CHAPTER 5

PERFORMANCE AND BREACH OF CONTRACT

LEARNING GOALS

• To examine the requirements for performance of a contract.
• To identify events that may prevent performance of a contract.
• To understand what constitutes breach of contract

      and its consequences.

CHAPTER COMMENTARY 
The performance of contractual obligations must always be exact  and precise, and  until such time as  the performance is  complete,  the contract remains  in  existence, unless  discharged by some other means (such as frustration, etc.). As tender is an important part of performance, the two forms of tender should be examined, particularly in terms of their effect on the performance of the contract. Of the various other forms of discharge, the doctrine of frustration is perhaps the most difficult for students to understand.
The concept of condition precedent might be reviewed. The various other  forms of  termination, which include discharge by agreement, and by operation of law are also important, and a review of the examples of each of these in the chapter would be useful to set the stage for the part of the chapter dealing with breach and, the consequences when a contract is not properly performed. 
The chapter lay‑out, concerning breach of contract deals first with express repudiation, then the concept of anticipatory breach and the doctrine of substantial performance.  Implied repudiation, which is by far the most difficult to determine, is covered on pp. 138-139. A discussion of this concept should perhaps be tied in with the Ask A Lawyer scenario at the beginning of the chapter.   
Fundamental breach, and the attendant problem of exemption clauses deserve particular  emphasis,  since most purchase  agreements contain clauses of this nature, and their implications  to the buyer  should  be fully  understood. Students should be made aware that  the courts often employ the doctrine of fundamental breach to provide relief from onerous exemption clauses.
The concept of compensation for loss as a result of breach of contract, and the determination of the limits of liability are also discussed in the test reference to Hadley v. Baxendale (p.143).  This should, however, be considered in  connection  with the duty imposed on the injured party to mitigate his or her loss (p. 144), and the various remedies available.

REVIEW QUESTIONS

• Explain performance of a contract under contract law.

Answer:     
Performance in  contract  law means that a party must carry out  a promise exactly  and  precisely  in  order  to  discharge  the contractual obligation. Anything less is a breach.

• Explain ‘tender’ and how tender relates to performance of a contract.

Answer:     
A valid tender is  a demonstration by  the party obliged to perform an act or make a payment of money that he or she was ready, willing, and able to make the exact payment  or perform  the act  at the time and place for performance.

• Describe the effect of a valid tender on the payment of a debt.

Answer:     
A valid tender of payment of money as payment of a debt causes interest to cease running, and  ends the debtor's obligation to make  further attempts to pay the debt to the creditor.  The debt remains, however, but the creditor must seek out the debtor for payment.

• Other than by performance, how may a contract be discharged?

Answer:     
Contracts  may  also  be  discharged  by:  operation  of  law,  agreement, condition subsequent, condition precedent, frustration, implied terms, express terms, and by breach.

• What are the usual consequences that flow from a refusal or failure to perform a valid contract?

Answer:     
A failure  or refusal  to  perform  a contract  at  the time required for performance  constitutes  a breach of  the contract, and  would  entitle  the injured party to seek redress through the courts.                           

• Explain the effects of an unanticipated event that renders performance impossible.  How has this been altered by statute law?

Answer:     
At  common  law, where  performance  is  rendered impossible, the courts generally  treat the  contract  as  being  at  an  end, and the parties  are discharged  from  further performance.   Any money  paid  for which  a person received no benefit may be recoverable, but otherwise it may not.  Frustrated contracts  legislation  permits  the courts to  apportion  the loss in  a more equitable fashion.

• Describe the effect of a material alteration on the enforceability of a contract.

Answer:     
Material alteration affects  the enforcement  of  an agreement  where  the parties  have in  effect substituted different terms for those in the original agreement, and essentially replaced it with a new agreement
8.  Outline the nature and purpose of a force majeure clause in a contract.  Give an example.

Answer:     
A force majeure clause  in  a contract  usually set out  conditions  under which performance may be excused or the agreement terminated.  For example, an Act  of  God  may be set out  as grounds to termination, should such an event occur.

9.  Describe the difference between express and implied repudiation of a contract, and give an example of each.

Answer:
Express repudiation  occurs where one party informs the other that he/she will definitely not perform the contract at the required time.  E.g.:  where A writes B informing her that he will not perform his obligations under the agreement.

