Copyright © 2006 by Pearson Prentice-Hall. All rights reserved Slides developed by Les Wiletzky PowerPoint Slides to Accompany ESSENTIALS OF BUSINESS AND ONLINE COMMERCE LAW 1 st Edition by Henry R. Cheeseman Chapter 9 Contracts: Third Party Rights, Performance, Breach, and Remedies Chapter 9 Contracts: Third Party Rights, Performance, Breach, and Remedies

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved Privity of Contract  The state of two specified parties being in a contract  Contracting parties have a legal obligation to perform the duties specified in their contract  If one party fails to perform as promised, the other party may enforce the contract and sue for breach

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved Breach of Contract  There are three levels of performance of a contract: Complete (or strict) performance Substantial performance Inferior performance  Breach of contract  Breach of contract – if a contracting party fails to perform an absolute duty owed under a contract

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved Third Party Rights  Third parties acquire rights under other people’s contracts if they are: 1.Assignees 1.Assignees to whom rights subsequently are transferred, and 2.Intended third-party beneficiaries 2.Intended third-party beneficiaries to whom the contracting parties intended to give rights under the contract at the time of contracting

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved Assignment of Rights  Assignment–  Assignment – The transfer of contractual rights by the obligee to another party  Assignor –  Assignor – The obligee who transfers the right  Assignee –  Assignee – The party to whom the right has been transferred

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved Assignment of a Right Contract No. 1: Creditor (Obligee) Contract No. 2: Assignor Debtor (Obligor) Assignee Contract No. 1 Loan of Money Note (Promise to pay) Right to enforce payment of note Contract No. 2 Assignment of note

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved Successive Assignments of the Same Right  If the obligee makes successive assignments of the same right, one of the following rules applies: American Rule (or New York Rule) English Rule

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved Delegation of Duties  Delegation –  Delegation – A transfer of contractual duties by the obligor to another party for performance  Delegator –  Delegator – The obligor who transferred his or her duty  Delegatee –  Delegatee – The party to whom the duty has been transferred

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved Delegation of a Duty Contract No. 1: Promisor (Obligor) Contract No. 2: Delegator Promisee (Obligee) Delegatee Contract No. 1 Promise to Perform Duty of performance Contract No. 2 Delegation of duties

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved Third-Party Beneficiaries Intended Beneficiary  A third party who is not in privity of contract Has rights under the contract Can enforce the contract against the obligor Intended Beneficiary  A third party who is not in privity of contract Has rights under the contract Can enforce the contract against the obligor Incidental Beneficiary  A party who is unintentionally benefited by other people’s contracts  An incidental beneficiary has no rights to enforce or sue under other people’s contracts Incidental Beneficiary  A party who is unintentionally benefited by other people’s contracts  An incidental beneficiary has no rights to enforce or sue under other people’s contracts

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved Intended Beneficiary Contract Life Insurance Company (Promisor) Insured (Promisee) Original Contract Right to enforce contract (Life insurance policy) Named Beneficiary

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved Covenants and Conditions Covenant  An unconditional promise to perform  Nonperformance of a covenant is a breach of contract that gives the other party the right to sueCovenant  An unconditional promise to perform  Nonperformance of a covenant is a breach of contract that gives the other party the right to sue Conditions of Performance  A qualified or conditional promise that becomes a covenant is met Conditions of Performance  A qualified or conditional promise that becomes a covenant is met

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved Types of Conditions Type of ConditionDescription Condition precedentA specified event must occur (or not occur) before a party is obligated to perform contractual duties Condition subsequentThe occurrence (or nonoccurrence) of a specified event excuses the performance of an existing contractual duty to perform Concurrent conditionThe parties to a contract are obligated to render performance simultaneously. Each party’s duty to perform is conditioned on the other party’s duty to perform

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved Discharge of Performance  A party’s duty to perform under a contract may be discharged by: Mutual agreement Mutual agreement of the parties Impossibility of performance Impossibility of performance Operation of the law Operation of the law

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved Discharge by Agreement  The parties to a contract may mutually agree to discharge or end their contractual duties: Mutual Rescission Substituted Contract Accord and Satisfaction

