CONTRACTS: PART II

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CHAPTER 10

• CONTRACTS PART II

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DUTY TO PERFORM

• Two types
• Conditioned the duty to perform is contingent
  on the occurrence or nonoccurrence of an event.
• Absolute The duty must be performed or the
  party will be in breach of contract.

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DISCHARGE BY PERFORMANCE

• The majority of contracts are discharged by
  performance. That is, the contract comes to an
  end when both parties fulfill their respective
  duties by performing the acts they have promised.
• If one party performs and the other fails to
  perform, the latter is in breach of contract.

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TYPES OF PERFORMANCE

• Two types
• Complete A party performs exactly as agreed and
  there is no question as to whether the contract
  has been performed.
• Substantial A party in good faith performs
  substantially all of the terms of a contract.
  (Example Jacobs Young, Inc. v. Kent)

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BREACH OF CONTRACT

• Definition The nonperformance of a contractual
  duty.
• Two types
• Material Performance is not at least
  substantial a failure of consideration. (Van
  Steenhouse v. Jacor Broadcasting of Colorado,
  Inc.)
• Minor Any breach which is not material.
• Note While any breach entitles the nonbreaching
  party to sue for damages, only a material breach
  discharges the nonbreaching party from the
  contract.

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TIME FOR PERFORMANCE

• If no time for performance is stated in a
  contract, a reasonable time is implied.
• If a time is expressly stated in a contract, the
  time element becomes a condition.

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DISCHARGE BY AGREEMENT

• Any contract can be discharged by agreement of
  the parties.
• Types
• Discharge by Rescission
• Discharge by Novation
• Discharge by Substituted Agreement
• Discharge by Accord and Satisfaction

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DISCHARGE BY RECISSION

• Rescission The process by which a contract is
  cancelled or terminated and the parties are
  returned to the positions they occupied prior to
  forming it.
• Requirements an offer, an acceptance, and
  consideration
• If neither party has yet performed, their
  promises not to perform the first contract
  constitute consideration for the second contract
  (the rescission.)
• If one party has performed, additional
  consideration is required of the nonperforming
  party to constitute a rescission.

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DISCHARGE BY NOVATION

• Novation The process by which both parties to a
  contract agree to substitute a third party for
  one of the original parties.
• Requirements
• A previous valid obligation.
• An agreement of all the parties to a new
  contract.
• The extinguishment of the old obligation.
• A new contract that is valid.

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DISCHARGE BY SUBSTITUTED AGREEMENT

• A compromise, or settlement agreement, that
  arises out of a genuine dispute over the
  obligations under an existing contract will be
  recognized at law.
• That is, the two original parties to a contract
  form a different agreement to substitute for the
  original one.

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DISCHARGE BY ACCORD AND SATISFACTION

• A process where the parties agree to accept
  performance that is different from the
  performance originally promised.
• Accord An executory contract to perform some
  act to satisfy an existing contractual duty.
• Satisfaction The performance of the accord
  agreement.

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DISCHARGE BY OPERATION OF LAW

• Under certain circumstances, contractual duties
  may be discharged by operation of law.
• Types
• Alteration of the Contract
• Statutes of Limitations
• Bankruptcy
• Impossibility or Impracticability of Performance

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ALTERATION OF THE CONTRACT

• To discourage parties from altering written
  contracts, the law operates to allow an innocent
  party to be discharged when the other party has
  materially altered a written contract without
  consent.

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STATUTES OF LIMITATIONS

• Statutes of limitations restrict the period
  during which a party can sue on a particular
  cause of action.
• The running of a statute of limitations bars
  access only to judicial remedies it does not
  extinguish the debt or the underlying obligation.

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BANKRUPTCY

• A discharge in bankruptcy will ordinarily bar
  enforcement of most of a debtors contracts by
  the creditors.
• Note A proceeding in bankruptcy attempts to
  allocate the assets the debtor owns to the
  creditors in a fair and equitable fashion.

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IMPOSSIBILITY OR IMPRACTICABILITY OF PERFORMANCE

• After a contract has been made, performance may
  become impossible or impractical.
• Types
• Objective Impossibility of Performance
• Commercial Impracticability
• Frustration of Purpose
• Temporary Impossibility

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OBJECTIVE IMPOSSIBILITY OF PERFORMANCE

• 3 Criteria
• When one of the parties to a personal contract
  dies or becomes incapacitated prior to
  performance.
• When the specific subject matter of the contract
  is destroyed.
• When a change in law renders performance illegal.

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COMMERCIAL IMPRACTICABILITY

• A doctrine under which courts may excuse parties
  from their performance obligations when the
  performance becomes much more difficult or
  expensive then originally contemplated at the
  time the contract was formed.
• The added burden of performing must be extreme
  and, more important, must not have been within
  the cognizance of the parties when the contract
  was made.

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FRUSTRATION OF PURPOSE

• A doctrine under which a contract will be
  discharged if supervening circumstances make it
  impossible to attain the purpose both parties had
  in mind when making the contract.

