Contractual Obligations and their Enforcement

Chapter 11

Transfer and Discharge of Obligations

Chapter 11-1

Transfer of Contract Rights and Duties

Assignment - transfer of a right a party may have under a contract to another. May transfer right to collect payment Assignor – person who transfers the contractual right. Assignee – the party who receives this contractual

right. Does not always have to have consideration Assignee has exactly the same contractual rights.

If the obligor (one who owes a duty under a contract) breaches the contract it is the assignee must sue for breach.

Question

Whipple bought a high-powered sports coupe from Oriental Motors for $32,000. After a down payment of $2,000, the balance, plus a finance charge, was to be paid by mail in installments over the following 48 months. Oriental Motors needed cash to restore its inventory of new cars. It immediately sold Whipple’s contract to a finance company, Palmout Inc., and told Whipple to mail all installment payments to Palmout. Is such a transfer of contract rights legal?

Yes, the can. The parties involved are:Assignor: Oriental MotorsAssignee: PalmoutObligor: Whipple

Assignable Rights

A party may assign contractual rights to another, provided performance will not be materially changed.

Performance – fulfillment of contractual promises as agreed.

Non-Assignable Rights These contract situations cannot be transferred:

a right created under a contract that prohibits transfer of the contractual rights

claims for damages for personal injuries

claims against the United States

rights to personal services, especially those of a skilled nature, or when personal trust and confidence are involved.

assignments of future wages, as limited by state statutes.

Assignments

Assignments can be written or oral but written is preferred.

Not until the obligor has been notified are there any changes. After that time the obligor is liable to the assignee for performance.

Delegation of Contractual Duties

Delegation of Duties – transferring to another the performance of the routine obligations. A person cannot delegate to another

any duty where performance requires unique personal skill or special qualifications.

CHECKPOINT

Under what conditions may you assign contractual rights to another person?

Generally, contract rights may be assigned as long as the performance requirements will not be changed in a material way.

Question

When Sheila told him that she could no pay the full $1,000 she owed him by August 1 as required by their contract, Bob suggested a new agreement. After some negotiations, he agreed to take $500 as payment in full if Sheila could provide it by July 15. When Sheila failed to make the payment by July 15, Bob demanded the $1,000 be paid according to the terms of the original contract. Dows Sheila owe $500 or $1,000

Because she failed to pay under the accord the $500 by July 15 she still owes the $1,000. The old contract was still in effect.

Discharge of Contractual Obligations

By Performance By the initial terms By Subsequent Agreement By Impossibility of Performance By Operation of Law By Tender of Performance

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By Performance

Discharge – termination of duties that ordinarily occurs when the parties perform promised.

By Performance

Breach of Contract – failure to provide complete performance.

When one party fails to perform a crucial duty under a contract, the other party may treat such a failure as a major breach and regard their own obligation as discharged.

Cancellation – in sales contracts under UCC

By Performance Substantial Performance – when just about all the

duties are performed but a minor duty under the contract remains. This is a minor breach.

A minor breach does not discharge the duties of the non-breaching party.

If it is not intentional the party that substantially performed can sue and recover what is due, less the cost of completing the remaining work.

Defaults – a party that fails to perform the contract. If notified of default in advance called anticipatory breach. Party can sue then or at time actual breach takes place.

Timing of Performance

If contract doesn’t identify time then duty must be performed within reasonable time.

If date on contract then only a minor breach if performance is shortly after the date.

If “time is of the essence” in contract then if contract not preformed by date then a major breach of contract.

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By the Initial Terms

When parties prepare their contracts they may agree to terminate:

on a specific date or specific period of time.

upon occurrence of specified event

upon failure of a certain event to happen

at the free will of either party upon giving notice

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By Subsequent Agreement When parties mutually agree to change either the terms or the nature of

their relationship. They can do without liability for breach in any of the following ways:

Rescission – parties agree to undo. Things go back to their original position as much as possible.

Accord and Satisfaction – This discharges their original contract by substitution. An agreement to make such a change is an accord.

Performance of the new obligation is called a satisfaction.

If performance in the accord is not rendered, the old contract remains in effect.

