Performing a Contract
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What is the duty of performance?
Under a contract, each party has a duty to undertake (or refrain from undertaking) some activity. This is known as the duty of performance. Basically, it is what each party seeks from the other party. Example: Clarence enters into a contract with Dina to wash her car. In this situation, Clarences duty is to wash Dinas car. Dinas duty is to pay Clarence for washing his car. Note: In some situations, the duty to perform under the contract may only arise once certain conditions are in place. In the above example, the condition for Dinas performance is dependent upon Clarence performing his duty.
What does it mean to discharge ones duty of performance?
Discharge of ones duty means that the party has undertaken, completed, or forgone all of the activities required under the contract. She has no further duties thereunder. Example: In the situation above, once Clarence has washed Dinas car, he has discharged his duty under the contract. Note: Generally, parties either discharge their duty of performance (this includes being excused from the contract obligations) or are in breach of the contract.
What is complete, partial, and substantial performance?
Complete performance is where a party completes her entire obligation under the contract. Partial performance is a completion of some, but not all, of the material provisions under the contract. Partial performance is relevant for purposes of installment of divisible contracts. Partial performance may lead to breach of one portion of an installment contract, while leaving other portions of the contract enforceable. The same is true for divisible contracts. Substantial performance is completion of all material portions of the contract and failure to complete other non-material portions. Substantial performance generally avoids an action for breach of contract, but may give rise to an action for an equitable remedy, such as offset. Example: Frank enters into a contract with Diana to build her a home. Frank grades the land, lays the foundation, and begins framing the home. At this point, Frank has partially performed the contract. He has taken more than incidental steps toward completion of the contract. Frank continues construction under the contract and completes everything, except for painting the exterior of the house. Frank has likely substantially performed the contract. Substantial performance means all major obligations under the contract have been performed; there are, however, minor elements that have not been completed. While there is not complete performance due to the failure to paint the exterior, there is substantial performance because the entire house is built in accordance with the contract. Frank will have completed performance (complete performance), once the contract is completed in accordance with all terms of the contract. Note: If a party substantially performs, he is not liable for breach of contract. He may, however, be sued to offset the value of services paid for but not delivered.
What are conditions of performance in a contract?
A condition in a contract is when something must take place prior to or before a party has a duty to perform. That is, there is no obligation for the party to undertake any action, unless the condition occurs. Conditions are characterized as either express or implied and as either precedent or subsequent. Example: Eric enters into a contract with Mary stating, if the Oakland Athletics win the American League championship series, I (Eric) will sell you (Mary) my season tickets to the World Series for face value. The Athletics winning the championship series is a condition to Erics obligation to sell the tickets to Mary. Note: A condition can be an event, occurrence, non-occurrence, characteristic subject to discovery or revelation, etc.
What is an express and implied condition?
An express condition is any condition expressly stated by the parties as part of the contract. It can be oral or written. It simply has to be communicated, understood, and accepted by both parties as part of the contract. An implied condition, on the other hand, is not stated expressly as part of the contract; rather, it is implied from the language or nature of the contract. Example: Seller says that he will sell a vehicle to any customer for $1,000. Buyer accepts the offer, with the condition that the car pass a mechanics inspection first. The Seller accepts the Buyers terms and a contract is formed. An express condition to the Buyers duty to perform is that the car pass a mechanics inspection. Note: An implied condition under the UCC is that the customer make payment prior to the Seller delivering the item.
What is a condition precedent and condition subsequent?
A condition precedent is some event, condition, or occurrence that must take place before one partys duty of performance arises. A condition subsequent serves to excuse parties from their obligation under a previously formed contract upon some future event, condition, or occurrence. Example: If the stock drops to $10 per share, I will purchase your 5 shares. This is an example of a condition precedent, because something must take place before the promisor is obligated under the contract. Example: I will purchase your 5 shares for $10 at the end of the month. If the shares drop below an $8 market value, I do not have to purchase them. This is an example of a condition subsequent. I am obligated under the contract, but some future event, occurrence, or condition can excuse my duty of performance.
