contracts: third party rights, discharge, breach, and remedies

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1 © 2011 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. Contracts: Third Party Rights, Discharge, Breach, and Remedies Chapter 10 BUSINESS LAW TODAY BUSINESS LAW TODAY Essentials 9 Essentials 9 th th Ed. Ed. Roger LeRoy Miller - Institute for University Studies, Roger LeRoy Miller - Institute for University Studies, Arlington, Texas Arlington, Texas Gaylord A. Jentz - University of Texas at Austin, Gaylord A. Jentz - University of Texas at Austin, Emeritus Emeritus

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BUSINESS LAW TODAY Essentials 9 th Ed. Roger LeRoy Miller - Institute for University Studies, Arlington, Texas Gaylord A. Jentz - University of Texas at Austin, Emeritus. Contracts: Third Party Rights, Discharge, Breach, and Remedies. Chapter 10. Learning Objectives. - PowerPoint PPT Presentation

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1© 2011 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.

Contracts: Third Party Rights, Discharge,

Breach, and Remedies

Contracts: Third Party Rights, Discharge,

Breach, and Remedies

Chapter

10Chapter

10

BUSINESS LAW TODAYBUSINESS LAW TODAY Essentials 9Essentials 9thth Ed. Ed.Roger LeRoy Miller - Institute for University Studies, Arlington, TexasRoger LeRoy Miller - Institute for University Studies, Arlington, TexasGaylord A. Jentz - University of Texas at Austin, EmeritusGaylord A. Jentz - University of Texas at Austin, Emeritus

2© 2011 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.

Learning ObjectivesLearning Objectives

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

What factors indicate that a third party What factors indicate that a third party beneficiary is an intended beneficiary?beneficiary is an intended beneficiary?

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

When do courts grant specific When do courts grant specific performance as a remedy?performance as a remedy?

What is the rationale underlying the What is the rationale underlying the doctrine of election of remedies?doctrine of election of remedies?

3© 2011 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.

AssignmentsAssignments

An assignment is a transfer of An assignment is a transfer of contractual rights to a 3contractual rights to a 3rdrd party party (assignee).(assignee).

4© 2011 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.

AssignmentsAssignments

EffectEffect: Assignee has the right to demand : Assignee has the right to demand performance from the original party (Obligor) performance from the original party (Obligor) to the contract.to the contract.

NoticeNotice of Assignment. of Assignment. Rights That Cannot Be Assigned:Rights That Cannot Be Assigned:

Statute Expressly Prohibits Assignment.Statute Expressly Prohibits Assignment.Contract is for Personal Services.Contract is for Personal Services.Assignment will Materially Change Risks or Duties of Assignment will Materially Change Risks or Duties of

Obligor.Obligor.When Contract Itself Prohibits Assignment.When Contract Itself Prohibits Assignment.

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DelegationsDelegations

Transfer of duties to a 3Transfer of duties to a 3rdrd party (Delegatee) by party (Delegatee) by Delegator.Delegator.

Delegatee still owes duty to original party in Delegatee still owes duty to original party in contract, and is still liable for performance.contract, and is still liable for performance.

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DelegationsDelegations

Generally any duty can be delegated Generally any duty can be delegated except:except:When performance depends on personal When performance depends on personal

skills or talents of original obligor.skills or talents of original obligor.When special trust has been placed in the When special trust has been placed in the

obligor.obligor.When 3When 3rdrd party performance will materially party performance will materially

vary.vary.When the contract expressly prohibits When the contract expressly prohibits

delegation.delegation.

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SummarySummary

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Third Party BeneficiariesThird Party Beneficiaries

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Third Party BeneficiariesThird Party Beneficiaries

3P Intended Beneficiary3P Intended Beneficiary (Both Creditor and (Both Creditor and Donee) Original parties to K intend at the time Donee) Original parties to K intend at the time of contracting that the contract performance of contracting that the contract performance directly benefit a 3rd party.directly benefit a 3rd party.When rights vest: When rights vest:

• Third party demonstrates express consent.Third party demonstrates express consent.• Third party materially alters her position.Third party materially alters her position.• When conditions are satisfied. When conditions are satisfied.

After rights vest, third party can sue for breach.After rights vest, third party can sue for breach.

3P Incidental Beneficiary3P Incidental Beneficiary. . Benefit is Benefit is unintentional. 3P has no rights.unintentional. 3P has no rights.

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To determine whether beneficiary is intended To determine whether beneficiary is intended or incidental, courts use the reasonable person or incidental, courts use the reasonable person test, plus factors:test, plus factors:Performance is rendered directly.Performance is rendered directly.Third party has right to control details.Third party has right to control details.Third party is expressly designated.Third party is expressly designated.

