chapter 9 contract performance, breach, and remedies

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CHAPTER 9 CONTRACT PERFORMANCE, BREACH, AND

REMEDIES

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LEARNING OBJECTIVES

What is an assignment? What is the difference between an assignment and a delegation?

How are most contracts discharged?What is the standard measure of

compensatory damages when a contract is breached?

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LEARNING OBJECTIVES

How are damages computed differently in construction contracts?

Under what circumstances is the remedy of rescission and restitution available?

What is a limitation-of-liability clause, and when will courts enforce it?

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INTRODUCTION

Privity of Contract: only original parties to a contract have rights and liabilities under the contract.

Exceptions:• Assignment or Delegation. • Third Party Beneficiary Contract.

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ASSIGNMENT

Transfer of contractual rights is an assignment. (Transfer of duties is a delegation.)

Terminology:• Assignor: party assigning rights to third

party.• Assignee: party receiving rights.

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Terminology:• Obligee: person to whom a duty or

obligation is owed.• Obligor: person who is obligated to

perform the duty.

ASSIGNMENT

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ASSIGNMENT

Effect of An Assignment.• Extinguishes the Rights of the Assignor.

• When rights of assignor are unconditionally assigned, her rights are extinguished.

• The third party (assignee) has right to demand performance from original party to contract.

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ASSIGNMENT

Effect of An Assignment.• CASE 9.1 Hosch v. Colonial Pacific

Leasing Corp. (2012). Why was Hosch liable to Colonial Pacific if he had signed the loan agreements with GE Capital?

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EXHIBIT 9.1 ASSIGNMENT RELATIONSHIPS

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ASSIGNMENT

Rights That Cannot be Assigned:• When a Statute Expressly Prohibits

Assignment.• When a Contract is Personal in Nature.• Assignment materially changes rights or

duties of obligor.• When an Assignment Will Significantly

Change the Risk or Duties of the Obligor.10

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ASSIGNMENT

Notice of Assignment.• Once assignment is made, assignee should

notify the obligor of the assignment. • If notice is not given:

• Who has the priority if the assignor assigns the same right to two different persons?

• Obligor can discharge his obligation by performance to assignor.

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DELEGATION

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Contractual duties are delegated to a third party.

Terminology:• Delegator: party making the delegation

of duty.• Delegatee: party to whom the duty is

owed.

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EXHIBIT 9.2 DELEGATION RELATIONSHIPS

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DELEGATION

Duties That Cannot Be Delegated.• Performance depends on the personal

skills or talents of the obligor.• Special trust in the obligor.• Third party performance will materially

vary from contractual expectations.• When contract expressly prohibits

delegation.14

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DELEGATION

Effect of a Delegation.• If a delegation is enforceable, the

obligee (to whom performance is owed), must accept performance from the delegatee (to whom duties are delegated).

• Valid delegation does not relieve delegator of duties under the contract.

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DELEGATION

“Assignment of All Rights.”• Generally, when an assignment is made

in a contract, the implication is an assignment of ALL rights and duties.

• However, assignee remains liable for performance of duties.

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THIRD PARTY BENEFICIARIES

Exception to Privity of Contract. Original parties to the contract

intend at the time of contracting to directly benefit a third person.

Both parties are promisors.

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THIRD PARTY BENEFICIARIES

Types of Intended Beneficiaries.• Creditor beneficiary benefits from a

contract in which promisor promises the promisee to pay a debt the promisee owes to a third party (CB).

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THIRD PARTY BENEFICIARIES

Types of Intended Beneficiaries.• Donee Beneficiary: contract is made for

the express purpose of promisor giving a gift to a third party (donee), the donee can sue the promisor directly if the promisor breaches the contract.

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THIRD PARTY BENEFICIARIES

Vesting. Rights vest when:• 1. When the third party demonstrates

express consent to the agreement.• 2. When the third party materially alters

his or her position in detrimental reliance on the contract.

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THIRD PARTY BENEFICIARIES

Vesting. Rights vest when:• 3. When the conditions for vesting are

satisfied. For instance, the rights of a beneficiary under a life insurance policy vest when the insured person dies.

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INTENDED V. INCIDENTALBENEFICIARIES

Intended.• Promisee intended to confer on the

beneficiary the right to bring suit to enforce the contract.

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INTENDED V. INCIDENTALBENEFICIARIES

Intended.• Factors:

•Performance is rendered directly to TPB.

•TPB’s right to control contract details.•TPB expressly designated as

beneficiary.

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INTENDED V. INCIDENTALBENEFICIARIES

Incidental.• TPB’s benefit from contract between two

parties is unintentional.• Incidental beneficiary cannot sue to

enforce the contract.

