ContractsContractsThird PartiesThird PartiesPerformance and DischargePerformance and DischargeRemediesRemediesContract NegotiationsContract Negotiations

Class 3Class 3

Third Party RightsThird Party Rights A third party (someone not a party to A third party (someone not a party to

the underlying contract) may have a the underlying contract) may have a legal interest in a contract and be legal interest in a contract and be able to enforce the contract, if there able to enforce the contract, if there is:is:– A “beneficiary” interestA “beneficiary” interest– An assignment An assignment – A delegationA delegation

Beneficiary InterestsBeneficiary Interests A third party beneficiary is someone A third party beneficiary is someone

who was not a party to the contract who was not a party to the contract but stands to benefit from it.but stands to benefit from it.– Two types:Two types:

Intended beneficiariesIntended beneficiaries (can enforce the (can enforce the contract)contract)

Incidental beneficiariesIncidental beneficiaries (cannot enforce the (cannot enforce the contract)contract)

Intended BeneficiariesIntended Beneficiaries A beneficiary of a promise may A beneficiary of a promise may

enforce a contract if both of the enforce a contract if both of the contracting parties intentionally contracting parties intentionally meant the third party to benefit meant the third party to benefit andand ifif– Enforcing the promise will satisfy a duty Enforcing the promise will satisfy a duty

of the promisee to the beneficiary of the promisee to the beneficiary oror– The promisee intended to make a gift to The promisee intended to make a gift to

the beneficiarythe beneficiary

Incidental BeneficiariesIncidental Beneficiaries An incidental beneficiary is one who An incidental beneficiary is one who

was not intended to benefit from the was not intended to benefit from the contract. contract.

The incidental beneficiary has no The incidental beneficiary has no right to enforce the contract.right to enforce the contract.– The issue in enforcement actions The issue in enforcement actions

therefore is generally whether the third therefore is generally whether the third party is an intended or an incidental party is an intended or an incidental beneficiary.beneficiary.

DIA v. Rose Jr.

Contract Action

(Or Custody Battle?)

http://www.youtube.com/watch?v=j2W8ZVNK7W8http://www.youtube.com/watch?v=j2W8ZVNK7W8

PromisorRufus Rose

Meeting of the MindsContract formed

PromiseeNBC

Contract Should Benefit

Third Party BeneficiaryDIA Puppet Museum

1. Did Rose intendto benefit DIA ?

2. Did NBC intendto benefit DIA?

3. Did NBC (a) have a dutyto DIA or (b)intend to makea gift to DIA?

Assignment and Assignment and DelegationDelegation

A contracting party may transfer his A contracting party may transfer his or her or her rightsrights under a contract – this is under a contract – this is an an assignmentassignment..

A contracting party may transfer his A contracting party may transfer his or her or her dutiesduties under a contract – this is under a contract – this is a a delegationdelegation..

AssignmentAssignment A contract must first exist. A contract must first exist.

– There will be an obligor and an obligee.There will be an obligor and an obligee. One of the parties (the obligee) One of the parties (the obligee)

transfers his rights under a contract transfers his rights under a contract to a third person.to a third person.– The person transferring – or assigning – The person transferring – or assigning –

his rights is the his rights is the assignor.assignor.– The person receiving the assignment is The person receiving the assignment is

the the assigneeassignee.. The obligor now owes the money to The obligor now owes the money to

the assignee.the assignee.

What rights are What rights are assignable?assignable?

Assignment is okay Assignment is okay unless:unless:– The assignment substantially changes The assignment substantially changes

the obligor’s rights or duties under the the obligor’s rights or duties under the contract;contract;

– It is prohibited by public policy or law;It is prohibited by public policy or law;– The contract is for specific personal The contract is for specific personal

services; orservices; or– The underlying contract forbids The underlying contract forbids

assignment.assignment.

How Rights are How Rights are Assigned?Assigned?

May be written or oral contract, May be written or oral contract, subject to requirements of the subject to requirements of the Statute of Frauds.Statute of Frauds.

Enforcement of the Enforcement of the ContractContract

Once the assignment is made and Once the assignment is made and the obligor notified, the assignee the obligor notified, the assignee may enforce the contract against the may enforce the contract against the obligor.obligor.

The obligor may raise all defenses The obligor may raise all defenses against the assignee that he or she against the assignee that he or she could have raised against the could have raised against the assignor.assignor.