What are concurrent conditions?
Concurrent conditions are two or more conditions that must take place or both parties are excused from the contract. In the examples above, each party has a duty to perform. The condition affects (and possibly excuses) one partys duty to perform. The other party maintains the duty to perform until the other party elects to be excused from their duty. A concurrent condition simultaneously excuses both parties duty to perform. Example: In a contract for Will to sell Grace his car, the contract requires that the car pass inspection and that Grace (the buyer) be able to obtain financing for the purchase. If either of these concurrent conditions fails, then both parties are free from their duties to buy and sell the car.
What is fulfillment of a condition?
A condition must take place (or not occur) either naturally or as a result of the parties efforts. Fulfillment is the occurrence (or non-occurrence) that takes place and gives rise to a partys duty to perform. Example: In the above example of Will and Grace, the fulfillment of the conditions is the car passing the mechanics inspection and Grace finding financing for the purchase.
What is strict fulfillment of a condition?
Certain conditions must be completely fulfilled (strictly fulfilled) before a duty of performance arises. All express conditions are subject to strict fulfillment. In most jurisdictions, any conditions implied from the course of performance, course of dealing, or from a trade usage must also be strictly fulfilled. Example: In the example of Will and Grace, if the car passes 9 of 10 points on the mechanics inspection, it may not be in strict fulfillment of the condition. If the contract calls for the car to pass every element of the mechanics inspection, substantial passage is not sufficient. Even if the failed element is easily corrected, the condition is still not fulfilled. Note: A condition may be fulfilled at any time prior to expiration of the period allocated for fulfillment.
What is substantial fulfillment of a condition?
Substantial performance is the completion of the major aspects of an obligation. Unlike complete performance, however, substantial performance falls short of complete and total fulfillment of an obligation. Often a court (generally a court applying equity or fairness principles) will impose a condition on the court-ordered transaction between two parties in order to prevent an injustice under an existing contract. Such a condition will be subject to substantial performance or substantial fulfillment. If the condition is substantially filled, then the contract will remain in full force and effect. Example: Alex enters into a contract with Jennifer for the sale of equipment. Pursuant to the contract, Jennifer makes numerous representations. When Alex receives the equipment, it is not functioning as expected. Jennifer refuses to accept return of the equipment and retains Alexs money. Alex sues Jennifer for misrepresentation in the sale of the equipment. The court orders Alex to return the property to Jennifer in the exact condition in which it was delivered. Once the equipment is returned, Jennifer must return the purchase funds to Alex. Alex returning the equipment to Jennifer as specified is a condition to Jennifers returning the purchase price to Alex.
Are there any excuses that make a contract enforceable when a condition is not fulfilled?
Yes. There are certain circumstances where a condition will be excused and the parties will be subject to a duty to perform. Wrongful interruption by one party prevents the occurrence of a condition. Example: Zora enters into a contract with Sam to sell him equipment. Zora refuses to accept payment from Sam when payment is due. Because payment is a condition precedent to Zora delivering the goods, it would appear that a condition precedent has failed. Since Zora has caused the failure of the condition (payment by Sam), she cannot rely on the failure of the condition to defend her failure to perform. Note: This exception is based upon principles of equity. It would not be fair to allow a party to interrupt a contract by her own actions. This is similar to the reasoning behind why illusory promises are insufficient as consideration. Waiver of the condition by the parties will excuse the condition. Example: Neil enters into a contract with Judith to sell her a vehicle so long as the vehicle passes a mechanics inspection. When the car fails the inspection, Judith states that she is willing to purchase the car anyway and provides Neil the purchase money. Since the parties continue to perform following the failure of the condition, it will be deemed waived. Note: In some case, the conduct of the parties may constitute a waiver. In any event, a waiver by one party can be withdrawn if the other party has not relied on the waiver to her detriment. If performance of a non-material condition would cause a disproportionate loss to one party under the contract or the performance of the condition becomes impossible. Example: Gale enters into a contract with Jackie to supply cement for her construction business. Selling the cement is contingent upon Jackie getting a purchase order to Gale at least 14 days prior to the shipment date. Jackie and