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EXHIBIT 9.3 THIRD PARTY BENEFICIARIES

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CONTRACT DISCHARGE

A party may be discharged from a valid contract by:• A condition occurring -- or not occurring. • Full performance or material breach by

the other party.• Agreement of the parties.• Operation of law.

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CONTRACT DISCHARGE

Conditions of Performance.• A possible future event, the occurrence or

nonoccurrence of which will trigger the performance of a legal obligation or terminate an existing obligation under a contract.

• Three types: precedent, subsequent, or concurrent.

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CONTRACT DISCHARGE

Condition Precedent.• Condition that must be fulfilled before a

party’s performance can be required.• Requires absolute duty to perform.

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CONTRACT DISCHARGE

Condition Subsequent.• When a condition operates to terminate

a party’s absolute promise to perform, after the time of absolute performance was due.

• The Restatement refers to both precedent and subsequent as ‘conditions.’

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CONTRACT DISCHARGE

Concurrent Conditions.• When each party’s performance is

conditioned on the other party’s performance or tender.

• Both parties required to perform their duties simultaneously.

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CONTRACT DISCHARGE

Discharge by Performance.• Both parties fulfill their respective duties

by performing the acts they have promised.

• Tender of performance: unconditional offer to perform.

• Types of Performance: complete or substantial.

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CONTRACT DISCHARGE

Discharge by Performance.• Complete Performance.

• Parties perform exactly as agreed, or ‘perfect.’

• All conditions satisfied.

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CONTRACT DISCHARGE

Discharge by Performance.• Substantial Performance: party who

performs substantially in good faith can enforce the contract.• Confers Most of the Benefits Promised:

performance must not vary greatly from what was promised.

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CONTRACT DISCHARGE

Discharge by Performance.• Substantial Performance.

• Omission or defect is unimportant, damages can be awarded.

• Entitles the Other Party to Damages.• Measure of damages is cost to bring object of

contract into compliance. There is no exact formula.

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CONTRACT DISCHARGE

Discharge by Performance.• Performance to the Satisfaction of

Another.• When the Contract is Personal: subject

matter is personal, and actual personal satisfaction is required.

• Reasonable Person Standard: for most contracts, unless contract explicitly states third party approval.

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CONTRACT DISCHARGE

Discharge by Performance.• Material Breach of Contract.

• A breach of Contract is the nonperformance of a contractual duty.

• A material breach occurs when performance is not substantial, and nonbreaching party is excused from performance and entitled to damages. .

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CONTRACT DISCHARGE

Discharge by Performance.• Material Breach of Contract.

• In a minor (non-material) breach, the duty to perform is not excused and the non-breaching party must resume performance of the contractual obligations undertaken.

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CONTRACT DISCHARGE

Anticipatory Repudiation.• Before performance is due, one party

may refuse to perform his or her contractual obligation.

• Treated as a material breach, and nonbreaching party may sue for damages immediately, even though performance is not due.

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CONTRACT DISCHARGE

Anticipatory Repudiation.• Notice by repudiating party may restore

parties to original obligations. • May Occur When Market Prices

Fluctuate.• Sharp fluctuation may create an extremely

unfavorable performance.

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CONTRACT DISCHARGE

Discharge by Agreement.• Discharge by Rescission.

• Mutual Rescission: for executory contract, parties must make a new contract, oral or written. Under UCC, however, contracts must be in writing.

• If one party has performed, agreement to rescind must have additional consideration.

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CONTRACT DISCHARGE

Discharge by Agreement.• Discharge by Novation.

• Both parties agree to substitute a new third party for one of the original parties.

• Requirements: previous valid obligation, agreement by all parties, extinguishment of all old obligations, and new valid contract.

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CONTRACT DISCHARGE

Discharge by Agreement.• Discharge by Accord and Satisfaction.

• Accord: contract to perform existing contractual duty not yet discharged.

• Satisfaction: performance of the accord.

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CONTRACT DISCHARGE

Discharge by Operation of Law.• Alteration of The Contract: Innocent party

is discharged after material alteration. • Statutes of Limitations.• Bankruptcy: Generally bars enforcement

of non-exempt transactions.

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CONTRACT DISCHARGE

Discharge by Operation of Law.• Impossibility of Performance.

• Supervening event was not foreseeable.• When impossibility can occur:

• Death or Incapacitation in personal contract prior to performance,

• Destruction of the Subject Matter; or• Change in Law makes Contract Illegal.

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CONTRACT DISCHARGE

Discharge by Operation of Law.• Impossibility of Performance.