DelegationDelegation A contract must first exist. A contract must first exist.

– There will be an obligor and an obligee.There will be an obligor and an obligee. One of the parties (the obligor) transfers his One of the parties (the obligor) transfers his

duties under a contract to a third person.duties under a contract to a third person.– The person transferring – or delegating – his The person transferring – or delegating – his

duties is the duties is the delegator.delegator.– The person receiving the delegation is the The person receiving the delegation is the

delegatee.delegatee. The delegatee now owes the duty (usually The delegatee now owes the duty (usually

money) to the obligee.money) to the obligee. The delegator remains ultimately responsible The delegator remains ultimately responsible

for the performance under the contract.for the performance under the contract.

What duties can be What duties can be delegated?delegated?

Delegation is okay, Delegation is okay, unlessunless:: Prohibited by law or public policyProhibited by law or public policy Prohibited by the terms of the Prohibited by the terms of the

contractcontract If obligee has a substantial interest in If obligee has a substantial interest in

personal performance by obligor.personal performance by obligor.

Enforcement of the Enforcement of the ContractContract

Once the delegation has been made, Once the delegation has been made, the obligee may enforce the contract the obligee may enforce the contract against the delegatee. If the against the delegatee. If the delegatee does not perform, the delegatee does not perform, the obligee may enforce the contract obligee may enforce the contract against the obligor/delagator.against the obligor/delagator.

NovationNovation A novation is a three-way agreement in A novation is a three-way agreement in

which one party transfers all her rights which one party transfers all her rights and duties to a third party.and duties to a third party.

Both original parties agree to the Both original parties agree to the novation.novation.

Essentially the third party substitutes in Essentially the third party substitutes in for one of the original parties to the for one of the original parties to the contract.contract.

The obligee agrees to look The obligee agrees to look onlyonly to the to the third party for performance.third party for performance.

When does the contract When does the contract end?end?

A contract is finished (executed) A contract is finished (executed) when performance is complete.when performance is complete.

A contract also may come to end A contract also may come to end upon “discharge” of a non-upon “discharge” of a non-performing party.performing party.

Discharge of Discharge of DutiesDuties

A party is discharged from A party is discharged from contractual obligations when he or contractual obligations when he or she has no more duties under the she has no more duties under the contract.contract.

Discharge of DutiesDischarge of Duties Contractual duties may be Contractual duties may be

discharged by:discharged by:– Performance of all contractual dutiesPerformance of all contractual duties

OrOr occurrence of a condition excusing the occurrence of a condition excusing the dutyduty

– By agreementBy agreement– Impossibility of performanceImpossibility of performance– Commercial ImpracticabilityCommercial Impracticability

ConditionsConditions

A condition is an event that must A condition is an event that must occur before a a duty to perform occur before a a duty to perform arises or which discharges a duty arises or which discharges a duty that has already arisen.that has already arisen.

How are they created?How are they created?– By words or conduct; by lawBy words or conduct; by law– No special language is necessary to No special language is necessary to

create a condition. create a condition.

Classification of Classification of ConditionsConditions

Classification historically was based Classification historically was based on the time when the conditioning on the time when the conditioning event was to happen in relation to event was to happen in relation to the duty to perform.the duty to perform.– Condition PrecedentCondition Precedent– Condition SubsequentCondition Subsequent– Concurrent ConditionConcurrent Condition

PerformancePerformance The contract ends when it is fully The contract ends when it is fully

executed – that is when both parties executed – that is when both parties fully perform their obligations under fully perform their obligations under the contract.the contract.

BreachBreach Any failure or refusal to perform a Any failure or refusal to perform a

contractual duty constitutes a contractual duty constitutes a breach. breach.

When one party breaches a contract, When one party breaches a contract, the other party is discharged.the other party is discharged.

PerformancePerformance Strict – or absolute and complete – Strict – or absolute and complete –

performance is generally not required performance is generally not required unless the contract expressly demands unless the contract expressly demands it it and and the demand is reasonable.the demand is reasonable.

If the contract is If the contract is substantiallysubstantially performed, the performing party is performed, the performing party is discharged – but may be liable for any discharged – but may be liable for any loss caused by the deviations from the loss caused by the deviations from the contract.contract.

Washington LawWashington Law There is “substantial performance” of There is “substantial performance” of

a contract, where the variations from a contract, where the variations from the contract specifications are the contract specifications are inadvertent and unimportant and inadvertent and unimportant and may be remedied at relatively small may be remedied at relatively small expense. expense.

