Basic Business Law (BPP432/80) 2006 Fall Quarter Instructor: David Oliveiri Week 7: Facilitating Exchange; What Excuses Contract Performance; Rights When Transactions Break Down

Agenda “Transactional Breakdown” Performance, Breach, and Discharge Remedies

Learning Objectives Understand Valid Excuses for Nonperformance of a Valid Contract Understand How to Pass Risk to Other Party in a Valid Contract Understand Financial Interests Protected by a Valid Contract Understand When to Limit Damages Payable at Breach Understand How Breach and Compensate is a Financially Sound Strategy Understand When Money is Insufficient Compensation for a Contract Breach

Performance, Breach, & Discharge Assumption: Valid Contract in Place Basic Question: Have Parties Honored Commitments Common Scenario: –One Party Refuses to Perform –Claims Contractual Obligations Excused or Terminated –Other Party Cries “Foul” Legal Issue/Rules: Is Non-Performing Party’s Refusal Justified?

“I Will Transfer This Painting to You for $1,000,000.”

Acceptable Excuses For Not Proceeding With A Valid Contract Failure of an Agreed Condition “I’ve Already Performed My Obligations.” “You’ve Failed To Perform Your Obligations.” “We Agree To Do Something Else.” “ ‘The Law’ Excuses My Performance.”

Conditions Definition – An Event Whose Happening or Nonhappening Affects a Duty of Performance Types – Express or Implied Timing – Concurrent – “So Long As,” “While” – Requires Simultaneous Performance Precedent -- “Provided That,” “If,” “As Soon As,” “After,” “Upon,” “When” – Triggers Performance Subsequent – “Until” – Stops Performance Satisfaction – Subjective – Approval Based Upon Honestly Held Opinion Objective – Approval Based Upon Reasonableness [S&R 17 – Problem 10]

Conditions and Risk –What – Generally, Who Should Bear the Risk of Non-Performance of a Condition? –How – Before Contract –Catalog Risks –Determine Party to Bear Risks –Convert Risks to Conditions

Start-Up, Inc. Service/Maintenance Contract ― 25 Locations Two “Financially Equivalent” Bids –Flat Rate/Month –Cost+/Month How Can We Do Better? –What Are Risks? –Who Should Bear Risks? –What Should Contract Say?

Start-Up, Inc. What Are Risks? –Flat Rate – Quality, Responsiveness –Cost+ -- “Too Perfect,” Runaway Costs Who Should Bear Risks? Contractor! Why? What Should Contract Say? –Flat Rate – Specify Quality Standard, Set Responsiveness Standard –Cost+ -- Set Ceilings on Cost, Approval Thresholds, Quality Standard

Valid Excuses for Not Proceeding with a Valid Contract Failure of an Agreed Condition “I’ve Already Performed My Obligations.” –OR Tender/Offer of Performance Refused “You’ve Failed To Perform Your Obligations.” –Materiality Standard – Define in Contract! [S&R Problem 6] “We Agree To Do Something Else.” “ ‘The Law’ Excuses My Performance.” –Impossibility – Destruction, Illegality [S&R 17 – Problem 2] –Bankruptcy – Automatic Stay, Discharge –Statute of Limitations – 6 Years

A Discharged A and B Discharged B Discharged Discharge of Contracts A Enters into Contract with B A fully performs B materially breaches A and B agree to substitute C for A A discharge in bankruptcy Failure of a condition Mutual recission of the contract Substituted contract Accord and satisfaction Subsequent illegality of the contract Impossibility of performance B fully performs A materially breaches A and B agree to substitute C for B B discharged in bankruptcy

Remedies – Upon Breach General Rule -- Injured Party May Recover “Benefit of the Bargain” Interests Protected EXPECTATION RELIANCE RESTITUTION PROTECTED BY MONETARY DAMAGES EQUITABLE REMEDIES RESTITUTION

Monetary Damages Compensatory Damages = Lost Contract Value + Incidental Damages + Consequential Damages – Savings Compensatory Damages = Lost Contract Value + Incidental Damages + Consequential Damages – Savings Hypothetical: C agrees to build O’s house for $100k. Material and labor cost to C is $80k. Profit is $20k. After the house is partly built ($50k of work expended) C repudiates and O spends $55k to finish the job. Hypothetical: C agrees to build O’s house for $100k. Material and labor cost to C is $80k. Profit is $20k. After the house is partly built ($50k of work expended) C repudiates and O spends $55k to finish the job. What is O’s Loss of Value? What are O’s Incidental Damages? Any Consequential Damages? Expenses Saved

Other Monetary Damage Measures Nominal Damages Reliance Damages Example: O repudiates after C has spent $50k on wages and materials. Damage to C? Example: O repudiates after C has spent $50k on wages and materials. Damage to C? Punitive Damages -- Generally, Not Allowed Liquidated Damages (vs. Penalty) [S&R 18 – Problem 2] [S&R 18 – Problem 2]

Limitations on Contract Damages Damages Must Be Foreseeable Damages Must Be Certain, Not Speculative Injured Party Must Mitigate Damages –Must S dispose of oil at $14 per on B’s breach? –UCC’s Lost Volume Seller Exception –Case of Shirley Maclaine, Bloomer Girl, and Big Country/Big Man Hypothetical: B contracts with S for 1,000 barrels of oil at $20 per, to be delivered in 90 days. On delivery date, oil is $14 per in the market. B refuses to go ahead with the deal. What are S’s damages?

Remedies in Equity – Where Monetary Damages Inadequate Specific Performance = f (Uniqueness) [S&R 18 – Problem 6] [S&R 18 – Problem 6] Injunctions = f (Uniqueness) [S&R 18 – Problem 4] [S&R 18 – Problem 4]

Equitable Remedies may be available No Compensatory Damages Restitution Reliance Damages Legal Remedies are available No Contract Remedies Are legal remedies adequate? Yes Is there a provision for reasonable liquidated damages? Yes Recovery of liquidated damages Yes No RemedyHas the contract been breached? No

Bottom Lines; Q&A Failure to Perform a Valid Contract is OK in Certain Circumstances Conditions Can Pass Financial Risk to Another Party in a Valid Contract The Principal Financial Interest Protected by a Valid Contract is the “Benefit of the Bargain” Liquidated Damages Provisions Can Define and Limit Damages Payable at Breach “Breach and Compensate” is a Financially Sound Strategy In Limited Circumstances Money is Insufficient Compensation for a Contract Breach