16 Contract Discharge

and Remedies

LEARNING OUTCOMES FACING A LEGAL PROBLEM

The five learning outcomes The DeLeons contract with a construction company
labeled LO1 through LO5 are
designed to help improve your to build a house. The contract specifies Brand X
understanding of the chapter. plasterboard. The builder cannot obtain Brand X,
After reading this chapter, you and the DeLeons are on a mountain-hiking vacation
should be able to . . .
in Peru and are unreachable. The builder decides to install Brand
LO1 Explain the difference Y instead, which she knows is identical in quality and durability to
between complete and
substantial contractual
Brand X. All other aspects of construction conform to the contract.
performance. Does this deviation constitute a breach of contract? Can the DeLeons
LO2 Describe how parties can
avoid their obligation to pay the builder because Brand Y plasterboard
discharge their contract by was used instead of Brand X?
agreement.
LO3 Identify different types of
damages.
LO4 Define the remedy of
rescission and restitution.
Parties to a contract need to know when their contract is terminated. In other
LO5 Explain the remedy of words, the parties need to know when their contractual duties are at an end.
specific performance. This chapter deals first with the discharge of a contract, which is normally
accomplished when both parties have performed the acts promised in the con-
tract. We look at the degree of performance required and at some other ways in
breach of contract
Failure, without legal excuse,
which discharge can occur.
of a promisor to perform the When it is no longer advantageous for a party to fulfill his or her contractual
obligations of a contract. obligations, breach of contract may result. A breach of contract occurs when
a party fails to perform part or all of the required duties under a contract.
discharge Once this occurs, the other party—the nonbreaching party—can choose one or
The termination of one’s more of several remedies. These remedies are discussed in the last part of this
obligation. In contract law, chapter.
discharge occurs when the
parties have fully performed their
contractual obligations or when
events, conduct of the parties,
or operation of law releases the
Contract Discharge
parties from further performance.
The most common way to discharge (terminate) contractual duties is by
performance performance (fulfillment) of those duties. As you can see in Exhibit 16–1, in
In contract law, the fulfillment addition to performance, there are numerous other ways in which a contract
of one’s duties arising under can be discharged. These include discharge by performance, agreement, and
a contract with another; the operation of law.
normal way of discharging one’s
contractual obligations.
DISCHARGE BY PERFORMANCE
tender
A timely offer or expression The contract comes to an end when both parties fulfill their respective duties
of willingness to pay a debt or by performance of the acts they have promised. Performance can also be accom-
perform an obligation. plished by tender. Tender is an unconditional offer to perform by a person who
196
C HA PTER 16 ■ Contract Discharge and Remedies 197

EXHIBIT 16–1
Contract Discharge

CONTRACT
BY FAILURE OF A DISCHARGE
CONDITION
If performance is
conditional, duty to
perform does not
become absolute until
that condition occurs.

• Statute of limitations
• Impossibility
performance
of

• Commercial
Impracticability

is ready, willing, and able to do so. EXAMPLE 16.1 A seller who places goods at
the disposal of a buyer has tendered delivery and can demand payment accord-
ing to the terms of the agreement. A buyer who offers to pay for goods has
tendered payment and can demand delivery of the goods.• Once performance
has been tendered, the party making the tender has done everything possible
to carry out the terms of the contract. If the other party refuses to perform, the
party making the tender can consider the duty discharged and sue for breach
of contract.

