Outline: Contracts - VIII - Termination and Rescission

Contracts (Spring 2006, Hull)

VIII. TERMINATION AND RESCISSION

1. Termination, Rescission, Setoff, and Suspension
   1. Termination - Affirms existence of contract, discharges injured party from performance, and grants injured party right to recover damages
   2. Rescission - Disaffirms contract; arose from equity court
   3. Rescission may occur only by mutual consent or in case of material breach. [Woodruff v. McClellan – Where buyer in real property refused to sign closing papers despite repeated extensions, there is no mutual consent, thus no rescission, so attorney’s fees applicable]
   4. Courts are merging termination (law) and rescission (equity), and sometimes confuse terms.
   5. Setoff - Similar to dependency of obligations [GTM Investments v. Depot, Inc. – Dispute over placing of sign in business lease does not entitle tenant to withhold rent, particularly where lease explicitly provides against setoffs]
   6. Suspension of Performance [Romig v. De Vallance – Where real estate buyer discovered defect and refuses to finish payment, and agreement requires seller to deliver clear title upon full payment and not before, buyer’s potential remedy to be determined based on:]
      1. Did buyer have reasonable grounds for insecurity with respect to seller’s performance?
      2. If so, and buyer demanded adequate assurance of performance, and such was not provided, buyer’s failure to pay is not breach. [2-609 – Right to Adequate Assurance of Performance – Failure to perform is not breach without adequate written assurance of due performance.]
      3. If seller’s failure to provide adequate assurance was repudiation, seller is in breach. [2-610 – Anticipatory Repudiation]
2. When Can a Party Terminate or Rescind?
   1. Express Conditions – If there is a condition, it hasn’t been met, and it hasn’t been excused, there is a termination.
      1. Elements
         1. Is there a condition to performance?
         2. If so, has the condition been satisfied?
         3. If not, has the condition been excused?
      2. Haymore v. Levinson – Term “satisfactory” in construction contract where purchase price is held in escrow conditioned on “satisfactory completion” must be reasonable.
      3. ARD Dr. Pepper Bottling Co. v. Dr. Pepper Co. – Where contract spells out method of determining satisfactory conditions, contract is not otherwise illegal, and injured party has made good-faith determination of breach, termination is proper.
      4. Waiver of condition
         1. No consideration required to enforce waiver.
         2. Waiver may be inferred from conduct. [Burger King Corp. v. Family Dining, Inc. – Where franchiser has not demonstrated history of holding franchisee to literal interpretation of development plan, it has waived terms, and is not entitled to termination]
         3. Waiver of one right does not waive other rights. [American Continental Life Ins. Co. v. Ranier Construction Co., Inc. – Where both parties have deviated from formal requirements in other terms, builder’s obligation to issue final certificate for payment to secure buyer’s payment has not been waived]
      5. Language of promise, condition, or both? [see R.2d 227]
         1. Language of promise: Non-breaching party may still be required to perform, but has cause of action for breach.
         2. Language of condition: Failure of condition means that party whose performance was conditional need not perform unless condition is excused.
         3. Language of promise & condition: Party whose performance is conditioned need not perform and can sue for breach.
   2. Implied Conditions [Jacob & Youngs v. Kent – Builder who used different brand of pipe entitled to payment despite contractual requirement to use original brand of pipe, where branding is only difference, and buyer already occupies house; implied condition was one of substantial completion]
   3. Material breach
      1. Walker & Co. v. Harrison – Seller’s delay in maintaining sign as stipulated in contract, while annoying, is not sufficiently material to warrant repudiation by buyer.
      2. R.2d 241 – Factors of Material Breach
         1. extent to which injured party will be deprived of reasonably expected benefit
         2. extent to which injured party can be adequately compensated for part of benefit deprived of
         3. extent to which failing party will suffer forfeiture [policy to avoid forfeiture]
         4. likelihood failing party will cure failure, taking account of circumstances including any reasonable assurances
         5. extent to which behavior of failing party comports with standards of good faith and fair dealing
   4. Anticipatory Repudiation
      1. R.2d 250 – A repudiation is:
         1. by words – statement that party will commit breach
         2. by conduct – act renders party unable or apparently unable to perform
      2. R.2d 253 – Effect of Repudiation
         1. Repudiation alone makes repudiator liable for damages for total breach
         2. Injured party relieved of remaining duties to perform
