CH-17-18 Performance, Breach, and Discharge – Smith and Robersons Business Law : Chapter Notes

This Document Contains Chapters 17 to 18 Chapter 17 PERFORMANCE, BREACH AND DISCHARGE Conditions [17-1] Express Conditions [17-1a] Satisfaction of a Contracting Party Satisfaction of a Third Party Implied-in-Fact Conditions [17-1b] Implied-in-Law Conditions [17-1c] Concurrent Conditions [17-1d] Condition Precedent [17-1e] Condition Subsequent [17-1f] Discharge by Performance [17-2] Discharge by Breach [17-3] Material Breach [17-3a] Prevention of Performance Perfect Tender Rule Substantial Performance [17-3b] Anticipatory Repudiation [17-3c] Unauthorized Material Alteration of Written Contract [17-3d] Discharge by Agreement of the Parties [17-4] Mutual Rescission [17-4a] Substituted Contracts [17-4b] Accord and Satisfaction [17-4c] Novation [17-4d] Discharge by Operation of Law [17-5] Impossibility [17-5a] Destruction of Subject Matter Subsequent Illegality Frustration of Purpose Commercial Impracticability Availability of Restitution Bankruptcy [17-5b] Statute of Limitations [17-5c] Cases in This Chapter Chapter Outcomes After reading and studying this chapter, the student should be able to: • Identify and distinguish among the various types of conditions. • Distinguish between full performance and tender of performance. • Explain the difference between material breach and substantial performance. • Distinguish among a mutual rescission, substituted contract, accord and satisfaction, and novation. • Identify and explain the ways discharge may be brought about by operation of law. TEACHING NOTES 17-1 CONDITIONS A contract condition will either delay or relieve a party's obligation of performance based upon whether an event happens or fails to occur. Conditions may be either (1) express, (2) implied-in-fact, or (3) implied-in-law. From a timing perspective, they may be further categorized as concurrent conditions, condition precedent, or condition subsequent. *** Chapter Outcome *** Identify and distinguish among the various types of conditions. 17-1a Express Conditions An express condition is explicitly provided for by the contract language using words such as "provided that," "on condition that," "while," "after," "upon," or "as soon as." An express condition must be fully and literally fulfilled. Satisfaction of a Contracting Party — A condition can be one party’s satisfaction with the performance of the other party. May be subjective, if based on personal taste or opinion, or objective, if based on a recognized standard. Satisfaction of a Third Party — A contract may require a third party’s satisfaction with the performance of one or both parties. CASE 17-1 SILVESTRI v. OPTUS SOFTWARE, INC. Supreme Court of New Jersey, 2003 175 N.J. 113, 814 A.2d 602 http://scholar.google.com/scholar_case?q=814+A.2d+602&hl=en&as_sdt=2,34&case=3846111007491599697&scilh=0 LaVecchia, J. This is a breach of contract action. Defendant Optus Software, Inc. (“Optus” or “the company”), a small computer software company, hired plaintiff Michael Silvestri as its Director of Support Services, responsible for supervising the provision of technical support services to the company’s customers. Silvestri’s two-year employment contract [commencing on January 4, 1999 at an annual salary of $70,000] contained a clause that reserved to the company the right to terminate his employment for failure to perform to the company’s satisfaction (the “satisfaction clause”). Nine months into the contract, Silvestri was terminated under the satisfaction clause by the chief executive officer of Optus, Joseph Avellino. Silvestri filed this action, contending that the company’s dissatisfaction was objectively unreasonable and that therefore his termination was a breach of the employment contract. The trial court granted summary judgment to the company. The Appellate Division reversed, however, holding that an employer must meet an objective standard for satisfaction in order to invoke a right to terminate pursuant to a satisfaction clause in an employment contract. The question presented then is whether the employer’s satisfaction is subject to an objective or subjective evaluation. We conclude that, absent language to the contrary, a subjective assessment of personal satisfaction applies and that the trial court’s grant of summary judgment to the company was appropriate. * * * * * * Silvestri was charged with supervision of the support services staff, responsibility for communication with resellers of the Optus computer software to end-users, and coordination of ongoing training for support staff and resellers of the company’s products in order to maintain their proficiency in assisting end-users. * * * [During the first six months of his employment Silvestri enjoyed the full support of Joseph Avellino, the CEO of Optus. Avellino’s attitude started to change during the summer months of 1999, when several clients and resellers communicated to Avellino their disappointment with the performance and attitude of the support services staff generally, and several complaints targeted Silvestri specifically. Avellino informed Silvestri of those criticisms. On September 17, 1999, Avellino terminated Silvestri under the satisfaction clause.] * * * Silvestri did not assert that there was any reason for his termination other than Avellino’s genuine dissatisfaction with his performance. Rather, Silvestri challenged the reasonableness of that dissatisfaction. He portrayed Avellino as a meddling micro-manager who overreacted to any customer criticism and thus could not reasonably be satisfied. * * * * * * Agreements containing a promise to perform in a manner satisfactory to another, or to be bound to pay for satisfactory performance, are a common form of enforceable contract. [Citation.] Such “satisfaction” contracts are generally divided into two categories for purposes of review: (1) contracts that involve matters of personal taste, sensibility, judgment, or convenience; and (2) contracts that contain a requirement of satisfaction as to mechanical fitness, utility, or marketability. [Citation.] The standard for evaluating satisfaction depends on the type of contract. Satisfaction contracts of the first type are interpreted on a subjective basis, with satisfaction dependent on the personal, honest evaluation of the party to be satisfied. [Citation.] Absent language to the contrary, however, contracts of the second type—involving operative fitness or mechanical utility—are subject to an objective test of reasonableness, because in those cases the extent and quality of performance can be measured by objective tests. [Citation]; Restatement (Second) of Contracts §228; [citation]. A subjective standard typically is applied to satisfaction clauses in employment contracts because “there is greater reason and a greater tendency to interpret [the contract] as involving personal satisfaction,” rather than the satisfaction of a hypothetical “reasonable” person. [Citations.] In the case of a high-level business manager, a subjective test is particularly appropriate to the flexibility needed by the owners and higher-level officers operating a competitive enterprise. [Citation.] When a manager has been hired to share responsibility for the success of a business entity, an employer is entitled to be highly personal and idiosyncratic in judging the employee’s satisfactory performance in advancing the enterprise. [Citations.] The subjective standard obliges the employer to act “honestly in accordance with his duty of good faith and fair dealing,” [citation], but genuine dissatisfaction of the employer, honestly held, is sufficient for discharge. [Citation.] Although broadly discretionary, a satisfaction-clause employment relationship is not to be confused with an employment-at-will relationship in which an employer is entitled to terminate an employee for any reason, or no reason, unless prohibited by law or public policy. [Citation.] In a satisfaction clause employment setting, there must be honest dissatisfaction with the employee’s performance. * * * If * * * the employer’s dissatisfaction is honest and genuine, even if idiosyncratic, its reasonableness is not subject to second guessing under a reasonable-person standard. In other words, standing alone, mere dissatisfaction is sufficient so long as it does not mask any other reason for the adverse employment action. * * * We hold that a subjective test of performance governs the employer’s resort to a satisfaction clause in an employment contract unless there is some language in the contract to suggest that the parties intended an objective standard. There is no such language here. * * * Turning then to application of the subjective test in this setting, * * * we conclude that the entry of summary judgment in favor of defendants was appropriate. * * * The judgment of the Appellate Division is reversed and the matter remanded for entry of summary judgment in favor of defendants. 17-1b Implied-in-Fact Conditions This type is not expressly stated in the agreement but may be inferred from the contract language, nature of the transaction, or conduct of the parties. 