Gale carry on operations successfully for some time. Gale routinely sells the cement without receiving the purchase order 14 days in advance of shipping. Gale and Jackie begin having disagreements. In the middle of a large job, Jackie sends the purchase order to Gale approximately 13 days prior to the requested shipment date. Gale refuses to sell the cement due to the failure of the condition. If Jackie will suffer a disproportionate detriment due to the failure of the condition, the court may ignore the failure of the condition in evaluating whether Gale breached the contract. Note: If performance of the condition is a material part of the bargain, then impossibility or disproportionate loss is not an excuse. If the actions or consent of a third-party to a contract is a condition under the agreement, the unjustified or unreasonable failure of the third-party to perform or consent will excuse the condition if certain requirements are met. Example: Neil enters into a contract with Judith to sell her a vehicle if the vehicle passes a mechanics inspection. The mechanic completes part of the inspection, but refuses to complete the work in a timely manner. He also refuses to complete an inspection report, as required in the contract. Because of the mechanics failure or refusal to complete his inspection (a condition under the contract), the court may excuse this condition in enforcing a contract or determining whether a breach has occurred. Note: This is particularly important in contracts that require subjective evaluations and opinions by third parties.
What standards apply if a contract makes approval by a third party an express condition in the contract?
A condition precedent or subsequent based upon the subjective determinations or approval of a third party is generally enforceable. The third partys death or incapacity will not interrupt this condition. As discussed above, if the third party acts unreasonably in failing to act or withholding their approval, it will not excuse the condition unless the failure of the condition will result in a loss (or forfeiture) by the other party. If a loss or forfeiture would occur, then the court will look to the nature of the third-parties obligation under the condition. If the condition is expressly dependent on a third partys subjective beliefs, interpretations, or taste, then a failure to give approval will not excuse the condition. If, however, the third-partys duty is functional (such as carrying out a routine activity) or is not based upon some professional certification, qualification, or opinion, then a failure to undertake that activity may excuse the condition. Example: In the situation of Neil and Judith, the mechanic withheld his physical report as to whether the vehicle meets prescribed mechanical standards. In such a case, the failure to perform the inspection and create the report will excuse the condition. As such, Neil cannot refuse to sell the car due to the absence of a mechanics report. Since the condition is in place to protect Judith, she can refuse to purchase the vehicle without the inspection report. Example: In the above example, if the contract requires that the mechanic give his affirmative opinion that the vehicle is a certain quality and the mechanic refuses, a failure to do so will likely not excuse the condition. In this case, the mechanic is not simply failing to undertake his duties; rather, he knowingly withholds a favorable opinion that is required or is a condition to the duties under the contract arising. In any event, Neils duty to sell and Judiths duty to purchase the vehicle will not arise and they are excused from the contract.
What if a condition to a duty to perform is based upon one partys approval of a situation?
Courts generally enforce provisions where a condition to a partys duty to perform is based on her subjective approval of the other partys performance. If the failure of the condition will result in a loss to the other party, the court will examine the context of the condition. If the condition is specifically based on the other parties taste or preference, the court will uphold it if the other party is honestly dissatisfied. If the condition is based upon a general task or function by the approving party, the court will look to make certain it is not unreasonably withheld. Example: Adam contracts with Dan to paint a modern art piece to hang on his wall. The contract makes Adams duty to pay Dan contingent upon Adams approval of the art piece. When Dan presents the finished piece to Adam, Adam is not pleased with the work and refuses to pay for the art. If Dan sues Adam for payment, the court will likely hold that no breach has occurred. Adams duty to pay Dan only arises upon a condition being satisfied (Dan approving the painting). Example: In the above situation, the condition on performance is that Adam must transfer funds from his saving account to pay Dan. If Adam simply refuses to move the money, this is a manual failure on the part of Adam. This condition will not excuse Adams duty to pay Dan for his work. Note: If the non-performing party is unjustly enriched at the expense of the performing party, the performing party may be entitled to compensation based upon principles of unjust enrichment.
