The acceptance by one party, of a breach of contract made by the other, and the refusal on the part of the former further to carry out the contract, is known in law as recission. To rescind a contract, a party must return what he has received thereunder, called putting the other party in statu quo. He must also accept the breach promptly. For example, A promises to sell B three horses to be delivered one each day, upon the three following days. A delivers one and fails to deliver the second. To rescind the contract, B must return promptly to A the horse already delivered. He may then sue A for damages suffered. If B does not promptly return the horse to A, he must permit A to go on with the contract, waiving the delay, or pay for the horse already delivered, less damages for A's breach of contract.
35. Discharge by Bankruptcy. By a United States' statute, certain persons may become bankrupts and thereby be discharged from their obligations. By the terms of this act, the bankrupt's property is turned over to an officer, called a trustee in bankruptcy who disposes of it, and distributes it pro rata among the bankrupt's creditors. Any person except a corporation, who owes debts, may become a voluntary bankrupt.
The United States statute further provides that certain persons may be declared bankrupts at the instance of their creditors. The United States statute provides that:
"Any natural person, except a wage earner, or a person engaged chiefly in farming or the tillage of the soil, any unincorporated company and any corporation engaged principally in manufacturing, trading, printing, publishing, mining or mercantile pursuits, owing debts to the amount of one thousand dollars ($1,000.00) or over, may be adjudged an involuntary bankrupt, upon default, or on impartial trial and shall be subject to the provisions and entitled to the benefits of this act. Private bankers, but not national banks or banks incorporated under state or territorial laws may be adjudged involuntary bankrupts."
Any of the above enumerated parties may be made an involuntary bankrupt at the instance of creditors if he has committed an act of bankruptcy.
The bankruptcy statute defines an act of bankruptcy as follows:
"Acts of bankruptcy by a person shall consist of his having (1) conveyed, transferred concealed or removed, or permitted to be concealed or removed, any part of his property with intent to hinder, delay or defraud his creditors or any of them; (2) transferred, while insolvent any portion of his property to one or more of his creditors with intent to prefer such creditors over his other creditors; or (3) suffered or permitted, while insolvent, any creditor to obtain a preference through legal proceedings and not having at least five days before a sale or final disposition of any property affected by such preference vacated or discharged such preference; or (4) made a general assignment for the benefit of his creditors, or being insolvent, applied for a receiver or trustee for his property, or because of insolvency a receiver or trustee has been put in charge of his property under the laws of a state, of a territory, or of the United States; or (5) admitted in writing his inability to pay his debts, and his willingness to be adjudged a bankrupt on that ground."
Bankruptcy discharges a bankrupt from his contracts.
36. Remedies for Breach of Contract. Originally, at common law, there was no power given a party to a contract, to compel the other party specifically to perform the provisions of the contract. For example, A promises to pay B one thousand dollars ($1,000.00) for one thousand bushels of wheat, to be delivered within ten days. B fails and refuses to deliver the wheat. A could not at common law, and cannot under the present rules of law, compel B to deliver the wheat. A's remedy is an action for damages. A may go into the market at the time and place of delivery, provided for in the contract, and purchase one thousand bushels of wheat of the quality provided for in the contract, and collect as damages from B the advance in price, if any, together with expenses connected therewith. If A is obliged to pay one thousand five hundred dollars ($1,500.00) for the wheat, which by the terms of the contract, he had purchased for one thousand dollars ($1,000.00) from B, he may recover five hundred dollars ($500.00) damages from B. If A succeeds in obtaining the wheat for nine hundred dollars ($900.00), he can only recover nominal damages from B, commonly five cents, for breach of contract. In case A obtains the wheat for nine hundred dollars ($900.00), B cannot recover one hundred dollars ($100.00) from A, since he has violated the contract, and cannot take advantage of his own wrong.
Parties frequently fix the amount of damages for a possible breach at the time the contract is made. This is known in law as liquidated damages. If reasonably compensatory, the courts will recognize and enforce liquidated damages; if clearly unreasonable they are regarded as penal, and the courts will not enforce them. For example, A agrees to construct a rolling mill for B, for fifty thousand dollars ($50,000.00), and to complete the structure within one year, and to pay damages of two hundred dollars ($200.00) per day, for each and every day consumed, in excess of a year in finishing the structure. If this is a reasonable loss to B, for the failure to have the use of the mill, the courts will enforce the provisions; otherwise they will remit the excess over the fair value of B's loss.