Complete versus Substantial Performance. It is important to distinguish LO1 Explain the difference
between complete performance and substantial performance. Normally, condi- between complete and
tions expressly stated in the contract must fully occur in all aspects for com- substantial contractual
plete (or strict) performance to take place. Any deviation breaches the contract performance.
and discharges the other party’s obligation to perform. Although in most con-
tracts the parties fully discharge their obligations by complete performance,
sometimes a party fails to fulfill all of the duties or completes the duties in
a manner contrary to the terms of the contract. The issue then arises as to
whether the performance was sufficiently substantial to discharge the contrac-
tual obligations.
To qualify as substantial, the performance must not vary greatly from the
performance promised in the contract. It must result in substantially the same
benefits as those promised in the contract. If performance is substantial, the
other party’s duty to perform remains absolute (minus damages, if any, for
the minor deviations). If performance is not substantial, there is a material
breach—the nonbreaching party is excused from performance and can sue for
damages caused by the breach.
198
LO2 Describe how parties can
discharge their contract by
agreement.
novation
The substitution, by agreement,
of a new contract for an old one,
with the rights under the old
one being terminated. Typically,
there is a substitution of a new
person who is responsible for the
contract and the removal of the
original party’s rights and duties
under the contract.
UNIT TWO ■ Contracts
Performance to the Satisfaction of Another. Contracts often state that
completed work must personally satisfy one of the parties or a third person.
When the subject matter of the contract is personal, performance must actu-
ally satisfy the party whose satisfaction is required. EXAMPLE 16.2 Contracts
for portraits, works of art, medical or dental work, and tailoring are personal.•
Only the personal satisfaction of the party is sufficient to fulfill the contract—
unless the party expresses dissatisfaction only to avoid payment or otherwise
is not acting in good faith.
Contracts that involve mechanical fitness, utility, or marketability (such
as “the pump must be mounted on a platform”) need only be performed to
the satisfaction of a reasonable person unless they expressly state otherwise.
When contracts require performance to the satisfaction of a third party (such
as “the road must be graded to the satisfaction of the supervising engineer”),
the courts are divided. A majority of courts require the work to be satisfactory
to a reasonable person, but some courts hold that the personal satisfaction of
the third party must be met.
DISCHARGE BY AGREEMENT
Any contract can be discharged by the agreement of the parties. This agree-
ment can be part of the original contract, or the parties can form a new contract
for the express purpose of discharging the original contract.
Discharge by Rescission. Rescission is a process in which the parties cancel
the contract and are returned to the positions they occupied prior to the con-
tract’s formation. For mutual rescission to take place, the parties must make
another agreement that also satisfies the legal requirements for a contract—
there must be an offer, an acceptance, and consideration. Ordinarily, if the par-
ties agree to rescind the original contract, their promises not to perform those
acts promised in the original contract will be legal consideration for the sec-
ond contract. This occurs when the contract is executory on both sides (that
is, neither party has completed performance). Contracts that are executed on
one side (one party has performed) can be rescinded only if the party who has
performed receives consideration for agreeing to call off the deal.
Discharge by Novation. The process of novation substitutes a third party
for one of the original parties. Essentially, the parties to the original contract
and one or more new parties all get together and agree to the substitution. The
requirements of a novation are as follows:
1. The existence of a previous, valid obligation.
2. Agreement by all the parties to a new contract.
3. The extinguishing of the old obligation (discharge of the prior party).
4. A new, valid contract.
IN THE COURTROOM
You contract with A. Logan Enterprises to sell it your office equipment
business under an installment sales contract requiring twelve monthly
payments. Logan later decides not to buy the business but knows of
another party, MBI Corporation, interested in doing so. All three of you
get together and agree to a new contract under which MBI agrees to purchase your
business. Is the original contract discharged and replaced with the new contract?
As long as the new contract is supported by consideration, the novation discharges
the original contract between you and Logan and replaces it with the new contract
between you and MBI. Logan prefers the novation over an assignment, because the
C HA PTER 16 ■ Contract Discharge and Remedies 199

novation discharges all the liabilities stemming from its contract with you. If Logan
had merely assigned the contract to MBI, Logan would have remained liable to you
for the payments if MBI defaulted.

Discharge by Accord and Satisfaction. In an accord and satisfaction, the accord and satisfaction
parties agree to accept performance different from the performance originally An agreement and payment (or
promised. An accord is defined as an executory contract (one that has not yet other performance) between
been performed) to perform some act in order to satisfy an existing contractual two parties, one of whom has a
right of action against the other.
duty. The duty is not yet discharged. A satisfaction is the performance of the
After the agreement has been
accord. An accord and its satisfaction (performance) discharge the original con- made and payment or other
tractual obligation. performance has been tendered,
Once the accord has been made, the original obligation is merely suspended. the “accord and satisfaction” is
The obligor can discharge the original obligation by performing the obligation complete.
agreed to in the accord. Likewise, if the obligor refuses to perform the accord,
the obligee can bring an action on the original obligation.
EXAMPLE 16.3 Shep obtains a judgment against Marla for $8,000. Later, both
parties agree that the judgment can be satisfied by Marla’s transfer of her
automobile to Shep. This agreement to accept the auto in lieu of $8,000 in cash
is the accord. If Marla transfers her automobile to Shep, the accord agreement
is fully performed, and the $8,000 debt is discharged. If Marla refuses to trans-
fer her car, the accord is breached. Because the original obligation is merely
suspended, Shep can sue to enforce the judgment for $8,000 in cash or bring an
action for breach of the accord.•

DISCHARGE BY OPERATION OF LAW

Under some circumstances, contractual duties may be discharged by operation
of law. These circumstances include the running of the relevant statute of limi-
tations and impossibility of performance.

