7. CONTRACTS: Performance
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ART 2 PERFORMANCE:
Art2 generally requires a perfect tender -- the delivery and condition of the goods must be exactly as promised in the contract.
Art2 reuires all parties to act in good faith, which is defined as honesty in fact and in the observance of reasonable commercial standards of dealing
ART2 SELLER'S OBLIGATION OF TENDER AND DELIVERY: NONCARRIER CASES
TENDER: In a proper tender of delivery, the seller must put and hold conforming goods at the buyer's disposition for a time sufficient for the buyer to take possession. Seller must give the buyer notice reasonably necessary to enable her to take possession of the goods. The tender must be at a reasonable hour.
PLACE: In the absence of an agreement otherwise, the place of delivery is the seller's place of business, or if he has none, his residence. However, if at the time of contracting, the goods are to the knowledge of both parties, at some other place, that is the place of delivery.
ART2 SELLER'S OBLIGATION OF TENDER AND DELIVERY: CARRIER CASES
SHIPMENT CONTRACTS: In the absense of agreement otherwise, seller need not see that the goods reach the buyer, but need only:
(a) put the goods into the hands of a reasonable carrier and made a reasonable contract for their transportation to the buyer;
(b) obtain and promptly tender any documents required by the contract or usage of trade or otherwise necessary to enable the buyer to take possession; and
(c) promptly notify buyer of shipment.
DESTINATION CONTRACTS: If the contract requires the seller to tender delivery of the goods at a particular destination, the seller must, at the destination, put and hold conforming goods at the buyer's disposition. he must also give buyer any notice of tender that is reasonably necessary and provide her with any documents of title necessary to obtain delivery. Tender of documents through ordinary banking channels is sufficient.
BUYER'S OBLIGATION TO PAY
In a shipment case, the price is due when the goods are put in the hands of the carrier, and in a destination contract, the price is due when the goods reach the named destination.
Price is by cash unless there is some other agreement. Tender of payment by check is sufficient unless the seller demands legal tender and gives the buyer time to get cash. If a check is given, the buyer's duty to pay is suspended until the check is either paid or dishonored. If the check bounces, the seller may sue for the price or recover the goods.
In an installment contract, the seller may demand payment for each installment if the price can be so apportioned, unless a contrary intent appears.
BUYER'S RIGHT TO INSPECT
Unless the contrac provides otherwise, the buyer has a right to inspect the goods before she pays. Expenses of inspection must be born by the buyer but may be recovered from the seller if the goods do not conform and are rejected.
A buyer may inspect at any reasonable time and in any reasonable manner.
If the contract provides for payment COD or otherwise indicates that the buyer has promised to pay without inspecting the goods, there is no right of inspection prior to payment. If payment is due before inspection, the fact that the goods are defective does not excuse nonpayment unless the defect appears without inspection or there is fraud in the transaction.
PROMISES AND CONDITIONS:
A promise is a commitment to do or refrain from doing something, may be conditional or unconditional. An unconditional promise is absolute; a conditional promise will become absolute upon the occurrence of the condition. The failure to perform a promise that has become absolute is a breach.
A condition is an event, other than passage of time, the occurrence or nonoccurrence of which will create, limit, or extinguish the other party's absolute duty to perform. A condition is a promise modifier.
The failure of a contractual provision that is only a condition is not a breach of contract, but it discharges the liability of the promisor whose obligations on the conditional promise never mature.
To determine whether an item is a condition or a promise, the test is one of intent of the parties. Courts apply the following criteria to determine intent:
-- the specific words of the phrase and the words of the rest of the agreement
-- custom with repect to the business in the community
-- if performance is to be rendered by a third party, it is more likely to be a condition than an absolute promise
-- in doubtful situations, courts prefer promises
A particular contractual provision may serve as a promise for one party and a condition for the other. These are called constructive conditions of exchange.
A term may also be a promise and a condition for the same party.
CLASSIFICATION OF CONDITIONS:
ACCORDING TO TIME OF OCCURRENCE
A condition precedent is one that must occur before an absolute duty of immediate performance arises in the other party.
If a party has no duty to perform unless she is satisfied with another party's performance, the level of satisfaction required depends on the subject matter of the contract. If it involves mechanical fitness, utility, or marketability, the party's performance is judged objectively, and this it must satisfy a reasonable person. If it involves personal taste or judgement the party's performance is judged subjectively, and thus, it must satisfy the particular party receiving performance. The party must act honestly and in good faith.
Conditions concurrent are those that are capable of occuring together, and theat the parties are bound to perform at the same time. Each is in effect a condition precedent of the other.
A condition subsequent is one the occurrence of which cuts off an already existing absolute duty of performance.
CLASSIFICATION OF CONDITINS:
EXPRESS, IMPLIED, AND CONSTRUCTIVE
Express conditions are written into the contract.
Implied conditions are to be inferred from evidence of the parties' intention, ie, their existence is determined by the process of contractual interpretation. Usually referred to as implied in fact conditions.
Constructive conditions are read into a contract by the court without regard to, or even despeite, the parties' intention. This is done in the interests of fairness to ensure that both parties receive the performance for which they bargained. Referred to as implied in law conditions.
If a contract is not enforceable due to the failure or occurrence of a condition, and one of the parties has fully or partially performed, he can usually recover under unjust enrichment theories, although that may be less than the contract price.
HAVE CONDITIONS BEEN EXCUSED?
The duty of immediate performance with respect to a conditional promise does not become absolute until the conditions (1) have been performed, or (2) have been legally excused. Thus, in analyzing a question, if the facts do not reveal performance of the applicable condition precedent or concurrent, look to see whether the condition has been excused.
Conditions can be legally excused because the party protected by the condition hinders or fails to cooperate if it is wrongful. No need to prove bad faith or malice and hindrence can be active or passive.
An actual breach of contract when performance is due will excuse the duty of counterperformance. At common law, will be excused only if the breach is material. If breach is minor, duty may be suspended but not excused.
- Anticipatory repudiation occurs if a promisor, prior to the time set for performance of his promise, indicates that he will not perform when the time comes. If the requirements below are met, this will serve to excuse conditions:
- -- executory bilateral contract required -- ie, unperformed duties on both sides
- -- repudiation must be unequivocal
EFFECT OF ANTICIPATORY REPUDIATION
The nonrepudiating party has four alternatives:
(1) treat the repudiaiton as a total repudiation and sue immediately;
(2) suspend his own performance and wait to sue until the performance date;
(3) treat the repudiation as an offer to rescind and treat the contract as discharged; or
(4) ignore the repudiation and urge the promisor to perform.
EXCUSE OF CONDITION BY PROSPECTIVE INABILITY OR UNWILLINGNESS TO PERFORM
Prospective failure of condition occurs when a party has reasonable grounds to believe that the other party will be unable or unwilling to perform when performance is due.
Prospective inability or unwillingness to perform is not an anticipatory repudiation because such a repudiation must be unequivocal, whereas prospective failure involves conduct or words that merely raise doubts that the party will perform.
In deciding whether conduct suffices to be considered prospective failure, a reasonable person standard will be applied.
The effect of this prospective failure is to allow the innocent party to suspend further performance on her side until she receives adequate assurances that performance will be forthcoming. If she fails to obtain adequate assurances, she may be excused from her own performance and may treat the failure to provide assurances as a repudiation.
Retraction is possible if the defaulting party regains his ability or willingness to perform. Must be communicated to the other party in order to be effective and if other party has already changed her position in reliance on the prospective failure, the retraction might be ineffective.
EXCUSE OF CONDITION BY SUBSTANTIAL PERFORMANCE
Generally, the condition of complete performance may be excused if the party has rendered substantial performance. In this case, the other party's duty of counterperformance becomes absolute.
Substantial performance arises where breach is minor. If it is material, the performance has not been substantial.
Most courts will not apply the substantial performance doctrine where the breach has been willful.
The other party will be able to mitigate by deducting damages suffered due to the first party's incomplete performance.
This doctine was developed in the construction context and may not be applicable to sale of goods.
EXCUSE OF CONDITION BY DIVISIBILITY OF CONTRACT
If a party performs one of the units of a divisible contract, he is entitled to the agreed-on equivalent for that unit even if he fails to perform the other units. It is not a condition precedent to the other party's liability that the whole contract be performed. However, the other party has a cause of action for failure to perform the other units and may withhold his counterperformance for those units.
- The rule applies only if there is a divisible contract. Three conditions must be met concurrently in order to make this finding:
- (1) the performance of each party is divided into two or more parts under the contract;
- (2) the number of parts due from each party is the same; and
- (3) the performance of each part by one party is agreed on as the equivalent of the corresponding part from the other party.
Art2 assumes that a contract is not divisible unless it authorizes deliveries in several lots, in which case the contract is called an installment contract. The price may be demanded for each lot unless a contrary intent appears.
EXCUSE OF CONDITION BY WAIVER OR ESTOPPEL
Consideration is not required for a proper waiver of a condition, which may be by words or conduct.
