Excuse for Non-Performance

Question 1

Seller contracts to sell 50 green tee shirts to Buyer. Seller delivers 40 green tee shirts and 10 yellow shirts.

What can Buyer do?

Answer 1

The Buyer has three options because the Seller’s performance was not perfect in every respect (conforming to the UCC’s perfect tender rule):

1. Buyer can reject all the shirts.
2. Buyer can accept all the shirts.
3. Buyer can accept the 40 green shirts and reject the 10 yellow shirts.

Whichever option Buyer chooses, Buyer can still get damages for Seller’s breach.

Question 2

How does common law treat breaches?

Answer 2

Under common law, the injured party can recover damages for ANY breach of contract. But only a material breach provides an excuse for non-performance.

Question 3

I hire M to decorate my house. What if she finished the job after the due date of the contract?

Answer 3

Here, I can recover damages for M’s breach of the contract. But this is unlikely a material breach so I am still obligated to pay the contract price.

This would be a material breach if the contract said “time is of the essence.” If there was a material breach, I could refuse to pay M, but M would be entitled to restitution (reasonable value of what she completed).

Question 4

M contracts to decorate my house, payable on completion. After M starts the job, I tell her I am not going to pay her. What are M’s rights?

Answer 4

This is an example of anticipatory repudiation, which provides M an excuse to stop performing the contract. Anticipatory repudiation occurs before performance is due and is an excuse for non-performance UNLESS retracted.

So M can stop performing the contract and sue me for breach because anticipatory repudiation acts as a material breach.

Question 5

What is failure to give adequate assurance?

Answer 5

Failure to give adequate performance under Article 2 allows a party with reasonable grounds for being insecure about the other party’s performance may, in writing, request adequate assurance that the other party will perform in accordance with the contract.

Question 6

B contracts to buy computer chips from S. B learns from other buyers that S’s recent deliveries have contained a lot of defective chips. What can B do?

And if S does not provide B with adequate performance, what are B’s rights against S?

Answer 6

Because B is aware that S’s deliveries have contained a lot of defects, B can send a request in writing for adequate assurance about the chips’ lack of defects.

If S refuses to give adequate assurance, B can treat this as anticipatory repudiation of the contract - essentially a material breach. This means that B does not have to perform the contract and can sue S for damages.

Question 7

S contracts to sell B goods on credit. Later, S learns that B is missing payments to other suppliers. Can S demand that B pay cash?

Answer 7

No. A party cannot use the adequate assurance provision to rewrite the contract or demand a particular kind of assurance.

Question 8

What is rescission?

Answer 8

Rescission is an agreement to cancel the contract. To be effective, each party must have some performance remaining.

Question 9

What is modification?

Answer 9

Modification is an agreement to replace an existing contract with a new one. A modification takes effect immediately.

Question 10

A borrows $500 from B and promises to repay her with interest. Later, B agrees to discharge the debt now if A promises to mow the lawn for a year. A makes the promise.

What are B’s rights if A does not mow her lawn as promised?

Answer 10

If A does not mow her lawn, B can sue him for their agreement about mowing the lawn. B has no action concerning the previous debt because they replaced that agreement with the new one - mowing the lawn.

Question 11

What is an accord/satisfaction?

Answer 11

An accord is an agreement to accept performance in future satisfaction of an existing duty. The duty is suspended by the accord but is not excused until the accord is satisfied/performed.

Question 12

A borrows $500 from B and promises to repay her with interest. They agree that if A mows her lawn for a year, then B will discharge the debt. What are B’s rights if A does not mow the lawn as promised?

Answer 12

B can sue A for $500 or for failure to mow the lawn. There was an accord to accept performance in future satisfaction (lawn mowing) of an existing duty (the debt). The duty (debt) was suspended by the accord, but it is not excused until the accord is satisfied (performed). Here, there was no lawn mowing so A owes $500 and the lawn mowing.

Question 13

T/F: Whether you have a modification or an accord depends on the timing. Is the underlying obligation excused right now (modification) or only later on (accord/satisfaction)?

Answer 13

True.

Question 14

O contracts to mow H’s lawn. Later O, G, and H agree that G will mow it instead. If G does not mow the lawn, is O liable for breach?

Answer 14

O is not liable for breach because a new contract was created - between G and H. O is excused by novation.

Question 15

Builder agrees to build a home using Owner’s plans. Rising costs led Builder and Owner to agree in writing that Builder could omit the AC unit in the plans and still receive the full contract price.