Statute of Limitations. A statute of limitations limits the time during which statute of limitations
a party can sue on a particular cause of action. After the time has passed, a A statute setting the maximum
suit based on that cause can no longer be brought. EXAMPLE 16.4 The statutory time period during which a
period for bringing a suit for breach of a written contract is typically four or certain action can be brought.
five years.•

When Performance Is Impossible or Impracticable. After a contract

has been made, performance may become impossible in an objective sense.
This is known as impossibility of performance and may discharge a contract. impossibility of performance
This objective impossibility (“It can’t be done”) must be distinguished from A doctrine under which
subjective impossibility (“I simply can’t do it”). Examples of subjective impos- a party to a contract is
sibility include contracts in which goods cannot be delivered on time because relieved of his or her duty to
perform when performance
of freight car shortages and contracts in which money cannot be paid on time
becomes impossible or totally
because the bank is closed. In effect, the party in these cases is saying, “It impracticable (through no fault
is impossible for me to perform,” not “It is impossible for anyone to perform.” of either party).
Accordingly, such excuses do not discharge a contract, and the nonperforming
party is normally held in breach of contract.

Impossibility of Performance. Certain situations generally qualify under the

objective-impossibility rules to discharge contractual obligations:
1. When one of the parties to a personal contract dies or becomes incapacitated
prior to performance. EXAMPLE 16.5 Fred, a famous dancer, contracts with
Ethereal Dancing Guild to play a leading role in its new ballet. Before the
ballet can be performed, Fred becomes ill and dies. His personal performance
was essential to the completion of the contract. Thus, his death discharges
the contract.•
200
commercial impracticability
A doctrine under which a
party may be excused from
performing a contract when
(1) a contingency occurs, (2) the
contingency’s occurrence makes
performance impracticable,
and (3) the nonoccurrence of
the contingency was a basic
assumption on which the
contract was based.
remedy
The relief given to innocent
parties, by law or by contract, to
enforce a right or to prevent or
compensate for the violation of
a right.
LO3 Identify different types
of damages.
damages
Money sought as a remedy for
a breach of contract or for a
tortious act.
compensatory damages
A money award equivalent to
the actual value of injuries or
damages sustained by the
aggrieved party.
UNIT TWO ■ Contracts
2. When the specific subject matter of the contract is destroyed. EXAMPLE 16.6 A-1
Farm Equipment agrees to sell Gudgel a specific tractor on its lot and prom-
ises to have it ready for Gudgel to pick up on Saturday. On Friday night, a
bus veers off the nearby highway and smashes into the tractor, destroying it
beyond repair. The accident renders A-1’s performance impossible.•
3. When a change in the law renders performance illegal. EXAMPLE 16.7 A con-
tract to build an apartment building becomes impossible to perform when
the zoning laws are changed to prohibit the construction of residential rental
property at the planned location.•
Commercial Impracticability. Performance becomes commercially impracticable
when it turns out to be significantly more difficult or expensive than antici-
pated. A party may sometimes be excused from performing a contract under
the doctrine of commercial impracticability. EXAMPLE 16.8 In one case, a court
held that a contract was discharged because a party would otherwise have had
to pay ten times more than the original estimate to excavate (remove from the
ground) a certain amount of gravel.•
Caution should be used in invoking the doctrine of commercial impracti-
cability. The added burden of performing must be extreme and must not have
been foreseeable by the parties at the time the contract is made.
Temporary Impossibility. An occurrence or event (such as war) that makes it
temporarily impossible to perform the act for which a party has contracted oper-
ates to suspend performance until the impossibility ceases. Then, ordinarily, the
parties must perform the contract as originally agreed. If, however, the lapse of
time and the change in circumstances make it substantially more burdensome
for the parties to perform the promised acts, the contract is discharged.
Contract Remedies
A remedy is the relief provided for an innocent party when the other party has
breached the contract. It is the means employed to enforce a right or to redress
an injury. The most common remedies are damages, rescission and restitution,
and specific performance.
DAMAGES
A breach of contract entitles the nonbreaching party to sue for damages
(money). Damages are designed to compensate the nonbreaching party for the
loss of the bargain. Generally, innocent parties are to be placed in the position
they would have occupied had the contract been performed. Several types of
damages are discussed in the sections that follow.
Compensatory Damages. Damages compensating the nonbreaching party
for the loss of the bargain are known as compensatory damages. These dam-
ages compensate the injured party only for injuries actually sustained and
proved to have arisen directly from the loss of the bargain due to the breach of
contract. Compensatory damages simply replace the loss caused by the wrong
or injury.
The amount of compensatory damages is the difference between the value
of the breaching party’s promised performance and the value of his or her
actual performance. This amount is reduced by any loss that the injured party
has avoided. EXAMPLE 16.9 If you are hired to perform certain services during
August for $3,000, but the employer breaches the contract and you find another
job that pays only $500, you can recover $2,500 as compensatory damages.
C HA PTER 16 ■ Contract Discharge and Remedies 201