17-1c Implied-in-Law Conditions This condition, also called a constructive condition, is not derived from the language of the contract or intent of the parties. It is imposed by law in order to accomplish a fair result. 17-1d Concurrent Conditions Conditions that require a simultaneous performance by the parties. 17-1e Conditions Precedent Requires the happening of an event before a party is obligated to perform. Failure of the event to occur will mean that performance will not be required. 17-1f Conditions Subsequent Performance obligations are terminated by the occurrence of a subsequent event. *** Chapter Outcome *** Distinguish between full performance and tender of performance. 17-2 DISCHARGE BY PERFORMANCE A complete performance will discharge a party to the contract. In bilateral contract cases it is also possible for a party to be discharged if a tendered or offered performance is not accepted. *** Chapter Outcome *** Explain the difference between material breach and substantial performance. 17-3 DISCHARGE BY BREACH 17-3a Material Breach A material breach is nonperformance that significantly impairs the aggrieved party's rights under the contract. It discharges the non-breaching party, while still allowing for damages. It is measured by a standard that considers whether there has been a substantial performance of the contract obligations. A material breach occurs 1) if a partial performance does not include an important contract element, 2) if there are qualitative or quantitative disparities, 3) if the breach is intentional, or 4) if a failure to perform occurs where time is of the essence. Moreover, the parties may reasonably establish what will constitute a material breach. Prevention of Performance — Where a party prevents another from performing, a material breach results. Note that the prevention does not have to be complete. A substantial interference is sufficient. Perfect Tender Rule — The UCC does not follow the material breach approach taken by the common law. Instead, under the Code the perfect tender rule renders any deviation a material breach. 17-3b Substantial Performance Substantial performance is performance that is incomplete but does not defeat the purpose of the contract. Although a substantial performance constitutes a breach of contract giving rise to a right of damages, it will not cause a discharge of contract obligations for the other party. 17-3c Anticipatory Repudiation Action by one party prior to the date of performance indicating that she will not perform according to the contract. Non-breaching parties need not wait until the date of performance to sue, but may bring a breach of contract action upon notice of the anticipatory breach. The non-breaching party may elect to wait until the time performance is due to see if the repudiator will retract his repudiation. The breaching party may retract the repudiation if the other party has not already begun legal action to collect damages or materially changed his position in reliance on the repudiation. CASE 17-2 HOCHSTER v. DE LA TOUR Queen’s Bench of England, 1853 2 Ellis and Blackburn Reports 678 Lord Campbell, C. J. [On April 12, 1852, Hochster contracted with De La Tour to serve as a guide for De La Tour on his three-month trip to Europe, beginning on June 1 at an agreed-upon salary. On May 11, De La Tour notified Hochster that he would not need Hochster’s services. He also refused to pay Hochster any compensation. Hochster brings this action to recover damages for breach of contract.] On this motion * * * the question arises, Whether, if there be an agreement between A. and B., whereby B. engages to employ A. on and from a future day for a given period of time, to travel with him into a foreign country as a [guide], and to start with him in that capacity on that day, A. being to receive a monthly salary during the continuance of such service, B. may, before the day, refuse to perform the agreement and break and renounce it, so as to entitle A. before the day to commence an action against B. to recover damages for breach of the agreement; A. having been ready and willing to perform it, till it was broken and renounced by B. * * * If the plaintiff has no remedy for breach of the contract unless he treats the contract as in force, and acts upon it down to the 1st June, 1852, it follows that, till then, he must enter into no employment which will interfere with his promise “to start with the defendant on such travels on the day and year” and that he must then be properly equipped in all respects as a [guide] for a three months’ tour on the continent of Europe. But it is surely much more rational, and more for the benefit of both parties, that, after the renunciation of the agreement by the defendant, the plaintiff should be at liberty to consider himself absolved from any future performance of it, retaining his right to sue for any damage he has suffered from the breach of it. Thus, instead of remaining idle and laying out money in preparations which must be useless, he is at liberty to seek service under another employer, which would go in mitigation of the damages to which he would otherwise be entitled for a breach of the contract. It seems strange that the defendant after renouncing the contract, and absolutely declaring that he will never act under it, should be permitted to object that faith is given to his assertion, and that an opportunity is not left to him of changing his mind. * * * * * * The man who wrongfully renounces a contract into which he has deliberately entered cannot justly complain if he is immediately sued for a compensation in damage by the man whom he has injured: and it seems reasonable to allow an option to the injured party, either to sue immediately, or to wait till the time when the act was to be done, still holding it as prospectively binding for the exercise of this option, which may be advantageous to the innocent party, and cannot be prejudicial to the wrongdoer. Judgment for plaintiff. 17-3d Unauthorized Material Alteration of Written Contract If the material terms of a written contract are altered without authorization, the entire contract is discharged. *** Chapter Outcome *** Distinguish among a mutual rescission, substituted contract, accord and satisfaction; and novation. 17-4 DISCHARGE BY AGREEMENT OF THE PARTIES 17-4a Mutual Rescission This is a separate contract in which the parties agree to terminate an existing agreement thereby discharging performance obligations. In an executory bilateral contract consideration is provided through each party giving up his respective legal rights under the original contract. 17-4b Substituted Contracts A new contract accepted by both parties in satisfaction of the parties' duties under the original contract. It immediately discharges the original contract and imposes new obligations. 17-4c Accord and Satisfaction An accord consists of a new contract in which promises are exchanged to provide and accept a substituted performance different from that previously agreed upon. A satisfaction is the discharge of the performance obligations existing under the old contract. CASE 17-3 MCDOWELL WELDING & PIPEFITTING, INC. v. UNITED STATES GYPSUM CO. Supreme Court of Oregon, 2008 345 OR. 272, 193 P.3D 9 http://scholar.google.com/scholar_case?q=193+P.3d+9&hl=en&as_sdt=2,34&case=8212741394978818508&scilh=0 Kistler, J. Defendant United States Gypsum (U.S. Gypsum) was constructing a new plant in Columbia County. Defendant B E & K Construction Co. (B E & K) was the general contractor on that project. B E & K subcontracted with plaintiff [McDowell Welding & Pipefitting, Inc.] to perform work on the project. During construction, defendants asked plaintiff to perform additional tasks, over and above plaintiff’s contractual obligations, and defendants promised to pay plaintiff for doing so. After plaintiff completed its work on the project, the parties disagreed over the amount that defendants owed for the additional work that plaintiff had performed. Plaintiff filed this action against defendants, alleging breach of contract and related claims. All of plaintiff’s claims arose out of the modification to the construction contract. B E & K’s answer included an affirmative defense [and counterclaim] captioned “Compromise and Settlement,” alleging that plaintiff had agreed to settle its claims against defendants [for a total payment of $896,000.] * * * B E & K filed a motion asking the trial court to bifurcate the proceedings and try its counterclaim before trying plaintiff’s claims against it. * * * The trial court granted BE & K’s motion. After the trial court granted B E & K’s motion, plaintiff filed a demand for a jury trial, which B E & K moved to strike. B E & K reasoned that, because its counterclaim was equitable, plaintiff had no right to a jury trial on the counterclaim. The trial court granted B E & K’s motion to strike plaintiff’s jury trial demand and, sitting as the trier of fact, found that plaintiff