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11.3 Summary and Exercises

Summary

The law of contracts has various rules to determine whether obligations have been discharged. Of course, if both parties have fully performed the contract, duties will have terminated. But many duties are subject to conditions, including conditions precedent and subsequent, conditions requiring approval of the promisee or someone else, and clauses that recite time to be of the essence.

A contract obligation may be discharged if the promisor has not received the benefit of the promisee’s obligation. In some cases, failure to carry out the duty completely will discharge the corresponding obligation (material breach); in other cases, the substantial performance doctrine will require the other party to act.

A contract may have terminated because one of the parties tells the other in advance that he will not carry out his obligations; this is called anticipatory breach. The right to adequate assurance allows one party to determine whether the contract will be breached by the other party.

There are other events, too, that may excuse performance: impracticability (including the UCC rules governing impracticability in contracts for the sale of goods), death or incapacity of the obligor, destruction of the thing necessary for the performance, government prohibition, frustration of purpose, and power of avoidance.

Finally, note that not all obligations are created by contract, and the law has rules to deal with discharge of duties in general. Thus, in the appropriate cases, the obligee may cancel or surrender a written contract, may enter into an accord, may agree to rescind the agreement, or may release the obligor. Or the obligor may show a material alteration in the contract, may become bankrupt, or may plead the statute of limitations—that is, plead that the obligee waited too long to sue. Or the parties may, by word or deed, mutually abandon the agreement. In all these ways, duties may be discharged.