You can also recover expenses you incurred in finding the other job. These are
incidental damages—damages directly resulting from a breach of contract,
including expenses incurred because of the breach.•
The measurement of compensatory damages varies by type of contract. In a
contract for a sale of goods, the usual measure of compensatory damages is an
amount equal to the difference between the contract price and the market price
at the time and place of delivery.

IN THE COURTROOM
MediQuick Laboratories contracts with Cal Computer Industries to pur-
chase ten model X-15 computer work stations for $8,000 each. If Cal
Computer fails to deliver the ten work stations, and the current market
price of the work stations is $8,500 each, what is MediQuick’s mea-
sure of damages? MediQuick’s measure of damages is $5,000 (10 ✕ $500), plus
incidental damages. In cases in which the buyer breaches and the seller has not
yet produced the goods, compensatory damages normally equal the lost profits on
the sale, not the difference between the contract price and the market price.

Consequential Damages. Consequential damages, which are also referred to consequential damages
as special damages, are foreseeable damages that result from a party’s breach Special damages that
of contract. They differ from compensatory damages in that they are caused by compensate for a loss that is
special circumstances beyond the contract itself. When a seller does not deliver not direct or immediate (for
example, lost profits). The
goods, knowing that a buyer is planning to resell those goods immediately, con-
special damages must have
sequential damages are awarded for the loss of profits from the planned resale.
been reasonably foreseeable
EXAMPLE 16.10 Marty contracts to buy a certain quantity of Quench, a specialty
at the time the breach or injury
sports drink, from Nathan. Nathan knows that Marty contracted with Ruthie occurred.
to resell and ship the Quench within hours of its receipt. The beverage is then
to be sold to fans attending the Super Bowl. Nathan fails to timely deliver
the Quench. Marty can recover the consequential damages—the loss of profits
from the planned resale to Ruthie—caused by the nondelivery.•
For a nonbreaching party to recover consequential damages, the breach-
ing party must know (or have reason to know) that special circumstances will
cause the nonbreaching party to suffer an additional loss.

IN THE COURTROOM
Gilmore contracts to have a specific item shipped to her—one that she
desperately needs to repair her printing press. Gilmore tells the ship-
per that she must receive the item by Monday or she will not be able
to print her paper and will lose $750. If the shipper is late, what can
Gilmore recover? Gilmore can recover the consequential damages caused by the
delay (the $750 in losses).

