BUSINESS LAW CH 11Contractual Obligations and their Enforcement

Transfer of Contractual Rights

Assignment – Transfer of a right a party may have under a contract to another Assignor – The party who transfer the

contractual rights Assignee – Party who receives this

contractual right

Assignment does not need to be supported by consideration to be legally effective

Assignee “stands in the shoes of the assignor”

Means that the assignee receives exactly the same contractual rights and duties as the assignor

Assignor typically does not promise that the obligor (one who owes a duty under a contract) will perform as promised in the original contract

If the obligor breaches, the assignee, not the assignor, must sue for breach.

Transfer of Contractual Rights

Assignable Rights

A party may assign contractual rights to another, providing performance (fulfillment of contractual promises as agreed) will not be materially changed.

Non-Assignable Rights

Contractual rights may not be assigned if performance requirements would be materially changed

Non-Assignable Rights

Other situations:1. Rights created under a contract that

prohibits transfer of a contractual right2. Claims for damage for personal injuries3. Claims against the United States4. Rights to personal service, especially

those of a skilled nature, or when personal trust and confidence are involved

5. Assignments of future wages, as limited by state statutes.

Form of Assignments

Assignment of contractual rights usually is made voluntarily

Assignments may be written or oral No consideration is necessary to make a

valid assignment

Notice of Assignment

Until notified that an assignment has occurred, the obligor may continue to pay assignor.

After notification, obligor is liable to assignee for performance.

Assignee should properly notify the obligor of the assignment

Delegation of Contractual Duties Delegation of Contractual Duties

– Transfer of a routine obligation of a party that must be performed to fulfill a contract to another party

Person who delegates duties is still remains legally obligated and responsible for proper performance

A person cannot delegate to another any duty where performance requires unique personal skill or special qualifications

Discharge of Contractual Obligations: By Performance

Discharge of a contract – Termination of duties that ordinarily occur when the parties perform as promised Most contracts are discharged by

complete performance Breach of Contract – Failure to

provide complete performance

By Performance

Cancellation – Breach of a sales contract under the UCC

Substantial Performance – Just about all the duties are performed but a minor duty under the contract remains

Defaults – Fails to perform Anticipatory Breach – Notifies the

other party to a contract before the time of performance has arrived that he or she will not perform.

Timing of Performance

Contract does not say when performance must be done - The duty must be performed within a reasonable time

Contract identifies a date for performance – Courts will rule it as a minor breach

Contract identifies the date and that “time is of the essence” – Courts will rule it as a major breach

By the Initial Terms

Parties may agree that the contract will terminate:1. On a specific date or upon the

expiration of a specified period of time

2. Upon the occurrence of a specified event

3. Upon the failure of a certain event to happen

4. At the free will of either party upon giving notice

By Subsequent Agreement

Parties may mutually agree to change either the terms of the contract or the nature of their relationship1. Rescission – The parties may agree to

unmake or to undo their entire contract from its very beginning

2. Substitution – Replace the present contract with a new contract

By Subsequent Agreement

3. Accord and Satisfaction – Accord is an agreement to substitute a new contractual obligation for an existing one if the new obligation is satisfactorily performed. Satisfaction is the actual performance of the new obligation.

Discharges the previous obligation If performance in the accord is not rendered, the old

contract remains in effect.

4. Novation – A party entitled to receive performance under a contract may release the other party from the duty of performance and accept a substitute party. New contract is formed

By Impossibility of Performance Impossibility of Performance refers to

extreme external conditions rather than an obligor’s personal inability to perform

Discharges contractual obligations Escape Hatch – language in contract

that permits modification or even termination of performance without liability for damages in the event of an inability to perform on schedule because of specified conditions

By Operation of Law

A contract may be discharged or the right to enforce it may be barred by operation of law Persons debts are discharged in

bankruptcy Also happens when the time

allowed for enforcement of the contract has elapsed because of statute of limitations

Alteration (material change in the terms of a written contract without the consent of the other party) discharges the agreement by operation of law

By Tender of Performance

Tender – A ready, willing, and able offer to perform an obligation If the duty requires the doing of an act,

a tender that is made in good faith but is rejected will discharge the obligation of the one offering to perform.

If obligation requires the payment of money, rejection of a tender to pay the money does not discharge the debt nor does it prevent the creditor from colleting later

By Tender of Performance

To be valid, the tender of money must consist of the exact amount due in currency or coins, or legal tender

A tender of only part of the debt is not a valid tenderCreditor may refuse it without losing the right to later collect the entire amount due.

11-1 Assessment

Turn to page 196 and complete the 11-1 assessment

11-1 Assessment Answers

1. B (Assignor)2. False 3. A (Complete Performance)4. False5. A (Novation)6. False

11-1 Assessment Answers

7. Yes, the performance can be delegated as it does not require special skills or qualifications. Yes, any delegation of duties leaves the delegator still liable to the other contracting party.