Under the general rule, this subsequent written agreement is:

Answer 15

This written agreement is unenforceable for lack of consideration. Under common law, you need consideration to modify a contract.

This is not novation because there is no new party in place of the Builder to complete the existing contract.

Question 16

What is impossibility?

Answer 16

A later unforeseen event that makes performance impossible may provide seller with an excuse.

Under UCC, this is called impracticability.

Question 17

Kim contracted to sell her BMW to Khloe. After risk of loss passed to Khloe, the car was destroyed by a fire. Is Kim excused from performing by impracticability?

Answer 17

Impracticability is when an unforeseen event makes performance impossible.

Here, Kim does not need an excuse to perform the contract because Khloe bears the risk of loss.

Question 18

Buyer contracts to buy 500 computers. After the contract and before delivery, a fire destroys one of the Seller’s warehouses and thousands of computers are destroyed.

Is Seller excused from performing?

Answer 18

Seller is only excused from performing if the computers that were tagged for sale to this Buyer were damaged.

Question 19

T/F: On the MBE (but not TX portion), an increase in the seller’s costs is almost never an excuse for the seller’s non-performance.

Answer 19

True.

Question 20

A rents a loft for Thanksgiving Day because it will have a good view of the parade. The parade is canceled the day before. Is A excused by frustration of purpose?

Answer 20

A is only excused by frustration of purpose if the landlord knew why A rented the loft when they entered into the contract.

Question 21

What is failure of an express condition?

Answer 21

Failure of an express condition limits obligations created by other contract language and does not create an independent obligation.

Usually indicated with language like: “if”, “as long as”, when”, “provided that”, “on condition that”, and “unless.”

Question 22

When a contractor is under a contractual duty to construct a building and the building is destroyed by an act of nature while it is still a work in progress, the destruction __________.

Answer 22

A contractor’s duty to construct a building is not discharged by destruction of the work in progress. But if the destruction was not caused by the contractor, such as by an act of nature, most courts will extend the date of performance beyond the original deadline.

Question 23

A building that is the subject of a contract between its owner and a contractor is completely destroyed by an act of nature.

If the contractor was working on a renovation, the destruction _____________; if the contractor was constructing the building, the destruction ________________.

Answer 23

The total destruction by an act of nature of a renovation in progress discharges the contractor’s duties by impossibility. If a contract’s subject matter is destroyed without the fault of either party, the contractual duties are discharged. If the original building no longer exists, it is impossible to renovate it.

The construction of a new building, even if destroyed during progress, is not impossible and thus will not discharge the contractor’s duty to perform. Courts typically will extend the time for the contractor to perform.

Question 24

What is the effect of death or incapacity of the person to perform the services of a contract?

Answer 24

Death or physical incapacity of a person necessary to effectuate the contract serves to discharge it, but this applies in personal service contracts where the services involved are “unique.” If the services are the kind that could be delegated, the contract is not discharged by the death of the person who was to perform them.

Question 25

A homeowner and a contractor duly executed a contract providing that the contractor was to construct a residence on a specified lot. No date was included in the contract for completion of the home. After the contractor completed 5% of the residence, a tornado demolished the construction but left the lot undamaged.

Which of the following states the probable legal consequences of the tornado damage?

Answer 25

The contractor remains bound under the original contract, and he is not entitled to compensation for the work that was destroyed. The general rule is that a contractor is responsible for destruction of the premises under construction prior to completion. Once the residence is completed, risk of loss shifts to the owner.

Question 26

A craftsperson entered into a written agreement with an electrician to install electrical wiring in her standalone garage so that she could convert the garage into a workshop. The contract contained a clause requiring all electrical work to be completed within two days and provided that the craftsperson would pay the electrician $700 for his work. After the first day, approximately half of the job was completed. That evening, a piece of a defunct satellite reentered the Earth’s atmosphere and a large chunk of it crashed directly into the craftsperson’s garage, catching the garage on fire and destroying it.

Which of the following best describes the obligations of the electrician and the craftsperson after the crash?

Answer 26

The destruction of the garage discharges the electrician’s duties due to impossibility, but the electrician has a right to recover for the reasonable value of the work he performed. Contractual duties are discharged where it has become impossible to perform them. The occurrence of an unanticipated or extraordinary event may make contractual duties impossible to perform. If the non-occurrence of the event was a basic assumption of the parties in making the contract, and neither party has assumed the risk of the event’s occurrence, duties under the contract may be discharged. If there is impossibility, each party is excused from duties that are yet to be performed. If either party has partially performed prior to the existence of facts resulting in impossibility, that party has a right to recover in quasi-contract for the reasonable value of his performance.

