Effects of Contracts - Dissolution

Question 1

General Principles

Answer 1

i. Definition—Dissolution occurs when a contract is dissolved; that is, the binding force of a contract is brought to an end.
(a) Note—Dissolution is not the same as rescission. Rescission involves a contract’s nullity. Dissolution involves termination of the contract as a result of mutual consent or due to one party’s failure to perform. These terms are often conflated.
ii. Grounds for Dissolution—“Contracts have the effect of law for the parties and may be dissolved only through the consent of the parties or on grounds provided by law. Contracts must be performed in good faith.” (La. Civ. Code art. 1983)
(a) Consent of the Parties—The parties may agree to terminate their contract. This, of course, is the easy case.
(b) Other Grounds Provided by Law—“Grounds provided by law” entail, generally, a failure to perform When one party fails to perform, the other party has the option to either (1) seek specific performance or (2) seek dissolution of the contract. Thus, specific performance and dissolution are alternative remedies. In either case, however, damages may be owed.

Question 2

Types of Dissolution

Answer 2

b. Types of Dissolution—“When the obligor fails to perform, the obligee has a right to the judicial dissolution of the contract, or, according to the circumstances, to regard the contract as dissolved. In either case, the obligee may recover damages.” (La. Civ. Code art. 2013). This article contemplates that dissolution may be either (1) judicial or (2) extra-judicial.

Question 3

Judicial Dissolution

Answer 3

(a) In General—The default position of the Civil Code is that judicial dissolution (i.e., court intervention to bring a contract to an end) is required absent special circumstances. Why is this the default position of the Civil Code? Why not simply allow obligees to freely regard their contracts as dissolved when the obligor breaches? How does the rule articulated in La. Civ. Code art. 2013, paragraph 2 contribute to your understanding of the preference for judicial dissolution?
(b) Judicial Discretion to Grant Additional Time—When an obligee sues for judicial dissolution, the court can refuse dissolution and give the obligor additional time to perform. Under what circumstances will the obligor be granted additional time to perform?
(i) Waseco Chem. & Supply v. Bayou State Oil Corp.—This is a famous case; you need to know it. Bayou State, an oil and gas lessee, owed an obligation to its lessor Waseco to develop the leased premises as a reasonably prudent operatory (this is mainstream mineral law). Bayou State failed to perform, and Waseco sued for dissolution. At trial, the court granted dissolution and Bayou State appealed. Was dissolution the appropriate remedy here, or should Bayou State be given additional time to perform? What factors does the court consider? How are these factors related to the cause of the contract?
- Waseco Factors
} The extent and gravity of the failure to perform
} The nature of the obligors fault
} The good or bad faith of the parties
} The surrounding economic circumstance
- All of these factors wil be wieghed when determining whether or not the party will have more time to make a performance right.
- An obligee who is seeking dissolution may possibly be in bad faith if the breach is super minor and they are just trying to game this to get out of contractual obligations, in that case the court may grant additional time to perform instead.

Question 4

Extra Judicial Dissolution

Answer 4

To allow a party to simply regard a contract as dissolved without the necessity of a court decree has been regarded historically as exceptional. But extra-judicial dissolution is recognized when the circumstances of the case permit. This can be done with notice, and even more exceptionally, without prior notice to the other party.

				(a) By Notice to Breaching Party—“Upon a party’s failure to perform, the other may serve him a notice to perform within a certain time, with a warning that, unless performance is rendered within that time, the contract shall be deemed dissolved.  The time allowed for that purpose must be reasonable according to the circumstances.  The notice to perform is subject to the requirements governing a putting of the obligor in default and, for the recovery of damages for delay, shall have the same effect as a putting of the obligor in default.”  (La. Civ. Code art. 2015)
					(i) Requirements for Putting in Default—Note that  La. Civ. Code art. 2015 refers back to La. Civ. Code art. 1991: “The obligee may put the obligor in default by a written request of performance, or by an oral request of performance made before two witnesses, or by filing suit for performance, or by a specific provision of the contract.”   
				(b) Without Notice to Breaching Party—“When a delayed performance would no longer be of value to the obligee or when it is evident that the obligor will not perform, the obligee may regard the contract as dissolved without any notice to the obligor.” (La. Civ. Code art. 2016)
					(i) Manella v. Kurt S. Schon BAI Ltd.—Manella purchased a painting from Schon. She agreed to pay $350,000 ($50,000 due immediately and the rest subject to a term).  She didn’t pay.  Schon resold the painting for $1.4 million.  Manella argues that dissolution was not appropriate in this case.  Did Schon have the right to dissolve the contract extra-judicially?  Was notice required?  Did Schon provide notice?

				(c)    Express Dissolution Clause—“The parties may expressly agree that the contract shall be dissolved for the failure to perform a particular obligation.  In that case, the contract is deemed dissolved at the time it provides for or, in the absence of such a provision, at the time the obligee gives notice to the obligor that he avails himself of the dissolution clause.” (La. Civ. Code art. 2017)

Question 5

Partial Performance

Answer 5

An obligor may render partial performance, making even more unclear whether the contract can be dissolved. If “substantial performance” has been rendered, dissolution is not allowed. But if partial performance that is not substantial performance has been rendered, a court may allow dissolution, though the obligor may be entitled to compensation, either on the contract or in quasi-contract, for the performance that has been rendered.

			i. Substantial Performance – No Dissolution—“A contract may not be dissolved when the obligor has rendered a substantial part of the performance and the part not rendered does not substantially impair the interest of the obligee.”  (La. Civ. Code art. 2014)  
				- If requirements are satisfied, the contract is not dissolved and obligee must perform, but may be entitled to damages. ii. (Nonsubstantial) Partial Performance – Dissolution plus damages in quasi-contract—“If partial performance has been rendered and that performance is of value to the party seeking to dissolve the contract, dissolution does not preclude recovery for that performance, whether in contract or in quasi-contract.” (La. Civ. Code art. 2018)