Implied repudiation  occurs where one party, by his or her actions gives the other the impression that performance will not take place at the original time.  E.g.:  where a person contracts to haul goods for another, then just before the date for performance, sells his only truck.

10. What are the rights of a party to a contract when informed by the other party to the contract that performance will not be made?

Answer:     
The party informed of the express repudiation may treat the contract as at an end and sue for damages, or may refuse to accept the repudiation, then wait until the date for performance and take action for non‑performance.

11.  Explain the doctrine of fundamental breach as it applies to a contract situation.

Answer:     
Where  the performance of a party is  so far  below  that required by  the terms of the contract, the performance may be treated as a fundamental breach, and will release the injured party from the agreement.

12.  How does the doctrine of substantial performance affect the rights of a party injured by the repudiation of the contract when the contract has not been fully performed?

Answer:    
The doctrine of substantial performance does not permit a party injured by the failure to complete the contract to avoid payment.  The injured party must pay the contract price less the cost of having some third party complete the work.

13.  Describe the concept of damages as it applies to common law contracts.

Answer:     
The concept of damages in contract  law means that the court will  attempt to put  the injured party in the same position following a breach as he or she would have been had the contract been fully performed

DISCUSSION QUESTIONS

1.  In Ask A Lawyer, Ashtown Foundry Co. is faced with a dilemma:  will Hygrade Iron Mine perform its contract?  What is the position of Ashtown?  Are there risks involved?  What can it do?  What are its rights and remedies? 

Comment:
The fact situation in Ask A Lawyer raises the kind of dilemma associated with implied repudiation.  It raises the question:  will the short-falls in delivery continue?  Is the breach sufficient to entitle the Ashtown Foundry Co. to treat the contract at an end?  Given the rumours about Hygrade Iron Mine, the lawyer might advise that a letter be sent to the company stating that all future deliveries must be in accordance with the contract, otherwise Ashtown Foundry Co. would treat the contract at an end for breach.
Students may wish to discuss this advice as well as it raises the question of whether the short-falls in delivery have reached the point where future performance has become impossible.

2. What tests will a court apply to determine the remoteness of a damage claim for breach of contract?

Comment:
The courts will generally apply the test set out on page 143 of the text, containing the excerpts from Hadley v. Baxendale and the later statements of the court.  In essence, the test is the damages that would be reasonably foreseeable as flowing from a breach at the time the contract is formed.

3.  Apart from money damages, what other remedies are available for breach of contract?  Under what circumstances would the remedies be awarded?

Comment:
While money damages are the usual remedy for breach of contract, breach of a term such as a ‘no competition’ clause in the sale of a business, may be enforced by way of an injunction.  Injunctions are usually used to enforce negative clauses in a contract.  For contracts concerning land, specific performance may be ordered by the courts.

4.  Explain why mitigation of loss by the injured party is important where breach of contract occurs.

Comment:
Mitigation of the loss when breach occurs is important because the injured party is expected to take steps to reduce the loss suffered.  A failure to do so, if established, may result in the court only compensating the injured party for those losses that would have been suffered if mitigation had occurred.

COMMENTS RE:  DISCUSSION CASES

CASE 1
Victor owned and operated a large refrigerated highway transport truck.  He entered into a contract with Meat Packers Ltd. to haul large sides of beef for them at a fixed price per load for a period of six months, commencing July 2nd.  On June 28th , he appeared at the packing plant with his truck to see the loading facilities.  When he examined the freezer plant he discovered that he would require an extra employee to help him load, and unload the meat.  He then realized that he had made a contract that he could only perform at a substantial loss.
He approached one of the owners with whom he had contracted, to inform him that he could not perform the agreement.  The owner persuaded Victor to wait until the next day, when he could discuss the matter with the other owners.  Victor agreed to wait and left his truck in the company’s garage overnight.
During the night, a fire at the garage destroyed the garage and Victor’s truck.
Analyze the events that occurred in this case and discuss the legal position of both parties.

