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Dynamic business law 4e kubasek 4e CH20

Chapter 20
Discharge and Remedies

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGrawHill Education.


Overview
• LO20-1: What are the primary methods of
discharging a contract?
• LO20-2: What are the primary legal
remedies available for a breach of
contract?
• LO20-3: What are the primary equitable
remedies available for a breach of
contract?

20-2


Chapter 20 Hypothetical Case 1
• On May 15, 2010, The Right Brothers Painting Services, LLC ("The Right

Brothers") contracted with Sally Sullenberger to paint her vacation home at Kill
Devil Hills, North Carolina. Pursuant to the contract, The Right Brothers were
obligated to begin painting on May 30, 2010, and finish the work by June 30,
2010. The total contract price was $15,000. The Right Brothers did not initiate
performance before June 30, 2010, and on July 15, 2010, Sullenberger arranged
for a substitute painting company, Jake Yeager Master Paint Company, Inc.,
("Jake Yeager") to perform the work. Jake Yeager completed the work, and
charged $23,000 for its services.
On August 30, 2013, Sullenberger filed a complaint in Dare County, North
Carolina District Court, seeking $8,000 and court costs and attorney's fees from
The Right Brothers. According to North Carolina law, the statute of limitations
period applicable to a breach of contract action is three (3) years from the date
of the breach.
• Is The Right Brothers Painting Services, LLC legally and/or ethically obligated to
pay Sally Sullenberger the damages she has requested?

20-3


Chapter 20 Hypothetical Case 2
• 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, Sykes 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.
(Sykes is well known for anger management issues, and she becomes especially angry
when her requests as a buyer are not met.) The conversation ended with Hillman
proclaiming that "Hades would freeze over" before he had his construction crew install the
shutters, and with Sykes 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 Sykes'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?

20-4




Circumstances Resulting in
Discharge of Contract
• Occurrence or nonoccurrence of a
condition
• Complete or substantial performance
• Material breach: Occurs when party
unjustifiably fails to substantially perform
his obligations under contract
• Mutual agreement
• Operation of law

20-5


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
• Express condition: Condition explicitly state in contract
(usually preceded by words such as "if," "provided that,"
or "when")
• Implied condition: Condition not explicitly stated, but
inferred from nature and language of contract

20-6


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
• No willful departure from terms of agreement
20-7


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
• Can occur either through express indication of intent, or
action inconsistent with intent to fulfill contract when
performance due
• Once contract anticipatorily repudiated, nonbreaching
party discharged from obligations under contract, and
can sue immediately for breach

20-8


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: Parties agree that one party will
perform duty differently from performance specified in
original agreement; after new duty performed the party's duty
under original contract is discharged
• Novation: Original parties and a third party agree that the
third party will replace an original party and the original party
will be discharged
20-9


Discharge By Operation of Law
• Alteration of contract
• Bankruptcy
• Tolling of statute of limitations
• Impossibility of performance
• Commercial impracticability
• Frustration of purpose
2010


Things To Consider
Before Filing Suit
• Likelihood of success
• Desire/need to maintain ongoing
relationship with potential defendant
• Possibility of getting better/faster
resolution through alternative dispute
resolution (ADR)
• Cost of litigation/ADR compared to value
of likely remedy

2011


Legal Remedies for
Breach of Contract
• Monetary damages: Include compensatory, punitive, nominal, and
liquidated damages.
• 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; 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
• 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)

2012


Duty to Mitigate Damages
• Definition:
• Obligation on nonbreaching party (plaintiff) to
use reasonable efforts to minimize damage
resulting from defendant's breach of contract

2013


Equitable Remedies (Court-Ordered
Action) 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)
• 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: Contractlike obligation imposed on party to
prevent unjust enrichment

2014


Elements 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
2015


Chapter 20 Hypothetical Case 3
• K.K. Legume, Incorporated is a reputable and popular sweater manufacturer. Based upon
Legume's reputation and popularity, Arrow Stores, LLC 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?

2016


Chapter 20 Hypothetical Case 4
• Roxette Shandling is a celebrity in her own right in her hometown of Las
Vegas—a celebrity chef, that is. Three years ago, she was courted to join the
restaurant Vega as a part-owner and chef emeritus. The restaurant's owner
promised Shandling a salary of $100,000 per year, a 25 percent stake in the
business, and 50 percent of the restaurant's profits.
Things didn't really turn out that way. She received her salary, but she found
that the restaurant's owner in effect diluted Vega's profits by expensing out
her salary and also paying himself a salary of $425,000 a year, even though
he does not work at the restaurant. She also never received her equity stake
in the business.
• Shandling sues for breach of contract, demanding compensatory damages, a
49 percent stake in the restaurant, and expectation damages. In this
example, what would the compensatory damages be awarded for? The
expectation damages?

2017



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