Forrester v. CraddockForrester v. Craddock, 51 Wn.2d 315 (1957), 51 Wn.2d 315 (1957)

Personal Satisfaction Personal Satisfaction ContractsContracts

This is a contract in which the promisee This is a contract in which the promisee makes a personal makes a personal subjectivesubjective evaluation evaluation of the promisor’s performance.of the promisor’s performance.

Dissatisfaction results in termination of Dissatisfaction results in termination of the contract.the contract.– In Washington the dissatisfaction must be In Washington the dissatisfaction must be

based on reasonable grounds. based on reasonable grounds. Omni Group, Omni Group, Inc. v. Seattle-First Nat’l Bank, 32 Wn. Inc. v. Seattle-First Nat’l Bank, 32 Wn. App.22 (1982).App.22 (1982).

Good FaithGood Faith Every contract imposes upon each Every contract imposes upon each

party a duty of good faith and fair party a duty of good faith and fair dealing in its performance and its dealing in its performance and its enforcement.enforcement.

Restatement (Second) of Contracts Restatement (Second) of Contracts § 205§ 205

Washington LawWashington Law Every contract carries with it an Every contract carries with it an

implied covenant of good faith and implied covenant of good faith and fair dealing that obligates the parties fair dealing that obligates the parties to cooperate with one another so to cooperate with one another so that each may obtain the full benefit that each may obtain the full benefit of performance.of performance.

Ross v. Ticor Title Ins. Co., Ross v. Ticor Title Ins. Co., 135 Wn. App. 182 135 Wn. App. 182 (2006)(2006)

Material BreachMaterial Breach A party will be relieved of his or her A party will be relieved of his or her

responsibilities under a contract if responsibilities under a contract if the other party has committed a the other party has committed a materialmaterial breach of the contract.breach of the contract.– This is a breach that substantially harms This is a breach that substantially harms

the innocent party and for which it the innocent party and for which it would be hard to compensate without would be hard to compensate without terminating the contract.terminating the contract.

Anticipatory Anticipatory RepudiationRepudiation

Occurs when one of the parties to a Occurs when one of the parties to a bilateral contract either expressly or bilateral contract either expressly or impliedly repudiates the contract impliedly repudiates the contract prior to the time of performance. prior to the time of performance. – Must be a positive statement or action Must be a positive statement or action

indicating distinctly and unequivocally indicating distinctly and unequivocally that the repudiating party will not that the repudiating party will not substantially perform.substantially perform.

Discharge By Discharge By AgreementAgreement

Parties can end the contract by Parties can end the contract by agreement throughagreement through– RescissionRescission– NovationNovation– Accord and satisfactionAccord and satisfaction

Impossibility of Impossibility of PerformancePerformance

If a party is unable to perform a If a party is unable to perform a contract because performance contract because performance becomes “impossible,” then the becomes “impossible,” then the performance is excused.performance is excused.

Commercial Commercial ImpracticalityImpracticality

If circumstances change (that neither If circumstances change (that neither party anticipated), leaving one party party anticipated), leaving one party at a significant commercial at a significant commercial disadvantage, that party may be disadvantage, that party may be excused from the contract under the excused from the contract under the theory of commercial impracticality.theory of commercial impracticality.– If the change could have been foreseen, If the change could have been foreseen,

the court will generally not afford relief.the court will generally not afford relief.

Commercial Commercial ImpracticalityImpracticality

Mere financial difficulties are not Mere financial difficulties are not enoughenough

The event must have been The event must have been unexpectedunexpected

No other reasonable method of No other reasonable method of complying with the contract are complying with the contract are availableavailable

A A force majeureforce majeure clause may support a clause may support a claim of impracticalityclaim of impracticality

Remedies for BreachRemedies for Breach If one party fails to live up to the If one party fails to live up to the

terms of the contract, the other party terms of the contract, the other party may sue.may sue.

The The remedyremedy is how the court is how the court compensates the injured party. compensates the injured party.

Types of RemediesTypes of Remedies Money damages based onMoney damages based on

– Expectation of contract performanceExpectation of contract performance– Actions taken in reliance on Actions taken in reliance on

Performance of the ContractPerformance of the Contract Rescission and RestitutionRescission and Restitution Reformation of the ContractReformation of the Contract

Expectation Interest Expectation Interest Designed to put the injured party in Designed to put the injured party in

the position he or she would have the position he or she would have been in if the contract had been fully been in if the contract had been fully performed.performed.