CASE 10.1CASE 10.1 Revels v. Miss America Revels v. Miss America Organization Organization (2007). (2007). Revels was an incidental Revels was an incidental beneficiary under the MAO contract because she beneficiary under the MAO contract because she didn’t prove the contract was executed for her didn’t prove the contract was executed for her direct benefit.direct benefit.

Intended vs. Incidental Intended vs. Incidental BeneficiariesBeneficiaries

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Contract DischargeContract Discharge

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Contract DischargeContract Discharge

Discharge is the Discharge is the fullfull performance of all performance of all contractual duties.contractual duties.

Conditions of Performance:Conditions of Performance:Condition is a possible future event that may Condition is a possible future event that may

or may not happen.or may not happen.Triggers or terminates performance.Triggers or terminates performance.Condition Condition PrecedentPrecedent: prior to performance: prior to performanceCondition Condition SubsequentSubsequent: follows initial : follows initial

performance.performance.Concurrent Concurrent Conditions: occur simultaneously.Conditions: occur simultaneously.

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CompleteComplete Performance: perfect performance Performance: perfect performance under the contract.under the contract.

SubstantialSubstantial Performance: technically a minor Performance: technically a minor breach but as long as in good faith, the non-breach but as long as in good faith, the non-breaching party remains liable to pay.breaching party remains liable to pay.

CASE 10.2CASE 10.2 Wisconsin Electric Power Co. Wisconsin Electric Power Co. Union Pacific Railroad Union Pacific Railroad (2009)(2009). . In this case, In this case, 84% work constituted substantial performance.84% work constituted substantial performance.

SatisfactionSatisfaction Contract: performance is Contract: performance is conditioned on reasonable satisfaction.conditioned on reasonable satisfaction.

Discharge By Performance: Discharge By Performance: Complete vs. Substantial Complete vs. Substantial

PerformancePerformance

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Breach of ContractBreach of Contract

Material Breach of Contract.Material Breach of Contract.When performance is not substantial.When performance is not substantial.Innocent party is excused from performance Innocent party is excused from performance

and has the right to sue for damages.and has the right to sue for damages.A minor breach may be cured.A minor breach may be cured.

Anticipatory Repudiation of Contract. Anticipatory Repudiation of Contract. One party gives notice of refusal to perform.One party gives notice of refusal to perform.Innocent party treats AR as material breach.Innocent party treats AR as material breach.

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Discharge by AgreementDischarge by Agreement

Discharge By Discharge By Mutual RescissionMutual Rescission: : parties parties must make another agreement.must make another agreement.

Discharge by Discharge by NovationNovation: : new contract with new contract with substitution of a third party for one of the substitution of a third party for one of the original parties.original parties.

Discharge by Discharge by Accord and SatisfactionAccord and Satisfaction: : settlement to discharge original contract.settlement to discharge original contract.

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Discharge By Operation of LawDischarge By Operation of Law

Contract Alteration.Contract Alteration.Material alteration discharges innocent party.Material alteration discharges innocent party.

Statutes of Limitations.Statutes of Limitations.Automatically discharges.Automatically discharges.

Bankruptcy.Bankruptcy. Impossibility. Impossibility.

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Objective Impossibility.Objective Impossibility.Party with required personal performance dies Party with required personal performance dies

or becomes incapacitated prior to performance.or becomes incapacitated prior to performance.Specific subject matter is destroyed.Specific subject matter is destroyed.Change in law renders performance illegal.Change in law renders performance illegal.

Temporary Impossibility.Temporary Impossibility.Performance is suspended until impossibility Performance is suspended until impossibility

ceases.ceases.

Discharge by Impossibility Discharge by Impossibility

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Impracticability and Impracticability and Frustration of PurposeFrustration of Purpose

Commercial Impracticability.Commercial Impracticability.Parties may be excused when performance Parties may be excused when performance

becomes becomes extremelyextremely expensive than originally expensive than originally agreed and agreed and not knownnot known or foreseeable. or foreseeable.

Frustration of Purpose: Frustration of Purpose: supervening supervening circumstances make it impossible to attain circumstances make it impossible to attain the purpose both parties had in mind.the purpose both parties had in mind.

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DamagesDamages

Compensatory : covers direct losses and Compensatory : covers direct losses and costs).costs).

Consequential: indirect and foreseeable Consequential: indirect and foreseeable losses.losses.

Punitive: punish and deter wrongdoing.Punitive: punish and deter wrongdoing. Nominal: recognize wrongdoing with no Nominal: recognize wrongdoing with no

monetary loss.monetary loss.

