Chapter 11: Contract Performance, Breach, and Remedies

BLAW 220 Exam 3

Why does contract performance, breach, and remedies matter?

• Damages

• Reformation

• Rescission

• Restitution

• Specific Performance

Voluntary Consent

If one party does not voluntarily consent to the terms of a contract, then the law will not normally enforce the contract.

Voluntary consent (assent) may be lacking because of mistake, fraudulent misrepresentation, undue influence, or duress.

Only a mistake of fact (and not a mistake of value or quality) makes a contract voidable.

Mistakes of Fact

Unilateral Mistakes (One Party Mistaken)

• A mistake that occurs when one party to a contract is mistaken as to a material fact.

• The contract is enforceable against the mistaken party.

• Exceptions:

1. The other party knew or should have known that a mistake of fact was made.

2. The error was due to a substantial mathematical mistake without extreme negligence.

Bilateral (Mutual) Mistakes (Both Parties Mistaken)

• A mistake that occurs when both parties are mistaken about same material fact.

− Either party can rescind the contract

• The contract is voidable by the adversely affected party and can be rescinded.

When the Parties Reasonably Interpret a Term Differently

• If the contract parties attach has materially different meanings to the term, the mutual misunderstanding may allow the contract to be rescinded or reformed.

Mistakes of Value

• A mistake that impacts a future market value or quality of the object

− Value is variable; thus, contract is normally enforceable.

− Example 11.2 Idris

Fraudulent Misrepresentation

Typically, fraud involves:

1. A misrepresentation of a material fact must occur.

2. There must be an intent to deceive.

3. The innocent party must justifiably rely on the misrepresentation.

4. To collect damages, a party must have been harmed as a result of the misrepresentation.

• Misrepresentation by Words or Actions

− Occurs when a party takes specific action to conceal a fact that is material to the contract.

Intent to Deceive

Innocent Misrepresentation

• Occurs when a person makes a false statement of fact that he or she believes is true.

Negligent Misrepresentation

• Occurs when a person makes a false statement of fact through carelessness, or because he or she did not use the skill and competence required by her or his business or profession.

− Case 11.1: Borman v. Brown

Justifiable Reliance on the Misrepresentation

• The third element of fraud is reasonably justifiable reliance on the misrepresentation of fact.

• The deceived party must have a justifiable reason for relying on the misrepresentation.

• The misrepresentation must also be an important factor—but not necessarily the sole factor—in inducing the deceived party to enter into the contract.

Injury to the Innocent Party

• Most courts do not require a showing of harm in an action to rescind a contract.

• In contrast, to recover damages caused by fraud, proof of harm is universally required.

• The measure of damages is ordinarily equal to the property’s value had it been delivered as represented, less the actual price paid for the property.

Undue Influence and Duress

A Presumption of Undue Influence in Certain Situations

• When the dominant party in a fiduciary relationship benefits from the relationship, the court will often presume that the contract was made under undue influence.

Duress

• Use of threats to force a party to enter into a contract constitutes duress. Duress is both a defense to the enforcement of a contract, and a ground for rescission of a contract.

Third Party Rights

The privity of contract principle establishes that third parties have no rights in contracts to which they are not parties.

Effect of an Assignment

Extinguishes the Rights of the Assignor

• When rights under a contract are assigned unconditionally, the rights of the assignor are extinguished.

• The assignee has a right to demand performance from the other original party to the contract, the obligor.

Assignee Takes Rights Subject to Defenses

• The assignee obtains only those rights that the assignor originally had. In addition, the assignee’s rights are subject to the defenses that the obligor has against the assignor.

Delegations 

A party can transfer duties just as a party can transfer rights to a third party through an assignment. However, duties are delegated, not assigned.

Normally, a delegation of duties does not relieve the party making the delegation (the delegator) of the obligation to perform, that is in the event that the party to whom the duty has been delegated (the delegatee) fails to perform.

