Chapter 13

Contract Defenses,
Discharge, and Remedies
 Chapter Objectives
1. Describe the circumstances in which an
otherwise valid contract may be
unenforceable.
2. Summarize the ways in which contractual
obligations can be discharged.
3. Define the different types of damages that may
be obtainable on the breach of a contract.
4. Indicate the usual measure of damages for
breach of various types of contracts.
5. List the equitable remedies that may be
granted by courts and indicate when they will
be granted.

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Case 13.1 Raffles v. Wichelhaus
Wichelhaus purchased a shipment of
cotton from Raffles to arrive on a ship
called the Peerless from Bombay, India.
Wichelhaus meant a ship called Peerless
sailing from Bombay in October; Raffles
meant another ship called the Peerless
sailing from Bombay in December. When
the goods were finally delivered in
December, Wichelhaus refused them.
The judge ruled in favor of Wichelhaus,
claiming that a mutual mistake of fact
had occurred.
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 The Statue of Frauds
Article 11 of the Contracts for the
International Sale of Goods (CISG) does
not incorporate any Statue of Frauds
provisions. Article 11 accords with the
legal customs of most nations, in which
contracts no longer need to meet certain
formal or writing requirements to be
enforceable.
If there were no Statute of Frauds and if a
dispute arose concerning an oral
agreement, how would the parties
substantiate their respective positions?
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 Contract Discharge
In addition to performance,
there are numerous other ways
in which a contact can be
discharged, including:
 Discharge by Agreement of the
Parties
 Discharge based on Impossibility of
Performance

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 Discharge by Performance
• A contract may be discharged by
complete (strict) or by substantial
performance.
 In some cases, performance must be to
the satisfaction of another.
• Totally inadequate performance
constitutes a material breach of contract.
• An anticipatory repudiation of a contract
allows the other party to sue immediately
for breach of contract.
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 Case 13.2 Van Steenhouse v. Jacor
Broadcasting of Colorado
Jacor Broadcasting of Colorado, Inc., owns and
operates Newsradio 85 KOA. In 1991, Andrea Van
Steenhouse signed a three-year agreement to perform as
a radio talk-show host for KOA. She was to receive a
salary and a performance bonus, depending on the
number of people who tuned in. In 1994, she was
replaced by the Rush Limbaugh show. Jacor paid Van
Steenhouse her base salary but did not resume use of her
services. Van Steenhouse filed suit claiming breach of
contract. The court awarded her the amount of the bonus
she would have received.
If courts routinely held that only performance could
discharge employment contracts, how would this affect
employment relations?

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 Discharge by Agreement
Parties may agree to discharge
their contractual obligations in
several ways:
By Rescission ByNovation By Accord and
Satisfaction
The parties A new party is The parties
mutually agree substituted for agree to render
to rescind one of the performance
(cancel) the primary parties different from
contract. to a contract. that originally
agreed on.
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 Discharge Due to
Impossibility
• Parties’ obligations under contracts
may be discharged by objective
impossibility of performance or
commercial impracticability of
performance.
• Where performance is only
temporarily impossible, the
performance is suspended until the
impossibility ceases.
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 Punitive Damages
The reason punitive damages are
awarded in tort actions while they
normally are not in contract actions has
to do with the different purposes of tort
and contract law.
Unlike an intentional tort, which is
generally viewed as a morally wrongful
action, breach of contract is often viewed
as morally neutral.
Can a breach of a contract ever be viewed
as “morally neutral” by the nonbreaching
party to that contract?
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 Damages
The legal remedy of damages is designed
to compensate the nonbreaching party for
the loss of the bargain.
By awarding money damages, the court
tries to place the parties in the positions
that they would have occupied had the
contract been fully performed.
The nonbreaching party frequently has a
duty to mitigate the damages incurred as
a result of the contract’s breach

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 Types of Damages
There are five broad categories of
damages:
Compensatory Consequential
Damages Damages

Punitive Damages

Nominal Damages Liquidated Damages

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 Compensatory Damages
Damages that compensate the nonbreaching party
for injuries actually sustained and proved to have
arisen directly from the loss of the bargain
resulting from the breach of contract.
In breaches of contracts for the sale of goods or
land, the usual measure of compensatory damages
is an amount equal to the difference between the
contract price and the market price.
In breached construction contracts, the measure of
damages depends on which party breaches and at
what stage of construction the breach occurs.

