Basic Business Law (BPP432/80) 2006 Fall Quarter

1. Basic Business Law (BPP432/80) 2006 Fall Quarter Instructor: David Oliveiri Week 7: Facilitating Exchange; What Excuses Contract Performance; Rights When Transactions Break Down

2. Agenda “Transactional Breakdown” • Performance, Breach, and Discharge • Remedies

3. Learning Objectives • Understand Valid Excuses for Nonperformance of a Valid Contract • Understand How to Pass Risk to Other Party in a Valid Contract • Understand Financial Interests Protected by a Valid Contract • Understand When to Limit Damages Payable at Breach • Understand How Breach and Compensate is a Financially Sound Strategy • Understand When Money is Insufficient Compensation for a Contract Breach

4. Performance, Breach, & Discharge • Assumption: Valid Contract in Place • Basic Question: Have Parties Honored Commitments • Common Scenario: • One Party Refuses to Perform • Claims Contractual Obligations Excused or Terminated • Other Party Cries “Foul” • Legal Issue/Rules: Is Non-Performing Party’s Refusal Justified?

5. “I Will Transfer This Painting to You for $1,000,000.”

6. Acceptable Excuses For Not Proceeding With A Valid Contract • Failure of an Agreed Condition • “I’ve Already Performed My Obligations.” • “You’ve Failed To Perform Your Obligations.” • “We Agree To Do Something Else.” • “ ‘The Law’ Excuses My Performance.”

7. Conditions • Definition – An Event Whose Happening or Nonhappening Affects a Duty of Performance • Types – Express or Implied • Timing – • Concurrent – “So Long As,” “While” – Requires Simultaneous Performance • Precedent -- “Provided That,” “If,” “As Soon As,” “After,” “Upon,” “When” – Triggers Performance • Subsequent – “Until” – Stops Performance • Satisfaction– • Subjective– Approval Based Upon Honestly Held Opinion • Objective– Approval Based Upon Reasonableness [S&R 17 – Problem 10]

8. Conditions and Risk • What – Generally, Who Should Bear the Risk of Non-Performance of a Condition? • How – Before Contract • Catalog Risks • Determine Party to Bear Risks • Convert Risks to Conditions

9. Start-Up, Inc. • Service/Maintenance Contract ― 25 Locations • Two “Financially Equivalent” Bids • Flat Rate/Month • Cost+/Month • How Can We Do Better? • What Are Risks? • Who Should Bear Risks? • What Should Contract Say?

10. Start-Up, Inc. • What Are Risks? • Flat Rate – Quality, Responsiveness • Cost+ -- “Too Perfect,” Runaway Costs • Who Should Bear Risks? Contractor! Why? • What Should Contract Say? • Flat Rate – Specify Quality Standard, Set Responsiveness Standard • Cost+ -- Set Ceilings on Cost, Approval Thresholds, Quality Standard

11. Valid Excuses for Not Proceeding with a Valid Contract • Failure of an Agreed Condition • “I’ve Already Performed My Obligations.” • OR Tender/Offer of Performance Refused • “You’ve Failed To Perform Your Obligations.” • Materiality Standard – Define in Contract! [S&R 17 --- Problem 6] • “We Agree To Do Something Else.” • “ ‘The Law’ Excuses My Performance.” • Impossibility – Destruction, Illegality [S&R 17 – Problem 2] • Bankruptcy – Automatic Stay, Discharge • Statute of Limitations – 6 Years

12. A fully performsB materially breachesA and B agree to substitute C for AA discharge in bankruptcy ADischarged AEntersintoContractwithB Failure of a conditionMutual recission of the contractSubstituted contractAccord and satisfactionSubsequent illegality of the contractImpossibility of performance A and BDischarged B fully performs A materially breachesA and B agree to substitute C for BB discharged in bankruptcy BDischarged Discharge of Contracts

13. Remedies – Upon Breach • General Rule -- Injured Party May Recover “Benefit of the Bargain” • Interests Protected • EXPECTATION • RELIANCE • RESTITUTION • MONETARY DAMAGES • EQUITABLE REMEDIES • RESTITUTION PROTECTED BY

14. Monetary Damages Compensatory Damages = Lost Contract Value + Incidental Damages + Consequential Damages – Savings Hypothetical: C agrees to build O’s house for $100k. Material and labor cost to C is $80k. Profit is $20k. After the house is partly built ($50k of work expended) C repudiates and O spends $55k to finish the job. • What is O’s Loss of Value? • What are O’s Incidental Damages? • Any Consequential Damages? • Expenses Saved

15. Other Monetary Damage Measures • Nominal Damages • Reliance Damages Example: O repudiates after C has spent $50k on wages and materials. Damage to C? • Punitive Damages -- Generally, Not Allowed • Liquidated Damages (vs. Penalty) [S&R 18 – Problem 2]

16. Limitations on Contract Damages Hypothetical: B contracts with S for 1,000 barrels of oil at $20 per, to be delivered in 90 days. On delivery date, oil is $14 per in the market. B refuses to go ahead with the deal. What are S’s damages? • Damages Must Be Foreseeable • Damages Must Be Certain, Not Speculative • Injured Party Must Mitigate Damages • Must S dispose of oil at $14 per on B’s breach? • UCC’s Lost Volume Seller Exception • Case of Shirley Maclaine, Bloomer Girl, and Big Country/Big Man

17. Remedies in Equity – Where Monetary Damages Inadequate • Specific Performance = f (Uniqueness) [S&R 18 – Problem 6] • Injunctions = f (Uniqueness) [S&R 18 – Problem 4]

18. No Has the contract been breached? No Remedy Yes No Equitable Remedies may be available Are legal remedies adequate? Yes Is there a provision for reasonable liquidated damages? Legal Remedies are available No Yes Compensatory Damages Restitution Recovery of liquidated damages RelianceDamages Contract Remedies

19. Bottom Lines; Q&A • Failure to Perform a Valid Contract is OK in Certain Circumstances • Conditions Can Pass Financial Risk to Another Party in a Valid Contract • The Principal Financial Interest Protected by a Valid Contract is the “Benefit of the Bargain” • Liquidated Damages Provisions Can Define and Limit Damages Payable at Breach • “Breach and Compensate” is a Financially Sound Strategy • In Limited Circumstances Money is Insufficient Compensation for a Contract Breach