Contracts Third Parties Performance and Discharge Remedies Contract Negotiations Class 3

Third Party Rights A third party (someone not a party to the underlying contract) may have a legal interest in a contract and be able to enforce the contract, if there is: A “beneficiary” interest An assignment A delegation

Beneficiary Interests A third party beneficiary is someone who was not a party to the contract but stands to benefit from it. Two types: Intended beneficiaries (can enforce the contract) Incidental beneficiaries (cannot enforce the contract)

Intended Beneficiaries A beneficiary of a promise may enforce a contract if both of the contracting parties intentionally meant the third party to benefit and if Enforcing the promise will satisfy a duty of the promisee to the beneficiary or The promisee intended to make a gift to the beneficiary

Incidental Beneficiaries An incidental beneficiary is one who was not intended to benefit from the contract. The incidental beneficiary has no right to enforce the contract. The issue in enforcement actions therefore is generally whether the third party is an intended or an incidental beneficiary.

DIA v. Rose Jr. Contract Action (Or Custody Battle?) http://www.youtube.com/watch?v=j2W8ZVNK7W8 http://www.youtube.com/watch?v=j2W8ZVNK7W8

Third Party Beneficiary Meeting of the Minds Contract formed Promisor Rufus Rose Promisee NBC 2. Did NBC intend to benefit DIA? Contract Should Benefit 1. Did Rose intend to benefit DIA ? 3. Did NBC (a) have a duty to DIA or (b) intend to make a gift to DIA? Third Party Beneficiary DIA Puppet Museum

Assignment and Delegation A contracting party may transfer his or her rights under a contract – this is an assignment. A contracting party may transfer his or her duties under a contract – this is a delegation.

Assignment A contract must first exist. There will be an obligor and an obligee. One of the parties (the obligee) transfers his rights under a contract to a third person. The person transferring – or assigning – his rights is the assignor. The person receiving the assignment is the assignee. The obligor now owes the money to the assignee.

What rights are assignable? Assignment is okay unless: The assignment substantially changes the obligor’s rights or duties under the contract; It is prohibited by public policy or law; The contract is for specific personal services; or The underlying contract forbids assignment.

How Rights are Assigned? May be written or oral contract, subject to requirements of the Statute of Frauds.

Enforcement of the Contract Once the assignment is made and the obligor notified, the assignee may enforce the contract against the obligor. The obligor may raise all defenses against the assignee that he or she could have raised against the assignor.

Delegation A contract must first exist. There will be an obligor and an obligee. One of the parties (the obligor) transfers his duties under a contract to a third person. The person transferring – or delegating – his duties is the delegator. The person receiving the delegation is the delegatee. The delegatee now owes the duty (usually money) to the obligee. The delegator remains ultimately responsible for the performance under the contract.

What duties can be delegated? Delegation is okay, unless: Prohibited by law or public policy Prohibited by the terms of the contract If obligee has a substantial interest in personal performance by obligor.

Enforcement of the Contract Once the delegation has been made, the obligee may enforce the contract against the delegatee. If the delegatee does not perform, the obligee may enforce the contract against the obligor/delagator.

Novation A novation is a three-way agreement in which one party transfers all her rights and duties to a third party. Both original parties agree to the novation. Essentially the third party substitutes in for one of the original parties to the contract. The obligee agrees to look only to the third party for performance.

When does the contract end? A contract is finished (executed) when performance is complete. A contract also may come to end upon “discharge” of a non-performing party.

Discharge of Duties A party is discharged from contractual obligations when he or she has no more duties under the contract.

Discharge of Duties Contractual duties may be discharged by: Performance of all contractual duties Or occurrence of a condition excusing the duty By agreement Impossibility of performance Commercial Impracticability

Conditions A condition is an event that must occur before a a duty to perform arises or which discharges a duty that has already arisen. How are they created? By words or conduct; by law No special language is necessary to create a condition.

Classification of Conditions Classification historically was based on the time when the conditioning event was to happen in relation to the duty to perform. Condition Precedent Condition Subsequent Concurrent Condition

Performance The contract ends when it is fully executed – that is when both parties fully perform their obligations under the contract.

Breach Any failure or refusal to perform a contractual duty constitutes a breach. When one party breaches a contract, the other party is discharged.

Performance Strict – or absolute and complete – performance is generally not required unless the contract expressly demands it and the demand is reasonable. If the contract is substantially performed, the performing party is discharged – but may be liable for any loss caused by the deviations from the contract.

Washington Law There is “substantial performance” of a contract, where the variations from the contract specifications are inadvertent and unimportant and may be remedied at relatively small expense. Forrester v. Craddock, 51 Wn.2d 315 (1957)

Personal Satisfaction Contracts This is a contract in which the promisee makes a personal subjective evaluation of the promisor’s performance. Dissatisfaction results in termination of the contract. In Washington the dissatisfaction must be based on reasonable grounds. Omni Group, Inc. v. Seattle-First Nat’l Bank, 32 Wn. App.22 (1982).

Good Faith Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement. Restatement (Second) of Contracts § 205

Washington Law Every contract carries with it an implied covenant of good faith and fair dealing that obligates the parties to cooperate with one another so that each may obtain the full benefit of performance. Ross v. Ticor Title Ins. Co., 135 Wn. App. 182 (2006)

Material Breach A party will be relieved of his or her responsibilities under a contract if the other party has committed a material breach of the contract. This is a breach that substantially harms the innocent party and for which it would be hard to compensate without terminating the contract.

Anticipatory Repudiation Occurs when one of the parties to a bilateral contract either expressly or impliedly repudiates the contract prior to the time of performance. Must be a positive statement or action indicating distinctly and unequivocally that the repudiating party will not substantially perform.

Discharge By Agreement Parties can end the contract by agreement through Rescission Novation Accord and satisfaction

Impossibility of Performance If a party is unable to perform a contract because performance becomes “impossible,” then the performance is excused.

Commercial Impracticality If circumstances change (that neither party anticipated), leaving one party at a significant commercial disadvantage, that party may be excused from the contract under the theory of commercial impracticality. If the change could have been foreseen, the court will generally not afford relief.

Commercial Impracticality Mere financial difficulties are not enough The event must have been unexpected No other reasonable method of complying with the contract are available A force majeure clause may support a claim of impracticality

Remedies for Breach If one party fails to live up to the terms of the contract, the other party may sue. The remedy is how the court compensates the injured party.

Types of Remedies Money damages based on Performance of the Contract Expectation of contract performance Actions taken in reliance on Performance of the Contract Rescission and Restitution Reformation of the Contract

Expectation Interest Designed to put the injured party in the position he or she would have been in if the contract had been fully performed. Three types of monetary damages are awarded in contract actions: Compensatory Consequential Incidental

Compensatory Damages These damages flow directly from the contract – damages that inevitably result from the breach.

Washington law The general measure of damages for breach of contract is that the injured party is entitled (1) to recovery of all damages that accrue naturally from the breach, and (2) to be put into as good a pecuniary position as he would have had if the contract had been performed. Diedrick v. School Dist. No. 81, 87 Wn.2d 598 (1976)

Consequential Damages These are damages that result from the unique circumstances of the injured party. The injured party must prove that the breaching party had reasonable notice of the special circumstances and that a breach would cause the damages suffered. http://www.uncut.co.uk/news/smashing_pumpkins/news/11271

Incidental Damages The minor costs associated with responding to a breach of performance.

Reliance Interest Where the expectation interest of a contract cannot be established a party injured by a breach may be entitled to damages that will restore the party to the position he would have been in if he had not entered into the contract.

Restitution Interest Rescission results in a cancellation of the contract. Generally occurs if there was fraud, mistake, duress or undue influence (something affecting the genuiness of assent). If a contract is rescinded, both parties must make restitution to each other. Both parties are returned to the position they were in prior to the contract.

Additional Equitable Remedies Specific performance Injunction Reformation of the contract

Specific Performance Specific Performance is an appropriate remedy where damages would not be adequate or where no alternative comparable product is available. This remedy is generally only available in cases involving the sale of land or some other asset that is unique.

Reformation A very rare remedy in which a court will partially rewrite the contract if it believes the agreement contains a simple mistake and does not reflect the true intentions of the parties.

Mitigation The law does not permit a party to recover damages for breach of contract if the damages could have been avoided without undue risk, burden or humiliation. A party must exercise reasonable efforts to mitigate damages.

Liquidated Damages Damages specified within the contract itself – a liquidated damages clause states, in advance, how much a party must pay if he or she breaches the contract. Washington upholds these clauses unless it appears to be a “penalty” and so long as the agreement is fair.

Attorney Fees and Costs A court will enforce a contract term requiring the losing party in an action on the contract to pay the other party’s attorney fees and litigation costs.