CHAPTER

McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved

Breach of Contract

TEN

10-2

ObjectivesChapter Objectives:

• Use vocabulary regarding breach of contract properly

• Discuss the theory of “anticipatory repudiation” giving the party a right to sue prior to the breach

• Determine if the breach is material and total or nonmaterial and/or partial

• Explain recourses available to the non-breaching party

10-3

ObjectivesChapter Objectives:

• Identify the factors a court will consider in determining materiality

• Recognize the divisibility of a contract to determine the extent of the breach and extent of recourse available to the non-breaching party

• Determine whether there has been a knowing and intentional waiver after a breach has occurred

10-4

• This chapter will examine HOW courts determine IF and WHEN a material breach of a contract has occurred and HOW that breach affects the viability of the entire contract

• After one or both parties have tendered performance on the contract, one or both of them may find that they received less than they originally bargained for. The question then arises, “what should be done about it?”

Objectives

10-5

Definitions• Breach

− Contract law examines the given performance in light of the expectations of the parties

− Where there is a significant deviation from the expectation of the “innocent” party, the party at fault is in breach

10-6

• Anticipation– An expectation of things to come

that has reasonable basis for the conclusion

– The aggrieved party anticipates that the performance is not forthcoming. By permitting the aggrieved party to sue before performance is actually due, the potential damages can be mitigated

Anticipatory Repudiation

10-7

• What are the “certain circumstances” that allow a party to seek relief for anticipatory repudiation?

1. If a party has positively and unequivocally stated that she will not or cannot perform on the contract, that party has repudiated the contract

Anticipatory Repudiation

10-8

• What are the “certain circumstances” that allow a party to seek relief for anticipatory repudiation?

2. A party’s actions, not words, may repudiate a contract. If a party transfers interest in the subject matter or an essential element of the transaction making subsequent performance or transfer impossible, the party has repudiated the contract

Anticipatory Repudiation

10-9

• What are the “certain circumstances” that allow a party to seek relief for anticipatory repudiation?

3. any affirmative acts taken by a party that would make performance of obligations under the contract impossible constitute anticipatory repudiation− The action taken by the repudiating

party does not necessarily have to directly relate to the subject matter of the contract; the action may affect another material aspect of the agreement

Anticipatory Repudiation

10-10

In all three of the scenarios described above, the non-breaching parties have

the right to file a complaint for anticipatory breach of contract. The non-breaching parties have certain

knowledge that the other parties will not perform

Anticipatory Repudiation

10-11

• There are three actions that the aggrieved party can take in response to the repudiation

1. The aggrieved party has an immediate

right to commence a lawsuit, despite the fact that performance is not yet due

Anticipatory Repudiation

10-12

• There are three actions that the aggrieved party can take in response to the repudiation

2. The aggrieved party can simply cancel the contract and walk away− If the non-breaching party feels there

is no point in pursuing performance or the remedies for nonperformance, they can just pretend the contract never existed in the first place

Anticipatory Repudiation

10-13

• There are three actions that the aggrieved party can take in response to the repudiation

3. “Wait and see” option − The aggrieved party may choose to ignore

the repudiation and urge the potentially breaching party to reconsider and perform

− If the repudiating party does not perform in the contractually allotted time, the aggrieved party may then sue for breach of contract based on the nonperformance, not the anticipatory repudiation

Anticipatory Repudiation

10-14

• Mere Request For A Change– A party’s interest in renegotiating the terms of the contract does not amount to anticipatory repudiation

• Retract The Repudiation– Until the aggrieved party notifies the repudiator or takes some action in reliance on the repudiation, the repudiator has the right to “take

it back” and perform on the contract

Anticipatory Repudiation

10-15

• Material– An element or term that is significant or

important and relates to the basis for the agreement a material breach is an inexcusable failure by the breaching party to do what was required of him under the terms of the contract

– In reality, it makes the whole purpose of the contract null as the aggrieved party will not get what she bargained for

Materiality

10-16

• Restatement (Second) of Contracts § 241 best explains the factors in determining whether a failure of performance is material. They are:

1. the extent to which the injured party will be deprived of the benefit which he reasonably expected

Materiality

10-17

• Restatement (Second) of Contracts § 241 best explains the factors in determining whether a failure of performance is material. They are:

2. the extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived

Materiality

10-18

• Restatement (Second) of Contracts § 241 best explains the factors in determining whether a failure of performance is material. They are:

3. the extent to which the party failing to perform or to offer to perform will suffer forfeiture

Materiality

10-19

• Restatement (Second) of Contracts § 241 best explains the factors in determining whether a failure of performance is material. They are:

4. the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances

Materiality

10-20

• Restatement (Second) of Contracts § 241 best explains the factors in determining whether a failure of performance is material. They are:

5. The extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing

Materiality

10-21

• Deprived of expected benefit

− A party can reasonably expect to receive that for which he bargained; if he does not receive it, the breach is considered material

• Adequate compensation − A party denied the benefit of his bargain

may be paid or otherwise put in a position equivalent to where he would have been had performance been in compliance with the contractual terms

Materiality

10-22

• Forfeiture

− An unreasonable loss

Materiality

10-23

• The doctrine of substantial compliance covers instances where the performance was not perfect; however, when examined objectively, using the above factors, it appears that the party endeavored to perform to the best of his or her ability and the performance was very close to compliance

• The court will most likely then hold that there was no breach because the party substantially complied with the terms of the contract

Materiality

10-24

• After a material breach has occurred, the non-breaching party is excused from performance

• A material breach is considered a total breach, even though not every term of the contract may have been breached

• Totality refers to the impact it has on the entire contract. A total or material breach renders the rest of the contract inert

Materiality

10-25

Divisibility/SeverabilityA contract may be able to be

compartmentalized into separate parts and seen

as a series of independent transactionsbetween the parties

Divisibility

10-26

• A contract often covers a series of transactions between the parties. If these transactions can be separated from each other, the contract is considered to be divisible

• In this way, the breach is only partial and contained to that part of the contract; the rest of the contract can go on as if nothing happened

Divisibility

10-27

• Waiver– A party may knowingly and

intentionally forgive the other party’s breach and continue her performance obligations under the contract

Waiver

10-28

• Knowing And Intentional– a party must be aware of and plan on

the outcome of his words or actions in order to be held accountable for the result

Waiver

10-29

Summary

• Nonconforming performance of contractual obligations is a breach

• These breaches can be either material and total or minor and partial

• After the time for performance is due, a party may evaluate the tendered performance and, if it is not what she bargained for, the breach may be considered material

10-30

Summary

• To determine the extent of the breach, there are five factors to consider:

– Deprivation of the benefit expected– Adequacy of compensation– Forfeiture– Ability or likelihood of cure– Good faith and fair dealing