Chapter 9 Contract Performance, Breach, and Remedies

1. Chapter 9 Contract Performance, Breach, and Remedies

2. Learning Objectives • What is an assignment? What is the difference between an assignment and a delegation? • How are most contracts discharged? • What is the standard measure of compensatory damages when a contract is breached? 

3. Learning Objectives • How are damages computed differently in construction contracts? • Under what circumstances is the remedy of rescission and restitution available? • What is a limitation-of-liability clause, and when will courts enforce it?

4. Introduction • Privity of Contract: only original parties to a contract have rights and liabilities under the contract. • Exceptions: • Assignment or Delegation.  • Third Party Beneficiary Contract. 

5. Assignment • Transfer of contractual rights is an assignment. (Transfer of duties is a delegation.) • Terminology: • Assignor: party assigning rights to third party. • Assignee: party receiving rights. 

6. Assignment • Terminology: • Obligee: person to whom a duty or obligation is owed. • Obligor: person who is obligated to perform the duty.

7. Assignment • Effect of An Assignment. • Extinguishes the Rights of the Assignor. • When rights of assignor are unconditionally assigned, her rights are extinguished. • The third party (assignee) has right to demand performance from original party to contract. 

8. Assignment • Effect of An Assignment. • CASE 9.1 Hosch v. Colonial Pacific Leasing Corp. (2012). Why was Hosch liable to Colonial Pacific if he had signed the loan agreements with GE Capital?

9. Exhibit 9.1 Assignment Relationships

10. Assignment • Rights That Cannot be Assigned: • When a Statute Expressly Prohibits Assignment. • When a Contract is Personal in Nature. • Assignment materially changes rights or duties of obligor. • When an Assignment Will Significantly Change the Risk or Duties of the Obligor.

11. Assignment • Notice of Assignment. • Once assignment is made, assignee should notify the obligor of the assignment. • If notice is not given: • Who has the priority if the assignor assigns the same right to two different persons? • Obligor can discharge his obligation by performance to assignor. 

12. Delegation • Contractual duties are delegated to a third party. • Terminology: • Delegator: party making the delegation of duty. • Delegatee: party to whom the duty is owed.

13. Exhibit 9.2 Delegation Relationships

14. Delegation • Duties That Cannot Be Delegated. • Performance depends on the personal skills or talents of the obligor. • Special trust in the obligor. • Third party performance will materially vary from contractual expectations. • When contract expressly prohibits delegation. 14

15. Delegation • Effect of a Delegation. • If a delegation is enforceable, the obligee (to whom performance is owed), must accept performance from the delegatee (to whom duties are delegated). • Valid delegation does not relieve delegator of duties under the contract.

16. Delegation • “Assignment of All Rights.” • Generally, when an assignment is made in a contract, the implication is an assignment of ALL rights and duties. • However, assignee remains liable for performance of duties.

17. Third Party Beneficiaries • Exception to Privity of Contract. • Original parties to the contract intend at the time of contracting to directly benefit a third person. • Both parties are promisors.

18. Third Party Beneficiaries • Types of Intended Beneficiaries. • Creditor beneficiary benefits from a contract in which promisor promises the promisee to pay a debt the promisee owes to a third party (CB). 

19. Third Party Beneficiaries • Types of Intended Beneficiaries. • Donee Beneficiary: contract is made for the express purpose of promisor giving a gift to a third party (donee), the donee can sue the promisor directly if the promisor breaches the contract.

20. Third Party Beneficiaries • Vesting. Rights vest when: • 1. When the third party demonstrates express consent to the agreement. • 2. When the third party materially alters his or her position in detrimental reliance on the contract. 

21. Third Party Beneficiaries • Vesting. Rights vest when: • 3. When the conditions for vesting are satisfied. For instance, the rights of a beneficiary under a life insurance policy vest when the insured person dies.

22. Intended v. IncidentalBeneficiaries • Intended. • Promisee intended to confer on the beneficiary the right to bring suit to enforce the contract. 

23. Intended v. IncidentalBeneficiaries • Intended. • Factors: • Performance is rendered directly to TPB. • TPB’s right to control contract details. • TPB expressly designated as beneficiary.

24. Intended v. IncidentalBeneficiaries • Incidental. • TPB’s benefit from contract between two parties is unintentional. • Incidental beneficiary cannot sue to enforce the contract.

25. Exhibit 9.3 Third Party Beneficiaries

26. Contract Discharge • A party may be discharged from a valid contract by: • A condition occurring -- or not occurring. • Full performance or material breach by the other party. • Agreement of the parties. • Operation of law.

27. Contract Discharge • Conditions of Performance. • A possible future event, the occurrence or nonoccurrence of which will trigger the performance of a legal obligation or terminate an existing obligation under a contract. • Three types: precedent, subsequent, or concurrent. 