Novation – party entitled to receive performance under a contract may release the other party from the duty of performance and accept a substitute party. In effect a new contract by agreement of the three parties who are involved.

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By Impossibility of Performance

Extreme external conditions rather than an obligor’s personal inability to perform.

Unique subject matter identified in the contract is destroyed.

Performance becomes illegal before it can be rendered.

Death or disability of someone who was to provide a personal service that only that person could render.

If “escape hatch” language that would permit modifications or even termination.

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By Operation of Law

Contract may be discharged if it is barred by law. (Bankruptcy). Also if time allowed for enforcement has reached statute of limitations. Alteration – a material change in the terms of a written

contract without the consent of the other party. To discharge the contract the alteration must be:

material made intentionally made by a party or authorized agent made without consent of the other party

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By Tender of Performance

Tender – a ready, willing and able offer too perform an obligation. If the duty requires the doing of an act, the tender that is

made in good faith but is rejected will discharge the obligation of the one to perform.

If the obligation requires the payment of money, rejection of an offer to pay the money does not discharge the debt nor does it prevent the creditor from collecting later. It does however, relieves the debtor of court costs or future interest charges.

A tender of only part of the debt is not a valid tender.

CHECKPOINT

Identify the six ways in which contractual obligations can be discharged?

By Performance By the initial termsBy Subsequent AgreementBy Impossibility of PerformanceBy Operation of LawBy Tender of Performance

QuestionTori operated a business that provided graphic design

and printing services. Gerov contracted to have Tori design and print 25,000 brochures in full color promoting a variety of international tours. Under their contract, Tori also agreed to address and mail envelopes containing the brochures to a select list of prospects. Tori delegated the addressing, stuffing, and mailing of the envelopes. Is this a valid delegation? Does Tori remain liable to Gerov for proper completion of the entire job?

Yes, the performance can be delegated as it does not require special skills. Yes, any delegation of duties leaves the delegator still liable to the other contracting party.

QuestionYour school orders 50 new uniforms for its marching

band. The contract is with Quality Uniforms Inc., a firm with whom the school has done business for 12 years. A week before the first public performance by the band, Quality states that it has overbooked its business and has delegated the sewing to New Era Uniforms. Is the delegation legally proper?

No, the contract is based on trust from 12 years of experience and the qualifications of skill and quality.

QuestionYour school orders 50 new uniforms for its marching

band. The contract states that “time is of the essence,” and if the goods are not received in time for the first performance by the band of September 1, the old uniforms will be used for another year. The performance is the major part a contest to see which area band will go to New York City to take part in its Thanksgiving Parade. The manufacturer does not deliver the uniforms until September 3. Can the school cancel the contract.

Yes, Time truly is of the essence in this situation. Just putting the statement in the contract, however, would not make it so.

Remedies for Breach of Contract

Chapter 11-2

QuestionLiz contracted to buy 160 acres of land from McCall.

She planned to build an amusement park on the land that was near the junction of two interstates and had adequate utilities and population density. When McCall learned of her plan, he refused to transfer the title. What is the optimal remedy for Liz?

Liz could likely win a suit for specific performance. The court would order McCall to transfer title to the property with a properly signed deed delivered to Liz.

Remedies Possible for Breach

Remedy – an action or procedure followed to enforce a right or to get damages for an injury to a right. Depends on major or minor breach Depends on how significant the breach in

relation to the entire contract.

Remedies Minor Breach

Only remedy available is money damages.

Injured party must continue to perform

Amount of damages would be whatever it took to complete the minor duty.

Remedies Major Breach

If breach is major then injured party does not need to continue performing the duties in the contract. In addition they can do one of the following: Recession and restitution Money Damages Specific Performance

Recession and Restitution

Canceling the contract and returning whatever has been received under it.

Intended to place parties where they were before contracting.

Money Damages

Payment of money to compensate for injury. May be:

Compensatory Consequential Liquidated Punitive Nominal

Compensatory

Consequential

Punitive

Liquidated

Nominal

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Compensatory

Seeks to place the injured party in the same financial position they would have been in if there had been no breach. It grants the “benefits of the bargain.” Example: If a homeowner contracted to sell at $65,000,

when the fair market value of the property was $75,000, the buyer would be receiving a $10,000 bargain. Therefore if the seller then committed a material breach, the buyer could recover the amount of their “bargain,” $10,000, as compensatory money damages.