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Consequential DamagesConsequential Damages

Compensates injured party (Plaintiff) who must Compensates injured party (Plaintiff) who must prove actual damages caused by breach. prove actual damages caused by breach. Amount is calculated:Amount is calculated: GenerallyGenerally: difference between Defendant’s promised : difference between Defendant’s promised

performance and actual.performance and actual. Sale of GoodsSale of Goods: difference between the contract price : difference between the contract price

and market.and market. Sale of LandSale of Land: Usually specific performance (or : Usually specific performance (or

difference between contract price and FMV of land.difference between contract price and FMV of land. Construction ContractsConstruction Contracts: Depends on the stage of : Depends on the stage of

construction construction

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Damages in Construction Damages in Construction ContractsContracts

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DamagesDamages

Consequential (Special) DamagesConsequential (Special) DamagesForeseeable damages that result from breach of Foreseeable damages that result from breach of

contract.contract.Caused by other than breach of contract.Caused by other than breach of contract.

Punitive (Exemplary) Damages.Punitive (Exemplary) Damages.Deter wrongdoer; set example.Deter wrongdoer; set example.

Nominal Damages.Nominal Damages.Technical injury, no actual damages.Technical injury, no actual damages.

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Mitigation of DamagesMitigation of Damages

Injured party has a legal duty to mitigate Injured party has a legal duty to mitigate (reduce) her damages.(reduce) her damages.

Terminated employee has duty to take a Terminated employee has duty to take a similar job, if one is available.similar job, if one is available.

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Liquidated Damages vs. Liquidated Damages vs. PenaltiesPenalties

LiquidatedLiquidated: : fixed, certain dollar amount fixed, certain dollar amount agreed to by parties, paid in the event of agreed to by parties, paid in the event of breach. Clauses for liquidated damages are breach. Clauses for liquidated damages are enforceable.enforceable.

PenaltiesPenalties: : designed to penalize a party. designed to penalize a party. Generally not enforceable.Generally not enforceable.

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Damages SummaryDamages Summary

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Equitable RemediesEquitable Remedies

Rescission: cancel or undo a contract.Rescission: cancel or undo a contract.Available for fraud, mistake, duress and failure of Available for fraud, mistake, duress and failure of

consideration.consideration.

Restitution: recapture the benefit conferred on Restitution: recapture the benefit conferred on the defendant that has unjustly enriched her. the defendant that has unjustly enriched her. Parties must return goods, property or money.Parties must return goods, property or money.

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Equitable RemediesEquitable Remedies

Specific Performance.Specific Performance.Non-monetary relief only granted in cases Non-monetary relief only granted in cases

where the legal remedy is inadequate and the where the legal remedy is inadequate and the subject matter is unique (e.g., sale of land, or subject matter is unique (e.g., sale of land, or original art).original art).

Contracts for Personal Services.Contracts for Personal Services.Courts generally Courts generally refuserefuse to grant specific to grant specific

performance due to notions of ‘involuntary performance due to notions of ‘involuntary servitude.’servitude.’

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Equitable RemediesEquitable Remedies

Reformation.Reformation.Used when parties have imperfectly expressed Used when parties have imperfectly expressed

their agreement in writing. their agreement in writing. Court can rewrite the contract to reflect the Court can rewrite the contract to reflect the

parties’ true intentions. parties’ true intentions.

CASE 10.3CASE 10.3 Drake v. Hance Drake v. Hance (2009). (2009). Legal Legal document can be reformed based on parol document can be reformed based on parol evidence that shows a mutual mistake.evidence that shows a mutual mistake.

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Quasi-ContractQuasi-Contract

Recovery based on Quasi-Contract. Recovery based on Quasi-Contract. Plaintiff must show:Plaintiff must show:Benefit was conferred on the other party.Benefit was conferred on the other party.Party conferring benefit expected to be paid.Party conferring benefit expected to be paid.Party seeking recovery did not volunteer.Party seeking recovery did not volunteer.Retaining benefit without payment would be Retaining benefit without payment would be

unjust enrichment.unjust enrichment.

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Election of RemediesElection of Remedies

Generally, a non-breaching party has Generally, a non-breaching party has several remedies available. several remedies available.

The common law of contracts requires the The common law of contracts requires the party to choose which remedy to pursue. party to choose which remedy to pursue. This is called This is called election of remedies. election of remedies.

The purpose of the doctrine of election of The purpose of the doctrine of election of remedies is to prevent double recovery.remedies is to prevent double recovery.

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Summary of Remedies Summary of Remedies AvailableAvailable