Mitigation of Damages. In most situations, when a breach of contract occurs,

the injured party has a duty to mitigate, or reduce, the damages that he or
she suffers. Under this doctrine of mitigation of damages, the required action mitigation of damages
depends on the nature of the situation. EXAMPLE 16.11 In the majority of states, A rule requiring a plaintiff to have
wrongfully terminated employees have a duty to mitigate damages suffered done whatever was reasonable
as a result of the employer’s breach. The damages that the employees will be to minimize the damages caused
by the defendant.
awarded are their salaries less the incomes they would have received in simi-
lar jobs obtained by reasonable means.•
202
punitive damages
Compensation in excess
of actual or consequential
damages. They are awarded in
order to punish the wrongdoer
and usually will be awarded
only in cases involving willful or
malicious misconduct.
liquidated damages
An amount, stipulated in the
contract, that the parties to
a contract believe to be a
reasonable estimation of the
damages that will occur in the
event of a breach.
penalty
A sum named in a contract not
as a measure of compensation
for its breach but rather as
punishment for a default. The
agreement as to the amount
will not be enforced, and
recovery will be limited to actual
damages.
LO4 Define the remedy of
rescission and restitution.
restitution
A remedy under which a person
is restored to his or her original
position prior to formation of a
contract.
UNIT TWO ■ Contracts
Punitive Damages. Punitive damages, which are also known as exemplary
damages, generally are not recoverable in an action for breach of contract.
Punitive damages are designed to punish and make an example of a wrongdoer
for the purpose of deterring similar conduct in the future. Such damages have
no legitimate place in contract law because they are, in essence, penalties, and
a breach of contract is not unlawful in a criminal sense. A contract is, after all,
a civil relationship between the parties. The law may compensate one party for
the loss of the bargain—no more and no less.
In a few situations, a person’s actions can cause both a breach of contract and
a tort. EXAMPLE 16.12 The parties can establish by contract a certain reasonable
standard or duty of care. Failure to live up to that standard is a breach of con-
tract, and the act itself may constitute negligence.• An intentional tort (such
as fraud) may also be tied to a breach of contract. In such a case, it is possible
for the nonbreaching party to recover punitive damages for the tort in addition
to compensatory and consequential damages for the breach of contract.
Liquidated Damages. A liquidated damages provision in a contract specifies
a certain amount of money to be paid in the event of a future default or breach
of contract. (Liquidated means determined, settled, or fixed.) Liquidated dam-
ages differ from penalties. A penalty specifies a certain amount to be paid in the
event of a default or breach of contract and is designed to penalize the breach-
ing party. Liquidated damages provisions normally are enforceable; penalty
provisions are not.
To determine whether a particular provision is for liquidated damages or for
a penalty, answer two questions: First, when the contract was formed were the
potential damages that would be incurred if the contract was not performed on
time difficult to estimate? Second, was the amount set as damages a reason-
able estimate of those potential damages? If both answers are yes, the provi-
sion is for liquidated damages and will be enforced. If either answer is no, the
provision is for a penalty and normally will not be enforced.
IN THE COURTROOM
ACTUAL CASE EXAMPLE
Allen and Patsy McCain own the Green Park Inn in North Carolina. They
lease the Inn to Gary and Gail Moore. The lease provides that if the
Moores default, the McCains are entitled to “liquidated damages” to
cover “restoration of the physical plant,” “lost lease payments,” “harm to the repu-
tation of the hotel,” and other items. The lease states that $500,000 is “a fair and
reasonable estimate” of these damages. The Moores default on the rent and vacate
the hotel. The McCains file a suit against the Moores to obtain $500,000. Is the
lease clause an enforceable liquidated damages provision? Yes. In a 2002 case,
Green Park Inn, Inc. v. Moore, a North Carolina state court ordered the defendants
to pay the McCains. The lease provision satisfied the two-part test for liquidated
damages: the amount of the damages would have been difficult to determine at the
time that the lease was signed, and the estimate of the damages was reasonable.
RESCISSION AND RESTITUTION
Rescission essentially is an action to undo, or cancel, a contract—to return non-
breaching parties to the positions that they occupied prior to the transaction.
When fraud, mistake, duress, or failure of consideration is present, rescission is
available. The failure of one party to perform entitles the other party to rescind
the contract. The rescinding party must give prompt notice to the breaching
party. To rescind a contract, the parties must make restitution to each other by
returning goods, property, or money previously conveyed.
C HA PTER 16 ■ Contract Discharge and Remedies 203

If the goods or property can be returned, they must be. If the goods or prop-
erty have been consumed, restitution must be an equivalent amount of money.
Essentially, restitution refers to the recapture of a benefit conferred on the
defendant through which the defendant has been unjustly enriched.

IN THE COURTROOM
Alima pays $10,000 to Milos in return for Milos’s promise to design a
house for her. The next day Milos calls Alima and tells her that he has
taken a position with a large architectural firm in another state and
cannot design the house. Alima decides to hire another architect that
afternoon. If Alima sues Milos for restitution, what can Alima recover? Alima can
obtain restitution of $10,000, because an unjust benefit of $10,000 was conferred
on Milos.

SPECIFIC PERFORMANCE
The equitable remedy of specific performance calls for the performance of the specific performance
act promised in the contract. This remedy is quite attractive to the nonbreach- An equitable remedy requiring
ing party, because it provides the exact bargain promised in the contract. It exactly the performance that
also avoids some of the problems inherent in a suit for money damages. First, was specified in a contract.
Usually granted only when
the nonbreaching party need not worry about collecting the judgment. Second,
money damages would be an
the nonbreaching party need not look around for another contract. Third, the inadequate remedy and the
actual performance may be more valuable than the monetary damages. subject matter of the contract
Although the equitable remedy of specific performance is often preferable is unique (for example, real
to other remedies, it is not granted unless the party’s legal remedy (monetary property).
damages) is inadequate. EXAMPLE 16.13 Contracts for the sale of goods, such as
wheat or corn, that are readily available on the market rarely qualify for spe- LO5 Explain the remedy of
cific performance. Damages ordinarily are adequate in such situations because specific performance.
substantially identical goods can be bought or sold in the market.•
If the goods are unique, a court of equity will decree specific performance.
EXAMPLE 16.14 Paintings, sculptures, or rare books or coins are so unique that
damages will not enable a buyer to obtain substantially identical goods in the
market.• The same principle applies to contracts relating to sales of land or
interests in land—each parcel of land is unique.
Courts of equity normally refuse to grant specific performance of personal-
service contracts. Public policy strongly discourages involuntary servitude.
Moreover, the courts do not want to monitor a personal-service contract.
EXAMPLE 16.15 If you contract with a brain surgeon to perform brain surgery
on you, and the surgeon refuses to perform, the court would not compel (and
you certainly would not want) the surgeon to perform under these circum-
stances. There is no way the court can ensure meaningful performance in such
a situation.•

