THE LEGAL ENVIRONMENT TODAY, 8E ROGER LEROY MILLER / FRANK B. CROSS © 2016 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.

CHAPTER 11 CONTRACT PERFORMANCE, BREACH, AND REMEDIES © 2016 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 OBJECTIVES 1.What are the elements of fraudulent misrepresentation? 2.What is substantial performance? 3.When is a breach considered material, and what effect does that have on the other party’s duty to perform a contract? © 2016 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 OBJECTIVES (CONT’D) 4.What is the standard measure of compensatory damages when a contract is breached? 5.What equitable remedies can a court grant, and in what circumstances will a court consider granting them? © 2016 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.

VOLUNTARY CONSENT Lack of consent can be a defense to enforceability. Contracts can be voided if there was no consent. Mistakes Mistake of fact: Bilateral: either party can rescind the contract Unilateral: a mistake regarding a material fact, the other person must have known or should have known that the person was mistaken OR there was a mathematical error Mistake of value/quality: not a defense © 2016 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.

EXHIBIT 11.1 © 2016 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.

VOLUNTARY CONSENT Fraudulent Misrepresentation A misrepresentation of material fact occurred An intent to deceive The innocent party justifiably relied on the misrepresentation The party was harmed as a result of the misrepresentation © 2016 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. LO-1

VOLUNTARY CONSENT Undue Influence Pressuring another into signing a contract There must be clear and convincing evidence that the party was not acting of their own free will. Duress When someone is threatened into signing a contract, there is no consent. © 2016 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.

THIRD PARTY RIGHTS Privity of contract – normally the contract relationship is only between the parties who entered the contract Parties can transfer contract rights to a third party. Delegation : transferring duties to another Assignment : transferring rights to another © 2016 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.

THIRD PARTY RIGHTS Assignments Assignor – assigns the rights Assignee – receives the rights The assignee can demand performance from the original contracting party. All rights can be assigned unless: The assignment is prohibited by statute The contract is personal It significantly changes the risk or duties of the obligor The contract prohibits assignment © 2016 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.

THIRD PARTY RIGHTS Delegations Parties Delegator – delegates the duties Delegatee – receives the delegation If the delegatee does not perform, the delegator is still obligated to do so. © 2016 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.

THIRD PARTY RIGHTS Duties can be delegated unless: Special trust has been placed in the obligor When performance depends on the personal skill or talents of the obligor. If performance by a third party will vary materially from that expected by the obligee. When the contract expressly prohibits delegation © 2016 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.

THIRD PARTY RIGHTS Third Party Beneficiaries When the original parties contract to benefit a third person, that third person is an intended third party beneficiary. The intended beneficiary has legal rights and can sue the promisor for breach of contract. © 2016 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.

PERFORMANCE AND DISCHARGE Discharge : the termination of the contract obligation Occurs when the parties have fully performed their contractual obligations or When events, conduct of the parties, or operation of law releases the parties from performance © 2016 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.

PERFORMANCE AND DISCHARGE Conditions of Performance Performance is an absolute promise and must be completed exactly as specified in the contract. A condition is a qualification which creates, suspends, or terminates the obligations of the contracting parties. Conditions precedent are qualifications that must be fulfilled before a contract can be performed. © 2016 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.

PERFORMANCE AND DISCHARGE Discharge by Performance Complete performance – the contract conditions are met Substantial performance The party must have performed in good faith. The performance must not vary greatly from the performance promised in the contract. The performance must create substantially the same benefits as those promised in the contract. If the performance is not complete or substantial, then it is considered a breach. © 2016 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. LO-2 LO-3

PERFORMANCE AND DISCHARGE Anticipatory Repudiation When one party asserts that they will not be fulfilling their end of the contract This is treated as a material breach and the other party can immediately sue for damages. Time for Performance If no time is specified, a reasonable time is implied. © 2016 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.

PERFORMANCE AND DISCHARGE Discharge by Agreement Discharge by mutual rescission The parties can form a new contract to rescind the old contract Discharge by novation When both parties agree to substitute a third party for one of the original parties. Discharge by settlement agreement The parties can agree to a new contract with different terms than the first © 2016 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.

PERFORMANCE AND DISCHARGE Discharge by accord and satisfaction Accord: contract to perform existing contractual duty not yet discharged. Satisfaction: performance of the accord. Release A contract in which one party forfeits the right to pursue a legal claim against the other party. It bars any further recovery beyond the terms stated in the release. Covenant not to sue An agreement to substitute a contractual obligation for some other type of legal action based on a valid claim © 2016 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.

PERFORMANCE AND DISCHARGE Discharge by Operation of Law Material alteration of the contract Statutes of limitations Bankruptcy Impossibility of performance Commercial impracticability Frustration of purpose © 2016 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.

EXHIBIT 11.2 © 2016 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.

DAMAGES Types of Damages Compensatory: direct losses and costs Consequential: indirect and foreseeable losses Punitive: to punish and deter wrongdoing Nominal: to recognize wrongdoing when no monetary loss is shown © 2016 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. LO-4

EXHIBIT 11.3 © 2016 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.

DAMAGES Mitigation of Damages When a breach occurs, the other party has a duty to reduce damages Liquidated Damages versus Penalties Liquidated damages : specific amount agreed to be paid as damages in the event of future breach Penalty : designed to penalize, generally unenforceable © 2016 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.

EQUITABLE REMEDIES Rescission and Restitution Rescission Remedy where the contract is canceled and the parties are restored to the original positions that they occupied prior to the transactions. Restitution To rescind a contract, both parties must make restitution to each other by returning goods, property, or funds previously conveyed. If the goods or property have been consumed, restitution must be made in an equivalent dollar amount. © 2016 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. LO-5

EQUITABLE REMEDIES Specific Performance Requires that the contract be fulfilled instead of receiving damages Usually granted when the subject matter of the contract is unique and so money would be an inadequate remedy Sale of land, for example Not allowed for personal services contracts © 2016 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.

EQUITABLE REMEDIES 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 © 2016 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.

CONTRACT PROVISIONS LIMITING REMEDIES Exculpatory clauses Provisions in the contract stating that no damages can be recovered Limitation-of-liability clauses Contracts can limit the amount of remedies if one party breaches The UCC Allows Sales Contracts to Limit Remedies Enforceability of Limitation-of-Liability Clauses © 2016 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.

EXHIBIT 11.4 © 2016 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.