Third Party Rights, Discharge, Breach and Remedies

1. Chapter 9 Third Party Rights, Discharge, Breach and Remedies

2. Third Party Rights Brennan owes Adler $1,000 on a promissory note. Adler, for consideration, gives Carson the right to be paid the $1,000 that Brennan owes to Adler. Can they do this? Yes; this is an assignment of a debt. The debt is usually evidenced by a note; here the note has been assigned to Carson, probably for some cash payment to Adler of less than the face value of the note. Adler is the assignor; Carson is the assignee. How are assignments used? Why are they important?

3. Third Party Rights Brennan owes Adler$1,000 under a contract in which Brennan agreed to buy Adler�s computer. Adler assigns his right to receive the $1,000 to Carson. Brennan, in deciding to purchase the computer, relied on Adler�s fraudulent misrepresentation that the computer had a 120 gb hard drive. When Brennan discovers it only has a 20 gb drive, he returns it to Adler and cancels the deal. What happens to Carson in this instance? Brennan has a defense to payment under the contract because of the fraudulent misrepresentation and does not have to pay the $1,000 to Carson. Carson has to look to Adler for any relief.

4. Third Party Rights Assignment v. Delegation Contractual rights are transferred to third parties by assignment. Contractual duties are transferred to third parties by delegation. IN GENERAL, CONTRACTUAL RIGHTS ARE ASSIGNABLE AND CONTRACTUAL DUTIES ARE DELEGABLE. THERE ARE EXCEPTIONS, HOWEVER

5. Third Party Rights Adler needs some cash. He doesn�t have much of a way to raise the money, but he works in a high-risk job where injuries are common. He offers to assign Brennan any future workers� comp benefits he may receive if he�s injured on the job if Brennan will give him $500 today. Can he do this? No, most states prohibit assignments of future workers comp benefits; against public policy. So, the general freedom to assign contract rights can be limited by statute.

6. Third Party Rights Brennan signs a contract with Adler to be a math tutor to Adler�s kids. Carson, whose kids are brats, can�t find a tutor for them, and so he offers Adler a bunch of money if Adler will assign his right to have Brennan tutor Adler�s children to Carson, so Carson�s brats will pass geometry. Remember that contract rights are generally assignable. But are these rights assignable? No, the contract in this instance is considered a personal services contract. The particular identity of the people involved is itself a material term of the agreement that would be changed if an assignment were allowed. Rights to receive personal services can�t be assigned, at least not without consent of the person rendering the services.

7. Third Party Rights Adler has an office building and he takes out a fire insurance policy on it with Carson Insurance Co. Brennan also owns an office building that is built of substandard materials, and located in an area where arson is prevalent. Brennan can�t get any fire insurance. But if contracts are generally assignable, why can�t he pay Adler and have Adler assign Brennan the right to receive payment if Brennan�s building burns down? Such an assignment would materially alter the risk undertaken by a party to the contract. The assignment cannot have the affect of changing the original agreement.

8. Third Party Rights Brennan contracts to build a house for Adler. The contract says that neither party can assign the contract without the prior consent of the other party, and that any attempted assignment will be void. Nevertheless, Adler wants to assign the contract to Carson. Can he? No, he can�t. It is an exception to the general rule that contract rights are assignable that they are not assignable if the contract provides they are not. However, this exception has several exceptions.

9. Third Party Rights Exceptions to the Exception � or, in what situations may one be able to assign a contract or a right even if the contract itself says that you can�t? the right to merely receive money under a contract can generally always be assigned; it furthers a public policy of free flow of funds and credit. The assignment of interests in real estate cannot be prohibited; these kind of restrictions are called restraints on alienation. Again, it�s a public policy thing. What do you think is the policy? Negotiable instruments (checks, notes, drafts) can normally always be assigned. In a contract for the sale of goods under the UCC , the right to receive damages for breach of contract or for payment of an account can be assigned even if the contract says they can�t.

10. Third Party Rights Brennan agrees to tutor Adler in financial underwriting and investment banking. Brennan is a renowned expert in these fields. Brennan gets a chance to take a leave of absence in Europe for 6 months, so he delegates the contract to tutor Adler to Dunlap, a local banker. Is this OK? No, Adler contracted for Brennan�s particular expertise. This duty cannot be delgated because high finance lessons by Dunlap are not a fair substitute for lessons by Brennan.

