Chapter 12 Contract Discharge and Remedies for Breach

I. Discharge of Contractual Obligations

Unless a party’s obligation is discharged, failure to perform as agreed is a breach of contract

A. Performance [CC§ ] When an obligation is fully performed, that party’s contractual obligation is discharged [CC§ 1473]

B. Offer of Performance [CC§ ] If a party to a contract in good faith tenders (offers) full performance of the contract obligation to the other party, that tender discharges the party’s obligation

C. Prevention of Performance or Offer [CC§ ] A party’s obligation of performance is excused in the following situations: 1. If government action or interference prevents performance by operation of law, a party is discharged from performance 2. The prevention or delay by an “act of God” is a common area of concern for the contracting parties 3. A party is discharged from a performance obligation when that party is induced by the other party to the contract not to perform

D. Accord and Satisfaction [CC§ ] ACCORD is an agreement to accept something different than a person is entitled to under the contract SATISFACTION takes place when the other party to the obligation has accepted full performance of the accord and, therefore, both parties to the contract are discharged

E. Novation [CC§ ] A NOVATION is a substitution of a new contract between the same parties to an old contract, with the intent to discharge the old contract obligations, or the substitution of a new party to the contract in place of an old party to the contract, with the intent to discharge the old party from any performance obligation

F. Release [CC§ ] A RELEASE occurs when a party to a contract excuses the other party from performance A RELEASE occurs when a party to a contract excuses the other party from performance

G. Impossibility If it is “impossible” to perform a contract, the parties are discharged Impossibility of performance requires that the performance must, in the nature of things, be impossible for anyone to perform

H. Impracticability DISCHARGE BY IMPRACTICABILITY takes place when, subsequent to entering into the contract, some event or situation has occurred that neither party anticipated at the time of contracting and contract performance is now unreasonably difficult or expensive

I. Frustration of Purpose FRUSTRATION OF PURPOSE discharges performance of a contract when some situation or event that was unforeseeable at the time of contracting has subsequently occurred, and makes the purpose of the contract of no value for one of the parties

J. The Occurrence of Contract Conditions A condition is an event that must occur, unless it is excused, before a dependent performance becomes due

K. Breach of Contract The victim of a material breach of contract is discharged from the performance obligation in that contract Since the victim did not get the substantial benefit of the bargain, there is no obligation to perform

L. Rescission [CC§ ] With RESCISSION, the parties have agreed to place themselves back in the positions they were in prior to contracting

M. Modification and Cancellation [CC§ ] “A contract not in writing may be modified in any respect by consent of the parties, in writing, without a new consideration, and is extinguished thereby to the extent of the modification” [Civil Code § 1697] “A contract not in writing may be modified in any respect by consent of the parties, in writing, without a new consideration, and is extinguished thereby to the extent of the modification” [Civil Code § 1697] “The destruction or cancellation of a written contract, or of the signature of the parties liable thereon, with intent to extinguish the obligation thereof, extinguishes it as to all the parties consenting to the act” “The destruction or cancellation of a written contract, or of the signature of the parties liable thereon, with intent to extinguish the obligation thereof, extinguishes it as to all the parties consenting to the act” [Civil Code § 1699]

II. Remedies for Breach of Contract

Breach of Contract Failure by a party to perform the contract as promised constitutes breach of contract Most breaches are a result of an intentional act by a party to the contract Occasionally, the breach results from careless or negligent acts in attempting to perform the contract

A.Anticipatory Breach of Contract If a party to the contract clearly and unequivocally informs the other party of a refusal to perform the contract prior to the time for performance, such refusal constitutes an ANTICIPATORY BREACH OF CONTRACT [Civil Code § 1511(3)]

B. Material Breach v. Immaterial (Minor) Breach A breach of contract is considered material when the victim of the breach did not get the substantial benefit of the bargain With a material breach, the victim of the breach is discharged from performance of his or her duties under the contract If the breach is minor, the victim of the breach is not discharged from performing his or her duties under the contract The victim of either breach may sue the breaching party for damages, but only a material breach allows the victim to select remedies other than money damages

C. Remedies Available to the Victim of the Breach – 1. Victim of an Immaterial Breach – recover money damages suffered as a result of the breach

2. Victim of a Material Breach – Can select one of the following:  Money damages  Equitable remedies of rescission and restitution  Specific relief  Preventive relief  Reformation

Damages a. Compensatory Damages – compensate for the loss sustained by the victim of the breach b. Consequential Damages – are for losses that are more remote than the compensatory damage c. Nominal Damages [CC§ 3360] – are generally a small or token sum awarded to the plaintiff who has proved to the court that the defendant breached the contract, but has been unable to prove any compensatory or consequential damages from the breach d. Punitive Damages [CC§ ] – are awarded to punish an individual

3. Rescission and Restitution [CC§ ] This remedy is commonly used by a victim of mistake, duress, menace, undue influence or fraud Basically, the victim of the breach has decided to cancel the contract and is asking to be placed in the position he or she was in prior to the contract

4. Specific Relief SPECIFIC RELIEF (performance) is an equitable remedy that results from a plaintiff asking the court for an order requiring the defendant to perform the contract as promised Specific performance is only available when money damages are inadequate to compensate the victim of the breach

5. Preventive Relief [CC§ ] PREVENTIVE RELIEF is accomplished through a court injunction against the party enjoining (stopping) him from breaching the contract Generally, an injunction in not available for use in a contract that cannot be specifically enforced like personal services

6. Reformation [CC§ ] REFORMATION is an equitable process whereby the court is asked to “rewrite” a contract in order to conform the written contract to the true “meeting of the minds”

D. Mitigation To MITIGATE DAMAGES means damages could have been minimized if reasonable and appropriate efforts had been used Failure to mitigate will reduce the amount of the victim’s damages by the amount of loss caused by that failure

III. How Breach of Contract Remedies Work

A. Sale of Goods 1. Breach by the Seller 2. Breach by the Buyer

B. Contract for Services 1. Breach by the Employer At Will For Term 2. Breach by the Employee

C. Consequential Damages CONSEQUENTIAL DAMAGES are damages that are special to the breach of contract and are above and beyond the typical compensatory damages

D. Liquidated Damages LIQUIDATED DAMAGES are a specific amount determined at the time of contracting and payable if there is a breach of contract in the future The burden of proof rests on the party trying to avoid payment to prove the liquidated damages provision was unreasonable at the time of contracting

E. Damages for Emotional Distress Very Rare The general rule is that the victim of a breach of contract cannot recover damages for mental suffering and emotional distress resulting from the breach

F. Waiver of Breach A victim of a breach of contract may decide to waive the breach rather than treat the breach as a termination of the contract The effect of a waiver is to treat the contract as though it is still in existence and continue with performance

Chapter Summary Discharge of Contractual Obligations Performance Offer of Performance Prevention of Performance or Offer Accord and Satisfaction Novation Release Impossibility Impracticability Frustration of Purpose The Occurrence of Contract Conditions Breach of Contract Rescission Modification and Cancellation Remedies for Breach of Contract Anticipatory Breach of Contract Material Breach v. Immaterial Remedies Available to the Victim Mitigation How Breach of Contract Remedies Work How Breach of Contract Remedies Work Sales of Goods Sales of Goods Contract for Services Contract for Services Consequential Damages Consequential Damages Liquidated Damages Liquidated Damages Damages for Emotional Distress Damages for Emotional Distress Waiver of Breach Waiver of Breach