BLTC 11e IM-Ch16 - NACM



Chapter 16Performance and DischargeIntroductionThis chapter answers these questions—when have the parties to a contract done all that is required under the contract? When is a party excused from doing what he or she promised in the contract to do?When contracting parties do what they promised to do, their duties are discharged, and their contract is terminated. Performance is the most common form of discharge, but duties can be discharged in other ways. Generally, the occurrence or failure of a condition on which a contract is based will discharge the parties’ duty to perform. A breach of contract will discharge the duty of the nonbreaching party to perform. The parties may agree—through rescission, novation, or accord and satisfaction—not to perform as they contracted. Also, by operation of law the parties’ duties may be discharged (through material alteration of the contract, a statute of limitations, bankruptcy, impossibility or commercial impracticability, or frustration of purpose).Chapter OutlineI.Conditions of PerformanceSometimes performance is conditioned on a certain event. If the condition is not satisfied, the obligations of the parties are discharged. There are three types of conditions.Additional Background—Conditions of PerformanceThe Restatement (Second) of Contracts is an authoritative source for some of the principles discussed in this chapter. Specific sections of the Restatement are noted in the text. The following is the section that relates to and is cited in this part of the text—the definition of a condition as stated in Restatement (Second) of Contracts, Section 224.§ 224. Condition DefinedA condition is an event, not certain to occur, which must occur, unless its non-occurrence is excused, before performance under a contract becomes due.A.Conditions PrecedentA condition that must be fulfilled before performance is required is a condition precedent.Case Synopsis—Case 16.1: Park 2000, Inc. v. CushmanEugene Cushman transferred two Midas muffler shops to Pack 2000, Inc. The deal included leases for the real estate. Each lease gave Pack the option to buy the real estate subject to certain conditions—payment of the rent, the notes, the utilities, and other accounts on time. Pack, however, was often late in paying. When Pack sought to buy the real estate, Cushman responded that Pack had not complied with the conditions. Pack filed a suit in a Connecticut state court against Cushman, seeking specific performance. The court rendered a judgment in Pack’s favor. Cushman appealed.A state intermediate appellate court reversed and remanded for the entry of a judgment for Cushman. A party retains its right to exercise an option to buy real estate only by strict compliance with the conditions precedent. In this case, the plaintiff did not strictly comply with the condition of timely payments and lost the right to exercise the options to buy the real estate...................................................................................................................................................Notes and QuestionsWhat is the difference between a contract to buy and sell real estate and an option to buy? Is the difference significant? An option, unlike a bilateral contract to buy and sell real estate, is unilateral. A contract to buy and sell creates a mutual obligation on one party to sell and on the other party to buy. But an option merely gives the right to buy within a limited time without imposing any obligation to buy. This difference is significant. The general rule with respect to compliance with bilateral contracts is substantial compliance. Because an option contract is unilateral—one party is bound but the other is not—the rule is one of strict compliance.Why are rent and other payments due under a lease subject to strict time deadlines? In most situations, an owner of real property has creditors who require the timely payment of obligations. For example, the owner may have mortgaged the property and owe payments on the loan. Utilities and others that provide services to the property want timely payments. There are property taxes to be paid. The owner most likely relies on the income that the rent represents to make these payments. As this case illustrates, arrearages can cause problems. Adhering strictly to timeliness can avoid those problems.B.Conditions SubsequentWhen a condition operates to terminate a party’s duty to perform, it is a condition subsequent. Generally, conditions precedent are common; conditions subsequent are rare. The Restatement (Second) of Contracts does not use the terms.C.Concurrent ConditionsConcurrent conditions exist when each party’s performance is conditioned on the other’s simultaneous performance.II.Discharge by PerformanceMost contracts are discharged by performance—by doing what was promised. Performance may also be accomplished by tender.plete PerformanceOrdinarily, express or implied-in-fact conditions must fully occur for complete performance to take place. Any deviation operates as a discharge.B.Substantial PerformanceTo qualify as substantial—?The party must have performed in good faith.?Performance must not vary greatly from that promised in the contract.?Performance must create