8. No, the contract is based on trust from 12 years of experience and the qualifications and skill of Quality.

9. Yes, time truly is of the essence in this situation. Just putting the statement in the contract, however, would not make it so.

Remedies Possible for Breach Remedy – Legal means by which a

right is enforced or a right’s violation is prevented or redressed.

Different remedies are available depending on whether the breach is major or minor.

Remedy for a Minor Breach

Only remedy generally available for a minor breach is MONEY DAMAGES.

Party injured by a minor breach generally must continue to perform the duties defined by the contract

Amount of damages would be whatever it took to complete the minor duty left undone Recovered by suit if victim already paid Deduct from the money due

Remedies for Major Breach

Major breach – Injured party need not continue performing the duties defined by the contract.

In addition:1. Rescission and Restitution – Canceling

the contract and returning whatever has been received under it.

2. Money Damages – The payment of money to compensate for injury.

3. Specific Performance – A court order commanding the breaching party to perform what was promised in the contract

Rescission and Restitution

Intended to place the parties in the same legal position they were in before contracting.

Rescission – Allows the parties to treat the contract as canceled. All contractual obligations of the parties

are canceled. Restitution – Permits each party to

recover money or property given to the other party

Money Damages

Money damages may be:1. Compensatory2. Consequential3. Punitive4. Liquidated

Compensatory Damages

Seeks to restore injured parties to the same financial position they were in prior to the breach

Compensatory Example

Charlotte, a home broker contracted to buy a house from Ben for $65,000, knowing that the fair market value of the property was considerably higher. To facilitate the purchase Charlotte then spent $3000 on a title search, a survey, an appraisal, loan origination fee, and other expenses. If Ben then committed a material breach, for refusing to sell, a court would award Charlotte$3000 as compensatory damages.

Consequential Damages

Tries to place injured parties in the same financial position they would have been in if the contract had been performed.

Grants money for the foreseeable injuries caused by the breach

Consequential damages generally are foreseeable when a reasonable person would know that a breach would cause the injury or has been explicitly notified of same.

Consequential Example

Charlotte brags to Ben that because they contracted, she has arranged the resale of his property for $85000. Upon hearing this Ben refuses to go through with their contract. As a result, Charlotte loses her buyer at $85000. Ben will be liable for consequential damages in the amount of Charlottes lost profit of $20000.

Punitive Damages

When Fraud or Intentional Tort is involved in a breach of contract

Damages added to other money damages

Purpose is to punish and to make an example of the defendant

Liquidated Damages

Parties to a contract sometimes agree on a certain amount of monetary damages that will be paid if a particular contract breach occurs

Typically placed in a contract when an actual damage amount would be too speculative or too difficult to arrive at in court.

If liquidated damage amount is excessive in relation to the injury, the clause will not be enforceable

Nominal Damages

Token amount to acknowledge that a wrong has been done.

Specific Performance

Decree (order) that the breaching party do exactly what was required under the contract

A court will not award the remedy unless the party seeking it is blameless and has acted reasonably and fairly throughout the transaction

Available when the subject of the contract is unique

Courts are reluctant to grant specific performance in situations where they would have great difficulty in supervising the results. Examples – Personal Service or Employment

Factors Affecting Choice of Remedy Conflict of Remedies

Often electing to pursue one remedy will rule out pursuing another

Specific Performance and Damages cannot be recovered for the same breach

Rescission and Restitution pre-contract position and Damages is a post-contract financial position

Factors Affecting Choice of RemedyDuty to Mitigate Mitigate the Damages - A party

injured by a breach of contract is required by law to take reasonable steps to minimize the harm done

If injured party fails to take reasonable steps to mitigate the damages, the amount of potential recovery is lessened by the amount that could have been mitigated

Factors Affecting Choice of Remedy Waivers

Sometimes a party intentianally and explicitly gives up contractual rights

Example: “I will accept your overdue payment without a late charge”

Statute of Limitations

Period of time in which to bring suit Time period varies among states 4 years is common for contracts 3 years is common for torts UCC provides that an action for breach of

contract for the sale of goods must be begun within 4 years after the cause of action arises Parties may shorten the period

Bankruptcy

Discharging (or excusing) of debt. Debtors get a fresh start

Estate is distributed among various claimants in order to discharge many of the bankrupt's debt

11-2 Assessment

Turn to page 201 and complete the 11-2 Assessment

11-2 Assessment Answers

1. C (Specific Performance)2. True3. B (the subject matter of the contract is

unique)4. D (None of the above can be pursed at

the same time)5. True

11-2 Assessment Answers

6. No. The coach is not legally free to change employers. This would be a breach of his contract.

7. Yes. Bethlehem Steel is liable for $52000. The liquidated damage clause is clear and the amount is not punitively excessive

8. Yes. Consequential damages that are generally foreseeable can be recovered.

9. Pyramid can assert that the statute of limitations has passed.