had accepted defendants’ offer to settle its claims in return for defendants’ promise to pay plaintiff $800,000. [Court’s footnote: Although defendants alleged that they promised to pay plaintiff $896,000 in return for plaintiff’s promise to release its claims against them, defendants proved and the trial court found that defendants had promised to pay only $800,000.] Based on its resolution of defendants’ counterclaim, the trial court entered a limited judgment directing defendants to tender $800,000 to the court clerk and directing plaintiff, after defendants tendered that sum, to execute releases of its claims against defendants. After the trial court entered the limited judgment, defendants tendered $800,000 to the court clerk and then moved for summary judgment on plaintiff’s claims against them. The trial court granted defendants’ motion and entered a general judgment that dismissed plaintiff’s claims with prejudice. The plaintiff appealed, claiming a state constitutional right to a jury trial on the factual issues that the defendant’s counterclaim had raised. A divided Court of Appeals affirmed the trial court’s judgment. The Oregon Supreme Court allowed the plaintiff’s petition for review. As we discuss more fully below, a settlement agreement may take one of three forms: an executory accord, an accord and satisfaction, or a substituted contract. As we also discuss below, when the Oregon Constitution was adopted, only a court of equity would enforce an executory accord. The law courts would not enforce executory accords because they suspended the underlying obligation; they did not discharge it. By contrast, an accord and satisfaction and a substituted contract discharged the underlying obligation, albeit for different reasons, and both were enforceable in the law courts. It follows that the question whether the agreement that gave rise to defendants’ counterclaim would have been cognizable in law or equity turns, at least initially, on whether it is an executory accord, an accord and satisfaction, or a substituted contract. We first describe the distinctions among those types of settlement agreements before considering which type of settlement agreement defendants alleged. An executory accord is “an agreement for the future discharge of an existing claim by a substituted performance.” [Citation.] Usually, an executory accord is a bilateral agreement; the debtor promises to pay an amount in return for the creditor’s promise to release the underlying claim. When the parties enter into an executory accord, the underlying claim “is not [discharged] until the new agreement is performed. The right to enforce the original claim is merely suspended, and is revived by the debtor’s breach of the new agreement.” [Citation.] Because an executory accord does not discharge the underlying claim but merely suspends it, the law courts refused to allow it to be pleaded as a bar to the underlying claim. [Citations.] Once the promised performance occurs, the accord has been executed or satisfied and the underlying claim is discharged, resulting in an accord and satisfaction. [Citation.] [Court’s footnote: An accord and satisfaction may occur in one of two ways: “The two parties may first make an accord executory, that is, a contract for the future discharge of the existing claim by a substituted performance still to be rendered. When this executory contract is fully performed as agreed, there is said to be an accord and satisfaction, and the previously existing claim is discharged. It is quite possible, however, for the parties to make an accord and satisfaction without any preliminary accord executory or any other executory contract of any kind. [For example, a] debtor may offer the substituted performance in satisfaction of his debt and the creditor may receive it, without any binding promise being made by either party.” [Citation.] Because an accord and satisfaction discharges the underlying claim, that defense is legal, not equitable. [Citation.] Finally, the parties may enter into a substituted contract; that is, the parties may agree to substitute the new agreement for the underlying obligation. [Citation.] A substituted contract differs from an executory accord in that the parties intend that entering into the new agreement will immediately discharge the underlying obligation. [Citations.] A substituted contract discharges the underlying obligation and could be asserted as a bar to an action at law. [Citation.] With that background in mind, we turn to the question whether defendants pleaded an executory accord, an accord and satisfaction, or a substituted contract. Here, defendants alleged that they agreed to pay plaintiff $896,000 in exchange for a release of plaintiff’s claims against them. Defendants did not allege that they had paid plaintiff the promised sum—an allegation necessary for an accord and satisfaction. [Citations.] Nor did they allege that, by entering into the settlement agreement, they extinguished the underlying obligation—an allegation necessary to allege a substituted contract. [Citations.] Rather, defendants alleged that plaintiff agreed to release its claims only after defendants made the promised payment. In short, defendants alleged an executory accord. * * * [The Oregon constitutional right to a jury trial in civil cases does not extend to the defendants’ counterclaim of an executory accord. We affirm the Court of Appeals decision on the plaintiff’s jury trial claim but reverse its decision on a subsidiary issue regarding prejudgment interest.] 17-4d Novation A substituted contract which relieves one party to a contract of performance obligations while replacing this individual with another promisor or promisee. *** Chapter Outcome *** Identify and explain the ways discharge may be brought about by operation of law. 17-5 DISCHARGE BY OPERATION OF LAW 17-5a Impossibility Whether a contract is impossible to perform is judged by an objective test, i.e., actual performance is physically impossible. Examples: death of a party obligated to perform personal services or destruction of the contract subject matter through no fault of either party. Destruction of Subject Matter — duty is discharged if performance becomes impossible due to destruction of the subject matter of the contract, if it is through no fault of the promisor. Subsequent Illegality — duty is discharged if performance becomes illegal after contract is made. Frustration of Purpose — If one of the basic assumptions on which the contract is based changes through no fault of the contracting parties, duties may be discharged. Commercial Impracticality — Does not refer to mere hardship or increase in costs, but to severe difficulties in completing performance, such as unavailability of necessary materials. Availability of Restitution — If a contract has been partially or wholly performed at the time of discharge, the party who has rendered a more advanced performance is entitled to restitution to prevent unjust enrichment of the other party. CASE 17-4 NORTHERN CORP. v. CHUGACH ELECTRICAL ASSOCIATION Supreme Court of Alaska, 1974 518 P.2d 76 http://scholar.google.com/scholar_case?q=518+P.2d+76&hl=en&as_sdt=2,34&case=2017068664150967540&scilh=0 Boochever, J. [Northern Corporation entered into a contract with Chugach in August 1966 to repair and upgrade the upstream face of Cooper Lake Dam in Alaska. The contract required Northern to obtain rock from a quarry site at the opposite end of the lake and to transport the rock to the dam during the winter across the ice on the lake. In December 1966, Northern cleared the road on the ice to permit deeper freezing, but thereafter water overflowed on the ice, preventing the use of the road. Northern complained of the unsafe condition of the lake ice, but Chugach insisted on performance. In March 1967, one of Northern’s loaded trucks broke through the ice and sank. Northern continued to encounter difficulties and ceased operations with the approval of Chugach. On January 8, 1968, Chugach notified Northern that it would be in default unless all rock was hauled by April 1. After two more trucks broke through the ice, causing the deaths of the drivers, Northern ceased operations and notified Chugach that it would make no more attempts to haul across the lake. Northern advised Chugach it considered the contract terminated for impossibility of performance and commenced suit to recover the cost incurred in attempting to complete the contract.] * * * The focal question is whether the * * * contract was impossible of performance. The September 27, 1966 directive specified that the rock was to be transported “across Cooper Lake to the dam site when such lake is frozen to a sufficient depth to permit heavy vehicle traffic thereon,” and * * * specified that the hauling to the dam site would be done during the winter of 1966–67. It is therefore clear that the parties contemplated that the rock would be transported across the frozen lake by truck. Northern’s repeated efforts to perform the contract by this method during the winter of 1966–67 and