Recover y Based on Quasi Contract

In some situations, when no actual contract exists, a court may step in to pre-
vent one party from being unjustly enriched at the expense of another party. As
discussed in Chapter 8, quasi contract is a legal theory under which an obliga-
tion is imposed in the absence of an agreement.
The courts can also use this theory when the parties entered into a contract,
but it is unenforceable for some reason. EXAMPLE 16.16 Ericson contracts to
build two oil derricks for Petro Industries. The derricks are to be built over a
period of three years, but the parties do not create a written contract. Therefore,
204 UNIT TWO ■ Contracts

the Statute of Frauds (see Chapter 14) will bar the enforcement of the contract.
After Ericson completes one derrick, Petro Industries informs him that it will
not pay for the derrick. Ericson can sue Petro Industries under the theory of
quasi contract.•
To recover on a quasi contract theory, a party must show the following:
1. The party conferred a benefit on the other party.
2. The party conferred the benefit with the reasonable expectation of being
paid.
3. The party did not act as a volunteer in conferring the benefit.
4. The party receiving the benefit would be unjustly enriched by retaining the
benefit without paying for it.

ANSWERING THE LEGAL PROBLEM

In the legal problem set out at the beginning of this
chapter, a contract specified Brand X plasterboard,
but the builder substituted Brand Y, which is
identical in quality and durability. Does this deviation
from the contract constitute a breach? Can the buyers (the DeLeons)
avoid the contract on this basis? Very likely, a court will hold that
the builder has substantially performed her end of the bargain, and
the buyers are therefore obligated to pay. What if the plasterboard
substituted for Brand X had been inferior in quality, reducing the value
of the house by $20,000? A court would likely hold that the contract
had been substantially performed and the contract price should be
paid, less the $20,000.

Linking the Law to Your Career:

Per formance and Compromise
In any career field, if you become a
contractor, you may take on a job that
you cannot or do not wish to perform.
Simply walking away from the job
and hoping for the best normally is
not the most effective way to avoid
litigation—it can be costly, time
consuming, and emotionally draining.
Instead, you should consider various
options that may reduce the likelihood
of litigation.
Suppose that you are a building
contractor and you sign a contract
to build a home for the Andersons.
Performance is to begin on June 15.
On June 1, Central Enterprises offers
you a position that will yield you two
and a half times the amount of income
you could earn as an independent
builder. To take this new job, you would
have to start on June 15.
Consider Your Options
When You Cannot Perform
What can you do in this situation?
One option is to subcontract the work
on the Andersons’ home to another
builder and oversee the work to make
sure it conforms to the contract.
Another option is to negotiate with the
Andersons for a release. You can offer
to find another contractor who will build
a house of the same quality at the
same price. Or, you can offer to pay
any additional costs if another builder
takes the job but is more expensive.
In any event, this additional cost
would be one measure of damages
that a court would impose on you if
the Andersons prevailed in a lawsuit
for breach of contract (in addition to
any costs the Andersons suffered as a
result of the breach, such as costs due
to the delay in construction). Thus, by
making the offer, you might be able to
avoid the expense of litigation—if the
Andersons accept.
What to Consider
When You Make an Offer
Often, parties are reluctant to
propose compromise settlements
because they fear that what they say
will be used against them in court if
litigation ensues. Generally, offers
for settlement will not be admitted in
court to prove that you are liable for a
breach of contract, but at times, they
are admissible to prove that a party
breached the duty of good faith. For
this reason, the best course might be
to work with your attorney in making an
offer unless an insignificant amount of
money is involved.
C HA PTER 16 ■ Contract Discharge and Remedies 205

Terms and Concepts for Review

accord and satisfaction 199 impossibility of performance 199 remedy 200
breach of contract 196 liquidated damages 202 restitution 202
commercial impracticability 200 mitigation of damages 201 specific performance 203
compensatory damages 200 novation 198 statute of limitations 199
consequential damages 201 penalty 202 tender 196
damages 200 performance 196
discharge 196 punitive damages 202

Chapter Summary—Contract Discharge and Remedies

LO1 Explain the difference between complete and substantial contractual performance. A contract
may be discharged by complete (strict) per formance or by substantial per formance. Complete
per formance takes place when conditions expressly stated in a contract fully occur in all aspects.
Substantial per formance does not var y greatly from the per formance promised in a contract
and must result in substantially the same benefits. If per formance is substantial, the other
party’s duty to per form remains absolute (less damages for the deviation). Totally inadequate
per formance constitutes a material breach of the contract—the other party is excused from
per formance and can sue for damages caused by the breach.

