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Slide1
Chapter 10: Contract Performance, Breach, and Remedies
©
2013
Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Slide2
Voluntary Consent
A contract
may be unenforceable if the parties have not genuinely assented to its terms by:
Mistake. Misrepresentation. Undue Influence. Duress.
2Slide3
Mistakes.Mistakes of Fact vs Mistakes of Value (or Quality).
Only a mistake of
fact
allows a contract to be voided. Voluntary Consent3Slide4
Mistakes.Bilateral
(Mutual)
Mistakes: concerns the same material fact, and can be rescinded by either party.CASE 10.1 L&H Construction Co v. Circle Redmont, Inc. (2011). Do you agree the parties made a mutual mistake?Voluntary Consent4Slide5
Mistakes.Unilateral
Mistakes of fact cannot be canceled
unless
: Other party to the contract knows or should have known, ORMistake was due to an inadvertent mathematical mistake and was not gross negligence.Voluntary Consent5Slide6
Ex. 10-1 Mistake of Fact
6Slide7
Fraudulent Misrepresentation.Contract is Voidable
by Innocent Party.
Consists of the following Elements
:Misrepresentation of Material Fact.Intent to Deceive.Reliance on Misrepresentation.Injury to the Innocent Party.Voluntary Consent7Slide8
Voluntary Consent
Undue Influence.
Contract lacks voluntary consent and is voidable.Confidentiality, Fiduciary, or Relationship of Dependence.Undue Influence or Persuasion is presumed if a weaker party talked into doing something not beneficial to him or herself.
8Slide9
Voluntary Consent
Duress.
Forcing
a party to enter into a contract under fear or threat makes the contract voidable.Threatened act must be wrongful or illegal and render person incapable of exercising free will.Threat of civil suit is not duress.9Slide10
Statute of Frauds:
Writing Requirement
Some contracts must be in writing to be enforceable:
Contracts with an Interest in Land.Contracts involving “One-Year Rule.”Collateral or Secondary Contracts.Promises made in consideration of marriage.Contracts For Sales of Goods over $500.10Slide11
Third Party Rights
Privity of Contract: only original parties
to a contract have rights and liabilities under the contract.
Exceptions: Assignments, Delegations, and Third party Beneficiary Contracts. 11Slide12
Assignments: Terminology.Assignor: party assigning rights to third party.Assignee: party receiving rights.
Obligee: person to whom a duty or obligation is owed.
Obligor: person who is obligated to perform the duty.
Third Party Rights12Slide13
Third Party Rights
Assignments.
Effect of An Assignment: 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.13Slide14
Assignment Relationships
14Slide15
Third Party Rights
Assignments: Rights That Cannot be Assigned.
(i) when a statute expressly prohibits assignment,
(ii) when a contract is personal in nature, (iii) when the assignment materially changes rights or duties of obligor, or (iv) when an assignment will significantly change the risk or duties of the obligor.15Slide16
Third Party Rights
Assignments: Exceptions to Contractual Prohibition.
Cannot prevent right to receive money.
Cannot prevent rights in land.Negotiable instruments.Damages in sales of goods.16Slide17
Third Party Rights
Delegations.
Contractual
duties in a bilateral contract that are delegated to a third party. Terminology:Delegator: party making the delegation of duty.Delegatee: party to whom the duty is owed.17Slide18
Delegation Relationships
18Slide19
Delegations are Prohibited:When the Duties are Personal in Nature (special trust).
When
Performance by a Third Party Will Vary Materially From that Expected by the Obligee.
When the Contract Prohibits Delegation.Third Party Rights19Slide20
Third Party Rights
Delegations.
Delegator
remains liable, even after delegation.Delegatee is liable if delegation contract creates a third party beneficiary relationship in the obligee.20Slide21
Third Party Rights
Third Party Beneficiaries.
2
nd Exception to Privity of Contract. Original parties to the contract intend at the time of contracting to directly benefit a third person.21Slide22
Third Party Rights
Third Party Beneficiaries.
Intended 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.22Slide23
Third Party Rights
Third Party Beneficiaries.
Incidental
: a third party beneficiary’s benefit from contract between two parties is unintentional.Incidental beneficiary cannot sue to enforce the contract.23Slide24
Third Party Beneficiaries
24Slide25
Performance and 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.
25Slide26
Performance and 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.
CASE 10.2 Pack 2000, Inc. v. Cushman (2011). What should Pack have done differently?26Slide27
Performance and Discharge
Discharge by Performance.
Tender
: ready, willing, and able.Complete Performance.Parties perform exactly as agreed, or ‘perfect.’ All conditions satisfied.Substantial Performance.party in good faith performs substantially all of the terms, can enforce the contract.
27Slide28
Performance and Discharge
Discharge by Performance.