Here, the event was of such an unexpected nature that its non-occurrence was a basic assumption of the parties, and neither party was likely to have assumed the risk of its occurrence. Thus, it has become objectively impossible for the electrician (or anyone else) to complete the job. This impossibility will discharge both the craftsperson and the electrician from performing any contractual duties still to be fulfilled. Therefore, the electrician need not finish the wiring work, and the craftsperson is not obligated to pay the entire amount of $700. But the electrician can recover under quasi-contract.

Question 27

T/F: A contractual duty to perform may be discharged by objective impossibility (i.e., no one could have performed), but subjective impossibility (defendant could not perform) is insufficient.

Answer 27

True.

Question 28

On April 1, a graduate student who owned an antique dictionary agreed to sell it to a buyer for $1,500. The written contract between the seller and the buyer provided that the dictionary would not be delivered to the buyer until April 20. Late on April 15, a fire swept through the seller’s apartment building, through no fault of the seller, and the dictionary was destroyed. Fortunately for the seller, he had insurance that covered all of his damages, including compensation for the destroyed dictionary. On April 20, the seller told the buyer of the fire, but still demanded payment, claiming that the buyer was the equitable owner of the dictionary when it was destroyed, and told her that she could have obtained insurance on the dictionary had she wanted to, because she had an insurable interest in the dictionary as soon as the contract was made. The buyer refused to pay. The seller brings an action against the buyer for the $1,500.

Who will prevail?

Answer 28

The buyer will prevail because complete destruction of the dictionary results in avoidance of the contract and discharge of her duty to pay, since the seller still had the risk of loss.

Under the UCC, if a contract requires for its performance particular goods identified when the contract is made, and, before risk of loss passes to the buyer, the goods are destroyed without the fault of either party, the contract is avoided. The contract required the seller’s particular dictionary, which was identified at the time the contract was made. The risk of loss had not yet passed to the buyer because in a non-merchant’s sale, the risk of loss does not pass to the buyer until tender, and the seller never tendered the dictionary here. Thus, the contract is avoided.

Question 29

R agrees to buy a house, provided it is appraised for at least $2M. The house is appraised for $1.9M. Is R excused from buying the house?

Answer 29

Yes, R is excused from buying the house. The $2M appraisal value was an express condition (“provided it…”) and strict compliance is required. The condition was not satisfied with a $1.9M home.

R cannot sue the seller because the house is worth less than the required appraisal value because express conditions do not create obligations.

Question 30

P contracts to have her driveway paved and to pay $7,500 if she is satisfied with the work. What if everyone likes the work but not her?

Answer 30

P still has to pay. Satisfaction clauses are measured by a reasonable person standard unless the contract deals with art or matters of personal taste.

Question 31

What is a condition precedent?

Answer 31

A condition precedent is an event that must occur before performance is due.

e.g. I will mow the lawn for $25 if it rains on July 4.

Question 32

What is a condition subsequent?

Answer 32

A condition subsequent is an event that cuts off existing duty.

e.g. I will mow the lawn for $25 until the beginning of the fall semester.

Question 33

R agrees to buy the house provided she gets a $1.5M mortgage at 5% or less. She makes no effort to get the mortgage and claims that it was an express condition that was not satisfied, so she is excused from the contract.

What is the effect?

Answer 33

Obviously she is not excused from the contract. R created a condition (mortgage) meant to protect her and her lack of actions forfeited the protection.

R lost the protection of the condition and has to buy the house.

Question 34

R decides to build a house. Her duty to make monthly payments is conditioned on Builder’s providing an architect’s certificate for that month’s work. R tells Builder that she will not pay without a certificate. The next month, Builder does not provide a certificate.

Must R pay?

Answer 34

The condition protects R and she forfeited the protection by waiving it. R has to pay for this month, but she can withdraw her waiver for future performance.

Question 35

What is impossibility (impracticability)?

Answer 35

Impossibility is when an occurrence of an unanticipated or extraordinary event arises after the contract that may make contractual duties impossible to perform or may frustrate the purpose of the contract.

*The impossibility must be objective, not something that is subjective. If subjective, the duties could be performed by someone not but the promisor.

Question 36

How does impracticability work for the sale of goods?

Answer 36

The UCC discharges a seller from the obligations of a contract if performance has become impossible or commercially impracticable.