ESTOPPEL WAIVER: When a party indicates that she is waiving a condition before it is to happen or she is waiving some performance before it is to be rendered, and the person addressed detrimentally relies on the waiver, the courts will find this to be a binding estoppel waiver.
ELECTION WAIVER: When a condition or a duty of performance is broken, the beneficiary of the condition or duty must make an election; she may: (1) terminate her liability, or (2) continue under the contract. If she chooses the latter course, she will be deemed to have waived the condition or duty. This election waiver requires neither consideration nor estoppel.
It is important to not that a waiver severs only the right to treat the failure of the condition as a total breach excusing counterperformance. However, the waiving party does not thereby waive her right to damages.
IS ABSOLUTE DUTY TO PERFORM DISCHARGED?:
BY PERFORMANCE, ETC.
DISCHARGE BY PERFORMANCE: duty is discharged upon full and complete performance.
DISCHARGE BY TENDER OF PERFORMANCE: good faith tender of performance made in accordance with contractual terms will also discharge contractual duties. The tendering party must possess the present ability to perform; a mere promise of performance will not suffice.
DISCHARGE BY OCCURRENCE OF CONDITION SUBSEQUENT: will serve to discharge performance.
DISCHARGE BY ILLEGALITY: if the subject matter of the contract has become illegal due to a subsequently enacted law or other gov'tal act, performance will be discharged. (If illegality existed at time of contract, no contract existed.)
IS ABSOLUTE DUTY TO PERFORM DISCHARGED?:
Contractual duties will be discharged if it has become impossible to perform them.
-- impossibility must be objective, duties could not be performed by anyone;
-- impossibility must arise after the contract has been entered into; if impossibility existed at time of contracting, then the problem is one of contract formation, namely, whether the contract is voidable because of mistake.
-- if the contract is discharged because of impossibility, each party is excused from duties arising under the contract that are yet to be fulfilled, either party may sue for rescission and receive restitution of any goods delivered, etc.
-- if the performance is made only partially impossible, the duty may be discharged only to that extent of the impossibility
-- temporary impossibility suspends contractual duties; it does not discharge them; not however that if the burden on either party to the contract would be substantially increased or different from that originally contemplated.
-- if part performance has been renered by either party prior to the existence of the facts leading to impossibility, that party will have a right to recover in quasi-contract at the contract rate or for the reasonable value of his performance
death or physical incapacity: of a person necessary to effectuate the contract serves to discharge it.
supervening illegality: often treated as a form of impossibility
subsequent destruction of subject matter or means of performance: contractual duties will be discharged, note however, that this destruction must not have been the fault of either party; destruction of the subject matter will render a contract impossible only if the very thing destroyed is necessary to fulfill the contract, if the thing destroyed is not actually necessary, impossiblity is not a defense; the rules relating to discharge because of destruction of the subject matter will not apply if the risk has already passed to the buyer.
IS ABSOLUTE DUTY TO PERFORM DISCHARGED?:
- Test for impracticability: the party to perform has encountered:
- -- extreme and unreasonable difficulty or expense; and
- -- its nonoccurrence was a basic assumption of the parties.
The courts will allow relief where subjective impossibility is found. It should be noted, however, that a mere change in the degree of difficulty or expense due to such causes as increased wages, prices of raw materials, or costs of construction, unless well beyond the normal range, does not amount to impracticability
applied to sale of goods: art2 follows the above rules for impossiblity and impracticability, the seller will be discharged to the extent of the impossibility or impracticability. If it is fair to say that the parties would not have placed on the seller the risk of the extraordinary occurrence, the seller will be discharged.
Events sufficient to excuse performance include a shortage of raw materials or the inability to convert them into the seller's product because of contingencies such as war, strike, embargo, or unforeseen shutdown of a major supplier. However, mere increases in cost are rarely sufficient for discharge unless they change the nature of the contract.
IS ABSOLUTE DUTY TO PERFORM DISCHARGED?:
Frustration wll exist if the purpose of the contract has become valueless by virtue of some supervening event not the fault of the party seeking discharge. The elements necessary to establish frustration are as follows:
(1) there is some supervening act or event leading to the frustration;
(2) at the time of entering into the contract, the parties did not reasonably foresee the act or event occurring;
(3) the purpose of the contract has been completely or almost completely destroyed by this act or event; and
(4) the purpose of the contract was realized by both parties at the time of making the contract.
IS ABSOLUTE DUTY TO PERFORM DISCHARGED?:
Mutual Rescission: The contract may be discharged by an express agreement between the parties to rescind. The agreement is itself a binding contract with consideration. The reasons for entering into such an agreement are immaterial absent duress or fraud.
