Business Law I Conclusion to Contracts

1. Business Law I Conclusion to Contracts

2. Third Party Beneficiary • An intended beneficiarymay enforce a contract if the parties intended him or her to benefit and if either: • enforcing the promise will satisfy a duty of the promisee to the beneficiary; or • the promisee intended to make a gift to the beneficiary. • Any beneficiary who is not an intended beneficiary is an incidental beneficiary, and may not enforce the contract. A Third Party Beneficiary is someone who was not a party to the contract but stands to benefit from it.

3. Case AnalysisThird Party Beneficiaries Schauer v. Mandarin Gems of Califonia, Inc., Court of Appeals of California, 2005 • Facts • Issue – Does Schauer have the right to sue for breach of contract? • Decision – Yes. • Reasoning – A third party beneficiary may enforce a contract made by others, unless they rescinded the agreement. A plaintiff claiming status as a third party beneficiary must demonstrate that the promisor understood that the promisee intended to benefit the third party; it is not necessary that both parties intended to benefit the third party.

4. Assignment and Delegation • A contracting party may transfer his or her rights under the contract, which is called an assignment of rights. • The assignor is the one making an assignment and the assignee is the one receiving an assignment. • A contracting party may transfer his or her duties pursuant to the contract, which is a delegation of duties. • The delegator is the one making a delegation and the delegatee is the one receiving a delegation.

5. Assignment • Any contractual right may be assigned unless assignment: • would substantially change the obligor’s rights or duties under the contract; or • is forbidden by law or public policy; or • is validly precluded by the contract itself. • An assignment may be written or oral, and no particular formalities are required.

6. Assignment Obligations Obligor/ Promissor Obligee Obligation Party A (assignor) Contract Party B Assignment Performance rendered To Party C Party C (assignee)

7. Rights of the Parties after Assignment • Once the assignment is made and the obligor notified, the assignee may enforce his or her contractual rights against the obligor. • The obligor may generally raise all defenses against the assignee that he or she could have raised against the assignor.

8. Delegation of Duties • Most duties are delegable, but delegation does not by itself relieve the delegator of his own responsibility to perform the contract. • An obligor may delegate unless: • delegation would violate public policy, or • the contract prohibits delegation, or • the obligee has a substantial interest in personal performance by the obligor.

9. Delegation Obligations Obligor/ Promissor Obligee Obligation Party B (delegator) Party A Contract Delegation Performance rendered by Party D Party D (delegatee)

10. Novation • A novation is a three-way agreement in which the obligor delegates all duties to the delegatee and the obligee agrees to look only to the delegatee for performance. • The obligee releases the obligor from all liability.

11. Third PartiesSummary • Who can enforce the contract? • Contracting parties. • Assignees. • Can enforce any rights of assignor against obligor. • Can enforce implied guarantees against assignor. • May be liable for duties expressly or impliedly delegated with the assignment. • Intended beneficiaries. Incidental beneficiaries cannot enforce rights even though they benefit from another’s contract. Members of the general public are usually incidental beneficiaries of governmental contracts for goods and services.

12. Performance and Discharge

13. Discharge • A party is discharged when she has no more duties under a contract. • Most contracts are discharged by full performance.

14. Conditions • A condition is an event that must occur before a party becomes obligated under a contract. • How Conditions are Created • Express Conditions -- No special language is necessary to create the condition, but it must be stated clearly somehow. • Implied Conditions – The condition is not stated, but is clear from the agreement.

15. Conditions(cont’d)

16. Performance • Strict Performance • Performance that is exactly what promised; is usually not expected and failure to do so does not cause for discharge. • Substantial Performance • A party that substantially performs its obligations will receive the full contract price, minus the value of any defects. • A party that fails to perform substantially receives nothing on the contract and will only recover the value of the work, if any.

17. Complete or Satisfactory Performance An architect’s or engineer’s certificate is required. The promise is to perform to personal satisfaction in matters of taste, comfort, or judgment Complete or satisfactory performance essential for recovery of contract price when: Time is of the essence Nature of contract requires (e.g., repayment of money, delivery of deed, or delivery of goods)

18. Personal Satisfaction Contracts A personal satisfaction contract is one which the promisee makes a personal, subjective evaluation of the promisor’s performance. • A court uses a subjective standard only if assessing the work involves feelings, taste, or judgment and the contract explicitly demands personal satisfaction. • In all other cases, a court applies an objective standard to the decision.

19. Good Faith • The Restatement (Second) of Contracts §205 states: “Every contract imposes upon each party a duty of good faith and fair dealings in its performance and its enforcement.”

20. Case AnalysisGood Faith and Fair Dealing Brunswick Hills Racquet Club, Inc. v. Route 18 Shopping Center Associates, Supreme Court of New Jersey, 2005 • Facts • Issue – Did Route 18 breach its duty of good faith and fair dealing? • Decision – Yes. • Reasoning – Every party to a contract is bound by a duty of good faith and fair dealing. Route 18 engaged in a pattern of evasion, despite the obvious risk to Brunswick Hills, thereby preventing the latter from receiving the contract benefits of exercising its option to purchase a 99-year lease.

21. Time of the Essence Clauses • A time of the essence clause will generally make contract dates strictly enforceable. • Merely including a date for performance does not make time of the essence.