11. Third Party Rights Brennan contracts with Adler to personally mow Adler�s lawn during June, July and August. Brennan later decides he wants to spend the summer touring the Orient. Brennan delegates the lawn mowing to Conrad, who has a landscaping and mowing business and is a better lawn mower than Brennan could ever be. How about this? No matter how good Conrad is, this delegation can�t be made without Adler�s consent. The contract was for Brennan�s personal performance.

12. Third Party Rights Brennan contracts with Adler to pick up and deliver heavy construction equipment to Adler�s property. Brennan delegates this to Carson, who has a heavy equipment trucking company. Is this delegation OK? Yes, this is OK, since the duty is routine and non-personal. Brennan is still liable if Carson messes up, however.

13. Third Party Rights In the last example, must Adler accept performance of his agreement with Brennan from Adler? Yes, if the duty is �delegable� then the performance by the delegatee is the equivalent of performance by the delegator. Performance by Carson, the delegatee, discharges the obligation of Brennan to perform the contract with Adler.

14. Third Party Rights Assume that, as in the last example, the duty delegated was a delegable duty and that Adler was bound to accept Carson�s performance of the delegated duty to move his machinery. If Carson does not perform, what can Adler do? He has recourse against both Carson and Brennan. Brennan is not excused from his obligation by the delegation, even if it is an effective delegation. Adler can look to either for satisfaction.

15. Third Party Rights Adler pays a premium to Brennan State Life Insurance Company for a $1 million life insurance policy on Adler. Adler designates Conrad as the person to be paid when Adler dies. Is Conrad a party to the contract? No, Conrad is neither promisor or promisee. He is, however a beneficiary of the contract.

16. Third Party Rights Third Party Beneficiaries May be intended beneficiaries or incidental beneficiaries. Most common example of intended beneficiary is Conrad in the prior example. A life insurance policy is often a contract that has an intended third party beneficiary. Intended beneficiaries can gain legal rights in respect of the contract; incidental beneficiaries can�t.

17. Third Party Rights Only an INTENDED BENEFICIARY can sue to enforce the contract. And he or she can only do that once his or her rights as a beneficiary to the contract have VESTED. Vesting occurs when: The beneficiary demonstrates assent to the contract benefiting him or her, for example, by sending a letter showing awareness of the contract and consent to it; The beneficiary materially alters his or her position in reliance on the benefits Any express conditions to vesting are fulfilled, such as in a life insurance contract � vesting doesn�t occur until the insured dies.

18. Third Party Rights Adler goes to a WWF wrestling match to watch Brennan the Barbarian take on Conan the Destroyer. The match was called off after the first 35 seconds when the Barbarian bit off the Destroyer�s pinkie finger. Adler sued for a refund of the ticket price, alleging that he was a beneficiary of the contract between the promoters and Brennan the Barbarian. Was he? Maybe, but if so, only an incidental beneficiary. He had no privity with any party to the promotion agreement, and no right to enforce that contract. Court held the got what he paid for: the right to watch whatever happened at the match.

19. Third Party Rights How do you tell the difference? Courts use a �reasonable person� standard to determine. Would a reasonable person in the shoes of the claimed beneficiary believe that the promisee intended to confer on him or her the right to bring suit to enforce the contract?

20. Third Party Rights The presence of one or more of these factors indicate that the Third Party is an Intended Beneficiary: Performance is rendered directly to the third party Third party has the right to control the details of the performance Third party is expressly designated as a beneficiary in the contract.

21. Discharge In contract law, the term discharge refers to an event that terminates the contractual obligations of a party to the contract. Discharge can occur in a number of different ways but the most common, however, is discharge by performance. When a party has performed, he or she is discharged.

22. Discharge Adler contracts to sell Brennan a painting for $10,000. Adler delivers the painting to Brennan and Brennan pays Adler $10K. If the painting is not delivered, the payment does not have to be made. These promises are each unconditional. Adler shows up with the painting, and is discharged; Brennan shows up with the money and is discharged. Discharge here is by performance. Side question: What is the act of Brennan�s delivering payment of the money to Adler called?

23. Discharge But, what if the contract says that Brennan agrees to pay $10K for the paining provided that local art expert Cooper has determined that the painting is an authentic VanSloot masterpiece? Brennan�s promise to pay is conditional on the art expert�s certifying authenticity. Assume the expert concludes the painting is not a genuine VanSloot. What has happens to Brennan�s obligation to pay? Brennan is discharged by the failure of the condition.

