Contractual Obligations and Their Enforcement

1. Contractual Obligations and Their Enforcement Chapter 11

2. The Transfer of Contract Rights and Duties • Assignment—the transfer of a right a party may have under a contract to another party • Assignor—party who transfers the right • Assignee—party who receives the right • From the perspective of the courts, the assignee “stands in the shoes of the assignor” • Assignee receives exactly the same contractual rights and duties as the assignor had—no more, no less • If a contractual right is transferred, it does not affect the legal rights of the other party to the contract

3. The Transfer of Contract Rights and Duties • In all assignments, the assignor guarantees to the assignee that the assignor has the right to assign and that the assigned right is legally enforceable • The assignor does not promise that the obligor (the one who owes a duty under the contract) will perform as promised in the original contract • If the obligor breaches, the assignee, not the assignor, must sue for breach

4. The Transfer of Contract Rights and Duties • Assignable Rights • Generally, a party may assign contractual rights to another, provided performance will not be materially changed • Performance is the fulfillment of contractual promises as agreed • Non-Assignable Rights • Contractual rights may not be assigned if performance requirements would be materially changed as a consequence • A right created under a contract that prohibits transfer of the contractual rights • Claims for damages for personal injuries • Claims against the United States • Rights to personal services, especially those of a skilled nature, or when personal trust and confidence are involved • Assignments of future wages, as limited by state statutes

5. The Transfer of Contract Rights and Duties • Form of Assignments • Assignment of contractual rights usually is made voluntarily by the assignor. • While an assignment is usually valid whether oral or written, a written assignment is always wiser • Some state statutes require that certain assignments be written • No consideration is necessary to make a valid assignment • Notice of Assignments • Until notified that an assignment has occurred, the obligor may continue to pay the assignor • After notification, the obligor is liable to the assignee for performance

6. The Transfer of Contract Rights and Duties • Delegation of Contractual Duties • The routine obligations of a party that must be performed to fulfill a contract often can be transferred to another to perform • Delegation of duties • A person who delegates contractual duties remains legally obligated and responsible for proper performance even though someone else may do the required work • A person cannot delegate duties to another where performance requires unique personal skill or special qualifications • A contract creating a duty can prohibit delegation

7. Discharge of Contractual Obligations • By Performance • Discharge—termination of duties that ordinarily occurs when the parties perform as promised • Most contracts are discharged by complete performance of the terms of the contract • BREACH OF CONTRACT—failure to provide complete performance • Significance of breach determines what the non-breaching party can do in response • When one party fails to perform a crucial duty under a contract, the other party may treat such a failure as a major breach and regard his/her own obligation as discharged

8. Discharge of Contractual Obligations • By Performance continued • Substantial performance—when just about all of the contractual duties are performed but a minor duty under the contract remains • There has only been a minor breach therefore, it does not discharge the duties of the non-breaching party the way a major breach does • The party who has substantially performed can sue and recover what was due; less the cost of completing the remaining work • If the failure was deliberate, however, the non-breaching party may treat it as a major breach

9. Discharge of Contractual Obligations • By Performance continued • Default—failure to perform • Anticipatory breach—a party defaults and notifies the other party to a contract before the time of performance has arrived that he/she will not perform • The non-breaching party may wait until the time of performance or may treat the notice as evidence of a breach of contract and immediately sue for damages

10. Discharge of Contractual Obligations • By Performance continued • Timing of Performance • Contracts often identify a duty but don’t say when it must be performed • In this case, the duty must be performed within a reasonable time • If it is not, this is a breach • A judge or jury determines a reasonable time after examining the circumstances in each case • In other instances, the contract identifies a date for performance • Most courts will rule that performance shortly after the date is only a minor breach • If a contract states that performance is to occur by a specific date and that “time is of the essence” failure to perform is considered a major breach

11. Discharge of Contractual Duties • By the Initial Terms • When parties prepare their contracts, they may agree that it will terminate: • On a specified date or upon the expiration of a specified time period • 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

12. Discharge of Contractual Duties • By Subsequent Agreement • The parties who have made a contract may later mutually agree to change either the terms of the contract or the nature of their relationship • They may do so without any liability for breach in any of the following ways • Rescission—parties may agree to unmake or undo their entire contract form its very beginning • Accord and Satisfaction—parties may decided that the present contract is not what they want, and so replace it with a new contract • Novation—a party entitled to receive performance under a contract may release the other party from the duty of performance and accept the substitute party