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Case 13.3 Shadow Lakes, Inc. v. Cudlipp
Construction and Development Co.
Cudlipp Construction and Development Co. agreed to
build up to 375 houses for Shadow Lakes, Inc., near
Tampa, Florida. Under the contract, the parties were
bound to complete 14 of the houses, but either party
had the right to terminate the agreement with regard
to future houses if prices could not be mutually
agreed upon by the parties. After starting
construction on 8 houses, problems arose. Cudlipp
filed a suit against Shadow Lakes alleging breach of
contract. The jury awarded Cudlipp, but the Court of
Appeals reversed the award.
What might be an appropriate measure of damages if,
in fact, a contractor was realizing no profit, or was
even actually losing money, on a contract?

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 Consequential Damages
Damages resulting from special circumstances
beyond the contract itself; the damages flow
only from the consequences of a breach.
For a party to recover consequential damages,
the damages must be the foreseeable result of
a breach of contract.
The breaching party also must have known at
the time the contract was formed that special
circumstances existed and that the
nonbreaching party would incur additional loss
on breach of the contract.

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 Hadley v. Baxendale (1854)
The question before the court was whether Hadley
(the mill owner) could recover for consequential
damages—the lost profits—caused by Baxendale’s
delay in delivering a broken crankshaft.
The court held that the Hadleys could recover only
if Baxendale knew or should have known that the
mill would have to be shut down while the
crankshaft was being repaired. Was Baxendale
aware of this?
If it had not been the custom in the mid-1800s for
mills to have extra crankshafts on hand, how
would this circumstance have affected the court’s
ruling?
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 Punitive Damages
Punitive damages (also known
as exemplary damages) are
awarded to punish the
breaching party and deter
similar conduct in the future.
These are usually not awarded
in an action for breach of
contract unless a tort is
involved.
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 Nominal Damages
Nominal damages are those
small in amount (such as one
dollar) that are awarded when
a breach had occurred but no
actual damages have been
suffered.
They are often awarded only to
establish that the defendant
acted wrongfully.
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 Case 13.4 Parker v. Twentieth
Century- Fox Film Corp.
Twentieth Century-Fox Film Corp. planned to produce
a musical, Bloomer Girl, and contracted with Shirley
MacLaine Parker to play the leading female role. Fox
decided not to produce Bloomer Girl and tried to
substitute another contract for the existing contract.
Parker filed suit against Fox to recover the amount of
compensation guaranteed in the first contract,
because she believed the roles were not equivalent.
The trial court ruled in favor of Parker, and the
Supreme Court affirmed the decision.
Many legal systems, including that of France, have no
clear requirement that damages must be mitigated.
Can justice be better served by requiring that
damages be mitigated? If so, how?

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 Victims of Employment Discrimination
Danny Greenway was hired by Buffalo Hilton Hotel,
without notifying them he tested positive for HIV. Five
years later when he took a disability leave, he informed
them he was HIV positive. He was disciplined and
eventually fired. He filed suit claiming violation of the
ADA of 1990. The jury awarded him $1.4 million, but the
appellate court concluded that he was not entitled to
receive damages for future health insurance premiums,
medication costs, and front pay because he did not
mitigate his damages by seeking other permanent
employment.
If the wrongfully discharged employee does not seek
employment and fails to find any, why does the burden
then fall on the former employer to prove that suitable
employment was nonetheless available?