Money Damages

Consequential

The court tries to place inured parties in the same financial position they would have been in if the contract had been performed.

Damages generally are foreseeable when a reasonable person would know that a breach would cause injury.

Can be granted in both major and minor breaches.

Money Damages

Punitive

The purpose is to punish and to make an example of the defendant.

When fraud or an intentional tort is involved in breach of

contract.

Added to other money damages.

Money Damages

Liquidated

Parties sometimes agree that certain amount of money will be paid if a certain breach occurs.

Not all liquidated damages clauses are enforceable. If

excessive in relation to the injury. When not enforceable only other money damages can be collected.

If reasonable forecast then they would be enforced.

Nominal – failure to perform the contract is a legal wrong. Therefore, courts even when no harm has been done will award a taken amount called nominal damages.

Money Damages

Nominal

Nominal – failure to perform the contract is a legal wrong. Therefore, courts even when no harm has been done will award a taken amount called nominal damages.

Money Damages

Specific Performance

Making the party in breach of contract to order that the breaching party do exactly what was required under the contract.

Used when the subject of the contract is unique

Will not award remedy unless the party seeking it is blameless and acted reasonably and fairly. “Clean hands”

Does not usually specifically enforce employment or personal service contracts. Special cases only

CHECKPOINT

Explain the remedies available for a major breach of contract.

Rescission/RestitutionDamagesSpecific Performance

QuestionJim “high and tight” Brushback, an unknown baseball

pitcher, signed a two-year contract to play for a major league team for $120,000 a year. After two months, Brushback had won all four games he’d started with 37 strikeouts and an earned-run average (ERA) of 1.75. He then contracted with a competing team for $12 million a year, thereby breaching his contract. What remedies are available to the original team?

Brushbacks original team could recover the two months wages ($20,000) restitution. However, if the team elects this remedy, they would lose the ability to sue for damages and the ability to obtain and injunction to stop Brushback from playing for the competition.

Factors Affecting Choice of Remedy

A party injured must elect a remedy when suing.

Usually if you elect one it rules out another

Specific performance ≠ damages

Rescission and restitution ≠ damages

Under UCC sales contracts can have all.

Duty to Mitigate

Mitigate the damages – minimize the harm done

Injured party is required by law to take reasonable steps to mitigate the damages.

If not done the amount of potential recovery is lessened by the amount that could have been mitigated.

Waivers

Wavier – when the party intentionally and explicitly gives up a contractual right.

Statute of Limitations

Statues in all states deny any remedy if suit is not brought within a certain time after a legal claim. Called statue of limitations.

Four years is common for contracts

3 years is common for torts

½ states allow more time for written contracts than oral

Time begins running from moment there is a right to sue for a breach or default.

Bankruptcy

a legal proceeding whereby a debtor’s assets are distributed among his or her creditors to discharge the debts.

CHECKPOINT

What does it mean to “mitigate the damages”?

A party injured by a breach of contract must minimize the overall harm done by any legal means possible or whatever damages you could have avoided thereby will be subtracted from your recovery.

QuestionA college football coach has directed his team to division

championships five times. With two years remaining in his current three-year employment contract, he notifies the college president that he is resigning in order to coach a professional team at a higher salary. Is the coach legally free to change employers? Is the professional team legally free to hire him? What can the college legally do?

No, the coach is not legally free to change employers. This would be a breach of contract.

The professional team is legally free to hire him unless an injunction is issued that prevent the coach from working for someone else during the remainder of his contract.

The college can sue for restitution or for specific performance.

QuestionThe Bethlehem Steel Company contracted with the city

of Chicago to supply and erect the steelwork for a certain section of an interstate highway. The price agreed upon was $1,734,200. The contract also provided that the steel company would pay as liquidated damages $1,000 for each day the work was extended and uncompleted beyond a specified date. The work was completed 52 days after the date agreed upon. Is the company liable for $52,000?

