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An introduction to the fundamentals of dynamic business law and business ethics chap013

Chapter 13
Discharge and Remedies

McGraw-Hill/Irwin

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


Chapter 13 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?

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Chapter 13 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?

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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
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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

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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

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

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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

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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

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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

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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

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

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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

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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)
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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”
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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
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