Comment:
The first issue raised in the case  is the issue of express repudiation of the contract by Victor. The repudiation by Victor would entitle the contractor to treat the contract as being at an end, but from the facts of the case, the partner in the firm did not accept Victor’s repudiation, but instead, urged him to reconsider, and  this  might  be taken as  a decision to keep the contract alive pending performance by Victor.  This is due  to the fact that Victor was not required to perform until July 2nd.    
The events that followed the attempted repudiation, however, altered the rights of the parties substantially.   The fire at the garage, which destroyed Victor’s  truck, might  release  Victor from  performance  on  the basis  of frustration.  This might raise the question:   Should Victor  be expected to replace the truck (if it is insured) and be ready to perform by July 2nd?  Does the  event constitute  frustration if  performance  is  really  not  rendered impossible on this basis?  How far does the doctrine extend?    
In the cases dealing with this type of problem, the courts have generally treated destruction of equipment by fire as a frustrating event, since it  is something not usually contemplated by the parties at the time the contract was made.  See:  Reid v. Hoskins  (1856), 6 E.R. & B.L. 953; 119 E.R. 1119 where the repudiation was  not  accepted, and  the contract  subsequently  ended by operation of law, and in Cromwell v. Morris (1917), 34 D.L.R. 305, which also dealt with  a refusal to accept repudiation, where the court decided that the refusal to accept repudiation kept the contract  alive for the benefit of both parties.  

CASE 2
Highway Contractors Inc. owned and operated a number of gravel pits that it used as a source of supply for its highway construction projects.   Evans, the company president was always on the lookout for additional sources of supply, and while driving along a country road noticed what appeared to be an odd shaped formation on a farm property that he suspected might contain a quantity of gravel.
He decided to purchase the farm in his own name and later transfer it to his company.  He offered the owner of the property $350,000 for the land, and the farm owner agreed to sell the property.  A purchase agreement was prepared and signed by the parties.
Before the date for exchange of the deed and the money, the farm owner heard rumours that Evans was buying the farm because it contained a large amount of gravel.  The property owner accused Evans of trying to steal her farm, even though the purchase price offered was slightly more than the value of most other farms in the area.
The farm owner instructed her lawyer not to prepare the deed, and when Evans arrived at the farm gate, the farm owner refused him entry.
Evans pointed to his brief case and said he had the money, but the farm owner refused to sell the farm, and he returned to the city.
Discuss the rights and duties of the parties in this case.  If the case came before the court, render a decision.

Comment:     
This case deals with the requirements for tender, and the issue of repudiation by a party.  An approach to the case might be to review  the requirements for a valid tender by a series of questions such as:   What are the requirements for a valid tender? What would Evans be obliged to do to comply with these requirements?   Did his actions constitute a valid tender? When the tender was refused, what were Evans’ rights?  His duties?  Tender must be exact, and in  accordance with  the terms of the contract. This  would mean that Evans must show that he was ready, willing, and able to complete  his part of the contract  at the required time, and at the required place.  By having the cash in hand (as required by the contract) and tendering it  to the vendor at the vendor's farm on  the required day, he established a valid tender, which would in  turn entitle  him  to apply to the court for an order for specific performance of the agreement.    
This case  is  based  upon an unreported case  in  which the author acted as counsel for the purchaser, but a number of other reported cases deal with the same type of problem.   See:   O'Neil v. Arnew (1976), 78 D.L.R. (3d) 671 as an example.  

CASE 3
Highway Grading Contractors purchased a new back hoe from Construction Equipment Company, a firm that specialized in the sale of large, earth moving equipment.  In the six months following delivery, the back hoe had experienced numerous breakdowns, both major and minor.  The equipment was out of service on ten occasions, usually for minor problems such as parts breakage.  On six occasions, the breakdowns were serious and required major parts replacement, causing the back hoe to be out of service for several days.  All of the repair work was done under warranty by the manufacturer’s dealer, at no cost to Highway Grading Contractors.
At the end of the six months, on the thirteenth breakdown, Highway Grading Contractors left the back hoe with the dealer and demanded that the purchase price be returned.  Construction Equipment Company Ltd. refused, and  Highway Grading Contractors decided to take legal action against the seller for a return of the purchase price.
Indicate the nature of the claim of  Highway Grading Contractors and the defences (if any) of  Construction Equipment Company.  Render a decision.