substantially the same benefits.1.Effect on Duty to PerformWhen a party fulfills his or her contract obligation in good faith with substantial performance, the other party may be held to his or her obligation to perform.2.Measure of DamagesSubstantial performance entitles the other party to sue for damages for the failure to comply with the contract.?The measure of the damages is the cost to bring the object of the contract into compliance with its terms, if that cost is reasonable?If the cost is unreasonable, the measure is the difference in value between the performance that was rendered and the performance that would have been rendered if the contract had been performed completely.C.Performance to the Satisfaction of Another1.When the Contract Is PersonalWhen the subject matter of a contract that requires personal satisfaction is personal, personal satisfaction is a condition—performance must actually satisfy the party. The party to be satisfied must act honestly and in good faith.2.Reasonable Person StandardOther contracts need only be performed to the satisfaction of a reasonable person. When a contract requires performance to the satisfaction of a third party, a minority of courts require the personal satisfaction of the third party. Most courts require the work to be satisfactory to a reasonable person.D.Material Breach of ContractWhen performance is not substantial, a breach is material—the nonbreaching party is excused from performing and can sue for damages.?If a breach is not material, the innocent party’s duty to perform may be only suspended until the breach is remedied.?Any breach entitles the party to sue for damages, but only a material breach discharges him or her from the contract.Case Synopsis—Case 16.2: Kohel v. Bergen Auto Enterprises, L.L.C.Marc and Bree Kohel agreed to buy a used 2009 Mazda from Wayne Mazda Inc. The Kohels were credited $7,000 as a trade-in for their 2005 Nissan Altima. They still owed $8,118.28 on the Nissan, which Wayne agreed to remit. But later when Wayne discovered that the Nissan was missing a vehicle identification (VIN) tag, the dealer refused to make the payment and also refused to give the Kohels the permanent plates for the Mazda. The Kohels applied and paid for a replacement VIN tag, but Wayne refused their calls. The Kohels filed a complaint against the dealer in a New Jersey state court, alleging breach of contract. From a judgment in the plaintiffs’ favor, Wayne appealed.A state intermediate appellate court affirmed. “There is a material distinction in plaintiffs' conduct, which [was] unintentional, and defendant's refusal to release the permanent plates for which the plaintiffs had paid.”..................................................................................................................................................Notes and QuestionsWhat is the most basic way of determining whether a breach of contract is material? The most basic way of determining whether there has been a material breach of a common law contract is to ask whether the nonbreaching party got substantially what he or she bargained for. If he or she did not, then the breaching party's performance is not substantial, and the breach is material. Other factors may also be considered.What effect does a material breach have on the nonbreaching party? Performance far below reasonable expectations is a material breach of contract. The nonbreaching party is excused from performing and can sue for damages caused by the breach. Of course, the party need not treat the breach as a discharge but can treat the contract as still in effect and simply sue for damages. In that circumstance, the nonbreaching party’s duty to perform will only be suspended until the breach is remedied and he or she must then resume performance. How is this different from the effect of a nonmaterial breach? Any nonperformance of a contractual duty is a breach of contract, and any breach entitles the nonbreaching party to sue for damages. But only a material breach can discharge the nonbreaching party from the contract.What is a minor breach of contract? On a minor breach, is the nonbreaching party excused from performance? Explain. A breach of contract is the nonperformance of a contractual duty. If a breach is not material, it is minor. The nonbreaching party's duty to perform can sometimes be suspended until the breach has been remedied, but the duty to perform is not entirely excused. Once a minor breach has been cured, the nonbreaching party must resume performance. Any breach—material or minor—entitles the nonbreaching party to sue for damages.In this case, what were the defendant’s two arguments that the plaintiffs should not have been granted relief for Wayne Mazda’s breach? In this case, Wayne Mazda (the defendant) argued that the Kohels’ (plaintiffs) delivery of their Nissan as a trade-in without a vehicle identification (VIN) tag was a breach of the contract of sale and barred finding that Wayne Mazda breached the contract. The defendant also contended that the plaintiffs’ failure to obtain a replacement VIN tag was a repudiation of the contract.The lower court ruled in favor of the plaintiffs on both contentions, and the state intermediate appellate court affirmed. As for