LO2 Describe how parties can discharge their contract by agreement. Any contract can be
discharged by an agreement of the parties. This may occur as part of the original contract, or
the parties may form a new contract that expressly or impliedly discharges the original contract.
Parties may also agree to discharge their contract by (1) rescission—cancelling their contract and
returning to the positions they held before its formation; (2) novation—substituting a new party
for one of the original parties and a new contract for the old one; or (3) accord and satisfaction—
agreeing to accept per formance different from what was originally promised.

LO3 Identify different types of damages. Damages are designed to compensate a nonbreaching party
for the loss of a bargain on the breach of a contract. Damages attempt to place the parties in the
positions they would have occupied had the contract been per formed. Types of damages include
the following:
(1) Compensator y damages—Damages that compensate a nonbreaching party for injuries
actually sustained from a breach and proved to have arisen directly from the loss of a
bargain, which is the difference between the value of the promised per formance and the
value of the actual per formance.
(2) Consequential damages—Damages that result from special circumstances beyond a contract,
which a breaching party knew or had reason to know would cause a nonbreaching party to
incur an additional loss.
(3) Punitive damages—Damages that punish a breaching party but that are normally awarded
only in a case of willful or malicious misconduct involving a tort.
(4) Liquidated damages—Damages that a contract specifies as the amount to be paid on its
breach as a reasonable estimate of potential damages.

LO4 Define the remedy of rescission and restitution. Rescission is an action to cancel a contract
and return the parties to the positions that they occupied before the transaction. It is a remedy
available when fraud, mistake, duress, or failure of consideration is present. The rescinding party
must give prompt notice to the breaching party. When a contract is rescinded, the parties must
make restitution—return to each other the goods, property, or money previously conveyed.