22. Breach • Material Breach • Generally courts will discharge only if a party committed a material breach – one that causes substantial harm. • Anticipatory Breach • Anticipatory breach is committed by one party making it unmistakably clear that he will not honor the contract. • Statute of Limitations • Will limit the time within which the injured party may file suit.

23. Impossibility • True Impossibility • Something has happened making it utterly impossible to fulfill the promise. • Commercial Impracticability • Some event has occurred that neither party anticipated, making the contract extra-ordinarily difficult and unfair to one party. • Frustration of Purpose • Some event has occurred that neither party anticipated and the contract now has no value for one party.

24. Case AnalysisConsequential Damages You Be the Judge - Bi-Economy Market, Inc. v. Harleysville Ins. Co. of New York, New York Court of Appeals, 2008 Lower court ruling AFFIRMED • Facts • Issue – Is Bi-Economy entitled to consequential damages for destruction of its business? • Decision? • Reasoning?

25. Performance and DischargeSummary • Was the contract breached? No breach of contract if - • Conditions are not met • Condition precedent does not occur • Condition subsequent occurs • Performance excused due to • Prevention by promisee • Impossibility due to: • Illness or death of promisor • Intervening illegality • Destruction of subject matter • Commercial impracticability • Commercial frustration • Performance discharged due to • Agreement • Waiver • Alteration • Running of statute of limitations • Contract completely or substantially performed

26. Remedies

27. Breaching the Contract • Someone breaches a contract when he or she fails to perform a duty without a valid excuse. • A remedy is the method a court uses to compensate an injured party. • An order forcing someone to do something, or refrain from doing something, is an injunction.

28. Identifying the “Interest” • Expectation Interest • Designed to put the injured party in the position he or she would have been in had both sides fully performed their obligations. • Reliance Interest • Designed to put the injured party in the position he or she would have been in had the parties never entered into a contract. • In promissory estoppel cases, a court will generally award only reliance damages.

29. Identifying the “Interest”(cont’d) • Restitution Interest • Designed to return to the injured party a benefit that he has conferred on the other party, which it would be unjust to leave with that person. • Equitable Interest • When money is not sufficient to help the injured party, a court may order a transfer of property or may issue an injunction to prevent a particular action from continuing.

30. Compensatory Damages • Compensatory damages are the most common monetary awards. • They generally flow directly from the contract, such as an order to pay what was promised or to pay for expenses caused by the breach. • The injured party must prove the breach caused damages that can be quantified with reasonable certainty.

31. Consequential Damages • Consequential damages are those resulting from the unique circumstances of this injured party. • Because damage calculation can be complex, there are companies that specialize in doing the work on behalf of litigants or other interested parties.

32. Big Bob can recover incidental damages of the extra $250 from Acme. Big Bob has to buy 1000 widgets from ConCo for $1.25 each. Incidental Damages • Incidental damages are the relatively minor costs incurred when the injured party responds to the breach (obtaining cover), such as the extra cost of buying replacement goods. Acme agrees to sell 1000 widgets to Big Bob’s for $1 each, but fails to deliver.

33. Seller’s Remedies • If the Seller acts in good faith, the Seller will be awarded the difference between the original contract price and the price he or she was able to obtain in the open market. • Most courts hold that the Seller of goods is not entitledto consequential damages.

34. Buyer’s Remedies • The Buyer will be awarded the difference between the original contract and his or her cover (replacement) price. • Under the UCC, the Buyer is entitled to consequential damages provided that the Seller could reasonably have foreseen them.

35. Restitution Interest • Restitution in Cases of a Valid Contract • Restitution is a common remedy in contracts involving fraud, misrepresentation, mistake, and duress. • Restitution in Cases of Quasi-Contract • A court may award restitution, even in the absence of a contract, where one party has conferred a benefit on another and it would be unjust for the other party to retain the benefit.

36. Equitable Interests • Specific Performance • A court will order the parties to perform the contract only in cases involving the sale of land or some other asset that is unique. • Injunction • An injunction is a court order that requires someone to do something or refrain from doing something. • Reformation • Reformation is a process in which a court will partially “re-write” a contract.

37. Special Issues of Damages • Mitigation of Damages • A party may not recover for damages that could be avoided with reasonable efforts. • A liquidated damages clause is a provision stating in advance how much a party must pay it if it breaches. • A court will generally enforce a liquidated damages clause if: • (1) at the time of creating the contract it was very difficult to estimate actual damages, and • (2) the liquidated amount is reasonable.

38. Case AnalysisInjunctive Relief Milicic v. Basketball Marketing Company, Inc., SupremeCourt of Pennsylvania, 2004 • Facts • Issue – Is Milicic entitled to a preliminary injunction? • Decision – Yes. • Reasoning – Four elements must be proven: (1) there is a strong likelihood of success on the merits; (2) injunctive relief is necessary to prevent immediate and irreparable harm for which money damages would inadequately compensate; (3) denying the injunction would cause greater harm than granting it; and (4) a preliminary injunction will return the parties to status quo.

39. RemediesSummary • If the contract was breached, remedies are • Damages • Compensatory – Loss in value of promised performance • Consequential – Foreseeable losses from special circumstances of particular contract • Nominal – Award for purely technical breach of contract (usually $1) • Liquidated – Damages specified in contract for breach • Punitive – Usually unavailable – sometimes awarded for bad faith breach • Equitable Remedies • Specific Performance – Promisor ordered to perform contract where subject matter is unique • Injunction – Ordered to prevent irreparable injury