subsequently in February 1968, culminating in the tragic loss of life, abundantly support the trial court’s findings that the contract was impossible of performance by this method. Chugach contends, however, that Northern was nevertheless bound to perform, and that it could have used means other than hauling by truck across the ice to transport the rock. The answer to Chugach’s contention is that * * * the parties contemplated that the rock would be hauled by truck once the ice froze to a sufficient depth to support the weight of the vehicles. The specification of this particular method of performance presupposed the existence of ice frozen to the requisite depth. Since this expectation of the parties was never fulfilled, and since the provisions relating to the means of performance was clearly material, Northern’s duty to perform was discharged by reason of impossibility. There is an additional reason for our holding that Northern’s duty to perform was discharged because of impossibility. It is true that in order for a defendant to prevail under the original common law doctrine of impossibility, he had to show that no one else could have performed the contract. However, this harsh rule has gradually been eroded, and the Restatement of Contracts has departed from the early common law rule by recognizing the principle of “commercial impracticability.” Under this doctrine, a party is discharged from his contract obligations, even if it is technically possible to perform them, if the costs of performance would be so disproportionate to that reasonably contemplated by the parties as to make the contract totally impractical in a commercial sense. * * * Removed from the strictures of the common law, “impossibility” in its modern context has become a coat of many colors, including among its hues the point argued here—namely, impossibility predicated upon “commercial impracticability.” This concept—which finds expression both in case law * * * and in other authorities * * * is grounded upon the assumption that in legal contemplation something is impracticable when it can only be done at an excessive and unreasonable cost. As stated in Transatlantic Financing Corp. v. United States [citation] * * * The doctrine ultimately represents the ever-shifting line, drawn by courts hopefully responsive to commercial practices and mores, at which the community’s interest in having contracts enforced according to their terms is outweighed by the commercial senselessness of requiring performance. * * * * * * In the case before us the detailed opinion of the trial court clearly indicates that the appropriate standard was followed. There is ample evidence to support its findings that “[t]he ice haul method of transporting riprap ultimately selected was within the contemplation of the parties and was part of the basis of the agreement which ultimately resulted in amendment No. 1 in October 1966,” and that that method was not commercially feasible within the financial parameters of the contract. We affirm the court’s conclusion that the contract was impossible of performance. 17-5b Bankruptcy Bankruptcy is a method of discharging a contractual obligation by operation of law. It is available to a debtor who complies with the requirements of the Bankruptcy Code and thereby obtains an order of discharge from the bankruptcy court. Only debts dischargeable under the Bankruptcy Act will be affected. 19-5c Statute of Limitations At common law a plaintiff was not subject to a limitation on the time period within which to bring an action. Today all states have statutes that provide such a limitation. The lapse of a limitations period does not discharge performance, rather the contract party will not be able to enforce a remedy at law. Note: See Figure 17-1. Chapter 18 CONTRACT REMEDIES Cases in This Chapter Merritt v. Craig Arrowhead School District No. 75, Park County Montana, v. James A. Klyap, Jr. Prestenbach v. Collins Madison Square Garden Corp, Ill. v. Carnera Chapter Outcomes After reading and studying this chapter, the student should be able to: • Explain how compensatory damages and reliance damages are computed. • Define (1) nominal damages, (2) incidental damages, (3) consequential damages, (4) foreseeability of damages, (5) punitive damages, (6) liquidated damages, and (7) mitigation of damages. • Define the various types of equitable relief and explain when the courts will grant such relief. • Explain how restitutionary damages are computed and identify the situations in which restitution is available as a contractual remedy. • Identify and explain the limitations on contractual remedies TEACHING NOTES 18-1 INTERESTS PROTECTED BY CONTRACT REMEDIES Contract remedies are available to protect one or more of the following interests of the injured party: (1) the expectation interest; (2) the reliance interest; or (3) the restitution interest. 18-2 MONETARY DAMAGES *** Chapter Outcomes *** Explain how compensatory damages and reliance damages are computed Define (1) nominal damages, (2) incidental damages, (3) consequential damages, (4) foreseeability of damages, (5) punitive damages, (6) liquidated damages, and (7) mitigation of damages. 18-2a Compensatory Damages Designed to place the injured party in the position in which he would have been had the contract breach not occurred (expectation interest). In general compensatory damages are measured by taking the difference between the value of the promised performance of the breaching party and the value of the actual performance rendered by the breaching party. The value of the promised performance minus the value of the actual performance equals the loss of value. Incidental and consequential damages are added to the loss of value, while expenses saved by nonperformance are subtracted. Loss of Value — Value of the promised performance minus the value of the actual performance. Cost Avoided — Recovery is reduced by any cost or loss which the injured party avoided by the nonperformance. Incidental Damages — This includes those miscellaneous expenses that are directly attributable to the contract breach such as costs incurred to acquire the nondelivered performance from another source. Consequential Damages — These damages include indirect losses, such as lost profits and injury to person or property, resulting from defective performance. 18-2b Nominal Damages Nominal damages are a small sum of money awarded where the contract has been breached but the dollar loss is negligible or unproved. 18-2c Reliance Damages The injured party may seek reimbursement for foreseeable loss caused by his reliance on the contract; intended result is to place the injured party in as good a position as he would have been in had the contract not been made; may include: • actual expenses incurred by the injured party in preparing to perform • actual expenses incurred by the injured party in performing • the potential for gain that was not realized by the injured party because he had to pass up opportunities to enter into other contracts. 18-2d Punitive Damages Punitive damages (also called exemplary damages) are monetary damages in addition to compensatory damages that are awarded to an injured party in certain situations involving willful, wanton, or malicious conduct; intended purpose is to punish the defendant, in hopes of discouraging him and others from similar wrongful conduct. The Restatement provides that punitive damages will not be awarded for a breach of contract unless the conduct involved in the breach is also a tort. CASE 18-1 MERRITT v. CRAIG Court of Special Appeals of Maryland, 2000 130 Md.App. 350, 746 A.2d 923, certiorari denied, 359 Md. 29, 753 A.2d 2 http://scholar.google.com/scholar_case?q=746+A.2d+923&hl=en&as_sdt=2,34&case=10339288125936808164&scilh=0 Davis, J. In the fall of 1995, during their search for a new residence, appellants [Benjamin and Julie Merritt] inspected Craig’s property located at Pergin Farm Road in Garrett County [Maryland]. After viewing the residence, appellants advised Craig that they were interested in purchasing the property; however, their offer was contingent upon a satisfactory home inspection. On November 5, 1995, appellants, their inspector, and appellee’s husband Mark Craig conducted an inspection of the basement area of the residence, during which there was an examination of cistern and water supply pipes. The examination revealed that the cistern had been used to store a water supply reserve, but was not currently utilized. The inspector advised appellants that the system he had observed was one which utilized a submersible pump in the well from which water flowed to a pressure tank in the basement. The pressure tank distributed water through the internal piping system of the house. There were also two water lines that entered into the basement area. One of the lines came from an 800-foot well that was located on the property, and the other line came from a well located on the adjacent property. The well located on the adjacent property supplied water to both appellants’ residence and a guest