24. Discharge Adler contracts with Brennan Construction to build him a house. The contract says that Brennan will use Brandex siding, but Brandex siding is not available and Brennan can�t reach Adler to ask if he�s OK using a substitute, as Adler is in a Brazilian jungle on vacation. Brennan goes ahead and uses Brandeye siding instead. Assume that Brandex and Brandeye siding are identical in quality and durability. Has Brennan discharged his obligation?

25. Discharge Most likely yes, because Brennan has substan-tially performed its obligation. Normally complete performance is necessary for discharge, but where: Performance doesn�t vary greatly from what�s promised; and It creates substantially the same benefits for the promisee, Then courts may find substantial performance to be adequate to discharge a promisor�s obligations.

26. Discharge Two Painting Problems Adler contracts with Brennan, an artist, to paint Adler�s portrait. If it meets with Adler�s approval, then Adler agrees to pay Brennan. Adler is very particular and withholds his approval. Even though any reasonable person would think the portrait is excellent, has Brennan discharged his duty under the agreement?

27. Discharge Instead of a portrait, Brennan is hired by Adler to paint his house to Adler�s satisfaction. Just as in previous question, Brennan does a fabulous job, and every reasonable person agrees. But again, Adler refuses to approve. Has Brennan performed so that he�s discharged and can recover his fee?

28. Discharge What�s different about these contracts? The first contract, for a portrait, is personal and courts will generally require that performance be actually acceptable to the particular person for whom the work is done. The second, for painting a house, is much less personal; here, courts would usually hold that Brennan substantially performed if a reasonable person would have accepted. The contract would probably have to expressly say otherwise for the court to interpret as a strict condition.

29. Discharge Adler is to deliver a boat to Brennan by Friday, so that Brennan can use it on Sunday for a water ski outing. Brennan is to pay for the boat upon delivery. Adler does not deliver the boat on Friday. Brennan finds another boat on Saturday, and buys it instead. Obviously, Adler has not discharged his obligation to deliver, but is Brennan discharged? Yes, Adler�s breach has discharged Brennan from his obligation to pay.

30. Discharge Adler is a boat manufacturer and contracts to sell Brennan Boat Dealer 500 boats of a new design. Adler delivers 200 boats, but then his suppliers go up on their prices, making it impossible for Adler to continue to deliver boats to Brennan under the agreement and still make a profit. Adler tells Brennan it can�t deliver any more boats, but that if things change it will resume. Is Brennan discharged such that it can go elsewhere for the boats it needs without worrying that Adler will later come through? Yes, Adler�s notice is an anticipatory repudiation of the contract, and Brennan can treat it as a breach that discharges Brennan. Brennan can confidently secure boats from some other source (and can sue Adler for any additional cost incurred)

31. Discharge Anticipatory Repudiation Non-breaching party should not have to remain ready, willing and able to perform when the other party has already said it was not going to perform Non-breaching party should have an opportunity to seek an alternative to the repudiated contract in order to minimize his or her loss. This is called MITIGATION OF DAMAGES. Parties to contracts that are breached normally have a duty to do what they reasonably can to mitigate their damages.

32. Discharge Adler is selling boats to Brennan as in the last example. This time, the boats are being delivered and sold, but are suffering a lot of warranty claims, making them a pain for both Adler and Brennan to keep selling. After 200 boats have been sold, Adler and Brennan agree to amend the contract to change the order from 500 boats to 250 boats. This is called what? Mutual rescission. The parties have made a new agreement and rescinded the prior one. Upon making the new agreement, the parties are discharged as to the original deal.

33. Discharge Same facts as previous example. Adler and Brennan are both unhappy about the warranty issues. Brennan brings in a third party, Conrad, also a boat manufacturer who has a similar product. Brennan, Conrad and Adler agree that Conrad, not Brennan, will supply the remaining 250 boats of the original 500 boat order under a new agreement directly with Adler. Is Brennan discharged? Yes, this is a NOVATION. The parties have agreed to allow a third party�s performance to substitute for that of one of the original parties. The new contract with Conrad extinguishes the original agreement with Brennan, discharging Brennan. Differs from a delegation or assignment in that it involves a new contract.

34. Discharge Adler obtains a judgment against Brennan for $4,000. Later, both parties agree that the judgment can be satisfied by Brennan�s transferring his boat to Adler. Brennan tenders delivery of the boat, and Adler tenders a signed release of judgment. This is called what? From Chapter 7 � an accord and satisfaction. Once the accord is performed (here, the boat is delivered), the judgment is satisfied, and Brennan is discharged.