Comment:
Students should recognize that the numerous break-downs of the backhoe raise the issue of fundamental breach of the contract.  Did the purchaser get what was contracted for?  Is a reliable backhoe an implied term in the contract?  The repairs were done under warranty and cost the purchaser nothing.  Would this preclude the purchaser from taking legal action?  Students should recognize that the time lost while the equipment was out of service may well result in lost business and revenue for the purchaser.
The case problem is based upon the case of Rosseway v. Canada Kenworth Ltd. (1978) 6 Alta L.R. (2d) 177.  In that case the court found fundamental breach of the contract as the purchaser received something other than what was bargained for, and entitled to a return of the purchase price.  The judge did not grant compensation for time lost while the backhoe was out of service, because the purchaser had use of the backhoe prior to the date of rescission of the contract.

CASE 4
Tina entered into a contract with Home TV Production to perform the leading role in a television mini-series the company wished to produce.  The contract called for Tina, who was an experienced actress, to devote her time exclusively to the production until the recording of her part was complete, a period of some six weeks.  Her compensation was to be $30,000.  A week after the contract was signed, Tina notified the company that she did not intend to perform the role, and that the company should find a new leading actress for the production.
The company immediately made an effort to find a substitute for Tina, but after an exhaustive search, could not find a suitable replacement for her role.  As a consequence, they were obliged to abandon their plans for the production.  During the week after signing Tina, the company incurred liability of $25,000 under contracts they had entered into for services and commitments made in anticipation of her starring the production.  They also incurred the sum of $3,000 in expenses paid to a search group to find a substitute, when Tina refused to perform.
The company instituted legal proceedings against Tina to recover the total expenses incurred as a result of her repudiation.  In response, Tina offered a settlement of $3,000 to cover expenses incurred in their search for a substitute performer.
Discuss the arguments off the parties and render a decision.

Comment:
This case raises the question of damages where express repudiation of a contract takes place.  Note in the case that the contract was one for personal service and Tina should have been aware at the time that she would be difficult to replace in the role in the play.  Tina could argue that her liability should only be for the $2,500 expended to find a replacement for the part in the play.  However, her repudiation caused the company to abandon the project when a substitute could not be found.  The question should be asked:  Was this a reasonably foreseeable result of the breach?  Was it something which could reasonably be contemplated at the time the contract was entered into?  According to the case of Anglin Television Ltd. v. Reed [1972] 1 Q.B. 60, the plaintiff succeeded in claiming the full costs of the abandoned production.

CASE 5
On June 1st, Bethune entered into an agreement to purchase the Happy Hour Bar and  Restaurant.  The purchase price was $400,000, with a down payment of $50,000.  The balance was payable September 1st, when Bethune was to take possession of the business.  In anticipation of his start in the restaurant business, Bethune quit his job and enrolled in a three month community college course on restaurant management.
On August 1st, the owner of the restaurant notified Bethune that she had received another offer to purchase the restaurant for $425,000, and she intended to sell the businesses to the offeror.  Bethune objected to the restaurant owner’s actions and threatened to take legal action against her if she proceeded with the proposed sale.
A few days later, the restaurant owner did in fact enter into an agreement to sell the business to Volrath, the new purchaser, for the purchase price of $425,000.  The closing date of the transaction was to be September 1st.  She then mailed a cheque to Bethune for the $50,000 she had received from him previously as his deposit.
Bethune immediately returned the cheque and insisted that the restaurant owner proceed with the sale of the restaurant to him in accordance with their agreement.
On August 28th, the local newspaper contained an announcement of the opening of a new restaurant in a large office building across the street from the Happy Hour Bar and Restaurant.  The office building housed most of the customers of Happy Hour Bar and Restaurant, and the new restaurant could be expected to take about two-thirds of the lunch customers and one-third of the dinner customers from the Happy Hour Bar and Restaurant.
The announcement came as a surprise to all parties.  Volrath immediately wrote a letter to the owner of the Happy Hour Bar and Restaurant in which he indicated that he did not intend to proceed with the transaction unless the owner reduced the purchase price to $200,000.  Bethune was out of town on other business on August 28th, and he did not become aware of the new competitor until September 1st, the proposed closing date for his purchase of the restaurant.
Advise each of the parties of their legal position in this case.  Assuming that each party exercised their rights at law, indicate how the issues raised in the case would be resolved by a court.