house owned by Craig. The existence of the adjacent well was not disclosed to appellants. On December 2, 1995, a contract of sale for the property was executed between appellants and Craig, along with a “Disclosure Statement” signed by Craig on June 9, 1994, and acknowledged by appellants on November 2, 1995, affirming that there were no problems with the water supply to the dwelling. Between November 5, 1995 and June 1996, Craig caused the water line from the guest house to appellants’ residence to be cut, and the cistern reactivated to store water from the existing well on appellants’ lot. On May 18, 1996, Craig’s husband advised Dennis Hannibal, one of the real estate agents involved in the deal, that he had spent $4,196.79 to upgrade the water system on appellants’ property and to restore the cistern and remove appellants’ house from the second well on Craig’s guest house property. On June 14, 1996, appellants and Craig had settlement on the property. Later that afternoon, Craig’s husband, without appellants’ knowledge, excavated the inside wall of appellants’ house and installed a cap to stop a leaking condition on the water line that he had previously cut. Subsequently, appellants, while attempting to fill a water bed, noticed that the water supply in their well had depleted. On July 13, 1996, appellants met with Craig to discuss a solution to the water failure problem, believing that Craig was responsible for cutting a water line to their house. Appellants agreed with Craig to conduct a flow test to the existing well and contribute money for the construction of a new well. On October 29, 1996, the well was drilled and produced only one half gallon of water per minute. On December 13, appellants paid for the drilling of a second well on their property, but it failed to produce water. In January appellants contacted a plumber, Robert Warnick, who confirmed that the line from the guest house well to appellants’ residence had been cut flush with the inside surface of the basement wall and cemented closed. Appellants continued to do further work on the house in an effort to cure the water problem. On February 11, 1997, appellants brought suit against Craig and other appellees in the Circuit Court for Garrett County, seeking rescission of the deed to the property and contract of sale, along with compensatory and punitive damages. During the course of the trial, the judge dismissed appellants’ claim for rescission on the ground that they had effectively waived their right to rescission. * * * At the close of trial, the jury returned a verdict in favor of appellants and awarded compensatory damages in the amount of $42,264.76. Appellants were also awarded punitive damages in the amount of $150,000. Subsequently, appellants filed a motion to alter or amend the judgment requesting the court to grant rescission of the contract of sale and the deed, which the circuit court denied on June 17, 1998. * * * * * * Under Maryland law, when a party to a contract discovers that he or she has been defrauded, the party defrauded has either “a right to retain the contract and collect damages for its breach, or a right to rescind the contract and recover his or her own expenditures,” not both. [Citations.] “These rights [are] inconsistent and mutually exclusive, and the discovery put[s] the purchaser to a prompt election.” [Citation.] “A plaintiff seeking rescission must demonstrate that he [or she] acted promptly after discovery of the ground for rescission,” otherwise the right to rescind is waived. [Citations.] * * * In the case sub judice [before the court], appellants claim that they were entitled to a rescission of the subject contract of sale and deed and incidental damages. Appellants also claim that they were entitled to compensatory and punitive damages arising from Craig’s actions. Appellants, however, may not successfully rescind the contract while simultaneously recovering compensatory and punitive damages. Restitution is “a party’s unilateral unmaking of a contract for a legally sufficient reason, such as the other party’s material breach” and it in effect “restores the parties to their precontractual position.” [Citation.] The restoration of the parties to their original position is incompatible with the circumstance when the complaining party is, at once, relieved of all obligations under the contract while simultaneously securing the windfall of compensatory and punitive damages beyond incidental expenses. * * * In sum, although whether appellants promptly repudiated the contract was not squarely before the court, we are not persuaded by appellees’ assertion that appellants did not seek rescission in a timely fashion. We hold that, under the facts of this case, appellants must elect the form of relief, i.e., damages or rescission * * * We hold that * * * the appellants are entitled to be awarded punitive damages resulting from Craig’s actions. A “[p]laintiff seeking to recover punitive damages must allege in detail in the complaint the facts that indicate the entertainment by defendant of evil motive or intent.” [Citation.] The Court of Appeals has held that “punitive damages may only be awarded in such cases where ‘the plaintiff has established that the defendant’s conduct was characterized by evil motive, intent to injure, ill will or fraud. ***’” [Citation.] In cases of fraud that arise out of a contractual relationship, the plaintiff would have to establish actual malice to recover punitive damages. [Citation.] Finally, we have stated that “actual or express malice requires an intentional or willful act (or omission) * * * and ‘has been characterized as the performance of an act without legal justification or excuse, but with an evil or rancorous motive influenced by hate, the purpose being to deliberately and willfully injure the plaintiff.’” [Citation.] * * * The jury believed that the representations made by Craig were undertaken with actual knowledge that the representations were false and with the intention to deceive appellants. * * * Moreover, the record reflects that the jury could reasonably infer Craig’s intention to defraud appellants by her representation in the Disclosure Statement that there were no problems with the water supply, and by subsequently making substantial changes in the water system by cutting off a water line which supplied water to appellants’ residence immediately after appellants’ inspector examined the system. Therefore, we hold that the circuit court was not in error in finding facts from the record sufficient to support an award of punitive damages. Craig also challenges the punitive damages award on the basis that the amount of the award was excessive. * * * In the case at hand, the trial judge undertook the appropriate review of the jury’s award. It is clear from the court’s comments at the hearing that the court’s decision not to disturb the jury’s verdict was based on the evidence presented at trial and was not excessive. * * * Craig’s conduct toward appellants was reprehensible and fully warranted punitive damages. Her conduct in willfully misrepresenting the condition of the water system in the Disclosure Statement, coupled with her actions and those of her husband in interfering and diverting the water flow subsequent to the inspection and sale of the property, constitute egregious conduct. As a result of Craig’s conduct, appellants were forced to employ extreme water conservation practices due to an insufficient water supply and they attempted to ameliorate the problem by having two new wells drilled on the property which proved to be unproductive. Moreover, the lack of water supply to appellants’ property clearly reduced its market value. * * * * * * * * * Consequently, should appellants seek compensatory and punitive damages on remand, appellants’ actual knowledge, coupled with the intent to deceive, is a sufficient factual predicate for submission of punitive damages to the jury. Judgment of the circuit court reversed; case remanded for further proceedings consistent with this opinion. 