Performance and Breach
Episode #7 of the course Contract basics: Let’s make a deal! by James Wong
We’ve got the elements that make up contracts. For the next two lessons, we’ll learn how courts interpret and enforce contracts.
Written Contracts and the Statute of Frauds
In general, oral contracts are enforceable. However, certain types of business contracts need to be in writing and signed. These are mostly grouped under the common law, Statute of Frauds (“SOF”), when they:
• contemplate marriage, such as prenuptial agreements
• cannot be completed in a year, like multi-year employment deals
• transfer land, including sales, leases, mortgages, or easements, etc.
• sell goods over $500
• involve guarantees and insurance
Not every state (jurisdiction) applies laws in the same way. And there are some exceptions to SOF, such as promissory estoppel, where one party can show that they relied detrimentally on an oral contract. Let’s say that a car is sold for $600 and the buyer drives away. The seller cannot later cancel the deal simply because it wasn’t done in writing.
When the contract is written by one party, courts will interpret anything vague or ambiguous in favor of the non-writing party.
Duty to Perform
If there is a valid contract, then two-party contracts impose duties to perform on both parties. When both parties perform, they are both discharged and the contract is done. If only one side performs, the other side may have breached.
The court will check for a breach by asking this sequence of questions:
Was performance even triggered? Were there conditions to the contracts?
Performance may be triggered by something happening (called conditions precedent). For instance, insurance companies pay only if there is a covered incident—like an accident. No accident, no duty to perform. Another example is stock options: Many options “vest,” which mean that they can’t be exercised until a few years later. That passage of years is the condition precedent.
Was there an anticipatory breach?
Sometimes it looks like the other side can’t perform. The good guys can seek reassurance and threaten anticipatory repudiation (or anticipatory breach) if they’re not happy with the answer. Let’s say you’ve contracted to build a web page for a candy store on your street. But suddenly, the store looks closed. It’s emptied out, and there’s a “For Lease” sign on the window. If you do the work, you may not get paid, so you seek reassurance. If there’s no answer, the contract is cancelled on both sides.
Did the first party completely or substantially perform? Was performance tendered or was it divisible?
It’s possible to perform without completely performing. Substantial performance means most of what was supposed to happen happened and the other party has to perform. Any “shortfall” is made up in penalties or negotiation. But the contract is still good.
Performance can be tendered—that is, offered and the other side has to perform. Let’s say painters show up to paint a room, but the homeowner has changed. The painter can cancel the contract. But they can also tender performance, so they can still choose to enforce the contract and can ask to get paid. It wasn’t their fault that they didn’t actually do the painting.
Performance can also be phased. Building contractors are frequently paid based upon the amount of work completed.
If not, was performance excused by either waiver, release, or impossibility?
Sometimes, performance doesn’t have to happen even if it’s due. The non-breaching party can waive performance. “Waiver” means you’re being nice to the other side. For example, Grady agreed to deliver ten dozen roses to Trish’s wedding. But Grady only delivered eight dozen. Trish can waive the final two dozen and not ask for a refund, because everyone had a great time and nobody noticed.
A release is a negotiated waiver. For example, you want to get out of the remaining 18 months your office lease. Landlords may be willing to release you for your deposit and three months’ rent.
Sometimes performance is impossible: You’re hired to play piano at a hotel, but it burns down. The contract is cancelled because it can’t be performed.
That covers the way the court determines breach. Tomorrow, we’ll look at what happens if the court finds a breach and possible defenses.
See you then.
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