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 • 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 • 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 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 • 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 • 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 ... $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... 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... 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