18-2e Liquidated Damages A contract may contain a liquidated damages provision by which the parties agree in advance to the damages to be paid in case of a breach; will be enforced if it is a reasonable projection of the loss that may, or actually does, result from the breach. CASE 18-2 ARROWHEAD SCHOOL DISTRICT NO. 75, PARK COUNTY, MONTANA, v. KLYAP Supreme Court of Montana, 2003 318 Mont. 103, 79 P.3d 250 http://scholar.google.com/scholar_case?case=643756738100095281 &q=79+p.3d+250&hl=en&as_sdt=2,34 Nelson, J. Arrowhead School District No. 75 (District) is located in Park County south of Livingston [Montana]. The District consists of one school, Arrowhead School (School). For the 1997-98 school year, the School employed about eleven full-time teachers and several part-time teachers. During that school year, the School employed Klyap as a new teacher instructing math, language arts, and physical education for the sixth, seventh, and eighth grades. In addition, Klyap, through his own initiative, helped start a sports program and coached flag football, basketball, and volleyball. * * * the School offered Klyap a contract for the 1998-99 school year on or about June 15, 1998, which he accepted by signing on or about June 30, 1998. This contract provided for a $20,500 salary and included the liquidated damages clause at issue here. The clause calculated liquidated damages as a percentage of annual salary determined by the date of breach; a breach of contract after July 20, 1998, required payment of 20% of salary as damages. Klyap also signed a notice indicating he accepted responsibility for familiarizing himself with the information in the teacher’s handbook which also included the liquidated damages clause. * * * * * * On August 12, [Klyap] informed the School that he would not be returning for the 1998-99 school year even though classes were scheduled to start on August 26. As a result of Klyap’s decision not to teach at the School, the School sought to enforce the liquidated damages clause in Klyap’s teaching contract for the stipulated amount of $4,100, 20% of the $20,500 salary. * * * After Klyap resigned, the School attempted to find another teacher to take Klyap’s place. Although at the time that Klyap was offered his contract the School had 80 potential applicants, only two viable applicants remained available. Right before classes started, the School was able to hire one of those applicants, a less experienced teacher, at a salary of $19,500. * * * After a bench trial, the District Court determined the clause was enforceable * * * because the damages suffered by the School [were] impractical and extremely difficult to fix. Specifically, the court found the School suffered damages because it had to spend additional time setting up an interview committee, conducting interviews, training the new, less experienced teacher, and reorganizing the sports program. The District Court also found that all these activities took away from the other school and administrative duties that had been scheduled for that time and that the new teacher missed all the staff development training earlier that year. Finally, the court found that such clauses are commonly used in Montana and that the School had routinely and equitably enforced the clause against other teachers. After concluding that the School took appropriate steps to mitigate its damages, the court awarded judgment in favor of the School in the amount of $4,100. * * * * * * The fundamental tenet of modern contract law is freedom of contract; parties are free to mutually agree to terms governing their private conduct as long as those terms do not conflict with public laws. [Citation.] This tenet presumes that parties are in the best position to make decisions in their own interest. Normally, in the course of contract interpretation by a court, the court simply gives effect to the agreement between the parties in order to enforce the private law of the contract. [Citation.] When one party breaches the contract, judicial enforcement of the contract ensures the nonbreaching party receives expectancy damages, compensation equal to what that party would receive if the contract were performed. [Citations.] By only awarding expectancy damages rather than additional damages intended to punish the breaching party for failure to perform the contract, court enforcement of private contracts supports the theory of efficient breach. In other words, if it is more efficient for a party to breach a contract and pay expectancy damages in order to enter a superior contract, courts will not interfere by requiring the breaching party to pay more than was due under their contract. [Citation.] Liquidated damages are, in theory, an extension of these principles. Rather than wait until the occurrence of breach, the parties to a contract are free to agree in advance on a specific damage amount to be paid upon breach. [Citation.] This amount is intended to predetermine expectancy damages. Ideally, this predetermination is intended to make the agreement between the parties more efficient. Rather than requiring a post-breach inquiry into damages between the parties, the breaching party simply pays the nonbreaching party the stipulated amount. Further, in this way, liquidated damages clauses allow parties to estimate damages that are impractical or difficult to prove, as courts cannot enforce expectancy damages without sufficient proof. * * * In order to determine whether a clause should be declared a penalty, courts attempt to measure the reasonableness of a liquidated damages clause. * * * As indicated by * * * §356 of the RESTATEMENT (SECOND) OF CONTRACTS (1965) (hereinafter RESTATEMENT §356), the threshold indicator of reasonableness is whether the situation involves damages of a type that are impractical or extremely difficult to prove. * * * According to RESTATEMENT §356 and other treatises, damages must be reasonable in relation to the damages the parties anticipated when the contract was executed or in relation to actual damages resulting from the breach. * * * * * * Liquidated damages in a personal service contract induce performance by an employee by predetermining compensation to an employer if the employee leaves. However, the employer clearly prefers performance by the specific employee because that employee was chosen for hire. The preference for performance by a specific person is reflected in the rule that personal service contracts are not assignable. Further, because personal service contracts are not enforceable by specific performance, [citation], liquidated damages are an appropriate way for employers to protect their interests. * * * * * * After reviewing the facts of this case, we hold that while the 20% liquidated damages clause is definitely harsher than most, it is still within Klyap’s reasonable expectations and is not unduly oppressive. First, as the School pointed out during testimony, at such a small school teachers are chosen in part depending on how their skills complement those of the other teachers. Therefore, finding someone who would provide services equivalent to Klyap at such a late date would be virtually impossible. This difficulty was born out when only two applicants remained available and the School hired a teacher who was less experienced than Klyap. As a teacher, especially one with experience teaching at that very School, Klyap would have to be aware of the problem finding equivalent services would pose. Second, besides the loss of equivalent services, the School lost time for preparation for other activities in order to attempt to find equivalent services. * * * Further, the new teacher missed all the staff development training earlier that year so individual training was required. And finally, because Klyap was essential to the sports program, the School had to spend additional time reorganizing the sports program as one sport had to be eliminated with Klyap’s loss. These activities all took away from the other school and administrative duties that had been scheduled for that time. * * * Finally, although the School testified it had an intent to secure performance and avoid the above damages by reason of the clause, * * *, such an intent does not turn a liquidated damages clause into a penalty unless the amount is unreasonably large and therefore not within reasonable expectations. * * * Therefore, because as a teacher Klyap would know teachers are typically employed for an entire school year and would know how difficult it is to replace equivalent services at such a small rural school, it was within Klyap’s reasonable expectations to agree to a contract with a 20% of salary liquidated damages provision for a departure so close to the start of the school year. * * * Accordingly, we hold the District Court correctly determined that the liquidated damages provision was enforceable. [Affirmed.] 