      3. Stonecipher v. Pillatsch – Buyer entitled to restitution or rescission when seller manifested intent to repudiate through, and is not obliged to wait until original date of performance.
      4. R.2d 256 – Nullification of Repudiation
         1. Repudiation by statement may be nullified by retraction if injured party notified of retraction before materially changing position in reliance or indicating to breaching party that he considers repudiation final
         2. Repudiation by action may be nullified if injured party notified that events have ceased to exist before materially changing position in reliance or indicating to breaching party that he considers repudiation final
3. Effect of Rescission and Restitution
   1. R.2d 373 – Restitution When Other Party is in Breach
      1. Breach by non-performance, or repudiation, entitles injured party to restitution for benefits already conferred in reliance.
      2. Injured party has no right to restitution if he has finished performance and no performance remains due by breaching party other than payment.
   2. Ennis v. Interstate Distributors, Inc. – Although rescission usually granted only to restore status quo ante, inability to return to former position where there has been material breach (loss of consideration paid for covenant which was breached) which, though partial, goes to the essence of the contract, makes rescission proper.
   3. Divisible Contracts – If a contract is divisible into corresponding pairs of equivalent performances, breach of one pair does not excuse breach of another. [R.2d 240]
      1. Siemans v. Thompson – Where salary promise and stock purchase promise were dependent, failure to pay salary obviated obligation to purchase shares.
      2. Rudman v. Cowles Publishing – Promise to employ in return for acquisition was independent of promise of “number one man” position, supported by fact that promises were independently signed, so breach of one was adequately compensated by damages, and restitution is impracticable as acquisition was complete.
   4. Delay as Bar to Rescission
      1. 2-607(3)(b) – Where tender has been accepted, if claim is for infringement [2-312(3)], and buyer is sued as a result, he must notify seller within reasonable time after notice of litigation, or be barred from remedy for that litigation.
      2. R.2d 381 – Loss of Power of Avoidance by Delay – Party which does not manifest intention to avoid within reasonable time loses power to avoid. [Snyder v. Rhoads – Buyer of dry cleaning business that continued to operate it despite claims of profitability by seller and to make payments cannot after such unreasonable delay bring counterclaim for both rescission and affirmance [R.2d 380], but may bring suit for damages under fraud after counterclaim for affirmance]
   5. Restitution
      1. R.2d 374 – Restitution for Breaching Party – Reasonable value of services provided, capped at contract price minus damages from breach
         1. Injured party must get what it bargained for – e.g., if one pays $3000 for a project built to certain specifications, one should not pay more than that. [Kutzin v. Pirnie – Where real estate purchase contract did not contain liquidated damages clause, buyer who paid deposit then decided not to buy is entitled to recover portion of deposit in excess of loss caused to seller by buyer’s breach]
         2. Breaching party should recover reasonable value of work done, as long as injured party gets what it bargained for.
      2. Innocent Party’s Action for Restitution [see R.2d 373]
         1. Reasonable value of services provided, no cap unless work is entirely performed (capped at contract price), if injured party elects rescission
         2. United States v. Western Casualty & Surety Co. – If rescission is proper, supplier entitled to value of goods supplied, not percentage of price equivalent to percentage of contract performed.
   6. Hypos – Restitution for Breaching Party
      1. Hypo 1
         1. Facts: contract price = $3000; FMV of work completed = $3000; cost to complete = $500
         2. Restitution = $2500
         3. Damages = $2500
      2. Hypo 2
         1. Facts: contract price = $3000; FMV of work completed = $1500; cost to complete = $500
         2. Restitution = $1500 (value conferred)
         3. Damages = $2500 (assuming substantial completion and no material breach)
   7. Breach of Accord
      1. Terminology
         1. Executory accord - Original contract is dischargeable only upon performance of accord; if accord is breached, injured party may sue on original contract
         2. Substitute contract - Original contract discharged by making of substitute agreement; upon breach of substitute, injured party may sue only on substitute, not original contract [R.2d 279]
         3. Novation - Substitute contract where 3rd party is substituted to perform obligations of one of original parties
      2. Bradshaw v. Burningham – Where modified agreement in well-drilling contract stipulates that original contract was "still effective except for changes mentioned herein", and terms were not defined in original contract, new contract is substitute contract, not executory accord.