Contractual Obligations and their Enforcement Business Law Ch 11 Contractual Obligations and their Enforcement

Transfer of Contractual Rights Assignment – Transfer of a right a party may have under a contract to another Assignor – The party who transfer the contractual rights Assignee – Party who receives this contractual right Assignment does not need to be supported by consideration to be legally effective

Transfer of Contractual Rights Assignee “stands in the shoes of the assignor” Means that the assignee receives exactly the same contractual rights and duties as the assignor Assignor typically does not promise that the obligor (one who owes a duty under a contract) will perform as promised in the original contract If the obligor breaches, the assignee, not the assignor, must sue for breach.

Assignable Rights A party may assign contractual rights to another, providing performance (fulfillment of contractual promises as agreed) will not be materially changed.

Non-Assignable Rights Contractual rights may not be assigned if performance requirements would be materially changed

Non-Assignable Rights Other situations: Rights created under a contract that prohibits transfer of a contractual right Claims for damage for personal injuries Claims against the United States Rights to personal service, especially those of a skilled nature, or when personal trust and confidence are involved Assignments of future wages, as limited by state statutes.

Form of Assignments Assignment of contractual rights usually is made voluntarily Assignments may be written or oral No consideration is necessary to make a valid assignment

Notice of Assignment Until notified that an assignment has occurred, the obligor may continue to pay assignor. After notification, obligor is liable to assignee for performance. Assignee should properly notify the obligor of the assignment

Delegation of Contractual Duties Delegation of Contractual Duties – Transfer of a routine obligation of a party that must be performed to fulfill a contract to another party Person who delegates duties is still remains legally obligated and responsible for proper performance A person cannot delegate to another any duty where performance requires unique personal skill or special qualifications

Discharge of Contractual Obligations: By Performance Discharge of a contract – Termination of duties that ordinarily occur when the parties perform as promised Most contracts are discharged by complete performance Breach of Contract – Failure to provide complete performance

By Performance Cancellation – Breach of a sales contract under the UCC Substantial Performance – Just about all the duties are performed but a minor duty under the contract remains Defaults – Fails to perform Anticipatory Breach – Notifies the other party to a contract before the time of performance has arrived that he or she will not perform.

Timing of Performance Contract does not say when performance must be done - The duty must be performed within a reasonable time Contract identifies a date for performance – Courts will rule it as a minor breach Contract identifies the date and that “time is of the essence” – Courts will rule it as a major breach

By the Initial Terms Parties may agree that the contract will terminate: On a specific date or upon the expiration of a specified period of time Upon the occurrence of a specified event Upon the failure of a certain event to happen At the free will of either party upon giving notice

By Subsequent Agreement Parties may mutually agree to change either the terms of the contract or the nature of their relationship Rescission – The parties may agree to unmake or to undo their entire contract from its very beginning Substitution – Replace the present contract with a new contract

By Subsequent Agreement Accord and Satisfaction – Accord is an agreement to substitute a new contractual obligation for an existing one if the new obligation is satisfactorily performed. Satisfaction is the actual performance of the new obligation. Discharges the previous obligation If performance in the accord is not rendered, the old contract remains in effect. Novation – A party entitled to receive performance under a contract may release the other party from the duty of performance and accept a substitute party. New contract is formed

By Impossibility of Performance Impossibility of Performance refers to extreme external conditions rather than an obligor’s personal inability to perform Discharges contractual obligations Escape Hatch – language in contract that permits modification or even termination of performance without liability for damages in the event of an inability to perform on schedule because of specified conditions

By Operation of Law A contract may be discharged or the right to enforce it may be barred by operation of law Persons debts are discharged in bankruptcy Also happens when the time allowed for enforcement of the contract has elapsed because of statute of limitations Alteration (material change in the terms of a written contract without the consent of the other party) discharges the agreement by operation of law

By Tender of Performance Tender – A ready, willing, and able offer to perform an obligation If the duty requires the doing of an act, a tender that is made in good faith but is rejected will discharge the obligation of the one offering to perform. If obligation requires the payment of money, rejection of a tender to pay the money does not discharge the debt nor does it prevent the creditor from colleting later

By Tender of Performance To be valid, the tender of money must consist of the exact amount due in currency or coins, or legal tender A tender of only part of the debt is not a valid tender Creditor may refuse it without losing the right to later collect the entire amount due.

11-1 Assessment Turn to page 196 and complete the 11-1 assessment

11-1 Assessment Answers B (Assignor) False A (Complete Performance) A (Novation)

11-1 Assessment Answers Yes, the performance can be delegated as it does not require special skills or qualifications. Yes, any delegation of duties leaves the delegator still liable to the other contracting party. No, the contract is based on trust from 12 years of experience and the qualifications and skill of Quality. Yes, time truly is of the essence in this situation. Just putting the statement in the contract, however, would not make it so.