18-2f Limitations on Damages Limitations imposed upon monetary damages are intended to ensure that damages: • can be taken into account at the time of contracting • are compensatory and not speculative (based on a guesswork), and • do not include loss that could have been avoided by reasonable efforts. Foreseeability of Damages — Damages are recoverable only for loss that the party in breach could have foreseen as a likely result of a breach when the contract was made. The test of foreseeable damages is objective, based on what the breaching party had reason to foresee. Certainty of Damages — Damages are recoverable only for loss in the amount that the injured party can demonstrate with reasonable certainty. CASE 18-3 PRESTENBACH v. COLLINS Supreme Court of Mississippi, 2014 159 So.3d 531 Dickinson, P. J. [On September 15, 2011, Gerald Collins granted Garrett Prestenbach a one-year option to purchase approximately 150 acres of Collins’s farm and pasture land for $500,000. Prestenbach agreed to make a $25,000 down payment on the property and finance the remaining $475,000 through a combination of a $225,000 USDA loan and $250,000 financing agreement with Collins. The option contract included the following details: (1) a recital of $100 consideration; (2) a township-and-range description of the property; (3) a reference to the buyer’s intent to obtain a USDA loan; (4) the total purchase price; and (5) a recital that the option was irrevocable for the first three months and, after three months, the option could be revoked by giving ten days’ written notice. The parties also agreed that Collins would allow the USDA to inspect the property before closing. About a month after granting Prestenbach the option to purchase his land, another buyer offered to buy Collins’s property immediately. Collins attempted to persuade Prestenbach to give up his option so he could sell to the other party, but Prestenbach refused and quickly recorded the option contract to prevent the sale. By early December, relations between Collins and Prestenbach had deteriorated. On December 8, 2011, Collins’s attorney sent Prestenbach a letter attempting to terminate the one-year option. Prestenbach responded on December 16, 2011, by hand-delivering a letter exercising his option to purchase. At that time, the USDA loan process was nearly complete, and on December 22, 2011, the USDA conditionally approved Prestenbach’s loan. Prestenbach tried to set a closing date for the loan, but Collins refused to move forward with the closing. Claiming that the option to purchase had been terminated, Collins denied the USDA’s request to inspect the property. He then filed an action against Prestenbach to establish ownership of the property. In response, Prestenbach filed an answer and a counterclaim for specific performance, stating he was “ready, willing, and able” to close the deal. Both parties filed motions for summary judgment. The chancellor granted Collins’s motion for summary judgment and denied Prestenbach’s motion, finding that Prestenbach was not entitled to specific performance because, at the time he exercised his option, he could not pay the entire $500,000 purchase price. Prestenbach appealed. The Court of Appeals affirmed the chancellor’s judgment finding that Prestenbach was not entitled to “specific performance of [the] option contract,” because when he exercised his option, he “indisputably lacked the financing to purchase the property.” [Citation.] The Supreme Court of Mississippi then granted Prestenbach’s writ of certiorari.] The real-property option contract before us clearly provided how the option was to be exercised, and that a closing of the transaction would take place at some point following the exercise of the option. It further provided that “the purchase price shall be paid at the time of recording of [the] deed,” and that taxes and other assessments would be prorated “as of the date of the closing of the transaction.” So, while the contract required Prestenbach to pay the purchase price at “the closing of the transaction,” nothing in the contract suggests that he was required to pay—or demonstrate his ability to pay—the purchase price prior to closing. While an option contract is not a contract to sell, it morphs into a sales contract when the option holder exercises the option. [Citations.] When the option holder exercises the option “the option-giver has no choice but to sell when the option is accepted according to its terms.” [Citation.] A valid and enforceable option contract requires: (1) an adequate description of the property, (2) consideration, and (3) a date when the option must be exercised. [Citation.] *** When the option holder exercises the option to purchase, the option holder “is entitled to specific performance of the optionor’s duty to convey, so long as the holder is willing to pay the option price.” [Citation.] If an option subject to financing does not specify when the sale must take place, “the court may decree a reasonable time [for performance].” [Citations.] And where the parties fail to include a closing date for the resulting sale, the closing date is “to be within a reasonable time from the date of exercising the option.” [Citation.] In this case, Collins and Prestenbach created a valid and enforceable option to purchase real property and Prestenbach timely exercised this option. When Prestenbach exercised his option to purchase, the option contract became an enforceable contract to sell and Prestenbach had the right to specifically enforce that contract. In the absence of a definite closing date in the option contract, it must be presumed that the parties intended that the sale would take place within a reasonable time after Prestenbach exercised his option to purchase. And Prestenbach was required to present himself at the closing with the purchase price as specified in the contract. Absent language in the contract to the contrary, an option holder has no obligation or duty to show an ability to pay the entire sales price before the closing. Instead, by exercising the option, the option holder becomes bound to purchase the property at the closing, according to the terms of the contract. Prestenbach was entitled to set a closing date within a reasonable time following his exercise of the option. He attempted to do so, but Collins refused to cooperate. Thus, Prestenbach is entitled to specific performance, and the chancellor erred in denying Prestenbach’s motion for summary judgment. ***We reverse the judgment of the Court of Appeals. *** Mitigation of Damages — The injured party may not recover damages for loss that he could have avoided (or mitigated) with reasonable effort and without undue risk, burden, or humiliation. Note: See Case 3-3. *** Chapter Outcome *** Define the various types of equitable relief and explain when the courts will grant such relief. 18-3 REMEDIES IN EQUITY Equitable remedies are granted in the court’s discretion and only where legal remedies (monetary damages) are inadequate to redress an injury. They will not be granted: • where there is an adequate remedy at law; • where it is impossible to enforce them, as where the seller has already transferred the subject matter of the contract to an innocent third person; • where the contract is without consideration; • where the consideration is grossly inadequate; • where the contract is tainted with fraud, duress, undue influence, mistake, or unfair practices; • where the relief would cause the defendant unreasonable hardship. 18-3a Specific Performance A remedy requiring the breaching party to perform per the contract. Specific performance is generally available in contract cases involving real estate and unique items of personal property but not where personal services are the subject matter of the contract. As a matter of policy courts will not impose involuntary servitude. 18-3b Injunctions Court orders prohibiting a person from doing a specific act or engaging in a specific conduct. This remedy is available only where money damages are held to be inadequate. CASE 18-4 MADISON SQUARE GARDEN CORP., ILL. v. CARNERA United States Court of Appeals, Second Circuit, 1931 52 F.2d 47 http://scholar.google.com/scholar_case?q=52+F.2d+47&hl=en&as_sdt=2,34&case=133326573442361100&scilh=0 Chase, J. Suit by plaintiff, Madison Square Garden Corporation, against Primo Carnera, defendant. From an order granting an injunction against defendant, defendant appeals. On January 13, 1931, the plaintiff and defendant by their duly authorized agents entered into the following agreement in writing: 1. Carnera agrees that he will render services as a boxer in his next contest (which contest, hereinafter called the “First Contest,” shall be with the winner of the proposed Schmeling-Stribling contest, or, if the same is drawn, shall be with Schmeling, and shall be deemed to be a contest for the heavyweight championship title; provided, however, that, in the event of the inability of the Garden to cause Schmeling or Stribling, as the case may be, to perform the terms of his agreement with the Garden calling for such contest, the Garden shall be without further liability to Carnera) exclusively under the auspices of the Garden, in the United States of America, or the Dominion of Canada, at such time, not, however, later than midnight of September 30, 1931, as the Garden may direct. * * * 9. Carnera shall not, pending the holding of the First Contest, render services as a boxer in any major boxing contest, without the written permission of the Garden in each case had and obtained. A major contest is understood to be one with Sharkey, Baer, Campolo, Godfrey, or like grade heavyweights, or heavyweights who shall have beaten any of the above subsequent to the date hereof. If in any boxing contest engaged in by Carnera prior to the holding of the First Contest, he shall lose the same, the Garden shall at its option, to be exercised by a two weeks’ notice to Carnera in writing, be without further liability under the terms of this agreement to Carnera. Carnera shall not render services during the continuance of the option referred to in paragraph 8 hereof for any person, firm or corporation other than the Garden. Carnera shall, however, at all times be permitted to engage in sparring exhibitions