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved Discharge by Impossibility  Under certain circumstances, the nonperformance of contractual duties is excused: Impossibility of Performance Commercial Impracticability

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved Force Majeure Clauses  The parties may agree in their contract that certain events will excuse nonperformance of the contract force majeure clauses:  These clauses are called force majeure clauses: e.g., Natural disasters e.g., Labor strikes e.g., Shortages of raw materials

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved Types of Performance of Contract Type of PerformanceLegal Consequence Complete PerformanceThe contract is discharged. Substantial Performance (minor breach) The non-breaching party may recover damages caused by the breach. Inferior Performance (material breach) The non-breaching party may either: (1)Rescind the contract and recover restitution, or (2)Affirm the contract and recover damages.

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved Rescission and Restitution Rescission  An action to rescind (undo) the contract  Available if there has been a material breach of contract, fraud, duress, undue influence, or mistakeRescission  An action to rescind (undo) the contract  Available if there has been a material breach of contract, fraud, duress, undue influence, or mistakeRestitution  Returning of goods or property received from the other party to rescind a contract  If the actual goods or property is not available, a cash equivalent must be madeRestitution  Returning of goods or property received from the other party to rescind a contract  If the actual goods or property is not available, a cash equivalent must be made

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved Monetary Damages monetary damages  A non-breaching party may recover monetary damages from a breaching party  Monetary damages are available whether the breach was minor or material: Compensatory damages Consequential damages Liquidated damages Nominal damages

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved Compensatory Damages  Award of money intended to compensate a non-breaching party for the loss of the bargain  They place the non-breaching party in the same position as if the contract had been fully performed by restoring the “benefit of the bargain”

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved Mitigation of Damages  A non-breaching party is under a legal duty to avoid or reduce damages caused by a breach of contract  The extent of mitigation depends on the type contract involved

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved Consequential Damages  Foreseeable  Foreseeable damages that arise from circumstances outside the contract  To be liable for these damages, The breaching party must know or have reason to know that the breach will cause special damages to the other party

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved Liquidated Damages (1 of 2)  Damages to which parties to a contract agree in advance if the contract is breached  To be lawful, The actual damages must be difficult or impracticable to determine, and The liquidated amount must be reasonable in the circumstances

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved Liquidated Damages (2 of 2)  Many businesses include liquidated damages in their commercial contracts, which help to: Provide certainty, Avoid lawsuits, and Provide an incentive to enter into contracts

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved Equitable Remedies  Equitable remedies are available if there has been a breach of contract that cannot be adequately compensated by a legal remedy  They are also available to prevent unjust enrichment

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved Types of Equitable Remedies (1 of 2) Type of Equitable RemedyDescription Specific PerformanceCourt orders the breaching party to perform the acts promised in the contract. The subject matter of the contract must be unique. ReformationCourt rewrites a contract to express the parties’ true intentions. Usually used to correct clerical errors.

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved Types of Equitable Remedies (2 of 2) Type of Equitable RemedyDescription InjunctionCourt order that prohibits a party from doing a certain act. Available in contract actions only in limited circumstances.

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved Torts Associated With Contracts  The recovery for breach of contract usually is limited to contract damages  The major torts associated with contracts are: Intentional Interference with Contractual Relations Breach of the Implied Covenant of Good Faith and Fair Dealing

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved Tort Damages: Compensatory Damages  These include compensation for personal injury, pain and suffering, emotional distress, and other injuries caused by the defendant’s tortious conduct

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved Tort Damages: Punitive Damages  Damages that are awarded to: Punish the defendant Deter the defendant from similar conduct in the future Set an example for others  These are recoverable against a defendant for intentional or egregious conduct

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved Intentional Interference with Contractual Relations  A tort that arises when a third party induces a contracting party to breach the contract with another party  The following elements must be shown: A valid, enforceable contract between the contracting parties Third-party knowledge of this contract Third-party inducement to breach the contract

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved Breach of the Implied Covenant of Good Faith and Fair Dealing  Under this covenant: The parties to a contract are held to the express terms of the contract, and They are also required to act in good faith and deal fairly in all respects in obtaining the contract  A breach of this implied covenant is a tort for which tort damages are recoverable