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 Liquidated Damages
Damages that may be specified in a
contract as the amount to be paid to the
nonbreaching party in the event the
contract is later breached.
Clauses providing for liquidated damages
are enforced if the damages were difficult
to estimate at the time the contract was
formed and if the amount stipulated is
reasonable.
If construed to be a penalty, the clause
will not be enforced.

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 Rescission and Restitution
Rescission
A remedy whereby a contract is
canceled and the parties are
restored to the original
positions that they occupied
prior to the transaction.
Available when fraud, a
mistake, duress, or failure of
consideration is present.
The rescinding party must give
prompt notice of the rescission
to the breaching party.
Restitution
When a contract is
rescinded, both parties
must make restitution to
each other by returning
the goods, property, or
money previously
conveyed.
Restitution prevents the
unjust enrichment of the
defendant.
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 Specific Performance
An equitable remedy calling for the
performance of the act promised in the
contract.
Specific performance is only available in
special situations, such as
 those involving contracts for the sale of unique
goods or land, or
 when monetary damages would be an inadequate
remedy.
Specific performance is not available as a
remedy in breached contracts for personal
services.

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 Reformation
An equitable remedy allowing a
contract to be “reformed,” or
rewritten, to reflect the
parties’ true intentions.
Available when an agreement
is imperfectly expressed in
writing.

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 Recovery Based on
Quasi Contract
An equitable theory imposed by the courts to
prevent unjust enrichment in a situation in
which no enforceable contract exists.
The party seeking recovery must show:
 A benefit was conferred on the other party.
 The party conferring the benefit did so with the
expectation of being paid.
 The benefit was not volunteered.
 Retaining the benefit without paying for it would
result in the unjust enrichment of the party
receiving the benefit.

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 Election of Remedies
A common law doctrine under
which a nonbreaching party
must choose one remedy from
those available.
The purpose of the doctrine is
to prevent double recovery.

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 Remedies for Breach
of Sales Contracts
When the buyer breaches a contract
for the sale of goods, the seller may
stop or withhold delivery of the
goods, or recover damages or the
purchase price of the goods.
When the seller breaches a sales
contract, the buyer may reject the
goods, recover damages, obtain
specific performance, or cover and
obtain from the seller the extra cost
of the cover.
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 The Sale of Goods
Article 2 governs contracts for
the sale of goods (tangible,
movable personal property).
The common law of contracts
also applies to sales contracts
to the extent that the common
law has not been modified by
the UCC.
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 Performance of a
Sales Contract
The basic obligation of a seller
under a sales contract is to transfer
and deliver conforming goods, that
is, goods that conform to the
specifications of the contract.
The basic obligation of a buyer is to
accept and pay for conforming
goods in accordance with the
contract.
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 Provisions Limited Remedies
A contract may provide that no damages (or
only a limited amount of damages) can be
recovered in the event the contract is
breached.
Whether such provisions are enforced depends
on the type of breach that is excused by the
provision. For example:
 Clauses excluding liability for fraudulent or
intentional injury or for illegal acts cannot be
enforced.
 Clauses excluding liability for negligence may be
enforced if both parties hold roughly equal
bargaining power.

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 Contracts for the
International Sale of Goods
International sales contracts are governed
by the United Nations Convention on
Contracts for the International Sale of
Goods (CISG).
If the countries of the parties to the
contract have ratified the CISG (and if the
parties have not agreed that some other
law will govern their contract), the CISG
covers the transaction.
Essentially, the CISG is to international
sales contracts what Article 2 of the UCC
is to domestic sales contracts.
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 For Review
1. What defenses can be raised against the
enforceability of an otherwise valid contract?
2. What contracts must be in writing to be
enforceable?
3. How are most contracts discharged?
4. What is the difference between compensatory
damages and consequential damages? What are
the nominal damages, and when might they be
awarded by a court?
5. Under what circumstances will the remedy of
rescission and restitution be available? When
might specific performance be granted as a
remedy?

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