discharged from buying and Seller is discharged from turning over the house, but there may be legal remedies to Seller for Buyer’s breach 18 - 15

16. Performance of Contracts • A substantial performancestandard 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 Jason has the duty to pay the contract price less any damages (repainting) resulting from the defects in performance 18 - 16

17. Substantial Performance 18 - 17

18. 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 right to sue and recover for damages caused by the breach • For a material (serious) breach, further legal remedies are available 18 - 18

19. 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 performance if within reasonable time after performance due, but may deduct costs of delay 18 - 19

20. 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 refused, warning that “time is of the essence” • Buyers assured Sellers they would close, but failed to do so; Sellers notifed Buyers of contract termination 18 - 20

21. 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 - 21

22. 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 - 22

23. 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 - 23

24. 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 • Wait to sue until time for performance in case the other party changes his mind and decides to perform • Waive his/her rights to performance 18 - 24

25. 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. ProTravel International, Inc. • Impracticability: when unforeseen developments make performance highly impracticable, unreasonably expensive, or of little value to promisee (UCC 2–615) 18 - 25

26. 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 - 26

27. 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 - 27

28. 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 - 28

29. Test Your Knowledge • True=A, False = B • When a condition precedent occurs, the contract arises, creating duties to perform • John agrees to work as Katy’s realtor until he sells her house. Katy closed on her house sale yesterday, so the contract has been discharged. • The standard for materiality of a breach is when only 50% of a contract has been performed 18 - 29

30. Test Your Knowledge • True=A, False = B • Legal remedies for breach of contract include specific performance or injunction • Nonperformance of a duty is always a breach of contract • Performance that falls short of complete performance in some minor respect, but does not deprive the other party of a material part of the consideration for which s/he bargained is known as substantial performance. 18 - 30

31. Test Your Knowledge • Multiple Choice • Steve promised to work for his employer on Saturday morning. Steve didn’t show up for work on Saturday because he decided he didn’t need the overtime money. Steve: • (a) is excused due to impracticality • (b) breached his contract • (c) breached the implied covenant of good faith • (d) both B and C • (e) none of the above 18 - 31

32. Test Your Knowledge • Multiple Choice • Robert contracted to paint Stan’s house by the end of June, but realized after signing the contract that he had too many jobs to do and could not finish by the end of June. Robert called Stan and told him he could not fulfill the contract. Robert: • (a) is excused due to impossibility • (b) engaged in anticipatory breach • (c) is excused because of condition precedent • (e) none of the above 18 - 32

33. Thought Questions • Should a non-breaching party always file suit against a breaching party? • What are the ethical issues involved in a breach of contract? 18 - 33