Contracts: Third Party Rights, Discharge, Breach and Remedies Chapter 10

Privity Of Contract As a general rule, only the parties to a contract owe any duties and enjoy any rights arising from the contract.

Privity Of Contract Exceptions: –Third-Party Beneficiary The law distinguishes between intended and incidental third-party beneficiaries. Only intended beneficiaries acquire actionable legal rights in a contract.

Third-Party Beneficiaries Intended Beneficiary –A third party for whose benefit a contract is formed. –Rights vest when: Third party consents Third party alters their position in reliance Conditions for vesting are satisfied –Example: life insurance.

Third-Party Beneficiaries Incidental Beneficiary –A third party who benefits from the performance of a contract, but whose benefit was not the reason the contract was formed. –Example: include construction contracts.

Privity Of Contract Exceptions: –Assignment - a party to the contract (the assignor) transfers his or her rights to some third party (the assignee). –Delegation - a party to the contract frees himself or herself from duties by having some third party perform those duties.

Assignment of Rights Generally, all contracts may be assigned, BUT –Some assignments may be prohibited by law or by contract. –Not allowed if for personal services or to a personal standard. –Not allowed if it would materially alter duties of party.

Liabilities of Parties The assignor remains liable if the assignee fails to perform. The other party may sue both the assignor and the assignee. Assignee acquires no greater rights than held by assignor.

Delegation of Duty Delegating a duty does not relieve party making the delegation form liability if party does not perform.

Delegation of Duty Duties that may not be delegated Performance depends on the skill of the obligor. Special trust has been placed in the obligor. Performance by a third party will alter the expectation of the duty contract. Contract expressly prohibits delegation.

Discharge, Performance, and Tender Discharge - the termination of a party’s obligations arising under a contract. Discharge occurs either when: –Both parties have performed their contractual obligations. –Events, conduct of the parties, and/or operation of law release the parties from their obligations to perform.

Discharge, Performance, and Tender Performance –Fulfilling one’s contractual duties. Tender –An unconditional offer to perform an obligation by a person who is ready, willing, and able to do so.

Contractual Performance Complete vs. Substantial Performance –In order to qualify as substantial performance, the party’s performance must not vary greatly from that promised in the contract, and it must create substantially the same benefits as those promised in the contract.

Contractual Performance Complete vs. Substantial Performance –If one party substantially performs, the other party’s duty to perform remains absolute, but the other party may be entitled to recover damages for the substantially performing party’s failure to fully perform.

Breach And Repudiation Breach of Contract –A party’s failure, without legal excuse, to substantially perform the obligations he or she has promised to perform. –If a party’s breach is non-material, the non-breaching party’s duty to perform may be suspended until the breach is remedied or cured.

Breach And Repudiation Anticipatory Repudiation –An action by a party to a contract that indicates that he or she will not perform a contractual obligation due to be performed in the future. –Such a repudiation will excuse the non- repudiating party from performing under the contract.

Discharge By Agreement Rescission - the process by which the parties cancel a contract and return one another to their pre-contract status. Novation - substituting a new contract for an old one thereby terminating the parties’ rights and duties under the old contract. Accord and Satisfaction - an agreement between the parties to accept different performance than originally promised.

Discharge By Impossibility A party may be relieved of his or her contractual duties when performance becomes either impossible or totally impracticable through no fault of either party to the contract. An objective standard is used. Temporary impossibility only may allow delay of performance. Force Majeure clause

Impossibility Of Performance Temporary Impossibility –A change in circumstances that makes performance temporarily impossible will suspend but not excuse performance.

Suing For Damages A breach of contract entitles the non- breaching party to sue for money damages.

Types Of Monetary Damages Compensatory Damages - compensate the non-breaching party for the injuries or losses actually sustained due to the breach. Consequential Damages - indirect losses which were reasonably foreseeable. Punitive Damages - designed to punish a wrongdoer. Nominal Damages - awarded if no actual damages are provable.

Mitigation, Liquidated Damages, And Penalties Mitigation of Damages –In most situations, when a breach of contract occurs, the non-breaching party has a duty to take whatever action is reasonable to minimize the damages caused by the breach.

Mitigation, Liquidated Damages, And Penalties Liquidated Damages –Contract provisions specifying a certain sum of money to be paid by the breaching party in the event that he or she fails to perform as required. –Generally based on a reasonable estimate of the value of the promised performance. –Cannot be a penalty

Equitable Remedies In addition to money damages, there are several equitable remedies available.

Equitable Remedies Rescission - canceling a contract and returning the parties to their pre-contract position. Recession requires restitution. Restitution - returning goods, property, or money previously transferred in order to restore the non-breaching party to his or her pre-contract position.

Equitable Remedies Specific Performance - requiring the breaching party to perform exactly as required (only granted only when money damages would be an inadequate remedy and the subject matter of the contract is unique). Reformation - a remedy allowing the contract to be re-written to reflect the true intent of the parties.

Contracts: Third Party Rights, Discharge, Breach and Remedies End of Chapter 10