Exercises

  1. Theresa hired Contractor to construct a large office building. Theresa’s duty to pay Contractor was conditioned on receipt of a statement from her architect that the building complied with the terms of the contract. Contractor completed the building but used the wrong color fixtures in the bathrooms. The architect refused to approve the work, but under state law, Contractor was considered to have substantially performed the contract. Is he entitled to payment, less damages for the improper fixtures? Explain.
  2. In early 1987, Larry McLanahan submitted a claim to Farmers Insurance for theft of his 1985 Lamborghini while it was on consignment for sale in the Los Angeles area. The car had sustained extensive damage, which McLanahan had his mechanic document. The insurance policy contained this language: “Allow us to inspect and appraise the damaged vehicle before its repair or disposal.” But after considerable delay by Farmers, McLanahan sold the car to a cash buyer without notifying Farmers. He then sued Farmers for its refusal to pay for damages to his car. Upon what legal theory did Farmers get a summary judgment in its favor?
  3. Plaintiff sold a tavern to Defendants. Several months later, Defendants began to experience severe problems with the septic tank system. They informed Plaintiff of the problem and demanded the return of their purchase money. Plaintiff refused. Defendants took no formal action against Plaintiff at that time, and they continued to operate the tavern and make their monthly payments under the contract. Some months later, Defendants met with state officials from the Departments of Environmental Quality, Health, and Liquor Control Commission. The officials warned Defendants that because of the health hazards posed by the septic tank problems, Defendants’ licenses might not be renewed. As a result, Defendants decided to close the tavern and attempt to reopen when the septic tank was repaired. Defendants advertised a going-out-of-business sale. The purpose of the sale was to deplete the tavern’s inventory before closing. Plaintiff learned about the sale and discovered that Defendants had removed certain personal property from the tavern. He sued the Defendants, claiming, among other things, that they had anticipatorily breached their contract with him, though he was receiving payments on time. Did the Defendants’ actions amount to an anticipatory breach?Crum v. Grant, 692 P.2d 147 (Or. App., 1984).
  4. Julius, a manufacturer of neckties, contracted to supply neckties to a wholesaler. When Julius’s factory burned, he failed to supply any, and the wholesaler sued. Is Julius excused from performance by impossibility?
  5. The Plaintiff (a development corporation) contracted to buy Defendant’s property for $1.8 million. A term in the contract read: “The sale…shall be closed at the office of Community Title Company on May 16th at 10:00 am.…Time is of the essence in this contract.” Defendant appeared at the office at 10:00 a.m. on the day designated, but the Plaintiff’s agent was not there. Defendant waited for twenty minutes, then left. Plaintiff’s agent arrived at 10:30 a.m. and announced that he would not have funds for payment until 1:30 p.m., but Defendant refused to return; she had already made other arrangements to finance her purchase of other real estate. Plaintiff sued Defendant for specific performance. Who wins, and why?
  6. A contract between the Koles and Parker-Yale provided for completion of the Koles’s condominium unit within 180 days. It also authorized the Koles to make written changes in the plans and specifications. Construction was not completed within the 180-day period, and the Koles, prior to completion, sent a letter to Parker-Yale rescinding the contract. Were the Koles within their rights to rescind the contract?
  7. Plaintiff contracted to buy Defendant’s commercial property for $1,265,000. Under the terms of the agreement, Defendant paid $126,000 as an earnest-money deposit, which would be retained by Plaintiff as liquidated damages if Defendant failed to close by the deadline. Tragically, Defendant’s husband died four days before the closing deadline, and she was not able to close by the deadline. She was relying on her husband’s business to assist her in obtaining the necessary financing to complete the purchase, and after his death, she was not able to obtain it. Plaintiff sued for the $126,000; Defendant argued that the purpose of the contract was frustrated due to the untimely death of her husband. Is this a good argument?
  8. Buyer contracted to buy Seller’s house for $290,000; the contract included a representation by Buyer “that he has sufficient cash available to complete this purchase.” Buyer was a physician who practiced with his uncle. He had received assurances from his uncle of a loan of $200,000 in order to finance the purchase. Shortly after the contract was executed, the uncle was examined by a cardiologist, who found his coronary arteries to be dangerously clogged. As a result, the uncle immediately had triple bypass surgery. After the operation, he told Buyer that his economic future was now uncertain and that therefore it was impossible for him to finance the house purchase. Meanwhile, Seller, who did not know of Buyer’s problem, committed herself to buy a house in another state and accepted employment there as well. Buyer was unable to close; Seller sued. Buyer raised as a defense impossibility or impracticability of performance. Is the defense good?
  9. Pursuant to a contract for the repair and renovation of a swimming pool owned by Defendant (City of Fort Lauderdale), Plaintiff commenced the work, which included resurfacing the inside of the pool, and had progressed almost to completion. Overnight, vandals damaged the work Plaintiff had done inside the pool, requiring that part of the work be redone. Plaintiff proceeded to redo the work and billed Defendant, who paid the contract price but refused to pay for the additional work required to repair the damage. Did the damage constitute destruction of subject matter discharging Plaintiff from his obligation to complete the job without getting paid extra?
  10. Apache Plaza (the landlord) leased space to Midwest Savings to construct a bank building in Apache’s shopping mall, based on a prototype approved by Apache. Midwest constructed the building and used it for twelve years until it was destroyed by a tornado. Midwest submitted plans for a new building to Apache, but Apache rejected the plans because the new building was larger and had less glass than the old building or the prototype. Midwest built it anyway. Its architect claimed that certain changes in the structure of the new building were required by new regulations and building codes, but he admitted that a building of the stipulated size could have been constructed in compliance with the applicable codes. Apache claimed $210,000 in damages over the term of the lease because the new building consumed more square feet of mall space and required more parking. Midwest claimed it had substantially complied with the lease requirements. Is this a good defense?Apache Plaza, Ltd. v. Midwest Sav. Ass’n, 456 N.W.2d 729 (Minn. App. 1990).

Self-Test Questions

  1. A condition precedent

    1. is a condition that terminates a duty
    2. is always within the control of one of the parties
    3. is an event giving rise to performance
    4. is a condition that follows performance
  2. If Al and Betty have an executory contract, and if Betty tells Al that she will not be fulfilling her side of the bargain,

    1. Al must wait until the date of performance to see if Betty in fact performs
    2. Al can sue immediately for full contract damages
    3. Al can never sue because the contract was executory when Betty notified him of nonperformance
    4. none of the above
  3. Jack contracts with Anne to drive her to the airport Wednesday afternoon in his specially designed stretch limousine. On Wednesday morning Jack’s limousine is hit by a drunken driver, and Jack is unable to drive Anne. This is an example of

    1. impossibility of performance
    2. frustration of purpose
    3. discharge by merger
    4. none of the above
  4. Jack is ready and willing to drive Anne to the airport. But Anne’s flight is cancelled, and she refuses to pay. This is an example of

    1. impracticability of performance
    2. frustration of purpose
    3. discharge of merger
    4. none of the above
  5. Rescission is

    1. the discharge of one party to a contract through substitution of a third person
    2. an agreement to settle for substitute performance
    3. a mutual agreement between parties to a contract to discharge each other’s contractual duties
    4. none of the above

Self-Test Answers

  1. c
  2. b
  3. a
  4. b
  5. c