Comment:
The actions of the parties in this case raise issues of breach, alleged damages, and performance.  Students should note that a binding contract was established between Bethune and the owner of the restaurant on June 1st.  The restaurant owner then sold the restaurant to Volrath, and advised Bethune of the sale.  At this point Bethune would be entitled to treat his contract as at an end and sue the restaurant owner for damages.  He did not do so, and insisted that the transaction proceed in accordance with the agreement.
The second sale to Volrath was repudiated by Volrath when the new competitor was discovered.  This would allow the restaurant owner to treat the contract at an end, and complete the transaction with Bethune on September 1st, as provided in the agreement.  Bethune under the circumstances would be obliged to complete the purchase on that date as he lost the opportunity to avoid the agreement earlier.  For a case with different issues and varied facts, see:  Williams and Gnettler v. Copperfields Hotels Ltd. and Ward (1992) 6 O.R. (3d) 557.

CASE 6
Robot Software Corporation produced sophisticated software programs for computer-assisted robots.  Robot Software Corporation was engaged by Robot Equipment Ltd. to develop software that would enable it to design robots to do more technically difficult jobs on production lines.  Robot Equipment Ltd. provided the engineering data necessary to develop the program, and Robot Software Corporation prepared the software.
The software was tested by both Robot Software Corporation and Robot Equipment Ltd. using a simple robot with known design and performance characteristics as a model.  The software appeared to work properly, and Robot Equipment used the program to design a new complex, multi use robot.
Unknown to Robot Equipment Ltd., the input of design data in a particular sequence would have the effect of cancelling out the safety factor to be built into the robot.  The input sequence was not the sequence used in the test, but a technician used the particular input sequence in testing the new robot model.  As a result, when the new robot was tested the electrical system overheated and caught fire.  The fire destroyed the equipment.
Robot Equipment Ltd. brought a legal action against Robot Software Corporation claiming $500,000 damages as its loss in the construction of the faulty robot.
Discuss the various arguments that may be raised by the parties in this case, and prepare a decision as  if you were the judge.  Outline your reasoning in reaching your decision.

Comment:
The issue raised in this case concerns the alleged breach of an agreement to produce a software program for the development of robot.  Questions that might be raised include:  Would a skilled software producer be aware of the problems the key stroke sequence would produce?  Did it have a duty to warn the user?  Given the facts of the case, the Complex Software Corporation should have forseen the possibility of the key stroke sequence, and its failure to do so would perhaps constitute breach of contract.  The damages that would flow from the breach would be those damages reasonably forseeable at the time the agreement was entered into, and might include the full value of the robot.

CASE 7
A wholesale florist decided to grow a variety of  patented, hybrid flowers, based upon the success that its competitors had with the particular varieties.  The florist purchased seeds for the flower varieties from the catalogue of a commercial seed supplier.
The seeds were planted according to proper planting instructions and cultivated in accordance with accepted agricultural practices.  Weather conditions were “normal” throughout the growing season, but in spite of this, the seeds produced a very poor crop.
The florist informed the seed supplier that the crop had failed, even though it had used proper growing techniques.  The florist demanded that the seed company compensate it for the loss.  The seed company rejected the complaint and noted the seed purchase contract term which stated:

The vendor warrants seeds only as to variety named and makes no warranty express or implied as to quality or quantity of crop produced from the seed supplied.  Any responsibility of the vendor is limited to the price paid for the seed by the purchaser.

            When the seed company refused to entertain the complaint, the florist decided to take legal action to recover it loss.
Discuss the arguments that might be raised in this case, and render a decision.

Comment:
The facts of this case are essentially those in Kordas v. Stokes Seeds Ltd. (1992) 11 O.R. (3d) 129.  The case concerns the application of an exculpatory clause and the doctrine of fundamental breach, when the seeds failed to provide the crop results the buyer expected.  The buyer alleged fundamental breach when the crop was unsatisfactory, but the court held that the buyer did not receive seed that was fundamentally different than what he had ordered, and the defendant seed company was entitled to rely on the exculpatory clause.