in which no decision is rendered and in which the heavyweight championship title is not at stake, and in which Carnera boxes not more than four rounds with any one opponent. * * * Thereafter the defendant, without the permission of the plaintiff, written or otherwise, made a contract to engage in a boxing contest with the Sharkey mentioned in paragraph 9 of the agreement above quoted, and by the terms thereof the contest was to take place before the first contest mentioned in the defendant’s contract with the plaintiff was to be held. The plaintiff then brought this suit to restrain the defendant from carrying out his contract to box Sharkey, and obtained the preliminary injunction order, from which this appeal was taken. Jurisdiction is based on diversity of citizenship and the required amount is involved. The District Court has found on affidavits which adequately show it that the defendant’s services are unique and extraordinary. A negative covenant in a contract for such personal services is enforceable by injunction where the damages for a breach are incapable of ascertainment. [Citations.] The defendant points to what is claimed to be lack of consideration for his negative promise, in that the contract is inequitable and contains no agreement to employ him. It is true that there is no promise in so many words to employ the defendant to box in a contest with Stribling or Schmeling, but the agreement read as a whole binds the plaintiff to do just that, providing either Stribling or Schmeling becomes the contestant as the result of the match between them and can be induced to box the defendant. The defendant has agreed to “render services as a boxer” for the plaintiff exclusively, and the plaintiff has agreed to pay him a definite percentage of the gate receipts as his compensation for so doing. The promise to employ the defendant to enable him to earn the compensation agreed upon is implied to the same force and effect as though expressly stated. * * * [Citations.] As we have seen, the contract is valid and enforceable. It contains a restrictive covenant which may be given effect. Whether a preliminary injunction shall be issued under such circumstances rests in the sound discretion of the court. [Citations.] The District Court, in its discretion, did issue the preliminary injunction and required the plaintiff as a condition upon its issuance to secure its own performance of the contract in suit with a bond for $25,000 and to give a bond in the sum of $35,000 to pay the defendant such damages as he may sustain by reason of the injunction. Such an order is clearly not an abuse of discretion. Order affirmed. *** Chapter Outcome *** Explain how restitutionary damages are computed and identify the situations in which restitution is available as a contractual remedy. 18-4 RESTITUTION Restitution is the restoration of the injured part to the position he was in before the contract was made (restitution interest). It permits the injured party to recover any consideration given to the breaching party. 18-4a Party Injured by Breach The Restatement of Restitution provides that a party is entitled to restitution if the other party materially breaches the contract by nonperformance or repudiation. The Restatement of Restitution provides, however, that restitution as a remedy for breach of contract is not available against a defendant whose defaulted obligation is exclusively an obligation to pay money. Section 37. Thus, restitution as an alternative contract remedy is available to a prepaying buyer but not to a credit seller. 18-4b Party in Default The Restatement of Restitution provides that a partly performing party whose material breach prevents a recovery on the contract has a claim in restitution against the recipient of performance, as necessary to prevent unjust enrichment. Section 36. Thus, if a party, after having partly performed, commits a breach by nonperformance or repudiation that discharges the other party's duty to perform, the party in default is entitled to restitution for any benefit she has conferred in excess of the loss she has caused by the breach. 18-4c Statute of Frauds The Restatement of Restitution provides that a person who renders performance under an agreement that cannot be enforced by reason of the failure to satisfy the statute of frauds has a claim in restitution to prevent unjust enrichment. Section 31. In such a case, that party may recover in restitution the benefits she directly conferred upon the other as the performance required or invited by the unenforceable contract. 18-4d Voidable Contracts A party who has rescinded or avoided a contract for lack of capacity, duress, undue influence, fraud, misrepresentation, or mistake is entitled to restitution for any benefit conferred on the other party. Section 54 of the Restatement of Restitution provides Rescission requires a mutual restoration and accounting in which each party (a) restores property received from the other, to the extent such restoration is feasible, (b) accounts for additional benefits obtained at the expense of the other as a result of the transaction and its subsequent avoidance, as necessary to prevent unjust enrichment, and (c) compensates the other for loss from related expenditure as justice may require. NOTE: See Figure 18-1 for a summary of the remedies for breach of contracts. *** Chapter Outcome *** Identify and explain the limitations on contractual remedies. 18-5 LIMITATIONS ON REMEDIES 18-5a Election of Remedies A party injured by a breach of contract may be able to seek more than one remedy for the same breach so long as they are not inconsistent. For example, a party who seeks specific performance, an injunction, or restitution may also be entitled to incidental damages. NOTE: See Case 18-1. 18-5b Loss of Power of Avoidance The power to avoid a contractual obligation may be lost in certain circumstances. Affirmance — A party who has the power to avoid a contract for lack of capacity, duress, undo influence, fraud, misrepresentation, or mistake will lose that power by affirming the contract. Delay — The power of avoidance may be lost if the party who has the power does not rescind within a reasonable time. What is a reasonable time depends on all of the circumstances surrounding the transaction. Rights of Third Parties — The power of avoidance and the accompanying right to restitution are limited by the intervening rights of third parties. The one notable exception to this is the situation involving a sale by a minor who subsequently wishes to avoid a transaction, other than for a sale of goods, from a good faith purchaser. In this situation the third party is no more protected from the minor's disaffirmance than the person who deals directly with the minor. 18-6 REMEDIES FOR MISREPRESENTATION Misrepresentation that induces a party to enter into a contract may give rise to remedies under the law of restitution, contract law, and tort law. Although a deceived party may seek a remedy under tort law, contract law, and restitution she may not be compensated more than once and may also be subject to election of remedies. 18-6a Restitution Under the law of restitution, a remedy for misrepresentation is rescission (avoid¬ance) of the contract by the deceived party, though when appropriate, the courts also will require restitution. This remedy was discussed earlier in this chapter. 18-6b Contract Law Under contract law the deceived party can elect either to affirm and enforce the contract despite the misrepresentation or to disaffirm the contract and seek rescission. Rescission as a contract remedy is functionally the same as rescission in restitution. In addition, the equitable remedy of reformation, discussed earlier, may be available. Moreover, if a misrepresentation satisfies the requirements of breach of warranty, compensatory damages, discussed earlier, may be recovered. 18-6c Tort Law Under tort law the deceived party may leave the contract in place and recover damages for the loss caused by the other party’s misrepresentation. The availability and the mea-sure of damages in tort for misrepresentation depend upon whether the misrepresentation is fraudulent or nonfraudulent. Damages in Tort for Fraud —Fraud is an intentional misrepresentation of material fact by one party to the other, who consents to enter into a contract in justifiable reliance upon the misrepresentation. Recovery is allowed in a tort action when fraud is used to induce a party to enter into a contract; most states follow a "benefit of the bargain" rule, a few states follow the "out of pocket" rule. Damages in Tort for Nonfraudulent Misrepresentation — Where the misrepresentation is negligent rather than fraudulent, recovery under the out-of-pocket measure is allowed, although some states use the benefit-of-the bargain measure. Where the misrepresentation is neither fraudulent nor negligent, only out-of-pocket damages may be recovered. Instructor Manual for Smith and Robersons Business Law Richard A. Mann, Barry S. Roberts 9781337094757, 9780357364000, 9780538473637