Question 37

What are events sufficient for discharging a seller under the UCC?

Answer 37

Events sufficient to excuse performance (impracticability) include a shortage of raw materials or the inability to convert them into the seller’s product because of unforeseen events (aka what you’d see in a force majeure clause).

Mere increases in cost - even 50% - is not enough.

Question 38

What is frustration?

Answer 38

Frustration will exist if the purpose of the contract has become valueless by virtue of some supervening event not the fault of the party seeking discharge.

To show frustration:

(i) supervening act or event leading to the frustration;
(ii) at time of entering into contract, parties did not reasonably foresee the act or event occurring;
(iii) purpose of the contract has been completely or almost completed destroyed by this act or event; and
(iv) purpose of the contract was realized by both parties at time of making the contract

Question 39

If the contract is unilateral, a contract to mutually rescind where one party still has a duty to perform will be ineffective. For an ineffective rescission where the offeree has already performed, the rescission promise must be supported by one of the following:

Answer 39

(i) offer of new consideration by the non-performing party
(ii) elements of promisory estoppel (detrimental reliance); or
(iii) manifestation of an intent by the original offeree to make a gift of the obligation owed

Question 40

T/F: Mutual rescission may be made orally, even if the contract states that it can be rescinded only be a written document.

Answer 40

True, BUT oral mutual rescission does not apply if the subject matter of the contract falls within the SoF or the contract is for the sale of goods requires a written rescission or modification.

Question 41

To partially discharge parts of a contract by modification, what factors must be met?

Answer 41

If a contract is subsequently modified by the parties, this will serve to discharge those terms of the original contract that are the subject of the modification. To have a partial discharge, the following requirements typically must be met:

• mutual assent
• consideration (unless modification is to merely correct an error in the original contract OR falls under UCC 2)

Question 42

What are the requirements for a valid novation?

Answer 42

A novation occurs when a new contract substitutes a new party to receive benefits and assume duties that had originally belonged to one of the original parties under the old contract.

The elements are:

(i) previous valid contract
(ii) an agreement among all parties to the new contract
(iii) immediate extinguishment of contractual duties as between the original contracting parties; and
(iv) valid and enforceable new contract

Question 43

A contract may be discharged by an accord and satisfaction. What does this mean?

Answer 43

An accord is an agreement in which one party to an existing contract agrees to accept, in lieu of the performance that she is supposed to receive from the other party, some other or different future performance. This merely suspends the right to enforce it.

Satisfaction is the performance of the accord agreement. It discharges the original contract and the accord contract.

Question 44

What’s a good way to distinguish an accord versus a modification?

Answer 44

Accord and satisfaction is usually triggered by a dispute of an amount due. Generally, parties are looking to discharge the contract seek an accord.

For modification, look to where the parties intend for the contract to continue (e.g. change sought for terms of a multi-year contract or one installment of an installment contract).

Question 45

What is a minor (non-material) breach?

Answer 45

A non-material breach is when the obligee gains a substantial benefit of her bargain despite the obligor’s defective performance. A minor breach does not relieve the aggrieved party of her duty of performance under the contract - just a right to damages.

Question 46

What is a material breach?

Answer 46

A material breach is when the obligee does not gain the substantial benefit of her bargain. If the breach is material, the non-breaching party (i) may treat the contract as at an end and (ii) will have an immediate right to all remedies for breach of the contract.

Question 47

T/F: Failure to perform by the time stated in the contract is generally not a material breach if performance is rendered within a reasonable time.

Answer 47

True. But if the contract specifies that timely performance is essential or if “time is of the essence,” then this can be a material breach.

Question 48

When does a buyer accept goods?

Answer 48

A buyer accepts under UCC 2 when:

(i) after a reasonable opportunity to inspect, indicates to seller that goods conform or she’ll keep them even if they don’t
(ii) she fails to reject within a reasonable time after tender or delivery or fails to notify seller of her rejection; or
(iii) she does any act inconsistent with the seller’s ownership

Question 49

When a debtor breaches an accord agreement by failing to make an immediate satisfaction, the creditor:

Answer 49

may sue either on the original undischarged contract or for breach of the accord agreement.

A contract may be discharged by an accord and satisfaction. The effect of the satisfaction is to discharge not only the original contract but also the accord contract. The accord, taken alone, will not discharge the original contract. It merely suspends the right to enforce it in accordance with the terms of the accord contract. The creditor is not required to sue on the original contract, but may choose to do so. The accord agreement is valid without the satisfaction; it just does not discharge the original agreement without the satisfaction.

Question 50

An executive hires a personal trainer for six months at $100 per week to ready the executive for an upcoming triathlon. One month into the contract, the executive suffers an accident that leaves her paralyzed and unable to compete in the triathlon. When the executive fails to pay the trainer, the trainer sues for breach of contract.

The trainer will not prevail because:

Answer 50

the purpose of the contract was frustrated, thereby discharging the executive’s duty to pay.

If a subsequent physical incapacity of a person prevents that person from enjoying the benefits of the contract, the contractual duties may be discharged by frustration of purpose. Frustration exists if the purpose of the contract has become valueless by virtue of an unforeseeable supervening event. The person is still capable of performing under the contract but would not enjoy the benefit he anticipated when entering into the contract. Here, the executive can still perform (i.e., pay), but the contract for the trainer’s services has become valueless by virtue of the unforeseeable accident and paralysis.

Question 51

After reaching an oral agreement on the terms of representation, a law firm, at its clients’ behest, instituted a class action lawsuit against a tobacco company for $100 million. Prior to signing the written contract outlining the parties’ rights and responsibilities, including the fee arrangement, the firm’s senior partner told the clients’ representative in a moment of goodwill and generosity that if they won or the tobacco company settled, he would turn over half of the attorneys’ fees in the case to a particular nonprofit group that funds research on lung cancer and other respiratory illnesses. After the law firm won the case and collected its fee of $33 million, it had second thoughts about turning over half of it to the nonprofit group.

If the nonprofit group sues the law firm in an attempt to collect the $16.5 million, which of the following is the law firm’s best defense to such action?

A - The promise to turn over half of the attorneys’ fees was discharged by novation.

B - A partial assignment (in favor of the nonprofit group) is ineffective.

C - The promise to turn over half of the attorneys’ fees was not in writing.

D - The law firm was simply attempting to confer a gift upon the nonprofit group.

Answer 51

The nonprofit group did not give consideration to the law firm in return for the law firm’s promise to turn over half of its attorneys’ fees to the group in the event it won or settled the class action suit. Thus, the law firm’s promise was gratuitous; i.e., it was simply attempting to confer a gift upon the nonprofit group, and the group could not compel the law firm to turn over the money. (D)

Question 52

A salvage company offered for sale Confederate dollars that had been recovered when the company recently raised a shipwreck off the coast of South Carolina. A purchasing agent for a private west coast museum purchased the bills, but he had represented that he was buying them for himself in hopes of obtaining a lower price.

After purchasing the bills, the agent carefully packaged them and had them shipped to his museum. While the bills were in transit, the museum burned to the ground and its owner decided that she would not rebuild because most of her collections had been destroyed.

When the bills arrived after the fire, the owner opened the package only to discover that the bills were too brittle for shipping by this method—three bills had disintegrated in transit. Undaunted, the owner took the remaining nine bills and had them mounted behind a glass frame so she could display them in her study. While the bills were being framed, the owner read on the Internet that a large cache of similar bills had just been discovered, and the market price for such bills had just been cut in half.

Frustrated but still undaunted, the owner hung the framed bills in her study. Unfortunately, the salt water had reacted with the pigments in the bills in such a way that shortly after they had been exposed to indirect sunlight, all of the color in the bills faded almost completely away. No other Confederate bills raised from the ocean before had similar reactions; these bills appear to have been printed using substandard dyes.

Which of the following facts would give the museum owner the best basis for rescinding the contract with the salvage company?

A - The bills were too brittle for transport.

B - The discovery of a large cache of similar bills a few days after the sale.

C - The bills’ unusual reaction to indirect sunlight.

D - The destruction of the museum before the bills arrived.

Answer 52

The circumstances of (C) offer the best grounds for rescinding the contract based on mutual mistake. When both parties entering into a contract are mistaken about existing facts relating to the agreement, the contract may be voidable by the adversely affected party if (i) the mistake concerns a basic assumption on which the contract is made; (ii) the mistake has a material effect on the agreed-upon exchange; and (iii) the party seeking avoidance did not assume the risk of the mistake. Here, both parties probably believed that the bills would be suitable for display, like other bills that had been raised from the ocean. They had no reason to suspect that the bills would discolor when exposed to indirect sunlight. This occurrence probably rendered the bills nearly worthless, creating a material imbalance in the exchange. Finally, there is nothing to indicate that the museum owner/purchasing agent assumed the risk of what occurred.