28. Contract Discharge • Condition Precedent. • Condition that must be fulfilled before a party’s performance can be required. • Requires absolute duty to perform.

29. Contract Discharge • Condition Subsequent. • When a condition operates to terminate a party’s absolute promise to perform, after the time of absolute performance was due. • The Restatement refers to both precedent and subsequent as ‘conditions.’

30. Contract Discharge • Concurrent Conditions. • When each party’s performance is conditioned on the other party’s performance or tender. • Both parties required to perform their duties simultaneously.

31. Contract Discharge • Discharge by Performance. • Both parties fulfill their respective duties by performing the acts they have promised. • Tender of performance: unconditional offer to perform. • Types of Performance: complete or substantial. 

32. Contract Discharge • Discharge by Performance. • Complete Performance. • Parties perform exactly as agreed, or ‘perfect.’ • All conditions satisfied. 

33. Contract Discharge • Discharge by Performance. • Substantial Performance: party who performs substantially in good faith can enforce the contract. • Confers Most of the Benefits Promised: performance must not vary greatly from what was promised. 

34. Contract Discharge • Discharge by Performance. • Substantial Performance. • Omission or defect is unimportant, damages can be awarded. • Entitles the Other Party to Damages. • Measure of damages is cost to bring object of contract into compliance. There is no exact formula.

35. Contract Discharge • Discharge by Performance. • Performance to the Satisfaction of Another. • When the Contract is Personal: subject matter is personal, and actual personal satisfaction is required. • Reasonable Person Standard: for most contracts, unless contract explicitly states third party approval.

36. Contract Discharge • Discharge by Performance. • Material Breach of Contract. • A breach of Contract is the nonperformance of a contractual duty. • A material breach occurs when performance is not substantial, and nonbreaching party is excused from performance and entitled to damages. .

37. Contract Discharge • Discharge by Performance. • Material Breach of Contract. • In a minor (non-material) breach, the duty to perform is not excused and the non-breaching party must resume performance of the contractual obligations undertaken.

38. Contract Discharge • Anticipatory Repudiation. • Before performance is due, one party may refuse to perform his or her contractual obligation. • Treated as a material breach, and nonbreaching party may sue for damages immediately, even though performance is not due.

39. Contract Discharge • Anticipatory Repudiation. • Notice by repudiating party may restore parties to original obligations. • May Occur When Market Prices Fluctuate. • Sharp fluctuation may create an extremely unfavorable performance.

40. Contract Discharge • Discharge by Agreement. • Discharge by Rescission. • Mutual Rescission: for executory contract, parties must make a new contract, oral or written. Under UCC, however, contracts must be in writing. • If one party has performed, agreement to rescind must have additional consideration.

41. Contract Discharge • Discharge by Agreement. • Discharge by Novation. • Both parties agree to substitute a new third party for one of the original parties. • Requirements: previous valid obligation, agreement by all parties, extinguishment of all old obligations, and new valid contract.

42. Contract Discharge • Discharge by Agreement. • Discharge by Accord and Satisfaction. • Accord: contract to perform existing contractual duty not yet discharged. • Satisfaction: performance of the accord.

43. Contract Discharge • Discharge by Operation of Law. • Alteration of The Contract: Innocent party is discharged after material alteration. • Statutes of Limitations. • Bankruptcy: Generally bars enforcement of non-exempt transactions. 

44. Contract Discharge • Discharge by Operation of Law. • Impossibility of Performance. • Supervening event was not foreseeable. • When impossibility can occur: • Death or Incapacitation in personal contract prior to performance, • Destruction of the Subject Matter; or • Change in Law makes Contract Illegal. 

45. Contract Discharge • Discharge by Operation of Law. • Impossibility of Performance. • Temporary Impossibility: suspends performance until the impossibility ceases. • Commercial Impracticability. • Performance becomes extremely difficult or costly. • Conditions not known at contracting.

46. Contract Discharge • Discharge by Operation of Law. • Frustration of Purpose. • Supervening event make it impossible to attain purpose both parties had in mind. • Event must not have been reasonably foreseeable, and decreases value of what a party receives under contract. 

47. Contract Discharge

48. Damages • Compensatory Damages. • Designed to compensate nonbreaching party for loss of the bargain. • Actually sustained, out-of-pocket costs, directly arising from breach. • Standard Measure: difference between value of promised performance and value of actual performance. 

49. Damages • Compensatory Damages. • Incidental Damages: expenses cause directly by breach of contract. • Measurement of Damages: • Sale of Goods: difference between contract and market price. • Sale of Land: specific performance.

50. Damages • Compensatory Damages. • Measurement of Damages: • Construction Contracts.