LO5 Explain the remedy of specific performance. Specific per formance is an equitable remedy
requiring the per formance of an act promised in a contract. It is available when monetar y
damages would be an inadequate remedy and the subject matter of the contract is unique. It
usually is not available as a remedy on the breach of a contract for personal ser vices.
206 UNIT TWO ■ Contracts
Issue Spotters
1. George contracts to build a storage shed for Ron. Ron
pays George in full, but George completes only half
the work. Ron pays Paula $500 to finish the shed.
If Ron sues George, what would be the measure of
recovery?
2. Amy contracts to sell her ranch to Mark, who is to
take possession on June 1. Amy delays the transfer
Before the Test
Check your answers to the Issue Spotters and, at the
same time, take the interactive quiz for this chapter. Go to
www.cengage.com/blaw/te and click on “Chapter 16.”
Hypothetical Questions
16–1. Damages. Ken owns and operates a famous candy
store and makes most of the candy sold in the store.
Business is particularly heavy during the Christmas
season. Ken contracts with Sweet, Inc., to purchase ten
thousand pounds of sugar to be delivered on or before
November 15. Ken has informed Sweet that this particu-
lar order is to be used for the Christmas season busi-
ness. Because of problems at the refinery, the sugar is
not tendered to Ken until December 10, at which time
Ken refuses it as being too late. Ken has been unable
to purchase the quantity of sugar needed to meet his
Christmas orders and has had to turn down numerous
regular customers, some of whom have indicated that
they will purchase candy elsewhere in the future. What
sugar Ken has been able to purchase has cost him 10
cents per pound more than the price contracted for with
Real-World Case Problems
16–3. Quasi Contract. Middleton Motors, Inc., a strug-
gling Ford dealership in Madison, Wisconsin, sought man-
agerial and financial assistance from Lindquist Ford, Inc.,
a successful Ford dealership in Bettendorf, Iowa. While
the two dealerships negotiated the terms for the services
and a cash infusion, Lindquist sent Craig Miller, its gen-
eral manager, to assume control of Middleton. After about
a year, the parties had not agreed on the terms, Lindquist
had not invested any money, Middleton had not made a
profit, and Miller was fired by Middleton without being
paid. Lindquist and Miller filed a suit in a federal district
court against Middleton based on quasi contract, seeking
to recover Miller’s pay for his time. What are the require-
ments to recover on a quasi-contract theory? Which of
until August 1. Mark incurs expenses in providing for
cattle that he bought to stock the ranch. When they
made the contract, Amy had no reason to know of the
cattle. Is Amy liable for Mark’s expenses in providing
for the cattle? Explain your answer.
First, click on “Answers to Issue Spotters” to compare
your answers. Next, select “Interactive Quiz” to assess
your mastery of the concepts in this chapter.
Sweet. Ken sues Sweet for breach of contract, claiming
as damages the higher price paid for sugar from others,
lost profits from this year’s lost Christmas sales, future
lost profits from customers who have indicated that they
will discontinue doing business with him, and punitive
damages for failure to meet the contracted delivery date.
Sweet claims Ken is limited to compensatory damages
only. Discuss who is correct, and why.
16–2. Impossibility of Performance. Millie contracted to
sell Frank 1,000 bushels of corn to be grown on Millie’s
farm. Owing to drought conditions during the growing
season, Millie’s yield was much less than anticipated,
and she could deliver only 250 bushels to Frank. Frank
accepted the lesser amount but sued Millie for breach of
contract. Can Millie defend successfully on the basis of
objective impossibility of performance? Explain.
these requirements is most likely to be disputed in this
case? Why? [Lindquist Ford, Inc. v. Middleton Motors,
Inc., 557 F.3d 469 (7th Cir. 2009)]
16–4. Breach of Contract. Roger Bannister was the
director of technical and product development for Bemis
Company. A covenant not to compete prohibited his work-
ing for a “conflicting organization” for eighteen months
following his termination, but required Bemis to pay his
salary if he was unable to find a job “consistent with his
abilities and education.” Bemis terminated Bannister.
Mondi Packaging, a Bemis competitor, told him that it
would offer him a job but for the noncompete agreement.
Bemis released Bannister from the agreement with
respect to “all other companies than Mondi” and refused
C HA PTER 16 ■ Contract Discharge and Remedies
to pay his salary. Nine months later, Bannister accepted
a position with Bancroft Bag, Inc., another Bemis com-
petitor. He filed a suit in a federal district court against
Ethical Questions
16–5. Should the courts allow the defense of impossibil-
ity of performance to be be used more often?
16–6. Should liquidated damages clauses be enforced
when no actual damages have been incurred?
16–7. Tamara Cohen, a real estate broker, began show-
ing property in Manhattan to Steven Galistinos, who rep-
resented comedian Jerry Seinfeld and his wife, Jessica.
Cohen spoke with Maximilian Sanchez, another broker,
about a townhouse owned by Ray and Harriet Mayeri.
On a Friday, Cohen showed the townhouse to Jessica.
Later that day, Galistinos asked Cohen to arrange for the
Seinfelds to see the premises again. Cohen replied that
her religious beliefs prevented her from showing prop-
erty on Friday evenings or Saturdays before sundown.
She suggested the following week, but Galistinos said
Video Question
16–8. Go to this text’s Web site at www.cengage.com/
blaw/te, and select “Chapter 16.” Click on “Video
Questions,” and view the video titled Midnight Run.
Then answer the following questions.
1. In the video, Eddie (Joe Pantoliano) and Jack (Robert
DeNiro) negotiate a contract for Jack to find The
Duke, a mob accountant who embezzled funds, and
207
his former employer. Do these facts show a breach of con-
tract? If so, what is the appropriate remedy? Explain.
[Bannister v. Bemis Co., 556 F.3d 882 (8th Cir. 2009)]
that Jerry would not be available. Over the weekend,
despite repeated attempts, the Seinfelds were unable to
contact Cohen. They toured the building on their own and
agreed to buy it. The contract between the Seinfelds and
the Mayeris stated that the sellers would pay Sanchez’s
fee and the “buyers will pay buyer’s real estate broker’s
fees.” The Seinfelds refused to pay Cohen. She filed a suit
in a New York state court against them, asserting breach
of contract. Is Cohen entitled to payment even though
she was not available when the Seinfelds wanted to see
the townhouse? What obligation do parties in business
deals owe to each other with respect to their religious
beliefs? How might the situation in this case have been
avoided? [Cohen v. Seinfeld, 15 Misc.3d 1118(A), 839
N.Y.S.2d 432 (Sup. 2007)]
bring him back for trial. Assume that the contract is
valid. If Jack breaches the contract by failing to bring
in The Duke, what kinds of remedies, if any, can Eddie
seek? Explain your answer.
2. Would the equitable remedy of specific performance
be available to either Jack or Eddie in the event of a
breach? Why or why not?