Three types of monetary damages Three types of monetary damages are awarded in contract actions:are awarded in contract actions:– CompensatoryCompensatory– ConsequentialConsequential– IncidentalIncidental

Compensatory Compensatory DamagesDamages

These damages flow directly from These damages flow directly from the contract – damages that the contract – damages that inevitably result from the breach.inevitably result from the breach.

Washington lawWashington law The general measure of damages for The general measure of damages for

breach of contract is that the injured breach of contract is that the injured party is entitled (1) to recovery of all party is entitled (1) to recovery of all damages that accrue naturally from damages that accrue naturally from the breach, and (2) to be put into as the breach, and (2) to be put into as good a pecuniary position as he would good a pecuniary position as he would have had if the contract had been have had if the contract had been performed.performed.

Diedrick v. School Dist. No. 81Diedrick v. School Dist. No. 81, 87 Wn.2d 598 (1976), 87 Wn.2d 598 (1976)

Consequential Consequential DamagesDamages

These are damages that result from These are damages that result from the unique circumstances of the the unique circumstances of the injured party. injured party. – The injured party must prove that the The injured party must prove that the

breaching party had reasonable notice of breaching party had reasonable notice of the special circumstances and that a the special circumstances and that a breach would cause the damages suffered. breach would cause the damages suffered.

http://www.uncut.co.uk/news/smashing_pumpkins/news/11271

Incidental DamagesIncidental Damages The minor costs associated with The minor costs associated with

responding to a breach of responding to a breach of performance.performance.

Reliance InterestReliance Interest Where the expectation interest of a Where the expectation interest of a

contract cannot be established a contract cannot be established a party injured by a breach may be party injured by a breach may be entitled to damages that will restore entitled to damages that will restore the party to the position he would the party to the position he would have been in if he had not entered have been in if he had not entered into the contract.into the contract.

Restitution InterestRestitution Interest Rescission results in a cancellation of Rescission results in a cancellation of

the contract. the contract. Generally occurs if there was fraud, Generally occurs if there was fraud,

mistake, duress or undue influence mistake, duress or undue influence (something affecting the genuiness of (something affecting the genuiness of assent).assent).

If a contract is rescinded, both parties If a contract is rescinded, both parties must make restitution to each other.must make restitution to each other.– Both parties are returned to the position Both parties are returned to the position

they were in prior to the contract.they were in prior to the contract.

Additional Equitable Additional Equitable RemediesRemedies

Specific performanceSpecific performance InjunctionInjunction Reformation of the contractReformation of the contract

Specific Specific PerformancePerformance

Specific Performance is an Specific Performance is an appropriate remedy where damages appropriate remedy where damages would not be adequate or where no would not be adequate or where no alternative comparable product is alternative comparable product is available.available.– This remedy is generally only available This remedy is generally only available

in cases involving the sale of land or in cases involving the sale of land or some other asset that is unique. some other asset that is unique.

ReformationReformation A very rare remedy in which a court A very rare remedy in which a court

will partially rewrite the contract if it will partially rewrite the contract if it believes the agreement contains a believes the agreement contains a simple mistake and does not reflect simple mistake and does not reflect the true intentions of the parties. the true intentions of the parties.

MitigationMitigation The law does not permit a party to The law does not permit a party to

recover damages for breach of recover damages for breach of contract if the damages could have contract if the damages could have been avoided without undue risk, been avoided without undue risk, burden or humiliation.burden or humiliation.

A party must exercise reasonable A party must exercise reasonable efforts to mitigate damages.efforts to mitigate damages.

Liquidated DamagesLiquidated Damages Damages specified within the Damages specified within the

contract itself – a liquidated damages contract itself – a liquidated damages clause states, in advance, how much clause states, in advance, how much a party must pay if he or she a party must pay if he or she breaches the contract.breaches the contract.

Washington upholds these clauses Washington upholds these clauses unless it appears to be a “penalty” unless it appears to be a “penalty” and so long as the agreement is fair. and so long as the agreement is fair.

Attorney Fees and Attorney Fees and CostsCosts

A court will enforce a contract term A court will enforce a contract term requiring the losing party in an action requiring the losing party in an action on the contract to pay the other on the contract to pay the other party’s attorney fees and litigation party’s attorney fees and litigation costs.costs.