Yes, they are liable for the $52,000

Question

Rivera had the concession rights to sell food, drinks and souvenirs at a post-season football bowl game. Some 60,000 reserved seat tickets had been sold for the event. As part of her preparations, Rivera contracted with the High Novelty Company for 10,000 pennants, noisemakers, and other items imprinted with the emblems and in the colors of the two competing teams. Although Rivera had emphasized the absolute necessity of delivery at least eight hours before game time, the goods arrived tow days after the game had been played. Can Rivera recover lost profits from Ace? Why?

Yes, Consequential damages that are generally foreseeable can be recovered, as is certainly the case here.

QuestionTaipei Yang ordered 900 solid brass bowls for indoor plants from

the East-Meets-West Company, which imports such goods from Singapore. Yang had included the bowls as a special in his holiday gift catalog and expected to generate a net profit of a least $9000 from their sale. When the shipment arrived and was opened, Yang scratched the bottom of one bowl and determined that it was steel with a surface plating of brass. Yang complained to the supplier, who pleaded ignorance and apologized. Nothing further was said and Yang paid the full price. Three months later he thought he should get a reduction in price because of the defect. Will he succeed?

No, Yang will not succeed. Yang waived his right to a price reduction by implication. When he appeared to accept the supplier’s apology and paid the full price, he implied that he was accepting the bowls as they were.

QuestionWhile under contract with the county, Pyramid Paving

improperly applied asphalt to the public gravel road in front of your family’s home. Soon after application, large cracks appeared and your family complained. It took the city six years to file suit. What defense can Pyramid assert?

Pyramid can assert that the statue of limitations for breach of contract has passed. Most states allow four years after the contract ahs been breached for the victim to sue. In taking six years, the city waited too long.

The Marriage Contract and Divorce

Chapter 11-3

Marriage and Contracts

Marriage – a legal union of a man and woman as husband and wife.

Typical minimum age (varies by state) to marry 18 years.

Close relatives may not marry.

If child results prior to marriage identified male is responsible for his share of the female’s medical bills and to contribute to the child’s support until the child reaches adulthood.

Contractual Elements of Premarital Relationships If one party proposes marriage and the other accepts, a

binding contract results.

If only one party want to end this then breach of promise suit may be brought. Not many states allow anymore.

If 3rd party (not parents) interfere with engagement suit could be brought.

If ring given by other in expectation or marriage the courts generally order it returned. Some state woman keeps ring if the man breaks off the engagement.

Statutory Requirements of Marriage

Most states: Marriage license (with fee) Blood tests Ceremony (Religious, Judge, Mayors, ship captains)

Statutory Requirements of Marriage

Most states: Marriage license (with fee) Blood tests Ceremony (Religious, Judge, Mayors, ship captains)

Contractual Elements of Marital Relationships. Marital Consortium – mutual duties of wife and husband.

If either spouse suffers an injury that prevents the fulfillment of their duties, the other can sue the party who caused the harm for damages for “loss of consortium”

Support, nurture, welfare and education of children contracts, notes income tax returns

Rights and duties of parenthood - support their children until they reach adulthood. Both parents have custody rights to their children Joint obligation

Contractual Elements of Marital Relationships. Property rights and Duties – property acquired during the

marriage may be kept in either spouses name. One spouse may incur debt for other spouse.

Prenuptial agreement – spouses bringing property into a marriage that wants sole claim over it must get this.

Give up claim to any future part of all of the other’s property.

Common-Law Marriage

Man/Woman living together (usually 10 years) sharing common property. ¼ of states recognize this.

Ending the Marriage Contract

Death of either spouse Annulment Divorce Variety of illegalities

Annulment

Divorce

Annulment

Annulment – a court order that cancels a marriage because of a problem that existed from the beginning of the marriage. Marriage considered voidable or void

Voidable reasons – (marriage valid until annulment) Refusal to have children grounds for annulment Marriage on fraudulent grounds such as lying about

pregnancy health, disease, past marriage or age.

Void Reasons – (Marriage considered invalid from beginning.) Creates no duties for either party

Violation of law – already married (bigamy) Marriage of close relatives

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Divorce

Divorce – court dissolution of marriage. Court divides property and responsibilities and property.

