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Chapter 18 Performance & Remedies

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1 Chapter 18 Performance & Remedies
“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)

2 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 - 2

3 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 - 3

4 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 Compare a conditional duty to duties that are unconditional or absolute in which the duty to perform does not depend on the occurrence of any further event other than the passage of time A condition is an uncertain, future event that affects a party’s duty to perform 18 - 4

5 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 If the condition does not occur, performance does not become due. If the condition does occur, the duty to perform arises. See Smith v. Carter & Burgess, Inc., page 433 of the text, in which the contract language contained a condition precedent. 18 - 5

6 Condition Concurrent When the contract calls for parties to perform at the same time Example: Bryan promises to buy Stevie’s guitar for $ Stevie must give Bryan the guitar when Bryan gives Stevie $1000. When the contract calls for the parties to perform at the same time, each person’s performance is conditioned on the performance or tender of performance (offer of performance) by the other. 18 - 6

7 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. When a duty is subject to a condition subsequent, the duty to perform arises but is discharged if the future, uncertain event occurs.. 18 - 7

8 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 - 8

9 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 Optus Software, Inc., a small computer software company, hired Michael Silvestri as director of support services. Silvestri’s two-year employment contract contained a “satisfaction clause” that reserved to the company the right to terminate his employment for “failure or refusal to perform faithfully, diligently or completely his duties to the satisfaction” of the company. Silvestri enjoyed the full support of Optus’s CEO, Joseph Avellino, during the first six months of his employment. Avellino’s communications within and without the organization praised Silvestri’s abilities to the support services group. Avellino sent an message to all members of the group that referred to the problems Optus had been having in providing technical support to resellers and end users, stressed that Optus had hired Silvestri to help alleviate those problems, and asked the staff to support Silvestri. Avellino’s attitude started to change shortly after the when several clients and resellers communicated to Avellino their disappointment with the performance and attitude of the support services staff generally, and several complaints targeted Silvestri specifically. Avellino informed Silvestri of those criticisms. Criticisms mounted and Avellino had a “heart-to-heart” discussion with Silvestri. Finally, nine months into the contract, Avellino terminated Silvestri’s employment. Silverstri brought suit against Optus, claiming that the company’s dissatisfaction was objectively unreasonable and his termination was a breach of the employment contract. 18 - 9

10 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 The trial court granted summary judgment to Optus, and Silvestri appealed. The Appellate Division reversed, holding that an employer must meet an objective standard for satisfaction in order to invoke a right to terminate pursuant to a satisfaction clause in an employment contract. Optus appealed. Court: “Avellino explained that he terminated Silvestri because Silvestri had failed to ‘exhibit the leadership and management skills necessary to perform his duties to the Company’s satisfaction.’ He cited the objective evidence of the complaints…Agreements containing a promise to perform in a manner satisfactory to another, or to be bound to pay for satisfactory performance, are a common form of enforceable contract. …The standard for evaluating satisfaction depends on the type of contract. …A subjective standard typically is applied to satisfaction clauses in employment contracts…. Although broadly discretionary, a satisfaction clause employment relationship is not to be confused with an employment-at-will relationship in which an employer is entitled to terminate an employee for any reason, or no reason, unless prohibited by law or public policy. In a satisfaction clause employment setting, there must be honest dissatisfaction with the employee’s performance…. If, however, the employer’s dissatisfaction is honest and genuine, even if idiosyncratic, its reasonableness is not subject to secondguessing under a reasonable-person standard…”

11 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 Court: “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.”

12 Performance of Contracts
To determine whether a promisor is discharged by performance, courts consider the standard of performance expected A strict performance standard requires full or perfect compliance with the contract terms Example: Buyer agrees to finalize a home purchase (close) by 5:00 pm on Nov 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 The strict performance standard is also applied to contractual obligations that can be performed either exactly or to a high degree of perfection. Examples of this type of obligation include promises to pay money, deliver deeds, and, generally, promises to deliver goods.

