McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 7

Contract Performance:Conditions, Breach,and Remedies

7-2

GOOD FAITH PERFORMANCE

Substantial Performance

The law recognizes a party’s good faith effort to perform by allowing substantial performance rather than perfect performance.

This satisfies the requirements of the agreement and triggers the other party’s obligation to perform.

7-3

Mutual Consent

If neither party has fully performed, the parties may agree to cancel the contract - a rescission.

Or the parties may agree to accept performance that is different from the original performance - an accord and satisfaction.

Or the parties may agree to substitute a third party for one of the original parties to the contract - a novation.

7-4

Operation of Law

Contract obligations may also be discharged through operation of law.

Despite the fact that the parties have formed a valid contract, the law provides a discharge under certain circumstances where fairness demands it.

7-5

Other Examples of Discharge by Law (1) a contract is unilaterally altered by a

party

(2) a contract is subject to relief of the bankruptcy code

(3) expiration of the statute of limitations where state law imposes a time limit on enforcement of contract obligations

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REMEDIES

For most contracts, the remedy at law will be money damages awarded by the court to the non-breaching party to compensate the innocent party for losses related to the breach.

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Compensatory Damages

Compensatory damages cover a broad spectrum of losses for recovery of actual damages.

These damages put the non-breaching party in the same position she would have been in if the other party had performed.

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Specific Performance

Remedy whereby a court orders the breaching party to render the promised performance by ordering the party to take a specific action.

Only available when the subject matter of the contract is sufficiently unique.

7-9

Consequential Damages

Compensate the nonbreaching party for foreseeable indirect losses not covered by compensatory damages.

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Restitution

Designed to prevent unjust enrichment.

If one party is in the process of performing the contract and the other party commits breach, the non-breaching party is entitled to rescind (cancel) the contract and receive fair market value for any services rendered.

7-11

Liquidated Damages

It may be very difficult to determine actual damages, so parties may agree at the time of the contract that a breach would result in a fixed damage amount.

7-12

RIGHTS OF A THIRD PARTY

In some cases, a party to an existing contract wishes to substitute another party in their place.

7-13

learning outcome checklist

7 - 1 Define what a condition is used for in a contract and distinguish conditions precedent from conditions subsequent.

7-2 Apply the doctrines related to good faith performance, discharge of a contract, and substantial performance.

7-14

learning outcome checklist

7-3 Identify the ethical dilemmas that a manager faces in the context of good faith performance.

7-4 Articulate circumstances that give rise to events of discharge via mutual consent and operations of law.

7-5 Recognize events that result in breach of contract and explain anticipatory repudiation.

7-15

learning outcome checklist

7-6 Identify the appropriate remedy available to nonbreaching parties and understand the responsibilities of an injured party to avoid and mitigate damages.

7- 7 Explain the rights of third parties who have rights in a contract through assignment or delegation and third-party beneficiaries.