35. Discharge By Operation of Law Contract Alteration. After securing Brennan�s signature on page 2 of the contract, Adler changes page 1 to show a different price. May Brennan elect to treat as a discharge? Statute of Limitations. Adler failed to deliver the painting promised to Brennan in a contract 8 years ago. Brennan sues today. Is Adler still liable? Bankruptcy. Adler files for bankruptcy. At the time he had a loan from Brennan Bank & Trust. Adler receives a discharge in the bankruptcy. What�s the effect on Brennan�s loan?

36. Discharge Adler, a famous portrait artist contracts with Brennan, a famous robber baron to do his formal portrait. Before he can do so, Adler dies. What is the effect? Does Adler�s estate still owe performance? No, Adler�s death discharged him (and his estate) from the contract due to impossibility. Nobody but Adler could have performed this personal contract.

37. Discharge Brennan Boats and Motors contracts to sell Adler the used 54� Blue Wave Sailing Yacht in its marina on Saturday. On Friday, the marina burns to the waterline, taking every vessel with it including the 54� Blue Wave. Adler still wants to enforce the agreement. Can he? No, again, Brennan is discharged due to impossibility of performance. The particular craft that was the subject of the contract was destroyed, so the contract can�t be performed.

38. Discharge Adler contracts with Brennan to build Adler an apartment building at Fourth and State Streets. However, before work can begin, the City re-zones that corner for single-family home use only. Adler seeks to avoid. Can he? Yes, an intervening change in law can make performance impossible.

39. Discharge The question in impossibility is whether it is subjective impossibility or objective impossibility. Subjective Impossibility. �I can�t do it.� Objective Impossibility. �Nobody can do it.� Only Objective Impossibility will discharge a party from contractual obligations.

40. Damages Adler, a consultant, contracts to perform consulting services for Brennan Industries over a weeklong period during September for $3,500. Brennan cancels the contract in violation of its terms. You are able to find other work during that week for which you are paid $1,000. You spent $200 in finding that substitute work. What are your damages? $2,700. $3,500 - $1,000 + $200 = $2,700. This is composed of Compensatory Damages and Incidental Damages.

41. Damages $3,500 - $1,000 = $2,500 + 200 $2,700

42. Damages Compensatory Damages General Measure: Difference between the value of the breaching party�s promised performance and the value of the performance actually carried out (less any avoided damage or mitigation). The �measure� of damages, or the way they are calculated, can change with the context however.

43. Damages We just considered a contract for services. Let�s look at a contract for the sale of goods: Adler contracts to buy 10 network servers from Brennan Computing for $8,000 each. Brennan fails to deliver the servers, but Adler still needs them. The current market price of these servers is now $8,150 each. Assuming Adler has not paid Brennan yet, what are Adler�s damages in this situation? $150 x 10 = $1,500. This, plus any incidental damages will put Adler whole again.

44. Damages In a CONSTRUCTION CONTRACT, the measure of damages depends on who breaches and when: Owner � The owner can breach before, during or after construction. Contractor � The contractor can breach before or during construction.

45. Damages Breach by Owner: Adler contracts Brennan Construction to build a building. Before construction has begun, Adler pulls an anticipatory repudiation, placing him in breach. What should Brennan be able to recover? The profit it would have made on the job, in other words, the total contract price, less labor and materials costs. This would make Brennan whole.

46. Damages Breach by Owner: This time, construction begins and is halfway done when Adler repudiates. What�s Brennan�s recovery now? The profits, plus the costs incurred in partially completing the work.

47. Damages Breach by Owner: Brennan completes the building, and Adler refuses to pay. What�s the damage measure now? Full contract price, plus interest for delay in payment.

48. Damages Breach by Contractor: Adler tells Brennan he�s ready to proceed with construction, but Brennan says it can�t go forward, placing it in breach. What is Adler�s measure of damages? Adler�s entitled to have the building he contracted for built for the price he agreed to pay�so he�s entitled to recover the cost of the building in excess of the contract price with Brennan.

49. Damages Breach by Contractor: Brennan is half done with the building when its subs all quit and it pulls out, breaching the contract with Adler. Now what is Adler�s measure of damages? Basically, everything it takes to complete the building as contracted for�actual costs of completion.