What events or conditions discharge a partys contractual duties to perform?
As discussed above, a party is discharged from her duty to perform under the contract upon performance (either complete or substantial) of the contract. Also, a failure of a condition will excuse and individuals performance. Other manners of excusing or discharging ones duty under a contract include: rescission of the contract by the parties; substitution of the contract; reaching an accord and satisfaction; novation of the agreement; voiding a voidable contract; the contract purpose becoming illegal; a bankruptcy court staying performance of a contract; breach of contract by the other party; Impossibility or impracticability; or frustration of the contracts purpose. Each of these manners of discharging performance is discussed below.
What is rescission of a contract?
This is where both parties mutually agree to undo (or rescind) a contract that has not been completely performed. Jurisdictions are split on the level of formality required for rescission. If neither party has begun performance, new consideration is not required to rescind the contract. If either party has taken significant steps toward performance, then new consideration is required. Under the common law, many jurisdictions do not require that a rescission be in writing, even if the original contract was in writing. The UCC, however, requires that the rescission of any contract under the statute of frauds also be in writing if the contract requires written modifications or rescissions. This rule coincides with the rule regarding modification of a contract. Example: Francis enters into a contract with Tommy to paint his house. She has not paid Tommy and he has not begun performance. The parties may rescind the agreement without new consideration or the need for a writing. If, however, Tommy has begun performance, Francis may have to enter into a new agreement with Tommy in order to rescind the original agreement. The new agreement, like any contract, will require some form of new consideration (such as paying a higher rate for the services already performed). The new agreement likely does not have to be in writing, even if the original contract was in writing. Note: Rescission may not be available if it affects the rights vested in a third party.
What is an accord and satisfaction?
An accord and satisfaction is an agreement between the parties. It states that a given level of performance by either or both parties (that is less than complete performance of the contract) is sufficient to satisfy that partys obligation under the agreement. Example: Jane paints Erics house under an agreement where Eric will pay her $1,000 upon completion. Eric does not believe the job is complete because Jane should have put two coats of paint. Jane refuses to paint another coat of paint. Eric refuses to pay $1,000 for the services. The parties get tired of arguing and enter into an accord and satisfaction, whereby Eric will pay Jane $700 for the paint job. The accord and satisfaction excuses the obligations under the original contract.
What is a substitute contract?
The parties enter into a completely new contract that supersedes and replaces the old contract. After the new contract is executed, the old contract is no longer enforceable and the duties owed thereunder are excused. Example: Carlos enters into a contract with Jan to build him a fence. Carlos later approaches Jan and offers to pay her an additional sum to also build him a new deck for his house. Jan and Carlos execute a new agreement that expressly supersedes the original agreement. This substitute contract will excuse any duties previously required under the old contract. Note: An accord and satisfaction settles an issue between the parties where one or both parties fail to completely perform. A substitute contract simply disregards and replaces the old contract.
What is novation?
Novation is where one party transfers her rights or obligations to another party. The non-transferring party then agrees to substitute the other party and to excuse the transferring partys duties under the contract. To affect this change, the non-transferring party and the new party enter into an agreement obligating her to the contract and excusing the transferring party. Example: Diane and Ervin enter into a contract for the sale of goods. Diane attempts to transfer her obligation to supply the goods under the contract to Alfred. Diane wishes to be excused from the contract. If Alfred and Ervin enter into a new agreement that expressly adopts the agreement between Diane and Ervin, then the original agreement is extinguished. The formation of the new contract (or novation) will control the relationship between and Alfred and Ervin.
What is a release?
A release is an expression by one party (the party owed a duty of performance) that the other party does not have to perform their obligation. That is, the party is released from her obligation under the agreement. Example: Mike enters into a contract to sell his car to Julian. Later, Julian tells Mike that he does not wish to purchase the car. Mike, not upset at Julian, releases Julian from the contract. Since the contract was for the sale of a good of $500 or more, both the contract and Mikes release of Julian must be in writing.