• Temporary Impossibility: suspends performance until the impossibility ceases.

• Commercial Impracticability.• Performance becomes extremely difficult or

costly.• Conditions not known at contracting.

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CONTRACT DISCHARGE

Discharge by Operation of Law.• Frustration of Purpose.

• Supervening event make it impossible to attain purpose both parties had in mind.

• Event must not have been reasonably foreseeable, and decreases value of what a party receives under contract.

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CONTRACT DISCHARGE

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DAMAGES

Compensatory Damages.• Designed to compensate nonbreaching party for

loss of the bargain.• Actually sustained, out-of-pocket costs, directly

arising from breach.• Standard Measure: difference between value of

promised performance and value of actual performance.

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DAMAGES

Compensatory Damages.• Incidental Damages: expenses cause

directly by breach of contract.• Measurement of Damages:

• Sale of Goods: difference between contract and market price.

• Sale of Land: specific performance.49

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DAMAGES

Compensatory Damages.• Measurement of Damages:

• Construction Contracts.

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DAMAGES

Consequential (Special) Damages—foreseeable losses.• Breaching party is aware or should be

aware, cause the injury party additional loss.

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DAMAGES

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DAMAGES

Punitive Damages—punish or deter future conduct.• Generally not available for mere breach

of contract. Usually tort (e.g., fraud) is also involved.

Nominal Damages—no financial loss.

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DAMAGES

Mitigation of Damages.• When breach of contract occurs, the

innocent injured party is held to a duty to reduce the damages that he or she suffered.

• Duty owed depends on the nature of the contract: Employment vs. Rental Agreements.

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DAMAGES

Liquidated Damages versus Penalties.• Liquidated Damages: specific amount

agreed to be paid as damages in the event of future breach.

• Penalties: designed to penalize, generally unenforceable.

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DAMAGES

Liquidated Damages versus Penalties.• Enforceability. Court asks two questions:

• When contract was entered into, was it apparent damages would be difficult to estimate in the event of a breach?

• Was the amount set as damages a reasonable estimate and not excessive?

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DAMAGESLiquidated Damages versus

Penalties.• CASE 9.2 B-Sharp Musical

Productions, Inc. v. Haber (2010). Why was this liquidated damages, and not a penalty?

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EQUITABLE REMEDIES

Sometimes damages are inadequate remedy.

Court can create equitable remedies: Rescission and Restitution

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EQUITABLE REMEDIES

Rescission.• Remedy whereby a contract is canceled

and the parties are restored to the original positions that they occupied prior to the transactions.

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EQUITABLE REMEDIES

Restitution.• Both parties must return goods,

property, or money previously conveyed. • Note: Rescission does not always call for

restitution. Restitution is called for in some cases not involving rescission.

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EQUITABLE REMEDIES

Specific Performance.• Equitable remedy calling for the

performance of the act promised in the contract.

• Provides remedy in cases involving: • Sale of Land.• Contracts for Personal Services.

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EQUITABLE REMEDIES

Reformation.• 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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EQUITABLE REMEDIES

Reformation.• When Fraud or Mutual Mistake is

Present: most common use of reformation.

• Written Contract Incorrectly States Parties’ Oral Agreement.

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EQUITABLE REMEDIES

Reformation.• Covenants Not to Compete (CNTC): courts

may reform the contract if the constraints are unreasonable, or my find the entire contract unenforceable.

• CASE 9.3 Emerick v. Cardiac Study Center, Inc. P.S. (2012). Why was the CNTC enforceable?

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EXHIBIT 9.6 REMEDIES

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EQUITABLE REMEDIES

Recovery Based on Quasi Contract.• Arises when no contract actually exists.

Equitable remedy created by courts to obtain justice and prevent unjust enrichment.• Party conferring benefit can recover in

quantum meruit (“as much as she deserves”).

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EQUITABLE REMEDIES

Recovery Based on Quasi Contract.• When Quasi Contract is Used.

• When no contract exists.• When a contract exists but is unenforceable.• Partially performing party can recover value

of services when contract is unenforceable.

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EQUITABLE REMEDIES

Requirements of Quasi Contract.• Benefit was conferred to the other party.• Party conferring benefit reasonably

expected to be paid.• The benefit was not volunteered.• Receiving benefit without paying for it

would result in unjust enrichment.

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CONTRACT PROVISIONS LIMITING REMEDIES

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Exculpatory (Ch. 11) and Limitation of Liability clauses.

UCC Allows Sales Contracts to Limit Remedies.

Enforceability of Limitation-of-Liability Clauses: depends on type of breach excused by provision.

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