13 Performance of Contracts
A substantial performance standard 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 The most common example of this type of obligation is a promise to construct a building. Other examples include promises to construct roads, to cultivate crops, and to render some types of personal or professional services. When applied, the promisor substantially performed and is discharged, but the performance triggers the other party’s duty to pay the contract price less any damages resulting from the defects in performance

14 Substantial Performance

15 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

16 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

17 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 New date scheduled for January 25, Throughout negotiations for settlement agreement, sellers insisted upon a rigid, absolute closing date. On January 18, Ocean Atlantic sent sellers a letter demanding that they move the closing to May 1 and pay an additional $680,000 in development fees. These fees had never been the subject of any prior negotiations nor were they embodied in any prior agreement between the parties. The sellers rejected Ocean Atlantic’s demand and warned that “if the closing does not occur in accordance with the terms of the settlement agreement, your clients will have no rights whatsoever to the property after January 25, 2001, as clearly spelled out in that same agreement.” Ocean Atlantic withdrew its proposals and assured sellers it would “fully participate in the scheduled closing [January 24], pursuant to the settlement agreement.” However, when the sellers arrived for the closing on the morning of January 24, they executed each and every document and were ready to close that day, but the closing failed to occur on the 24th (date selected by Ocean Atlantic) or January 25 (absolute, final drop-dead date) because Ocean Atlantic failed to tender the purchase price of $7.267 million for deposit into the sellers’ escrow account. Arnhold and Argoudelis’s attorneys notified Ocean Atlantic that the contract was terminated. After receiving this notice, Ocean Atlantic pleaded with Arnhold and Argoudelis to go forward with the sale, but they refused.

18 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 Ocean Atlantic sued Arnhold and Argoudelis, seeking specific performance of the contract. Arnhold and Argoudelis asked the district court to rule that the contract was null and void. The district court decided in favor of Arnhold and Argoudelis, and Ocean Atlantic appealed.

19 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 Court: “Timely performance often is an absolute requirement even if the contract does not contain the talismanic phrase “time is of the essence”; it is well-settled that the intention of the parties as expressed by the agreement controls, and courts will give effect to this provision when no peculiar circumstances have intervened to prevent or excuse strict compliance….” “When analyzing the materiality of a time-essence clause, the factfinder initially must ask whether performance by a particular date was truly of such significance that the contract would not have been made if the provision had not been included…. The factfinder must take into account the totality of the circumstances and focus on the inherent justice of the matter…..” “1. Step one: Intent of the parties… In the case before us, the district court considered the language of the settlement agreement, along with the substance of the parties’ negotiations and their course of performance. All three categories of evidence support a finding of materiality…. We are convinced that the settlement agreement reflects a compromise. The sellers agreed to … give Ocean Atlantic one last, final chance to comply with the language of the contract and purchase the farmland. In exchange, Ocean Atlantic agreed that absolutely no further delays would be tolerated. We agree that the clause was a material term of the contract….”

20 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 Court: “2. Step two: Totality of the circumstances. b. The relevant factors i. Bargained-for objective …The sellers displayed the patience of Job by waiting nearly 3 1⁄2 years to accomplish the sale of farmland that was originally intended to be transferred within six months…. ii. Proportionality of prejudice…requires the factfinder to compare the relative burdens that each side would suffer if the contract were terminated…. Ocean Atlantic’s million-dollar loss was, admittedly, substantial. However…, the loss was not enough to warrant granting Ocean Atlantic’s motion for specific performance…. iii. Unreasonable, unfair advantage… Two important factors to consider at this juncture are: (1) whether the breaching party used reasonable efforts to perform its contractual obligations; and (2) whether the parties contemplated that the breaching party would forfeit its contractual rights if it committed the type of breach that is at issue. Neither of these factors favors Ocean Atlantic….” “A reasonable factfinder concluded that Ocean Atlantic treated the material, bargained-for deadlines in this agreement as if they were trivial details that could be flouted with impunity. As a result, Ocean Atlantic has lost any and all rights to purchase the sellers’ farmland. Affirmed in favor of Arnhold and Argoudelis.”

21 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

22 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) The three most common situations for impossibility involve illness or death of the promisor, supervening illegality, and destruction of the subject matter of the contract. Impracticability basically means the event was beyond the scope of the risks that the parties contemplated at the time of contracting. Case law and official comments to UCC section 2–615 indicate that neither increased cost nor collapse of a market for particular goods is sufficient to excuse nonperformance, because those are the types of business risks that every promisor assumes. However, drastic price increases or severe shortages of goods resulting from unforeseen circumstances such as wars and crop failures can give rise to impracticability.

23 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

24 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

25 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

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