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TEMPORARY IMPOSSIBILITY

• An occurrence or event that makes performance
  temporarily impossible operates to suspend
  performance until the impossibility ceases.
• If, however, the lapse of time and the change in
  circumstances surrounding the contract make it
  substantially more burdensome for the parties to
  perform the promised acts, the contract is
  discharged.

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REMEDIES FOR BREACH OF CONTRACT

• When one party breaches a contract, the other
  party the nonbreaching party can choose one
  or more of several remedies.
• Remedy The relief provided for an innocent
  party when the other party has breached the
  contract.
• Types
• Damages
• Rescission and Restitution
• Specific Performance
• Reformation
• Recovery Based on Quasi Contract

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DAMAGES

• A breach of contract entitles the nonbreaching
  party to sue for money (damages.)
• Damages are designed to compensate a party for
  harm suffered as a result of anothers wrongful
  act.
• Courts say that innocent parties are to be placed
  in the position they would have occupied had the
  contract been fully performed.

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DAMAGES (CONT.)

• Types
• Compensatory
• Consequential
• Punitive
• Nominal

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COMPENSATORY DAMAGES

• Damages compensating the nonbreaching party for
  the loss of the bargain.
• These damages compensate the injured party only
  for damages actually sustained and proved to have
  arisen directly from the loss of the bargain
  caused by the breach of contract.

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CONSEQUENTIAL DAMAGES

• Foreseeable damages that result from a partys
  breach of contract.
• These are also referred to as special damages.
• They differ from compensatory damages in that
  they are caused by special circumstances beyond
  the contract itself.
• Example Hadley v. Baxendale

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MITIGATION OF DAMAGES

• In most situations, when a breach of contract
  occurs, the innocent party is held to a duty to
  mitigate, or reduce, the damages that he or she
  suffers.
• The duty owed under this doctrine depends on the
  nature of the contract.
• Example Parker v. Twentieth Century-Fox Film
  Corp.

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LIQUIDATION DAMAGES VERSUS PENALTIES

• Liquidated Damages Damages that are certain in
  amount.
• Penalties A certain amount to be paid in the
  event of a default or breach of contract and are
  designed to penalize the breaching party.
• Liquidated damages provisions are enforceable
  penalty provisions are not.
• Two questions, if answered with yes, characterize
  a liquidated damages provision and will be
  enforced
• When the contract was entered into, was it
  apparent that 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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RECISSION AND RESTITUTION

• When fraud, a mistake, duress, undue influence,
  misrepresentation, or lack of capacity to
  contract is present, unilateral rescission is
  available.
• To rescind a contract, both parties must make
  restitution to each other by returning goods,
  property, or money previously conveyed.

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SPECIFIC PERFORMANCE

• A doctrine calling for the performance of the act
  promised in the contract.
• 3 reasons this remedy attractive to nonbreaching
  party
• The nonbreaching party need not worry about
  collecting the money damages awarded by a court.
• The nonbreaching party need not spend time
  seeking an alternative contract.
• The performance is more valuable than the money
  damages.
• Normally, however, specific performance will not
  be granted unless the partys legal remedy (money
  damages) is inadequate. For example, courts
  normally grant specific performance to a buyer of
  land, but refuse it for contracts for personal
  services.

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REFORMATION

• An equitable remedy used when the parties have
  imperfectly expressed their agreement in writing.
• Reformation allows the contract to be rewritten
  to reflect the parties true intentions.
• Reformation applies most often when fraud or
  mutual mistake is present and is almost always
  sought so that some other remedy may then be
  pursued.

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RECOVERY BASED ON QUASI CONTRACT

• Quasi Contract A legal theory under which an
  obligation is imposed in the absence of an
  agreement.
• The courts use this theory to prevent unjust
  enrichment by providing a basis for relief when
  no enforceable contract exists.
• 4 Criteria for Recovery
• The party conferred a benefit on the other party.
• The party conferred the benefit with the
  reasonable expectation of being paid.
• The party did not act as a volunteer in
  conferring the benefit.
• The other party would be unjustly enriched by
  retaining the benefit without making payment.

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ELECTION OF REMEDIES

• The purpose of this doctrine is to prevent double
  recovery, as in many cases the nonbreaching party
  has several remedies available.
• This doctrine requires the suing party to choose
  which remedy to pursue.

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WAIVER OF BREACH

• Under certain circumstances, a nonbreaching party
  may be willing to accept a defective performance
  of the contract.
• Waiver The knowing relinquishment of a legal
  right.
• When a waiver of breach of contract occurs, the
  party waiving the breach cannot take any later
  action on it.

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CONTRACT PROVISIONS LIMITING REMEDIES

• A contract may include provisions stating that no
  damages can be recovered for certain types of
  breaches or that damages must be limited to a
  maximum amount.
• Exculpatory Clauses Provisions stating that no
  damages can be recovered.
• Limitation-of-Liability Clauses Provisions that
  affect the availability of certain remedies.
• Whether these contract provisions and clauses
  will be enforced depends on the type of breach
  that is excused by the provision.