CPA Prep REG

REG Chapter 6 Part 2: Performance of Contracts

What is performance?

Another exciting lesson on contracts. Today we will be talking about performance of a contract. Here are today’s learning outcomes:

  • Explain the rules related to the fulfillment of performance obligations necessary for an executed contract.
  • Identify whether both parties to a contract have fulfilled their performance obligation given a specific scenario.

Types of Common Law Performance

A contract is a legal agreement between parties to perform agreed upon promises – delivering on those promises is called performance. So if I entered into a contract to mow someone’s lawn then I would perform my promise by actually mowing the law. The most easy and natural way to complete a contract is for both parties to do what they agreed they were going to do. But it’s not always that easy – here are some common types of performance and what they mean for the discharge of obligation for both parties:

  • Actual performance: Going off of the mowing the lawn example, actual performance would be to actually mow the lawn. In this case I met my side of the contract so I executed my half of the deal.
  • Substantial performance: I mowed 90% of the lawn but I ran out of gas and couldn’t finish the job. I performed a substantial portion of the contract so I am entitled to a substantial portion of the pay. The homeowner would be unfairly enriched by having a substantial portion of the work done without paying so he stills needs to hold up his end of the deal. Although, since I did not finish the work the homeowner may deduct the expenses for finishing the job from my total pay.
  • Partial performance: I didn’t mow the entire law, maybe about half. I didn’t hold up my end of the deal but if the homeowner pays me half and accepts my performance then my side of the deal is done. But they can easily refuse to pay me until all or substantially all the work is done.
  • Attempted performance: I tried to mow the lawn but the homeowner kept throwing rocks at me and turning on the sprinklers. I attempted to perform but the other party stopped me from performing. Even though I didn’t mow the lawn, the homeowner’s actions relived me of my obligation to mow the law.

UCC (Uniform Commercial Code) Performance

I covered performance of services but what about performance of goods. When you buy something online you want to get what you paid for – same color, same size, same quantity, etc. Under the UCC there needs to be “perfect tender” which requires the goods to conform 100% to the contract. Some highlights:

  • If the goods conform 100% to the contract then the seller has performed their side of the contract (after a reasonable inspection of the goods).
  • If the goods don’t conform to the contract then the buyer can either send back the goods or accept the goods as is. Or if a portion of the shipment is correct but a portion is incorrect then they can send back just the items that didn’t conform to the contract.
  • Buyer has duty to send back nonconforming products with due care. Rejection of nonconforming goods belongs to the seller and title of the goods doesn’t transfer to the buyer.
  • The buyer has an opportunity to “cure” or rectify the situation by sending conforming goods in place of nonconforming goods.

When Does Performance Occur?

The “when” as it relates to performance is usually spelled out in the terms of the contract.  However, in any contract there is an explicit or implicit timeframe when it comes to performance. Some things have to occur before performance occurs – for example, “I will pay you $10 after you finish this part of the contract and $20 when you complete the total contract.” In this example performance happens after a specified event. There are three general rules for when performance is due:

  1. Precedent: condition must occur before performance can be met. For example, an employment contract can be contingent on the passing of a background check.
  2. Subsequent: condition must be met after duty to perform arises. For example, when you get into a car accident you have to fill out a claim before the insurance company can perform their portion of the contract.
  3. Concurrent: condition happens simultaneously with performance. For example, when you buy a slice of pizza the performance happens simultaneously by both parties. You get some pizza and they get some money.

Key Highlights

  • Know the different types of performance: actual, substantial, partial and attempted.
  • Know that the sale of goods requires 100% perfect tender under the UCC and the buyer has the right to refuse nonconforming goods.
  • Know when performance has to occur.
Photo Credit: <a href='https://www.123rf.com/profile_binaryproject'>binaryproject / 123RF Stock Photo

0 comments on “REG Chapter 6 Part 2: Performance of Contracts

Leave a Reply

%d bloggers like this: