Business Law II Professor Pamela Gershuny Fall 2011

B USINESS L AW II Contract Relationships

B USINESS L AW II Contract Relationships 1.Collateral Promises 2.Assignment Relationships 3. Delegation Relationships Contract Relationships (3)

B USINESS L AW II Contract Relationships

Third Party Rights Privity of Contract –Only parties have rights and duties under the K Two Exceptions: –Assignment = right to demand performance –Delegation = duty to perform

B USINESS L AW II Contract Relationships Collateral Promises

B USINESS L AW II Contract Relationships Original Contract A (Debtor)B (Creditor) Collateral Promises

B USINESS L AW II Contract Relationships Original Contract A (Debtor)B (Creditor) C (Third Party) Collateral Promises

B USINESS L AW II Contract Relationships Promise to Answer for A’s Debt (Requires a Signed Writing to Be Enforceable Against C) Original Contract A (Debtor)B (Creditor) C (Third Party) Collateral Promises

B USINESS L AW II Contract Relationships

B USINESS L AW II Assignment Relationships Contract Relationships

B USINESS L AW II Assignment Relationships Step 1: Original Contract Formed Horton (obligee-assignor) Brower (obligor) Contract Relationships

B USINESS L AW II Assignment Relationships Step 1: Original Contract Formed Horton (obligee-assignor) Kuhn (assignee) Brower (obligor) Contract Relationships

B USINESS L AW II Assignment Relationships Step 1: Original Contract Formed Horton (obligee-assignor) Kuhn (assignee) Brower (obligor) Step 2: Horton Assigns Rights under Contract to Kuhn Contract Relationships

B USINESS L AW II Assignment Relationships Duties Owed after Assignment Step 1: Original Contract Formed Horton (obligee-assignor) Kuhn (assignee) Brower (obligor) Step 2: Horton Assigns Rights under Contract to Kuhn Contract Relationships

Third Party Rights Assignments –Unconditional Assignment Rights of assignor extinguish Assignee has the right to demand performance Subject to defenses, e.g. fraudulent misrep Mortgage loans, accounts receivable Oral or written

Third Party Rights Assignments –Rights that cannot be assigned Express prohibition by statute Personal services Material alterations of risks or duties of performance Antiassignment clauses »Except: right to receive money, »real estate, »negotiable instruments »damages for breach or payment in a sale of goods

Third Party Rights Assignments –Assignment is effective immediately, before notice is given. However, if notice is delayed and two assignments are made, Check the jx for – first in time, first in right or –first to receive notice rule. performance can be rendered to assignor before notice is received

B USINESS L AW II Contract Relationships

B USINESS L AW II Delegation Relationships Contract Relationships

B USINESS L AW II Delegation Relationships Horton (obligee) Brower (obligor-delegator) Step 1: Original Contract Formed Contract Relationships

B USINESS L AW II Delegation Relationships Horton (obligee) Brower (obligor-delegator) Kuhn (delegatee) Step 1: Original Contract Formed Contract Relationships

B USINESS L AW II Delegation Relationships Horton (obligee) Brower (obligor-delegator) Step 2: Brower Delegates Contract Duties To Kuhn Kuhn (delegatee) Step 1: Original Contract Formed Contract Relationships

B USINESS L AW II Delegation Relationships Horton (obligee) Brower (obligor-delegator) Step 2: Brower Delegates Contract Duties To Kuhn Kuhn (delegatee) Step 1: Original Contract Formed Performance Owed after Delegation Contract Relationships

Third Party Rights Delegations –General rule: Obligee must accept performance –Obligee can only legally refuse performance if duty cannot be delegated –Breach makes delegatee liable to obligee –Delegatee and delegator can be sued

Third Party Rights Delegations –Delegator is not relieved of duty to perform is delegatee fails to perform. –Duties that cannot be delegated Special trust in obligor Personal skill or talents of obligor Material alteration in performance Express contractual prohibitions

Third Party Rights Assignment of “all rights” –Assignment + Delegation –Assignor remains liable if assignee fails to perform

Third Party Rights Third Party Beneficiaries –At formation, parties can create intended beneficiaries with legal rights who can sue promisor for breach. –Intended beneficiaries Creditor beneficiary Donee beneficiary Holsapple v. McGrath

Third Party Rights Vesting of an Intended Beneficiary’s rights –Rights vest upon Manifest assent Material alteration in position to his detriment –Rights subject to Express reservations of rights to parties –Example: beneficiary to life insurance K

Third Party Rights Intended beneficiaries occur when –performance is rendered directly to the third party –the third party has the right to control performance –the third party is expressly designated as beneficiary –Contrast: Incidental/Unintended Beneficiaries Caswell v. Zoya International, Inc.

End of Contract Relationships

B USINESS L AW II Damages

Availability A party sustains and proves an injury arising directly from the loss of the bargain. Result The injured party is compensated for the loss of the bargain. Remedy: Compensatory Damages B USINESS L AW II Damages

Sale of Goods Seller breach = KP - MP Buyer breach = lost profits Sale of Land Seller breach = specific performance If sold: Majority jx = KP-MP Non-deliberate breach = down payment + expenses Remedy: Compensatory Damages B USINESS L AW II Damages

B USINESS L AW II Damages

B USINESS L AW II Measurement of Damages Breach of Construction Contracts

Measurement of Damages: Profits. (Contract price less cost of material and labor.) Owner in Breach Before Construction has begun B USINESS L AW II Measurement of Damages Breach of Construction Contracts

B USINESS L AW II Measurement of Damages Breach of Construction Contracts

Measurement of Damages: Profits plus costs incurred up to time of breach. B USINESS L AW II Owner in Breach During construction Measurement of Damages Breach of Construction Contracts

B USINESS L AW II Measurement of Damages Breach of Construction Contracts

Measurement of Damages: Contract price plus interest. B USINESS L AW II Owner in Breach After construction is completed Measurement of Damages Breach of Construction Contracts

B USINESS L AW II Measurement of Damages Breach of Construction Contracts

Measurement of Damages: Generally, all costs incurred by owner to complete construction. B USINESS L AW II Contractor in Breach Before construction is completed Measurement of Damages Breach of Construction Contracts

Availability Special circumstances, of which the breaching party is aware of, should be aware, cause the injured party additional loss. Hadley v. Baxendale Result The injured party is given the entire benefit of the bargain. Remedy: Consequential Damages B USINESS L AW II Damages

B USINESS L AW II Damages

Availability Damages are normally available only when a tort is also involved. Result The wrongdoer is punished, and others are deterred from committing similar acts. Remedy: Punitive Damages B USINESS L AW II Damages

B USINESS L AW II Damages

Availability There is no financial loss. Result Wrongdoing is established without actual damages being suffered. The plaintiff is awarded a nominal amount (such as $1) in damages. Remedy: Nominal Damages B USINESS L AW II Damages

B USINESS L AW II Damages

Availability A contract provides a specific amount to be paid as damages in the event that the contract is later breached. Result The non-breaching party is paid the amount stipulated in the contract for the breach, unless the amount is construed as a penalty. Remedy: Liquidated Damages B USINESS L AW II Damages

Parker v. Twentieth Century Mitigation of Damages B USINESS L AW II Damages

B USINESS L AW II Equitable Remedies

Rescission and Restitution B USINESS L AW II Equitable Remedies

Rescission and Restitution The injured party is entitled to recapture a benefit conferred. Availability B USINESS L AW II Equitable Remedies Result The contract is terminated. The parties are returned to the positions they occupied before the contract was made. Racicky v. Simon

B USINESS L AW II Equitable Remedies

Specific Performance B USINESS L AW II Equitable Remedies

Specific Performance The subject matter of the contract is unique. (The legal remedy, money damages, is inadequate.) B USINESS L AW II Equitable Remedies The injured party gets the bargain promised in the contract. Availability Result

Specific Performance No collection action No need to cover Performance worth more than money B USINESS L AW II Equitable Remedies No involuntary servitude Benefits Paintings, sculptures, rare books, coins, land

B USINESS L AW II Equitable Remedies

Reformation B USINESS L AW II Equitable Remedies

Reformation B USINESS L AW II Equitable Remedies The written contract imperfectly expresses the parties’ agreement. The contract is rewritten to reflect the parties’ true intention. Availability Result

B USINESS L AW II Equitable Remedies

Quasi-contractual Recovery B USINESS L AW II Equitable Remedies

Quasi-contractual Recovery B USINESS L AW II Equitable Remedies The parties have no contract, but unjust enrichment cannot otherwise be avoided. The party who conferred the benefit gets the reasonable value of the benefit conferred. Availability Result

Quasi-contractual Recovery B USINESS L AW II Equitable Remedies Conferring a benefit on the other party With the reasonable expectation of payment Without volunteering Unjust enrichment of the recipient Elements

Election of Remedies No double recoveries UCC 2-703, Waiver of Breach –Acceptance of defective performance –Pattern of conduct/course of dealing –Partial waivers

Contract Provisions Limiting Remedies Express clauses may rule out or limit damages Limitation of liability clauses - limit remedy for breach to replacement, repair, refund Exculpatory clauses - equal bargaining positions?

End of Equitable Remedies