Duties That Cannot Be Delegated

1. When special trust has been placed in the obligor.

2. When performance depends on the personal skill or talents of the obligor.

3. When performance by a third party will vary materially from that expected by the obligee.

4. When the contract expressly prohibits delegation.

Third Party Beneficiaries

• The original parties to a contract can agree that the contract performance should be rendered to or directly benefit a third person (the intended beneficiary of the contract).

• Incidental beneficiary: third person who receives a benefit from a contract even though that person’s benefit is not the reason for the contract

Discharge by Performance

• Performance can be accomplished by tender (unconditional offer to perform by a person who is ready, willing, and able to do so).

  • Complete Performance (No breach—contract is discharged.)

  • Substantial Performance (Duty to perform continues. Party can recover damages.)

  • Material Breach (Contract is discharged. No further duty to perform. Party can sue immediately for breach.)

1. Good faith

2. Performance must not vary greatly (omission, variance, defect is minor)

3. Substantially same benefits

• Effect on Duty to Perform

• Measure of Damages

• Performance to the Satisfaction of Another

• Material Breach of Contract

− A breach of contract is the nonperformance of a contractual duty.

• Case Example 11.10 DBT Yuma LLC v. Yuma County Airport Authority

Discharge by Agreement

• Discharge by Mutual Rescission

• Discharge by Novation

− Novation: substitution by agreement of new contract for old one, with old rights terminated

Requirements:

1. A previous valid obligation

2. An agreement by all of the parties to a new contract

3. The extinguishing of the old obligation

4. A new, valid contract

• Discharge by Accord and Satisfaction

Discharge by Operation of Law

• Material alteration of the contract

• Statutes of limitations

– Oral 2-3 years

– Written 4-5 years

• Bankruptcy

• Impossibility of performance

When Performance Is Impossible

1. When a party whose personal performance is essential to the completion of the contract dies or becomes incapacitated prior to performance.

2. When the specific subject matter of the contract is destroyed.

3. When a change in the law renders performance illegal.

Temporary Impossibility

Case Example 11.15 Downtown Soho LLC

• Commercial Impracticability: a doctrine that may excuse duty to perform

• Frustration of Purpose: a court-ordered doctrine under which party will be relieved of duty to perform

Types of Damages (YOU WILL NEVER GET PUNITIVE DAMAGES FOR A CONTRACT)

1. Compensatory

2. Consequential

3. Nominal

Compensatory Damages

• Standard Measure

• Sale of Goods

• Sale of Land

• Construction Contracts

Mitigation of Damages

• A plaintiff must do whatever is reasonable to minimize damages the defendant caused.

• Regarding rentals, some states require a landlord to take a reasonable action, such as finding a new tenant if the current one leaves or stops paying rent.

• Rental agreements – a landlord is responsible to take reasonable action

Liquidated Damages versus Penalties

Enforceability

1. When the contract was formed, it is apparent that damages would be difficult to estimate in the event of a breach.

2. The amount set as damages is reasonable and not excessive.

Common Uses of Liquidated Damages Provisions

• Construction contracts

• Sale of goods

• Loan contracts

• Contracts with entertainers and professional athletes

Equitable Remedies

Rescission and Restitution

• Party seeking rescission must show that the contracting parties can be restored to the status quo.

• Restitution is an equitable remedy to restore parties to their original position before loss or injury.

• Consists of returning goods, property, or funds previously conveyed.

Specific Performance

• Calls for the performance of the act promised in the contract

• Usually not granted unless the party’s legal remedy (monetary damages) are inadequate

– Sale of land

– Contracts for personal services

Reformation

• Fraud or mutual mistake

• Example 11.25 Carson

• Incorrect written statement of the parties' oral agreement

• Covenants of Not to Compete

Remedies for Breach of Contract

Damages: Compensatory, Consequential, Nominal, Liquidated

Rescission & Restitution, Specific Performance, and Reformation