Remedies Possible for Breach Remedy – Legal means by which a right is enforced or a right’s violation is prevented or redressed. Different remedies are available depending on whether the breach is major or minor.

Remedy for a Minor Breach Only remedy generally available for a minor breach is MONEY DAMAGES. Party injured by a minor breach generally must continue to perform the duties defined by the contract Amount of damages would be whatever it took to complete the minor duty left undone Recovered by suit if victim already paid Deduct from the money due

Remedies for Major Breach Major breach – Injured party need not continue performing the duties defined by the contract. In addition: Rescission and Restitution – Canceling the contract and returning whatever has been received under it. Money Damages – The payment of money to compensate for injury. Specific Performance – A court order commanding the breaching party to perform what was promised in the contract

Rescission and Restitution Intended to place the parties in the same legal position they were in before contracting. Rescission – Allows the parties to treat the contract as canceled. All contractual obligations of the parties are canceled. Restitution – Permits each party to recover money or property given to the other party

Money Damages Money damages may be: Compensatory Consequential Punitive Liquidated

Compensatory Damages Seeks to restore injured parties to the same financial position they were in prior to the breach

Compensatory Example Charlotte, a home broker contracted to buy a house from Ben for $65,000, knowing that the fair market value of the property was considerably higher. To facilitate the purchase Charlotte then spent $3000 on a title search, a survey, an appraisal, loan origination fee, and other expenses. If Ben then committed a material breach, for refusing to sell, a court would award Charlotte$3000 as compensatory damages.

Consequential Damages Tries to place injured parties in the same financial position they would have been in if the contract had been performed. Grants money for the foreseeable injuries caused by the breach Consequential damages generally are foreseeable when a reasonable person would know that a breach would cause the injury or has been explicitly notified of same.

Consequential Example Charlotte brags to Ben that because they contracted, she has arranged the resale of his property for $85000. Upon hearing this Ben refuses to go through with their contract. As a result, Charlotte loses her buyer at $85000. Ben will be liable for consequential damages in the amount of Charlottes lost profit of $20000.

Punitive Damages When Fraud or Intentional Tort is involved in a breach of contract Damages added to other money damages Purpose is to punish and to make an example of the defendant

Liquidated Damages Parties to a contract sometimes agree on a certain amount of monetary damages that will be paid if a particular contract breach occurs Typically placed in a contract when an actual damage amount would be too speculative or too difficult to arrive at in court. If liquidated damage amount is excessive in relation to the injury, the clause will not be enforceable

Nominal Damages Token amount to acknowledge that a wrong has been done.

Specific Performance Decree (order) that the breaching party do exactly what was required under the contract A court will not award the remedy unless the party seeking it is blameless and has acted reasonably and fairly throughout the transaction Available when the subject of the contract is unique Courts are reluctant to grant specific performance in situations where they would have great difficulty in supervising the results. Examples – Personal Service or Employment

Factors Affecting Choice of Remedy Conflict of Remedies Often electing to pursue one remedy will rule out pursuing another Specific Performance and Damages cannot be recovered for the same breach Rescission and Restitution pre-contract position and Damages is a post-contract financial position

Factors Affecting Choice of Remedy Duty to Mitigate Mitigate the Damages - A party injured by a breach of contract is required by law to take reasonable steps to minimize the harm done If injured party fails to take reasonable steps to mitigate the damages, the amount of potential recovery is lessened by the amount that could have been mitigated

Factors Affecting Choice of Remedy Waivers Sometimes a party intentianally and explicitly gives up contractual rights Example: “I will accept your overdue payment without a late charge”

Statute of Limitations Period of time in which to bring suit Time period varies among states 4 years is common for contracts 3 years is common for torts UCC provides that an action for breach of contract for the sale of goods must be begun within 4 years after the cause of action arises Parties may shorten the period

Bankruptcy Discharging (or excusing) of debt. Debtors get a fresh start Estate is distributed among various claimants in order to discharge many of the bankrupt's debt

11-2 Assessment Turn to page 201 and complete the 11-2 Assessment

11-2 Assessment Answers C (Specific Performance) True B (the subject matter of the contract is unique) D (None of the above can be pursed at the same time)

11-2 Assessment Answers No. The coach is not legally free to change employers. This would be a breach of his contract. Yes. Bethlehem Steel is liable for $52000. The liquidated damage clause is clear and the amount is not punitively excessive Yes. Consequential damages that are generally foreseeable can be recovered. Pyramid can assert that the statute of limitations has passed.