Performance Risks

• Author: Robert J. Spjut
• Pages: 191-224

8

Performance Risks

PERFORMANCE HAZARDS

Black’s Law Dictionary defines performance as “[t]he successful

completion of a contractual duty, usu. resulting in the performer’s release

from any past or future liability”1 and default as “the omission or failure

to perform a legal or contractual duty.”2 The chances that an obligor will

not so perform or will so default are performance risks. A performance

hazard is a condition (or circumstance that exists at contract formation)

or contingency (or event that occurs after contract formation) that

indicates the obligor might not perform as expected.

Willingness, Ability, and Execution

An obligor’s default will be attributable to one or more of the following

causes:

● its lack of intent or desire or its unwillingness to perform when

performance is due,

1 B’ L D 1319 (10th ed. 2014).

2 Id. at 507.

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● its lack of financial, technical, and other resources to perform or its

inability to perform when performance is due, and

● its lack of diligence or care when performing, or its incompetent

or inept performance.

Performance hazards are conditions and contingencies that indicate

the obligor lacks or will lack at the time performance is due a willingness

or ability to perform or will lack sucient diligence when performing.

Such conditions and contingencies may occur earlier than breach,

anticipatory breach, and repudiation.

Unwillingness and Inability to Perform. An unwillingness or inability

may be the result of a condition that exists at contract formation or it

may be the result of a contingency that occurs later. Such condition or

contingency may cause an obligor to immediately lose its willingness

or ability to perform or may portend a future loss of such willing-

ness or ability. In the latter case, additional contingencies, acts, and

events may have to occur before the obligor becomes unwilling or

unable to perform. Until that time, one or more such conditions

and contingencies evidence uncertainty about such willingness and

ability.

The following cases illustrate such conditions and contingencies:

● Channel Master Corp. v. Aluminum Ltd. Sales, Inc.3: A seller agreed

to sell a quantity of aluminum ingots each month for five years,

knowing that it did not have sucient supplies and intending

to sell only supplies not sold to other buyers. The intent notto

sell was a condition that existed at contract formation. The

harm would come to the buyer on the first date delivery was

due; before that time, the seller’s lack of intent was a hazard to

the buyer.4 Unwillingness to perform was a condition at contract

formation.

3 4 N.Y.2d 403, 176 N.Y.S.2d 259, 151 N.E.2d 833 (N.Y. 1958).

4 Unable to sue on the contract, which had not been reduced to writing as required by the

statute of frauds, the buyer sued for fraud. The New York Court of Appeals held the action

should be allowed. “If the proof of a promise or contract, void under the statute of frauds,

is essential to maintain the action, there may be no recovery, but, on the other hand, one

who fraudulently misrepresents himself as intending to perform an agreement is subject to

liability in tort whether the agreement is enforcible (sic) or not.” Id. at 408.

Counterparty Risks

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● In re Newport Oshore, Ltd.5: Newport, a ship repair firm, agreed to

complete alterations and repairs to Long’s vessel. It had competent

welders on sta but assigned incompetent welders to the work

because of commitments to other vessel owners, with the result

that the repairs to Long’s vessel were incompetently performed. A

hazard occurred at contract formation when Newport committed

to repair more vessels than it had competent sta to do the repairs.

If, at that time, Newport expected to assign its incompetent

welders to the vessel’s repairs, it did not intend to perform as it

had committed to do. If, at that time, Newport had not decided

the repairs to which it would assign the incompetent welders, it was

neither willing nor unwilling to perform. That would come later

when it had to appoint the sta to repair Long’s vessel.6 The hazard

existed at contract formation because the overcommitment created

the chance Newport would not assign competent welders when it

finally had to assign welders to the job, even if it hoped they would

satisfactorily complete their tasks.

● Resource Management Co.7: This case is summarized in chapter 3.8

A company that owned 8,000 acres of ranch land in Utah and

its shareholders negotiated a two- page consulting agreement

that generously compensated the consultant. The company and

the brothers later decided not to use the consultant’s services,

claiming the contract was unconscionable because the consultant

would receive far more than its services were worth.9 The hazard,

the decision not to use the consultant, occurred whenever they

changed their minds; that resulted in harm on the first occasion

they entered into a mineral lease without consulting the consultant.

Their unwillingness to perform most likely occurred sometime

after contract formation but before performance was due.

● Trans World Airlines, Inc. v. Skyline Air Parts, Inc.10: TWA solicited

bids for certain boost pumps it once had as spare parts but had

5

155 B.R. 616 (Bankr. R.I. 1993).

6

Long submitted a claim for breach of contract in the bankruptcy proceeding for Newport.

The trustee opposed the claim and the bankruptcy court found Newport was negligent in

repairing Long’s vessel and breach the contract with Long.

7

706 P.2d 1028 (Utah 1985).

8

See text accompanying ch.3, notes 65 and 66

9

Supra ch. 3, note 66.

10 193 A.2d 72 (D.C. App. 1963).

Performance Risks 193