For a contract to be effectively discharged by rescission, the duties must be executory on both sides
- In a unilateral contract situation, where the offeree has already performed, the rescission promise must be supported by one of the following:
- -- an offer of new consideration by the nonperforming party;
- -- elements of promissory estoppel; or
- -- manifestation of an intent by the original offeree to make a gift of the obligation owed her
A mutual agreement to rescind will usually be enforced when a bilateral contract has been partially performed. Whether the party who has partially performed will be entitled to compensation will depend on the terms of the rescission agreement. The party seeking such compensation must affirmatively prove his right to the compensation in order to recover.
- Mutual rescission may be made orally. This is so even though the contract to be rescinded expressly states that it can be rescinded only in writting. Several exceptions, though:
- -- if the subject matter of the contract to be rescinded falls within the statute of frauds, then the rescission should be in writing; and
- -- contracts for sale of goods, art2 and the statute of frauds requires a written rescission or modification if the original contract so requires
- Unilateral Rescission: results when one of the parties desires to rescind but the other desires that the contract be performed according to its terms. The party desiring rescission must have adequate legal grounds. Most common among these are mistake, misrepresentation, duress, and failure of consideration. If the nonassenting party refuses to voluntarily grant rescission, the other party may file an action in equity to obtain it.
PARTIAL DISCHARGE BY MODIFICATION OF CONTRACT
- 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 such a partial discharge, the following requirements must usually be met:
- -- mutual assent
- -- consideration -- usually found to be present because each party has limited his right to enforce the original contract as is, must be consideration in both directions, though
No consideration where the mod is only a correction.
No consideration is needed for the modification of a contract for the sale of goods under art2 as long as mod is sought in good faith.
DISCHARGE BY NOVATION
- 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 terms of the old contract. A novation will serve to discharge the old contract. The elements for a valid novation are as follows:
- (1) a previous valid contract;
- (2) an agreement among all parties, including the new party or parties to the new contract;
- (3) the immediate extinguishment of contractual duties as between the original contracting parties; and
- (4) a valid and enforceable new contract.
DISCHARGE BY CANCELLATION OR RELEASE
The destruction or surrender of a written contract will not usually by itself discharge a contract. If, however, the parties manifest their intent to have these acts serve as a discharge, it will usually have this effect if consideration or one of its alternatives is present.
A release and/or contract not to sue will serve to discharge contractual duties, must be in writing and supported by new consideration or promissory estoppel elements.
DISCHARGE BY ACCORD OR SATISFACTION
ACCORD: An accord is an agreement in which one party to an existing contract agrees to accept, in lieu of the performance stated, some other, different performance.
An accord must be supported by consideration
. Where the new consideration is of lower value than the old, it is sufficient if it is of different type or to be paid to a third party. An accord, taken alone, will not discharge the prior contract. It merely suspends the right to enforce it in accordance with the terms of the accord contract.
SATISFACTION: the performance of the accord agreement. Its effect is to discharge not only the original contract but also the accord contract as well.
BREACH BY DEBTOR: the creditor may sue either on the original undischarged contract or for breach of the accord agreement.
If a monetary claim is uncertain or is subject to a bona fide dispute, an accord and satisfaction may be accomplished by a good faith tender and acceptance of a check when that check conspicuously states that the check is tendered in full satisfaction of the debt.
- BREACH BY CREDITOR: If the accord agreement is breached by the creditor, ie, he sues on the original contract, the debtor has two courses of action available:
- (1) she may raise the accord agreement as an equitable defense and ask that the contract action be dismissed; or
- (2) she may wait until she is damaged, ie, she loses in court, and then bring an action at law for damages for breach of the accord contract.
DISCHARGE BY ACCOUNT STATED
An account stated is a contract between parties whereby they agree to an amount as a final balance due. This serves to merge all of thier transactions by discharging all claims owed. All rights to the original transactions are discharged and the new agreement is enforceable. The parties must have had more than one transaction between them.
Not necessary that it be in writing unless one or more of the original transactions was subject to the statute of frauds.
Account stateds can be express or implied.
DISCHARGE BY LAPSE OR RUNNING OF STATUTE OF LIMITATIONS
Where the duty of each party is a condition concurrent to the other's duty, it is possible that on the day set for performance, neither party is in breach and their contractual obligations lapse.
If the contract states that time is of the essense, then it will lapse immediately; otherwise will lapse in a reasonable time.
If a statute of limitations on an action has run, it is generally held that an action for breach of contract may be barred. Note, however that only judicial remedies are barred; the running of the statute does not discharge the duties.
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