What is impossibility of performance?
Impossibility of performance is when the conditions surrounding a contract make it impossible for a party to perform her obligation. Impossibility will excuse a partys performance where the circumstances are not the fault or under the control of the non-performing party and the party did not expressly or impliedly accept or bear the risk of performance becoming impossible. Example: Rachel enters into a contract to supply Persian rugs for sale at Winstons rug supply. Rachel sources the rugs from Iran and sells them in the United States. Due to deteriorating relations between Iran and the U.S., the U.S. Government places an embargo on all goods from Iran. This embargo makes it illegal for Rachel to sell the Persian rugs. In this case, Rachel would be excused from the contract under the doctrine of impossibility of performance. The illegality of selling the rugs means that it is legally impossible for Rachel to perform and it is at no fault of her own. Note: Events that make a contract impossible include: Illegality of the subject matter; Note: The above example of Rachel and Winston is an example of the subject matter of the agreement becoming illegal. The subject of the contract (property) is destroyed; Example: Marshal agrees to sell a specific piece of equipment to Linda. The piece of equipment is destroyed before Marshal can deliver it. Because it was a specific piece of equipment that is not readily replaced, this would render performance of the contract impossible. One of the parties to the contract dies or becomes physically or mentally disabled; Note: If a party is rendered physically or mentally unable to perform the contract, it is excused. If, however, the individual recovers within the time period allowed by the contract or within a reasonable time, the contract may still be enforceable. Natural forces interrupt the contract (tornado, earthquake, severe storms, flooding, etc.); Example: A tornado destroys the methods of shipping to a town. As such, it becomes impossible to make delivers of goods to local stores. The interruption by natural forces would make fulfillment of the duties under the contract impossible. Performance would cause substantial risk of physical harm to one party. Example: Kyle agrees to paint Julias house this weekend. The wind is blowing extremely hard all weekend. The danger to Kyle in painting the house in this heavy wind makes performance of the contract unduly risky The justification for the above exemptions regards the unexpected nature of the interruption in contractual performance. The interruption is not specifically attributable to any party and, therefore, should not unduly burden either of the parties.
What is impracticability?
Impracticability is where performance of a contract by a party has become unfeasibly difficult or costly to perform. The difference between impracticability and impossibility is that impracticability is still physically possible it simply results in a substantial hardship to the performing party. Impracticability will excuse performance where the excused party did not have control over (or was not at fault for) the condition that made performance impracticable. Further, the excused party must not have expressly or impliedly assumed the risk of the duties becoming impracticable. Example: Claire enters into a contract with Phil to supply him with live crabs for his restaurant. Claire and Phil settle on a price that reflects the risk of market conditions. The following month, the local government levies a large tax on local seafood. The tax causes Claire to suffer a substantial loss on every bushel of crabs sold at the pre-negotiated price. This may be a case where Claire is excused from the contract under a theory of impracticability. The increase in taxes is an unforeseen event that was outside of Claires control. She will suffer a huge detriment if not relieved from the contract. Note: Generally, impracticability is only found in extreme circumstances. Such instances include major price swings due to government action or international relations. In any event, impracticability generally requires the relieved party to suffer some form of unreasonable burden, risk, or expense.
What is supervening frustration of purpose?
This is when circumstances arise that fundamentally frustrate a partys reason or purpose for entering a contract. The doctrine is similar to impracticability, but it does not relate to a partys hardship; rather it focuses on her expectation and purpose in entering the agreement. For a frustrating circumstance to relieve or excuse an obligation under a contract, the party cannot have assumed the risk of the circumstance (in the contract), be at fault for the occurrence or the non-occurrence of the event or circumstance, and the occurrence or non-occurrence must have been a basic assumption on which the contract was made. Note: Suffering an economic loss is not a frustration of purpose. Example: John signs up for piano playing lessons from Tara. John suffers a horrible accident that causes him to lose dexterity in his hands. This is a frustration of purpose that was unforeseeable and substantially frustrates the purpose of learning to play the piano. As such, John will be excused from performance of the contract.