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ESSENTIALS OF THE LEGAL ENVIRONMENT TODAY, 5E ROGER LEROY MILLER © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. CONTRACT PERFORMANCE, BREACH, AND REMEDIES CHAPTER 13 © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. LEARNING OBJECTIVES 1. What are the elements of fraudulent misrepresentation? 2. What is substantial performance? 3. When is a breach considered material, and what effect does that have on the other party’s duty to perform a contract? © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. LEARNING OBJECTIVES (CONT’D) 4. What is the standard measure of compensatory damages when a contract is breached? 5. What equitable remedies can a court grant, and in what circumstances will a court consider granting them? © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. VOLUNTARY CONSENT • Mistakes • Unilateral mistakes of fact • Made by only one party • Two exceptions • Bilateral (mutual) mistakes of fact • Mutual misunderstanding • Mistakes of value • Concerns the future market value or quality of the object of the contract © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. EXHIBIT 13.1 © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. VOLUNTARY CONSENT • Fraudulent Misrepresentation • Consists of the following elements: 1. Misrepresentation of a material fact must occur 2. There must be an intent to deceive 3. Innocent party must justifiably rely on the misrepresentation 4. To collect damages, a party must have been harmed as a result of the misrepresentation. LO-1 © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. VOLUNTARY CONSENT • Undue Influence • A stronger party overcomes a weaker party’s free will by exerting psychological influence. • Duress • Agreement is not voluntary if one party was forced into it. • Can serve as basis for rescission of contract • Economic need, by itself, is not duress © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. THIRD PARTY RIGHTS • Assignments • Used in many types of business financing • All rights can be assigned, except: • The assignment is prohibited by statute • The contract is personal • The assignment significantly changes the risk or duties of the obligor • The contract prohibits assignment © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. THIRD PARTY RIGHTS • Delegations • Transfer duties by delegation • Delegation is prohibited when: • Special trust has been placed in the obligor • Performance depends on the personal skill or talents of the obligor • Performance by a third party will vary materially from that expected by the obligee • The contract expressly prohibits delegation by including an antidelegation clause © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. THIRD PARTY RIGHTS • Third Party Beneficiaries • Exception to the doctrine of privity of contract arises when the contract is intended to benefit a third party • Third party beneficiary: one for whose benefit a promise is made in a contract but who is not a party to the contract • Intended beneficiary: a third party for whose benefit a contract is formed © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. PERFORMANCE AND DISCHARGE • Discharge is the termination of the obligation. • Performance is the fulfillment of one’s duties arising in a contract. • Conditions of Performance • Qualification in a contract based on a possible future event © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. PERFORMANCE AND DISCHARGE • Discharge by Performance • Both parties fulfill their duties by performing the acts they promised • Complete performance • Party performs exactly as agreed • Substantial performance • Party performs substantially all of the terms of a contract • Requirements • Performed in good faith • Performance must not vary greatly • Performance must create LO-2 © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. PERFORMANCE AND DISCHARGE • Performance to the satisfaction of another • Performance is conditioned on reasonable satisfaction. • Material breach of contract • Failure, without legal excuse, of a promisor to perform the obligations of a contract • Innocent party is excused from performance and has the right to sue for damages. • Material versus minor breach • A minor breach may be cured. • Discharges nonbreaching party from further performance LO-3 © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. PERFORMANCE AND DISCHARGE • Anticipatory repudiation • Before either party has a duty to perform, one of the parties may refuse to carry out his or her contractual obligations • Time for performance • If no time for performance is stated in the contract, a reasonable time is implied © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. PERFORMANCE AND DISCHARGE • Discharge by Agreement • Discharge by mutual rescission • Parties must make another agreement. • Discharge by novation • New contract with substitution of a third party for one of the original parties. • Discharge by settlement agreement • Compromise that results from dispute • Discharge by accord and satisfaction • Settlement to discharge original contract. • Covenant not to sue © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. PERFORMANCE AND DISCHARGE • Discharge by Operation of Law • Material alteration of the contract • Statutes of limitations • Bankruptcy • Impossibility of performance 1. When one of the parties dies or becomes incapacitated prior to performance 2. When the specific subject matter is destroyed 3. When a change in law renders performance illegal © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. PERFORMANCE AND DISCHARGE • Commercial impracticability • When it becomes much more difficult or expensive then originally contemplated at time contract was formed • Frustration of purpose • If supervening circumstances make it impossible to attain the purpose both parties had in mind when they made the contract © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. EXHIBIT 13.2 © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. DAMAGES • Types of Damages 1. 2. 3. 4. • Compensatory Consequential Punitive Nominal Compensatory damages • Standard measure – difference between value of breaching party’s promised and actual performance • Sale of goods • Sale of land • Construction contracts LO-4 © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. DAMAGES • Consequential damages • Special damages to compensate for a loss that does not directly or immediately result from breach • Punitive damages • Punish and deter wrongdoing • Nominal damages • Recognize wrongdoing with no monetary loss © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. DAMAGES • Mitigation of Damages • Injured party has a legal duty to mitigate (reduce) her damages. • Terminated employee has duty to take a similar job, if one is available. © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. DAMAGES • Liquidated Damages versus Penalties • Liquidated damages • Fixed, certain dollar amount agreed to by parties, paid in the event of breach. • Clauses for liquidated damages are enforceable. • Penalty • Designed to penalize a party. • Generally not enforceable. • Waiver of Breach © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. EQUITABLE REMEDIES • Equitable remedies include rescission and restitution, specific performance, and reformation. • Rescission and Restitution • Rescission – undo or terminate a contract • Restitution – return of goods, property, or funds LO-5 © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. EQUITABLE REMEDIES • Specific Performance • Performance of the act promised in the contract • Sale of land • Contracts for personal services © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. EQUITABLE REMEDIES • Reformation • Used when parties have imperfectly expressed their agreement in writing. • Court can rewrite the contract to reflect the parties’ true intentions. © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. EXHIBIT 13.3 © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. CONTRACT PROVISIONS LIMITING REMEDIES • Contract may contain a clause stating. • (1) No damages • (2) Limited damages • (3) product replacement, or: • Exculpatory clauses • Limitation-of-liability clauses © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use.