the first argument, the trial court found that the plaintiffs were not aware the Nissan lacked a VIN tag when they offered it in trade. And the defendant's representatives examined the car twice without noticing the missing VIN. As for the defendant’s second contention, the missing tag could be replaced, and the plaintiffs attempted to do this, but the defendants refused to take his calls on the matter.Was there a difference in the degree to which the plaintiffs and the defendant failed to perform the contract? Explain. Which party was in material breach? Yes, the plaintiffs’ conduct was distinguishable from the defendant’s actions. The Kohels’ (plaintiffs) delivered a Nissan as a trade-in on their purchase of a Mazda without a vehicle identification (VIN) tag. But the trial court found that they were not aware the Nissan lacked a VIN tag when they offered it in trade. And Wayne Mazda’s (the defendant's) representatives examined the car twice without noticing the missing tag. In the appellate court’s words, “There is a material distinction in plaintiffs' conduct, which the court found unintentional, and defendant's refusal to release the permanent plates for which the plaintiffs had paid, an action the court concluded was done to maintain ‘leverage.’?” In other words, the parties’ intent was the chief distinction.Here, the defendant was in material breach of their contract. While both parties were arguably in breach, “there is a material distinction in plaintiffs' conduct,” which was unintentional, “and defendant's refusal to release the permanent plates for which the plaintiffs had paid.” This refusal excused the plaintiffs from performance and permitted them to maintain their suit against the defendant for damages.Additional Cases Addressing this Issue —Material Breach of ContractCases considering whether there had been substantial performance or a material breach of a contract include the following.?Peterson Contractors, Inc. v. Herd Producing Co., 811 So.2d 130 (La.App. 2 Cir. 2002) (a contractor substantially performed a contract to construct a road and a work pad, when the project was 85 percent completed and the only remaining task was to dump and spread rock over the work pad).?Hansel v. Creative Concrete & Masonry Construction Co., 148 Ohio App.3d 53, 772 N.E.2d 138 (10 Dist. 2002) (a contractor substantially performed a contract to construct a concrete driveway, even though the owners did not receive exactly what they bargained for, because the driveway was usable and hence met its essential purpose).Additional Background—Material BreachThe following is from the Restatement (Second) of Contracts, Section 241.§ 241. Circumstances Significant in Determining Whether a Failure Is MaterialIn determining whether a failure to render or to offer performance is material, the following circumstances are significant:(a) the extent to which the injured party will be deprived of the benefit which he reasonably expected;(b) the extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived;(c) the extent to which the party failing to perform or to offer to perform will suffer forfeiture;(d) 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 reason-able assurances;(e) 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. E.Anticipatory RepudiationIf, before either party to a contract has a duty to perform, one of the parties refuses to perform, the other party is discharged.1.Repudiation is a Material BreachThe anticipatory repudiation can be treated as a present, material breach and damages can be sought immediately. Until this is done, the breaching party can retract the repudiation by proper notice.?The nonbreaching party should not have to remain ready to perform when the other party has repudiated the contract.?The nonbreaching party should have the chance—and may have a duty—to seek a similar contract elsewhere.Additional Background—Anticipatory RepudiationThe following is a section of the Restatement (Second) of Contracts that is cited in, and relates, to this part of the text—Restatement (Second) of Contracts, Section 253. § 253. Effect of a Repudiation as a Breach and on Other Party’s Duties(1) Where an obligor repudiates a duty before he has committed a breach by non-performance and before he has received all of the agreed exchange for it, his repudiation alone gives rise to a claim for damages for total breach.(2) Where performances are to be exchanged under an exchange of promises, one party’s repudiation of a duty to render performance discharges the other party’s remaining duties to render performance. 