Separation – first step toward divorce. maintain separate living quarters but marital rights and

obligations remain intact. Can negotiate legal separation agreement that covers custody's

support, alimony and property division.

No fault divorce – no assignment of fault for the dissolution. dissolution may be initiated by either spouse. granted after testimony that there is no chance of repairing the

marriage. Most states irreconcilable differences are stated as legal

reasons Usually 6 months till final.

Typical issues in Divorce

Division of property Child custody and Support Alimony

Division

Custody

Alimony

Division of Property Most states based on English common law

Property brought into a marriage remains that spouse’s property should marriage end.

During marriage whatever earned, inherited, received as gift also remains the property of spouse who earned or received it

Community Property states ½ property acquired by marital partners during the marriage

is presumed to belong to each. During marriage whatever earned, inherited, received as gift also

remains the property of spouse who earned or received it

Most states provide some type of equitable distribution or marital property upon dissolution of marriage. Many factors such as length, age etc. considered.

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Child Custody and Support Physical care and responsibilities for a child

Welfare of the child is most important

Factors considered are: Parents’ wishes Child’s wishes Child’s relationship with parents, siblings and others that affect the child child’s adjustment to home, school and community physical and mental health of all person concerned.

Joint custody - responsibility is shared.

Non-custodial parent usually has to pay child support (a monetary payment to provide for a dependant child for housing clothes etc.)

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Alimony

support paid by the wage earned of the family to the other spouse.

Usually paid at regular intervals

Not intended to penalize the person paying

Look at earnings outlook, current debts, number of former and subsequent spouses.

CHECKPOINT

Name three ways in which a marriage contact is ended.

Annulments, divorces, death of one of the spouses, illegalities

QuestionMaria is an only child. Her mother died when she was eight years

old. Now, seven years later, her father is engaged to remarry, and Maria objects. She is afraid that her father’s new wife will come between her and her father and that the new wife will end up with the family home after her father dies. Ethically, should Maria try to persuade her father not to marry? What legal device would help resolve part of her worries if she could get both her father and his intended to enter into it?

She is ethically bound to present her objections as to allow him to make an informed decision. The legal device that would help would be a prenuptial agreement. It must be in writing and signed by the party against whom enforcement will be sought.

QuestionMarcel is 22 years old and Heather is 16. They are very

much in love and planned to get married right away. After Heather’s parents refused to consent to her marriage, Heather and Marcel eloped. Can Heather’s parents have the marriage annulled even though Marcel is an adult?

Yes, Ether of their parents could bring suit to annul the marriage.

QuestionMichael was driving home late one night when a tractor trailer truck

ran a red light and struck his vehicle. Even thought Michael was wearing a seat belt and his air bag properly deployed, he was critically injured. Several months later it become obvious that he was permanently paralyzed from the waist down. Michael has grounds for a lawsuit against the trucking company and the driver of the tractor semi-trailer. What cause of action does his wife have? How do you think a judge will decide?

Loss of consortium. The judge will decide in Michael’s favor.

QuestionOrlando and Mary lived together for 14 years in Oklahoma City.

During the latter part of their cohabitation, they both claimed to be married to one another . In addition, they added Mr. and Mrs. to their address and held a joint band account in those names. Now they are living apart from one another. Orlando currently lives in California. He has fallen in love with another woman and plans to marry her. As a consequence, he hires an attorney to determine whether he and Mary were legally married. What will the attorney check first? What other elements of common-law marriage might be significant in the determination? Is Orlando free to marry another?

The attorney will first check to see if Oklahoma has common-law marriage and if it does how long the period for it is. Other significant factual points will be the time of cohabitation and how long they held themselves out as married.

QuestionThe night after Zeke and Shanda were married, Shanda admitted

that she was pregnant by another man. Can Zeke end their marriage? How?

Yes, by having it annulled.

QuestionBernice and Bernie are married. he is a Certified Public

Accountant making $75,000 per year. She is an architect making almost exactly the same amount. In the event of divorce, who will pay whom alimony?

If income is the only factor considered by the court, neither will have to pay alimony to the other.