Substantial
Performance.Confers Most of the Benefits Promised: performance must not vary greatly from what was promised. But damages can be awarded.Entitles the Other Party to Damages.Measure of damages is cost to bring object of contract into compliance.
28Slide29
Performance and Discharge
Discharge by Performance.
Performance to Satisfaction
of Another.Material Breach of Contract.A material breach occurs when performance is not substantial, and nonbreaching party is excused from performance and entitled to damages.
29Slide30
Performance and 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.30Slide31
Performance and Discharge
Discharge by Performance.
Anticipatory Repudiation
. Occurs when one party refuses to perform his contractual obligation, before performance is due.Treated as a material breach, and nonbreaching party may sue for damages immediately, even though performance is not due.31Slide32
Performance and Discharge
Discharge by Performance.
Anticipatory Repudiation
.Notice by repudiating party may restore parties to original obligations. Rational for Treating Repudiation as Breach.Anticipatory Repudiation and Market Prices. 32Slide33
Performance and Discharge
Discharge by Agreement.
Discharge by
Rescission.Mutual Rescission: for executory contract, parties must make a new contract, oral or written. Under UCC, contracts must be in writing.If one party has performed, agreement to rescind must have additional consideration.33Slide34
Performance and Discharge
Discharge by Agreement.
Discharge by
Novation: parties agree to substitute a third party for an original party. Requirements: previous valid obligation, agreement by all parties, extinguishment of all old obligations, and new valid contract.34Slide35
Performance and Discharge
Discharge by Agreement.
Discharge by
Settlement Agreement.Discharge by Accord and Satisfaction.Accord: contract to perform existing contractual duty not yet discharged.Satisfaction: performance of the accord.
35Slide36
Performance and 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.
36Slide37
Performance and Discharge
Discharge by Operation of Law.
Objective
Impossibility: the supervening event was not foreseeable:Death or incapacitation in personal contract prior to performance, Destruction of the subject matter; orChange in law renders performance Illegal.
37Slide38
Performance and Discharge
Discharge by Operation of Law.
Temporary
Impossibility. Commercial Impracticability.Performance becomes extremely difficult or costly, and must not have been known by parties when contract made. 38Slide39
Performance and 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.39Slide40
Exhibit 10-2 Contract Discharge
40Slide41
Four broad categories of damages:
Compensatory.
Consequential. Punitive. Nominal. Damages for Breach of Contract41Slide42
Compensatory Damages.
Compensates nonbreaching party for loss of the bargain.
Out-of-pocket costs directly arising from breach.
Standard Measure: difference between value of promised performance and value of actual performance. Damages for Breach of Contract42Slide43
Compensatory Damages.
Measurement of Damages:
Sale of Goods: difference between contract and market price.
Sale of Land: specific performance.Construction Contracts.CASE 10.3 Jamison Well Drilling, Inc. v. Pfeifer (2011). Why did Pfeifer have to pay for the storage container?
Damages for Breach of Contract
43Slide44
Consequential Damages.
Consequential (Special) Damages—foreseeable losses.
Breaching party is aware or should be aware, cause the injury party additional loss.
Damages for Breach of Contract44Slide45
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.
Damages for Breach of Contract45Slide46
Liquidated Damages vs. Penalties.
Liquidated Damages: specific amount agreed to be paid as damages in the event of future breach.
Penalties: designed to penalize, generally unenforceable.
Damages for Breach of Contract46Slide47
Liquidated Damages vs. 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?Damages for Breach of Contract47Slide48
Sometimes damages are inadequate remedy.
Court can create equitable remedies:
Rescission
and Restitution Equitable Remedies48Slide49
Rescission.
Remedy whereby a contract is canceled and the parties are restored to the original positions that they occupied prior to the transactions.
Equitable Remedies49Slide50
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.
Equitable Remedies50Slide51
Specific Performance.
Equitable remedy calling for the performance of the act promised in the contract.
Provides remedy in cases involving unique subject matter:
Sale of Land.Contracts for Personal Services.Equitable Remedies51Slide52
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.
Used when fraud or mutual mistake occurs.Equitable Remedies52Slide53
Recovery Based on Quasi-Contract.
No actual contract exists, court will create one in the interests of fairness and justice.
Usually granted when one party has performed in good faith and the other has been unjustly enriched.
Equitable Remedies53Slide54
Recovery Based on Quasi-Contract.
To recover, party seeking recovery must show:
Party conferred benefit on other party.
Party conferred the benefit with reasonable expectation of payment.Party did not volunteer in performing.Party receiving benefit would be unjustly enriched by retaining benefit without payment.Equitable Remedies
54Slide55
Election of Remedies
Purpose of the Doctrine: to
prevent double
recovery. Nonbreaching party chooses which remedy to pursue.UCC Rejects Election of Remedies.Pleading in the Alternative.55Slide56
Exculpatory 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.
Contract Provisions Limiting Remedies56