2.Anticipatory Repudiation and Market PricesThis often occurs because a fluctuation in market prices would make performance unfavorable for one of the parties.III.Discharge by AgreementMost contracts are discharged by performance—by doing what was promised. Performance may also be accomplished by tender.A.Discharge by Mutual Rescission?To mutually rescind, the parties must make another contract. Their promises not to perform constitute consideration for the new agreement.?An oral rescission agreement is generally enforceable unless it concerns a transfer of land or the original contract required written rescission. Contracts that are executory on both sides can be rescinded solely by agreement.?Contracts that are executed on one side can be rescinded only if the party who has performed receives consideration for the promise to call off the deal.B.Discharge by NovationNovation substitutes a new party for an original party by agreement of all the parties. Novation requires ?A previous valid obligation.?An agreement of all the parties to a new contract.?The extinguishment of the old obligation (discharge of the prior party.?A new valid contract.C.Discharge by Accord and SatisfactionAn accord is an executory contract to perform an act to satisfy a contractual duty that has not been discharged. A satisfaction is the performance of the accord. An accord suspends the original obligation. The obligor discharges the obligation by performing the accord. If the obligor refuses to perform the accord, the obligee can sue on the original obligation or on the accord.IV.Discharge by Operation of LawA.Material Alteration of the ContractAn innocent party is discharged when another party to the contract materially alters it without consent.B.Statutes of LimitationsThe UCC provides that an action for breach of a sales contract must be initiated within four years after the cause accrues. The running of a limitations statute does not extinguish the obligation under a contract. If the obligor makes a new promise to perform, the cause revives.C.BankruptcyA discharge in bankruptcy will ordinarily bar enforcement of most of a debtor’s contracts by the creditors. Partial payment of a debt after discharge in bankruptcy will not revive the debt.D.Impossibility of PerformanceIf contractual performance becomes impossible in an objective sense, the contract may be discharged.1.When Performance Is ImpossibleSituations that generally qualify include—?A party essential to a personal contract dies or becomes incapacitated before performing.?The specific subject matter of a contract is destroyed.?A change in law renders performance illegal.Case Synopsis—Case 16.3: Kolodin v. ValentiHilary Kolodin (a.k.a. Hilary Kole), a jazz singer, was involved personally with John Valenti, the president of Jayarvee, Inc., which manages artists, produces recordings, and owns and operates Birdland. Kolodin contracted professionally with Jayarvee. When Kolodin and Valenti’s personal relationship deteriorated, they agreed to have contact only through legal counsel. Later, Kolodin filed a suit in a New York state court against Valenti, alleging breach of her Jayarvee contracts and seeking their rescission. The court issued a judgment in Kolodin’s favor. Valenti appealed.A state intermediate appellate court affirmed. Performance of the contracts was rendered objectively impossible by the stipulation prohibiting contact between the parties except through counsel. Performance “would necessarily require [Valenti’s] input, given his central role in [their] operation.” And “the stipulation was not foreseeable, such that the parties could have contracted around it.”..................................................................................................................................................Notes and QuestionsIs domestic abuse something that parties should be expected to contract around? No, domestic abuse is not something that, as a public policy matter, parties should be expected to contract around. Contracting parties should expect good faith and legal and ethical behavior in all of their dealings. Illegal, unethical, abusive conduct is not something that should be anticipated and contracted around in any foreseeable circumstances.Suppose that the “no contact” stipulation between Kolodin and Valenti had exempted Jayarvee's employees. Would the result have been different? Yes, if the “no contact” stipulation between Kolodin and Valenti had exempted Jayarvee's employees, it is likely that the result in this case would have been different. The exemption would have allowed contact between Kolodin and Jayarvee employees, with whom Valenti also had contact. This would have rendered performance of the professional contracts between Kolodin and Jayarvee possible.In fact, although it is not noted in the text, as originally drafted, the stipulation between Kolodin and Valenti included language that would have permitted contact by “other individuals at Jayarvee or Valenti's place of business.” But the parties agreed to the stipulation with this language removed. According to the court, “Valenti evidently understood that the stipulation precluded contact between plaintiff and employees of Jayarvee and that, without an exception permitting such contact, the contracts could not be performed.”2.Temporary ImpossibilityAn event that makes it temporarily impossible to perform a contractual act suspends performance until the impossibility ceases. If the lapse of time and any change in circumstances surrounding the contract make it substantially more burdensome to perform, however, the parties will be discharged.mercial ImpracticabilityIf circumstances arise that make performance extremely difficult or costly, the contract may be discharged under the doctrine of commercial impracticability. The anticipated performance must become extremely difficult or costly. Circumstances of which businesspersons