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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
By Novation
The parties
mutually agree
to rescind
(cancel) the
contract.
A new party is
substituted for
one of the
primary parties
to a contract.
By Accord and
Satisfaction
The parties
agree to render
performance
different from
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
Damages
Consequential
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
Restitution
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.
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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Laws Governing Contracts
General Contract
Law
Relevant Common
Law Not Modified by
the UCC
Controls
Nonsales Contracts
(Contracts outside the
UCC)
Contracts for the Sale
of Goods
UCC Article 2
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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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