13. Discharge of Contractual Duties • By Impossibility of Performance • Generally, impossibility of performance refers to extreme external conditions rather than an obligor’s personal inability to perform • Examples: • Surprise war • Unexpected embargo • Earthquake • Impossibility of performance also may be used to discharge contractual obligations when events on a smaller scale interfere • Unique subject matter identified in the contract is destroyed before it can be delivered • A performance becomes illegal before it can be rendered • The death or disability of someone who was to provide a personal service that only that person could render

14. Discharge of Contractual Duties • By Operation of Law • A contract may be discharged or the right to enforce it may be barred by operation of law • Debts discharged in bankruptcy • Time allowed for enforcement of the contract has elapsed because of the statute of limitations • Alteration—a material change in the terms of a written contract without the consent of the other party—the alteration must be: • Material—thus changing the obligation in an important way • Made intentionally—not by accident or mistake • Made by a party to the agreement or by an authorized agent • Made without the consent of the other party

15. Discharge of Contractual Duties • 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 the obligation requires the payment of monies, rejection of an offer to pay the money does not discharge the debt nor does it prevent the creditor from collecting later • Relieves the debtor of court costs or future interest charges that might become due • Tender must consist of the exact amount due in currency or coins—legal tender

16. Remedies for Breach • Remedy—the action or procedure followed to enforce a right or get damages for an injury to a right • Remedy for a Minor Breach • Money damages • The party injured by a minor breach generally must continue to perform the duties defined by the contract • The amount of damages would be whatever it took to complete the minor duty • They could be deducted from the money due the breaching party • They could be recovered by suit if the victim had already paid

17. Remedies for Breach • Remedies for a Major Breach • If the breach is classified as major, then the injured party need not continue performing the duties defined by the contract • In addition, the victim may choose among the following remedies: • Rescission and restitution • Money damages • Specific performance

18. Remedies for Breach • Remedies for a Major Breach • Rescission and Restitution • Rescission—allows the parties to treat the contract as cancelled • Restitution—permits the injured party to recover money or property (or the value thereof) given to the defaulting party

19. Remedies for Breach • Remedies for a Major Breach • Money Damages • Compensatory—seeks to place the injured parties in the same financial position they would have been if there had no breach • Consequential—court tries to place the 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 • Punitive—added to other money damages—used to punish or make an example of the defendant • Liquidated—parties to a contract sometimes agree that a certain amount of money will be paid if a certain breach occurs • Nominal—token amount even when no substantial harm has been done

20. Remedies for Breach • Remedies for a Major Breach • Specific Performance • Sometimes the only remedy for breach of contract is to order that the breaching party do exactly what was required under the contract • Generally available when the subject of the contract is unique such as in the purchase of a 1932 Rolls Royce or a specific parcel of land • Courts are reluctant to grant specific performance in situations where they would have difficulty supervising the result • Courts can issue an injunction prohibiting the defaulting party from working for anyone else during the period of time agreed to under the contract • Specific performance is an equitable remedy—the court will not award the remedy unless the party seeking it is blameless and has acted reasonably and fairly throughout the transaction

21. Factors Affecting Choice of Remedy • Conflict of Remedies • Electing to pursue one remedy will rule out pursuing another • Specific performance and damages cannot be recovered for the same breach • Rescission and restitution cannot be combined with damages • Duty to Mitigate • A party injured by a breach of contract is required by law to take reasonable steps to minimize the harm done • If the 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

22. Factors Affecting Choice of Remedy • Waivers • Sometimes a party intentionally and explicitly gives up a contractual right • Statute of Limitations • Statutes in all states deny any remedy if suit is not brought within a certain time after a legal claim arises • Bankruptcy • Under the U.S. Constitution, Congress has established uniform laws on bankruptcies that permit the discharge of debts • Debtors can get a fresh start, and creditors share fairly in whatever assets are available

23. Marriage and Contracts • Marriage is a legal union of two people • No law specifies a minimum age for dating, although there are still state laws setting a minimum age for marriage without parental permission (typically 18) • No law restricts marriage partners with one exception, close relatives may not marry