at the time of contracting are or should be aware, however, do not qualify.Additional Background—Commercial ImpracticabilityThe following is a section of the Restatement (Second) of Contracts that states the principle of law explained in this part of the text—Restatement (Second) of Contracts, Section 261. § 261. Discharge by Supervening ImpracticabilityWhere, after a contract is made, a party’s performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.F.Frustration of PurposeA contract is discharged if unforeseen circumstances make it impossible to attain its purpose.Teaching Suggestions1.Students find the subject of conditions generally difficult. It may be made easier by emphasizing that there are clearly implied conditions that exist of necessity in every contract. For example, a contract for the performance of personal services includes an implied condition that the promisor will be alive and able to perform the obligation.Discuss the use of express conditions in (1) an automobile purchase contract (“subject to the approval of my parents”) and (2) a home purchase contract (subject to financing, inspection, sale of present home). Encourage students to come up with ideas for conditions in each of these contracts that could be used to give them more control over their contract obligations.2.Students often believe that only complete performance is valid. It is important to underscore that the law recognizes various degrees of performance. Have students explain what is required of a party who wants to render complete performance. Ask students to list the criteria that a party must fulfill to demonstrate that he or she has substantially performed. Remind students that substantial performance makes the performing party eligible for payment, but that the other party can sue for damages.3.You might tell students that in taking notes, they may find it helpful to use some of the terms, abbreviations, and symbols that law students, lawyers, an judges use in their note-taking and writing. Some of the abbreviations are those that appear in case citations—”S.Ct.” for the United States Supreme Court, for example. “J.” can be shorthand for “judge” and “JJ.” for “judges.” Symbols that are commonly used include “K,” which is used to refer to a contract. To indicate a reference to a plaintiff, the pi symbol—”?”—is often used, and a defendant is noted by a triangle—”?.”Cyberlaw LinkWhat is the current state of technology for protecting online transactions? How can a party be assured that the negotiation and transmission of a contract online is secure? How can the performance of a contract be monitored online?Discussion Questions1.What is a condition? A condition is part of a contract, either expressly by the parties or impliedly by courts. A condition is a possible future event, the occurrence or nonoccurrence of which will trigger the performance of a legal obligation or terminate an existing obligation under a contract (a purchase of land, for instance, may hinge on a neighbor’s willingness to sell his or her property—if the neighbor does not sell, the contract is not enforceable).2.What are the differences between express conditions and implied-in-fact conditions? Express conditions are provided by the parties in their agreement (and often begin “if,” “provided,” “after,” or “when”). Implied-in-fact conditions are also part of the agreement, but are not expressly found in the language of the agreement—they are inferred from the promises (a promise to make periodic repairs as needed impliedly requires notice of what needs to be repaired, for instance).3.Discuss the degrees of performance. Complete performance is performance within the bounds of reasonable expectations. Substantial performance is performance slightly below reasonable expectations. Complete Performance. Generally, express or implied-in-fact conditions must be fully complied with for complete performance to occur. Any deviation operates as a discharge (substituting for stipulated materials without a promisee’s required permission may discharge the promisee from the obligation to pay). Substantial Performance. As long as a party fulfills his or her obligation with substantial performance, the other party may be required to perform (less damages for the deviations). To qualify as substantial, performance must not vary greatly from what was promised (substituting materials of similar quality for specified materials may not discharge the promisee’s obligation to pay). The deviation must not involve gross negligence. Some courts require that it not be intentional.4.What is the effect of an anticipatory repudiation on the nonbreaching party? The nonbreaching party can treat an anticipatory repudiation as a material breach and sue for damages immediately—a nonbreaching party is not required to remain ready and willing to perform when another party repudiates the contract. Until the nonbreaching party treats an anticipatory repudiation as a breach, the breaching party can retract his or her repudiation by proper notice and restore the parties to their original obligations.5.What is the difference between a rescission and a novation? Rescission. By rescission a contract is canceled and the parties are returned to the positions they were in before the contract was formed. The parties may mutually rescind by making another contract. An oral rescission agreement is generally enforceable unless it falls subject to the Statute of Frauds or the original contract was a contract for a sale of goods and required written rescission. Contracts that are executory on both sides can be rescinded solely by agreement. Contracts that are executed on one side can be rescinded only if the party who performed receives consideration for the promise to rescind. Novation. Novation substitutes a new party for an original party by agreement of all the parties (for instance, before completing a sale of a firm’s assets, the seller, buyer, and a third party agree that the third party will take the place of the buyer). Novation requires (1) a previous valid obligation, (2) an agreement of all the parties to a new contract, (3) the extinguishment of the old obligation (discharge of the prior party), and (4) a new valid contract. Novation discharges the original contract and replaces it with a new contract.6.How is a novation distinguished from a substituted agreement? Novation substitutes a new party for an original party by agreement of all the parties (for instance, before completing a sale of a firm’s assets, the seller, buyer, and a third party agree that the third party will take the place of the buyer. The parties to a contract may instead enter into a “substituted agreement” that discharges the obligations under their previous contract. The difference between a novation and a substituted agreement is that the latter does not involve a third party.7.How does an accord and satisfaction work? An accord is an executory contract to perform an act to satisfy a contractual duty that has not been discharged. Satisfaction is performance of the accord. An accord suspends the original obligation; the accord’s performance discharges it. If the obligor refuses to perform the accord, the obligee can sue on the original obligation or on the accord (agreeing that a judgment can be satisfied by a transfer of a car in lieu of cash is an accord; the transfer is the satisfaction, and the debt is discharged).8.When a contract’s performance is not impossible, how can it be discharged by operation of law? Alteration of Contract. An innocent party is discharged when another party to the contract materially alters it (changes a quantity or price term, for instance) without the innocent party’s consent. Statute of Limitations. Statutes of limitations limit the period during which a party can sue on a cause of action (breach of the contract). The statute runs whether or not the innocent party knows of the breach. The running of the statute does not extinguish the contractual obligation. If the obligor makes a new promise to perform (agrees in writing to pay an amount owed or actually pays part of it, for instance), the cause barred by the statute revives. (Typically, suits for breach of oral contracts must be brought within two or three years; for written contracts, four or five years; for recovery of amounts awarded in judgment, ten to twenty years. The UCC provides that an action for breach of a sales contract must be initiated within four years after the breach occurs.) Bankruptcy. A discharge in bankruptcy will normally bar enforcement of most of a debtor’s contracts by the creditors. (Partial payment of a debt after discharge in bankruptcy will not revive the debt.)9.How does the impossibility of performance discharge a contract? Situations that generally qualify to discharge contractual obligations under the doctrine of impossibility of performance include: (1) one of the essential parties to a personal contract dies or becomes incapacitated before performing (an actor’s death before fulfilling a contract to make a film discharges the contract); (2) the specific subject matter of a contract is destroyed (a fire that destroys a building discharges a contract for its sale); (3) a change in law renders performance illegal (lowering the usury rate renders contracts to loan money at higher rates illegal). Commercial Impracticability. To discharge a contract under the doctrine of impracticability, performance must become extremely difficult or costly (ten times more than the original estimate). Circumstances of which businesspersons at the time of contracting are or should be aware do not qualify (foreseeable, foreign political events). Frustration of Purpose. A contract will be discharged under the doctrine of frustration of purpose if circumstances make it impossible to attain the purpose the parties intended when contracting (when a parade is canceled, for instance, the purpose of contracts for hotel rooms en route—viewing the parade—is frustrated, and the would-be observers may be excused from payment). Temporary Impossibility. An event that makes it temporarily impossible to perform a contract (war) suspends performance until the impossibility ceases. If the lapse of time and any change in circumstances surrounding the contract make it substantially more burdensome to perform, (if the war is long and inflation high) the parties will be discharged.Activity and Research AssignmentHave students draft a simple contract for a small construction