24. Marriage and Contracts • Contractual Elements of Premarital Relationships • If one party proposes marriage and the other accepts, a binding contract results • If both later mutually agree to end their engagement, the law considers their agreement void and never to have existed • If only one party wants out of the contract and refuses to perform, a breach-of-promise suit may be brought by the other party • When a relationship breaks down, gifts given by one party to the other may create legal problems • Engagement rings may be ordered to be returned • Some states allow the woman to keep the ring if the man breaks off the engagement

25. Marriage and Contracts • Contractual Elements of Premarital Relationships • Statutory Requirements • Each state has its own requirements for marriage • Most couples begin the process by obtaining a marriage license (revenue license) • Some states require a blood test to show that applicants are free of communicable diseases • A mandatory waiting period of three days form application issuance is common • Once the license has been issued, any authorized religious or civil officials can perform the ceremony

26. Marriage and Contracts • Contractual Elements of Marital Relationships • Marital Consortium • Mutual duties of married couple • If either spouse suffers and injury that prevents the fulfillment of these marital duties, the other can sue the party who caused the harm for damages of the “loss of consortium” • The most important duty of both spouses is to provide for the support, nurture, welfare, and education of their children • Rights and Duties of Parenthood • Parents are obligated by law to support their children until they reach adulthood • An exception is an emancipated minor • Financial support is a joint obligation • Both parents in a married couple have custody rights to their children

27. Marriage and Contracts • Contractual Elements of Marital Relationships • Property Rights and Duties • Property acquired during the marriage may be kept in the name of one or both of the married couple • Either marital partner can buy or sell property of all types in his or her own name and have sole control of the respective earnings and credit • Keeping a spouse from getting property rights can be accomplished through a prenuptial agreement • Give up any future claim they might have to part or all of the other’s property • The actions of one spouse may incur a liability for the other • Stay-at-home spouse—person working is responsible for the debts incurred by the other spouse in purchasing food, clothing, medical care, furniture, and any other household necessities

28. Marriage and Contracts • Common Law Marriage • Have their roots in the American frontier • Many pioneers could not follow the legal methods for becoming husband and wife • Law recognized common-law marriages that occurred when a single man and a single woman lived together, shared property, and held themselves as husband and wife for a prolonged time period (usually 10 years) • Today about ¼ of states fully allow common-law marriages

29. Ending the Marriage Contract • By annulment • Annulment—a court order that cancels a marriage because of a problem that existed from the beginning of the marriage • Annulments serve to end marriages considered to be either voidable or void • Voidable: • Refusal to have children • Fraudulent grounds • Void • Created when laws are violated by the matrimonial union

30. Ending the Marriage Contract • By Divorce • Dissolution of the marriage • Court action that terminates the marriage and divides the property and responsibilities between parties • Separation • First step toward divorce • Spouses maintain separate living quarters, but marital rights and obligations remain intact • No Fault Divorce • In a no-fault divorce proceeding, there is no assignment of fault for the dissolution • Irreconcilable differences

31. Ending the Marriage Contract • Typical Issues in a Divorce • Division of Property • In most states, marital property laws are based on English Common Law • Property brought into a marriage by a spouse will remain that spouse’s property should the marriage end • During the marriage, whatever is earned, inherited, or received as a gift remains the property of the spouse who earned or received it • States that do not follow this are called community property states • Half of all property acquired by the marital partners during marriage is presumed to belong to each • Property owned by either spouse at the time of the marriage or received by gift or inheritance during the marriage remains each spouse’s own • Most state laws provide some type of equitable distribution of marital property upon the dissolution of the marriage

32. Ending the Marriage Contract • Typical Issues in a Divorce • Child Custody and Support • Concerned with the division of the physical and other cares and control responsibilities for a child • The welfare of the child is the most important consideration in determining who will have custody of the child • Considerations: • Parents’ wishes as to custody • Child’s wishes as to custody • Child’s relationship with parents, siblings, and others who may affect the child’s best interest • Child’s adjustment to home, school, and community • Physical and mental health of all persons concerned • Joint Custody—both parents remain involved • Child support—parents are obligated to provide a dependant child with appropriate maintenance

33. Ending the Marital Contract • Typical Issues in Divorce • Alimony • Support paid by the wage earner of the family to the other spouse • Usually paid at regular intervals • In some cases may be a lump-sum • Not intended to penalize the person ordered to pay • Factors considered by the court: • Paying spouse’s income • Financial responsibilities • Earnings outlook • Current debts • Number of dependants