project (remodeling a kitchen, for instance) under which a homeowner hires an independent contractor to do the work. Consider the points of view of (1) the homeowner, (2) the contractor, and (3) a subcontractor. What clauses would each party want in his or her contract to assure satisfactory performance by the others? How specific should the details regarding the work be? To whose advantage is it to be specific? What recourse would each party have if the others did not perform? Should that be spelled out in the contract?Provisions commonly included in personal service contracts concern amounts and methods of payment; descriptions of the work to be done; materials that will be used and who will pay for them; deadlines; what constitutes completion of the work; what happens if the work or payment is late or incomplete; the status of the party performing the work (independent contractor); responsibility for any injury; indemnity for injury to others; and how disputes should be resolved.Some states have additional statutory requirements with which licensed contractors must comply. For example, California has specific restrictions regarding down payments and payment schedules in home improvement contracts costing more than $500. Students may be asked to research their states’ specific requirements.Explanation of a Selected Footnote in the TextFootnote 2: Wisconsin Electric Power Co. (WEPCO) contracted with Union Pacific Railroad Co. to transport coal. The contract required WEPCO to notify Union Pacific monthly how many tons of coal (within a certain maximum) it wanted shipped the next month, and Union Pacific was to make “good faith reasonable efforts” to meet the schedule. The contract also required WEPCO to supply the railcars. When WEPCO did not supply the railcars, Union Pacific used its own to deliver 84 percent of the requested coal. Claiming that the minimum percentage should have exceeded 90 percent and that Union Pacific was shipping less because other customers paid higher rates, WEPCO filed a suit in a federal district court against the railroad. The court issued a judgment in the defendant’s favor. WEPCO appealed. In Wisconsin Electric Power Co. v. Union Pacific Railroad Co., the U.S. Court of Appeals for the Seventh Circuit affirmed—“84 percent” constituted substantial performance of this contract. The contract did not require Union Pacific to comply strictly with WEPCO’s schedule—Union Pacific only had to make “good faith reasonable efforts.” Also, the contract required Union Pacific to transport tonnages that WEPCO specified only if WEPCO supplied the railcars for the shipment—which, for the deliveries that WEPCO cited in its suit, WEPCO did not. As for the allegation that Union Pacific was putting other, higher-paying customers’ requests ahead of WEPCO’s demands, good faith does not require a contracting party to put one customer ahead of others.Under the reasoning in this case, could another customer of Union Pacific have charged it with bad faith if Union Pacific had denied service because “we prefer WEPCO”? No. The court in this case does not apply a standard that requires a contracting party to put the needs of one customer ahead of others for any reason. The duty of good faith does not require a contracting party to act to its own detriment to benefit another party to the contract, nor does it require acting to the detriment of a third party with which it also has a contract.Should a contracting party “relax” the terms if the other party has “trouble” performing them? A contracting party is not legally obligated to “relax” the terms of a contract if the other party has difficulty performing his or her side of the bargain. But what that difficulty means for the performing party should reasonably be taken into account, for that party’s own interest. There are costs associated with insisting on strict compliance: the time and effort to manage that goal, as well as litigation costs and negative publicity if it is not met. And the costs to the performing party associated with the other’s failure to strictly comply might be recouped in other ways, such as tailoring its own conduct to the same standard.Why would a different customer have paid a higher rate than WEPCO to Union Pacific for the transport of resources or other products? Another customer of the railroad might have been paying a higher rate because it had an urgent need for service. The movement of other commodities or finished goods might have been less economically efficient than the transport of coal because of infrastructure costs or other barriers to cheaper shipping. Or the parties might have negotiated a higher rate.Rail is the most common method of moving coal long distances. Rail transport is capital-intensive, due to its infrastructure costs, but the possible long life of those assets and the potential large volume of the shipments, among other factors, offset the expense. One hundred or more railcars can carry as much as 15,000 tons of coal in a single shipment. When loading and unloading terminals are dedicated at either end of a line for this purpose, the movement of coal by rail can be highly efficient and relatively cheap. ................
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